“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

You 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 stressing how important innovation is to “our customers/our shareholders/our business/our future and most often, our survival and growth.” Innovation shouts from advertisements 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 2 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 The Importance of Innovation

This isn’t just hype or advertising babble – you can get a feel for the importance attached to it in the View 1.1.

Innovation is strongly associated with growth. New business is created by new ideas, 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 coming to favor 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 create 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.

The consulting firm PWC runs a regular survey of senior executives on the theme of innovation; 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 draw 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.

1.2 Innovation Is Not Just High Technology

Importantly, innovation and competitive success are not simply about high-technology companies; for example, the German firm Wurth is the largest maker of screws (and other fastenings such as nuts and bolts) in the world with a turnover of €11 billion in 2015. Despite low-cost competition from China, the company has managed to stay ahead through an emphasis on product and process innovation across a supplier network similar to the model used in computers by Dell [7]. In a similar fashion, the UK Dairy Crest business has built up a turnover of nearly €1.5 billion (2015) by offering a stream of product innovations including resealable packaging, novel formats, and new varieties of cheese and related dairy products, supported by manufacturing and logistics process innovations [8].

Research Note 1.2 gives some more examples of the link between innovation and economic performance.

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 has 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 [10]. Similar dramatic gains have been made in a variety of Indian health-care operations, and several examples are described on the website. Public sector innovations have included the postage stamp, the National Health Service in the United Kingdom, and much of the early development work behind technologies such as fiber 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.

Survival and growth pose a problem for established players but a huge opportunity for newcomers 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 opportunities and create new ways to exploit them is at the heart of the innovation process. Entrepreneurs 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 1.2 gives some examples of such entrepreneurship in action.

1.3 It’s Not Just Products…

Innovation is, of course, not confined to manufactured products; plenty of examples of growth through innovation can be found in services [12–14] (In fact, the world’s first business computer was used to support bakery planning and logistics for the UK catering services company J. Lyons and Co). In banking, the UK First Direct organization became the most competitive bank, attracting around 10,000 new customers each month by offering a telephone banking service backed up by sophisticated information technology (IT) – a model that eventually became 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 [15,16]. Internet-based retailers such as Amazon.com have changed the ways in which products as diverse as books, music, and travel are sold, while firms such as eBay have 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.

Innovation is becoming a central plank in national economic policy – for example, the UK Office of Science and Innovation sees it as “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

One person’s problem is another’s opportunity, and the nature of innovation is that it is fundamentally about entrepreneurship – a potent mixture of vision, passion, energy, enthusiasm, insight, judgment and plain hard work, which enables good ideas to become a reality. As the famous management writer Peter Drucker put it:

“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” [18].

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 judgment 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 taking innovation forward, but effective change won’t happen without the “animal spirits” of the entrepreneur.

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 labeled as “intrapreneurs” or working in “corporate entrepreneurship” 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.

Research Note 1.4 discusses the ideas of Joseph Schumpeter, the “godfather” of innovation studies.

1.5 Strategic Advantage Through Innovation

Innovation contributes in several ways. For example, research evidence suggests a strong correlation between market performance and new products. New products help capture and retain market shares and increase profitability in those markets. In the case of more mature and established products, competitive sales growth comes not simply from being able to offer low 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 [20]; in their 2015 survey, BCG found that increasing the speed of innovation was the most important driver [5].

At the same time, new product development is an important capability because the environment 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 environmentally 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 advantages of around two to one over average car makers across a range of quality and productivity indicators [21]. 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 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-cozy 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 offerings, 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, and Case Study 1.3 looks in detail at one example – the music industry.

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 either offered 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 [24].

The challenge that the Internet poses is not only one for the major banks and retail companies, although those are the stories that hit the headlines. It is also an issue – and quite possibly a survival one – for thousands of small businesses. Think about the local travel agent and the cozy 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 mainstream 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.

