Globalisation,

Innovation and
Sustainability

Lecture 7: Managing Innovation

Learning Objectives
 Recognize the sources of innovations
 Understand the innovation strategy and the
different types
 Explore the process of innovation flow within a firm
What is innovation?
Defining Innovation
 Creating Value from ideas.

 It is not just invention. It is ideas in practice or applied.

 ‘The process of turning opportunity into new ideas and of putting these into widely
used
practice’ (Bessant and Tidd, 2013)

 Innovation is the successful exploitation of new ideas (DTI)

 ‘Innovation includes the scientific, technological and commercial introduction of a new
(or improved) product or new (or improved) production process or equipment’
(Dodgson, 2000)
 Innovation is about taking risks and managing change (EU
Innovation is not just products

• Innovation is the “creation of substantial new

value for customers and the firm by creatively
changing one or more dimensions of the
business.
What are the Sources of Innovation
7
Where businesses innovate
• Innovation can take different forms:

• Product innovation’ –
• business makes changes to its products/services

• ‘Process innovation’ –
• The business alters the way its products and services are created and
offered.
 Where businesses innovate
• Position innovation’ –
• The business repositions the offering and perception of their
products/services

• ‘Paradigm innovation’ –
• The business changes the core and underlying mental models that
underpins its activities. E.g the shift to low-cost airlines, provision of
online insurance and other financial services, etc

• Business Model Innovation-

• The business changes how it extracts value from what it creates.
• E.g Netflix moving to subscription based model.
Why does Innovation Matter
 Competition and competitive advantage is driven by change
 Competitive advantage through innovation derives from doing
novel things, making existing things better or cheaper
 Innovation matters- survival and growth
 Innovative firms tend to be more successful than non-innovative
firms
 Innovation enables smaller firms to challenge dominant firms
 Innovation also allows firms to create social value e.g social
entrepreneurship.
Innovation Strategy
• “Strategy is the long-term direction of an organisation, formed by
choices and actions about its resources and scope, in order to create
advantageous positions relative to competitors and peers in
changing environmental and stakeholder contexts”.
 Why innovation strategy?
• The conventional view of strategy is one of matching
internal resources with external opportunities and threats.
• Success depends on acute anticipation and response to
market trends.
• Long term survival requires the capacity to deal with
environmental disequilibrium through innovation.
Why innovation strategy?
• At the heart of an innovation strategy are 3 core
questions:
• Analysis – what could we do?
• Selection – what are we going to do (and why)?
• Implementation – how are we going to do it?
Innovation Strategy
• Two important aspects of innovation strategy:
• Content: the content of innovation strategy which involves decisions
about the organization’s vision, innovation type, approach to
innovation, which strategy to adopt given the state of the external
environment, and the competencies required to successfully
implement the strategy.

• Process: the actual steps involved in developing and implementing

the innovation strategy.
Vision
• Clear and compelling vision of the organisation

• Values- who are we, what do we believe in , and what is acceptable

behaviour?

• The vision of the organisation should drive the type of innovation it pursues.

• Examples:
• Tesla’s Vision is to “create the most compelling car company of the 21st
century by driving the world's transition to electric vehicles”
Strategic Analysis of external and internal
environment
• What are the external factors that affect our business? PESTLE?
Porter’s Diamond?

• SWOT- what are our strengths and weaknesses and the opportunities
they present and threats we face?
Strategic Analysis of external and internal
environment
• What about our resource portfolio?
• What are the resources and capabilities and competencies we have
and where to deploy them?

• What resources and capabilities and competencies do you think Tesla

needs to achieve its vision and innovation strategy?
Where to Innovate
• The 4Ps of innovation
Innovation Strategies
Strategies based on posture or timing

• These are strategies based on the organization posture to either be at

the forefront of innovation or follow innovative peers.

• Innovation leadership or followership strategies

Strategies based on posture or timing

• Innovation leadership or Pioneering (or first mover) strategy

• organizations that produce and introduce new, innovative products or
services to the market. Risky and expensive but reward high.

• Firms aim at being the first to the market based on technological leadership.
• Requires strong corporate commitment to creativity and risk taking.
• Has close linkages to major sources of relevant new knowledge.
• Has close links to the needs and responses of customers.
Strategies based on posture or timing

• Innovation followership
• not first to market but allow others to innovate and wait for the most opportune
time to enter the market.
- An early follower – or fast follower.
- Simply a follower – in step with majority of the competitors.
- A late follower – also known as a late entrant.

