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Strat. Change 20: 101–110 (2011)
Published online in Wiley Online Library
(wileyonlinelibrary.com) DOI: 10.1002/jsc.888 RESEARCH ARTICLE

Innovations: Principles and Strategies1

Veland Ramadani
South East European University at Tetovo, Macedonia
Shqipe Gerguri
South East European University at Tetovo, Macedonia

The best way for companies

to achieve a competitive
advantage is through
I n order for companies to innovate as much as possible it is necessary for
them to be familiar with the process of innovation and the principles on
which innovation is founded.
innovation.

There are several types of

innovation or ways in which
companies can innovate.
Innovation can be financed by
merit-based awards (grants)
and external equity, such as
business angels, venture
capital, and corporations.
The benefits may depend on
conditions and typology of
innovation such as increasing
the quality of products and
services, creating better
conditions and flexibility at
work, maintaining good
position in the market,
entering new markets,
improving the ecological
environment, and diversifying
products.
If you can’t compete on price you have to differentiate, and to differentiate you
have to innovate!
—Andy Bruce
Definition of innovation: it is not an easy task
Enterprises today act under a big pressure by other enterprises, which offer the
same or similar production or service, or they are under the pressure of the cus-
tomers who expect more and more from the product they consume. In order to
face with the new conditions and situations, enterprises are made to continuously
search for new ways of production, namely offering new products or enhancing
existing ones. In other words, they should continuously introduce innovations.
But, what in fact do innovations represent?
Innovation is a process of transforming the new ideas, new knowledge into
new products and services. Joseph Schumpeter defines innovation as an activity
which leads to new producing function or new product. For him, innovation is
(McDaniel, 2002, pp. 57–58):
• The introduction of a new good: the entrepreneur should produce, namely intro-
duce a new product which can be easily sold and which is not offered in the
market.
• The introduction of a new method of production: innovation should offer a new
scheme of production which can lead to an increased output through existing
inputs, decrease of costs per unit product, introduction of new inputs and
change of existing ones.
1
JEL classification codes: O1, O31, O40.

