Managing Innovation

As noted in the preceding postOpens in new window, creativity and innovation are related but distinct concepts.

Innovation is important because, without new products or services, any organization will fall behind its competition.

The Innovation Process

Figure X-1 The Organizational Innovation Process | Source: The innovation Process, Davidson & Griffin 2000:452

The organizational innovation process consists of developing, applying, launching, growing, and managing the maturity and decline of creative ideas. Each of this process is discussed below.

1.    Innovation Development

Innovation development can transform a product or service with only modest potential into a product or service with significant potential. Parker BrothersOpens in new window, for example, decided during innovation development not to market an indoor volleyball game, but instead to sell the appealing little foam ball designed for the game separately.

The firm will never know how well the volleyball game would have sold, but the Nerf ball and numerous related products generated millions of dollars in revenues for Parker Brothers.

2.    Innovation Application

At this point, the innovation emerges from the laboratory and is transformed into tangible goods or services. One example of innovation application is the use of radar-based focusing systems in Polaroid’s instant camerasOpens in new window.

The idea of using radio waves to discover the location, speed, and direction of moving objects was first applied extensively by Allied forces during World War II. As radar technology developed during the following years, the electrical components needed became smaller and more streamlined. Researchers at Polaroid applied this well-developed technology in a new way.

3.    Application Launch

The important question is not “Does the innovation work?” but “Will customers want to purchase the innovative product and service?”

History is full of creative ideas that did not generate enough interest among customers to be successful. Some notable “classic” innovation failures include a portable seat warmer from Sony, “New” Coke, and Polaroid’s SX-70 instant camera (which cost $3 billion to develop, but never sold more than 100,000 units in a year).

More recently a chocolate drink introduced by Starbucks, a relatively healthy low-fat burger from McDonald’s, and numerous products in the smartphone market have all done poorly and were discontinued. Thus, despite development and application, ne products and services can still fail at the launch phase.

4.    Application Growth

Once an innovation has been successfully launched, it then enters the stage of application growth. This is a period of high economic performance for an organization because demand for the product or service is often greater than supply.

Organizations that fail to anticipate this stage may unintentionally limit their growth, as Apple did by not anticipating demand for its iMac computer. At the same time, overestimating demand for a new product can be just as detrimental to performance. Unsold products can sit in warehouses for years.

5.    Innovation Maturity

After a period of growing demand, an innovative product or service often enters a period of maturity.

The technological application of an innovation during this stage of the innovation process can be very sophisticated. However, because most firms have access to the innovation, either as a result of their developing the innovation on their own or copying the innovation of others, it does not provide competitive advantage to any one of them.

The time that elapses between innovation development and innovation maturity varies notably depending on the product or service.

Whenever an innovation involves the use of complex skills (such as a complicated manufacturing process or highly sophisticated teamwork), moving from the growth phase to the maturity phase will take longer.

In addition, if the skills needed to implement these innovations are rare and difficult to imitate, then strategic imitation may be delayed, and the organization may enjoy a period of sustained competitive advantage.

6.    Innovation Decline

Every successful innovation bears its own seeds of decline. Because an organization does not gain a competitive advantage from an innovation at maturity, it must encourage its creative scientists, engineers, and managers to begin looking for new innovations.

This continued search for competitive advantage usually leads new products and services to move from the creative process through innovation maturity, and finally to innovation decline. Innovation decline is the stage during which demand for an innovation decreases and substitute innovations are developed and applied.

Forms of Innovation

Each creative idea that an organization develops poses a different challenge for the innovation process. Innovations can be:

• radical or incremental,
• technical or managerial, and
• product or process.

1.    Radical versus Incremental Innovations

• Firms that implement radical innovations fundamentally shift the nature of competition and the interaction of firms within their environments.
• Firms that implement incremental innovations alter, but do not fundamentally change, competitive interaction in an industry.

Over the last several years, organizations have introduced many radical innovations. For example, compact disk technology replaced cassette tapes in the recording industry and now digital downloading is replacing CDs; in the video industry, DVDs have replaced videocassettes but are now being supplanted by Blu-ray DVDs and online downloading; and high-definition television is replacing traditional television technology.

Whereas radical innovations like these tend to be very visible and public, incremental innovations actually are more numerous. For instance, each new generation of the iPhone and the iPad represent relatively minor changes over previous versions.

2.    Technical versus Managerial Innovations

Many of the most important innovations over the last several decades have been technical. For example, the serial replacement of the vacuum tube with the transistor, the transistor with the integrated circuit, and the integrated circuit with the microchip has greatly enhanced the power, ease of use, and speed of operation of a wide variety of electronic products. Not all innovations developed by organizations are technical, however.

Managerial innovations do not necessarily affect the physical appearance or performance of products or services directly. In effect, business process change or reengineering, as we discuss earlier, represents a managerial innovation.

3.    Product versus Process Innovations

Perhaps the two most important types of technical innovations are product innovations and process innovations.

Whereas managerial innovations generally affect the broader context of development, process innovations directly affect manufacturing. The implementation of robotics is a process innovation.

The effect of product and process innovations on economic return depends on the stage of the innovation process that a new product or service occupies. At first, during development, application, and launch, the physical attributes and capabilities of an innovation most affect organizational performance.

Thus, product innovations are particularly important during these beginning phases. Later, as an innovation enters the phases of growth, maturity, and decline, an organization’s ability to develop process innovations, such as fine-tuning manufacturing, increasing product quality, and improving product distribution, becomes important to maintaining economic return.

Japanese organizations have often excelled at process innovation. The market for 35mm cameras was dominated by German and other European manufacturers when, in the early 1960s, Japanese organizations such as CanonOpens in new window and NikonOpens in new window began making cameras. Some of these early Japanese products were not very successful, but these companies continued to invest in their process technology and eventually were able to increase quality and decrease manufacturing costs.

