Innovation – What It Is and

CHAPTER 1
Why It Matters
Mathieu Meur/Stocktrek Images/Getty Images

LEARNING OBJECTIVES
By the end of this chapter you will develop • the difficulties in managing what is an
an understanding of: uncertain and risky process
• what ‘innovation’ and ‘entrepreneurship’ • the key themes in thinking about how to
mean and how they are essential for manage this process effectively
survival and growth
• innovation as a process rather than a
single flash of inspiration

‘A slow sort of country’ said the Red Queen. ‘Now here, you see, it takes all the running you can do to keep
in the same place. If you want to get somewhere else, you must run at least twice as fast as that!’
— Lewis Carroll, Alice Through the Looking Glass, 1872. Public domain.

Y ou don’t have to look far before you bump into the innovation imperative. It leaps
out at you from a thousand mission statements and strategy documents, each stress-
ing how important innovation is to ‘our customers/our shareholders/our business/our
future and most often, our survival and growth’. Innovation shouts from advertisements

1
2 CHAPTER 1 Innovation – What It Is and Why It Matters

for products ranging from hairspray to hospital care. It nestles deep in the heart of our
history books, pointing out how far and for how long it has shaped our lives. And it is
on the lips of every politician, recognizing that our lifestyles are constantly shaped and
reshaped by the process of innovation.
Innovation makes a huge difference to organizations of all shapes and sizes. The
logic is simple – if we don’t change what we offer the world (products and services) and
how we create and deliver them, we risk being overtaken by others who do. At the limit,
it’s about survival, and history is very clear on this point: survival is not compulsory! Those
enterprises that survive do so because they are capable of regular and focused change.
(It’s worth noting that Bill Gates used to say of Microsoft that it was always only two years
away from extinction. Or, as Andy Grove, one of the founders of Intel, pointed out in his
autobiography, ‘only the paranoid survive!’) [1].
In this chapter, we’ll look at the challenge of innovation in more detail – what it
is, why it matters and, most importantly, how we might think about organizing and
managing the process.

1.1
This isn’t just hype or advertising babble – you can get a feel for the importance attached to it
1.1 THE
in View 1.1.
IMPORTANCE Innovation is strongly associated with growth. New business is created by new ideas,
OF INNOVATION by the process of creating competitive advantage in what a firm can offer. While competitive
advantage can come from size, or possession of assets, and so on, the pattern is increasingly

VIEW 1.1 I N N OVAT I O N – E V E RY B O DY ’ S TA L K I N G A B O U T I T

• ‘We believe in making a difference. Virgin stands for value • ‘Since 1899 HELLA has been continuously making its mark
for money, quality, innovation, fun and a sense of competitive on the market with outstanding ideas. This innovative power
challenge. We deliver a quality service by empowering our is both the origin and the future of the company. Those who
employees and we facilitate and monitor customer feedback want to be global leaders must be – and stay – curious, per-
to continually improve the customer’s experience through sistent and flexible. Networking at all levels is the primary
innovation’ (Richard Branson) reason behind this wealth of ideas. Our employees from
• ‘Adi Dassler had a clear, simple, and unwavering passion for around the world contribute new, fresh ideas.’ Hella Annual
sport. Which is why with the benefit of 50 years of relent- Report (www.hella.com)
less innovation created in his spirit, we continue to stay at • ‘Innovation distinguishes between a leader and a follower’,
the forefront of technology’, Adidas about its future (www. Steve Jobs, Apple
adidas.com) • ‘John Deere’s ability to keep inventing new products that are
• ‘Innovation is our lifeblood’, Siemens about innovation useful to customers is still the key to the company’s growth’,
(www.siemens.com) Robert Lane, CEO, John Deere

coming to favour those organizations that can mobilize knowledge and technological skills and
experience to create novelty in their offerings (product/service) and the ways in which they cre-
ate and deliver those offerings. Economists have argued for decades over the exact nature of the
relationship, but they have generally agreed that innovation accounts for a sizeable proportion
of economic growth. In a recent book, William Baumol [2] pointed out that ‘virtually all of the
economic growth that has occurred since the eighteenth century is ultimately attributable to
innovation’.
Research Note 1.1 gives some examples of this economic importance.
 1.1 The Importance of Innovation 3

RESEARCH NOTE 1.1 Why Innovation Is Economically Important

OECD countries spend $1700 billion per year on R&D [3]. innovative, compared to 45% of the businesses in the 2013
China has the ambition to spend 2.5% of gross domestic survey; 61% of large businesses (those with more than 250
product (GDP) on research by 2020; in 2019 it spent 2.2%, employees) and 53% of small and medium enterprises (those
equivalent to $278 billion. with 10 to 250 employees) were innovative.
South Korea and Israel are the world’s most R&D- In the United Kingdom, 28% of innovators were
intensive countries, spending well over 4% of GDP on research engaged in exports (compared with 10% of non-innovators);
and development. Other high performers in Asia included they reported employing more highly qualified staff, partic-
Japan at 3.35% and Chinese Taiwan at 3.1%. ularly staff with science and engineering degrees (12%, com-
In 2008, 16.8% of all firms’ turnover in Germany was pared to only 4% of non-innovators). Twenty-five per cent of
earned with newly introduced products, and in the research- all businesses used technological (either product or process)
intensive sector, this figure was 38%. During the same year, the innovation, and 42% of all businesses used nontechnologi-
German economy was able to save costs of 3.9% per piece by cal (organizational or market) innovation, and 27% reported
means of process innovations. engaging in ‘new business practices’.
The European Union’s Community Innovation Survey
(CIS) reported in 2015 that 53% of the businesses were

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Figure 1.1 shows the huge amount committed to R&D in some of the world’s most suc-
cessful businesses.
The consulting firm PWC runs a regular survey of senior executives on the theme of inno-
vation; in their 2015 Global Innovation Survey, almost half of the 1757 executives interviewed
(43%) felt that innovation is a ‘competitive necessity’ for their organization. This was not simply
an act of faith; PWC data suggests that leading innovators can expect significant rewards both
financially and in terms of competitive positioning. ‘Over the last three years, the most innovative
companies in our study delivered growth at a rate of 16% above that of the least innovative . . . In
five year’s time, they forecast that their rate of growth will further increase to almost double the
global average, and over three times, higher than the least innovative. For the average company, this
equates to $0.5bn more revenue than their less innovative peers’ [4].
Similarly, BCG in their report on the world’s top 50 innovative companies draws similar
conclusions. The importance issue remains the same – with 79% of respondents in 2015 ranking it
as their most important strategic priority, up from around 66% in 2005. And the benefits expected
include not only market share but also speed of entry into new and fast-growing fields [5].
Case Study 1.1 gives some more examples of the link between innovation and growth.
4 CHAPTER 1 Innovation – What It Is and Why It Matters

CA S E S T U DY 1 . 1 Growth Champions and the Returns from Innovation

Tim Jones has been studying successful innovating organi- between the two; innovative organizations are more profitable
zations for some time, looking to try and establish a link bet- and more successful.
ween those organizations that invest consistently in innovation Tim Jones talked about the Growth Champions project
and their subsequent performance [3]. His findings show that in a 2014 interview: https://www.youtube.com/watch?v=
over a sustained period of time, there is a strongly positive link O91BxG14G1c.

1.2
Importantly, innovation and competitive success are not simply about high-technology com-
1.2 INNOVATION
panies; for example, the German firm Wurth is the largest maker of screws (and other fastenings
IS NOT such as nuts and bolts) in the world with a turnover of €15 billion in 2019. Despite low-cost com-
JUST HIGH petition from China, the company has managed to stay ahead through an emphasis on product
TECHNOLOGY and process innovation across a supplier network similar to the model used in computers by Dell.
In a similar fashion, the UK Dairy Crest business (now part of the Canadian food giant Saputo)
has built up a turnover of nearly €1.5 billion (2018) by offering a stream of product innovations
including resealable packaging, novel formats and new varieties of cheese and related dairy prod-
ucts, supported by manufacturing and logistics process innovations [8]. The Danish company
Christian Hansen has spent the last two hundred years supplying a huge range of live bacterial
cultures to the food industry around the world. Their natural food colours are also extensively
used and they have a growing presence in the field of healthcare via probiotics. Their dominance
of this niche traces its roots to a commitment to innovation, borne out of the earliest days of the
company as a university lab-based spin out [4].
Another long-established German firm, Wilo was founded in 1872 and has evolved into one
of Europe’s most successful manufacturers of pumps for a wide range of domestic and industrial
applications. And Hella manufactures the lion’s share of headlights (as well as many other auto-
mobile electronic parts), having built from a nineteenth century startup to a €7 billion company
employing 35,000 people worldwide. Both survived and grew through a consistent commitment
to innovation in products, processes and markets [5].
Research Note 1.2 gives some more examples of the link between innovation and
economic performance.

RESEARCH NOTE 1.2 Company-level Innovation Performance

At the level of the firm, a number of research studies have stock market returns than firms that invest identical amounts
regularly highlighted the link between performance and in R&D but that have poor track (innovation) records . . .’ [7].
innovation – for example Kumar and Li of the University of This finding emerges from many studies – for example the
Houston found that ‘. . . innovative capacity is positively related Boston Consulting Group’s 2018 survey of the top 1000 inno-
to subsequent cumulative stock returns . . .’ [6]. Innovative com- vating firms concluded ‘There is no long-term correlation
panies tend to enjoy greater profits, faster profit growth, larger between the amount of money a company spends on its inno-
profit margins and other profit metrics as compared to non- vation efforts and its overall financial performance. Instead,
innovative firms. Importantly this is not due to investments in what matters is how companies use that money and other
R&D alone but rather to the ability to convert knowledge into resources, as well as the quality of their talent, processes, and
value. Another study found that firms that have been success- decision making, to create products and services that connect
ful innovators ‘. . . in the past earn substantially higher future with their customers’ [8].
 1.2 Innovation Is Not Just High Technology 5

Case Study 1.2 gives an example of how innovation can strengthen competitive position.

CA S E S T U DY 1 . 2 Running Away with the Competition

Shoes have been around for a very long time – archaeologists in 2016. For elite athletes, a Vaporflys could make a reduction of
have found them from 40,000 years ago. And even sports shoes one to two minutes across an entire marathon. It’s potentially the
are not that new – the first footwear designed to help improve difference between coming first and coming fifth’ [9].
running performance were developed by Adolf Dassler in 1920 It has helped athletes break multiple world records – and
(giving the brand name ‘Adidas’ from a shortening of his name). also thrown down a big challenge to other manufacturers to
So you could be forgiven for thinking that by now catch up; at a recent Japanese marathon, television showed 84%
there is little room for innovation in this space. But you’d be of the athletes wearing the Nike shoe. The impact on Asics, the
wrong – in an industry worth an estimated $13 billion globally local competitor brand, was dramatic, the share price falling
the pressure to keep introducing new products and services is sharply. By contrast Nike has been streaking ahead; since the
intense. It has led to new designs, new fabrics, new approaches shoes were introduced its share price has risen by 90% [10].
to the process of getting shoes to fit exactly (Adidas with its ‘mi- The fuss is, of course, not about the running track but
adidas’ platform now enables a user to have the shoes custom about the message sent to the millions of ‘ordinary’ people who
made for them using various 3D imaging and printing technol- run for pleasure and whose role models are now winning in
ogies. Nike even has a version of its shoes with self-tying shoe- such style. Despite their high cost – a pair of Vaporfly shoes
laces which can be controlled from a smartphone). currently cost $250 – the prospect of a performance boost is
But while the major players in this industry have been irresistible.
running neck and neck for some time, Nike has recently Needless to say the big competitors in the field like Asics
achieved a breakthrough. Its Vaporfly shoes were developed and Adidas have been running hard to catch up with their own
to include a carbon-fibre plate and a wedge of soft, energy- versions of carbon fibre plate shoes. Only now, three years after
returning foam that help runners move at least 4% more effi- the Vaporfly trainers first emerged, are running shoe rivals
ciently. Independent research studies have backed up this claim; releasing their own versions of footwear with carbon fibre
the shoe offers such a significant improvement to per­formance plates installed combined with soft foam cushioning – the new
that it risked being banned from the 2021 Olympics and even dominant design. But it takes time and money to develop such
now creates controversy in sporting circles. A report by Wired offerings and competitors like Adidas are currently on the back
magazine suggests that ‘twice as many men and women ran faster foot; sales of its ‘Boost’ shoe have flattened out reflecting its age
than 2:10 and 2:27 for a marathon than before the shoe’s debut and lack of excitement compared to Nike’s product.

Of course, not all games are about win/lose outcomes. Public services such as health
care, education and social security may not generate profits, but they do affect the quality of
life for millions of people. Bright ideas when implemented well can lead to valued new services
and the efficient delivery of existing ones at a time when pressure on national purse strings is
becoming ever tighter. For example, the Karolinska Hospital in Stockholm managed to make
radical improvements in the speed, quality and effectiveness of its care services – such as cutting
the waiting lists by 75% and cancellations by 80% – through innovation [11]. Similar dramatic
gains have been made in a variety of Indian health-care operations, and suggest important new
directions for global health-care management to help deal with the crisis of rising demands but
limited resources [12]. Public sector innovations have included the postage stamp, the National
Health Service in the United Kingdom and much of the early development work behind technol-
ogies such as fibre optics, radar and the Internet.
And new ideas – whether wind-up radios in Tanzania or microcredit financing schemes in
Bangladesh – have the potential to change the quality of life and the availability of opportunity
for people in some of the poorest regions of the world. There’s plenty of scope for innovation and
entrepreneurship, and sometimes, this really is about life and death – for example, in the context
of humanitarian aid for disasters.
Table 1.1 gives some examples drawn from across the spectrum showing how innovation
makes a difference to organizations of all shapes and sizes.
6 CHAPTER 1 Innovation – What It Is and Why It Matters

Table 1.1 Where Innovation Makes a Difference

Innovation Is About . . . Examples

Identifying or creating Innovation is driven by the ability to see connections, to spot opportunities, and to take advantage of
opportunities them. Sometimes, this is about completely new possibilities – for example, by exploiting radical break-
throughs in technology. New drugs based on genetic manipulation have opened a major new front in the
war against disease. Mobile phones, tablets, and other devices have revolutionized where and when we
communicate. Even the humble window pane is the result of radical technological innovation – these
days, almost all the window glass in the world is made by the Pilkington float glass process, which moved
the industry away from the time-consuming process of grinding and polishing to get a flat surface. James
Dyson built a global business by applying new technologies to domestic appliances such as vacuum
cleaners and hand driers.
New ways of serving Innovation isn’t just about opening up new markets – it can also offer new ways of serving established
existing markets and mature ones. Low-cost airlines are still about transportation – but the innovations that firms such as
Southwest Airlines, EasyJet and Ryanair introduced have revolutionized air travel and grown the market
in the process. Despite a global shift in textile and clothing manufacture towards developing countries, the
Spanish company Inditex (through its retail outlets under various names including Zara) has pioneered a
highly flexible, fast-turnaround clothing operation with over 2000 outlets in 52 countries. It was founded
by Amancio Ortega Gaona, who set up a small operation in the west of Spain in La Coruna – a region
not previously noted for textile production – and the first store opened there in 1975. They now have over
5000 stores worldwide and are now the world’s biggest clothing retailer; significantly, they are also the
only manufacturer to offer specific collections for Northern and Southern Hemisphere markets. Central to
the Inditex philosophy is the close linkage between design, manufacture and retailing, and their network
of stores constantly feeds back information about trends that are used to generate new designs. They
also experiment with new ideas directly on the public, trying samples of cloth or design and quickly getting
back indications of what is going to catch on. Despite their global orientation, most manufacturing is still
done in Spain, and they have managed to reduce the turnaround time between a trigger signal for an
innovation and responding to it to around 15 days.
Growing new markets Equally important is the ability to spot where and how new markets can be created and grown. Alexander
Bell’s invention of the telephone didn’t lead to an overnight revolution in communications – that depended
on developing the market for person-to-person communications. Henry Ford may not have invented the
motor car, but in making the Model T – ‘a car for everyman’ at a price most people could afford – he grew
the mass market for personal transportation. And eBay justifies its multibillion-dollar price tag not because
of the technology behind its online auction idea but because it created and grew the market.
Rethinking services In most economies, the service sector accounts for the vast majority of activity, so there is likely to be
plenty of scope. And the lower capital costs often mean that the opportunities for new entrants and radical
change are greatest in the service sector. Online banking and insurance have become commonplace, but
they have radically transformed the efficiencies with which those sectors work and the range of
services they can provide. New entrants riding the digital wave have rewritten the rule book for a wide
range of industrial games – for example, Amazon in retailing, eBay in market trading and auctions,
Google in advertising, Skype in telephony, Uber in transportation and Airbnb in accommodation.
Meeting social needs Innovation offers huge challenges – and opportunities – for the public sector. Pressure to deliver more
and better services without increasing the tax burden is a puzzle likely to keep many civil servants awake
at night. But it’s not an impossible dream – right across the spectrum, there are examples of innovation
changing the way the sector works. For example, in health care, there have been major improvements in
efficiencies around key targets such as waiting times. Hospitals such as the Leicester Royal Infirmary
in the United Kingdom or the Karolinska Hospital in Stockholm, Sweden, have managed to make radical
improvements in the speed, quality and effectiveness of their care services – such as cutting the waiting
lists for elective surgery by 75% and cancellations by 80% – through innovation.
Improving operations – At the other end of the scale, Kumba Resources is a large South African mining company that makes
doing what we do but another dramatic claim – ‘We move mountains’. In their case, the mountains contain iron ore, and their
better huge operations require large-scale excavation – and restitution of the landscape afterward. Much of their
business involves complex large-scale machinery – and their ability to keep it running and productive
depends on a workforce able to contribute their innovative ideas on a continuing basis.
 1.3 It’s Not Just Products . . . 7

Survival and growth pose a problem for established players but a huge opportunity for new-
comers to rewrite the rules of the game. One person’s problem is another’s opportunity, and the
nature of innovation is that it is fundamentally about entrepreneurship. The skill to spot oppor-
tunities and create new ways to exploit them is at the heart of the innovation process. Entrepre-
neurs are risk-takers – but they calculate the costs of taking a bright idea forward against the
potential gains if they succeed in doing something different – especially if that involves upstaging
the players already in the game. Case Study 1.3 gives some examples of such entrepreneurship
in action.