Copyright © 2011 John Wiley & Sons, Ltd. Strategic Change

Strategic Change: Briefings in Entrepreneurial Finance DOI: 10.1002/jsc.888
102 Veland Ramadani and Shqipe Gerguri
• The opening of a new market: innovations can increase
the sell in new regions, and also increase the number of
customers.
• The conquest of a new source of supply of raw materials or
half-manufactured goods: The raw material supplier can
often lower raw materials’ quality or increase their price
and this directly influences the quality and the selling
price of the new product. Therefore, the entrepreneur
should find an appropriate source of inputs, which are
needed for production of new products.
• The carrying out of the new organization of any industry:
Schumpeter describes this step as an entrance of the
entrepreneur in the monopoly market, where there has
been no competition previously, or as the creation of
conditions through which the entrepreneur would take
the monopoly position in the market.
Lionnet (2003, p. 6) defines innovation as a process
by which a novel idea is brought to the stage where it
eventually produces money. It is a dynamic technical,
economic and social process involving the interaction
of people with different horizons, perspectives, and
motivations. It represents a process, namely an activity
of creating a new product or service, new technology,
new organization, or enhancement of existing product
or service using existing technologic processes and
organizations.
According to the given definition, if we analyze its
separate elements, we can classify innovations in produc-
tion (development or enhancement of a specific product),
innovations in services (offering new or enhancing existing
services), innovations in process (finding of new ways of
organizing and combining inputs in the process of produc-
tion of specific products or services), and innovations in
management (creating new ways of organizing business
resources).
The importance and definition of innovations can be
explained from several points of view. From the perspec-
tive of customers, innovation means products with better
quality and better services, which in turn mean a better
Copyright © 2011 John Wiley & Sons, Ltd.
way of life. From the perspective of businesses, innovation
means sustainable growth and development, and realiza-
tion of great profit. For the employees, innovation means
new and more interesting job, which requires more mental
faculty, which results in higher salaries. From the perspec-
tive of the whole economy, innovation represents a bigger
productivity and prosperity for all.
Innovation, invention, creativity —
synonymous terms or something else
In daily conversation, terms like innovation, invention,
creativity and science are often used interchangeably. But,
for academics, researchers, and policy-makers there are
important distinctions in meaning between these terms.
Invention is the first occurrence of an idea for a new
product or process, while innovation is the first attempt
to carry it out into practice (Fagerberg et al., 2004, p. 4).
Creativity is thinking about new things, while innovation
is making new things. Creativity is an ability to develop
new ideas and ways of facing problems and possibilities,
while innovation is an ability to perform creative solutions
in order to enhance people’s lives. Hence, enterprises can
be successful only if they invent and make new things, or
if they make the old ones in a new way (Zimmerer and
Scarborough, 2002, p. 37).
Cannon (1991, p. 17) defines the following terms:
• Creativity represents an opportunity to create new
appearance, content or process by combining existing
inputs or factors of production.
• Inventiveness is a process of creating something new,
which assigns a contribution to the level of mankind
knowledge.
• Innovation is linked to the definitive marketing of the
new product, service or technologic process, which is a
result of the inventiveness.
The differences between these terms are made and
described also by Feldman (2004, pp. 3–5) as shown in
Table 1.
Strategic Change
DOI: 10.1002/jsc
 Innovations: Principles and Strategies
Innovation represents one of the essential characteris-
tics of small businesses. According to some statistical data,
in all countries, small businesses constitute the majority
of enterprises and, as a result, they face the most severe
competition. In order to survive in this competition,
they have to be innovative. Small businesses are centres
of initiatives for innovative attempts. Typical innova-
Table 1. Innovation, creativity, invention and science
Innovation versus Invention
Invention is the creation of a new concept.
Innovation is reducing that concept to practice, and
making it a commercial success.
Innovation versus Creativity
Creativity is coming up with ideas.
Innovation is bringing ideas to life.
Innovation versus Science
Science is the conversion of money into knowledge.
Innovation is the conversion of knowledge into money.
Source: Feldman (2004, pp. 3–5).
Table 2. Types of innovations
Incremental innovations
Exploits existing technology
Low uncertainty
Focuses on cost or feature improvements of existing
processes, products or services
Improves competitiveness within current markets or
industries
Source: http://www.1000ventures.com/products/ss_effective_innovation.html
Copyright © 2011 John Wiley & Sons, Ltd.
103
tions that are ascribed to small businesses include air-
