A Framework For Analysing Innovation Commerce Essay

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Innovation is widely accepted as a crucial competitive weapon in today's global market place. Has been cited as one of the key factors that affects competitiveness, the driver of economic growth. Innovation is important on different levels and is also important for different reasons. For nations, (and regions) innovation is an important driver of economic growth and improvement. For firms, there are a number of' reasons, including survival, growth and shareholder return. This paper reports main concepts behind innovation. The literature explains why innovation is important. There are a number of surveys that have recently been published which confirm this. Also the literature explain the relationship of innovation and business performance, define the meaning of innovation, different types of innovation that affect the growth of an organization, the difference between radical and incremental innovation, evolution of innovation management and national system of innovation.

Key words: innovation, business performance, generation of innovation, NSI.

INTRODUCTION

Innovation is widely accepted as a crucial competitive weapon in today's global market place. Has been cited as one of the key factors that affects competitiveness. Researchers and practitioners have defined innovation in several different ways. Schumpeter (1934), pioneer of innovation research, has identified different forms of innovation, including product, process, market and organizational innovations.

Innovation is important; it is the driver of economic growth. according to Economist Intelligence Unit 2007 ''Innovation is considered an important driver of long- term productivity and Economic growth. It is argued that countries that generate innovation, create new technologies and encourage adoption of these new technologies grow faster than those that do not''. In accordance with this, over the last 50 years, researcher has consistently linked innovation with business success.; shown as a major contributory factor in the growth of firms (Mansfield, 1971); new products and processes, the fastest growing product groups or 'clusters' (Freeman, 1974).

This article starts with giving answers the question "Why innovation is important?". Then, the article presents the relationship between innovation and business performance and than gives the definition of innovation in these last 50 years given by various authors. The next point is about the generation of innovation management. The last section the article discuss about the type of innovation and the national system of innovation.

WHY INNOVATION IS IMPORTANT?

Innovation is important on different levels and is also important for different reasons. For nations, (and regions) innovation is an important driver of economic growth and improvement. For firms, there are a number of' reasons, including survival, growth and shareholder return. According to Baumol (2002) virtually all of the economic growth that has occurred since the eighteenth century is ultimately attributable to innovation. Long-run economic growth depends on the creation and fostering of an environment that encourages innovation. Also according to Economist Intelligence Unit 2007 ''Innovation is considered an important driver of long- term productivity and economic growth. It is argued that countries that generate innovation, create new technologies and encourage adoption of these new technologies grow faster than those that do not''.

Why do we say that innovation is important? There are a number of surveys that have recently been published which confirm this. For example, respondents to The Boston Consulting Group for their report Innovation 2010. A Return to Prominence - and the Emergence of a New World Order" ranked innovation as a strategic priority with 26% citing it as a top priority and a further 45% ranking it as a top three priority. Research undertaken by McKinsey during 2010 supports this with their survey reporting that '"84 percent of executives say innovation is extremely or very important to their companies growth strategy.

DEFINE THE MEANING OF INNOVATION

Innovation means different things to different people and has been studied in a variety of contexts, including in relation to social systems, economic development, policy construction technology and commerce (Fagerberg&Godinho, 2004).

Already Schumpeter (1934), pioneer of innovation research, has identified different forms of innovation, including product, process, market and organizational innovations. He includes five manifestations of innovation in its definition:

1. Creation of new products or qualitative improvements in existing products

2. Use of a new industrial process

3. New market openings

4. Developing of new raw-material sources or other new inputs

5. New forms of industrial organizations

The influence of the Schumpeterian vision of innovation persists to this day and can be seen in the European Commission's Green Paper (1995) on innovation that defines it as "…renewal and enlargement of a range of products and services and the associated markets, the establishment of new methods of production, supply and distribution, the introduction of changes in management, work organization and the working conditions and skills of the workforce" and in Edquist's (2001) summary description of innovations as new creations of economic significance normally carried out by firms (or sometimes by individuals).

