Tuesday, 5 June 2012



By the end of this chapter, students should be able to:

  1. Define innovation;
  2. Explain different forms, categories, types  and sources of innovation;
  3. Describe of innovation as engine of economic growth;
  4. Understand the importance of innovation in organization.


Recent surveys confirm that whilst most managers acknowledge the importance of innovation, the majority are dissatisfied with the management of innovation in their organizations. In fact the performance of innovation varies significantly between dif­ferent sectors, and between firms in the same sector, suggesting that both structural and organizational factors influence the effect of innovation on performance. Manage­ment research confirms that innovative firms – those that are able to use innovation to improve their processes or to differentiate their products and services – outperform their competitors, measured in terms of market share, profitability, growth or market capitalization. However, the management of innovation is inherently difficult and risky: most new technologies fail to be translated into products and services, and most new products and services are not commercial successes. In short, innovation can enhance competitiveness, but it requires a different set of management knowledge and skills from those of everyday business administration. 

Innovation is the ability to see the connection, to spot opportunities and to take advantage of them. When Tasman Bridge collapsed in Hobart, Tasmania in 1975 Robert Clifford was running a small ferry company and saw an opportunity to capitalize on the increased demand for ferries and to differentiate his offering by selling drinks to thirsty cross city commuters. This is an example of how we take the opportunity.



Innovation represents a subset of a much bigger set of inventions. For instance, they refer to ideas and they refer things being new while both features of invention.
Below are the top ten inventions according to the UK Patent Office:
1. Bicycle (Pierre Lallement, 1866)
2. Radio (Guglielmo Marconi, 1897)
3. Computer (Alan Turing, 1945)
4. Penicillin (Florey and Heatley, 1940)
5. Internal Combustion Engine (Nicolaus Otto, 1876)
6. World Wide Web (Tim Berners-Lee, 1989)
7. Light bulb (Thomas Edison and Joseph Swan, 1829)
8. Cat’s Eyes (Percy Shaw, 1936)
9. Telephone (Alexander G. Bell, 1876)
10. Television (John Logie Baird, 1923)

???? Do you think the above creations are invention, innovation or combination of both? Why.

The situation where we commercialize the invention can be considered innovation – making them relevant to business. Innovation is about exploiting inventions so that they can be traded in a marketplace. Also, innovation is about bringing inventions out of the workshop or the laboratory and getting them ready for the market