CA S E S T U DY 1 . 3 Finding Opportunities

Back in 1877 Sally Windmuller set up a small business near high-technology weaponry such as mines. The problem is com-
his home town of Lippstadt in Germany making and selling pounded by the fact that many of those requiring new limbs
accessories and equipment for farm transportation – lamps, are also in the poorest regions of the world and unable to
harnesses, horns and so on to go on their buggies, wagons afford expensive prosthetics. The chance meeting of a young
and bicycles. By 1895 it was a thriving business with a factory surgeon, Dr Pramod Karan Sethi, and a sculptor, Ram Chandra,
employing 120 people; four years later in 1899 he set up the in the hospital in Jaipur, India, has led to the development
company Hella making headlamps and horns for the emerging of a solution to this problem – the Jaipur foot. This artificial
world of ‘horseless carriages’ along with other entrepreneurs in limb was developed using Chandra’s skill as a sculptor and
the nascent automobile industry. Over the next hundred years Sethi’s expertise and is so effective that those who wear it can
this grew to become a global company turning over €7 bil- run, climb trees, and pedal bicycles. It was designed to make
lion and employing 35,000 people, dominating the headlamp use of low-tech materials and be simple to assemble – for
market and also playing an increasingly important role in auto- example, in Afghanistan, craftsmen hammer the foot together
motive electronics. out of spent artillery shells, while in Cambodia, part of the
When the Tasman Bridge collapsed in Hobart, Tasmania, foot’s rubber components are scavenged from truck tires. Per-
in 1975, Robert Clifford was running a small ferry company haps the greatest achievement has been to do all of this at a
and saw an opportunity to capitalize on the increased demand low cost – the Jaipur foot costs only $28 in India. Since 1975,
for ferries – and to differentiate his by selling drinks to thirsty nearly 1 million people worldwide have been fitted with the
cross-city commuters. The same entrepreneurial flair later Jaipur limb, and the design is being developed and refined – for
helped him build a company – Incat – that pioneered the wave- example, using advanced new materials.
piercing design, which helped them capture over half the world Not all innovation is necessarily good for everyone. One
market for fast catamaran ferries. Continuing investment in of the most vibrant entrepreneurial communities is in the
innovation has helped this company from a relatively isolated criminal world where there is a constant search for new ways
island build a key niche in highly competitive international of committing crime without being caught. The race between
military and civilian markets. the forces of crime and law and order is a powerful innovation
People have always needed artificial limbs, and the arena – as works by Howard Rush and colleagues have shown
demand has, sadly, significantly increased as a result of in their studies of ‘cybercrime’ [13].

1.3
Innovation is, of course, not confined to manufactured products; plenty of examples of growth
1.3 IT’S
through innovation can be found in services [14–16]. (In fact, the world’s first business com-
puter was used to support bakery planning and logistics for the UK catering services company NOT JUST
J. Lyons and Co.) In banking, the UK First Direct organization became the most competitive PRODUCTS . . .
bank, attracting around 10,000 new customers each month by offering a telephone banking ser-
vice backed up by sophisticated information technology (IT) – a model that eventually became
8 CHAPTER 1 Innovation – What It Is and Why It Matters

the industry standard. A similar approach to the insurance business – Direct Line – radically
changed the basis of that market and led to widespread imitation by all the major players in the
sector [17,18]. Internet-based retailers such as Amazon changed the ways in which products as
diverse as books, music and travel were sold, while firms such as eBay brought the auction house
into many living rooms.
Research Note 1.3 discusses some examples of innovation in fields that may sometimes
be ‘hidden’ from view.

RESEARCH NOTE 1.3 Hidden Innovation

In 2006, the UK organization NESTA published a report on ‘The or business models. For example, the development of new
Innovation Gap’ in the United Kingdom and laid particular contractual relationships between suppliers and clients on
emphasis on ‘hidden Innovation’ – innovation activities that major construction projects;
are not reflected in traditional indicators such as investments in • Type III: Innovation created from the novel combination
formal R&D or patents awarded. In a research focusing on six of existing technologies and processes. For example, the way
widely different sectors that were not perceived to be innovative, in which banks have integrated their various back-office
they argued that innovation of this kind is increasingly impor- IT systems to deliver innovative customer services such as
tant, especially in services, and in a subsequent study looked in Internet banking;
detail at six ‘hidden innovation’ sectors – oil production, retail
• Type IV: Locally developed, small-scale innovations that
banking, construction, legal aid services, education, and the
take place ‘under the radar’, not only of traditional indica-
rehabilitation of offenders. The study identified four types of
tors but often also of many of the organizations and indi-
hidden innovation:
viduals working in a sector, for example, the everyday
• Type I: Innovation that is identical or similar to activities innovation that occurs in classrooms and multidisciplinary
that are measured by traditional indicators, but which is construction teams.
excluded from measurement. For example, the development
of new technologies in oil exploration;
Source: National Endowment for Science, Technology and the Arts
• Type II: Innovation without a major scientific and tech- (NESTA), 2006, ‘The innovation gap’, and 2007, ‘Hidden innovation’,
nological basis, such as innovation in organizational forms https://www.nesta.org.uk/.

Innovation is a central plank in national economic policy – for example, a UK government

report called it ‘the motor of the modern economy, turning ideas and knowledge into products
and services’ [17]. An Australian government website puts the case equally strongly – Companies
that do not invest in innovation put their future at risk. Their business is unlikely to prosper, and
they are unlikely to be able to compete if they do not seek innovative solutions to emerging problems.
According to Statistics Canada (2006), the following factors characterize successful small- and
medium-sized enterprises:
• 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 innovative.
Not surprisingly, this rationale underpins a growing set of policy measures designed to
encourage and nurture innovation at regional and national levels.
 1.4 Innovation and Entrepreneurship 9

1.4
One person’s problem is another’s opportunity, and the nature of innovation is that it is fun-
1.4 INNOVATION
damentally about entrepreneurship – a potent mixture of vision, passion, energy, enthusiasm,
insight, judgement and plain hard work, which enables good ideas to become a reality. As the AND ENTRE-
famous management writer Peter Drucker put it: PRENEURSHIP
‘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 practised’ [19].

Entrepreneurship is a human characteristic that mixes structure with passion, planning

with vision, tools with the wisdom to use them, strategy with the energy to execute it and judge-
ment with the propensity to take risks. It’s possible to create structures within organizations –
departments, teams, specialist groups and so on – with the resources and responsibility for tak-
ing innovation forward, but effective change won’t happen without the ‘animal spirits’ of the
entrepreneur.
Research Note 1.4 discusses the ideas of Joseph Schumpeter, the ‘godfather’ of innova-
tion studies.

RESEARCH NOTE 1.4 Joseph Schumpeter – The ‘Godfather’ of Innovation Studies

One of the most significant figures in this area of economic the cycle repeats itself – our original entrepreneur or someone
theory was Joseph Schumpeter, who wrote extensively on the else looks for the next innovation, which will rewrite the rules of
subject. He had a distinguished career as an economist and the game, and off we go again. Schumpeter talks of a process of
served as Minister for Finance in the Austrian government. His ‘creative destruction’ where there is a constant search to create
argument was simple: entrepreneurs will seek to use techno- something new that simultaneously destroys the old rules and
logical innovation – a new product/service or a new process for establishes new ones – all driven by the search for new sources
making it – to get strategic advantage. For a while, this may be the of profits [20].
only example of the innovation, so the entrepreneur can expect In his view , ‘[What counts is] competition from the new
to make a lot of money – what Schumpeter calls ‘monopoly commodity, the new technology, the new source of supply, the
profits’. But, of course, other entrepreneurs will see what he has new type of organization. . . competition which. . . strikes not at
done and try to imitate it – with the result that other innovations the margins of the profits and the outputs of the existing firms
emerge, and the resulting ‘swarm’ of new ideas chips away at the but at their foundations and their very lives’.
monopoly profits until an equilibrium is reached. At this point,

Of course, entrepreneurship plays out on different stages in practice. One obvious example
is the new start-up venture in which the lone entrepreneur takes a calculated risk to bring
something new into the world. But entrepreneurship matters just as much to the established
organization, which needs to renew itself in what it offers and how it creates and delivers that
offering. Internal entrepreneurs – often labelled as ‘intrapreneurs’ or working in ‘corporate entre-
preneurship’ or ‘corporate venture’ departments – provide the drive, energy and vision to take
risky new ideas forward inside that context. And of course, the passion to change things may
not be around creating commercial value but rather in improving conditions or enabling change
in the wider social sphere or in the direction of environmental sustainability – a field that has
become known as ‘social entrepreneurship’.
This idea of entrepreneurship driving innovation to create value – social and
commercial – across the life cycle of organizations is central to this book. Table 1.2 gives some
examples of entrepreneurship and innovation.
10 CHAPTER 1 Innovation – What It Is and Why It Matters

Table 1.2 Entrepreneurship and Innovation

Stage in Life Start-up Growth Sustain/Scale Renew

Cycle of an
Organization
Creating Individual Growing the Building a portfolio of Returning to the
commercial entrepreneur business through incremental and radical radical frame-breaking
value exploiting new adding new innovation to sustain kind of innovation,
technology or products/services the business and/or which began the
market oppor- or moving into new spread its influence business and enables
tunity markets into new markets it to move forward as
something very different
Creating Social entrepre- Developing Spreading the idea Changing the
social neur, passion- the ideas and widely, diffusing it to system – and then
value ately concerned engaging others other communities of acting as an agent
with improving in a network for social entrepreneurs, for the next wave
or changing change – perhaps engaging links with of change
something in in a region or mainstream players
their immediate around a key issue such as public sector
environment agencies

1.5
Innovation contributes in several ways. For example, research evidence suggests a strong corre-
1.5 STRATEGIC
lation between market performance and new products. New products help capture and retain
ADVANTAGE market shares and increase profitability in those markets. In the case of more mature and
THROUGH established products, competitive sales growth comes not simply from being able to offer low
INNOVATION prices but also from a variety of nonprice factors – design, customization and quality. And in
a world of shortening product life cycles – where, for example, the life of a particular model of
television set or computer is measured in months, and even complex products such as motor cars
now take only a couple of years to develop – being able to replace products frequently with better
versions is increasingly important. ‘Competing in time’ reflects a growing pressure on firms not
just to introduce new products but to do so faster than the competitors [21]; in their 2019 survey,
BCG found that increasing the speed of innovation was a key driver [8].
At the same time, new product development is an important capability because the envi-
ronment is constantly changing. Shifts in the socioeconomic field (in what people believe,
expect, want and earn) create opportunities and constraints. Legislation may open up new
pathways, or close down others – for example, increasing the requirements for environmen-
tally friendly products. Competitors may introduce new products that represent a major threat
to existing market positions. In all these ways, firms need the capability to respond through
product innovation.
While new products are often seen as the cutting edge of innovation in the marketplace,
process innovation plays just as important a strategic role. Being able to make something no one
else can, or to do so in ways that are better than anyone else is a powerful source of advantage.
For example, the Japanese dominance in the late twentieth century across several sectors – cars,
motorcycles, shipbuilding, consumer electronics – owed a great deal to superior abilities in
manufacturing – something that resulted from a consistent pattern of process innovation. The
Toyota production system and its equivalent in Honda and Nissan led to performance advan-
tages of around two to one over average car makers across a range of quality and productivity
indicators [22]. One of the main reasons for the ability of relatively small firms such as Oxford
Instruments or Incat to survive in highly competitive global markets is the sheer complexity of
 1.5 Strategic Advantage Through Innovation 11

what they make and the huge difficulties a new entrant would encounter in trying to learn and
master their technologies.
Similarly, being able to offer better service – faster, cheaper, higher quality – has long
been seen as a source of competitive edge. Citibank was the first bank to offer automated teller
machinery (ATM) service and developed a strong market position as a technology leader on
the back of this process innovation. Benetton is one of the world’s most successful retailers,
largely due to its sophisticated IT-led production network, which it innovated over a 10-year
period, and the same model has been used to great effect by the Spanish firm Zara. Southwest
Airlines achieved an enviable position as the most effective airline in the United States despite
being much smaller than its rivals; its success was due to process innovation in areas such as
reducing airport turnaround times. This model has subsequently become the template for a
whole new generation of low-cost airlines whose efforts have revolutionized the once-cosy
world of air travel.
Importantly, we need to remember that the advantages that flow from these innovative
steps gradually fall to the competition as others imitate. Unless an organization is able to move
into further innovation, it risks being left behind as others take the lead in changing their offer-
ings, their operational processes or the underlying models, which drive their business. For
example, leadership in banking has been passed to those who were able to capitalize early on
the boom in information and communications technologies; in particular, many of the lucrative
financial services such as securities and share dealing have become dominated by players with
radical new models such as Charles Schwab. In turn, there are now major challenges from the
world of peer-to-peer lending and other Web-based financial services.
Research Note 1.5 discusses the innovation imperative facing organizations.
Case Study 1.4 looks in detail at one example – the music industry.

RESEARCH NOTE 1.5 The Innovation Imperative

In the mid-1980s, a study by Shell suggested that the average cor- nineteenth century, which had Wellington boots and toilet
porate survival rate for large companies was only about half as paper among its product range, became one of the largest
long as that of a human being. Since then, the pressures on firms and most successful in the world in the telecommunications
have increased enormously from all directions – with the inevi- business. Nokia began life as a lumber company, making the
table result that life expectancy is reduced still further. Many equipment and supplies needed to cut down forests in Finland.
studies look at the changing composition of key indices and It moved through into paper and from there into the ‘paperless
draw attention to the demise of what were often major firms and, office’ world of IT – and from there into mobile telephones. It
in their time, key innovators. For example, Foster and Kaplan has now moved beyond handsets and into the core architecture
point out that, of the 500 companies originally making up the of networks and systems infrastructure.
Standard and Poor 500 list in 1857, only 74 remained on the list Another mobile phone player – Vodafone Airtouch –
through to 1997 [23]. Of the top 12 companies that made up the grew to its huge size by merging with a firm called Mannes-
Dow Jones index in 1900 only one – General Electric – survives man, which, since its birth in the 1870s, had been more com-
today. Even apparently robust giants such as IBM, GM or Kodak monly associated with the invention and production of steel
can suddenly display worrying signs of mortality, while for small tubes! TUI is the largest European travel and tourism services
firms, the picture is often considerably worse since they lack the company. Its origins, however, lie in the mines of old Prussia,
protection of a large resource base. where it was established as a public sector state lead mining
Some firms have had to change dramatically to stay and smelting company! [24].
in business. For example, a company founded in the early
12 CHAPTER 1 Innovation – What It Is and Why It Matters

CA S E S T U DY 1 . 4 The Changing Nature of the Music Industry

1 April 2006. Apart from being a traditional day for playing relatively slow modems. With MP3, effective compression is
practical jokes, this was the day on which another landmark in achieved by cutting out those frequencies that the human ear
the rapidly changing world of music was reached. ‘Crazy’ – a cannot detect – with the result that the files to be transferred
track by Gnarls Barkley – made pop history as the United are much smaller.
Kingdom’s first song to top the charts based on download sales As a result, MP3 files could be moved across the Internet
alone. Commenting on the fact that the song had been down- quickly and shared widely. What did this mean for the music
loaded more than 31,000 times but was only released for sale in business? In the first instance, aspiring musicians no longer
the shops on 3 April, Gennaro Castaldo, spokesman for retailer needed to depend on being picked up by A&R staff from major
HMV, said ‘This not only represents a watershed in how the companies who could bear the costs of recording and produc-
charts are compiled, but shows that legal downloads have come tion of a physical CD. Instead, they could use home recording
of age . . . if physical copies fly off the shelves at the same rate software and either produce a CD themselves or else go straight
it could vie for a place as the year’s biggest seller’. to MP3 – and then distribute the product globally via news-
One of the less visible but highly challenging aspects groups, chatrooms and so on. In the process, they effectively
of the Internet is the impact it has had – and is having – on created a parallel and much more direct music industry, which
the entertainment business. This is particularly the case with left existing players and artists on the sidelines.
music. At one level, its impacts could be assumed to be con- Such changes were not necessarily threatening. For many
fined to providing new ‘e-tailing’ channels, such as Amazon or people, the lowering of entry barriers opened up the possibility
hundreds of other websites. These innovations increased the of participating in the music business – for example, by mak-
choice and tailoring of the music purchasing service and dem- ing and sharing music without the complexities and costs of a
onstrated some of the ‘richness/reach’ economic shifts of the formal recording contract and the resources of a major record
new Internet game. company. There was also scope for innovation around the
But beneath this updating of essentially the same trans- periphery – for example, in the music publishing sector where
action lay a more fundamental shift – in the ways in which sheet music and lyrics are also susceptible to lowering of bar-
music is created and distributed and in the business model riers through the application of digital technology. Journalism
on which the whole music industry is currently predicated. In and related activities became increasingly open – music reviews
essence, the old model involved a complex network in which and other forms of commentary become possible via specialist
songwriters and artists depended on A&R (artists and reper- user groups and channels on the Web, whereas before, they
toire) to select a few acts, production staff who would record were the province of a few magazine titles. Compiling popu-
in complex and expensive studios, other production staff who larity charts – and the related advertising – was also opened up
would oversee the manufacture of physical discs, tapes and as the medium switched from physical CDs and tapes distrib-
CDs, and marketing and distribution staff who would ensure uted and sold via established channels to new media such as
that the product was publicized and disseminated to an increas- MP3 distributed via the Internet.
ingly global market. As if this were not enough, the industry was also chal-
Several key changes undermined this structure and lenged from another source – the sharing of music between dif-
brought with it significant disruption to the industry. Old com- ferent people connected via the Internet. Although technically
petencies were no longer relevant, while acquiring new ones illegal, this practice of sharing between people’s record collec-
became a matter of urgency. Even well-established names such tions had always taken place – but not on the scale that the
as Sony found it difficult to stay ahead, while new entrants were Internet threatened to facilitate. Much of the established music
able to exploit the economics of the Internet. At the heart of the industry was concerned with legal issues – how to protect copy-
change was the potential for creating, storing and distributing right and how to ensure that royalties were paid in the right
music in digital format – a problem that many researchers had proportions to those who participated in production and distri-
worked on for some time. One solution, developed by one of bution. But when people could share music in MP3 format and
the Fraunhofer Institutes in Germany, was a standard based distribute it globally, the potential for policing the system and
on the Motion Picture Experts Group (MPEG) level 3 protocol collecting royalties became extremely difficult to sustain.
(MP3). MP3 offers a powerful algorithm for managing one of It was made much more so by another technological
the big problems in transmitting music files – that of compres- development – that of person-to-person networking. Shawn
sion. Normal audio files cover a wide range of frequencies and Parker and Sean Fanning, teenage students (Fanning had the
are thus very large and not suitable for fast transfer across the nickname ‘The Napster’), were intrigued by the challenge of
Internet – especially with a population who may only be using being able to enable their friends to ‘see’ and share between their
 1.5 Strategic Advantage Through Innovation 13

