Amsterdam Business School

Innovation Management

Lecture 1
CHAPTER 1: INTRODUCTION

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Innovation

 Innovation is the implementation of creative

ideas into some new device or process.
 Requires combining creativity with
resources and expertise.

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The most innovative companies

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 OK But why technological innovations?
 Technological innovation now the single most
important driver of competitive success in
many industries
 Many firms earn over one-third of sales on products
developed within last five years
 Product innovations help firms protect margins by
offering new, differentiated features.
 Process innovations help make manufacturing more
efficient.

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Importance of Technological Innovation
 Advances in information technology have enabled faster
innovation
 CAD/CAM systems enable rapid design and shorter
production runs

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Importance of Technological Innovation
 Importance of innovation and advances in information
technology have lead to:
 Shorter product lifecycles (more rapid product
obsolescence)
 More rapid new product introductions
 Greater market segmentation

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Impact on Society
 Innovation enables a wider range of goods and
services to be delivered to people worldwide
 More efficient food production, improved medical
technologies, better transportation, etc.
 Increases Gross Domestic Product by making labor
and capital more effective and efficient
 However, may result in negative externalities,
 E.g., pollution, erosion, antibiotic-resistant bacteria

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 Innovation by Industry:
The Importance of Strategy
 Successful innovation requires carefully crafted
strategies and implementation processes.
 Innovation funnel
 Most innovative ideas do not become successful new
products.
 E.g., The New Product Development Funnel in Pharmaceuticals

5,000 125 2-3 drugs tested 1 drug Rx

Compounds Leads

Discovery & Preclinical Clinical Trials Approval

3-6 years 6-7 years ½-2 years Innovation Management / F. Situmeang 13
CHAPTER 2: SOURCES OF
INNOVATION
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Overview
 Innovation can arise from many different sources and the
linkages between them.

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 Creativity: The ability to produce work that is
useful and novel.
 Individual creativity is a function of:
 Intellectual abilities (e.g., ability to articulate ideas)
 Knowledge (e.g., understand field, but not wed to
paradigms)
 Style of thinking (e.g., choose to think in novel ways)
 Personality (e.g., confidence in own capabilities)
 Motivation (e.g., rely on intrinsic motivation)
 Environment (e.g., support and rewards for creative
ideas)

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Creativity
 Individual creativity:
 Personality (e.g., confidence in own capabilities)
Klaas Knot: “Be open to everyone. Be efficient in
conversations.”
 Motivation (e.g., rely on intrinsic motivation)
Luhut Pandjaitan: “Happiness is not determined by what you
have, but by what you give.”
 Environment (e.g., support and rewards for creative ideas)
Clayton Christensen: “How will you measure your life?”
Blessed is the (wo-)man who does not walk in the counsel of
the wicked or stand in the way of sinners or sit in the seat of
mockers. But his delight is in the law, and on the
law (s)he meditates day and night. (Psalm 1:1)
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Innovation by Individuals

 Inventors
1. Have mastered the basic tools and operations of the field in which they
invent, but they will have not specialized solely on that field.
2. Are curious, and more interested in problems than solutions.
3. Question the assumptions made in previous work in the field.
4. Often have the sense that all knowledge is unified. They will seek global
solutions rather than local solutions, and will be generalists by nature

 Such individuals may develop many new devices or processes

but commercialize few.

