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This paper is based on the Schumpeterian view (Schumpeter, 1934) that market boundaries and industry structure are not given but can be reconstructed by the actions and beliefs of industry players. The essence of strategy lies in creating tomorrow's competitive advantages faster than competitors mimic the ones you possess today (Hamel & Prahalad, 2000). Innovation is what allows a firm to gain an edge over its rivals in attracting customers and defending against competitive forces.
Strategy is a dynamic and creative process, rather than the administration of existing resources and activities, which should challenge our habitual patterns of thinking (Andersen & Strandskov 2008). Andersen and Stranskov, and many others, suggest that the competitive equilibrium should be abandoned. In other words, the status quo should be challenged. Industry dynamics and market disruption are ongoing and neverending struggles between different innovation regimes, different business models, and different sets of routines that can either promote or hinder innovation (Andersen & Strandskov 2008). These struggles are captured by the term 'value innovation'. Value innovation occurs when a company's actions favorably affect both its cost structure and its value proposition to buyers (Kim & Mauborgne, 2005). Business ventures have to take into account all of the internal and external forces, and the specific market conditions that come forth from this.
This paper specifically addresses internal and external forces influencing a firm's optimization of its innovative capabilities and competitive advantage. The first thing to consider is the relevance of pursuing an innovation strategy in general. This entails the role of Research and Development (R&D) in the organization. The second element concerns how to fill in this innovation strategy by choosing a specific approach and basic argumentation for practicing innovation, rather than innovate in every thinkable manner. Third, since innovation is partly measured by its relevant position regarding other players and stakeholders in the industry, conclusions are drawn from a firm's networking activities - whether a firm self-develops innovations, does cooperate or outsources its innovation activities. The fourth key element is continuity and innovation continuity on the long term. This entails the question whether a firm's innovation strategy should be changed over time and, if so, to what direction.
Next is the theoretical background, containing a description of the field, the topic and the context of this study. Then, the hypotheses are stated together with the relevance of them. The third part addresses the research design used to conduct this proposal, further research and methodology for data collection and analysis.
The fundamental purpose of strategy with respect to innovation is to be different than you used to be and to be different from competitors. In this context, an industry can be seen as an 'ocean' (Kim & Mauborgne, 2005). In Blue Oceans, competition is irrelevant because the rules of the game are waiting to be set. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities, and cutthroat competition turns the red ocean bloody. Cost savings are made from eliminating (and reducing) the factors on which the industry competes on. Buyer value will be higher when raising and creating elements the industry has never offered. Over time, costs are reduced further as scale economies kick in, due to the high sales volumes that superior value generates. This is not so easy with supply exceeding demand in more and more industries, so companies need to go beyond competing. Businesses can only do this by creating/ finding a Blue Ocean and go beyond competing for the same customers. In order to be able to enter a Blue Ocean companies have to actively pursue innovations which is a very costly thing to do.
Innovation is not simply a direct result of inspiration but an extend and organized process of turning bright ideas into successful strategies (Bessant and Tidd, 2007). Successful strategies could then entail the changing of the offering (product or service), the ways in which it is created and delivered (process innovation), the context and the ways in which it is introduced to that context (position innovation), and overall mental models for thinking what we are doing (paradigm innovation) (Bessant and Tidd, 2007). Since I believe position innovation and paradigm innovation could apply to all forms of innovation output (i.e. no difference between product or process innovation), these two are considered as overarching innovation thoughts. Product- and process innovation, however, can make a difference if weighted against each other in a proper way. It is for that reason that these two are subject to research for this thesis.
Innovation can take many forms - from simple, incremental development of what is already there to radical development of complete new options. What seems to happen is that for a given set of technological and market conditions there is a long period of relative stability during which a continuous stream of variations around a basic innovation theme take place (Bessant and Tidd, 2007). Essentially this is product/process improvement along the lines of 'doing what we do, but better'. But these steady-state innovation conditions are punctuated by occasional discontinuities. When these occur one or more of the basic conditions (e.g. technology, markets, society, regulations) shifts dramatically. In the process the underlying 'rules of the game' change and a new opportunity for innovation opens up.