own personal record collections. They argued that if they held and downloaded around the globe, representing a major force
these in MP3 format, then it should be possible to set up some against music piracy and the future of music distribution as we
kind of central exchange program that facilitated their sharing. move from CDs to the Internet’.
The result – the Napster.com site – offered sophisticated This technological change to digital music was a
software that enabled peer-to-peer (P2P) transactions. The dramatic shift, reaching the point where more singles were
Napster server did not actually hold any music on its files – but bought as downloads in 2005 than as CDs and where new
every day, millions of swaps were made by people around the players began to dominate the game. And the changes didn’t
world exchanging their music collections. Needless to say, this stop there. In February 2006, the Arctic Monkeys topped the
posed a huge threat to the established music business since it UK album charts and walked off with a fistful of awards from
involved no payment of royalties. A number of high-profile the music business – yet their rise to prominence had been
lawsuits followed, but while Napster’s activities were curbed, entirely via ‘viral marketing’ across the Internet rather than by
the problem did not go away. Many other sites began emulating conventional advertising and promotion. Playing gigs around
and extending what Napster started – sites such as Gnutella, the northern English town of Sheffield, the band simply gave
Kazaa and Limewire took the P2P idea further and enabled away CDs of their early songs to their fans, who then oblig-
exchange of many different file formats – text, video and so ingly spread them around on the Internet. ‘They came to the
on. In Napster’s own case, the phenomenally successful site attention of the public via the Internet, and you had chat rooms,
concluded a deal with the entertainment giant Bertelsmann, everyone talking about them’, says a slightly worried Gennaro
which paved the way for subscription-based services that pro- Castaldo of HMV Records. David Sinclair, a rock journalist,
vide some revenue stream to deal with the royalty issue. suggests that ‘It’s a big wakeup call to all the record companies,
Expectations that legal protection would limit the impact the establishment, if you like . . . This lot caught them all nap-
of this revolution were dampened by a US Court of Appeal ping . . . We are living in a completely different era, which the
ruling, which rejected claims that P2P violated copyright Arctic Monkeys have done an awful lot to bring about’.
law. Their judgement said, ‘History has shown that time and Subsequent developments have shown an acceleration
market forces often provide equilibrium in balancing interests, in the pace of change and an explosion in the variety of new
whether the new technology be a player piano, a copier, a tape business models better adapted to create and capture value
recorder, a video recorder, a PC, a karaoke machine or an MP3 from the industry. For example, the US music download
player’ (Personal Computer World, November 2004, p. 32). business became dominated by Apple and Amazon (with 70%
Significantly, the new opportunities opened up by this and 10%, respectively, of the market) – two companies with
were seized not by music industry firms but by computer com- roots in very different worlds. While the volume of downloads
panies, especially Apple. In parallel with the launch of their increased significantly, competition emerged from other new
successful iPod personal MP3 player, they opened a site called business models, notably those built around streaming ser-
iTunes, which offered users a choice of thousands of tracks vices. In 2008 the Swedish company Spotify AB launched the
for download at 99c each. In its first weeks of operation, it Spotify service with a different assumption – that people did
recorded 1 million hits; in February 2006, the billionth song, not necessarily wish to own the music they wanted but would
‘Speed of Sound’, was purchased as part of Coldplay’s ‘X&Y’ be prepared to rent access to it on a subscription basis. Its
album by Alex Ostrovsky from West Bloomfield, Michigan. ‘I catalogue now runs to over 30 million items and the company
hope that every customer, artist, and music company execu- currently has 271 million users spread across 79 countries; of
tive takes a moment today to reflect on what we’ve achieved these 124 million pay a subscription for the premium service
together during the past three years’, said Steve Jobs, Apple’s while the rest access the service for free with the costs being
CEO, ‘Over one billion songs have now been legally purchased picked up in advertising streamed alongside the music.

With the rise of the Internet, the scope for service innovation has grown enormously, so
much so that it is sometimes called ‘a solution looking for problems’. As Evans and Wurster point
out, the traditional picture of services being offered either as a standard to a large market (high
‘reach’ in their terms) or else highly specialized and customized to a particular individual able to
pay a high price (high ‘richness’) is ‘blown to bits’ by the opportunities of Web-based technology.
Now it becomes possible to offer both richness and reach at the same time – and thus to create
totally new markets and disrupt radically those that exist in any information-related businesses [25].
The challenge that the Internet poses is not only one for the major banks and retail com-
panies, although those are the stories that hit the headlines. It is also an issue – and quite pos-
sibly a survival one – for thousands of small businesses. Think about the local travel agent and
14 CHAPTER 1 Innovation – What It Is and Why It Matters

the cosy way in which it used to operate. Racks full of glossy brochures through which people
could browse, desks at which helpful sales assistants sort out the details of selecting and booking
a holiday, procuring the tickets, arranging insurance and so on. And then think about how all
of this can be accomplished at the click of a mouse from the comfort of home – and that it
can potentially be done with more choice and at lower cost. Not surprisingly, one of the biggest
growth areas in dot.com start-ups was the travel sector, and while many disappeared when the
bubble burst, others such as lastminute.com and Expedia have established themselves as main-
stream players.
The point is that whatever the dominant technological, social or market conditions, the key
to creating – and sustaining – competitive advantage is likely to lie with those organizations that
continually innovate.
Table 1.3 indicates some of the ways in which enterprises can obtain strategic advantage
through innovation.

Table 1.3 Strategic Advantages Through Innovation

Mechanism Strategic Advantage Examples

Novelty in product or Offering something no one else can Introducing the first . . . Walkman, mobile phone, fountain pen,
service offering camera, dishwasher, telephone bank, online retailer and so
on . . . to the world
Novelty in process Offering it in ways others cannot match – Pilkington’s float glass process, Bessemer’s steel process,
faster, lower cost, more customized and so Internet banking, online bookselling and so on
on
Complexity Offering something that others find difficult Rolls-Royce and aircraft engines – only a handful of competi-
to master tors can master the complex machining and metallurgy involved
Legal protection of Offering something that others cannot do Blockbuster drugs such as Zantac, Prozac, Viagra and so on
intellectual property unless they pay a license or other fee
Add/extend range of Move basis of competition – for example, Japanese car manufacturing, which systematically moved
competitive factors from price of product to price and quality, or the competitive agenda from price to quality, to flexibility and
price, quality, choice and so on choice, to shorter times between launch of new models and
so on – each time not trading these off against each other but
offering them all
Timing First-mover advantage – being first can Amazon, Google – others can follow, but the advantage ‘sticks’
be worth significant market share in new to the early movers. For example, personal digital assistants
product fields. Fast follower advantage – (PDAs), which captured a huge and growing share of the
sometimes being first means you encounter market and then found their functionality absorbed into mobile
many unexpected teething problems, and it phones and tablet devices. In fact, the concept and design was
makes better sense to watch someone else articulated in Apple’s ill-fated Newton product some five years
make the early mistakes and move fast into earlier – but problems with software and especially handwriting
a follow-up product recognition meant it flopped. Equally, their iPod was not the first
MP3 player, but the lessons they learned from earlier product
failures from other companies helped them focus on making the
design a success and built the platform for the iPhone
Robust/platform Offering something that provides the platform Walkman architecture – through minidisk, CD, DVD, MP3 . . .
design on which other variations and generations Boeing 737 – over 50 years old, the design is still being adapted
can be built and configured to suit different users – one of the most suc-
cessful aircraft in the world in terms of sales
Intel and AMD with different variants of their microprocessor
families
Rewriting the rules Offering something that represents a com- Typewriters versus computer word processing, ice versus refrig-
pletely new product or process concept – a erators, electric versus gas or oil lamps
different way of doing things – and makes
the old ones redundant
 1.6 Old Question, New Context 15

Table 1.3 Strategic Advantages Through Innovation (continued)

Mechanism Strategic Advantage Examples

Reconfiguring the Rethinking the way in which bits of the Zara, Benetton in clothing, Dell in computers, Toyota in its
parts of the process system work together – for example, building supply chain management, Cisco in providing the digital infra-
more effective networks, outsourcing, structure underpinning the Web
coordination of a virtual company and so on
Transferring across Recombining established elements for Polycarbonate wheels transferred from application market such
different application different markets as rolling luggage into children’s toys – lightweight micro-
contexts scooters
Others Innovation is all about finding new ways Napster. This firm began by writing software that would enable
to do things and to obtain strategic music fans to swap their favourite pieces via peer-to-peer (P2P)
advantage – so there will be room for new networking across the Internet. Although Napster suffered from
ways of gaining and retaining advantage legal issues, followers developed a huge industry based on
downloading and file sharing. The experiences of one of these
firms – Kazaa – provided the platform for successful high-
volume Internet telephony, and the company established with
this knowledge – Skype – was sold to eBay for $2.6 billion and
eventually to Microsoft for $8.5 billion

1.6
‘Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting
1.6 OLD
uncertainty . . . all old-established national industries have been destroyed or are daily being destroyed.
They are dislodged by new industries . . . whose products are consumed not only at home but in every QUESTION,
quarter of the globe. In place of old wants satisfied by the production of the country, we find new NEW CONTEXT
wants . . . the intellectual creativity of individual nations become common property’

This quote does not come from a contemporary journalist or politician but from the Com-
munist Manifesto, published by Karl Marx and Friedrich Engels in 1848! But it serves to remind
us that the innovation challenge isn’t new – organizations have always had to think about chang-
ing what they offer the world and the ways they create and deliver that offering if they are to
survive and grow. The trouble is that innovation involves a moving target – not only is there
competition among players in the game, but the overall context in which the game is played out
keeps shifting. And while many organizations have some tried-and-tested recipes for playing
the game, there is always the risk that the rules will change and leave them vulnerable. Changes
along several core environmental dimensions mean that the incidence of discontinuities is likely
to rise – for example, in response to a massive increase in the rate of knowledge production and
the consequent increase in the potential for technology-linked instabilities. But there is also a
higher level of interactivity among these environmental elements – complexity – which leads to
unpredictable emergence.
The current uncertainty in the automobile industry is a good example. During most
of the twentieth century the technological and market trajectories were clear, and innova-
tion took place in a pattern reflecting the maturity of the sector. But now it has reverted to
a fluid state in which social forces (such as changing attitudes to ownership and concern for
the health of the planet), regulatory pressures (on emissions and on energy conservation),
the entry of new players (many coming from outside the traditional auto sector) and tech-
nological shifts (especially towards driverless car technology) are all creating a complex
co-evolving system.
Case Study 1.5 explores the ways in which Kodak is reinventing itself through redeploying
some of its knowledge base.
16 CHAPTER 1 Innovation – What It Is and Why It Matters

CA S E S T U DY 1 . 5 Reinventing Kodak

The difficulties of a firm such as Kodak illustrate the problem. while at the same time to rapidly acquire and absorb cutting
Founded around 100 years ago, the basis of the business was edge new technologies in electronics and communication.
the production and processing of film and the sales and ser- Although they made strenuous efforts to shift from being a
vice associated with mass-market photography. While the lat- manufacturer of film to becoming a key player in the digital
ter set of competencies are still highly relevant (even though imaging industry and beyond, they found the transition very
camera technology has shifted), the move away from wet difficult, and in 2012, they filed for Chapter 11 bankruptcy
physical chemistry conducted in the dark (coating emul- protection.
sions onto films and paper) to digital imaging represented Significantly, this is not the end of the company; instead,
a profound change for the firm. It needed – across a global it has regrouped around other core technologies and devel-
operation and a workforce of thousands – to let go of old oped new directions for innovation-led growth in fields such as
competencies, which are unlikely to be needed in the future, high-speed, high-volume printing.

1.7
Innovation has always been a globally distributed activity but until the latter part of the twentieth
1.7 THE
century it was strongly linked to the major industrial nations. The rise of the industrial research
GLOBALIZATION laboratory and the growing investment in universities and other parts of the science and tech-
OF INNOVATION nology ecosystem took place particularly in regions like the USA, Japan and Europe. That pattern
has changed dramatically; now even small country players like Taiwan, Singapore or Denmark
are important parts of the international innovation system.
As Figure 1.2 shows one indicator of this is the shift from the USA as a dominating R&D
spending in the 1960s to the current picture which has seen that share more than halved.
Figure 1.3 shows that the biggest shift by far has been in the entry of China on to the world
innovation stage.
And as Figure 1.4 shows the rise in recent years of China as a significant spender has
been dramatic.
Nor are the sums of money invested trivial, as Table 1.4 shows.

1960 2017
FIGURE 1.2 U.S. share
of global R&D
Sources: Based on
1960 : CRS analysis United Rest of United Rest of
of U.S Department States the World States the World
of commerce, office 69% 31% 28% 72%
of technology policy.
The Global context of
U.S Technology policy
1997. 2017: CRS anal-
ysis of organisation Notes: Rest of the World includes the members of the OECD (less the United States),
for economic coopera- Argentina, China, Romania, Russia, Singapore, South Africa, and Taiwan. R&D
tion and Development expenditures by others countries are not included but are likely to be small in relative
(OECD) data, Main terms. In estimating total global R&D, CRS used the most recent year’s reported R&D
science and Technology expenditures for two countries (Singapore and South Africa) that had not reported data
Indicators, OECD.Stat. for 2017.
 1.7 The Globalization of Innovation 17

45%
United States
40%
China
35% Japan
30% Germany
25% South Korea F I G U R E 1.3 Share of
global R&D of selected
20% France
countries, 2000–2017
15% United Kingdom
Source: Data from CRS
Russia analysis of Economic
10%
Taiwan Development and coop-
5% eration. OECD.Stat
Italy database, https://
0%
stats.oecd.org/index.
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
aspx?DataSetCode=
MSTI_Pub

1400% China
United States
China
1200% Japan
Germany
1000% South Korea
France
F I G U R E 1.4 Growth
800% United Kingdom
in R&D expenditures
Russia
since 2000 for selected
600% Taiwan South Korea countries, 2000–2017
Italy Taiwan
400% Russia Source: Data from CRS
Germany analysis of Economic
200% Italy Development and coop-
United States eration. OECD.Stat
United Kingdom database, https://
0% France stats.oecd.org/index.
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

Japan aspx?DataSetCode
=MSTI_Pub

Table 1.4 Countries with the Highest Expenditure on R&D, 2017 (in billions of current PPP dollars)

Rank Country Amount Rank Country Amount

1 United States $543.2 6 France $64.7
2 China 496.0 7 United Kingdom 49.3
3 Japan 170.9 8 Russia 41.9
4 Germany 132.0 9 Taiwain 39.3
5 South Korea 91.0 10 Italy 33.5

Source: Data from CRS analysis of Economic Development and cooperation. OECD.Stat database, https://stats.oecd.org/
index.aspx?DataSetCode=MSTI_Pub.
18 CHAPTER 1 Innovation – What It Is and Why It Matters

While these figures reflect spending on science and technology R&D we also need to take
into account the significant growth of other countries in terms of their innovation potential.
Countries like Brazil (with growing presence in aerospace and shipbuilding) and India (with
a particularly strong IT sector and major industrial groups like Tata active in key sectors like
automobiles) are playing an increasingly significant role, while small countries like Israel have
become renowned for their high levels of entrepreneurial activity, generating the seeds from
which major international businesses have grown [26]. And although Russia features primarily
as an energy and resource exporting economy the legacy of its massive investment during the
Cold War continues to fuel a variety of innovative businesses, particularly based on software.
The significance of this for innovation management is twofold. On the one hand the poten-
tial for strategic collaboration and sourcing of ideas is massively amplified in a world spending so
much on creating new knowledge. Open innovation in this landscape has much to offer. But at
the same time the ability to realize this potential requires a much more global outlook in terms of
search activity – a theme which we will return to in Chapter 7. There are also significant implica-
tions for innovation strategy – a theme we explore in Chapter 4.
Table 1.5 summarizes some of the key changes in the context within which the current
innovation game is being played out.

Table 1.5 Changing Context for Innovation

Context Change Indicative Examples

Acceleration OECD estimates that around $1700 billion is spent each year (public and private sector) in creating new
of knowledge knowledge – and hence, extending the frontier along which ‘breakthrough’ technological developments
production may happen.
Global distribution Knowledge production is increasingly involving new players especially in emerging markets – so the need to
of knowledge search for innovation opportunities across a much wider space. One consequence of this is that ‘knowledge
production workers’ are now much more widely distributed and concentrated in new locations – for example, Microsoft’s
third largest R&D centre employing thousands of scientists and engineers is now in Shanghai.
Market expansion Traditionally, much of the world of business has focused on the needs of around 1 billion people since they
represent wealthy enough consumers. But the world’s population has just passed the 7 billion mark and
population – and, by extension, market – growth is increasingly concentrated in nontraditional areas such as
rural Asia, Latin America and Africa. Understanding the needs and constraints of this ‘new’ population repre-
sents a significant challenge in terms of market knowledge.
Market fragmentation Globalization has massively increased the range of markets and segments so that these are now widely dis-
persed and locally varied – putting pressure on innovation search activity to cover much more territory, often
far from ‘traditional’ experiences – such as the ‘bottom of the pyramid’ conditions in many emerging mar-
kets [28] or along the so-called long tail – the large number of individuals or small target markets with highly
differentiated needs and expectations.
Market virtualization The emergence of large-scale social networks in cyberspace pose challenges in market research
approaches – for example, Facebook with over 1 billion members is technically the third largest country in the
world by population. Further challenges arise in the emergence of parallel world communities – for example,
by some accounts, World of Warcraft has over 10 million players.
Rise of active users Although users have long been recognized as a source of innovation, there has been an acceleration in
the ways in which this is now taking place – for example, the growth of Linux has been a user-led open
community development [29]. In sectors such as media, the line between consumers and creators is increas-
ingly blurred – for example, YouTube has around 5 billion videos viewed each day but over 300 hours of new
video material is uploaded every minute from its user base.
Growing concern Major shifts in resource and energy availability prompting search for new alternatives and reduced consump-
with sustainability tion; increasing awareness of impact of pollution and other negative consequences of high and unsustain-
issues able growth; concern over climate change; major population growth and worries over ability to sustain living
standards and manage expectations; increasing regulation on areas such as emissions and carbon footprint.
Development of Increasing linkages enabled by information and communications technologies around the Internet and broad-
technological and band have enabled and reinforced alternative social networking possibilities. At the same time, the increasing
social infrastructure availability of simulation and prototyping tools have reduced the separation between users and producers.

