The Background And A Problem Statement Commerce Essay

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The importance of innovation is increasing significantly. Organizational innovation, which includes the development of new products, services or administrative systems, is emerging as an important source of sustainable competitive advantage (Hurley and Hult, 1998). A company's ability to successfully identify and launch new products, services, processes or any other innoavtions has become one of the most important criteria for success. Especially in difficult economic times like we face today, firms need to adapt in order to survive. Ken Chenault (March 2008), CEO of American Express was quoted in Fortune saying, "A difficult economic environment argues for the need to innovate more, not to pull back." However, also during "regular" economic times innovation is believed to be one of the most important factors to be competitive in the market place (Davila, Epstein & Shelton, 2006). For instance, former Procter & Gamble CEO A.G. Lafley (2005) stated that innovation is P&G's "lifeblood".

It is clear that innovation is a hot topic in business today. A lot is written about why and how to innovate and about what strategies support the development and adoption of innovations. These are often technology-oriented, customer-oriented or market-oriented strategies (e.g. Cooper, 1984; Crawford, 1983; Amidon, 1997).

Nowadays firms increasingly try to increase their innovative performance through collaboration (MacCormack, Forbath, Brooks & Kalaher, 2007). On the other side there is the traditional approach based on the assumption that the best way to create new ideas is achieved by a centralized and collocated R&D team (Dickson, Lawton Smith & Smith, 1991). There are different ways of innovating. Making use of an internal R&D team used to be the main structure for innovation in the past, but companies are now increasingly making use of participation in joint ventures or using mergers and acquisitions (M&As) as a source for innovation (i.e. from internal to external innovation) (Tether, 2002). Therefore, the aim of this thesis is to provide a clear framework on the advantages and disadvantages of these different types of structures that have an effect on the innovation process. This should help identify what type of structure best supports innovative incentives and capabilities. Therefore the focus will be on the effects of joint ventures and M&As on innovation and on the performance of innovating internally. In sum: how does an innovation structure influence innovation?

b. Research questions

The problem statement will be answered by answering different questions, from a broader to a narrower the scope.

Firstly, it is important to identify the most important factors that influence innovation. Therefore the first question is: What are important requirements for innovation? This question should also take account of innovation supportive circumstances. A distinction will be made between radical and incremental innovation. Ease of implementation, control, flexibility and finances are the variables to be investigated.

Secondly, it is important to define the different structures that are in the focus of this thesis. The important characteristics of joint ventures, M&As and internal R&D will be identified. Therefore the second question is: What are the important characteristics of the certain structures that influence innovation?

Thirdly, the characteristics of the structures will have to be linked to the innovation requirements. Therefore the third question is: How do the different structures affect a firm's innovation process.

Fourthly, in the final part an overview will be given on how the link between structures and innovative capabilities turns out to be in practice. Here the scope will be on the search for a dominant structure among successfully innovating companies. This brings us to the fourth and last question: What type of structure do successfully innovating companies have?

c. Relevance

The focus of this thesis is on the effect of the structure (i.e. how innovation is organized) a firm can use to innovate and the resulting innovation. By making use of the four variables control, flexibility, ease of implementation and finances, in combination with the different innovation structures, this should provide a clear framework on the effects of joint ventures, M&As and internal R&D on innovation. These insights could be useful for companies that want to be innovative to have a clear overview on the advantages and disadvantages each structure faces. It could be useful for any (new) company that wants to be innovative.

Data collection

This thesis is a literature review on the effects that a firms innovative structure has on innovation. In this sense it is an exploratory research, since it should provide a clear framework on the matter. The different types of innovation (radical and incremental innovation) and the influence of the structure on certain innovative requirements will be described (flexibility, ease of implementation, control and finances). This helps describing the effect on innovation. The characteristics will be linked together in order to come to a final conclusion that creates the framework. Finally, there will be a comparison with real-life situations of top innovating companies.

Most of the literature is gathered from articles that are published in the Journal of Product Innovation Management, the International Journal of Innovation Management, Research Policy, the Journal of Business Research and Technovation: five respected journals on management and innovation (strategy) with a relatively high impact factor. Research Policy for example is currently ranked 8th among the world's top journals in "Management" and 2nd in the Planning & Development category (Thomson Scientific Journal Citation Reports, 2006).