Organizational theorists and managers alike have long shown more of an interest in the role of innovation in organizations, primarily because of the crucial role innovation plays in securing sustained competitive advantage (Porter, 1980). Fatherless according to Van de Ven, (1986) innovation is a product, service, or process that is new or perceived as new by its developers.

Researchers and practitioners have defined innovation in several different ways, at times applying the innovation label to phenomena that involve radically different management styles and structures (Burgelman and Sayles, 1986). For example, it has been shown that organizational forms that favor the adoption and implementation of new manufacturing processes may be improper for the generation of new products (Kimberly and Evanisko, 1981). Even so, a review of numerous textbooks for principles of management and strategic management showed that most offer little more than a single line devoted to the definition of innovation, often in terms that differ significantly. Another consequence of a non-differential approach to defining innovation is the tendency to suggest one organizational form accommodates all forms of innovation (Cooper 1998).

An important distinction is normally made between invention and innovation. Invention is the first occurrence of an idea for a new product or process. Innovation is the first commercialization of the idea. Also Schumpeter (1942) says that innovation, by a widely shared definition, means the commercialization of invention.

There are numerous alternative definitions of innovation. One popular alternative is to present innovation as an invention that has been exploited commercially (Martin, 1994). In this alternative definition, the term invention has the same meaning as mentioned earlier, that is, something new that has never existed before. This creation of something new derives from the creative capability of the organization and provides opportunities to be exploited. This alternative definition of innovation has been expressed as follows (Roberts, 1988):

Innovation = Invention + Exploitation

Another complicating factor is that invention and innovation is a continuous process. (Kline and Rosenberg, 1986), in an influential paper, point out:

"It is a serious mistake to treat an innovation as if it were a well-defined, homogenous thing that could be identified as entering the economy at a precise date - or becoming available at a precise point in time. The fact is that most important innovations go through drastic changes in their lifetimes-changes that may, and often do, totally transform their economic significance. The subsequent improvements in an invention after its first introduction may be vastly more important, economically, than the initial availability of the invention in its original form" (Kline and Rosenberg 1986, p.283)

EVOLUTION OF INNOVATION MANAGEMENT

Although innovation (management) was carried out professionally as early as the late nineteenth century, we start our historical overview of innovation management after Second World War, because after the war innovation was generally considered to be essential to the economic and technological survival of nations and companies alike, which led to a widespread use of and increasing scientific research into innovation management. The various generations of innovation management emerge in different times and in entirely different contexts, requiring different types of innovation processes. Niosi (1999, p. 117) provides a concise description of the successive generations: The first generation brought the corporate R&D laboratory. The second generation adapted project management methods to R&D. The third brought internal collaboration between different functions in the firm. The fourth adverts routines designed to make more flexible the conduct of the R&D function through the incorporation of the knowledge of users and competitors. Various others have identified different numbers of generations. The history of the development of innovation processes is often divided into four generations (Liyanage and Greenfield, 1999; Miller, 2001;). Both Rothwell (1994) and Amidon Rogers (1996) distinguish five generations, while Miller (2001), Liyanage et al. (1999) and Niosi (1999) identify four generations. In this article, we use a framework of four generations, because we believe that the alleged "fifth generation" is merely an implementation of the fourth generation, a view that Rothwell (1994), one of the authors distinguishing a fifth generation, appears to share: The development of 5G is essentially a development of the 4G (parallel, integrated) process . . . (Rothwell, 1994). There is also some variation with regard to the timing of the various generations, in some cases more than a decade. Miller (2001), for example, places the second generation between 1950 and 1985, whereas Niosi (1999) places the same generation between the early 1960s and the early 1970s. Although it is not always clear how the various authors arrived at their verdict, the main idea is to indicate when a specific innovation management approach was considered to be the dominant (i.e. most commonly applied) best practice model. We adopt a different procedure by using hallmarks in the societal context to establish when a specific generation prevailed.