Source: J. Bessant and T. Venables, Creating wealth from knowledge: Meeting the innovation challenge. Cheltenham: Edward Elgar, 2008.
 1.8 So, What Is Innovation? 19

1.8
One of America’s most successful innovators was Thomas Alva Edison, who during his life
1.8 SO, WHAT IS
registered over 1000 patents. Products for which his organization was responsible include the
light bulb, 35 mm cinema film and even the electric chair. Edison appreciated better than most INNOVATION?
that the real challenge in innovation was not invention – coming up with good ideas – but in
making them work technically and commercially. His skill in doing this created a business
empire worth, in 1920, around $21.6 billion. He put to good use an understanding of the interac-
tive nature of innovation, realizing that both technology push (which he systematized in one of
the world’s first organized R&D laboratories) and demand pull need to be mobilized.
His work on electricity provides a good example of this; Edison recognized that although
the electric light bulb was a good idea, it had little practical relevance in a world where there was
no power point to plug it into. Consequently, his team set about building up an entire electricity
generation and distribution infrastructure, including designing lamp stands, switches and
wiring. In 1882, he switched on the power from the first electric power generation plant in
Manhattan and was able to light up 800 bulbs in the area. In the years that followed, he built over
300 plants all over the world [30].
As Edison realized, innovation is more than simply coming up with good ideas; it is the
process of growing them into practical use. Definitions of innovation may vary in their word-
ing, but they all stress the need to complete the development and exploitation aspects of new
knowledge, not just its invention. Some examples are given in Research Note 1.6.
The dictionary defines innovation as ‘change’; it comes from Latin innovare, meaning ‘to
make something new’. That’s a bit vague if we’re trying to manage it; perhaps, a more useful defi-
nition might be ‘the successful exploitation of new ideas’. It’s also important to recognize that we
are not just concerned with creating commercial value although that business driver is powerful.
Innovation is also about creating social value – for example, in education, health care, poverty
alleviation and humanitarian aid. So perhaps, we can extend our definition to read ‘creating
value from ideas . . .’
Those ideas don’t necessarily have to be completely new to the world, or particularly rad-
ical; as one definition has it, ‘. . . 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). . .’ [31]. Whatever the nature of the change, the key issue is how to bring
it about. In other words, how to manage innovation?
One answer to this question comes from the experiences of organizations that have sur-
vived for an extended period. While most organizations have comparatively modest life spans,
there are some that have survived at least one and sometimes multiple centuries. Looking at the
experience of these ‘100 club’ members – firms such as 3M, Corning, Procter & Gamble, Reuters,
Siemens, Philips and Rolls-Royce – we can see that much of their longevity is down to having
developed a capacity to innovate on a continuing basis [4]. They have learned – often the hard
way – how to manage the process and, importantly, how to repeat the trick. Any organization
gets lucky once but sustaining it for a century or more suggests that there’s a bit more to it than
just luck.
Research Note 1.6 looks at some definitions of innovation.
If we only understand part of the innovation process, then the behaviours we use in
managing it are also likely to be only partially helpful – even if well intentioned and executed.
For example, innovation is often confused with invention – but the latter is only the first step in
a long process of bringing a good idea to widespread and effective use. Being a good inventor
is – to contradict Emerson – no guarantee of commercial success and no matter how good the
better mousetrap idea, the world will only beat a path to the door if attention is also paid to
project management, market development, financial management, organizational behaviour and
so on. Case Study 1.6 gives some examples that highlight the difference between invention and
innovation.
20 CHAPTER 1 Innovation – What It Is and Why It Matters

RESEARCH NOTE 1.6 What Is Innovation?

One of the problems in managing innovation is variation in – Roy Rothwell and Paul Gardiner (1985),
what people understand by the term, often confusing it with ‘Invention, innovation, re-innovation and the
invention. In its broadest sense, the term comes from the role of the user,’ Technovation, 3, 168
Latin – innovare – meaning ‘to make something new’. Our
‘Innovation is the specific tool of entrepreneurs, the means by which
view, shared by the following writers, assumes that innova-
they exploit change as an opportunity for a different business or ser-
tion is a process of turning opportunity into new ideas and of
vice. It is capable of being presented as a discipline, capable of being
putting these into widely used practice.
learned, capable of being practised.’
‘Innovation is the successful exploitation of new ideas.’ – Peter Drucker (1985),
– Innovation Unit, Innovation and Entrepreneurship.
UK Department of Trade Harper & Row, New York
and Industry (2004) ‘Companies achieve competitive advantage through acts of innova-
tion. They approach innovation in its broadest sense, including both
‘Industrial innovation includes the technical, design, manufac-
new technologies and new ways of doing things.’
turing, management and commercial activities involved in the
– Michael Porter (1990),
marketing of a new (or improved) product or the first commercial
The Competitive Advantage of Nations.
use of a new (or improved) process or equipment.’
Macmillan, London
– Chris Freeman (1982),
The Economics of Industrial Innovation, ‘An innovative business is one which lives and breathes ‘outside
2nd ed. Frances Pinter, London the box’. It is not just good ideas, it is a combination of good ideas,
motivated staff and an instinctive understanding of what your cus-
‘. . .Innovation does not necessarily imply the commercialization of only
tomer wants.’
a major advance in the technological state of the art (a radical innova-
– Richard Branson (1998),
tion) but it includes also the utilization of even small-scale changes in
DTI Innovation Lecture
technological know-how (an improvement or incremental innovation).’

CA S E S T U DY 1 . 6 Invention and Innovation

In fact, some of the most famous inventions of the nineteenth to pay Howe a royalty on all machines made, the name that
century came from men whose names are forgotten; the most people now associate with sewing machines is Singer
names that we associate with them are of the entrepreneurs not Howe. And Samuel Morse, widely credited as the father of
who brought them into commercial use. For example, the modern telegraphy, actually invented only the code that bears
vacuum cleaner was invented by one J. Murray Spangler and his name; all the other inventions came from others. What
originally called an ‘electric suction sweeper’. He approached Morse brought was enormous energy and a vision of what
a leather goods maker in the town who knew nothing about could be accomplished; to realize this, he combined marketing
vacuum cleaners but had a good idea of how to market and and political skills to secure state funding for development
sell them – a certain W. H. Hoover. Similarly, a Boston man work and to spread the concept of something that for the first
called Elias Howe produced the world’s first sewing machine time would link up people separated by vast distances on
in 1846. Unable to sell his ideas despite traveling to England the continent of America. Within five years of demonstrating
and trying there, he returned to the United States to find that the principle, there were over 5000 miles of telegraph wire
one Isaac Singer had stolen the patent and built a success- in the United States. And Morse was regarded as ‘the greatest
ful business from it. Although Singer was eventually forced man of his generation’ [32].
 1.8 So, What Is Innovation? 21

Case Study 1.7 reminds us that managing invention into successful innovation is not
always easy to do.

CA S E S T U DY 1 . 7 Innovation Isn’t Easy . . .

Although innovation is increasingly seen as a powerful way of the Concorde project, developed by the same company on
securing competitive advantage and a more secure approach to the same site a decade later, are hard to escape.
defending strategic positions, success is by no means guaran- • During the late 1990s, revolutionary changes were going
teed. The history of product and process innovations is littered on in mobile communications involving many successful
with examples of apparently good ideas that failed – in some innovations – but even experienced players can get their fin-
cases with spectacular consequences. For example: gers burned. Motorola launched an ambitious venture that
aimed to offer mobile communications from literally any-
• In 1952, Ford engineers began working on a new car to counter
where on the planet – including the middle of the Sahara
the mid-sized models offered by GM and Chrysler – the ‘E’
Desert or the top of Mount Everest! Achieving this involved
car. After an exhaustive search for a name involving some
a $7 billion project to put 88 satellites into orbit, but despite
20,000 suggestions, the car was finally named after Edsel
the costs, Iridium – as the venture was known – received
Ford, Henry Ford’s only son. It was not a success; when the
investment funds from major backers, and the network was
first Edsels came off the production line, Ford had to spend
established. The trouble was that, once the novelty had worn
an average of $10,000 per car (twice the vehicle’s cost) to get
off, most people realized that they did not need to make
them roadworthy. A publicity plan was to have 75 Edsels
many calls from remote islands or at the North Pole and that
drive out on the same day to local dealers; in the event, the
their needs were generally well met with less exotic mobile
firm only managed to get 68 to go, while in another live TV
networks based around large cities and populated regions.
slot, the car failed to start. Nor were these teething troubles;
Worse, the handsets for Iridium were large and clumsy
by 1958, consumer indifference to the design and concern
because of the complex electronics and wireless equipment
about its reputation led the company to abandon the car – at
they had to contain – and the cost of these high-tech bricks
a cost of $450 million and 110,847 Edsels.
was a staggering $3000! Call charges were similarly highly
• During the latter part of World War II, it became increasingly
priced. Despite the incredible technological achievement that
clear that there would be a big market for long-distance air-
this represented, the take-up of the system never happened,
liners, especially on the trans-Atlantic route. One UK con-
and in 1999, the company filed for Chapter 11 bankruptcy. Its
tender was the Bristol Brabazon, based on a design for a giant
problems were not over – the cost of maintaining the satellites
long-range bomber, which was approved by the Ministry of
safely in orbit was around $2 million per month. Motorola
Aviation for development in 1943. Consultation with BOAC,
who had to assume the responsibility had hoped that other
the major customer for the new airliner, was ‘to associate
telecoms firms might take advantage of these satellites, but
itself closely with the layout of the aircraft and its equip-
after no interest was shown, they had to look at a further price
ment’ but not to comment on issues such as size, range, and
tag of $50 million to bring them out of orbit and destroy them
payload! The budget rapidly escalated, with the construction
safely! Even then, the plans to allow them to drift out of orbit
of new facilities to accommodate such a large plane and,
and burn up in the atmosphere were criticized by NASA for
at one stage, the demolition of an entire village in order to
the risk they might pose in starting a nuclear war, since any
extend the runway at Filton, near Bristol. Project control was
pieces that fell on the Earth would be large enough to trigger
weak, and many unnecessary features were included – for
the Russian antimissile defences since they might appear not
example, the mock-up contained ‘a most magnificent ladies’
as satellite chunks but as Moscow-bound missiles!
powder room with wooden aluminium-painted mirrors and
• In the accelerating race to dominate the smartphone industry,
even receptacles for the various lotions and powders used by
Apple and Samsung became locked in a spiral of shorter prod-
the modern young lady’. The prototype took six-and-a half
uct life cycles and increasing features, trying to balance the
years to build and involved major technical crises with wings
risks of launching unproven technology by the need to get
and engine design; although it flew well in the tests, the
to the market first. With the launch of the Galaxy Note 7 in
character of the postwar aircraft market was very different
August 2016, Samsung appeared to have found a winning for-
from that envisaged by the technologists. Consequently in
mula, offering increased functionality to users, and preorders
1952, after flying less than 1000 miles, the project was aban-
exceeded expectations. But weeks after the launch, reports
doned at considerable cost to the taxpayer. The parallels with
22 CHAPTER 1 Innovation – What It Is and Why It Matters

began to emerge about the devices catching fire; this surge production would cease; TIME magazine wrote that this might
accelerated and led to many airlines refusing to carry pas- prove to be one of the costliest product failures in history.
sengers with such phones. Despite a major product recall (of • A museum opened in Sweden in 2017 carefully preserving
around 2 million devices) and attempts to fix the problem, the and showcasing examples of notable product failures, some
crisis continued with over $2 billion wiped off the company’s of them coming from the very best known and otherwise
share value and concerns about damage to the wider brand. successful organizations like Apple, Coca-Cola and Ford:
Eventually, on October 11, the company announced that https://failuremuseum.com/.

1.9
In this book, we will make use of a simple model of innovation as the process of turning ideas into
1.9 A PROCESS
reality and capturing value from them. We will explain the model in more detail in Chapter 3, but
VIEW OF it’s worth introducing it here (see Figure 1.5).
INNOVATION There are four key phases, each of which requires dealing with particular challenges – and
only if we can manage the whole process is innovation likely to be successful.
Phase 1 involves the question of search. To take a biological metaphor, we need to generate
variety in our gene pool – and we do this by bringing new ideas to the system. These can come from
R&D, ‘Eureka’ moments, copying, market signals, regulations, competitor behaviour – the list is
huge, but the underlying challenge is the same – how do we organize an effective search process
to ensure a steady flow of ‘genetic variety’ that gives us a better chance of surviving and thriving?
But simply generating variety isn’t enough – we need to select from that set of options the
variants most likely to help us grow and develop. Unlike natural selection where the process is
random, we are concerned here with some form of strategic choice – out of all the things we
could do, what are we going to do – and why? This process needs to take into account competitive
differentiation – which choices give us the best chance of standing out from the crowd? – and
previous capabilities – can we build on what we already have or is this a step into the unknown . . .?
Generating and selecting still leaves us with the huge problem of actually making it
happen – committing our scarce resources and energies to doing something different. This is
the challenge of implementation – converting ideas into reality. The task is essentially one of
managing a growing commitment of resources – time, energy, money and above all mobilizing
knowledge of different kinds – against a background of uncertainty. Unlike conventional project
management, the innovation challenge is about developing something that may never have been
done before – and the only way we know whether or not we will succeed is by trying it out.

Do we have a clear innovation strategy?

Search – how can

we find Select – what are Implement – how Capture – how are
opportunities for we going to do – are we going to we going to get the
innovation? and why? make it happen? benefits from it?

F I G U R E 1 . 5 Simplified Do we have an innovative organization?

model of the innovation
process
 1.9 A Process View of Innovation 23

Here the biological metaphor comes back into play – it is a risky business. We are
betting – taking calculated risks rather than random throws of the dice but nonetheless
gambling – that we can make this new thing happen (manage the complex project through to
successful completion) and that it will deliver us the calculated value that exceeds or at least
equals what we put into it. If it is a new product or service – the market will rush to our stall to
buy what we are offering, or if it is a new process, our internal market will buy into the new way
of doing things, and we will become more effective as a result. If it is a social innovation, can we
manage to make the world a better place in ways that justify the investment we put in?
Finally, we need to consider the challenge of capturing value from our innovative efforts.
How will we ensure that the efforts have been justified – in commercial terms or in terms of cre-
ating social value? How will we protect the gains from appropriation by others? And how might
we learn from the experience and capture useful learning about how to improve the innovation
process in the future?
None of this takes place in a vacuum; the innovation process is influenced by a number of
factors. Of particular relevance is the presence of an innovation strategy, a clear roadmap laying
out how and why innovation will take the organization forward. And innovation is at heart a
process involving people – their creativity, ideas and knowledge. So the presence of an enabling
innovative organization is another key influence.
Viewed in this way, the innovation task looks deceptively simple. The big question is, of
course, how to make it happen? This has been the subject of intensive study for a long period of
time – plenty of practitioners have not only left us their innovations but also some of their accu-
mulated wisdom, lessons about managing the process that they have learned the hard way. And a
growing academic community has been working on trying to understand, in systematic fashion,
questions about not only the core process but also the conditions under which it is likely to suc-
ceed or fail. This includes knowledge about the kinds of things that influence and help/hinder
the process – essentially boiling down to having a clear and focused direction (the underpinning
‘why’ of the selection stage) and creating the organizational conditions to allow focused creativity.
The end effect is that we have a rich – and convergent – set of recipes that go a long way
towards helping answer the practising manager’s question when confronted with the problem
of organizing and managing innovation – ‘what do I do on Monday morning?’ Exploring this in
greater detail provides the basis for the rest of the book.
View 1.2 gives some examples of these managerial concerns.

VIEW 1.2

‘There is nothing more difficult to take in hand, more perilous to ‘Managing and innovation did not always fit comfortably together.
conduct, or more uncertain in its success, than to take the lead in That’s not surprising. Managers are people who like order. They
the introduction of a new order of things.’ like forecasts to come out as planned. In fact, managers are often
– Niccolo Machiavelli, The Prince, 1532 judged on how much order they produce. Innovation, on the other
hand, is often a disorderly process. Many times, perhaps most
‘Anything that won’t sell, I don’t want to invent. Its sale is proof of
times, innovation does not turn out as planned. As a result, there
utility, and utility is success.’
is tension between managers and innovation.’
‘Everything comes to him who hustles while he waits.’
‘Genius is one percent inspiration and ninety-nine percent perspi- – Lewis Lehro, about the first years at 3M
ration.’ ‘To turn really interesting ideas and fledgling technologies into a
‘I never did anything by accident, nor did any of my inventions company that can continue to innovate for years, it requires a lot
come by accident; they came by work.’ of disciplines.’
‘Make it a practice to keep on the lookout for novel and inter- – Steve Jobs
esting ideas that others have used successfully. Your idea has to be
original only in its adaptation to the problem you are working on.’
– Thomas A. Edison
24 CHAPTER 1 Innovation – What It Is and Why It Matters

1.10
If innovation is a process, we need to consider the output of that process. In what ways can we
1.10 THE SCOPE
innovate – what kinds of opportunities exist for us to create something different and capture
FOR INNOVATION value from bringing those ideas into the world?
Sometimes, it is about completely new possibilities – for example, by exploiting radical
breakthroughs in technology. For example, new drugs based on genetic manipulation have
opened a major new front in the war against disease. Mobile phones, watches and other smart
wearable devices have revolutionized where and when we communicate. Even the humble
window pane is the result of radical technological innovation – almost all the window glass in the
world is made these days by the Pilkington float glass process, which moved the industry away
from the time-consuming process of grinding and polishing to get a flat surface.
Many innovations fail to develop significant markets because of their very newness. First-
movers often face the challenge of growing the market while imitators may be able to learn from
their experience and adapt to help shape and expand the market. For example, Facebook came
later than MySpace but was able to build the market, while AirBnB’s key contribution was in
developing a market originally identified by another start-up, VRBO. Henry Ford’s main claim to
innovation fame was not inventing the automobile but growing the mass market for it, as George
Eastman did for photography.
Innovation isn’t just about opening up new markets – it can also offer new ways of serving
established and mature ones. Low-cost airlines are still about transportation – but the innovations that
firms such as Southwest Airlines, EasyJet and Ryanair have introduced have revolutionized air travel
and grown the market in the process. One challenging new area for innovation lies in the previously
underserved markets of the developing world – the 4 billion people who earn less than $2 per day.
The potential for developing radically different innovative products and services aimed at meeting the
needs of this vast population at what C.K. Prahalad calls ‘the bottom of the pyramid’ is huge – and the
lessons learned may impact on established markets in the developed world as well [33].
And it isn’t just about manufactured products; in most economies, the service sector
accounts for the vast majority of activity, so there is likely to be plenty of scope. Lower capital
costs often mean that the opportunities for new entrants and radical change are the greatest in the
service sector. Online banking and insurance have become commonplace, but they have radically
transformed the efficiencies with which those sectors work and the range of services they can
provide. New entrants riding the Internet wave have rewritten the rule book for a wide range of
industrial games – for example, Amazon in retailing, eBay in market trading and auctions, Google
in advertising and Skype in telephony. Others have used the Web to help them transform business
models around things such as low-cost airlines, online shopping and the music business [34].
(We’ll look in detail at digital innovation and the radical changes it enables in the next chapter.)

