'This timely book journeys the reader through the logic of innovation activities from idea development, to
selection, to implementation by applying contemporary cases to critical concepts. A must-read for students of the
discipline, entrepreneurs looking to start up and corporate innovators including executives and project managers
who are vested with key innovation management responsibilities.'
- Subra Ananthram, Curtin University, Australia
'Uniquely comprehensive and accessible, Jan van den Ende's book covers both the "classics" and more contemporary
topics in innovation management. By linking concepts and frameworks from theory with examples and cases from
practice, this book will enable both the understanding and the application of innovation management principles
in different contexts.'
- Marcel Bogers, Eindhoven University of Technology, Netherlands
'This comprehensive textbook incorporates the latest thinking and academic research in innovation management.
It offers a wealth of relevant examples from a variety of industries and practical exercises which will enable
students to apply what they have learnt in the classroom and experience first-hand what it means to be an
innovation manager.'
- Paola Criscuolo, Imperial College London, UK
'Innovation Management should be widely read by students as well as practitioners and scholars. It provides clear
understanding of the organizational context - projects and project-based firms - within which innovation in
products, services and business models takes place and must be carefully managed. It is an important, opportune
and accessible book.'
- Andrew Davies, University of Sussex, UK
'Innovation has become a key capability for all organizations in the 21st century. Successful innovation
management must get many decisions right on both the project level and the firm level. Jan van den Ende's
very readable introductory text brings together these knowledge areas, fusing masterfully academic research and
practical advice.'
- Sebastian Fixson, Babson College, USA
'A comprehensive, insightful yet elegant book that takes a novice to this topic by hand and then eruditely walks
them through the various facets of innovation management. Both students and instructors will benefit from
the author's skilful treatment of the various complex multi-disciplinary threads, including strategic, operational,
technological, human resource, legal and financial, that constitute innovation management in practice. This book
is a refreshing and delightful introduction to innovation management.'
- Anup Nair, University of Strathclyde, UK
'This book provides clear insights on how to manage innovation using traditional and contemporary approaches.
It demonstrates practical and effective methodologies for bringing innovation to the core of businesses and
organisations, which are contextualised through a wide array of case studies and with visualisations to explain
concepts, thus making the book an excellent foundation resource for university students and practitioners.'
- Osikhuemhe Okwilagwe, Bournemouth University, UK
'This concise book is a breath of fresh air... not only does it address the typical process of innovation management,
but it also covers topical issues such as lean innovation, open innovation and customer co-creation within the
discipline. Incorporating these topical issues in the study of innovation management can inform the instructors
and students using this book of some of the latest developments of the field.'
- Eric Shiu, University of Birmingham, UK
'This book provides a novel and very interesting approach to innovation management. It offers readers a
perspective which is both multi-layered (in the sense that it offers footholds for innovation managers as well
as innovation actors) and integrated (in the sense that the book addresses most of the core elements not in
isolation, but connected to the processual dimension of innovation). All of this is not in abstracto, but enriched
and illustrated by lots of short cases and examples and stretches from the very early strategic and search phases
to the conclusion of the innovation activities.'
- Frido Smulders, Delft University of Technology, Netherlands
'Contemporary, timely and accessible: this book will benefit students and practitioners in their understanding of
the importance of innovation management in strategies for companies and other organizations. A pleasure to
read!'
- Cees van Beers, Delft University of Technology, Netherlands
Innovation
Management
Jan van den Ende
~
macmillan
~ international
HIGHER EDUCATION
~ RED GLOBE
~ PRESS
© Jan van den Ende, under exclusive licence to Macmillan Education Limited
2021
All rights reserved. No reproduction, copy or transmission of this publication
may be made without written permission.
No portion of this publication may be reproduced, copied or transmitted save
with written permission or in accordance with the provisions of the Copyright,
Designs and Patents Act 1988, or under the terms of any licence permitting
limited copying issued by the Copyright Licensing Agency, Saffron House,
6-10 Kirby Street, London EClN 8TS.
Any person who does any unauthorized act in relation to this publication may
be liable to criminal prosecution and civil claims for damages.