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 Dean Kamen
 The Segway HT: A self-balancing, two-wheeled
scooter.
 Invented by Dean Kamen
 Described as tireless and eclectic
 Kamen held more than 150 U.S. and foreign patents
 Has received numerous awards and honorary degrees
 Never graduated from college
 To Kamen, the solution was not to come up with a new
answer to a known problem, but to instead reformulate the
problem

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Innovation by Users
 Users have a deep understanding of their own
needs, and motivation to fulfill them.
 While manufacturers typically create
innovations to profit from their sale, user
innovators often initially create innovations
purely for their own use.
 E.g., Laser sailboat developed by Olympic
sailors; Lego Ideas

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Lego Ideas
 Website (online forum) run by Lego Group
 User can upload ideas for lego set
 Other users support and comment on the idea
 User refine the idea based on other users
comments
 After gaining sufficient support, Lego will pick
up the idea and work together with the user to
develop the end product
 The idea becomes an official Lego product, the
user receives 1% of revenue
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Organizational Creativity
 Organizational Creativity is a function of:
 Creativity of individuals within the organization
 Social processes and contextual factors that shape how those
individuals interact and behave
 Methods of encouraging/tapping organizational
creativity:
 Idea collection systems (e.g., suggestion box; Google’s idea
management system)
 Creativity training programs
 Culture that encourages (but doesn’t directly pay for)
creativity.

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Organizational Creativity

 So should we encourage creativity?

 We should encourage employee choice and

strengths
 Ideas require intentional effort and

oversights
 Cross-departmental collaboration

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Case Study: Google
 Inspiring Innovation at Google
 Google uses a range of formal and informal
mechanisms to encourage its employees to
innovate, including:
 20% Time (all engineers are encouraged to spend 20% of their
time working on their own projects)
 Recognition awards
 Google Founders’ Awards
 Ad sense Ideas Contest
 Innovation reviews

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Innovation by organization

 Research and Development by Firms

 Research refers to both basic and applied research.
 Basic research aims at increasing understanding of a topic or field
without an immediate commercial application in mind.
 Applied research aims at increasing understanding of a topic or field
to meet a specific need.
 Development refers to activities that apply knowledge to
produce useful devices, materials, or processes.

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Innovation by organization
 Science Push approaches suggest that innovation
proceeds linearly:
 Scientific discovery  invention  manufacturing 
marketing

 Demand Pull approaches argued that innovation

originates with unmet customer need:
 Customer suggestions → invention → manufacturing

 Most current research argues that innovation is not so

simple, and may originate from a variety of sources
and follow a variety of paths.

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Firm Linkages with Customers, Suppliers,
Competitors, and Complementors
 Most frequent collaborations are between firm
and their customers, suppliers, and local
universities.

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Firm Linkages with Customers, Suppliers,
Competitors, and Complementors
 External versus Internal Sourcing of Innovation
 External and internal sources are

complements
 Firms with in-house R&D also heaviest users of
external collaboration networks
 In-house R&D may help firm build absorptive capacity
that enables it to better use information obtained
externally.

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Research by Government and
Universities
 Many universities encourage research that leads to
useful innovations
 Bayh-Dole Act of 1980 allows universities to collect
royalties on inventions funded with taxpayer dollars
 Led to rapid increase in establishment of

technology-transfer offices.
 Revenues from university inventions are still very
small, but universities also contribute to innovation
through publication of research results.
 Think of Horizon 2020
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Research by Government and
Universities
 Governments invest in research through:
 Their own laboratories

 Science parks and incubators

 Grants for other public or private research

organizations
 Example: The internet and GPS (US DARPA
research)

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Private non-profit organizations

 Private Nonprofit Organizations

 Many nonprofit organizations do in-house R&D,
fund R&D by others, or both.
 Example: Solar Road, Hybrid Truck and Bus
Engines (Nederlandse Organisatie voor
Toegepast Natuurwetenschappelijk Onderzoek
(TNO))