FOUR DIMENSIONS OF INNOVATION SPACE

Given this wide area of possibility it would be helpful to have some form of framework to help
us navigate – a compass to steer our innovation search by. For the purposes of this book, we will
focus on four broad directions in which change – innovation – might take place:
• Product innovation – changes in the things (products/services) that an organization offers;
• Process innovation – changes in the ways in which they are created and delivered;
• Position innovation – changes in the context in which the products/services are introduced;
• Paradigm innovation – changes in the underlying mental models that frame what the organi-
zation does.
Figure 1.6 shows how these ‘4Ps’ provide the framework for a map of the innovation space
available to any organization [34]. And this link – https://vimeo.com/160130228 – leads to a
case study of the 4P framework applied to a small fish-and-chip shop business.
 1.10 The Scope for Innovation 25

PARADIGM
(MENTAL MODEL)

(incremental... radical)
PRODUCT
PROCESS INNOVATION
(SERVICE)
(radical ...incremental) (incremental... radical)

(radical ...incremental)
F I G U R E 1.6 The 4Ps
POSITION of innovation space

For example, a new design of car, a new insurance package for accident-prone babies and
a new home entertainment system would all be examples of product innovation. And change in
the manufacturing methods and equipment used to produce the car or the home entertainment
system, or in the office procedures and sequencing in the insurance case, would be examples of
process innovation.
Sometimes, the dividing line is somewhat blurred – for example, a new jet-powered sea ferry is
both a product and a process innovation. Services represent a particular case of this where the product
and process aspects often merge – for example, is a new holiday package a product or process change?
Innovation can also take place by repositioning the perception of an established product
or process in a particular user context. For example, an old-established product in the United
Kingdom is Lucozade – originally developed in 1927 as a glucose-based drink to help children
and invalids in convalescence. These associations with sickness were abandoned by the brand
owners, GSK, when they relaunched the product as a health drink aimed at the growing fitness
market where it is now presented as a performance-enhancing aid to healthy exercise. This shift
is a good example of ‘position’ innovation. In a similar fashion, Häagen-Dazs were able to give a
new and profitable lease of life to an old-established product (ice cream) made with well-known
processes. Their strategy was to target a different market segment and to reposition their product
as a sensual pleasure to be enjoyed by adults – essentially telling an ‘ice cream for grown ups’
story. And we have seen how Starbucks, Innocent and many other players have repositioned
drinks such as coffee and fruit juice as premium ‘designer’ products.
Sometimes, opportunities for innovation emerge when we reframe the way we look
at something. Henry Ford fundamentally changed the face of transportation not because he
invented the motor car (he was a comparative latecomer to the new industry) nor because he
developed the manufacturing process to put one together (as a craft-based specialist industry, car
making had been established for around 20 years). His contribution was to change the under-
lying model from one that offered a handmade specialist product to a few wealthy customers
to one that offered a car for everyman at a price they could afford. The ensuing shift from craft
to mass production was nothing short of a revolution in the way cars (and later countless other
26 CHAPTER 1 Innovation – What It Is and Why It Matters

products and services) were created and delivered. Of course, making the new approach work
in practice also required extensive product and process innovation – for example, in component
design, in machinery building, in factory layout, and particularly in the social system around
which work was organized. Significantly, Ford’s current presentation of itself is no longer as a car
manufacturer but as a global mobility company, reflecting the significant technological and social
trends around the industry and the need to rethink its business model accordingly.
Recent examples of ‘paradigm’ innovation – changes in mental models – include the shift
to low-cost airlines, the provision of online insurance and other financial services, and the shifts
in the transportation and accommodation sectors triggered by players like Uber and Airbnb.
Although in its later days Enron became infamous for financial malpractice, it originally came to
prominence as a small gas pipeline contractor that realized the potential in paradigm innovation
in the utilities business. In a climate of deregulation and with global interconnection through
grid distribution systems, energy and other utilities such as telecommunications bandwidth
increasingly became commodities that could be traded much as sugar or cocoa futures.
Increasingly, organizations are talking about ‘business model innovation’ – essentially
the same idea of changing the underlying mental models about how the organization creates
value [35]. Table 1.6 gives some examples of such changes.
Paradigm innovation can be triggered by many different things – for example, new tech-
nologies, the emergence of new markets with different value expectations, new legal rules of the
game, new environmental conditions (climate change, energy crises) and so on. For example,
the emergence of Internet technologies made possible a complete reframing of how we carry out
many businesses. In the past, similar revolutions in thinking were triggered by technologies such
as steam power, electricity, mass transportation (via railways and, with motor cars, roads) and
microelectronics. And it seems very likely that similar reframing will happen as we get to grips
with new technologies such as nanotechnology or genetic engineering.
In their book ‘Wikinomics’, Tapscott and Williams highlight the wave of innovation that
follows the paradigm change to ‘mass collaboration’ via the Internet, which builds on social net-
works and communities [34]. Companies such as Lego and Adidas are reinventing themselves by
engaging their users as designers and builders rather than as passive consumers, while others are

Table 1.6 Examples of Paradigm Innovation

Business Model Innovation How It Changes the Rules of the Game

‘Servitization’ Traditionally manufacturing was about producing and then selling a product.
But increasingly, manufacturers are bundling various support services around
their products, particularly for major capital goods. Rolls-Royce, the aircraft
engine maker still produces high-quality engines, but it has an increasingly
large business around services to ensure that those engines keep delivering
power over the 30-plus-year life of many aircraft. Caterpillar, the specialist
machinery company, now earns as much from service contracts that help keep
its machines running productively as it does from the original sale.
Ownership to rental Spotify is one of the most successful music streaming companies with around
8 million subscribers. They shifted the model from people’s desire to own the
music they listened to towards one in which they rent access to a huge library
of music. In a similar fashion, Zipcar and other car rental businesses have
transformed the need for car ownership in many large cities.
Offline to online Many businesses have grown up around the Internet and enabled substitution
of physical encounters – for example, in retailing – with virtual ones.
Mass customization New technologies and a growing desire for customization have enabled the
and cocreation emergence of not only personalized products but also platforms on which
users can engage and cocreate everything from toys (e.g., Lego), clothing
(e.g., Adidas) to complex equipment such as cars (Local Motors).
Experience innovation Moving from commodity through offering a service towards creating an experi-
ence around a core product – for example, coffee, bookselling and so on.
 1.10 The Scope for Innovation 27

exploring the potential of using the crowd to help make innovation selection decisions using ‘idea
markets’. Concerns about global warming and sustainability of key resources such as energy and
materials are, arguably, setting the stage for some significant paradigm innovation across many sec-
tors as firms struggle to redefine themselves and their offerings to match these major social issues.
Table 1.7 gives some examples of innovations mapped on to the 4Ps model.

Table 1.7 Some Examples of Innovations Mapped on to the 4Ps Model

Innovation Type Incremental – Do What We Do but Better Radical – Do Something Different

‘Product’ – what Microsoft Windows and Apple OS versions, New to the world software – for example, the first
we offer the world essentially improving on existing software idea speech recognition program
New versions of established car models, essentially Toyota Prius – bringing a new concept – hybrid
improving on established car design engines. Tesla – high-performance electric car
Improved performance incandescent light bulbs LED-based lighting, using completely different and
MP3s replacing CDs replacing vinyl records – more energy-efficient principles
essentially improving on the storage technology Spotify and other music streaming services – changing
the pattern from owning your own collection to renting
a vast library of music
Process – how Improved fixed line telephone services Skype and other VOIP systems
we create and Extended range of stock broking services Online share trading
deliver that
Improved auction house operations eBay
offering
Improved factory operations efficiency through Toyota Production System and other ‘lean’ approaches
upgraded equipment Online banking and now mobile banking in Kenya, the
Improved range of banking services delivered Philippines – using phones as an alternative to banking
at branch banks systems
Improved retailing logistics Online shopping
Position – where Häagen-Dazs changing the target market for ice Addressing underserved markets – for example, the
we target that cream from children to consenting adults Tata Nano aimed at an emerging but relatively poor
offering and the Starbucks, Innocent and others repositioning drinks like Indian market with car priced around $2000
story we tell coffee and fruit juice as premium designer products Low-cost airlines opening up air travel to those previ-
about it ously unable to afford it – create new market and also
Airlines segmenting service offering for different
passenger groups – Virgin Upper Class, BA Premium disrupt existing one. Variations on the ‘One laptop per
Economy and so on child’ project – for example, Indian government offering
$20 computer for schools
Dell and others segmenting and customizing computer
configuration for individual users. Online support for University of Phoenix and others building large edu-
traditional higher education courses cation businesses via online approaches to reach
different markets
Banking services targeted at key segments – students,
retired people and so on ‘Bottom of the pyramid’ approaches using a similar
principle but tapping into huge and very different
high-volume/ low-margin markets – Aravind eye care,
Cemex construction products
Paradigm – Bausch and Lomb – moved from ‘eye wear’ to ‘eye care’ Grameen Bank and other microfinance models –
how we frame as their business model, effectively letting go of the rethinking the assumptions about credit and the poor
what we do old business of spectacles, sunglasses (Ray-Ban) and iTunes platform – a complete system of personalized
contact lenses, all of which were becoming commodity entertainment
businesses. Instead, they moved into newer high-tech
Cirque de Soleil – redefining the circus experience
fields such as laser surgery equipment, specialist
optical devices and research in artificial eyesight
Dyson redefining the home appliance market in terms Amazon, Google and Skype – redefining industries
of high-performance engineered products such as retailing, advertising and telecoms through
Rolls-Royce – from producing high-quality aero engines to online models
becoming a service company offering ‘power by the hour’ Linux, Mozilla and Apache – moving from passive
IBM from being a machine maker to a service and users to active communities of users cocreating new
solution company – selling off its computer making and products and services
building up its consultancy and service side.
28 CHAPTER 1 Innovation – What It Is and Why It Matters

MAPPING INNOVATION SPACE

The area indicated by the circle in Figure 1.6 is the potential innovation space within which an
organization can operate. (Whether it actually explores and exploits all the space is a question for
innovation strategy, and we will return to this theme later in Chapter 4.)
We can use the model to look at where the organization currently has innovation
projects – and where it might move in the future. For example, if the emphasis has been on prod-
uct and process innovation, there may be scope for exploring more around position innovation –
which new or underserved markets might we play in? – or around defining a new paradigm, a
new business model with which to approach the marketplace.
We can also compare maps for different organizations competing in the same market – and
use the tool as a way of identifying where there might be relatively unexplored space, which
might offer significant innovation opportunities. By looking at where other organizations are
clustering their efforts, we can pick up valuable clues about how to find relatively uncontested
space and focus our efforts on these – as the low-cost airlines did with targeting new and under-
served markets for travel [36].
Research Note 1.7 looks in more detail at mapping innovation space.

RESEARCH NOTE 1.7 Mapping Innovation Space

Figure 1.7 shows how the 4Ps approach was applied in a company • Building totally customized products for customer’s individual
(R&P Ltd) making garden machinery. The diamond diagram orders (paradigm)
provides an indication of where and how they could construct • Using sensors in the next generation of lawn mowers to
a broad-ranging ‘innovation agenda’. Nine innovation activities avoid roots and stones (product)
were listed on the diamond chart, including the following:

Paradigm

Sub-contract Build totally

trimmer customized
manufacture products for
to firm in individual
Czech customers
Republic
Involve Use sensors in
Install 3D design
customers in new lawn
Process software
new product
Product
mower
Track lead users to see design
what products they feel
F I G U R E 1 . 7 Suggested add value
innovations mapped on Link gardening Relaunch trimmer
to the 4Ps framework to home- as environmentally
making in friendly
Source: Based on Re-position
Francis, D. and advertising products as
J. Bessant, Targeting ‘female friendly’
innovation and impli-
cations for capability
development. Technova-
tion, 2005. 25(3), 171–83. Position
 1.11 Key Aspects of Innovation 29

• Repositioning the company’s products as female-friendly as Some initiatives, such as relaunching their trimmer as
more women are keen gardeners (position) environmentally friendly, require both product and positional
• Installing 3D design software in the R&D department innovation. Such interdependencies are clarified by discussion
(process) on the placing of an initiative on the diagram. Also, the fact
that the senior management group had the 4Ps on one sheet of
The selection of just nine major innovation initiatives paper had the effect of enlarging choice – they saw completing
gave focus to R&P’s innovation management: the firm consid- the diagram as a tool for helping them think in a systematic
ered that ‘it is important not to try to do too much at once’. way about using the innovation capability of the firm.

Of course this 4Ps innovation compass is only one of many frameworks we might use – for
example, Research Note 1.8 discusses a model based on 12 types of innovation whilst an influ-
ential consulting report and book focuses on ten types [37]. The management question is less
about how many different types than the need to recognize the many different ways in which
innovation can take place and ensure the innovation space is explored as thoroughly as possible.
Research Note 1.8 gives some examples of different ways to innovate.

RESEARCH NOTE 1.8 Twelve Ways to Innovate

Mohanbir Sawhney, Robert Wolcott and Inigo Arroniz from • Solutions – integrated offerings that customers value
the Center for Research in Technology and Innovation at the • Customers – unmet needs or new market segments
Kellogg School of Management at Northwestern University,
• Customer experience – redesign of customer contact and
USA, interviewed innovation managers at a number of large
interactions
firms, including Boeing, DuPont, Microsoft, eBay, Motorola and
Sony and from these developed a survey questionnaire, which • Value capture – redefine the business model and how income
was sent to a further 19 firms, such as General Electric, Merck is generated
and Siemens. Analysing these data, they derived an ‘innova- • Processes – to improve efficiency or effectiveness
tion radar’ to represent 12 dimensions of business innovation • Organization – change scope or structures
they identified. Their definition of ‘business innovation’ does
• Supply chain – changes in sourcing and order fulfilment
not focus on new things, but rather anything that creates new
value for customers. Therefore, creating new things is neither • Presence – new distribution or sales channels
necessary nor sufficient for such value creation. Instead, they • Brand – leverage or reposition
propose a systematic approach to business innovation, which • Networking – create integrated offerings using networks
may take place in 12 different dimensions:
• Offerings – new products or services
Source: Based on Sawhney, M., R.C. Wolcott, and I. Arroniz (2006).
• Platform – derivative offerings based on reconfiguration of ‘The 12 different ways for companies to innovate’, MIT Sloan
components Management Review, Spring, 75–81.

1.11
The overall innovation space provides a simple map of the table on which we might place our
1.11 KEY
innovation bets. But before making those bets, we should consider some of the other characteris-
tics of innovation that might shape our strategic decisions about where and when to play. These ASPECTS
key aspects include the following: OF INNOVATION
• Degree of novelty – incremental or radical innovation?
• Level of innovation – component or architecture?
30 CHAPTER 1 Innovation – What It Is and Why It Matters

• Platforms and families of innovations

• Timing – the innovation life cycle
• Discontinuous innovation – what happens when the rules of the game change?
We will explore these – and the challenges they pose for managing innovation – a little
more in the following section.

INCREMENTAL INNOVATION – DOING WHAT WE DO BUT BETTER

A key issue in managing innovation relates to the degree of novelty involved in different places
across the innovation space. Clearly, updating the styling on our car is not the same as coming
up with a completely new concept car that has an electric engine and is made of new composite
materials as opposed to steel and glass. Similarly, increasing the speed and accuracy of a lathe
is not the same thing as replacing it with a computer-controlled laser forming process. There
are degrees of novelty in these, running from minor, incremental improvements right through
to radical changes, which transform the way we think about and use them. Sometimes, these
changes are common to a particular sector or activity, but sometimes, they are so radical and
far-reaching that they change the basis of society – for example, the role played by steam power
in the Industrial Revolution or the ubiquitous changes resulting from today’s communications
and computing technologies.
As far as managing the innovation process is concerned, these differences are important.
The ways in which we approach incremental, day-to-day change will differ from those used occa-
sionally to handle a radical step change in product or process. But we should also remember that
it is the perceived degree of novelty that matters; novelty is very much in the eye of the beholder.
For example, in a giant, technologically advanced organization such as Shell or IBM, advanced
networked information systems are commonplace, but for a small car dealership or food pro-
cessor, even the use of a simple personal computer (PC) to connect to the Internet may still rep-
resent a major challenge.
The reality is that although innovation sometimes involves a discontinuous shift, most of
the time it takes place in an incremental fashion. Essentially, this is product/process improve-
ment along the lines of ‘doing what we do, but better’ – and there is plenty to commend this
approach. For example, the Bic ballpoint pen was originally developed in 1957 but remains a
strong product with daily sales of 14 million units worldwide. Although superficially the same
shape, closer inspection reveals a host of incremental changes that have taken place in materials,
inks, ball technology, safety features and so on.
Another example of a small change that has had a big impact is the three-point seat belt,
originating in Volvo in 1959. Nils Bohlin came up with the simple idea of wrapping a belt of fabric
around the seats and anchoring it to the car’s chassis. Volvo opened up the patent to all manufac-
turers, and the resulting innovation has saved hundreds of thousands of lives.
In a similar fashion, process innovation is mainly about optimization and getting the bugs
out of the system. (Ettlie suggests that disruptive or new-to-the-world innovations are only 6% to
10% of all projects labelled innovation [38].) Studies of incremental process development (such as
Hollander’s famous study of DuPont rayon plants) suggest that the cumulative gains in efficiency
are often much greater over time than those that come from occasional radical changes [39].
Other examples include Tremblay’s studies of paper mills, Enos’s on petroleum refining and
Figueredo’s of steel plants [40–42].
Continuous improvement of this kind received considerable attention as part of the ‘total
quality management’ movement in the late twentieth century, reflecting the significant gains
that Japanese manufacturers were able to make in improving quality and productivity through
sustained incremental change. But these ideas are not new – similar principles underpin the
famous ‘learning curve’ effect, where productivity improves with increases in the scale of
 1.11 Key Aspects of Innovation 31

production; the reason for this lies in the learning and continuous incremental problem-solving
innovation that accompanies the introduction of a new product or process [43]. More recent expe-
rience of deploying ‘lean’ thinking in manufacturing and services and increasingly between as
well as within enterprises underlines further the huge scope for such continuous innovation [44].

