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Relationship between Demand and Innovation

Introduction

Organisations experience growth if their customers are satisfied, and customers are satisfied when their needs are met by the products and services provided by the organisations. Judging by this bidirectional relationship, isn't it relevant then that businesses focus more on innovating products based around customer demands? Demands, no doubt, influence innovation within an organisation. However, this influence is largely overlooked in literature and is often penned down or confused as market demand excluding actual consumer needs and “expected demands”. In this study, we will review the NESTA publication on “Demand and Innovation: How Customer Preferences Shape the Innovation Process” (referred henceforth as the ‘NESTA publication’) that tries to tie together a viable relationship between innovative exploitation of brand new ideas and consumer demands.

What is Demand?

One would generally think of any business entity as a profit-hungry enterprise. However, major parts of any number of business processes are dispensed at providing the utmost service to its customers. Satisfying customers comes first, and only then is it possible to sustain an effective profit and growth. An essential part of a business's well-being is the recognition of their relationship with their customers.

Customers voice their concerns often – and they should be able to do so; they have their preferences and needs that they want to see reflected in business products and services. Without the knowledge of what customers require, a business is unable to succeed. This 'customer voice' is what's called demand.

Demand Nurtures Innovation

Traditionally, consumer demand was defined as the willingness of the customer to pay for a certain product where innovation shaped consumer demand for a certain product. However, over time demand is seen as being a primary motivator in enabling innovations within an organisation. Helen Pukszta, a senior consultant at Cutter explains the orthodox approach in the following words: “As consumers, we are accepting of the notion that consumer products and marketing mould our demand. Did anyone submit requirements for an iPod six years ago? Everyone wants one now.” (Koprowski, 2006) With the turn of globalisation these orthodox virtues are fast being replaced by more efficient and streamlined processes. The advancement in customer relationship management tends to enable organisations to uphold customer needs and base their business models around these concerns. Maderna (2006) observes that customer demand has grown itself to be even more important in product innovation today than in the years gone past.

What is Innovation?

In general linguistics, innovation tends to be synonymous with the notion of invention. Invention is the first occurrence of an idea, whereas, innovation defines the first attempt of putting that idea into practice. EIPR (2006) defines innovation as “the successful exploitation of new ideas.” Where sales strategies like promotions and discounts policies help a business succeed in the short term, the ability to develop new products in line with customer needs adds to an organisation's competitiveness over a long-term (Maderna, 2006).

Innovation and Feedback

Innovation is an incremental process that requires continuous feedback. It is an amalgamation of ideas rather than them originating from a single source (Tidd, Besant and Pavitt, 2005). The NESTA publication suggests that innovation is nothing like a linear process and that ideas can occur at any point throughout the process, requiring one to modify development procedures. For instance, an idea may emerge during testing of a product and may require modifications in product design, or trigger the development of a completely new product altogether. Therefore feedback is entirely responsible for the development of the final product.

Kline and Rosenberg (1986) express the necessity of feedback in the following words: “The shortcomings and failures that are part of the learning process that creates innovation mean that in both radical and incremental innovation feedbacks and trials are essential.” (Kline and Rosenberg, 1986)

How Consumer Demand Shapes Innovation?

The NESTA publication implies that “demand is essential for the successful exploitation of ideas”. It tries to justify the influence that consumer demand has on the process of innovation within an enterprise. The argument it presents with implies that an organisation would only develop a product if there is a need for its use. Therefore, seen as feedback, consumer demand plays a crucial role in new innovative developments within an organisation.

Innovation is largely a systemic process whereby an idea for a product is shaped and formulated with constant feedback (interactions and interdependencies) amongst the various entities involved in the process. If there is a demand for a certain product within a potential market (even if its a niche market), there exists a fertile opportunity for innovations to occur. Consumer demands shape innovations, e.g., demand for “greener” automobile technology led to the development of Toyota Prius and Tesla Roadster, demand for paying online led to e-commerce websites like PayPal and Amazon, etc. In fact, much of the eco-friendly products in the recent past are seen as the result of demand-oriented innovations.