The author has asserted their right to be identified as the author of this work
in accordance with the Copyright, Designs and Patents Act 1988.
First published 2021 by
RED GLOBE PRESS
Red Globe Press in the UK is an imprint of Macmillan Education Limited,
registered in England, company number 01755588, of 4 Crinan Street,
London, N 1 9XW.
Red Globe Press® is a registered trademark in the United States, the United
Kingdom, Europe and other countries.
ISBN 9781352012446 hardback
ISBN 9781352012422 paperback
ISBN 9781352012439 ebook
This book is printed on paper suitable for recycling and made from fully
managed and sustained forest sources. Logging, pulping and manufacturing
processes are expected to conform to the environmental regulations of the
country of origin.
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A catalog record for this book is available from the Library of Congress.
Commissioning Editor: Isabelle Cheng
Assistant Editor: Christian Ritter
Production Editor: Elizabeth Holmes
Senior Marketing Manager: Amanda Woolf
Short contents
Part 1
Part 2
Part 3
Part4
Part 5
Introduction
1
1
3
Innovation management and new business development
Idea development
23
2
The front end of innovation
25
3
Design thinking
51
Selection
73
4
Innovation strategy
75
5
Portfolio management
107
Implementation
131
6
Managing projects
133
7
Organizing for innovation
153
8
Open innovation
185
Innovation in specific types of firms
9
Entrepreneurship
209
10 Innovation in project-based and multinational firms
Part 6
207
Conclusion
221
235
11 The future of innovation management and
new business development
V
237
Contents
List of figures
xii
List of cases
xiv
Acknowledgeme nts
xvi
Preface
xvii
Overview of the book
xviii
Part 1 Introduction
1
1
3
Innovation management and new business development
Lea rning objectives
1.0 Introduction
1.1 What are innovation management and new business development?
Definitions
The innovator
1.2 Paradoxes of innovation
1.3 What is business model innovation?
The Business Model Ca nvas
Types of business models
W hy business models are not the same as strategy
1.4 Types and classifications of innovations
1.5 Innovation and society
The economy
Innovation for society
Pub lic policy
Innovativeness of countries
1.6 Summary
1.7 Discussion questions and exercises
Discussion questions
Exerci ses
References
3
3
3
5
6
7
9
10
12
13
14
16
16
17
18
18
20
21
21
21
22
Part 2 Idea development
23
2
25
The front end of innovation
2.0
2.1
2.2
25
25
Learning objectives
Introduction
Creativity
Knowledge and problems
Hu man creativity
Thinking styles
26
26
27
29
30
Sources of ideas
Trends as drivers
Business and socia l networks
30
32
vi
vii
Contents
2.3 Tools for creativity
2.4 Scenario workshops
2.5 Leading creativity workshops
Conditions for a successful creativity workshop
2.6
2.7
2.8
2.9
3
Managing the internal front end
Crowdsourcing ideas
Summary
Discussion questions and exercises
Discussion questions
Exercises
References
Design thinking
Learning objectives
3.0 Introduction
3.1 Processes to involve customers
Should customers be involved?
Design thinking
Lean innovation
The solution space
3.2 The customer study phase
Traditiona l ma rketing techniques
Methods for more radical innovation
Crowdsourcing from customers
Data analytics
3.3 Market learning in the testing phase
Lean innovation and discovery-driven planning
Co - creation with customers
Testing during implementation and real market tests
3.4
3.5
3.6
3.7
When to use which method
Design-driven innovation
Summary
Discussion questions and exercises
Discussion questions
Exercises
References
33
36
40
40
41
45
48
48
48
49
49
51
51
51
52
52
53
54
55
57
57
59
59
60
60
61
63
65
66
67
69
70
70
71
71
Part 3 Selection
73
4
Innovation strategy
75
Learning objectives
75
75
76
76
78
78
82
83
88
90
4.0 Introduction
4.1 Creating an innovation strategy
What is an innovation strategy?
4.2 Life cycles of products, services and knowledge
Life cycles
Knowledge life cycles and the dynamics of firms
4.3 Disruptive innovation
4.4 Timing of innovation
4.5 Ecosystem innovation
vm
Innovation Management
4.6
Strategy in a networked market
What is a networked market?