conditioners, zippers, helicopters, computers, video
recorders, cameras, optical scanners, contact lenses.
In many cases, innovations are understood only in the
reductive technical/technological terms. They appear,
instead, as market and social phenomena. Many people
have developed their businesses without elaborating any
specific technological procedures. Examples of these are
newspapers, insurance certificates, and fast food (Drucker,
1993, pp. 30–33).
Types of innovations
In general, there are two types of innovations: radical and
incremental. A radical innovation focuses on products,
processes or services with unprecented performance
features, while an incremental innovation focuses on cost
or feature improvements of existing processes, products or
services (see Table 2).
According to Drucker (1993) there are four basic
types of innovation:
• Incremental Innovation — Doing more of the same
things you have been doing with somewhat better
results.
Radical innovations
Explores new technology
High uncertainty
Focuses on products, processes or services with
unprecented performance features
Creates dramatic change that transforms existing markets
or industries, or creates new one
Strategic Change
DOI: 10.1002/jsc
104 Veland Ramadani and Shqipe Gerguri
• Additive Innovation — More fully exploiting already
existing resources, such as product lines extensions, and
can achieve good results. These opportunities should
rarely be treated as high priority efforts. The risks should
be small — and they should not take resources away
from complementary or breakthrough opportunities.
• Complementary Innovation — Offering something new
and changes the structure of the business.
• Breakthrough Innovation (Radical Innovation) —
Changing the fundamentals of the business or creating
a new industry and new avenues for extensive wealth
creation.
Innovations which might help the enterprises succeed
in improving their competitive position in the market
are operational innovation, organizational innovation,
supply-side innovation, core-competence innovation,
selling-side innovation, product and service innovation
and innovation of innovation. This taxonomy is
derived from the systemic approach of innovation (see
Figure 1).
Figure 1. Systemic approach of innovation. Source: Fingar
(2006, pp. 78–89).
Copyright © 2011 John Wiley & Sons, Ltd.
Sources of innovation
An important issue regards where innovations originate.
Which are the innovation sources or ideas for potential
success? IBM made a study about the potential sources of
innovations, which was based on telephone interviews
with over 750 chief executive officers (CEOs) and busi-
ness leaders. This study found ‘that 76% of CEOs ranked
business partner and customer collaboration as top sources
for new ideas. This greatly contrasts with internal R&D,
which ranked eighth as a source for new ideas — cited by
only 14% of CEOs’. The top sources can be considered
sources outside of the company (De Ridder, 2008). There
are the IBM’s top sources of innovation: employees, busi-
ness partners, direct customers, consultants, competitors,
associations, internal sales and service unites, internal
R&D, academia, think-tanks and laboratories or other
institutions. Another research shows that innovations
come from inside the company (28.4%), suppliers
(26.4%), customers (25.8%), competitors (24.9%), and
exhibitions (24.6%). Such innovation sources as universi-
ties and other non-profit R&D institutions scored just
3.7% and 2.9%, respectively (Ukrainski and Varblane,
2005, pp. 20–21).
Another research reveals these other sources of inno-
vations (Wright, 2011):
1. Watch the market carefully. Unexpected market or
industry structure changes can provide potential inno-
vative opportunities. Changes in demographics, social
moods, values, norms and lifestyle, may require inno-
vative solutions to emerging needs as well. For example,
Johnson & Johnson company responded to declining
birth rates in western markets by encouraging adults
to use their products for babies.
2. Existing customers are often a valuable source of innova-
tion. Many researches confirmed that customers repre-
sent very important source of innovations, i.e., they
may provide valuable data on unmet needs and point
to innovative solutions to existing problems. Also,
disruptions in a customer’s industry may yield
Strategic Change
DOI: 10.1002/jsc
 Innovations: Principles and Strategies
circumstances where innovative product or services
may be just the answer to new or emerging needs. If
the company works cooperatively with leading or
innovative customers, it may foster innovation.
3. Suppliers can also provide valuable input. Suppliers are
interested in working with their market-leading cus-
tomers. Therefore, the development of strong partner-
ships with key suppliers will facilitate open discussions
addressed at identifying emerging business needs and
possible innovative solutions that integrate the best of
both businesses.
4. Learn from experience. The company or management
team experiences could be a valuable source of innova-
tion. Unexpected success and failures can provide new
and potentially important information. The company
does not need to sweep failures under the carpet, but
can use them to explore what they may learn in order
to create innovation in current or new markets.
Principles and strategies of innovation