Thus, we place the first generation between the end of the Second World War and the mid-1960s. In this generation innovation was represented by a pipeline of sequential processes that started at pure scientific research and ended with commercial applications. However, this model incorporated too late market information so that often commercial applications were merely technical inventions and was often not adopted by the market. Also, the link between the R&D department and other departments outside R&D was very loose. We place the second generation between the mid-1960s and the late 1970s. Second generation models emerged, which paid more attention to the feedback of information from the market, essentially reversing the linear pipeline. Hence, science was replaced by the market as the source of innovation. Processes were still largely seen as sequential steps. Disadvantages of this generation were: too much focus on small improvements of existing products (optimization), and innovation was managed by a range of loose projects. The late 1970s saw a recession that had a major impact on the resources that were allocated to innovation. We place the third generation between the late 1970s and the early 1990s, at which point the internet made its commercial presence felt. The internet has played a crucial role in people's ability to cooperate at a distance and it has further stimulated the emergence of a truly global economy. The fourth generation started in the early 1990s and it continues to be the dominant approach to this day. According to J. Berkhout and Patrick A. van der Duin (2007, p 300) fourth generation innovation models can be characterized by the following properties:

" innovation occurs in partnerships: 'open innovation'

ample attention is given to an early interaction between science and business

the need for new organizational concepts is emphasized: 'management of networks'

Entrepreneurship plays a central role".

In Table I, we provide an overview of the generations of innovation management, their context and their (dis)advantages. The second and fourth columns of the table represent the forces behind the evolution of innovation management: new generations emerge because innovation management adapts to a changing context; and they emerge to remedy the disadvantages of earlier generations.

Table I. The innovation management generations, their context, approach and disadvantages

Period

Societal and organizational context of Innovation

Innovation approach

Disadvantages of the approach

From the post-war

period to the

mid-1960s

Society

Society has a generally favorable attitude towards scientific progress. Governments subsidize R&D in universities and companies to stimulate economic growth and to attain military leadership. Consumer demand exceeds the supply of goods

Organizations

Organizational strategies are generally technology-oriented and focus on innovation and growth. Most organizations are functionally organized

Technology (science) push

The process of commercialization of technology is perceived as a linear progression from scientific discovery to the marketplace. Many R&D-departments are staff departments that are structured like scientific institutions.

Technology push, linear process, scientific freedom is very important, no strategic goals, no professional project management, no chain management.

Disadvantages

Little attention is paid to the entire process or the role of the market place. Innovation processes serve no strategic goals and commercial aspects are incorporated late Professional project management practices are not applied.

The link between the R&D department and other departments outside R&D was very loose

From the

mid-1960s to the

late 1970s

Society

This is a period of relative prosperity, although economic growth slows down. Demand more or less equals supply. Many

markets are becoming more competitive. Government policies tend to emphasize demand side factors.

Organizations

Organization strategies generally focus on growth, to attain economies of scale, and on diversification, to reduce financial risks. Many organizations adopt a multi-divisional structure

Market pull (need-pull)

Technological change is rationalized, needs are considered more important to innovation than scientific and technological progress. Because innovation processes are managed as projects, R&D-institutes are organized in a matrix. Divisions become internal clients that directly fund R&D Innovation is generally organized in multi-disciplinary projects. Linear sequential process in a project, starting with market need

Disadvantages

Focuses on evolutionary improvements rather than breakthroughs. Projects are individual units, strategic relationships between these projects and corporate goals are not established. Too much focus on small improvements of existing products (optimization), and innovation was managed by a range of looseprojects

From the late 1970s to the early

1990s

Society

This is a period with two oil crises, inflation and demand saturation. Supply exceeds demand and unemployment figures rise

Organizations

Company strategies generally focus on cost control and reduction. Organizations become more flexible and less hierarchically organized. Responsibilities are delegated to business units

Market pull and technology push combined

Knowledge about technology and market needs is used throughout the innovation process. To obtain this knowledge

(communication) networks are formed with internal and external partners. Innovation projects become part of a portfolio of projects aligned with the corporate strategy Model of an essentially sequential process with feedback loops and interaction with market needs and state of the art technology.