Types of Demand-Driven Innovations

The NESTA publication defined three distinct modes of demand-driven innovation processes which are discussed in detail below.

1. Market-mediated Innovations

Such innovations are driven via studies of the business and consumer markets. Innovative activities that fall under this category are rewarded with recognition by firms. Such innovations however being radical are very speculative and follows trends identified within markets over a number of years. These further include two different types of innovations: (a) Market-based: where past market performance and trends are utilised to work on new innovations – products and services; (b) Strategic: where future projections are made by looking at current market trends and consumer behaviours.

2. Coordinated Innovations

Such innovations are expressed through non-profit, political or governmental arenas. These include innovations that are considerations of a policy intervention, e.g., product innovations that are a part of the “green revolution” can be deemed as coordinated innovations.

3. Direct Innovations

Such innovations are a result of constant interactions with the end-users. Product innovation of this kind requires intermediate user engagement and process modification. These types of innovations are being increasingly termed as “democratic innovations”, however a more general term of “user-led innovations” is used more often.

Demand-Driven versus Supply-Oriented Innovation

In the post-World War II era, innovation was largely seen as one large, bulky and linear process whereby the innovation identified itself as being supply-oriented. Manufacturing on a mass scale provided effective delivery of tools and instruments of war. “Science led to technology, and technology satisfied the needs of the market” (Edquist and Hommen, 1999). Problems with such a linear approach to innovation are the absence and lack of feedback paths (Kline and Rosenberg, 1986), hence the need for a more inclusive and interactive innovation process was required.

In contrast, demand-driven innovation can be seen as a much more systemic process where multiple interactions are possible and complex interdependencies are observed within various entities involved in the innovation process. Constant feedback factors in the needs and demands of the consumers thus involving more participation from the demand-side. Laying pivotal importance on the demand-side plays a vital role in the evaluation of public policies for innovation (Edquist and Hommen, 1999). The NESTA publication also points out the fact that demand-oriented innovation is receiving more attention from policy-makers as it tends to be more inclusive and participatory.

Although however, the NESTA publication also points out that other than the virtues of a linear and systemic innovation, there actually is no prominent distinction between supply- and demand-oriented innovations. The fine line between the two is vague and blurry at best. This could also be argued by saying that even supply-side innovations tend to cater to a “need or demand” albeit not being interdependent on it.

Framework for a Demand-Driven Innovation Process

The NESTA publication defines a formal framework (p. 25) for a demand-driven innovation process. We will call it the NESTA Framework henceforth.

1. Defining Needs (Demands)

In demand-driven innovation processes, it is essential to understand what needs require addressing. The NESTA publication defines ideas occurring as response to two specific types of needs: an internal organisational need, and an employee or external employee need. These demands are defined as “triggers” for innovation. Furthermore, the publication simplifies these trigger demands in four distinct categories:

Suspected Demand:

Belief that there is a requirement for something that the customers would be willing to buy.

Client Demand:

Fulfillment of a project brief presented by a consumer.

Internal Cost Saving:

The need to reduce the organisational cost.

Revenue Generation:

Generating more income for the organisation or a need to expand the operations.

2. Identifying Needs

The NESTA publication focuses on the process of gathering requirements by identifying needs with virtue to two organizations: ASDA and “an unnamed large financial organization”. It clearly states that knowledge about consumers is vital in identifying needs in order to generate ideas. This enables any organisation to decide at an early stage what ideas should and should not be developed.

The NESTA publications talks about organisations being able to keep two separate process running in parallel – one where ideas are developed, and the other that gathers consumers’ most-vital needs to be fuelled into the first process. This bring innovation one level closer to the customers’ needs.

3. Consumer Influence

Thus, by including consumers’ top needs and addressing them while generating new ideas, the consumer influence greatly influences the idea-generation and finally the innovation process. Any new products and services that are yielded as a result of this marriage of processes results in innovation that is influenced by customers’ desires and demand.