COMPONENT/ARCHITECTURE INNOVATION AND THE IMPORTANCE

OF KNOWLEDGE
Another important lens through which to view innovation opportunities is as components within
larger systems. Rather similar to Russian dolls, we can think of innovations that change things
at the level of components or those that involve change in a whole system. For example, we can
put a faster transistor on a microchip on a circuit board for the graphics display in a computer.
Or, we can change the way several boards are put together into the computer to give it particular
capabilities – a games box, an e-book, a media PC. Or, we can link the computers into a network
to drive a small business or office. Or, we can link the networks to others into the Internet. There’s
scope for innovation at each level – but changes in the higher-level systems often have implica-
tions for lower down. For example, if cars – as a complex assembly – were suddenly designed to
be made out of plastic instead of metal, it would still leave scope for car assemblers – but would
pose some sleepless nights for producers of metal components!
Innovation is about knowledge – creating new possibilities through combining different
knowledge sets. These can be in the form of knowledge about what is technically possible or
what particular configuration of this would meet an articulated or latent need. Such knowledge
may already exist in our experience, based on something we have seen or done before. Or, it could
result from a process of search – research into technologies, markets, competitor actions and so
on. And it could be in explicit form, codified in such a way that others can access it, discuss it,
transfer it and so on – or it can be in tacit form, known about but not actually put into words
or formulae.
The process of weaving these different knowledge sets together into a successful innovation
is one that takes place under highly uncertain conditions. We don’t know about what the final
innovation configuration will look like (and we don’t know how we will get there). Managing
innovation is about turning these uncertainties into knowledge – but we can do so only by com-
mitting resources to reduce the uncertainty – effectively a balancing act.
A key contribution to our understanding here comes from the work by Henderson and
Clark, who looked closely at the kinds of knowledge involved in different kinds of innovation [45].
They argue that innovation rarely involves dealing with a single technology or market but rather
a bundle of knowledge, which is brought together into a configuration. Successful innovation
management requires that we can get hold of and use knowledge about components but also
about how those can be put together – what they termed the architecture of an innovation.
We can see this more clearly with an example. Change at the component level in building
a flying machine might involve switching to newer metallurgy or composite materials for the
wing construction or the use of fly-by-wire controls instead of control lines or hydraulics. But the
underlying knowledge about how to link aerofoil shapes, control systems, propulsion systems
and so on at the system level is unchanged – and being successful at both requires different and
higher-order set of competencies.
One of the difficulties with this is that innovation knowledge flows – and the structures
that evolve to support them – tend to reflect the nature of the innovation. So if it is at the com-
ponent level, then the relevant people with skills and knowledge around these components will
talk to each other – and when change takes place, they can integrate new knowledge. But when
change takes place at the higher system level – ‘architectural innovation’ in Henderson and
Clark’s terms – then the existing channels and flows may not be appropriate or sufficient to support
the innovation, and the firm needs to develop new ones. This is another reason why existing
32 CHAPTER 1 Innovation – What It Is and Why It Matters

incumbents often fare badly when a major system-level change takes place – because they have
the twin difficulties of learning and configuring a new knowledge system and ‘unlearning’ an old
and established one.
Figure 1.8 illustrates the range of choices, highlighting the point that such change can
happen at the component or subsystem level or across the whole system . . .
A variation on this theme comes in the field of ‘technology fusion’, where different techno-
logical streams converge, such that products that used to have a discrete identity begin to merge
into new architectures. An example here is the home automation industry, where the fusion of
technologies such as computing, telecommunications, industrial control and elementary robotics
is enabling a new generation of housing systems with integrated entertainment, environmental
control (heating, air conditioning, lighting, etc.) and communication possibilities.
Similarly, in services, a new addition to the range of financial services may represent
a component product innovation, but its impacts are likely to be less far-reaching (and the
attendant risks of its introduction lower) than a complete shift in the nature of the service
package – for example, the shift to direct-line systems instead of offering financial services
through intermediaries.
Many businesses are now built on business models that stress integrated solutions –
systems of many components that together deliver value to end users. These are often complex,
multiorganization networks – examples might include rail networks, mobile phone systems,
major construction projects or design and development of new aircraft such as the Boeing Dream-
liner or the Airbus A-321. Managing innovation on this scale requires development of skills in
what Mike Hobday and colleagues call ‘the business of systems integration’ [46].
Figure 1.9 highlights the issues in managing innovation.
In Zone 1, the rules of the game are clear – this is about steady-state improvement to prod-
ucts or processes and uses knowledge accumulated around core components.
In Zone 2, there is significant change in one element, but the overall architecture remains
the same. Here there is a need to learn new knowledge but within an established and clear frame-
work of sources and users – for example, moving to electronic ignition or direct injection in a car
engine, the use of new materials in airframe components, the use of IT systems instead of paper
processing in key financial or insurance transactions, and so on. None of these involve major
shifts or dislocations.
In Zone 3, we have discontinuous innovation where neither the end state nor the ways
in which it can be achieved are known about – essentially, the whole set of rules of the game
changes, and there is scope for new entrants.

SYSTEM
LEVEL
New generations
New versions e.g. MP3 and Steam power,
of motor car, download vs. ICT ‘revolution’,
aeroplane, TV CD and bio-technology
cassette music

Advanced
New components materials to
Improvements
for existing improve
to components
systems component
performance
COMPONENT
LEVEL
INCREMENTAL RADICAL
FIGURE 1.8 Dimen- (‘doing what (‘new to the (‘new to
sions of innovation we do better’) enterprise’) the world’)
 1.11 Key Aspects of Innovation 33

Overturned
ZONE 2 ZONE 3

CORE INNOVATION CONCEPTS

– modular – discontinuous
innovation innovation

F I G U R E 1.9 Compo-
Reinforced ZONE 1 ZONE 4 nent and architectural
– incremental – architectural innovation
innovation innovation
Source: Based on
Abernathy, W. and
J. Utterback, Patterns of
industrial innovation.
Unchanged Changed
Technology Review, 1978.
LINKS BETWEEN KNOWLEDGE ELEMENTS 80, 40–47.

In Zone 4, we have the condition where new combinations – architectures – emerge, pos-
sibly around the needs of different groups of users (as in the disruptive innovation case). Here
the challenge is in reconfiguring the knowledge sources and configurations. We may use existing
knowledge and recombine it in different ways, or we may use a combination of new and old.
Examples might be low-cost airlines, direct line insurance and others.

PLATFORM INNOVATION
One way in which the continuous incremental innovation approach can be harnessed to good
effect is through the concept of ‘platforms’. This is a way of creating stretch and space around an
innovation and depends on being able to establish a strong basic platform or family, which can be
extended. Boeing’s 737 airliner, for example, was a major breakthrough innovation back in 1967
when it first flew – and it cost a great deal to develop. However, the robustness and flexibility in
the design means that many variants and improvements have been made over the years, and the
plane is still being manufactured today, nearly 60 years later! (Although the attempts to develop
a more fuel-efficient version, the 737 Max floundered because of pressures inside the company
to launch too soon and without adequate safety checks or pilot training.) Rothwell and Gardiner
call this kind of platform a ‘robust design’, and examples can be seen in many areas [47].
Aircraft engine makers such as Rolls-Royce and General Electric work with families of
core designs, which they stretch and adapt to suit different needs, while semiconductor manufac-
turers such as Intel and AMD spread the huge cost of developing new generations of chip across
many product variants [48]. Car makers produce models that, although apparently different in
style, make use of common components and floor pans or chassis. IBM’s breakthrough in the PC
industry was built on a platform architecture that was then opened up to many players to create
hardware and software applications – a forerunner of today’s mobile phone apps model. And in
consumer products, the ‘Walkman’ originally developed by Sony as a portable radio and cassette
system defined a platform concept (personal entertainment systems) that continued to underpin
a wide range of offerings from all major manufacturers deploying technologies such as minidisk,
CD, DVD, MP3 players and now smartphones. Lego’s highly successful toy business has literally
been built with the core brick set representing its platform for innovation over 70 years.
In processes, much has been made of the ability to enhance and improve performance
over many years from the original design concepts – in fields such as steel making and chemi-
cals, for example. Service innovation offers other examples where a basic concept can be adapted
34 CHAPTER 1 Innovation – What It Is and Why It Matters

and tailored for a wide range of similar applications without undergoing the high initial design
costs – as is the case with different mortgage or insurance products. Sometimes, platforms can
be extended across different sectors – for example, the original ideas behind ‘lean’ thinking orig-
inated in firms such as Toyota in the field of car manufacturing – but have subsequently been
applied across many other manufacturing sectors and into both public and private service appli-
cations including hospitals, supermarkets and banks [49].
Platforms and families are powerful ways for companies to recoup their high initial invest-
ments in R&D by deploying the technology across a number of market fields. For example,
Procter & Gamble invested heavily in their cyclodextrin development for original application
in detergents but then were able to use this technology or variants on it in a family of products
including odour control (‘Febreze’), soaps and fine fragrances (‘Olay’), off-flavour food control,
disinfectants, bleaches and fabric softening (‘Tide’, ‘Bounce’, etc.). They were also able to license
out the technology for use in noncompeting areas such as industrial-scale carpet care and in the
pharmaceutical industry.
If we take the idea of ‘position’ innovation mentioned earlier, then the role of brands can be
seen as establishing a strong platform association, which can be extended beyond an initial prod-
uct or service. For example, Richard Branson’s Virgin brand has successfully provided a platform
for entry into a variety of new fields including trains, financial services, telecommunications and
food, while Stelios Haji-Ioannou has done something similar with his ‘Easy’ brand, moving into
cinemas, car rental, cruises and hotels from the original base in low-cost flying.
In their work on what they call ‘management innovation’, Julian Birkinshaw and colleagues
highlight a number of core organizational innovations (such as ‘total quality management’) that
have diffused widely across sectors [50]. These are essentially paradigm innovations, which
represent concepts that can be shaped and stretched to fit a variety of different contexts – for
example, Henry Ford’s original ideas on mass production became applied and adapted to a
host of other industries. McDonald’s owed much of their inspiration to him in designing their
fast-food business, and in turn, they were a powerful influence on the development of the Ara-
vind Eye Clinics in India, which bring low-cost eye surgery to the masses [51]. (We will return to
this important question of platforms in the next chapter.)

THE INNOVATION LIFE CYCLE – DIFFERENT EMPHASIS OVER TIME

We also need to recognize that innovation opportunities change over time. In new industries –
such as today’s biotech, Internet-software or nanomaterials – there is huge scope for experimen-
tation around new product and service concepts. But more mature industries tend to focus more
around process innovation or position innovation, looking for ways of delivering products and
services more cheaply or flexibly or for new market segments into which to sell them. In their
pioneering work on this theme, Abernathy and Utterback developed a model describing the
pattern in terms of three distinct phases (as we can see in Figure 1.10) [52].
Initially, under the discontinuous conditions, which arise when completely new tech-
nology and/or markets emerge, there is what they term a ‘fluid phase’ during which there is high
uncertainty along two dimensions:
• The target – what will the new configuration be and who will want it?
• The technical – how will we harness new technological knowledge to create and deliver this?
No one knows what the ‘right’ configuration of technological means and market needs will
be, and so there is extensive experimentation (accompanied by many failures) and fast learning
by a range of players including many new entrepreneurial businesses.
Gradually, these experiments begin to converge around what they call a ‘dominant
design’ – something that begins to set up the rules of the game. This represents a convergence
around the most popular (importantly, not necessarily, the most technologically sophisticated
 1.11 Key Aspects of Innovation 35

Product innovation

Emphasis of innovation
Process innovation

F I G U R E 1.10 The
innovation life cycle
Source: Based on
W. Abernathy and
Stage 1 – Fluid Stage 2 – Transitional Stage 3 – Specific J. Utterback, ‘Patterns
• Exploration • Dominant design • Standardization of industrial innova-
• Uncertainty • Integration tion’, Technology Review,
• Flexibility vol. 80, pp. 40–47, 1978.

or elegant) solution to the emerging configuration. At this point, a ‘bandwagon’ begins to roll,
and innovation options become increasingly channelled around a core set of possibilities – what
Dosi calls a ‘technological trajectory’ [53]. It becomes increasingly difficult to explore outside this
space because entrepreneurial interest and the resources that it brings increasingly focus on pos-
sibilities within the dominant design corridor.
This can apply to products or processes; in both cases, the key characteristics become stabi-
lized, and experimentation moves to getting the bugs out and refining the dominant design. For
example, the nineteenth-century chemical industry moved from making soda ash (an essential
ingredient in making soap, glass and a host of other products) from the earliest days where it
was produced by burning vegetable matter through to a sophisticated chemical reaction that
was carried out on a batch process (the Leblanc process), which was one of the drivers of the
Industrial Revolution. This process dominated for nearly a century but was in turn replaced by
a new generation of continuous processes that used electrolytic techniques and that originated
in Belgium, where they were developed by the Solvay brothers. Moving to the Leblanc process
or the Solvay process did not happen overnight; it took decades of work to refine and improve
each process and to fully understand the chemistry and engineering required to get consistent
high-quality output.
A similar pattern can be seen in products. For example, the original design for a camera is
something that goes back to the early nineteenth century and – as a visit to any science museum
will show – involved all sorts of ingenious solutions. The dominant design gradually emerged
with an architecture that we would recognize – shutter and lens arrangement, focusing princi-
ples, back plate for film or plates and so on. But this design was then modified still further – for
example, with different lenses, motorized drives, flash technology – and, in the case of George
Eastman’s work, to creating a simple and relatively ‘idiot-proof’ model camera (the Box Brownie),
which opened up photography to a mass market. More recent development has seen a similar
fluid phase around digital imaging devices.
The period in which the dominant design emerges and emphasis shifts to imitation and
development around it is termed the ‘transitional phase’ in the Abernathy and Utterback model.
Activities move from radical concept development to more focused efforts geared around product
differentiation and to delivering it reliably, cheaply, with higher quality, extended functionality
and so on.
As the concept matures still further, incremental innovation becomes more significant and
emphasis shifts to factors such as cost – which means that efforts within the industries that grow
up around these product areas tend to focus increasingly on rationalization, on scale economies,
and on process innovation to drive out cost and improve productivity. Product innovation is
36 CHAPTER 1 Innovation – What It Is and Why It Matters

increasingly about differentiation through customization to meet the particular needs of specific
users. Abernathy and Utterback term this the ‘specific phase’.
Finally, the stage is set for change – the scope for innovation becomes smaller and smaller
while outside – for example, in the laboratories and imaginations of research scientists – new
possibilities are emerging. Eventually, a new technology that has the potential to challenge all
the by-now well-established rules emerges – and the game is disrupted. In the camera case, for
example, this is happening with the advent of digital photography, which is having an impact on
cameras and the overall service package around how we get, keep and share our photographs. In
our chemical case, this is happening with biotechnology and the emergence of the possibility of
no longer needing giant chemical plants but instead moving to small-scale operations using live
organisms genetically engineered to produce what we need.
Table 1.8 sets out the main elements of this model.
Although originally developed for manufactured products, the model also works for
services – for example, the early days of online banking were characterized by a typically fluid
phase with many options and models being offered. This gradually moved to a transitional phase,
building a dominant design consensus on the package of services offered, the levels and nature
of security and privacy support, the interactivity of website and so on. The field has now become
mature with much of the competition shifting to marginal issues such as relative interest rates
and targeting specific customer niches.
We should also remember that there is a long-term cycle involved – mature businesses
that have already gone through their fluid and transitional phases do not necessarily stay in the
mature phase forever. Rather, they become increasingly vulnerable to a new wave of change as
the cycle repeats itself – for example, the lighting industry has entered a new fluid phase based
on the applications of solid-state LED technology, but this comes after over 100 years of the
incandescent bulb developed by Swann, Edison and others. Their early experiments eventually
converged on a dominant product design after which emphasis shifted to process innovation
around cost, quality and other parameters – a trajectory that has characterized the industry and
led to increasing consolidation among a few big players. But that maturity has now given way
to a new phase involving different players, technologies and markets. Something similar is hap-
pening in the automobile industry; after the initial fluid phase in the late nineteenth century, the
industry adopted the dominant design led by Ford’s Model T and the factory making it. But we
are now seeing a new fluid phase characterized by new technologies around autonomous driver-
less vehicles, shifting ownership patterns, strong regulatory pressures around emissions and the
entry of new players such as Google, Apple and Tesla.

Table 1.8 Stages in the Innovation Life Cycle

Innovation Characteristic Fluid Pattern Transitional Phase Specific Phase

Competitive emphasis Functional product Product variation Cost reduction
placed on . . . performance
Innovation stimulated Information on user Opportunities created Pressure to reduce cost,
by . . . needs, technical inputs by expanding internal improve quality and so on
technical capability
Predominant type of Frequent major changes Major process innova- Incremental product and
innovation in products tions required by rising process innovation
volume
Product line Diverse, often including Includes at least one Mostly undifferentiated
custom designs stable or dominant standard products
design
Production processes Flexible and inefficient – Becoming more rigid Efficient, often
aim is to experiment and and defined capital-intensive and
make frequent changes relatively rigid
 1.11 Key Aspects of Innovation 37

The pattern can be seen in many studies, and its implications for innovation management
are important. In particular, it helps us understand why established organizations often find it
hard to deal with discontinuous change.