Disadvantages

Third generation models look only at product and process innovation (technical) and not at organizational or market innovations (non-technical). In short, third generation innovation models tend to focus on new technological capabilities rather than including emerging societal needs

From the early

1990s to the early

2000s

Society

Globalization is important in this period, international competition increases. Organizations realize the strategic importance of technologies. Information and communication technologies influence internal and external business processes

Organizations

Company strategies generally concentrate on core competences. Strategic alliances and external networking become important. Time-to-market becomes more important. More organizations adopt team-based and project-based structures

Innovation in alliances; parallel and integrated innovation, from innovation to new business development (NBD)

Innovation management means managing research links and external research environments. Parallel processes are used to involve multiple actors and to increase the development speed. The 4th generation includes business and market models in

Innovation Coordinated process of innovation in a network of partners. The required coordination is often attained by system integration (with key suppliers and customers) and parallel development (of components or modules of the innovation)

Disadvantages

Innovation processes are becoming too complex and because of this more and more unmanageable Opening up the innovation process is not suited for any industry and might in general endanger fundamental research which is many cases still the basis for innovation

Sources: Based on Liyanage et al. (1999); Miller (2001); Niosi (1999); Rothwell (1994)

Evolutionary forces lead to changes in innovation management: innovation management itself is subject to innovation. From this historical overview, we conclude that in each period company adhere to a different set of best practices. Furthermore, these best practices evolve over time, because different economic, societal and technological contexts require different approaches to innovation management and because companies are forced to improve their innovation management due to the increasing importance of innovation.

INNOVATION AND BUSINESS PERFORMANCE

Research, over the last 50 years, has consistently linked innovation with business success.; shown as a major contributory factor in the growth of firms (Mansfield, 1971); new products and processes, the fastest growing product groups or 'clusters' (Freeman, 1974); better business performance related to the higher measures of innovation (Cavanagh and Clifford, 1983); levels of competitiveness linked with the levels of innovativeness (Dosi, 1988); firms using innovation to differentiate their products from competitors, twice as profitable (Pavitt, 1991); innovation a key element of business success (Nonaka and Takeuchi, 1995); high growth companies getting a higher percentage of sales from new products relative to competitors, (O'Gorman, 1997); new product development leading to greater sales volume and enhanced profitability (Kotler, 1999); innovating firms having lower probability of stagnant or declining employment in comparison to non-innovating firms (Frenz et al, 2003); innovative businesses growing more than non-innovative businesses (European Commission, 2004) , Therefore innovation is key to sustainable growth and economic development on a global scale (Jan Fagerberg 2006 ). Innovation is a major factor of economic growth and performance in the globalized economy. Innovation brings new technologies and new products that help address global challenges such as health or the environment (OECD 2007) and innovation is important to help address global challenges, such as climate change and sustainable development (OECD 2007). Innovation, which involves the introduction of a new or significantly improved product, process or method, will increasingly be needed to drive growth and employment and improve living standards. This is true as well for emerging economies that look to innovation as a way to enhance competitiveness, diversify their economy and move towards more high value added activities (OECD 2010).