Two -sided and other platforms
Who wins?
Standard ization
4.7 Intellectual property
Patents
Copyrights
Trademarks
Secrecy
Open - source strategies
4.8 Summary
4.9 Discussion questions and exercises
Discuss ion questions
Exercises
References
S Portfolio management
Learning objectives
Introduction
Reactive versus proactive portfolio management
Proactive portfolio management in sma ll or medium -s ized firms (SM Es)
Proactive portfolio management in large firms
5.2 Platform and modular design
5.3 Managing the decision process
Resistance and status in project decisions
5.4 Tools for portfolio management
Financial method: NPV
Real options
Software tools
5.5 Summary
5.6 Discussion questions and exercises
Discuss ion questions
Exercises
References
5.0
5.1
94
94
97
98
98
100
100
102
102
103
103
104
104
104
105
106
107
107
107
107
108
109
115
118
121
122
122
122
127
128
128
128
129
130
Part 4 Implementation
131
6
133
Managing projects
6.0
6.1
6.2
Learning objectives
133
Introduction
Uncertainty and process models
Process models
Sequential mode ls
Parallel models
Iterative processes
Does agile work?
133
134
136
6 .3 The business plan
6.4 Project management
Alignment with the innovation process
136
138
139
141
142
144
146
Contents
6.5 Control of innovation projects
6.6 Summary
6.7 Discussion questions and exercises
7
146
149
149
Discussion question s
Exercises
149
150
References
150
Organizing for innovation
Learning objectives
7.0 Introduction
7.1 Team structures
Flexib ility and ext erna l relat ions
Rep resentation of t he concept
7.2 Organizing innovation at the firm level
Opt ion 1: Separat e business unit
Ventures and spin offs
Option 2: Innovation unit
Option 3: Innovation manager
Option 4: Integrated in the business
Comparison of options
Team structures and organizationa l structures
Organizing for innovation in the rest of the company
Social networks
7.3 Leadership
Team leadership
Getting support
Organizat iona l identity
7.4 Knowledge for innovation and new business development
The need for know ledge
7.5 Culture of innovation
7.6 Summary
7.7 Discussion questions and exercises
153
153
153
153
156
157
160
160
162
163
166
167
168
170
170
171
172
172
175
176
177
177
178
181
181
Discussion questions
Exercises
18 1
182
References
183
8 Open innovation
Learning objectives
8.0 Introduction
8.1 Acquiring knowledge and innovation
8.2 Collaboration between firms
Why collaborate? Capabilities
Why co llabo rate? Low int erdependence
Other reasons to co llaborate
185
185
185
186
188
188
189
192
8.3 How to collaborate
193
Coordination of tasks
Contracts
Trust
193
195
196
8.4 Collaborating with start-ups and selling off innovation
Co rporate incubators
Spinning off innovations
197
197
198
ix
x
Innovation Management
8.5
8.6
8.7
8.8
Licensing out technology
Integration and disintegration in supply chains
Innovation clusters
Summary
Discussion questions and exercises
Discussion questions
Exercises
References
199
199
201
203
204
204
204
205
Part 5 Innovation in specific types of firms
207
9
209
Entrepreneurship
Learning objectives
9.0
9.1
Introduction
Start-ups and innovation
What types of innovations do start-ups create?
Surviva l rates
9.2 Who becomes an entrepreneur?
9.3 The entrepreneurial process
Team formation
Marketing and sa les
Sca ling up
Financing the start-up
Va luati on
Bootstrapping
9.4 Incubators
9.5 Summary
9.6 Discussion questions and exercises
Discussion questions
Exercises
References
10 Innovation in project-based and multinational firms
Learning objectives
10.0 Introduction
10.1 Innovation in project-based firms
How do project-based firms innovate?