DISCONTINUOUS INNOVATION – WHAT HAPPENS WHEN

THE GAME CHANGES?
Most of the time innovation takes place within a set of rules of the game, which are clearly under-
stood, and involves players trying to innovate by doing what they have been doing (product, pro-
cess, position, etc.) but better. Some manage this more effectively than others, but the ‘rules of the
game’ are accepted and do not change .
But occasionally, something happens, which dislocates this framework and changes the
rules of the game. By definition, these are not everyday events, but they have the capacity to rede-
fine the space and the boundary conditions – they open up new opportunities but also challenge
existing players to reframe what they are doing in the light of new conditions. This is a central
theme in Schumpeter’s original theory of innovation, which he saw as involving a process of
‘creative destruction’ [20].
Case Study 1.8 discusses the example of the ice industry and its experience of discontin-
uous innovation.
Change of this kind can come through the emergence of a new technology – similar to the
ice industry example (see Case Study 1.8). Or, it can come through the emergence of a completely
new market with new characteristics and expectations. In his famous studies of the computer
disk drive, steel and hydraulic excavator industries, Christensen highlights the problems that

CA S E S T U DY 1 . 8 The Melting Ice Industry

Back in the 1880s, there was a thriving industry in the north- refrigeration. It wasn’t long before artificial ice making became
eastern United States in the lucrative business of selling ice. a reality – Joseph Perkins had demonstrated that vaporizing and
The business model was deceptively simple – work hard to condensing a volatile liquid in a closed system would do the job
cut chunks of ice out of the frozen northern wastes, wrap and in doing so outlined the basic architecture that underpins
the harvest quickly, and ship it as quickly as possible to the today’s refrigerators. In 1870, Linde published his research, and
warmer southern states – and increasingly overseas – where by 1873, a patented commercial refrigeration system was on the
it could be used to preserve food. In its heyday, this was a market. In the years that followed, the industry grew – in 1879,
big industry – in 1886, the record harvest ran to 25 million there were 35 plants, and 10 years later, 222 making artificial
tons – and it employed thousands of people in cutting, storing ice. Effectively, this development sounded the death knell for
and shipping the product. And it was an industry with strong the ice-harvesting industry – although it took a long time to go
commitment to innovation – developments in ice cutting, snow under. For a while, both industries grew alongside each other,
ploughs, insulation techniques and logistics underpinned the learning and innovating along their different pathways and
industry’s strong growth. The impact of these innovations was expanding the overall market for ice – for example, by feeding
significant – they enabled, for example, an expansion of mar- the growing urban demand to fill domestic ‘ice boxes’. But
kets to far-flung locations such as Hong Kong, Bombay and inevitably, the new technology took over as the old harvesting
Rio de Janeiro, where, despite the distance and journey times, model reached the limits of what it could achieve in terms of
sufficient ice remained of cargoes originally loaded in ports technological efficiencies.
such as Boston to make the venture highly profitable [54]. Significantly, most of the established ice harvesters were
But at the same time, as this highly efficient system was too locked into the old model to make the transition and so
growing, researchers such as the young Carl von Linde were went under – to be replaced by the new refrigeration industry
working in their laboratories on the emerging problems of dominated by new entrant firms.
38 CHAPTER 1 Innovation – What It Is and Why It Matters

arise under these conditions [55]. For example, the disk drive industry was a thriving sector in
which the voracious demands of a growing range of customer industries meant that there was
a booming market for disk drive storage units. Around 120 players populated what had become
an industry worth $18 billion by 1995 – and – similar to their predecessors in ice harvesting – it
was a richly innovative industry. Firms worked closely with their customers, understanding the
particular needs and demands for more storage capacity, faster access times, smaller footprints
and so on. But just as our ice industry, the virtuous circle around the original computer industry
was broken – in this case, not by a radical technological shift but by the emergence of a new
market with very different needs and expectations.
The key point about this sector was that disruption happened not once but several times,
involving different generations of technologies, markets and participating firms. For example,
while the emphasis in the minicomputer world of the mid-1970s was on high performance and
the requirement for storage units correspondingly technologically sophisticated, the emerging
market for PCs had a very different shape. These were much less clever machines, capable of
running much simpler software and with massively inferior performance – but at a price that
a very different set of people could afford. Importantly, although simpler, they were capable of
doing most of the basic tasks that a much wider market was interested in – simple arithmetical
calculations, word processing and basic graphics. As the market grew so, learning effects meant
that these capabilities improved – but from a much lower cost base. The result was, in the end,
just as that of Linde and his contemporaries in the ice industry – but from a different direction.
Of the major manufacturers in the disk drive industry serving the minicomputer market, only a
handful survived – and leadership in the new industry shifted to new entrant firms working with
a very different model.
Discontinuity can also come about by reframing the way we think about an industry –
changing the dominant business model and hence the ‘rules of the game’. Think about the rev-
olution in flying that the low-cost carriers have brought about. Here the challenge came via a
new business model rather than technology – based on the premise that if prices could be kept
low, a large new market could be opened up. The power of the new way of framing the business
was that it opened up a new – and very different – trajectory along which all sorts of innova-
tions began to happen. In order to make low prices pay a number of problems needed solving –
keeping load factors high, cutting administration costs, enabling rapid turnaround times at
terminals – but once the model began to work, it attracted not only new customers but also
increasingly established flyers who saw the advantages of lower prices.
What these – and many other examples – have in common is that they represent the
challenge of discontinuous innovation. None of the industries were lacking in innovation or a
commitment to further change. But the ice harvesters, minicomputer disk companies or the
established airlines all carried on their innovation on a stage covered with a relatively predictable
carpet. The trouble was that shifts in technology, in new market emergence or in new business
models pulled this carpet out from under the firms – and created a new set of conditions on
which a new game would be played out. Under such conditions, it is the new players who tend to
do better because they don’t have to wrestle with learning new tricks and letting go of their old
ones. Established players often do badly – in part because the natural response is to press even
harder on the pedal driving the existing ways of organizing and managing innovation.
In the ice industry example, the problem was not that the major players weren’t interested
in R&D – on the contrary, they worked really hard at keeping a technological edge in insulation,
harvesting and other tools. But they were blindsided by technological changes coming from a
different field altogether – and when they woke up to the threat posed by mechanical ice mak-
ing their response was to work even harder at improving their own ice harvesting and shipping
technologies. It is here that the so-called sailing ship effect can often be observed, in which a
mature technology accelerates in its rate of improvement as a response to a competing new
alternative – as was the case with the development of sailing ships in competition with newly
emerging steamship technology [56].
 1.11 Key Aspects of Innovation 39

In a similar fashion, the problem for the firms in the disk drive industry wasn’t that they
didn’t listen to customers but rather that they listened too well. They build a virtuous circle of
demanding customers in their existing market place with whom they developed a stream of
improvement innovations – continuously stretching their products and processes to do what
they were doing better and better. The trouble was that they were getting close to the wrong
customers – the discontinuity that got them into trouble was the emergence of a completely dif-
ferent set of users with very different needs and values.
Table 1.9 gives some examples of such triggers for discontinuity. Common to these from
an innovation management point of view is the need to recognize that under discontinuous

Table 1.9 Some Examples of Sources of Discontinuity

Triggers/Sources Explanation Problems Posed Examples

of Discontinuity
New market Most markets evolve through a Established players don’t see it Disk drives, excavators,
emerges process of gradual expansion, but because they are focused on their mini-mills
at certain times, completely new existing markets Mobile phone/SMS where the
markets emerge, which cannot be May discount it as being too small or market that actually emerged
analysed or predicted in advance not representing their preferred target was not the one expected or
or explored through using conven- market – fringe/cranks dismissal predicted by originators
tional market research/analytical
Originators of new product may not
techniques
see potential in new markets and
may ignore them, for example, text
messaging
New technology Step change takes place in prod- Don’t see it because it is beyond Ice harvesting to cold storage
emerges uct or process technology – may the periphery of technology search Valves to solid-state electronics
result from convergence and environment
Photos to digital images
maturing of several streams Not an extension of current areas but
(e.g., industrial automation, completely new field or approach
mobile phones) or as a result of
Tipping point may not be a single break-
a single breakthrough (e.g., LED
through but convergence and maturing of
as white light source)
established technological streams, whose
combined effect is underestimated
Not invented here effect – new tech-
nology represents a different basis for
delivering value – for example, tele-
phone versus telegraphy
New political Political conditions that shape the Old mind-set about how business is Centrally planned to market
rules emerge economic and social rules may done, rules of the game and so on are economy, for example, former
shift dramatically – for example, challenged and established firms fail to Soviet Union
the collapse of communism meant understand or learn new rules Apartheid to post-Apartheid
an alternative model – capitalist, South Africa – inward and
competition – as opposed to insular to externally linked
central planning – and many
Free trade/globalization results
ex-state firms couldn’t adapt their
in dismantling protective tariff
ways of thinking
and other barriers and new
competition basis emerges
Running out Firms in mature industries may Current system is built around a Kodak, Polaroid and the digital
of road need to escape the constraints particular trajectory and embedded imaging shift
of diminishing space for product in a steady-state set of innovation Encyclopaedia Britannica
and process innovation and the routines, which militate against
increasing competition of industry widespread search or risk-taking
structures by either exit or by rad- experiments
ical reorientation of their business

(continued)
40 CHAPTER 1 Innovation – What It Is and Why It Matters

Table 1.9 Some Examples of Sources of Discontinuity (continued)

Triggers/Sources Explanation Problems Posed Examples

of Discontinuity
Sea change in Public opinion or behaviour shifts Don’t pick up on it or persist in The rise of file sharing in the
market sentiment slowly and then tips over into a alternative explanations – cognitive music industry
or behaviour new model – for example, the dissonance – until it may be too late Shifts towards meat-free food-
music industry is in the midst of a stuffs
(technology-enabled) revolution
Growth of sharing economy and
in delivery systems from buying
decline in ownership of cars
records, tapes and CDs to direct
and other consumer goods
download of tracks in MP3 and
related formats
Deregulation/ Political and market pressures lead New rules of the game but old mind- Old monopoly positions in fields
shifts in to shifts in the regulatory frame- sets persist and existing player unable such as telecommunications
regulatory work and enable the emergence to move fast enough or see new oppor- and energy were dismantled
regime of a new set of rules – for example, tunities opened up and new players/combinations
liberalization, privatization or of enterprises emerged. In
deregulation particular, energy and band-
width become increasingly
viewed as commodities
Fractures along Long-standing issues of concern to Rules of the game suddenly shift McDonald’s and obesity
‘fault lines’ a minority accumulate momentum and the new pattern gathers rapid Tobacco companies and
(sometimes through the action of momentum, often wrong-footing existing smoking bans
pressure groups) and suddenly players working with old assumptions. Oil/energy and others and
the system switches/tips over – Other players who have been working global warming
for example, social attitudes to in the background developing parallel
smoking or health concerns about alternatives may suddenly come into the
obesity levels and fast foods limelight as new conditions favour them
Unthinkable Unimagined and therefore not pre- New rules may disempower existing 9/11
events pared for events that – sometimes players or render competencies unnec-
literally – change the world and set essary
up new rules of the game
Business model Established business models are New entrants see opportunity to deliver Amazon, Alibaba
innovation challenged by a reframing, usually product/service via new business model Charles Schwab
by a new entrant who redefines/ and rewrite rules – existing players have
Southwest and other low-cost
reframes the problem and the at best to be fast followers
airlines
consequent ‘rules of the game’
Architectural Changes at the level of the system Established players develop particular Photolithography in chip
innovation architecture rewrite the rules of ways of seeing and frame their manufacture
the game for those involved interactions – for example, who they talk
at the ­component level to in acquiring and using knowledge to
drive innovation – according to this set
of views. Architectural shifts may involve
reframing, but at the component level, it
is difficult to pick up the need for doing
so – and thus new entrants better able to
work with new architecture can emerge
Shifts in Change takes place at system Hard to see where new paradigm Industrial
‘technoeconomic level, involving technology and begins until rules become established. Revolution
paradigm’ – market shifts. This involves the Existing players tend to reinforce their
Mass production
systemic changes convergence of a number of commitment to old model, reinforced by
that impact whole trends, which result in a ‘para- ‘sailing ship’ effects
sectors or even digm shift’ where the old order is
whole societies replaced
 1.11 Key Aspects of Innovation 41

conditions (which thankfully don’t emerge every day), we need different approaches to orga-
nizing and managing innovation. If we try and use established models that work under steady-
state conditions we find – as is the reported experience of many – we are increasingly out of our
depth and risk being upstaged by new and more agile players.
Organizations build capabilities around a particular trajectory and those who may be
strong in the later (specific) phase of an established trajectory often find it hard to move into the
new one. (The example of the firms that successfully exploited the transistor in the early 1950s
is a good case in point – many were new ventures, sometimes started by enthusiasts in their
garage, yet they rose to challenge major players in the electronics industry such as Raytheon.)
This is partly a consequence of sunk costs and commitments to existing technologies and mar-
kets and partly because of psychological and institutional barriers. They may respond but in slow
fashion – and they may make the mistake of giving responsibility for the new development to
those whose current activities would be threatened by a shift.
While some research suggests that the existing incumbents do badly when discontinuous
change triggers a new fluid phase, we need to be careful here [57]. Not all existing players do
badly – many of them are able to build on the new trajectory and deploy/leverage their accu-
mulated knowledge, networks, skills and financial assets to enhance their competence through
building on the new opportunity [58,59]. Equally, while it is true that new entrants – often small
entrepreneurial firms – play a strong role in this early phase, we should not forget that we see
only the successful players. We need to remember that there is a strong ecological pressure on
new entrants, which means only the fittest or luckiest survive.
It is more helpful to suggest that there is something about the ways in which innovation is
managed under these conditions, which poses problems. Good practice of the ‘steady state’ kind
described is helpful in the mature phase but can actively militate against the entry and success
in the fluid phase of a new technology. How do enterprises pick up signals about changes if they
take place in areas where they don’t normally do research? How do they understand the needs
of a market that doesn’t exist yet but that will shape the eventual package, which becomes the
dominant design? If they talk to their existing customers, the likelihood is that those customers
will tend to ask for more of the same, so which new users should they talk to – and how do they
find them?
The challenge involves trying to develop ways of managing innovation not only under
‘steady state’ but also under the highly uncertain, rapidly evolving and changing conditions,
which result from a dislocation or discontinuity. The kinds of organizational behaviour needed
here will include things such as agility, flexibility, the ability to learn fast, the lack of preconcep-
tions about the ways in which things might evolve and so on – and these are often associated with
new small firms. There are ways in which large and established players can also exhibit this kind
of behaviour, but it does often conflict with their normal ways of thinking and working.
Worryingly, the source of the discontinuity that destabilizes an industry – new technology,
emergence of a new market, rise of a new business model – often comes from outside that
industry [60]. So even those large incumbent firms that take time and resources to carry out
research to try and stay abreast of developments in their field may find that they are wrong-footed
by the entry of something that has been developed in a different field. The massive changes in
insurance and financial services that have characterized the shift to online and telephone pro-
vision were largely developed by IT professionals often working outside the original industry.
In extreme cases, we find what is often termed the ‘not invented here’ – NIH – effect, where a
firm finds out about a technology but decides against following it up because it does not fit with
their perception of the industry or the likely rate and direction of its technological development.
Famous examples of this include Kodak’s rejection of the Polaroid process or Western Union’s
dismissal of Bell’s telephone invention. In a famous memo dated 1876, the board commented,
‘this “telephone” has too many shortcomings to be seriously considered as a means of communi-
cation. The device is inherently of no value to us’.
42 CHAPTER 1 Innovation – What It Is and Why It Matters

1.12
This chapter has begun to explore the challenges posed by innovation. It has looked at why inno-
1.12
vation matters and opened up some perspectives on what it involves. And it has raised the idea
INNOVATION of innovation as a core process, which needs to be organized and managed in order to enable the
MANAGEMENT renewal of any organization. We talked about this a little earlier in the chapter, and Figure 1.6
sets it out as a graphic that highlights the key questions around managing innovation.
We’ve seen that the scope for innovation is wide – in terms of overall innovation space
and in the many different ways this can be populated, with both incremental and more radical
options. At the limit, we have the challenges posed when innovation moves into the territory
of discontinuous change and a whole new game begins. We’ve also looked briefly at concepts
such as component and architecture innovation and the critical role that knowledge plays in
managing these different forms. Finally, we’ve looked at the issue of timing and of understanding
the nature of different innovation types at different stages.
All that gives us a feel for what innovation is and why it matters. But what we now need to
do is understand how to organize the innovation process itself. That’s the focus of the rest of the
book, and we deal with it in the following fashion:
In Chapter 2 we look at the digital revolution and what it means for the innovation game – is
it a whole new game played by different rules or the old one with new tools? We explore some of
the opportunities and implications opened up by this technological wave.
Chapter 3 looks at the process model in more detail and explores the ways in which this
generic model can be configured for particular types of organization. It also looks at what we’ve
learned about success and failure in managing innovation – themes that are examined in greater
detail in the subsequent chapters – as well as key contextual issues around successful innovation
management. Chapter 4 looks at the question Do we have a clear innovation strategy? and explores
this theme in depth. Is there a clear sense of where and how innovation will take the organization
forward and is there a roadmap for this? Is the strategy shared and understood – and how can
we ensure alignment of the various different innovation efforts across the organization? What
tools and techniques can be used to develop and enable analysis, selection and implementation
of innovation?
In Chapter 5, we pick up the question Do we have an innovative organization? and examine
the role that key concepts such as leadership, structure, communication and motivation play in
building and sustaining a culture of focused creativity.
Chapter 6 moves on to the first of the core elements in our process model – the ‘search’
question – and explores the issues around the question of what triggers the innovation process.
There are multiple sources and also challenges involved in searching for and picking up sig-
nals from them. Chapter 7 takes up the complementary question – How do we carry out this
search activity? Which structures, tools and techniques are appropriate under what conditions?
How do we balance search around exploration of completely new territory with exploiting what
we already know in new forms? And Chapter 8 looks at the growing importance of innovation
networks – the different ways in which they contribute to innovation and the lessons we have
learned around configuring and managing them.
Moving into the area of selection in the core process model, Chapter 9 looks at how the
innovation decision process works – of all the possible options generated by effective search,
which ones will we back – and why? Making decisions of this kind are not simple because of
the underlying uncertainty involved – so which approaches, tools and techniques can we bring
to bear? It also picks up another core theme – how to choose and implement innovation options
while building and capturing value from the intellectual effort involved. How can we build a
business case, and how can we handle resource allocation for innovation projects in an uncer-
tain world?
In the ‘implementation’ phase, issues of how we move innovation ideas into reality become
central. Chapter 10 looks at the ways in which innovation projects of various kinds are organized
and managed and explores structures, tools and other support mechanisms to help facilitate this.
 1.12 Innovation Management 43

In Chapter 11, we explore in more detail how firms use external relationships with suppliers,
users and partners to develop new technologies, products and businesses in the context of ‘open
innovation’. Chapter 12 picks up the issue of new ventures, both those arising from within the
existing organization (corporate entrepreneurship) and those that involve setting up a new entre-
preneurial venture outside.
The last phase answers the question How can we ensure that we capture value from our
efforts at innovation? Chapter 13 looks at questions of adoption and diffusion and ways to
develop and work with markets for innovation. It picks up on questions of appropriability and
value capture in the context of the commercial world. Chapter 14 extends this discussion to the
question of ‘social entrepreneurship’ where concern is less about profits than about creating sus-
tainable social value.
Finally, Chapter 15 looks at how we can assess the ways in which we organize and manage
innovation and use these to drive a learning process to enable us to do it better next time.
The concern here is not just to build a strong innovation management capability but to rec-
ognize that – faced with the moving target that innovation represents in terms of technologies,
markets, competitors, regulators and so on – the challenge is to create a learning and adaptive
approach that constantly upgrades this capability. In other words, we are concerned to build
‘dynamic capability’.
View 1.3 gives some examples of the top challenges facing innovation managers.

