Chapter 1 – Introduction
THE IMPORTANCE OF TEHCNOLOGICAL INNOVATION
In many industries technological innovation is the most important driver of competitive success. The
increasing importance of innovation is due in part to the globalization of markets. Foreign competition
has put pressure on firms to continuously innovate in order to produce differentiated products and
services. Introducing new products helps firms protect their margins, while investing in process
innovation helps firms lower their costs. Advances in information technology also have played a role in
speeding the pace of innovation. These technologies help firms develop and produce more product
variants that closely meet the needs of narrowly defined customer groups, thus achieving differentiation
from competitors. While producing multiple product variations used to be expensive and time-
consuming, flexible manufacturing technologies now enable firms to seamlessly transition from
producing one product model to the next, adjusting production schedules with real-time information on
demand. Firms further reduce production costs by using common component in many of their models.
As firms adopt these new technologies and increase their pace of innovation, they raise the bar for
competitors, triggering an industrywide shift to shortened development cycles and more rapid new
product introductions. The net results are greater market segmentation and rapid product obsolescence.
This spurs firms to focus increasingly on innovation as a strategic imperative – a firm that does not
innovate quickly finds its margins diminishing as its products become obsolete.
Technological innovation = the act of introducing a new device, method, or material for application to
commercial or practical objectives.
THE IMPACT OF TECHNOLOGICAL INNOVATION ON SOCIETY
If the push for innovation has raised the competitive bar for industries, its net effect on society is more
clearly positive. Innovation enables a wider range of goods and services to be delivered to people
worldwide. The aggregate impact of technological innovation can be observed by looking at gross
domestic product (GDP). Economists showed that the historic rate of economic growth in GDP could not
be accounted for entirely by growth in labor and capital inputs. Robert Merton Solow argued that this
unaccounted-for residual growth represented technological change: technological innovation increased
the amount of output achievable from a given quantity of labor and capital. While GDP has its
shortcomings as a measure of standard of living, it does relate very directly to the amount of goods
consumers can purchase. Thus, to the extent that goods improve quality of life, we can ascribe some
beneficial impact of technological innovation.
Gross domestic product = the total annual output of an economy as measured by its final purchase
price.
Sometimes technological innovation results in negative externalities. Production technologies may
create pollution that is harmful to the surrounding communities; agriculture and fishing technologies can
result in erosion, elimination of natural habitats, and depletion of ocean stocks etc. Technological
innovation is the creation of new knowledge that is applied to practical problems. Sometimes this
knowledge is applied to problems hastily, without full consideration of the consequences and
alternatives, but overall it will probably serve us better to have more knowledge than less.
,INNOVATION BY INDUSTRY: THE IMPORTANCE OF STRATEGY
The majority of effort and money invested in technological innovation comes from industrial firms.
However, in the race to innovate, many firms go headlong into new product development without clear
strategies or well-developed processes or choosing and managing projects. Such firms often initiate
more projects than they can effectively support, choose projects that are a poor fit with the firm’s
resources and objectives, and suffer long development cycles and high project failure rates as a
consequence. Most successful innovators have clearly defined innovation strategies and management
processes.
The Innovation Funnel
Most innovative ideas do not become successful new products. Many projects do not result in
technically feasible products and, of those that do, many fail to earn a commercial return. The innovation
process is thus conceived of as a funnel, with many potential new product ideas going in the wide end,
but very few making it through the development process.
The Strategic Management of Technological Innovation
Improving a firm’s innovation success rate requires a well-crafted strategy. A firm’s innovation projects
should align with its resources and objectives, leveraging its core competencies and helping it achieve its
strategic intent. A firm’s organizational structure and control systems should encourage the generation
of innovative ideas while also ensuring efficient implementation. A firm’s new product development
process should maximize the likelihood of projects being both technically and commercially successful.
To achieve these things, a firm needs (a) an in-depth understanding of the dynamics of innovation, (b) a
well-crafted innovation strategy, and (c) well-designed processes for implementing the innovation
strategy.
Chapter 2 – Sources of Innovation
OVERVIEW
Innovation can arise from many different sources. It can originate with individuals, but innovation can
also come from the resource efforts of universities, government laboratories and incubators, or private
nonprofit organizations. One primary engine of innovation is firms. Firms are well suited to innovation
activities because they typically have greater resources than individuals and a management system to
marshal those resources toward a collective purpose. Firms also face stronger incentives to develop
differentiating new products and services, which may give them an advantage over nonprofit or
government-funded entities.