TYPE OF INNOVATION

Innovation can come in different forms, including: product innovation, organizational innovation, management innovation, production innovation, commercial/marketing innovation, and service innovation (Trott 2008). The different types of innovations and their uniqueness may lead to different impacts on strategy, structure, and performance of the organizations (Damanpour et al. 1989, Ettlie and Rubenstein 1987). Van de Ven (1986) splits innovation in being either technical (new product, service, or technology) or administrative (new process, organization etc.). Damanpour et al. (1989) looked at the impact of adapting administrative and technical innovations to the performance of organizations. Administrative innovations are innovations that occur in the administrative component and affect the social system of the organization. Administrative innovation is more coupled to management innovation, while technical innovation is more related to product and process innovations. An administrative innovation does not provide a new product or a new service, but it may indirectly influence the introduction of products or services, or the process of producing them (Kimberly and Evanisko 1981). This also highlights the potential value of management innovation to a firm's well-being. In order to attain higher performance, the social structure of an organization must change to meet the requirements of the technical system (Blau et al. 1976). Hidalgo et al. (2002) define innovation from a technological perspective. For them, technological innovation is defined as "all technical, industrial and commercial stages leading to successful launch of new products and services into the market or the commercial utilization of new technical processes". Damanpour and Gopalakrishnan (1998) investigated the relationship between organizational structural variables and innovation. Instead of a simple innovation theory, a number of approaches are proposed to deal with the various types of innovation-based predictive variables (Downs and Mohr 1976).

Innovation can also be clarified as either incremental or radical (Cooper 1998). Radical innovation generally involves more risk (O'Conner and McDermott 2004). Creation of new knowledge in a firm involves risks ( Howells and Michie 1997), which are difficult to assess.

Exploratory innovations are radical innovations and are designed to meet the needs of emerging customers or markets (Benner and Tushman 2003, p. 243). They offer new designs, create new markets, and develop new channels of distribution (Abernathy and Clark 1985). Exploratory innovations require new knowledge or departure from existing knowledge (Benner and Tushman 2002). Conversely, exploitative innovations are incremental innovations and are designed to meet the needs of existing customers or markets (Benner and Tushman 2003, p. 243;). They broaden existing knowledge and skills, improve established designs, expand existing products and services, and increase the efficiency of existing distribution channels (Abernathy and Clark 1985, p. 5).

Schumpeter (1983) proposed the following forms of innovation: (1) introduction of new goods; (2) introduction of new forms of production; (3) discovery of a new source of raw materials or semi elaborated products; (4) opening of a new market; and (5) creating new market structures in an industry. The Oslo Manual (OECD, 2005) proposes the following definition: 'an innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations'.

NATIONAL SYSTEMS OF INNOVATION PERSPECTIVE

National System of Innovation (NSI) approach-an institutional conception par excellence - has framed innovative activities and the way firms do things with in the institutional national context (Nelson,1993;Freeman,1995).The NSI concept rests on one fact and two well-established beliefs: (i) countries exhibit systematic differences in terms of economic performance; (ii) the latter largely depends on different technological and innovation capabilities on the one side, and development of institutions on the other side (Castellacci, 2008); (iii) innovation and technology policies are an effective tool for fostering innovation performance of countries. The way in which firms carry out innovation activities and set their learning processes is affected by a number of specific national factors (Lorenz and Lundvall, 2006), including the nature of the scientific and technological institutions, the education and training system, the financial system, the structure of the labour market, and industrial specialization. In their conceptualization of NSI, Lundvall and colleagues (Lundvalletal., 2002) go beyond the "techno-nationalism" that had inspired Nelson'sconceptualization of NSI (Nelson, 1993), in order to recognize that the ability of countries to foster innovation is dependent upon social capabilities, that are not solely based on science and technology. Within this broadened context "the national system of innovation is constituted by the institutions and economic structure affecting the rate and direction of techno- logical change in the society" (Edquist and Lundvall, 1993, p.267).

CONCLUSION

The review reported here covers the themes of innovation and business performance. The key concepts relating to innovation have been reviewed. We have seen why is so important innovation in nowadays.There are a number of surveys that have recently been published which confirm this. We can conclude that innovation is an important driver of economic growth, and all the benefits that this brings to individual nations.

As regards the link between innovation and business performance, our review of empirical studies shows that, in general, innovation leads to better performance. However, innovation is not the only cause of business performance.

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