The great researcher and professor in the field of manage-
ment and entrepreneurship Peter F. Drucker (1993, pp.
134–138) lists several principles which should be respected
by innovators. He has grouped these principles in ‘Do’s’
and ‘Don’ts’ in the process of innovation.
The ‘Do’s’ are listed as follows:
• Innovation starts with analysis of opportunities. It starts
with the seven opportunities for innovation. They are
unexpected events, disagreements in the process,
requirements of the process (the need for a new process),
and unexpected changes in industry or market struc-
ture, demographic changes, changes in perception,
importance and new knowledge.
• Innovation is a conceptual and perceptual activity. The
second imperative of the innovation is to go out and
see, ask and hear. Successful innovators work analyti-
cally on the question regarding what should the
innovation be in order to satisfy an opportunity.
Copyright © 2011 John Wiley & Sons, Ltd.
105
Afterwards, they go out and see the customers/users and
find out what their expectations, their values, and their
needs are.
• Innovation, in order to be successful, should be simple and
focused. If the innovation is not simple, it will not
succeed. Everything new gets into trouble: if it is
complicated, then it cannot be corrected or solved. All
the successful innovations are surprisingly simple. In
fact, the greatest acknowledgment for an innovation is
when people say: ‘This is so obvious. Why didn’t I think
of this?’
• Innovation should start as ‘small’. Innovation should not
be grandiose. It should hold up to something specific
and concrete. In the beginning, it should only require
a small amount of money, some people and a small
limited market.
• A successful innovation aims towards leadership. If an
innovation at the very beginning does not aim towards
leadership, it is highly probable that it will not be
‘innovative’ enough.
The ‘Don’ts’ are listed as follows:
• Innovations should not be very ‘smart’. Innovations should
be led by simple people. Everything that is done in a
very ‘smart’ way, either for the designing or the comple-
tion, is set to failure by high probability.
• Many things should not be done at a time. Innovations
have a need for concentrated energy and common
effort. They also require that people who effectuate the
innovation should have mutual understanding.
• Don’t innovate for the future, but for the present. One
innovation can have a long-term impact, but it demands
a longer time to reach its maturity. It should be a solu-
tion for the problems in the present.
Also we can count on these principles that give life to
the process of innovation (Ambler, 2007):
1. Innovation starts when people convert problems to ideas.
New ideas are born through questions, problems and
obstacles. The process of innovation is indebted to the
Strategic Change
DOI: 10.1002/jsc
106 Veland Ramadani and Shqipe Gerguri
trouble that comes about when we are surrounded by
that which is not solved, not smooth, and not simple.
Therefore, in order for the innovation process to flour-
ish, it needs a climate that encourages inquiry and
welcomes problems.
2. Innovation needs a system. All organizations have
innovation systems. Some are formal, designed by the
leadership, and some are informal, taking place outside
established channels. Informal channels are untidy and
inefficient, yet innovation is always associated with them.
3. Passion is the fuel, and pain is the hidden ingredient.
Ideas do not propel themselves; passion makes them
go. Passion, in addition to talent and skill, is a valuable
company asset. Passion is what transforms other
resources into profits, but it never shows up on a
balance sheet. Unfortunately, there seems to be some
universal law that says when pursuing a passion or
following a dream, pain is part of the process. Innova-
tion leaders need to take the pain with the passion and
learn to manage both effectively.
4. Co-locating drives effective exchange. Co-location refers
to physical proximity between people. It is a key for
building the trust that is essential to the innovation
process. It also increases the possibility for greater
exchange of information, cross-fertilization of ideas,
and stimulation of creative thinking in one another
and critique of ideas during their formative stage.
5. Differences should be leveraged. The differences that nor-
mally divide people — such as language, culture, race,
gender and thinking and problem solving styles — can
be a boon to innovation. When differences are used
constructively and people move beyond fear, suspi-
cion, mistrust and prejudice, differences can be lever-
aged to enhance and sustain the innovation process.
The 2007 Booz Allen Hamilton Report argues that
statistical analysis of a representative sample of global
innovation 1000 companies divided them into three dis-
tinct categories of innovation strategy (Jaruzelski and
Dehoff, 2007, pp. 4–5):
Copyright © 2011 John Wiley & Sons, Ltd.
1. Need Seekers companies focus on being first to bring
new products to markets and base their R&D efforts
on getting direct, proactive input from customers.
They engage actively current and potential customers
to shape new products, services and processes.
2. Market Readers distinguished themselves through their
preferences for incremental change and being fast fol-
lowers into markets. They watch markets carefully and
focus on creating values through incremental change.