1.6 Old Question, New Context

“Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting 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 quarter of the globe. In place of old wants satisfied by the production of the country, we find new wants … the intellectual creativity of individual nations become common property”

This quote does not come from a contemporary journalist or politician but from the Communist 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 changing 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. (E.g., the rapidly growing field of VoIP (Voice over Internet Protocol) communications is not developing along established trajectories toward a well-defined end point. Instead, it is a process of emergence. The broad parameters are visible – the rise of demand for global communication, increasing availability of broadband, multiple P2P networking models, growing technological literacy among users – and the stakes are high, both for established fixed-line players (who have much to lose) and new entrants (such as Skype). The dominant design isn’t visible yet – instead, there is a rich fermenting soup of technological possibilities, business models, and potential players from which it will gradually emerge).

Case Study 1.4 explores the ways in which Kodak is reinventing itself through redeploying some of its knowledge base.

Table 1.4 summarizes some of the key changes in the context within which the current innovation game is being played out.

1.7 What Is Innovation?

One of America’s most successful innovators was Thomas Alva Edison, who during his life 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 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 interactive 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 wording, 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 in and novare, meaning “to make something new.” That’s a bit vague if we’re trying to manage it; perhaps, a more useful definition 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 radical; 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 survived 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 and 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. 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 behaviors 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 behavior, and so on. Case Study 1.5 gives some examples that highlight the difference between invention and innovation.

Case Study 1.6 reminds us that managing invention into successful innovation is not always easy to do.

1.8 A Process View of Innovation

In this book, we will make use of a simple model of innovation as the process of turning ideas into reality and capturing value from them. We will explain the model in more detail in the next chapter, but it’s worth introducing it here. 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 behavior – 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.

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 creating 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?

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 accumulated 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 succeed or fail. This includes knowledge about the kinds of thing 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 toward 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.

1.9 Innovation Scopes and Types

If innovation is a process, we need to consider the output of that process. In what ways can we innovate – what kinds of opportunities exist for use to create something different and capture 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, PDAs, and other 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.

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.

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/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 [26].

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, 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 [33].

Four Dimensions of Innovation Space

Essentially, we are talking about change, and this can take several forms; for the purposes of this book, we will focus on four broad categories:

• 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.

Figure 1.1 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.

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 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.

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 underlying 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 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 repositioning of drinks such as coffee and fruit juice as premium “designer” products. 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. Table 1.5 gives some examples of such changes.

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 toward 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 and cocreation	New technologies and a growing desire for customization have enabled the emergence not only of personalized products but 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 toward creating an experience around a core product – for example, coffee, bookselling, and so on.

Paradigm innovation can be triggered by many different things – for example, new technologies, 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 networks and communities [33]. 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 exploring the potential of virtual worlds such as “Second Life.” 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 sectors as firms struggle to redefine themselves and their offerings to match these major social issues.

Table 1.6 gives 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 we offer the world	Microsoft Windows and Apple OS versions, essentially improving on existing software idea New versions of established car models, essentially improving on established car design Improved performance incandescent light bulbs CDs replacing vinyl records – essentially improving on the storage technology	New to the world software – for example, the first speech recognition program Toyota Prius – bringing a new concept – hybrid engines. Tesla – high-performance electric car LED-based lighting, using completely different and more energy-efficient principles Spotify and other music streaming services – changing the pattern from owning your own collection to renting a vast library of music
Process – how we create and deliver that offering	Improved fixed line telephone services Extended range of stock broking services Improved auction house operations Improved factory operations efficiency through upgraded equipment Improved range of banking services delivered at branch banks Improved retailing logistics	Skype and other VOIP systems On-line share trading eBay Toyota Production System and other ‘lean’ approaches Online banking and now mobile banking in Kenya, the Philippines – using phones as an alternative to banking systems Online shopping
Position – where we target that offering and the story we tell about it	Häagen-Dazs changing the target market for ice cream from children to consenting adults Airlines segmenting service offering for different passenger groups – Virgin Upper Class, BA Premium Economy, and so on Dell and others segmenting and customizing computer configuration for individual users Online support for traditional higher education courses Banking services targeted at key segments – students, retired people, and so on	Addressing underserved markets – for example, the Tata Nano aimed at emerging but relatively poor Indian market with car priced around $2000 Low-cost airlines opening up air travel to those previously unable to afford it – create new market and also disrupt existing one Variations on the “One laptop per child” project – for example, Indian government offering $20 computer for schools University of Phoenix and others, building large education businesses via online approaches to reach different markets “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 – how we frame what we do	Bausch and Lomb – moved from “eye wear” to “eye care” as their business model, effectively letting go of the old business of spectacles, sunglasses (Ray-Ban), and contact lenses, all of which were becoming commodity businesses. Instead, they moved into newer high-tech fields such as laser surgery equipment, specialist optical devices, and research in artificial eyesight Dyson redefining the home appliance market in terms of high-performance engineered products Rolls-Royce – from high-quality aero engines to becoming a service company offering “power by the hour” IBM from being a machine maker to a service and solution company – selling off its computer making and building up its consultancy and service side	Grameen Bank and other microfinance models – rethinking the assumptions about credit and the poor iTunes platform – a complete system of personalized entertainment Cirque de Soleil – redefining the circus experience Amazon, Google, Skype – redefining industries such as retailing, advertising, and telecoms through online models Linux, Mozilla, Apache – moving from passive users to active communities of users cocreating new products and services