How to run innovation projects
Inn ovation in health care
10.2 Innovation in multinationals
International inn ovation strategies
Fruga l innovation
International organization
10.3 Servitization: adding services to products
10.4 Summary
10.5 Discussion questions and exercises
Discuss ion questions
Exercises
References
209
209
209
210
211
211
212
213
214
214
214
215
216
216
217
218
218
218
219
221
221
221
222
222
223
225
225
225
228
229
230
232
232
232
233
233
Contents
Part 6 Conclusion
235
11 The future of innovation management and
new business development
237
Learning objectives
11.0 Introduction
11.1 Innovation in practice
11.2 The origins of the field
11.3 Towards a theory of innovation management and
new business development
The process perspective
The people perspective
The strategy pe rspective
How to combine perspectives
11.4 Summary
11.5 Discussion questions
References
Index
237
237
237
238
241
244
244
246
246
247
247
247
249
xi
List of figures
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4.1
4.2
4.3
4.4
4.5
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
6.1
6.2
6.3
6.4
6.5
7.1
The relation between innovation management and new business development
The Business Model Canvas
The Business Model Canvas for a supermarket
Business mode ls
Potentia l success factors for business models
Techno logy-market matrix
Modularity matrix
Long -term Kondratiev waves in the economy
Innovation indicators of the Global Innovation Index 2019
Types of opportunities
Four types of creativity
The relation between drivers and innovation
Trends as drivers of innovation
Creativity tools
The Va lue Proposition Framework
The Erasmus Value Proposition Framework©
The PESTE L framework applied to the context of a bank
Chart to score t he relevance of a trend
Chart to design scenarios
Five ways to ruin a bra instorming sess ion
How to structure a creativity workshop
The design thinking process
The lean innovation process
The evo lutionary approach (a) versus the set-based approach (b) in innovation
Examp les of even (a) and rugged (b) landscapes
Customer journey map at a furniture retailer
Assumptio ns in the business model of home delivery of supermarket products
A discovery-driven process with MVPs
W hen t o use wh ich market learn ing method
Market learning for uti litarian and hedonic innovation
Four types of business strategy re lated to innovation
The life cycle model of techn ology
The disrupt ive innovation mode l
The ecosystem of the run-fl at tyre
Nine behaviours to win a standard battle
Leve l of R&D intensity by ind ustry
The Innovation Amb ition Matrix
The differe nce between prospector/reactor strategies and proactive/reactive
portfolio management
Deg rees of modu larity
The innovation funnel
Reducing t he number of ideas early in the process
Ten ways to kill an idea
The effect of frami ng of innovat ions on resistance
Decreas in g uncertainty versus increas ing stakes
St age-gate mode l
The purpose of iterative process models
How ag il e works
Stages in the project planning process
Four types of team structure
xii
6
11
11
12
13
14
15
16
19
27
29
31
31
34
34
35
36
37
38
40
43
53
54
56
57
58
62
63
67
68
77
78
84
92
99
110
112
115
117
118
120
121
121
134
136
139
141
145
154
List of figures
7 .2
7 .3
7 .4
7 .5
7 .6
7.7
7.8
7.9
7.10
7.11
7.12
8.1
8.2
8.3
8.4
10.1
11.1
11.2
11.3
11.4
11.5
11.6
11.7
The structure of an agi le or scrum tea m
Dynamics of representations
Separate business unit for innovation in a company
Bell -Maso n Framework for corporate venture development
Innovation unit
Innovation ma nager
Integrated in t he business
Division of tasks over t ime in the four options
A diverse network (left) and a closed network (right)
Leadership styles for creativity
Stakeholder interest-power matrix
Forms of open innovation
Effects of acquisition of innovations in different phases of development
Co lla borati.on versus in-house development
The change in the mobi le te lecom va lue chain over ti me between 2000 (a)
and the 2010s (b)
Organizational forms for internationa l R&D
The ten commandments of Gi lles Holst
The content of Twiss (197 4) Managing Technological Innovation compared
with the current book
The paradigm of the Japanese- Harvard school
The innovation process as depicted in this book
Success factors for innovation projects
Theories in the field of innovation management
Integrated typo logies of organizational forms
156
158
16 1
163
164
166
167
168
172
173
176
186
188
191
200
229