A viewpoint on innovation related to organizations is one by Hamel (2000). In Hamel's (2000) view, the processes of socialization and group thinking render top managers the unwitting prisoners of their own out-of-date mental map, which reflects prevailing orthodoxies about what drives success in their industry. According to Hamel, formulating and generating new innovative strategies is not an elitist, top management exercise but, rather, a democratic, emerging process that activates and involves a broader part of the organization in seeking opportunities, asking questions, challenging orthodoxies, and generating new ideas and directions. This translates itself in bringing in others with diverse views in such a way that it can stimulate strategic conversations with new generic material and new thinking. Also new dialogues about strategy that cut through organizational and industrial boundaries and bypass the often ritual and calendar-driven strategic planning exercise are required. Finally, the launch of a series of small, risk-avoiding experiments in the marketplace that serve to maximize a company's rate of learning about the functioning of new business concepts and justify additional investments are mentioned by Hamel (2000).
Capability and cooperation
Firms seek to identify the most effective balance in both organizing alternatives to leverage their benefits, and mitigate their costs. Firms may integrate for that reason if they do not hold competences themselves. For example, to gain efficiencies by spreading overhead costs or to limit competition by raising barriers to both entry and exit. The technological and organizational interdependence resulting from integration limits the ability of firms to benefit from experience. Firms must have the capability to manage a large number of products to target them for the appropriate market segments and to ensure differentiation (as perceived by consumers).
To build competitive product portfolios, firms increasingly attempt to combine the benefits from economizing on transaction costs through cooperation (Williamson, 1975), as well with those derived through strategic outsourcing such as enhanced flexibility and access to a broader collection of knowledge external to the focal firm (Powell, Koput, and Smith-Doerr, 1996). Acquiring external knowledge or other input has the potential to enrich a firm's new product development because it provides the opportunity to integrate tacit knowledge with complementary assets across different value chain activities, including innovation activities. Cooperation with innovation activities is build on the idea that 'no man is an island' (Bessant and Tidd, 2007). In business life, taking any good idea forward relies on all sorts of inputs from different people and perspectives. Like almost all human activity, putting food on the table is dependent on others. But it's not simply about spreading the workload. Instead, for most of the activities the key is shared creativity. This means solving problems together and exploiting the fact that different people have different skills and experiences which they can bring to the party.
The mix of different knowledge enriches the firm's capability to expand its product portfolio and to offer a greater variety of related products. By considering this, a firm comes already closer to making competition irrelevant because the firm can better satisfy customer needs in a manner superior to competitors' product offerings. In a highly dynamic industry, a larger product portfolio often is important to gain and maintain a competitive advantage. Technological and market uncertainties provide entrepreneurial opportunities (McGrath and MacMillan, 2000), which firms can exploit by developing new technologies and products that satisfy market requirements. Firms with rich product portfolios are also in a position to gain first mover advantages as opportunities arise. A large portfolio requires managers to carefully coordinate a diverse set of activities along the value chain to meet market demand; the managerial attention that can be given to any one product is thus limited.
H1: collaboration and process innovation deliver short-term success (profitability and competitive advantage) and long-term continuity, and is more preferred than do-it-yourself and product innovation
Product vs. process
Innovation is the successful exploitation if new ideas (Innovation Unit, UK Department of Trade and Industry, 2004). Industrial innovation includes the technical, design, manufacturing, management and commercial activities involved in the marketing of a new or improved product or the first commercial use of a new or improved process or equipment (Freeman, 1982). Innovation is all about finding new ways to do things and to obtain strategic advantage so there will be room for new ways of gaining and retaining advantage. Innovation strategy could be seen as a process when exploring the space defined by four innovation types. Position innovation (i.e. changes in the context in which the products/services are introduced) and paradigm innovation (i.e. changes in the underlying mental models which frame what the organization does) apply to all applications of innovation thoughts - whether being product innovation or process innovation. Hence, the difference between product- and process innovation becomes important. At its core, product innovation is about changes in the things (product or service) which an organization offers. Process innovation concerns changes in the ways in which things (product or service) are created and delivered.