1.10 Key Aspects of Innovation

The overall innovation space provides a simple map of the table on which we might place our innovation bets. But before making those bets, we should consider some of the other characteristics of innovation that might shape our strategic decisions about where and when to play. These key aspects include the following:

• Degree of novelty – incremental or radical innovation?
• Platforms and families of innovations
• Discontinuous innovation – what happens when the rules of the game change?
• Level of innovation – component or architecture?
• Timing – the innovation life cycle

We will explore these – and the challenges they pose for managing innovation – a little more in the following section.

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 implications 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 committing 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 [49]. 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 a 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 component 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 incumbents often fare badly when 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 1.3 illustrates the range of choices, highlighting the point that such change can happen at component or subsystem level or across the whole system…

A variation on this theme comes in the field of “technology fusion,” where different technological 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 Dreamliner or the Airbus A-380. Managing innovation on this scale requires development of skills in what Mike Hobday and colleagues call “the business of systems integration” [64].

Figure 1.4 highlights the issues for managing innovation.

In Zone 1, the rules of the game are clear – this is about steady-state improvement to products 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 framework 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.

In Zone 4, we have the condition where new combinations – architectures – emerge, possibly 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.

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 experimentation 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 1.5) [65].

Initially, under the discontinuous conditions, which arise when completely new technology 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 or elegant) solution to the emerging configuration. At this point, a “bandwagon” begins to roll, and innovation options become increasingly channeled around a core set of possibilities – what Dosi calls a “technological trajectory” [66]. It becomes increasingly difficult to explore outside this space because entrepreneurial interest and the resources that it brings increasingly focus on possibilities within the dominant design corridor.

This can apply to products or processes; in both cases, the key characteristics become stabilized, 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 and 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 principles, 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 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.

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

Although originally developed for manufactured products, the model also works for services – for example, the early days of Internet 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. Similar patterns can be seen in Internet VOIP telephony, online auctions such as eBay, and travel and entertainment booking services such as expedia.com.

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 is entering a new fluid phase based on 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 happening 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 driverless vehicles, shifting ownership patterns, strong regulatory pressures around emissions, and the entry of new players such as Google, Apple, and Tesla.

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 the kind of discontinuous change discussed earlier. 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 markets 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.

Importantly, the “fluid” or “ferment” phase is characterized by coexistence of old and new technologies and by rapid improvements of both. (It is here that the so-called sailing ship effect, which we mentioned earlier, can often be observed, in which a mature technology accelerates in its rate of improvement as a response to a competing new alternative [67].)

While some research suggests existing incumbents do badly when discontinuous change triggers a new fluid phase, we need to be careful here [47]. Not all existing players do badly – many of them are able to build on the new trajectory and deploy/leverage their accumulated knowledge, networks, skills, and financial assets to enhance their competence through building on the new opportunity [53]. 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? [48].

The challenge seems to be 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 behavior needed here will include things such as agility, flexibility, the ability to learn fast, the lack of preconceptions 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 behavior, 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. 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 provision 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 communication. The device is inherently of no value to us.”