3. Technology Drivers focus on a technology forward
approach to innovation, while remaining less con-
cerned with direct customer input into the process.
They follow the direction suggested by their techno-
logical capabilities, leveraging their investment in
research and technology to drive breakthrough innova-
tion or incremental change.
There were significant performance differences
between the three categories: R&D spending was 40%
greater in the Need Seekers group. Each group showed a
similar mean values for return on assets, but the standard
deviation for Technology Drivers was 40% higher, indi-
cating that this group pursue a riskier innovation strategy
than the two other categories.
Benefits from innovation
Innovations can bring many benefits to the companies.
The benefits from innovation reflect the reasons why com-
panies innovate. To reveal the types of benefits that inno-
vations brings to companies, we will use the empirical data
from our research, which was carried out during January–
April 2010 in 119 small- and medium-sized enterprises
from different cities of the Republic of Macedonia.
Figure 2 shows that improving the quality of products
and services offered to customers is the first ranked benefit
from innovation. This benefit was mentioned from 27%
of respondents. Further benefits are ranked as follows:
creating better conditions at work (by 18% of respon-
dents), maintaining the existing position in the market
Strategic Change
DOI: 10.1002/jsc
 Innovations: Principles and Strategies
Figure 2. Benefits from innovation. Source: own research.
(17%), entering new markets (13%), creating flexibility
at work (9%), improving the ecological environment
(5%) and diversification of product range (2%).
Eurostat’s research on innovation have concluded that
the most important benefits rising from innovation are
better quality, more choice, and higher turnover. The find-
ings reveal that 38% of the innovative enterprises consid-
ered ‘improved quality in goods and services’ a highly
important effect, followed by ‘increased range of goods
and services’ and ‘entered new markets or increase market
share’ scored 34% and 29% respectively. In addition, up
to 25% of the innovative enterprises classified as highly
important benefits concern the internal organization of
the enterprise, whereas ‘improved flexibility of produc-
tion/service provision’ may lead to better development of
the enterprise performance. The same benefit can be seen
from the ‘increased capacity of production/service provi-
sion’. Bearing in mind that if more is produced, more can
be sold, enterprises can replace old by new and through
highly productive machinery. The benefits consisting of
met regulation requirements, reduced labor costs per unit
output, reduced environmental impacts or improved
health and safety, reduced materials and energy per unit
Copyright © 2011 John Wiley & Sons, Ltd.
107
output were chosen as highly important by less than 20%
of the innovative enterprises. The main reason why these
benefits are not as important is because they are forced by
regulatory requirements or they are considered more or
less collateral benefits of innovation (Eurostat, 2008,
p. 96).
Financing sources of innovations
Innovation can be supported by two major forms of financ-
ing: merit-based awards (grants) and external equity, such
as: business angels, venture capital and corporations.
Merit-based awards (grants) can be provided by public
services, i.e., government institutions or agencies. With
this form of financing, funds are received unconditionally,
which means they do not have to be repaid if the enter-
prise is not successful. The given grants are used for enter-
prises in the seed and start-up stage of development. In
addition, these funds can be an important reference for
these enterprises when they subsequently look for addi-
tional financial capital for their development (United
Nations Economic Commission for Europe, 2009, pp.
5–6).
Strategic Change
DOI: 10.1002/jsc
108 Veland Ramadani and Shqipe Gerguri
The financing through external equity means receiving
equity stakes in exchange for capital. Typical providers of
external equity capital are business angels, venture capital
firms and corporations. These types of investors are called
‘smart money’ considering that, besides the financial
means, they provide valuable expertise and networking
opportunities to the innovative enterprises.
• Business angels. Business angels represent private inves-
tors who, during their active work, have gained wealth
and experience and are ready to invest in new enter-
prises in order to help young entrepreneurs and profit
simultaneously (Ramadani, 2009, p. 250). According
to Sohl (2003), there are 300,000 to 350,000 active
business angels in the United States, who invest $30
billion per year in around 50,000 innovative projects.
In the United Kingdom, there are 20,000–40,000 busi-
ness angels who invest £0.5–1 billion per year in 3000–
6000 companies.
• Venture capital. Venture capital represents the financial
funds, usually in the form of equity capital and know-
how management, which are invested by individuals
and institutions in small and medium enterprises,
which are not listed on the stock exchange and have
high growth potential. According to Lerner et al. (2005),
venture capital represent dominant form of financing
of technology companies in the United States and have