239
240
240
242
243
243
245
Xlll
List of cases
1.1
1.2
1.3
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
3.1
3.2
3.3
3.4
3.5
3.6
3.7
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
6.1
6.2
6.3
6.4
ING: tra nsforming a bank
New business development by BMW and Sixt: DriveNow
Innovation to help solve t he COVID-19 crisis
Creativity in response to an urge nt need: South West
The ro le of knowledge in creativity
Trends as driver of computing innovations
Scenario development for the dredging industry
Gamechanger
Idea cata lysts at IBM
Crowdsourcing at P&G
lnnoCentive
The socia l construction of wheel clamp s
Design thinking: IDEO develops a shopping cart
The solution space of Geronimo.A l
Observation: development of a toothbrush by IDEO
Ph ilips Home Lab
Co-creation for Dutch Blend
Market learning by ING Direct
Alternative names for smartphones
Design battle in alternative energy cars
Why we use the QWERTY keyboard
Duration of successive life cycles of bicycles
Effects of DNA technology knowledge on product life cycles
The dynamics of Phil ips over time
The effects of knowledge development on company dynamics: Google
Ryanair: a disruptive innovation
Disruptive innovation in t he newspaper market
Disruptive innovation in a shipbuilding company
Fi rst mover disadvantages: Laker Airways
The ecosystem of the Mi chel in run -flat tyre
The failure of Better Place
IBM loses contro l of its Persona l Computer
Ecosystem orchestration for a sustainable innovat ion
Network effects in Microsoft's history
Fryi ng products: low network effects
How Dona ld Duck blocked a patent
Patent battles between Apple and Samsung
Blurred Lines versus Got to Give It Up
Radical in novat ion for SM Es
Diminishing opportunities in drug markets
Changing categories over t ime in th e car industry
Portfolio management and the fall of Nokia
Modu larity in web-shop and car-sharing services
Nespresso: patience to wait for success
Rea l options approach for an internationa lization project
Setting up a chain of charging stations for electric cars
The 'train schedu le': reducin g delays in projects at Medtronic
The innovation process model of Microsoft
The value of a market test: Kelly Slater's Pro Surfer game
Prob lems of information exchange in a large innovation project
xiv
4
5
17
26
28
31
38
43
45
46
46
52
53
56
59
60
64
65
79
79
80
81
82
82
83
85
86
87
89
90
91
93
93
94
96
101
102
102
109
111
112
113
116
120
123
125
135
139
140
141
List of cases
6.5
6.6
7.1
7.2
7.3
7.4
7.5
8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9
8.10
9.1
9.2
9.3
9.4
9.5
10.1
10.2
10.3
10.4
Ambiguity in the case of Rimonabant
The use of outcome indicators for a margarine project at Unilever
The influ ence of team composition in an autonomous team
Jibo: designing a socia l robot
Pros and cons of a separate unit in a bank
Integration of new business development in an engineering company
Co mpetition between the innovation lab and existing business units
Acquis ition of Dol lar Shave Clu b by Unilever
lntegrality in the design of the logi stic process of a web-shop
The mi rroring hypothesis in BMW
Problems in a collaboration project due to uncertainty
Corporate incubator at an energy company
The va lue of businesses of departed emp loyees from Xerox
Integration in the supply chain of navigation products
Research inten sity and horizontal integration in the plant breeding sector
The origins of Si licon Val ley
The innovation ca mpus at Aachen (Germany)
Red Bull: how a start- up attacks a market of large established companies
Si ren Care: how the founding team reflects the required expertise
X2A I: how entrepreneurs find each other
HealthTap, with ange l investor Eric Schmidt
Incubators of the space organ ization ESA
Coord ination of innovation in an engineering co mpany
Internationalization of liquid margarine
Xerox and the service business mode l
Servitization for life rafts : Wi lhemsen
145
147
157
158
165
167
169
187
190
191
194
198
198
199
201
202
203
211
213
214
216
217
224
227
230
231
xv
Acknowledgernen ts
I'm more than grateful to colleagues from the Innovation Section of Rotterdam School of Management, Erasmus
University, and to other colleagues from this school, for their input and feedback, in particular: Dirk Deichmann,
Murat Tarakci, Ivo Esseveld, Helen Gubby, Niels Eldering, Henk de Vries, Stefano Tasselli, Daan Stam, Serge
Rijsdijk, Helge Klapper, Amin Yousefi, Fouad El Osrouti, Wim Hulsink, Susanne Koster and Graham Cross.