Searching is done through Sciencedirect, Proquest, LexisNexis and the Tilburg University library search engine. A limitation of using the internet is, however that it may prove to be challenging in determining the usefulness and reliability of information. According to Sekaran & Bougie (2010), after having identified titles that seem to be relevant, the abstract of an article should help decide whether or not an article is actually useful. The main keywords that are used for searching for information (relevant titles) are:


Innovative capabilities

Mergers (+ innovation)

Ventures (+innovation)

Internal R&D

Furthermore, articles are searched for by using references of other articles.

Since it is a literature review, it is based on secondary data. Sekaran & Bougie (2010) not that the advantage of using secondary data sources is that it is an efficient and cheap way to obtain information. However, they also note that information can have become obsolete, or may not meet the specific situation discussed. Therefore articles are also selected on their age (when relevant). Articles are also selected based on their citation impact and the quality of the journals that published them. ScienceDirect shows how often an article is cited by others; Sekaran & Bougie (2010), note that this is a useful indicator for the quality of an article.

For the last part on how situations turn out to be in practice, some top innovative companies are identified by making use of BusinessWeek's list of the 50 most innovative companies. Then some of these firms will be linked to the innovative structure they apply.

Structure of the thesis

In the next chapter the theoretical framework will be provided: the requirements for innovation will be identified and described. The focus will be on the factors that affect a firm's innovative capabilities. Also the different innovation structures will be defined including their strengths and weaknesses. Then the factors affecting innovative capabilities will be linked to the innovation structures to see what the preferred structure is in a certain situation. Subsequently, an overview of top innovative companies and their structure will be given to determine if there is a dominant structure amongst top innovative companies. Finally, a conclusion and summary will be provided together with some limitations and recommendations.

2. What is Innovation?

Porter stated already in 1985 that "technological change is one of the principal drivers of competition" (Porter, 1985; p. 164). Indeed, gaining and sustaining a competitive advantage is certainly one of the main drivers for innovation. Innovation is created through different structures and in order to understand the effect of joint ventures, M&As and internal R&D teams some questions with respect to what exactly innovation is and how is it defined need to be answered first. This chapter deals with these questions, distinguishing radical and incremental innovation.


Schumpeter (1934) describes innovation as "the introduction of new goods, new methods of production, the opening of new markets, the conquest of new sources of supply and the carrying out of a new organization industry". The term is often also defined by simply stating that it is about doing something new or doing something different. Schumpeter (1950) believed that innovation was a key to long-term economic growth. He described this by the term "creative destruction", where innovations restructure the whole market, benefitting those who adapt to these discontinuities faster. Innovations, however, are not all the same. Different types of innovation are identified by researchers including administrative versus technical innovation, product versus process innovation, technological versus architectural innovation, and incremental versus radical innovation (Chiesa, Coughian, & Voss, 1996). The differences between the last types of innovation, incremental and radical, are described in more detail next.

Incremental versus Radical Innovation

Tushman & Romanelli (1985) and Abernathy & Clark (1985), amongst others, distinguish between two types of innovation: incremental and radical. Distinguishing between these two types however, is not always simple (Henderson & Clark, 1990). Most innovations are just built on something that already exists; only making modifications to the existing. However, some innovations change existing practice completely, making them obsolete (Van de Ven & Poole, 1995).

Herbig, (1994), defines radical innovations as innovations that create new industries, products or markets, or completely change the way things are done (processes). Mostly, these innovations are based on technological improvements that are so large that entire industries and markets can emerge, transform or even disappear (this occurs in a situation when efficiency, design or scale changes cannot compete with the innovation) (Kaplan, 1999). Therefore, radical innovation is actually about knowledge creation that results in fundamental changes in the way things are done (Henderson and Clark, 1990). In short, radical innovations are innovations that are new to a firm, market, or industry. They are the result of a significantly different and new technology and provide considerably larger customer benefits compared to current products in the industry. However, according to Song and Montoya-Weiss (1998), radical innovation has a high level of risk due to the complexity in new product requirements and a lot of uncertainty with respect to technology, market needs and the actions of competitors. They indicate that therefore this type of innovation asks for more learning, flexibility and adaptability.

Following Herbig (1994), incremental innovation can be defined as innovations with relatively little impact. These innovations improve certain characteristics of a product design or production process in order to better meet the needs of a specific market segment. This type of innovation is thus based on knowledge creation that results in small improvements or adjustments to a firm's existing offerings, thereby better satisfying current and potential customers' needs (Henderson and Clark, 1990). Although incremental innovations, just as radical innovation, are also often based on technological changes, these changes are relatively small and do not fundamentally change the existing practices of a firm (Benner & Tushman, 2003). Zirger and Hartley (1994) note that incremental innovations are often based on knowledge, experience and certain capabilities that a company already possesses, since this type of innovation has a lot more certainty than radical innovation; customer needs are often known, there is a good understanding of business processes and the required technology is normally not too different from the firm's existing technology.