a significant impact on the development of innovation.
Its contribution has two dimensions: to accelerate
growth and secure long-term success (Dobloug, 2008,
p. 22).
• Business incubators. Business incubators played a crucial
role in innovative idea generation and development in
the Silicon Valley (Kaplan, 1999). A lot of research has
shown that business incubators can be an effective tool
for supporting innovation and creation of new business.
Business incubators can also reduce small business
failure rates substantially (Jawahar, 2005).
• Corporations. The main objective of most sources of
financing is obtaining financial returns. Corporations’
Copyright © 2011 John Wiley & Sons, Ltd.
invesments typically have a combination of financial
and strategic objectives. In general, a strategic mission
of corporations is to help the growth of the business
through identifying new ideas or technologies, develop
new products or processes, and enter new markets or
enhance existing businesses. The year 2000 represented
the peak of venture capital investments, when more
than $100 billion was invested. From this amount,
around 16% of investment was made by corporations.
After this year, venture capital investments stabilized at
around $20 to $25 billion per year, and corporations’
investments ranged around 6% to 8% of total venture
capital investment (see more MacMillan et al., 2008).
A research conducted in Germany during the period
2004–2006 shows that when the firms were asked to state
which sources of funding were used to finance innovation
projects, the data revealed the following (Spielkamp and
Rammer, 2009):
1. Eighty-seven per cent of the firms finance innovation
projects from funds generated by ongoing business
operations, such as profits, sales, working capital, or
extended payment terms (cash flow financing).
2. The second important means of funding for financing
innovation in manufacturing and services is debt
financing by using credit lines and current account
advances.
3. Standard bank loans are ranked as a third financing
source of innovation, even though credit financing
implies a couple of disadvantages for firms, e.g., depen-
dency on lender, high interest rates, and concerns
about securities.
4. Stock markets and private equity funds represent
another important source of financing. According to
the empirical data the admission of new shareholders,
participation of other enterprises, shareholders’ loans,
dormant equities, and participation certificates have a
similar importance as bank loans but play a minor role
compared to internal funding.
Strategic Change
DOI: 10.1002/jsc
 Innovations: Principles and Strategies
5. Public funds in form of loans, allowances and grants
can be used to develop and launch innovations. On
average, 11% of all firms utilize public subsidies for
financing innovation projects, and 5% absorb public
loans.
Conclusion
Innovations represent an activity of creating a new product
or service, new technologic process, new organization, or
enhancement of existing product or service using existing
technological processes and organizations. According to the
given definition, if we analyze its separate elements, we can
classify innovations in production — development or
enhancement of a specific product, innovations in ser-
vices — offering new or enhancing of existing services,
innovations in processes finding new ways of organizing
and combining inputs in the process of production of spe-
cific products or services, and innovations in management
creating new ways of organizing business resources.
The importance and definition of innovations can be
explained from several aspects. From the viewpoint of
customers, innovation means products with better quality
and better services, which together bring about a better
way of life. From the aspect of businesses, innovation
means sustainable growth and development, realization of
profits. For the employees, innovation means new and
more interesting jobs, which require mental faculty result-
ing in higher salaries.
Our results show that improving the quality of prod-
ucts and services offered to customers is the first ranked
benefit from innovation. Further benefits are ranked in
the following order: creating better conditions at work,
maintaining the existing position in the market, entering
new markets, creating flexibility at work, improving the
ecological environment and diversification of products.
Innovation can be supported by two major forms of
financing, consisting of merit-based awards (grants) and
external equity such as business angels, venture capital and
corporations.
Copyright © 2011 John Wiley & Sons, Ltd.
109
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Hall: Upper Saddle River, NJ.

BIOGRAPHICAL NOTES

Veland Ramadani is Assistant Professor in Shqipe Gerguri is a Teaching Assistant in South-

South-East European University in Tetovo, East European University in Tetovo, Macedonia.
Macedonia. His research interests include Her research interests include innovation,
entrepreneurship and small business management. technology, and strategic management.

Correspondence to:
Veland Ramadani
South East European University at Tetovo
Faculty of Business and Economy, 1200 Tetovo,
Macedonia
e-mail: v.ramadani@seeu.edu.mk

Copyright © 2011 John Wiley & Sons, Ltd. Strategic Change

DOI: 10.1002/jsc

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