Thanks in particular to Timo van Balen for his great support in developing learning goals, exercises and
discussion questions; and to Christine Fong and Reza Hoseinpour for their contributions to exercises. Thanks to
Inge and Luc van den Ende for contributions to figures and cases.
Publisher's acknowledgements
The author and publisher would like to thank the following for permission to reproduce copyright material:
~
Academy of Management for Figure 7.11 Leadership styles for creativity.
~
Bell-Mason Group for Figure 7.5 Bell-Mason framework for corporate venture development.
~
Bruno von Pottelsberghe for Figure 5.1 Level of R&D intensity by industry
~
Cambridge University Press for Figure 4.3 The disruptive innovation model
~
Cornell University, INSEAD, and WIPO (2015) for Figure 1.9 Innovation Indicators of the Global
Innovation Index 2019.
~
Daan Stam for Figure 2.7 The Erasmus value proposition framework .
~
Elsevier for Figure 2.1 Types of opportunities, Figure 6.2 Stage-gate model and Figure 10.1 Organizational
forms for international R&D.
~
Gerda Casimir for Figure 11.1 The ten commandments of Gilles Holst. Published by Plunkett Press.
~
Harvard Business Publishing for Figure 5.2 The innovation ambition matrix, Figure 8 .2 Effects of
acquisition of innovations in different phases of development and Figure 8.3 Collaboration versus in-house
development.
~
John Wiley & Sons for Figure 3.9 Market learning for utilitarian and hedonic innovation.
~
Murat Tarakci for Case 2.4 Scenario development for the dredging industry.
~
Organization Science for Figure 7.3 Dynamics of Representations.
~
SAGE Publishing for Figure 1.7 The Modularity Matrix, Figure 7.1 Four types of team structure and Figure
11.5 Success factors for innovation projects.
~
Strategyzer for the Business Model Canvas template.
xvi
Preface
Innovation involves the creation of new products, services and business models by firms and other organizations;
it is a key activity in every firm because it determines the future of the company. The purpose of this book is to
provide a one-stop introductory overview for university students taking modules in innovation management; it
is also of interest to practitioners as a reference text. For both groups, the book is designed to be easy to read.
The text follows the natural order of activities in innovation: from idea development, to selection, and through
to implementation. In addition, the content of the book is evidence-based, which means that the claims and
arguments in the book are based on the current state of academic research in the field of innovation management,
balancing theory and practice. This distinguishes the book from many step-by-step instructional books written
by practitioners.
The book covers a wide range of companies and industries. Traditionally, it was mainly product firms that were
active in innovation, which they developed in their R&D department. But today every firm has to innovate, and
the field of innovation has become much broader. Therefore this book does not just cover technology, products and
R&D, but it also consistently discusses service and business model innovation. Also, it provides a contemporary
approach by including novel methodologies such as design thinking, lean innovation and open innovation. By
taking this approach, the book also gives an introduction to new business development as a field. New business
development overlaps with innovation management, but it also covers the creation of new markets. Consequently,
this book often includes the creation of new markets in the treatment of the topics.
The innovation activities described in this book happen in diverse units in companies. Some companies have
an innovation unit, others have an innovation manager, or a new business development unit. Still other firms
perform innovation activities as part of marketing, strategy, operations, or any other function in the firm . Today,
manufacturing firms often have new business development activity on top of their traditional R&D department, to
emphasize the broader application of innovation than just new technology and new products. This book will give
students knowledge on the innovation activities in these different parts of companies, and it serves innovation
practitioners from all these fields, providing them with a proper foundation in innovation management.
I hope you enjoy reading and studying the book!