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 GERD Share of total (%)
Country PPP ($billions) Business Government Higher education Private nonprofit
R&D performance
United States (2011)a 429.1 68.5 12.7 14.6 4.3
China (2011) 208.2 75.7 16.3 7.9 0.0
Japan (2011) 146.5 77.0 8.4 13.2 1.5
Germany (2011) 93.1 67.3 14.7 18.0 **
South Korea (2011) 59.9 76.5 11.7 10.1 1.6
France (2011) 51.9 63.4 14.1 21.2 1.2
United Kingdom (2011) 39.6 61.5 9.3 26.9 2.4
R&D funding sources
United States (2011)a, b 429.1 58.6 31.2 6.4 3.8
China (2011) 208.2 73.9 21.7 NA 1.3
Japan (2011) 146.5 76.5 16.4 6.6 0.5
Germany (2010) 93.1 65.6 30.3 0.2 3.9
South Korea (2011) 59.9 73.7 24.9 1.2 0.2
France (2010) 51.9 53.5 37.0 1.8 7.6
United Kingdom (2011) 39.6 44.6 32.2 6.2 17.0

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Innovation in Collaborative networks
 Collaborations include (but are not limited to):
 Joint ventures
 Licensing and second-sourcing agreements
 Research associations
 Government-sponsored joint research programs
 Value-added networks for technical and scientific
exchange
 Informal networks
 Collaborative research is especially important in
high-technology sectors where individual firms
rarely possess all necessary resources and
capabilities Innovation Management / F. Situmeang 34
Technology Cluster
 Technology Clusters are regional clusters of firms
that have a connection to a common technology
 May work with the same suppliers, customers, or
complements.
 Agglomeration Economies:
 Proximity facilitates knowledge exchange.
 Cluster of firms can attract other firms to area.
 Supplier and distributor markets grow to service
the cluster.
 Cluster of firms may make local labor pool more valuable by giving
them experience.
 Cluster can lead to infrastructure improvements (e.g., better
roads, utilities, schools, etc.)
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Technology cluster
 Likelihood of innovation activities being geographically
clustered depends on:
 The nature of the technology
 e.g., its underlying knowledge base or the degree to which it can be
protected by patents or copyright, the degree to which its
communication requires close and frequent interaction;
 Industry characteristics
 e.g., degree of market concentration or stage of the industry lifecycle,
transportation costs, availability of supplier and distributor markets;
and,
 The cultural context of the technology
 e.g., population density of labor or customers, infrastructure
development, national differences in how technology development is
funded or protected.
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Technology Spillover
 Technological spillovers occur when the benefits
from the research activities of one entity spill
over to other entities.
 Likelihood of spillovers is a function of:
 Strength of protection mechanisms (e.g., patents, copyright, trade
secrets)
 Nature of underlying knowledge base (e.g., tacit, complex)
 Mobility of the labor pool

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Knowledge Broker
 Some firms (or individuals) play a pivotal role in the
innovation network – that of knowledge brokers.
 Knowledge brokers are individuals or firms that
transfer information from one domain to another in
which it can be usefully applied.
 Digital Business Specialization, Big Data MBA at ABS are
good examples.
 By serving as a bridge between two separate groups of
firms, brokers can find unique combinations of knowledge
possessed by the two groups.
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CHAPTER 3:
TYPES AND PATTERNS OF
INNOVATIONS
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Product versus Process Innovation
 Product innovations are embodied in the outputs of an
organization – its goods or services.
 Process innovations are innovations in the way an
organization conducts its business, such as in techniques of
producing or marketing goods or services.
 Product innovations can enable process innovations and vice
versa.
 What is a product innovation for one organization might be a
process innovation for another
 E.g., UPS creates a new distribution service (product innovation) that
enables its customers, Amazon, to distribute their goods more widely
or more easily (process innovation)