1.11 Innovation Management

This chapter has begun to explore the challenges posed by innovation. It has looked at why innovation matters and opened up some perspectives on what it involves. And it has raised the idea of innovation as a core process, which needs to be organized and managed in order to enable the 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 concept 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:

Chapter 2 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. In Chapter 3, 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 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?

Chapter 5 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 signals from them. Chapter 6 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 7 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 8 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? Chapter 9 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 uncertain 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. 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 entrepreneurial 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 sustainable 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 recognize 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.

Research Note 1.8 gives some examples of different ways to innovate.

Summary

Innovation is about growth – about recognizing opportunities for doing something new and implementing 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 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?

Chapter 1: Concept Check Questions

Further Reading

Few texts cover the technological, market, and organizational aspects of innovation in integrated fashion. Peter Drucker’s Innovation and Entrepreneurship (Harper and Row, 1985) provides a more accessible introduction to the subject, but perhaps relies more on intuition and experience than on empirical research. Since we published the first edition in 1997, a number of interesting texts have been published. Paul Trott’s “Innovation Management and New Product Development” (now in its fifth edition, Prentice Hall, 2010) particularly focuses on the management of product development [54], books by Bettina von Stamm (“Managing innovation, design, and creativity” (second edition), John Wiley, 2008) and Margaret Bruce (“Design in business,” Pearson Education, 2001) have a strong design emphasis, and Tim Jones’ “Innovating at the edge” (Butterworth Heinemann, 2002) targets practitioners in particular. David Gann, Mark Dodgson, and Ammon Salter’s book (“The management of technological innovation,” Oxford University Press, 2008) looks particularly at innovation strategy and the “new innovation toolkit,” while Goffin and Mitchell’s (“Innovation management” (second edition, Pearson, 2010) also looks particularly from a management tools’ perspective. Brockhoff et al. (“The dynamics of innovation,” Springer, 1999) and Sundbo and Fugelsang (“Innovation as strategic reflexivity,” Routledge, 2002) provide some largely European views, while Melissa Schilling’s (“Strategic management of technological innovation,” McGraw Hill, 2005) is largely based on the experience of American firms. Some books explore the implications for a wider developing country context, notably Forbes and Wield (“From followers to leaders,” Routledge, 2002) C.K. Prahalad (“The fortune at the bottom of the pyramid,” Wharton School Publishing, 2006), Prabhu and colleagues (“Jugaad innovation,” Jossey Bass, 2012), and Govindarajan and Trimble “Reverse innovation: Create far from home, win everywhere,” Harvard Business Review Press, 2012.

Others look at public policy implications including Bessant and Dodgson (“Effective innovation policy,” International Thomson Business Press, 1996) and Smits et al. (“The theory and practice of innovation policy,” Edward Elgar, 2010).

There are several compilations and handbooks covering the field, the best known being Burgelman et al.’s “Strategic management of technology and innovation,” (McGraw-Hill, 2004) now in its fourth edition and containing a wide range of key papers and case studies, though with a very strong US emphasis. A more international flavor is present in Dodgson and Rothwell (“The handbook of industrial innovation,” Edward Elgar, 1995), Shavinina (“International handbook on innovation,” Elsevier, 2003), and Fagerberg et al. (“The Oxford handbook of innovation, OUP, 2004). The work arising from the Minnesota Innovation Project (Van de Ven et al., “The innovation journey,” Oxford University Press, 1999) also provides a good overview of the field and the key research themes contained within it.

Case studies provide a good lens through which this process can be seen, and there are several useful collections including Bettina von Stamm’s “Innovation, design and creativity” (second edition, John Wiley, 2008), Tim Jones and colleagues (“The growth agenda,” John Wiley, 2011), Roland Kaye and David Hawkridge “Case studies of innovation,” Kogan Page, London, 2003, and Roger Miller and Marcel Côté’s “Innovation reinvented: Six games that drive growth” (University of Toronto Press, 2012).

Some books cover company histories in detail and give an insight into the particular ways in which firms develop their own bundles of routines – for example, David Vise “The Google story” (Pan, London, 2008), Graham and Shuldiner’s “Corning and the craft of innovation” (2001, Oxford University Press), and Gundling’s “The 3M way to innovation: Balancing people and profit” (2000, New York: Kodansha International).