Following Henderson & Clark (1990) and Herbig (1994), the major difference between radical and incremental innovation is the level of new technological content, that is, the level of new knowledge that is embedded in the innovation and the way in which it changes the economic environment. The type of innovation can also be determined by the complexity and uncertainty that is involved with it.

Varadarajan (2009) notes that incremental innovations enable large companies to be competitive in the short run but only radical innovations can lead to long-term growth by "changing the game". On the contrary, Treacy (2004) notes that incremental innovations usually beat radical innovation strategies because of their slow and steady approach. However, Kanter (2006) shows that both incremental and radical innovations are part of the strategy of successful innovators. They can both have their importance for a firm's competitiveness and long-term growth.

Innovations, both radical and incremental, can be both internally developed as well as externally generated. In the end however, irrelevant of how they are created, these innovations can shift processes and open up new markets. Herbig (1994), however, did find that there a differences in the conditions that are favourable for radical innovation and those favourable for incremental innovation. In the next chapters, different innovation structures will be defined, and their effect on innovation will be examined.

3. Innovation Structures

As indicated earlier, internal innovation used to be the main innovation structure in the past and that companies nowadays increasingly make use of an external research structure (Tether, 2002) (note that the terms innovation and research are used interchangeably). The next step is to give an overview of these different structures, including internal innovation, joint ventures, and M&As. In order to link these structures to innovation, it is important to first identify some of their key characteristics and the important factors that influence innovation. This chapter therefore deals with different innovation structures, elaborating some of their characteristics. Furthermore, the factors affecting innovation are identified.

Internal Research & Development

The first structure to look at is internal innovation, or internal research and development (R&D). Schumpeter (1950) noted that large firms often have the capacities to exploit new technologies because of their large capacity and generally good marketing-, finance- and R&D infrastructure. However, as large firms have their pros with respect to innovation; small companies have their advantages too. They have a higher flexibility in adjusting the workforce with innovation related projects and they generally have a more simple management structure when it comes to the implementation of new projects. Large and small firms both have their advantages relevant to internal research. However, there is a common finding in literature (Scherer, 1970; Scott, 1984) that the relationship between R&D intensity (and innovative performance) and the concentration of research is one of an inverted U-shape with maximum research intensity at the 50% to 60% level of concentration. This is a strong indication that R&D concentrated within a single firm often is far from optimal.

Reasons for internal R&D

In order to be successful in the innovation process, companies need to be able to accumulate knowledge and to capitalize on learning processes (Chiesa, 1996). In order to do this, firms need to be able to evaluate new information and knowledge, and be capable to utilize it. (Arora & Gambardella, 1994). This is where the importance of internal research becomes clear: in order to accumulate, understand and use knowledge, firms must have a basis of knowledge and capabilities to build on (Chiesa, 1996). Therefore, internal research plays an important role in innovation since it allows firms to also evaluate and use research that is done externally (Rosenberg, 1990). This means that firms with a strong internal R&D department are better able to take advantage of newly created knowledge than those who do not. Furthermore, Arora and Gambardella (1994) state that a strong internal research base is allows for better choices and utilization in collaborative relationships, and that it supports a firm's ability to notice shifts in the environment.

The innovation process carries high uncertainty and mostly requires a lot of capital (*bron*). Narula (2001), indicates that one advantage of internal R&D is that a firm not only possesses some end result of an innovation process, but also the skills and tacit knowledge of the persons involved in the innovation process. Furthermore, this form of innovation development gives a single firm the opportunity to capture the benefits of innovations. In short, the importance of internal R&D as an innovation basis, together with the high uncertainty of the process combined with the risk of losing strategic assets crucial to the sustainability/development of the firm, provide reasons for internal R&D.

(not invented here syndrome (behandelen in volgend hoofdstuk))

((**Therefore, it is the basis for succesfully implementing new projects.**))

In addition, R&D in new technologies has been seen to be increasingly capital-intensive.

So, the need to reduce costs (and maintain pro. ts), while maintaining the . rm's

technological assets has become an important managerial balancing act.