An even more important source of innovation arises from the linkages between these sources.
Networks of innovators that leverage knowledge and other resources from multiple sources are one of
the most powerful agents of technological advance. We can thus think of sources of innovation as
composing a complex system where in any particular innovation may emerge primarily from one or more
components of the system or the linkages between them.
CREATIVITY
Innovation begins with the generation of new ideas. The ability to generate new and useful ideas is
termed creativity. Novel work must be different from work that has been previously produced and
surprising in that it is not simply the next logical step in a series of known solutions.
,The degree to which a product is novel is a function both of how different it is from prior work and of the
audience’s prior experience. A product could be novel to its immediate audience, yet be well known
somewhere else in the world. The most creative works are novel at the individual producer level, the
local audience level and the broader societal level.
Creativity = the ability to produce work that is novel and useful.
Individual Creativity
An individual’s creative ability is a function of his or her (1)intellectual abilities, (2)knowledge, (3)style of
thinking, (4)personality, (5)motivation and (6)environment. The most important intellectual abilities for
creative thinking include (1)the ability to look at problems in unconventional ways, (2)the ability to
analyze which ideas are worth pursuing and which are not, and (3)the ability to articulate those ideas to
others and convince others that the ideas are worthwhile. The impact of knowledge on creativity is
somewhat double-edged. If an individual has too little knowledge of a field, he or she is unlikely to
understand it well enough to contribute meaningfully to it. On the other hand, if an individual knows a
field too well, that person can become trapped in the existing logic and paradigms. Thus, an individual
with only a moderate degree of knowledge of a field might be able to produce more creative solutions
than an individual with extensive knowledge of a field. With respect to thinking styles, the most creative
individuals prefer to think in novel ways of their own choosing, and can discriminate between important
problems and unimportant ones. The personality traits deemed most important for creativity include
(1)self-efficacy, (2)tolerance for ambiguity, and (3)a willingness to overcome obstacles and take
reasonable risks. Intrinsic motivation is also important. Also, a supportive environment is also necessary.
Organizational Creativity
The creativity of the organization is a function of creativity of the individuals within the organization and
a variety of social processes and contextual factors that shape the way those individuals interact and
behave. The organization’s structure, routines, and incentives could thwart individual creativity or
amplify it. The most familiar method of a company tapping the creativity of its individuals is the
suggestion box. Firms have also created more elaborate systems that not only capture employee ideas,
but incorporate mechanisms for selecting and implementing those ideas. Another way is that employees
access the company’s idea repository through the company’s intranet. There they can submit their ideas
and actively interact and collaborate on the ideas of others. Through active exchange, the employees can
evaluate and refine ideas and improve their fit with the diverse needs of the organization’s stakeholders.
Idea collection systems are relatively easy and inexpensive to implement, but are only the first step in
unleashing employee creativity. Creativity training programs encourage managers to develop verbal and
nonverbal cues that signal employees that their thinking and autonomy are respected. These cues shape
the culture of the firm and are often more effective than monetary awards. The programs also often
incorporate exercises that encourage employees to use creative mechanisms.
TRANSLATING CREATIVITY INTO INNOVATION
Innovation is not just the generation of creative ideas, it is also the implementation of those ideas into
some new devices or processes. Innovation requires combining a creative idea with resources and
expertise that make it possible to embody the creative idea in a useful form.
,The Inventor
Analysis of personality traits of inventors suggests these individuals are likely to be interested in
theoretical and abstract thinking, and have an unusual enthusiasm for problem solving. Their tendency
towards introversion may cause them to be better at manipulating concept than at interacting socially.
Others, however, disagree and argue that innovators are made, not born. The most successful inventors
possess the following traits:
1. They have mastered the basic tools and operations of the field in which they invent, but they
have not specialized solely in that field; instead they have pursued two or three fields
simultaneously, permitting them to bring different perspectives to each.
2. They are curious and more interested in problems than solutions.
3. They question the assumptions made in previous work in the field.
4. They often have the sense that all knowledge is unified. They seek global solutions rather than
local solutions and are generalists in nature.