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Radical versus Incremental Innovation
 The radicalness of an innovation is the degree to
which it is new and different from previously existing
products and processes.
 Incremental innovations may involve only a minor
change from (or adjustment to) existing practices.
 The radicalness of an innovation is relative; it may
change over time or with respect to different
observers.
 E.g., digital photography a more radical innovation for
Kodak than for Sony. Electric cars is a more radical innovation
for Bugatti than for Tesla.
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Competence-Enhancing versus
Competence-Destroying Innovation
 Competence-enhancing innovations build on the
firm’s existing knowledge base
 E.g., Intel’s Pentium 4 built on the technology for Pentium III.
 Competence-destroying innovations renders a
firm’s existing competencies obsolete.
 E.g., digital photography rendered Fuji Film’s expertise
obsolete.
 Whether an innovation is competence enhancing or
competence destroying depends on the perspective
of a particular firm.
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 Architectural versus Component Innovation
 A component innovation (or modular
innovation) entails changes to one or more
components of a product system without
significantly affecting the overall design.
 E.g., adding gel-filled material to a bicycle seat
 An architectural innovation entails changing the
overall design of the system or the way
components interact.
 E.g., transition from high-wheel bicycle to safety bicycle.
 Most architectural innovations require changes
in the underlying components also.
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Technology S-Curves
 Both the rate of a technology’s improvement, and its rate of
diffusion to the market typically follow an s-shaped curve.
 S-curves in Technological Improvement

Technology improves slowly

at first because it is poorly
understood.
Then accelerates as
understanding
increases.
Then tapers off as
approaches limits.

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3-44
Example Microprocessor

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Technologies do not always get to reach
their limits
 May be displaced by new, discontinuous technology.
 A discontinuous technology fulfills a similar market need by means of an
entirely new knowledge base.
 E.g., switch from carbon copying to photocopying, or vinyl
 records to compact discs
 Technological discontinuity may initially have lower
performance than incumbent technology.
 E.g., first automobiles were much slower than horse-drawn carriages.
 Firms may be reluctant to adopt new technology because
performance improvement is initially slow and costly, and they
may have significant investment in incumbent technology

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S-Curves in Technology Diffusion
 Adoption is initially slow because the technology is unfamiliar.
 It accelerates as technology becomes better
understood.
 Eventually market is saturated and rate of new adoptions
declines.
 Technology diffusion tends to take far longer than
information diffusion.
 Technology may require acquiring complex knowledge or experience.
 Technology may require complementary resources to make it valuable
(e.g., cell phones not valuable without battery and display screen
technologies).

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S-Curves as a Prescriptive Tool
 Managers can use data on investment and performance of their
own technologies or data on overall industry investment and
technology performance to map s-curve.
 While mapping the technology’s s-curve is useful for gaining a
deeper understanding of its rate of improvement or limits, its use
as a prescriptive tool is limited.
 True limits of technology may be unknown
 Shape of s-curve can be influenced by changes in the market, component
technologies, or complementary technologies.
 Firms that follow s-curve model too closely could end up switching
technologies too soon or too late.

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Diffusion of Innovation and Adopter
Categories

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 Technologies often improve faster than customer requirements
demand
 This enables low-end technologies to eventually meet the needs
of the mass market.

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 From 1980 to 2011, Microsoft was the dominant
personal computer operating system. However,
operating systems for smartphones and tablets were
improving to the point where they could replace many
personal computer functions.
 In 2015, Apple’s iPhone operating system and
Google’s Android collectively controlled over 90% of
the market for smartphone purchases. Microsoft’s
Windows Phone held a share of only 3%.
 As tablets based on these systems became fully
functional computers, would Microsoft’s dominance
evaporate?
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Technological change tends to be cyclical
 Each new s-curve ushers in an initial period of
turbulence, followed by rapid improvement, then
diminishing returns, and ultimately is displaced by a
new technological discontinuity.

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 Technology cycles
• A dominant design always rose to command the majority of
market share unless the next discontinuity arrived too early.
• The dominant design was never in the same form as the
original discontinuity, but was also not on the leading edge of
technology. It bundled the features that would meet the
needs of the majority of the market.
• During the era of incremental change, firms often cease to
invest in learning about alternative designs and instead focus
on developing competencies related to the dominant design.
• This explains in part why incumbent firms may have difficulty
recognizing and reacting to a discontinuous technology.

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Phases on Innovation and Technological
Developments

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Next week

 Defining a strategic direction

 Choosing innovative projects
 Collaboration strategies

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