Innovation is a process of taking new ideas through to satisfied customers. It is the conversion of new knowledge into new products and services.
Innovation is about creating value and increasing efficiency, and therefore growing the business. It is a spark that keeps organizations and people moving ever onward and upward. "Without innovation, new products, new services, and new ways of doing business would never emerge, and most organizations would be forever stuck doing the same old things the same old way.
Invention that gets out in to the world is innovation. In many fields, something new must be substantially different to be innovative, not an insignificant change, e.g., in the arts, economics, business and government policy. In economics the change must increase value, customer value, or producer value. The goal of innovation is positive change, to make someone or something better. Innovation leading to increased productivity is the fundamental source of increasing wealth in an economy.
Innovation is an important topic in the study of economics, business, technology, sociology, and engineering. Colloquially, the word "innovation" is often used as synonymous with the output of the process. Since innovation is also considered a major driver of the economy, the factors that lead to innovation are also considered to be critical to policy makers.
Definitions of innovation may vary in their wording, but they all stress the need to complete the development and exploitation aspects of new knowledge, not just its invention.
`Innovation is the successful exploitation of new ideas' – Innovation Unit, UK Department of Trade and Industry (2004).
`. . . Innovation does not necessarily imply the commercialization of only a major advance in the technological state of the art (a radical innovation) but it includes also the utilization of even small-scale changes in technological know-how (an improvement or incremental innovation)' – Roy Rothwell and Paul Gardiner (1985) 'Invention, innovation, re-innovation and the role of the user', Technovation, 3, 168.
`Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or service. It is capable of being presented as a discipline, capable of being learned, capable of being practiced' – Peter Drucker (1985), Innovation and Entrepreneurship. Harper & Row, New York.
`Companies achieve competitive advantage through acts of innovation. They approach innovation in its broadest sense, including both new technologies and new ways of doing things' – Michael Porter (1990) The Competitive Advantage of Nations. Macmillan, London.
`An innovative business is one which lives and breathes "outside the box". It is not just good ideas, it is a combination of good ideas, motivated staff and an instinctive understanding of what your customer wants' – Richard Branson (1998) DTI Innovation Lecture.
From the definition of innovation, it becomes clear that innovation is closely linked to invention. Invention is in fact part of the process in innovation. But there is another important concept closely related to innovation namely diffusion.
Invention involves new ideas, new discoveries or new breakthrough. These are then developed via process of often lengthy experimentation and testing to arrive at a workable invention. A key feature is the newness but normally is not ready yet to be marketed.
Innovation therefore includes not only invention but also activities such as design, manufacturing, marketing, distribution and product support. These activities form part of the exploitation/ commercialization which is such an essential part of innovation.
Innovation is not the end of the story. There remains diffusion. As the term implies this is stage where innovation became widely used and in the time spread to other fields.
          The success of the organization derived in large measure from innovation. Now competitive advantage is not only can come from size, or possession of assets etc but the pattern increasingly coming to favor those organizations that can mobilize knowledge and technological skills and experience to create novelty in their product/services and the ways in which they create and deliver those offerings.
          It is not involves only at individual enterprise but contribute to the national economy as well. Study shows that “innovation leaders” had strong links between innovative activities and business performance. Its top five firms were Apple, Nokia, Google, Adidas and Reckitt Benckiser where all of these noted for different but distinctive innovation performance and the increase of the share prices over the year 2006 – 2007 by between 25% to 135%. They have sustained it for over 7 years.
          An Australian government website says “Companies that do not invest in innovation put their future at risk. Their business is unlikely to prosper and they are unlike to be able to compete if they do not seek innovation solutions to emerging problems. (www.dest.gov.au/sectors/science_innovation).
          Also, innovation contributes in several ways. For example, there is a strong relation between new product and market performance. New product can capture and retain market shares and increase profitability in those market. But in the case of more mature and established products, competitive sales growth comes not only simply from being able to offer lower price but from other variety of other factors – design, customization and quality. And in the world of shortening product life cycle where for example, the life of television set or computer is measured in month, and even complex products like motor cars can now take only a couple of years to develop – being able to replace product frequently with better versions is increasingly important. Competing in time reflects a growing pressure on firms not just to introduce new products but also to do so faster than competitors.
          In terms of process, being able to make something no one else can is a powerful source of competitive advantage. For example, Toyota Production System developed by Toyota owed a great deal for superior abilities in manufacturing and led to performance advantage of around its competitors in regards to quality and productivity indicators.

          Similarly, being able to offer better service – faster, cheaper, higher quality – able to become a competitive edge. Citibank was the first bank to offer automated telling machine (ATM) services and developed a strong market position as a technology leader on the back of this process innovation.
          The most important one is we need to remember others keep looking to compete us in the sense of imitation. Unless we are able to move into further innovation, it risks being left behind as others take the lead in changing their offering, their operational processes or the underlying models that derive their business.
According to Statistics Canada, the following factors characterize successful small and medium sized enterprise:
  • Innovation is consistently found to be the most important characteristic associated with success.
  • Innovative enterprises typically achieve stronger growth or are more successful than those that do not innovate.
  • Enterprises that gain market share and increasing profitability are those that are innovate.


Essentially we are talking about change, and this can take several forms; for this purposes of this module, we will focus on four broad categories (the ‘4Ps’ of Innovation)
a)           Product innovation- changes in the things (products/ services) which an organization offers
b)           Process innovation- changes in the ways in which they are created and delivered.
c)           Position innovation- changes in the context in which the products/ services are introduced.
d)           Paradigm innovation- changes in the underlying mental models which frame what the organization does.

Table 1.1: Examples according to the types of innovation

Innovation Type

Incremental – ‘Do what we do but better’

Radical – ‘Do something different’


·         Widow Vista replacing XP

  • Improved performance incandescent light bulbs
  • New improved washing machine
  • Improved version of televison

·         New to the world software – ex. Speech recognition program

  • Toyota Prius – hybrid engines
  • LED based lighting
  • Solar energy


·         Improved fixed line telephone services

  • Improved auction house operation
  • Improved factory operation efficiency through upgraded equipment
  • Improved range of banking services

·         Skype and other VoIP systems

  • Online share trading
  • eBay
  • Toyota Production System
  • Mobile banking
  • ‘No frills’ airlines
  • Internet bookstore