VIEW 1.3 W H E R E D O YO U S E E T H E T O P T H R E E C H A L L E N G E S I N M A N AG I N G I N N OVAT I O N ?

1. Creating and sustaining a culture in which innovation can community. The challenge is in confronting this issue and
flourish. This includes a physical and organizational space hopefully inspiring and changing people’s perception so that
where experimentation, evaluation and examination can ‘innovation is OK for all of us’.
take place. The values and behaviors that facilitate innova- 2. Raising awareness; coupled with the aforementioned, people
tion have to be developed and sustained. do not fully understand what innovation is or how it applies
2. Developing people who can flourish in that environment; to their world.
people who can question, challenge and suggest ideas as part 3. Managing in my opinion is either the wrong word or the
of a group with a common objective, unconstrained by the wrong thing to do; managing implies command and con-
day-to-day operational environment. trol, and while important, it does not always fit well with
3. Managing innovation in the midst of a commercial enter- the challenge of leading innovation that is far more about
prise that is focused on exploitation – maximum benefit inspiring, building confidence and risk-taking. Most sen-
from the minimum of resource that requires repeatability ior managers are risk-averse, therefore a solid management
and a right-first-time process approach. background is not always a best fit for the challenge of lead-
– Patrick McLaughlin, Managing Director, Cerulean ing innovation.
– John Tregaskes, Technical Specialist Manager, Serco
1. The level at which long-term innovation activities are best
conducted, without losing connectedness with the BUs 1. Culture – encouraging people to challenge the way we do
at which the innovations should finally be incubated and things and generate creative ideas.
elaborated. 2. Balancing innovation with the levels of risk management
2. Having diverse types of individuals in the company moti- and control required in a financial services environment.
vated for spending time on innovation-related activities. 3. Ensuring that innovation in one area does not lead to subop-
3. Having the right balance between application-oriented inno- timization and negative impact on another.
vation and more fundamental innovation. – John Gilbert, Head of Process Excellence, UBS
– Wouter Zeeman, CRH Insulation Europe
1. Alignment of expectations on innovation with senior man-
1. Innovation is too often seen as a technically driven issue; agement. A clear definition of the nature of innovation is
in other words, the preserve of those strange ‘scientific’ required, that is, radical versus incremental innovation and
and ‘engineering’ people, so it’s for them, not ‘us’ the wider the 4Ps. What should be the primary focus?
44 CHAPTER 1 Innovation – What It Is and Why It Matters

2. To drive a project portfolio of both incremental (do better) and historically has aimed to achieve a third of sales from
and radical (do different) innovation. How do you get the products introduced in the past five years. The famous
right balance? company culture, the ‘3M Way’, includes a policy of allowing
3. To get sufficient, dedicated, human and financial resources employees to spend 15% of their time on their own projects
up-front. and has been successfully emulated by other innovative com-
– John Thesmer, Managing Director, panies such as Google.
Ictal Care, Denmark He argues that ‘Invention is by its very nature a disorderly
process, you cannot say I’m going to schedule myself for three
1. Finding R&D money for far-sighted technology projects at a good ideas on Wednesday and two on Friday. That’s not how
time when shareholders seem to apply increasing amounts creativity works’. After a focus on improving efficiency, quality
of pressure on companies to deliver short-term results. Every and financial performance for 2001–2006, under its new CEO,
industry needs to keep innovating to stay competitive in the 3M is now refocusing on its core innovation capability. Buckley
future – and the rate of technological change is accelerating. believes that the company had become too dominated by formal
But companies are being forced to pursue these objectives quality and measurement processes, to the detriment of innova-
for less and less money. tion: ‘. . . you cannot create in that atmosphere of confinement
2. Managing this difficult balance of ‘doing more with less’ is or sameness, perhaps one of the mistakes we have made as a
a major challenge in our industry, and I am certain that we company . . . is that when you value sameness more than you
are not alone. Building a corporate culture that doesn’t pun- value creativity, I think you potentially undermine the heart and
ish risk-takers. Managers in many organizations seem to be soul of a company like 3M . . .,’ and since becoming CEO has sig-
judged almost exclusively according to how well they are nificantly increased the spending on R&D from some $1 billion
performing according to some fairly basic measurements, to nearer to $1.5 billion, and is targeting the company’s 45 core
for example, sales or number of units. No one would disa- technologies such as abrasives to nanotechnology, but sold the
gree that absorbing new technologies can potentially help noncore pharmaceutical business.
to improve these statistics in the long term, but new tech-
nologies can be a rather daunting obstacle in the short term. Source: Based on Hindo B., ‘At 3M: A struggle between efficiency
and creativity’, BusinessWeek, 6 November 2007, 8–14.
Sometimes, technology trials fail. An organization needs to
recognize this and has to lead its teams and managers in a
way that encourages a healthy amount of risk without losing The success of the companies we’ve identified as high-
control of the big picture. leverage innovators – those that outperformed their industry
3. Striking the right balance between in-house R&D and lever- groups on seven key measures of financial success for the
aging external innovations. The scope and scale of innova- previous five years, while at the same time spending less on R&D
tion are growing at a pace that makes it all but unthinkable as a percentage of sales – reaffirms one of the time-tested find-
that any single company can do it all themselves. But which ings of the Global Innovation 1000 study. There is no long-term
elements should be retained internally versus which ones correlation between the amount of money a company spends
can be outsourced? There’s never a shortage of people writ- on its innovation efforts and its overall financial performance.
ing papers and books that attempt to address this very topic, Instead, what matters is how companies use that money and
but managers in the field are hungrier than ever for useful other resources, as well as the quality of their talent, processes
and practical guidance on this issue. and decision making, to create products and services that con-
– Rob Perrons, Shell Exploration, USA nect with their customers.

George Buckley, CEO of 3M, is a PhD chemical engi- Source: PWC Global Innovation 1000 study, 2018. https://www
neer by training. 3M has global sales of around $23 billion .strategyand.pwc.com/gx/en/insights/innovation1000.html

S U M M A RY • Innovation is about growth – about recognizing opportunities for doing something new and implement-
ing those ideas to create some kind of value. It could be business growth; it could be social change. But at
its heart is the creative human spirit, the urge to make change in our environment.

• Innovation is also a survival imperative. If an organization doesn’t change what it offers the world and the
ways in which it creates and delivers its offerings, it could well be in trouble. And innovation contributes
 Further Reading 45

to competitive success in many different ways – it’s a strategic resource to getting the organization where
it is trying to go, whether it is delivering shareholder value for private sector firms, or providing better
public services, or enabling the start-up and growth of new enterprises.

• Innovation doesn’t happen simply because we hope it will – it’s a complex process that carries risks and
needs careful and systematic management. Innovation isn’t a single event, such as the light bulb going off
above a cartoon character’s head. It’s an extended process of picking up on ideas for change and turning
them through into effective reality. Research repeatedly suggests that if we want to succeed in managing
innovation we need to:
• Understand what we are trying to manage – the better our mental models, the more likely what we do
with them in the way of building and running organizations and processes will work;
• Understand the how – creating the conditions (and adapting/configuring them) to make it happen;
• Understand the what, why and when of innovation activity – strategy shaping the innovation work
that we do;
• Understand that it is a moving target – managing innovation is about building a dynamic capability.

• Innovation can take many forms, but they can be reduced to four directions of change:
• ‘product innovation’ – changes in the things (products/services) that an organization offers;
• ‘process innovation’ – changes in the ways in which they are created and delivered;
• ‘position innovation’ – changes in the context in which the products/services are introduced;
• ‘paradigm innovation’ – changes in the underlying mental models that frame what the organization
does.

• Any organization can get lucky once, but the real skill in innovation management is being able to repeat
the trick. So if we want to manage innovation, we ought to ask ourselves the following check questions:
• Do we have effective enabling mechanisms for the core process?
• Do we have strategic direction and commitment for innovation?
• Do we have an innovative organization?
• Do we build rich proactive links?
• Do we learn and develop our innovation capability?

Peter Drucker’s ‘Innovation and entrepreneurship’ (‘The dynamics of innovation’, Springer, 1999) and FURTHER
(Harper and Row, 1985) provides an accessible Sundbo and Fugelsang (‘Innovation as strategic READING
introduction to the subject, but perhaps relies more reflexivity’, Routledge, 2002) provide some largely
on intuition and experience than on empirical European views, while Melissa Schilling’s ‘Strategic
research. Since we published the first edition in management of technological innovation’ (fourth
1997, a number of interesting texts have been edition, McGraw Hill, 2013) is largely based on the
published. Paul Trott’s ‘Innovation Management experience of American firms.
and New Product Development’ (now in its sixth
Some books explore the implications for a wider devel-
edition, Pearson, 2016) particularly focuses on the
oping country context, notably Forbes and Wield
management of product development, books by
(‘From followers to leaders,’ Routledge, 2002)
Bettina von Stamm (‘Managing innovation, design,
C.K. Prahalad (‘The fortune at the bottom of the pyr-
and creativity’ (second edition), John Wiley, 2008)
amid’, Wharton School Publishing, 2006), Prabhu
and Margaret Bruce (‘Design in business’, Pearson
and colleagues (‘Jugaad innovation’, Jossey Bass,
Education, 2001) have a strong design emphasis,
2012) and Govindarajan and Trimble (‘Reverse
and Tim Jones’ ‘Innovating at the edge’ (Butter-
innovation: Create far from home, win everywhere’,
worth Heinemann, 2002) targets practitioners
Harvard Business Review Press, 2012). The ‘Hand-
in particular. David Gann, Mark Dodgson and
book of inclusive innovation’, edited by Gerry
Ammon Salter’s book (‘The management of tech-
George and colleagues, covers social and inclusive
nological innovation’, Oxford University Press,
innovation from a number of different contexts
2008) looks particularly at innovation strategy
(Edward Elgar, 2019).
and the ‘new innovation toolkit’, while Goffin and
Mitchell’s ‘Innovation management’ (third edition, There are several compilations and handbooks cov-
Macmillan, 2016) also looks particularly from a ering the field, the best known being Burgelman
management tools perspective. Brockhoff et al. et al.’s ‘Strategic management of technology and
46 CHAPTER 1 Innovation – What It Is and Why It Matters

innovation’ (McGraw-Hill, 2008) now in its fifth Dyer and colleagues focus on individual entrepreneurial
edition and containing a wide range of key papers skills (‘The innovator’s DNA: Mastering the five
and case studies, though with a very strong US skills of disruptive innovators’, Harvard Business
emphasis. A more international flavour is present in Review Press), while Schroeder and Robinson
Dodgson and Rothwell (‘The handbook of industrial (‘Ideas are free’, Berret Koehler, 2004) and Bessant
innovation’, Edward Elgar, 1996), The Routledge (‘High involvement innovation’, John Wiley, 2003)
Companion to innovation management (eds Chen look at the issue of high-involvement incremental
et al., 2019) and Fagerberg et al. (‘The Oxford hand- innovation building on the original work of Imai
book of innovation’, OUP, 2004). The work arising (Kaizen, Random House, 1987).
from the Minnesota Innovation Project (Van de Most marketing texts fail to cover the specific issues
Ven et al., ‘The innovation journey’, Oxford Uni- related to innovative products and services, although
versity Press, 1999) also provides a good overview a few specialist texts exist that examine the more
of the field and the key research themes contained narrow problem of marketing so-called high-
within it. technology products – for example, Jolly’s ‘Com-
Case studies provide a good lens through which this mercialising new technologies’ (Harvard Business
process can be seen, and there are several useful School Press, 1997) and Moore’s ‘Crossing the chasm’
collections including Bettina von Stamm’s ‘Inno- (Harper Business, 1999). There are also extensive
vation, design and creativity’ (second edition, John insights into adoption behaviour drawn from a wealth
Wiley, 2008), Tim Jones and colleagues’ ‘The growth of studies drawn together by Everett Rogers and col-
agenda’ (John Wiley, 2011), Roland Kaye and David leagues (‘Diffusion of innovation’, Free Press, 2003).
Hawkridge’s ‘Case studies of innovation’ (Kogan Particular themes in innovation are covered by a
Page, London, 2003) and Roger Miller and Marcel number of books and journal special issues; for
Côté’s ‘Innovation reinvented: Six games that drive example, services, (Bessant, Moeslein and Lehmann,
growth’ (University of Toronto Press, 2012). ‘Driving service productivity’ (Springer, 2014);
Some books cover company histories in detail and Tidd and Hull, ‘Service innovation: Organiza-
give an insight into the particular ways in which tional responses to technological opportunities and
firms develop their own bundles of routines – for market imperatives’ (Imperial College Press, 2003);
example, David Vise, ‘The Google story’ (Pan, and Chesbrough, ‘Open service innovation’ (Jossey
London, 2008), Graham and Shuldiner’s ‘Corning Bass, 2011)), public sector innovation (Osborne
and the craft of innovation’ (2001, Oxford Univer- and Brown, ‘Managing change and innovation in
sity Press), and Gundling’s ‘The 3M way to innova- public service organizations’ (Psychology Press,
tion: Balancing people and profit’ (2000, New York: 2010) and Bason, ‘Managing public sector inno-
Kodansha International) and John Bessant’ Riding vation’ (Policy Press, London, 2011)), networks
the innovation wave’ (Emerald, 2017), describing and clusters (Michael Best, ‘The new competitive
the German firm Hella. advantage’, OUP, 2001, and Phil Cooke, ‘Regional
Most other texts tend to focus on a single dimension of knowledge economies: Markets, clusters and inno-
innovation management. In ‘The nature of the inno- vation’, Edward Elgar, 2007), sustainability (Nidu-
vative process’ (Pinter Publishers, 1988), Giovanni molo et al., ‘Why sustainability is now the key driver
Dosi adopts an evolutionary economics perspective of innovation’, Harvard Business Review, ­September
and identifies the main issues in the management 2009), and discontinuous innovation (Joshua Gans,
of technological innovation. Julian Birkinshaw ‘The disruption dilemma’, MIT Press, 2016; Foster
and Gary Hamel explore ‘management innovation’ and Kaplan ‘Creative destruction’, Harvard Univer-
(‘The why, what and how of management innova- sity Press 2002; Christensen et al., ‘Seeing what’s
tion’, Harvard Business Review, February 2006), and next,’ Harvard Business School Press, 2007; and
the wider themes of organizational innovation are Augsdorfer et al., ‘Discontinuous innovation’, Imperial
explored in Clark’s ‘Organizational innovations’ College Press, 2013).
(Sage, 2002) and Gailly’s ‘Developing innovative A large number of websites are now available offering
organizations: A roadmap to boost your innovation blogs posts and short case examples; these include
potential’ (Palgrave Macmillan, 2011). Innovation Excellence (http://innovationexcel-
The design perspective is increasingly being explored lence.com), www.timkastelle.org and www.
in innovation, and good treatments can be found innovationmanagement.se, and others offer an
in Roberto Verganti’s ‘Design driven innovation’ aggregating service bringing several of these news-
(Harvard Business School Press, 2009) and Tim feeds together – for example, https://www.busi-
Brown’s ‘Change by design’ (Harper Collins, 2009). nessinnovationbrief.com/.
 Other Resources 47

Professional associations also offer a variety of support the Product development Managers Association
materials including cases, book reviews, tools and (PDMA) https://www.pdma.org/. The UK agency
methods and audio/video resources. Good exam- NESTA has a rich set of resources around innova-
ples include ISPIM (International Association for tion with particular emphasis on public sector and
Professional Innovation Management) http://ispim. social innovation (www.nesta.org.uk).
org, R&D Society https://www.rndtoday.co.uk/ and

A number of additional resources including download- with themes raised in the chapter can be found at OTHER
able case studies, audio and video material dealing locations listed below.
RESOURCES

Resource type Details Access

Video/audio John Bessant talking about the importance All at https://johnbessant.org/resources/
and definitions of innovation media-resources/the-innovators-media-
library/
And explaining the 4Ps model for exploring
innovation space

Interviews with practising innovation

managers

Finnegan’s innovative fish bar

Clayton Christensen on how to build a https://www.youtube.com/

disruptive business watch?v=Zn6-KksdOgE
Case studies The dimming of the light bulb and the All at https://johnbessant.org/
changing imaging industry, two examples case-studies/
of innovation patterns over time

Marshalls and Hella, case studies of

innovation over several decades within
a growing business from start-up to
global players

Spirit a highly successful Russian company

whose technology underpins most voice
recognition systems around the world.

Several cases including Zara, Lego, Philips,

Kumba Resources, Dyson and 3M showing
how companies use innovation to create and
sustain competitive advantage

Examples from the public and not-for-profit

world including Aravind Eye Clinics, NHL
Hospitals, Lifespring Hospitals and the
Eastville Community Shop

Kodak and Fujifilm showing how disruption

can affect well-established businesses
and their innovation strategies to deal
with this.
Tools The 4Ps approach to mapping innovation All at https://johnbessant.org/tools-for-
space innovation-and-entrepreneurship/

Blue Ocean strategy

Value curves

Competitiveness profiling
48 CHAPTER 1 Innovation – What It Is and Why It Matters

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