As Bessant and Tidd (2007) state, to some extent firms in emerging economies face a 'reverse product-process innovation life cycle'. The most common pattern of evolution of innovation in the industrialized world has been from product to process innovation, on the one hand, and from radical to incremental innovation, on the other. Initially a series of different radical product innovations emerge and compete in the market, but as the innovations and markets evolve together, a dominant design begins to emerge. Then, the locus of innovation shifts from product to process, and from radical to more incremental improvements in cost and quality (Bessant and Tidd, 2007).
Prahalad and Hamel (1990) showed that the capacity to open up new product markets requires distinctive core competencies, coupled with methods of corporate organization and evaluation that explicitly recognize the importance of these competencies, and top management visions that identify future opportunities. Therefore, process innovation might be preferred over product innovation.
H2a: a relation exists between the type of innovation (product, process, combination) and the level (firm, market, all) to which the outcome of innovation is new to.
H2b: process innovation has a larger impact on the newness of outcome on all levels (firm, market, all) than product innovation.
Self-development, cooperation, outsourcing
H3a: a relation exists between the type of innovation (product, process, combination) and the extent of cooperation with other firms (do-it-yourself, cooperation, outsourcing).
H3b-1: product innovation demands more (or is more subject to) cooperation and outsourcing with other firms than process innovation.
H3b-2: process innovation is more subject to do-it-yourself than product innovation
Continuity and change (over-time)
'Eurostat' related text below and the operational definitions are according to Eurostat data and metadata (2010).
I use the Community Innovation Surveys (CIS) from the Statistical Office of the European Countries (Eurostat) as the pool of data for this research' analysis and hypothesis testing. CIS provides information on the characteristics of innovation activity at firm level. It allows the monitoring of Europe's progress in the area of innovation, creating a better understanding of the innovation process and analyzing the effects of innovation on the economy (regarding competitiveness, employment, economic growth, trade patterns etc.). The CIS surveys contain statistical indicators on the following range of topics (amongst others): Product, process, ongoing and abandoned innovation; Innovation activity and expenditure; Intramural research and experimental development; Effects of innovation; Public funding of innovation; Innovation co-operation; Innovation co-operation; Sources of information for innovation; Hampered innovation activity; Patents and other protection methods; and Other important strategic and organizational changes in the firm. Except for CIS Light (the pilot version of the survey) and CIS2 are all CIS surveys used for this purpose. The CIS surveys are downloaded from the Eurostat website, available under the name of 'Innovation', using the Bulk Download Facility. For the complete research, except for the parts covering 'continuity', are CIS4 and CIS2006 used. For 'continuity' are the changes and developments over time equally important as individual CIS results, and are therefore resulting from CIS2 and CIS3 as well. Other databases from Eurostat relating to 'Innovation' might be used to improve coverage of the context of the thesis or to double-test the findings from the CIS surveys. These other databases entail the topics: 'Sustainability and innovation', 'Research and development', 'High-tech industry and knowledge-intensive services', 'Patent statistics', and 'Human resources in science & technology'. Finally, the European Innovation Scoreboards (EIS) from 2001 to 2006 are used to set this research's boundaries and conclude on generic findings by Eurostat's CIS surveys. The EISs are also used for conclusions on trends from 2006 up to 2010 and beyond.