Such individuals may spend a lifetime developing numerous creative new devices or processes, though
they may patent or commercialize few. The qualities that make a person inventive, does not necessarily
make them entrepreneurial.
Innovation by Users
Innovation often originates with those who create solutions for their own needs. Users often have both a
deep understanding of their unmet needs and the incentive to find ways to fulfill them. User innovators
have no initial intention to profit from the sale of their innovation – they create the innovation for their
own use. Users may (1)alter the features of existing products, (2)approach existing manufacturers with
product design suggestions, or (3)develop new products themselves. User innovations can also blossom
into new industries.
Research and Development by Firms
One of the most obvious sources of firm innovation is the firm’s own research and development efforts.
Research can refer to both basic research and applied research. Development refers to activities that
apply knowledge to produce useful devices, materials, or processes. Thus, the term research and
development refers to a range of activities that extend from early exploration of a domain to specific
commercial implementations.
Basic research = research targeted at increasing scientific knowledge for its own sake. It may or may not
have a long-term commercial application.
Applied research = research targeted at increasing knowledge for a specific application or need.
Firms consider their in-house R&D to be the most important source of innovation. This perception also
appears to be supported by evidence on R&D spending and firm sales: a firm’s R&D intensity has a strong
positive correlation with its sales growth rate, sales from new products, and profitability.
A science-push approach to research and development assumed that innovation proceeded linearly from
(1)scientific discovery, to (2)invention, to (3)engineering, then (4)manufacturing activities and finally
(5)marketing. According to this approach, the primary sources of innovation were discoveries in basic
science that were translated into commercial applications by the parent firm.
The demand-pull model of research and development argued that innovation was driven by the
perceived demand of potential users. Research staff would develop new products in efforts to respond
to customer problems or suggestions.
, Most research suggest that firms are successful innovators utilize multiple sources of
information and ideas, including:
In-house research and development.
Linkages to customer or other potential users of innovations.
Linkages to an external network of firms.
Linkages to other external sources of scientific and technical information.
Firm Linkages with Customers, Suppliers, Competitors, and Complementors
Firms often form alliances with customers, suppliers, complementors and even competitors to jointly
work on an innovation project or to exchange information and other resources in pursuit of innovation.
Collaboration might occur in the form of (1)alliances, (2)participation in research consortia, (3)licensing
agreements, (4)contract research and (5)development of joint ventures and (6)other arrangements.
Collaborators can pool resources such as knowledge and capital, and they can share risk of a new
product development project.
The most frequent collaborations are between firms and their customers, suppliers and local
universities. Firms may also collaborate with competitors and complementors. Complementors are
organizations (or individuals) that produce complementary goods. In some circumstances, firms might be
bitter rivals in a particular product category, and yet engage in collaborative development in that
product category or complementary product categories.
External versus internal sourcing of innovation
Critics have often charged that firms are using external sources of technological innovation rather than
investing in original research. But empirical evidence suggests that external sources of information are
more likely to be complements to rather than substitutes for in-house research and development.
Presumably, doing in-house R&D helps to build the firm’s absorptive capacity, enabling it to better
assimilate and utilize information obtained externally. Absorptive capacity is the firm’s ability to
understand new information.
Universities and Government-Funded Research
Universities
Many universities encourage their faculty to engage in research that may lead to useful innovations.
Typically, the intellectual property policies of a university embrace both patentable and un-patentable
innovations, and the university retains sole discretion over the rights to commercialize the innovation. If
an innovation is successfully commercialized, the university typically shares the income with the
individual inventors. To increase the degree to which university research leads to commercial innovation,
many universities have established technology transfer offices. These offices are designed to facilitate
the transfer of technology developed in a research environment to an environment where it can be
commercially applied.
Government-funded research
Governments of many countries actively invest in research through their (1)own laboratories, (2)the
formation of science parks and incubators, and (3)grants for other public or private research entities.
Science parks often include institutions designed to nurture the development of new businesses that
might otherwise lack access to adequate funding and technical advice (incubators). Incubators help
overcome the market failure that can result when a new technology has the potential for important
societal benefits, but its potential for direct returns is highly uncertain. These parks create fertile hotbeds
for new start-ups and a focal point for the collaboration activities of established firms. Their proximity to
university laboratories and other research centers ensures ready access to scientific expertise.