Jan van den Ende
xvii
Overview of the book
Part 1
Introduction
Innovation
management
Chapter 1
Company
Part 2
Idea development
Part 3
Selection
Part 4
Implementation
Idea
management
Innovation strategy
Portfo lio
ma nagement
Organization of
innovation
Section s 2.6-2.7
Project
Chapters 4-5
Sections 7. 2-7. 5
Chapter 8
Idea
development
Project
selection
Project
execution
Section s 2. 1- 2.4
Chapter 3
Chapters 4- 5
Chapter 6
Section 7.1
Part 5
Specific firms
Part 6
Conclusion
Specific types
of firms
The future of
innovat ion
management
Chapters 9-10
Chapter 11
The book follows the logic of innovation activities: from idea development, to selection, to implementation. In
discussing these topics, we distinguish two levels: the level of individual projects, in which innovators and team
go through these different stages, and the level of the firm as a whole, in which managers have to organize these
activities for the company. The figure above shows the two levels. Questions at the project level are:
~
how do we get good ideas and how do we learn from customers? (idea development);
~
how do we get the project accepted? (selection);
~
what team and process do we need to execute the project? (implementation).
Questions at the firm level are:
~
how do we make our company more creative? (idea development);
~
which projects do we select? (selection);
~
and how do we organize innovation activities in our company? (implementation).
In this book, we address the two levels alternately. For instance, when discussing idea development, we first
discuss individual creativity at the project level (Chapter 2, Section 2.1-2.5), then the company level (Chapter
2, Sections 2.6-2.7), and then design thinking at the project level again (Chapter 3). The discussion alternates
between the two levels throughout the rest of the book.
xviii
Overview of the book
~
The book is split into six parts. Part 1 consists of Chapter 1, and gives an introduction to the field .
...;;,,.
Chapter 1 outlines the field of innovation management, gives some basic definitions, and indicates the
field's societal importance.
Parts 2-4 follow the logic of the flow of innovation and new business development activities.
Part 2 consists of Chapters 2 and 3, and concerns the generation and initial development of ideas .
...;;,,.
Chapter 2 discusses individual and group creativity.
...;;,,.
Chapter 3 concerns design thinking - how to learn from customers, and how to align ideas to the market.
Lean innovation is discussed in this chapter.
Part 3 consists of Chapters 4 and 5, and is about the process of selecting ideas and projects .
...;;,,.
Chapter 4 is about the innovation strategy of companies. Amongst other topics, it discusses disruptive
innovation and intellectual property rights .
...;;,,.
Chapter 5 is about the actual selection process of ideas, including the alignment of projects to each other
(portfolio management). The chapter also explains real options, as a tool in project selection.
Part 4 consists of Chapters 6 to 8, and discusses the implementation of ideas, including the organization of
innovation .
...;;,,.
Chapter 6 focuses on process models for innovation projects .
...;;,,.
Chapter 7 is about the organization of innovation and new business development, both on the level of
projects (teams) and on the level of the organization as a whole .
...;;,,.
Chapter 8 is about open innovation - how to create innovations and new business jointly with outside
parties.
Part 5 consists of Chapters 9 and 10, and discusses innovation management and new business development in
specific types of firms .
...;;,,.
Chapter 9 is about start-ups (entrepreneurship) .
...;;,,.
Chapter 10 deals with the specifics of innovation and new business development in project-based firms
and multinationals, two types of firms with a distributed innovation process, in which it is harder to
manage innovation and new business development than in less complex firm environments. Chapter 10
also discusses servitization.
Finally, Part 6 includes the concluding Chapter 11, and discusses the disciplines of innovation management and
new business development .
...;;,,.
Chapters 11 reflects on the origin and future of the disciplines of innovation management and new
business development, and on the core theories in these fields.
Throughout the text, key terms have been emboldened and defined in the margin for ease of comprehension.
The Media Link icon indicates further learning resources to provide a broader level of knowledge about
the company-specific innovation activities described. These can be accessed via the book's companion
site: macmillanihe.com/vandenende-innovation-management. In addition, each chapter suggests several
thought-provoking discussion questions and exercises suited for either students or practitioners to synthesize
their learning from the chapter. Questions often have sub-questions to allow you to dig deeper into the
issue. For student discussion, we sometimes suggest taking a large, well-known company as an example.
For practitioners, it would be best to try to apply the discussion questions to their own company and the
innovations it produces.