• Firms aim at being late to the market based on imitating (learning) from the experience
of technological leaders.
• Requires strong corporate commitment to competitor analysis and intelligence.
• Committed to reverse engineering, cost cutting, and learning.
open innovation vs close innovation
strategies
Open innovation vs close innovation strategies
• Do we source enough good ideas from outside the
firm?

• Henry Chesbrough in 2003 book, Open Innovation:

The New Imperative for Creating and Profiting from
Technology
• He argued firms should be more open to the flow of
ideas outside of the firm.
What do we mean by open innovation?

‘Open innovation is a paradigm that assumes that firms can and should use external and
internal ideas, and internal and external paths to market’ (Chesbrough, 2003)

• Principles:
 Sourcing knowledge from outside the firm
 Co-ordinating external relationships
 Partnering around knowledge input and outputs
 IP and licensing agreements
CLOSED VS OPEN
External Innovation Network
• In a world of increasing global knowledge flows, innovation management is
increasingly challenged to access and relate to the right knowledge sources to
ensure innovation. Collaborating with appropriate partners that possess
heterogeneous and tacit knowledge are truly challenging tasks for even the most
experienced innovation managers.

• Knowledge collaboration with different external sources can affect

firms’ innovation

- How do MNEs manage and acquire innovation through external knowledge sources
 • Innovation sources through
internal innovation • open innovation
networks • External sources
• Knowledge sharing

Subsidiary 1
1. industry-based
partners
Acquire innovation
sources via external 2. Science-based
networks collaboration
MNEs partners
Subsidiary 2
(Home (Host country)
country) 3. Others – trade fairs,
scientific
publications/professi
onal & industry
Subsidiary associations
External Network: Industry-based collaboration in R&D

Who are they Benefit

• Suppliers, • Closely observe market trends
• competitors, • Acquire new technological skills
• clients, • Expand innovation networks
• consultants • Contribute to a better innovation
• commercial organisation performance by collaborating with
different types of industry partners
(private organisations)

PFIZER AND MERCK TO COLLABORATE ON

INNOVATIVE ANTI-CANCER COMBINATION STUDIES
External Network: Science-based knowledge sources

Who are they Why doing so

• By collaborating with science-based partners, R&D
teams gain access to tacit scientific knowledge
• Universities (fundamental and basic knowledge)
• Public Research • Quickly build on the latest research findings
institutions • Gain inexpensive and low risk source of specialist
knowledge
• Refine existing technologies

* Science-based partnerships have been growing in scale and scope over times
http://www.pgconnectdevelop.com/
Disruptive Innovative Strategy
When good firms die! Disruptive innovation.
• Why do ‘well-managed companies that have their
competitive antennae up, listen astutely to their customers,
invest aggressively in new technologies … still lose market
dominance’ (Christensen, 1997)

• How can firms become a victim of their own success?

• Firms which are very good at improving the performance of

existing products to meet existing customer needs may fail
to capitalise on new architectures to meet new applications
Disruptive Innovative Strategy
Sustaining and disruptive innovations
• Christensen (1997) offer a distinction between sustaining and
disruptive innovation.

• Sustaining innovations improve the performance of an

established product along the dimensions of performance that
mainstream customers in major markets have historically valued.
 The focus is on making better products or service for higher
margins to already existing market.
 This is the incremental progress that all good companies aim at.
Disruptive Innovation
• In many industries, the incumbents or established businesses focus on
sustaining innovations. They improve their products and services for their
most profitable customers.

• Disruptive innovation happens when new businesses aim not to compete

with established business at their turf.

• Disruptive companies are not focused on creating breakthrough

technologies that make good products better (their offering is not as good
as the incumbent’s offering).
Disruptive Innovation
• Instead, they focus on innovations that make the products/service more affordable
and accessible to people at the low end of the market or creating a new market
segment, to serve them.

• Because the established, incumbent companies own the most profitable market
segments, they most likely won’t fight the entrant for that market share.