4. Front-line Interaction

Innovations don’t usually just require consumer demand data that has been accumulated over a period of time but is more dynamic than that. Innovations can come out of “days on the shop floor”. This presumes that customers’ demands and desires can be identified by observing them while they are interacting with the business. For instance, how a customer shops can greatly influence decisions in a more innovative manner and can end up having to include greater congruence between their needs and the products and services provided.

Innovations as a result of this approach are usually influenced by a customer’s short-term preferences, and ideas that are then generated are born internally within the organisation rather than advised by consumers. This type of innovation paves the way for a more incremental innovation within the internal workings of an organisation.

Such innovation also presents with the identification of some hidden needs of the customers that the customer might not always voice their opinions upon.

5. Bespoke Consumer Interaction

We have discussed how observing customers can help in generating innovative ideas, but working with customers in building new innovations has a more radical effect. Even though such innovations again cater to the immediate and short-term needs of the client but because these ideas are usually put forth into a discussion by the client, the innovative changes that come as a result are usually very dynamic and radical. Such innovations result in both concrete and incremental changes.

6. Consumer Feedback

Another form of innovation process that relies both on observation of customers and their advice is “customer feedback”. With customer feedback, one makes sure that new ideas involve the feedback provided by the customers and what has been observed of their consumer habits. Such innovation can be internal (observed) or external (purely based on the feedback advice provided by a customer). This makes

7. Market Research and Scanning

The NESTA framework talks about market scanning and research as a vital part of innovations that cater to long-term trends. Such market research and scanning focuses mostly on the consumer habits, feedbacks and market trends for products and services over a number of years. This past assessment of trends leads to a focussed approach while generating new ideas for innovation. This helps companies cater to the needs that were either never met in the past or still need resolution.

Such innovations tend to result in radical innovative developments that are starkly visible in organisational processes and product development. For example in 2006, Apple Computers Incorporation noticed a need for a mobile phone device as a part of their product line-up with the emergence and penetration of mobile devices throughout the globe and the vast availability of GSM architecture. They not only came up with a phone but also (as per their past consumer behaviour and market trends) included their most wanted products – iPod and MacOS – in one package along with the phone dubbing it the “iPhone”.

8. “The sky is the limit”

A long-term innovation ideology that is commonly accepted in any organisational development circle is the inclusion of strategies in decisions. Strategies focus on the things that might affect any process or part of an organisation over a longer period of time. By looking at consumer behaviour at present, forecasts can be made to highlight the effects of these habits at a later date. Innovations that tend to cater to such trends of speculation are usually dealt under the “blue-sky thinking” part of the NESTA framework.

Such innovations cater mostly to the involvement of sound-minded strategies that understand present consumer needs and project these needs at a later time to understand what these clients would require in the long-term. Such long-term trends and focusing on their appeal is the major core of such innovation.

Conclusion

In today’s globalised world, innovation plays a vital part in the development of accessible and desirable products. But innovation since the World War II has been largely focused on supply-dynamics whereby if innovation was only limited to what was available and how that availability of raw material could be shaped into a product that would be desirable to any customer. Such supply-based innovation fuelled the industrial revolution and mass-production in the earlier years of the 20th century. However, this was usually not successful because customer didn’t usually require those products and they needed to be told why the product was desirable, usually through advertisements and marketing.

However, when businesses began to realise the importance of consumer demand and how it could be beneficial in producing even more newer and innovation products and services – it was highly visible that changes needed to be adopted in order to include these feedback loops into the innovation process in order to make a product that is not only automatically desirable to the end-user but also required a lot less marketing and advertising to make it acceptable within the global markets.

Further recommendations

The critical review of the NESTA publication on Demand and Innovation has been largely focussed on addressing the framework for developments within a demand-driven innovation and recommends the following changes businesses can bring out in their organisational process to involve such innovation:

Establishment of a relationship with customers that is more proactive and involves their feedback and desire to govern possibilities and opportunities for innovation.

Organisations need to observe customers to identify some hidden needs that customers might not always voice.

Organisations should focus on a process of collection of top consumer needs that runs parallel with the innovation process while fuelling the innovation process.

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