Autobiographies and biographies of key innovation leaders provide a similar – if sometimes personally biased – insight into this. For example, Richard Brandt’s “One click: Jeff Bezos and the rise of Amazon.com,” (Viking New York, 2011), Walter Issacson “Steve Jobs: The authorised biography” (Little Brown, New York, 2011), and James Dyson “Against the odds” (Texere, London, 2003). In addition, several websites – such as the Product Development Management Association (www.pdma.org), Innovation Excellence (http://innovationexcellence.com), and www.innovationmanagement.se – carry case studies on a regular basis.

Most other texts tend to focus on a single dimension of innovation management. In “The nature of the innovative process” (Pinter Publishers, 1988), Giovanni Dosi adopts an evolutionary economics perspective and identifies the main issues in the management of technological innovation. Julian Birkinshaw and Gary Hamel explore “management innovation” (“The why, what and how of management innovation,” Harvard Business Review, February 2006), and the wider themes of organizational innovation are explored in Clark’s “Organizational innovations” (Sage, 2002) and Gailly “Developing innovative organizations: A roadmap to boost your innovation potential,” 2011, Palgrave Macmillan.

The design perspective is increasingly being explored in innovation, and good treatments can be found in Roberto Verganti’s (2009) “Design driven innovation” (Harvard Business School Press) and Tim Brown’s (2009) “Change by design” (Harper Collins).

Dyer and colleagues focus on individual entrepreneurial skills (“The innovator’s DNA: Mastering the five skills of disruptive innovators,” Harvard Business Review Press), while Schroeder and Robinson (“Ideas are free,” Berret Koehler, 2004) and Bessant (“High involvement innovation,” John Wiley, 2003) look at the issue of high-involvement incremental innovation building on the original work of Imai (Kaizen, Random House, 1987).

Most marketing texts fail to cover the specific issues related to innovative products and services, although a few specialist texts exist that examine the more narrow problem of marketing so-called high-technology products – for example, Jolly “Commercialising new technologies” (Harvard Business School Press, 1997) and Moore “Crossing the chasm,” Harper Business, 1999). There are also extensive insights into adoption behavior drawn from a wealth of studies drawn together by Everett Rogers and colleagues (“Diffusion of innovation,” Free Press, 2003).

Particular themes in innovation are covered by a number of books and journal special issues; for example, services (Bessant, Moeslein, and Lehmann, “Driving service productivity,” (Springer, 2014), Tidd and Hull “Service innovation: Organizational responses to technological opportunities and market imperatives” (Imperial College Press, 2003), and Chesbrough “Open service innovation,” (Jossey Bass, 2011)), public sector innovation (Osborne and Brown “Managing change and innovation in public service organizations” (Psychology Press, 2010) and Bason, “Managing public sector innovation,” (Policy Press, London, 2011), networks and clusters (Michael Best, “The new competitive advantage,” OUP, 2001, and Phil Cooke “Regional knowledge economies: Markets, clusters and innovation,” Edward Elgar, 2007), sustainability (Nidumolo et al., “Why sustainability is now the key driver of innovation,” Harvard Business Review September 2009), and discontinuous innovation (Joshua Gans, “The disruption dilemma,” MIT Press, 2016, Foster and Kaplan “Creative destruction, Harvard University Press 2002, Christensen et al. “Seeing what’s next,” Harvard Business School Press, 2007, and Augsdorfer et al., “Discontinuous innovation,” Imperial College Press, 2013). Various websites offer news, research, tools, and so on – for example, NESTA (www.nesta.org.uk), Innovation Excellence (http://innovationexcellence.com/), Innovation Management (http://www.innovationmanagement.se/), and ISPIM (http://ispim.org/), and some offer an extensive video library – for example, www.innovationecosystem.com. Finally, there are many helpful blogs that cover issues around innovation management – for example, www.timkastelle.org and www.innovationexcellence.com.

Case Studies

A number of downloadable case studies dealing with themes raised in the chapter can be found at the companion website include the following:

• The dimming of the light bulb and the changing imaging industry, two examples of innovation patterns over time
• Marshalls, a case study of innovation over several decades within a growing business
• 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.

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