The Japanese organizations came to dominate the worldwide market for 35mm cameras, and the German companies, because they were not able to maintain the same pace of process innovation, struggled to maintain market share and profitability. And, as film technology gives way to digital photography, the same Japanese firms are effectively transitioning to leadership in this market as well.

Promoting Innovation in Organizations

A wide variety of ideas for promoting innovation in organizations has been developed over the years.

Three specific ways for promoting innovation are through the reward system, through the organizational cultureOpens in new window, and through a process called intrapreneurship.

1.    The Reward System

Major components of the reward system include salaries, bonuses, and perquisites. Using the reward system to promote innovation is a fairly mechanical but, nevertheless, effective management technique.

The idea is to provide financial and nonfinancial rewards to people and groups who develop innovative ideas. Once the members of an organization understand that they will be rewarded for such activities, they are more likely to work creatively. With this end in mind, MonsantoOpens in new window gives a $50,000 award each year to the scientist or group of scientists who develop the biggest commercial breakthrough.

It is important for organizations to reward creative behaviorOpens in new window, but it is vital to avoid punishing creativity when it does not result in highly successful innovations. Many new product ideas will simply not work out in the marketplace because creative and innovative processes have too many uncertainties to generate positive results every time.

An individual may have prepared herself to be creative, but an insight may not be forthcoming. Or managers may attempt to apply a developed innovation, only to recognize that it does not work. Indeed, some organizations operate according to the assumption that, if all their innovative efforts succeed, then they are probably not taking enough risks in research and development. At 3MOpens in new window, nearly 60 percent of the creative ideas suggested each year do not succeed in the marketplace.

Managers need to be careful in responding to innovative failure. If the innovative failure results from incompetence, systematic errors, or managerial sloppiness, then a firm should respond appropriately, for example, by withholding raises or reducing promotion opportunities.

People who act in good faith to develop an innovation that simply does not work out, however, should not be punished for failure. If they are, they will probably not be creative in the future.

2.    Organization Culture

A strong, appropriately focused organizational culture can be used to support innovative activity.

A well-managed culture can communicate a sense that innovation is valued and will be rewarded and that occasional failure in the pursuit of new ideas is not only acceptable but expected. In addition to reward systems and intrapreneurial activities, firms such as Apple, Google, Nintendo, Nokia, Sony, Walt Disney, Vodafone, and Hewlett-Packard are all known to have strong, innovation-oriented cultures that value individual creativity, risk taking, and inventiveness.

3.    Intrapreneurship in Larger Organizations

In recent years, many large businesses have realized that the entrepreneurial spirit that propelled their growth becomes stagnant after they transform themselves from a small but growing concern into a larger one.

To help revitalize this spirit, some firms today encourage what they call intrapreneurship. Intrapreneurs are similar to entrepreneurs, but they develop a new business in the context of a large organization.

There are three intrapreneurial roles in large organizations, including:

1. the inventory,
2. the product champion, and
3. the sponsor.

To successfully use intrapreneurship to encourage creativity and innovation, the organization must find one or more individuals to perform these roles.

Because the inventor may lack the expertise or motivation to oversee the transformation of the product or service from an idea into a marketable entity, a product champion, the second role, comes into play.

The product champion may have only limited understanding of the technological aspects of the innovation. Nevertheless, product champions are skilled at knowing how the organization works, whose support is needed to push the project forward, and where to go to secure the resources necessary for successful development.

With a sponsor in place, the inventor’s idea has a much better chance of being successfully developed.

Several firms have embraced intrapreneurship as a way to encourage creativity and innovation.

• Colgate-PalmoliveOpens in new window has created a separate unit, Colgate Venture Company, staffed with intrapreneurs who develop new products.

• General Foods developed Culinova as a unit to which employees can take their ideas for possible development.
• S. C. Johnson & SonOpens in new window established a $250,000 fund to support new product ideas, and Texas Instruments refuses to approve a new innovative project unless it has an acknowledged inventor, champion, and sponsor.

The Failure to Innovate

To remain competitive in today’s economy, organizations must be innovative. Yet, many organizations that should be innovative are not successful at bringing out new products or services or do so only after innovations created by others mature. Organizations may fail to innovate for at least three reasons.

1.    Lack of Resources

Innovation is expensive in terms of dollars, time, and energy. If a firm does not have sufficient capital to fund a program of innovation or does no currently employ the kinds of employees it needs to innovate, it may lag behind in innovation. Even highly innovative organizations cannot pursue every new product or service its employees think up.

For example, numerous other commitments in the electronic instruments and computer industry prevented Hewlett-Packard from investing in Steve Jobs and Steve Wozniak’s original idea for a personal computer. With infinite resources of money, time, and technical and managerial expertise, HP might have entered this market early. Because the firm did not have this flexibility, however, it had to make some difficult choices about which innovations to invest in.

2.    Failure to Recognize Opportunities

Because firms cannot pursue all innovations, they need to develop the capability to carefully evaluate innovations and to select the ones that hold the greatest potential.

To obtain a competitive advantage, an organization usually must make investment decisions before the innovation process reaches the mature stage. The earlier the investment, however, the greater the risk. If organizations are not skilled at recognizing and evaluating opportunities, they may be overly cautious and fail to invest in innovations that later turn out to be successful for other firms.

3.    Resistance to Change

As we discuss in a designated postOpens in new window, some organizations tend to resist change. Innovation means giving up old products and old ways of doing things. These kinds of changes can be personally difficult for managers and other members of an organization. Thus, resistance to change can slow down the innovation process.