Geographical boundaries: the starting point for the exact geographical area subject to this research is the European Union. The European Union might be equally interesting to investigate as some other global united nations groups (e.g the United States, OPEC countries, or the UNESCAP for Asia and the Pacific) in terms of economic cooperation or development. However, the EU is interesting, in particular, because of some specific goals set by all contributing countries as covered in the Lisbon Strategy - benchmark (from 2005 to 2010) with the initiative on growth and jobs. Knowledge and innovation for growth became one of three main areas for action in the new Lisbon Strategy. It stated that research and innovation should be put at the heart of EU policies, EU funding and business. For a more narrow bounded area have I looked at the countries on top of the EIS 2006, and the countries on the bottom of the list. This way, the conditions of these countries are quite similar when it comes to innovation and factors influencing innovation. I can benchmark the results of the top-lists ti those of the bottom-lists at the same time. To find this top-list at the EISs of 2006 I also make sure I am able to conclude on trends or specific changes with the period before 2006, with at least the final year being at a rather similar level. This way do I keep the possibility open that the top-countries might not always have been on top of the lists and that remarkable conclusions could result from this. The top-performing countries of the EIS 2006 are in alphabetical order: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, the Netherlands, Sweden, Switzerland, and the United Kingdom. The low(er)-performing countries of the EIS2006 are in alphabetical order: Bulgaria, Croatia, Czech Republic, Estonia, Greece, Hungary, Italy, Latvia, Lithuania, Malta, Poland, Portugal, Slovakia, Slovenia, and Spain. Both groups will be considered as being collections and not individuals.
Timeframe: CIS2 was launched in 1999 and refers to the period 1996-1998. CIS3 covers the period 1998-2000 and was published in 2002. CIS4 was launched in 2005, based on the reference period 2004, with the observation period 2002-2004. The CIS2006 was launched in 2007, based on the reference period 2006, with the observation period 2004-2006. This means an overall coverage of ten years ranging from 1996 to 2006. Please note again that CIS2 is only used to get insight in the development over time, since this survey is not as extensive as the others and not exactly comparable in methods and subjects with the others. CIS3, CIS4 and CIS2006 are valid in comparability and therefore used and linked together for that purpose.
Sector coverage: at the start of this research no distinction has been made between NACE sectors. If during the data analysis appears that there major differences in sector coverage between countries, then a decision can be made to adapt conclusions on such an event.
All terms are chosen and further explained in such a way that the interpretation of each topic or term should be clear to the reader and be recognizable throughout the research. Therefore, the terminology of the Customer Innovation Survey is used as basis for term explanation, as displayed in this section. The theory in the theoretical framework should be seen as additions in order to link the definitions below with this thesis' intentions and scientific literature to avoid different interpretations amongst all sources.
Innovation: an innovation is a new or significantly improved product (good or service) introduced to the market or the introduction within an enterprise of a new or significantly improved process. Innovations are based on the results of new technological developments, new combinations of existing technology or the utilization of other knowledge acquired by the enterprise. Innovations may be developed by the innovating enterprise or by another enterprise.
Product innovators: introduced new and significantly improved goods and/or services with respect to their fundamental characteristics, technical specifications, incorporated software or other immaterial components, intended uses, or user friendliness.
Process innovators: implemented new and significantly improved production technologies or new and significantly improved methods of supplying services and delivering products. The outcome of such innovations should be significant with respect to the level of output, quality of products (goods or services) or costs of production and distribution.
Enterprises with innovation activity: enterprises that introduce new or significantly improved products (goods or services) to the market or enterprises that implement new or significantly improved processes. Innovations are based on the results of new technological developments, new combinations of existing technology or the utilisation of other knowledge acquired by the enterprise.
Successful innovators: introduced or implemented product innovations, process innovations, or both product and process innovations during the observation period. An innovation is successful if it has been introduced to the market (product innovation), or if it has been implemented (process innovation).
Enterprise size (being "large enterprises"): enterprises with 250 or more employees are included in the statistical population. This way, local influences are excluded as much as possible from the research, since the assumption is that these in particular play a large role when considering enterprises smaller than 250 employees.
Data analysis and methodology