12.1. DEFINING INNOVATION

The term innovation is derived from the Latin term innovatus, which means to renew or alter. While novelty and change are key, contemporary definitions emphasize application of new ideas often, but not always, in a commercial sense. Peter Drucker (2002, p. 96) defines innovation as "the effort to create purposeful, focused change in an enterprise's economic or social potential," and underscores compelling customer value, opportunity, and impact. In The Theory of Economic Development (1934), the twentieth-century economist Schumpeter delineated several avenues related to creating economic value, including:

• The introduction of a new good—that is, one with which consumers are not yet familiar—or of a new quality of a good

• The introduction of a new method of production, which need by no means be founded upon a discovery scientifically new, and can also exist in a new way of handling a commodity commercially

• The opening of a new market, that is, a market into which the particular branch of manufacture of the country in question has not previously entered, whether or not this market has existed before

• The conquest of a new source of supply of raw materials or half-manufactured goods, again irrespective of whether this source already exists or whether it has first to be created

• The carrying out of the new organization of any industry, like the creation of a monopoly position (for example, through trust-formation) or the breaking up of a monopoly position

Sawhney and colleagues (2006) have built upon Schumpeter's categories of innovation by including market innovations, the use of information technology; and novel ways of supporting and monetizing existing offerings (Table 12.1).

^[] Dimensions most directly related to R&D-based innovation

While all twelve of the sources of innovation listed in Table 12.1 are important, the categories most germane to technological innovation include new product offerings, related process innovation, and products derived from platforms. These categories are based on intensive R&D, and therefore pose unique management challenges that set them apart from the others. "Knowledge based innovations," writes Drucker (2002, p. 100), "differ from all of the others in the time they take, their casualty rates and in the predictability, as well as the challenges they pose to entrepreneurs ... they can be temperamental, capricious and hard to direct." Drucker notes they also tend to have the longest lead time—up to 50 years—and demand that many kinds of knowledge be generated and integrated. Technological innovation—especially that emanating from basic research—can often only be understood retrospectively; the eventual application of research may end up far afield from the original intention.

Innovation based on science and technology requires acceptance of uncertainty that goes beyond business uncertainty related to political and economic variables. Business uncertainty, as Freeman and Soete (1997, pp. 243–45) note, is typically handled by applying a discount rate to future profits and expenditures associated with an initiative. By definition, however, technological innovation is experimental, and is subject to the additional uncertainty associated with technical development and market acceptance. Neither of these can be "discounted, eliminated or assessed as an insurable type of risk," and they are not subject to rational estimation and measurable probabilities. Beyond technical and market uncertainties, other human elements enter in. Moreover, the enthusiasm of innovators, termed "animal spirits" by the economist John Maynard Keynes, plays a key role in driving innovation, and yet resists precise calculation. In summary, R&D funding and focus can be guided; but this process is inherently unpredictable. While uncertainty can be reduced over time, ambiguity and iteration are simply part of the innovation process.

Freeman and Soete (1997, p 244) provide a continuum of innovation based roughly on the degree of uncertainty surrounding them, and the risk implied (Table 12.2). Radical innovation—which is based on fundamental or basic research and invention—is particularly risky. Uncertainty and therefore risk are reduced, relatively speaking, in innovation that involves incremental improvements on existing products. This continuum is of use in making strategic choices in the directions of innovation in an organization, and has implications for making innovation operational, as discussed below.