Until recently innovation has been seen as the means to turn research results into commercially successful products or services. Today, while research keeps playing its critical role as a major contributor to innovation, many new forms of innovation have emerged. They include system's approach to integration of new technologies and processes from other fields, new business models and ways of doing business, and new ways of reaching and servicing customers.
Innovation Can Have Different:
v  Focus: technology, organization, or external relationships,
v  Types: incremental or radical, and
v  Sources: technology transfer or development of new business models/concepts.
Entrepreneurial Action – the Engine of Innovation 
While research and invention is a major contributor to innovation, if there is no entrepreneurial action there is no value creation.
Technological Innovation Alone Is Not Enough
Facing a tidal wave of global economic, technological and social change, you are not going to survive in the new rapidly globalizing economy through technological innovation alone. If you are going to withstand relentless global competition, you need to radically change the way of doing business. Innovation is everything that helps your enterprise adapt to rapidly changing business environment.
Renewed Emphasis on Innovation
Shift to the new knowledge-based economy, combined with a dramatic increase in highly capable global competition, demands a renewed emphasis on innovation. Rapid changes in the competitive environment create the new world of competition – "a fierce contest set in truly global context, with more capable players, higher stakes, and vastly different rules of engagement from those that we have enjoyed to date."3 This new economy is led by those who innovate – create, find and/or combine knowledge into new products, services, and distribution methods – faster than their competitors. Innovation is above all spurred by entrepreneurial action, aimed at creating value through the application of knowledge.


Assess the innovativeness of organization:
v  Incremental Innovation – Doing more of the same things you have been doing with somewhat better results.
v  Additive Innovation – More fully exploiting already existing resources, such as product lines extensions, and can achieve good results. These opportunities should rarely be treated as high priority efforts. The risks should be small – and they should not take resources away from complementary or breakthrough opportunities.
v  Complementary Innovation – Offers something new and changes the structure of the business.
v  Breakthrough Innovation (Radical Innovation) – Changes the fundamentals of the business, creating a new industry and new avenues for extensive wealth creation.


There are several sources of innovation. In the linear model the traditionally recognized source is manufacturer innovation. This is where an agent (person or business) innovates in order to sell the innovation. Another source of innovation, only now becoming widely recognized, is end-user innovation. This is where an agent (person or company) develops an innovation for their own (personal or in-house) use because existing products do not meet their needs.
Innovation by businesses is achieved in many ways, with much attention now given to formal research and development for "breakthrough innovations." But innovations may be developed by less formal on-the-job modifications of practice, through exchange and combination of professional experience and by many other routes. The more radical and revolutionary innovations tend to emerge from R&D, while more incremental innovations may emerge from practice – but there are many exceptions to each of these trends.

Regarding user innovation, rarely user innovators may become entrepreneurs, selling their product, or more often they may choose to trade their innovation in exchange for other innovations. Nowadays, they may also choose to freely reveal their innovations, using methods like open source. In such networks of innovation the creativity of the users or communities of users can further develop technologies and their use.
Whether innovation is mainly supply-pushed (based on new technological possibilities) or demand-led (based on social needs and market requirements) has been a hotly debated topic. Similarly, what exactly drives innovation in organizations and economies remains an open question.


The speed and efficiency of the diffusion of innovation through the economy is critical to productivity and economic growth. It can be pictured as a cascade process. Through the forces of competition and imitation, an initial innovation is developed and improved so that the impact on the economy is many times greater than that brought about by the first application of the innovation.
The operative assumption today is that someone, somewhere, has a better idea; and the operative compulsion is to find out who has that better idea, learn it and put into action – fast.
In fast-moving sectors it is the new enterprises with growth potential that are often the most innovative, forcing established enterprises to respond to the change by themselves becoming more innovative. Encouraging the emergence of new firms is a strong force for innovation in many sectors.


In the organizational context, innovation may be linked to performance and growth through improvements in efficiency, productivity, quality, competitive positioning, market share, etc. All organizations can innovate, including for example hospitals, universities, and local governments.
While innovation typically adds value, innovation may also have a negative or destructive effect as new developments clear away or change old organizational forms and practices. Organizations that do not innovate effectively may be destroyed by those that do. Hence innovation typically involves risk. A key challenge in innovation is maintaining a balance between process and product innovations where process innovations tend to involve a business model which may develop shareholder satisfaction through improved efficiencies while product innovations develop customer support however at the risk of costly R&D that can erode shareholder return.
For innovation to occur, something more than the generation of a creative idea or insight is required: the insight must be put into action to make a genuine difference, resulting for example in new or altered business processes within the organization, or changes in the products and services provided.
A further characterization of innovation is as an organizational or management process. For example, Davila et al (2006), write:
"Innovation, like many business functions, is a management process that requires specific tools, rules, and discipline."

From this point of view the emphasis is moved from the introduction of specific novel and useful ideas to the general organizational processes and procedures for generating, considering, and acting on such insights leading to significant organizational improvements in terms of improved or new business products, services, or internal processes.


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