• The entrant then improves its offerings and moves upmarket with increasing
profitability. Once the incumbents’ customers have widely adopted the entrant’s
offerings in the mainstream market, disruption has occurred.
Two types of disruption

• Low-end Disruptions

 Low-end disruption is when a company uses a low-cost business model to enter at the bottom of
an existing market and claim a segment.

 Because there’s no profitability incentive to fight for the bottom of the market, a low-end
disruption causes incumbent companies to focus their efforts on more profitable areas. E.g low
cost airlines
• New-Market Disruptions

 This is when a company creates a new segment in an existing market with a low-cost version of a
product.

 The factor that sets new-market disruption apart from low-end disruption is its focus on an
audience that doesn’t yet exist in the market. Offering a more cost-effective, simple, or accessible
product effectively creates a new segment.
Disruptive innovation: An example
 Example: Low-cost airlines
 New air travel providers sought new markets at the
fringe, i.e. users who would accept:
- a lower level of service (no free food, no seat allocation,
no lounges, i.e. no frills
- a much lower price for a basic safe flight

 Word of mouth led to industry growth

 Came to the attention of existing private and
business travellers
 Eventually the challenge hit the major airlines
 Found it difficult to respond because of their
inherently much higher cost structure
Process of Innovation

• How does Innovation unfold in firms?

• Rational” vs “incremental” approaches to innovation

development.

• Strategies based on clear choice and implementation can be

problematic in complex and fast changing environment.
Rationalist approaches of innovation
• Rationalist strategy heavily influenced by military experience and rational decision-
making models
• Follows a linear model of rational action: appraise, determine, and act.
• The approach is to help the firm:
• Be conscious of trends in the competitive environment.
• Focus sufficient attention on longer term.
• Ensure coherence in objectives and actions.
• But….in reality is much more complex….decision-makers are boundedly rational and
lack complete information of the firm’s external environment.
 Incrementalist process of innovation
• Incrementalists” argue that complete understanding of complexity and
change is impossible.
• Recognise that the firm has imperfect knowledge of its environment,
strengths, weaknesses, the likely rates and direction of change in the
future.
• Organisations adjust (if necessary) the objectives and decide on the next
step (change).
• Incrementalism – ‘trial and error’, and ‘muddling through and learning’
• Accordingly ”managing” the innovation process involves creating spaces
for knowledge sharing and flows, for experimenting with new ideas, and
encouraging imitative taking by employees.
Improving Innovation

46
Managing Innovation: Innovation Value Chain
• Every company asks, how can we do better? Better at innovation?

• There’s no one-size-fit-all approach for organisations.

• Different businesses have different structures, obstacles,

challenges and opportunities.

• Hansen and Birkinshaw (2007) argues that businesses can

manage and improve their innovation process by considering the
innovation value chain
Innovation Value Chain
• Innovation Value Chain (IVC) refers to the sequential process of
transforming ideas into commercial products or services.

• According to the Hansen and Birkinshaw (2007) the innovation value

chain consists of three phases:
 Idea generation

 Idea conversion

 Idea diffusion
• An organisation’s capacity to innovate is only as good as the weakest link in
the IVC
The Innovation Value Chain: An Integrated Flow

Viewing innovation as an end-to-end process rather than focusing on a part allows you to spot both
the weakest and the strongest links.
Innovation Value Chain
• The IVC framework helps business executives to choose the best
innovative strategies and practises to adopt

• Rather than reflexively adopt innovation practices that may

have worked elsewhere but may not be a fit for the
organisation, IVC framework allows managers to identify the
weakest link in the IVC, and then select the best practises that
solves the particular problem.
Managing the innovation process

Source: Hansen & Birkinshaw (2007, p. 1 and 4)

Summary
• Innovation can come from different sources.

• Organisations can learn to adopt innovations within and outside its

boundaries.

• No one size fit all for innovation strategy or practises

• The innovation value chain allows firm to identify their weakest link
and then seek to improve it.
SEMINAR
References

• Ahmed, P. K. & Shepherd, C. D. (2010). Innovation Management:

Context. Strategies, systems and processes. Harlow: Pearson
• Hansen, M. T., & Birkinshaw, J. (2007). The innovation value
chain. Harvard business review, 85(6), 121.
• Tidd, J., and Bessant J.R., (2018), Managing Innovation (sixth edtn),
Wiley - Chapter 4