Introduction
Part
1
Part 1
Introduction
Innovation
management
Chapter 1
Part 2
Idea development
Company
Idea
management
-----+
Sections 2.6-2.7
Project
Idea
development
Part 3
Selection
Part4
mplementation
Innovation strategy
Portfolio
management
Organization of
innovation
Chapters 4-5
Sections 7.2-7 .5
Chapter 8
Project
selection
Project
execution
Chapters 4-5
Chapter 6
Section 7.1
-----+
Sections 2.1-2.4
Chapter 3
Part 5
Specific firms
Part 6
Conclusion
Specific types
of firms
The future of
innovation
management
Chapters 9-10
Chapter 11
1
Innovation
management and new
business development
1
Learning objectives
After reading this chapter, you will be able to:
1. Describe innovation and differentiate innovation management from new business development
2. Explain the skillset of an innovation manager
3. Distinguish the idea development phase from the implementation phase in the innovation process
4. Illustrate the role of uncertainty in the innovation process
5. Categorize and define different types of innovation
6. Implement the Business Model Canvas in specific cases
7. Assess the role of innovation in the economy and on public policy
8. Describe what it means for countries to be innovative
1.0 Introduction
This chapter outlines what innovation management and new business development
mean, which capabilities innovation managers need, and how uncertainty plays
out in innovation. We discuss business models and how they can change, based on
the Business Model Canvas . You will be taken through different classifications of
product innovations and an explanation of the difference between the creative and
implementation phases of innovation and new business development. We also discuss
the importance of innovation for society and governments.
1.1 What are innovation management and new business
development?
Innovation is key to firms and other organizations today. Organizations have to
change, adapt to changing circumstances and lead in broader economical and societal
change. Without innovation, firms run a large risk of disappearing in the short or
medium term. At the same time, innovation is difficult because of the high degree
of uncertainty. Proper innovation management increases the chances of success .
Therefore, innovation management is a key capability in today's business
environment.
3
4
Innovation Management
The discipline of innovation management originated in research and development
(R&D) contexts within manufacturing companies, but has now spread to all kinds
of other firms, including service firms, government agencies and non-profits. New
business development is a relatively new and upcoming field, and closely related
to innovation management. It also concerns innovation but has a stronger focus
on the creation of new markets. Both innovation management and new business
development are engaged in innovation.
Examples of innovation are abundant. Case 1.1 tells the story of a large international
bank that completely transformed its head offices to become more innovative, while
Case 1.2 highlights an established car manufacturer starting regional car-sharing
services in big cities. Innovation and new business development are the answers
to the need for change. Innovation and new business development involve the
creation of new products or services for customers, the creation of new markets, but
increasingly also the creation of new business models. Established firms are not the
only organizations to engage in innovation and new business development; start-ups
by definition innovate and create new business.
~ CASE 1.1 ING: TRANSFORMING A BANK
In 2015, the international bank ING started a major transformation . The bank aimed
to become more innovative, bringing new applications faster to the market. For
instance, the bank wanted to improve the accessibility of bank accounts and payment
options for customers on their cell phones quickly. Customers also had to be able to
use different channels - the computer, apps, telephone calling and visiting the bank's
branch - interactively. The bank made a bold decision: it replaced its existing structure
in its headquarters of units and departments by one of squads and tribes. Squads
were cross-functional teams of people with an IT, marketing, product management,
user-experience or data analytical background. The teams worked in an agile way
(see Section 6.2) and had more autonomy to make decisions than in the past. In this
way the team could go to market with new releases of products much more frequently,
about every two weeks or every month instead of once every two months (Mahadevan,
2017) . The teams were also responsible for selecting new hires. A number of squads
jointly formed a tribe (Barton et al., 2018). Team members from different teams with
the same expertise got support in so-called chapters. ING created in total 350 squads
embedded in 13 so-called tribes. The transition helped the bank to become a forerunner
in innovation in the banking world.
Innovation and new business development are usually performed by separate
departments or sometimes only by a single innovation manager or new business
developer in a firm. But they can also be done by people in other departments,
for instance in marketing, in product management, or in research-oriented
environments. At the same time, innovation and new business development are
different from R&D. R&D focuses on technology development and the successive
creation of new products. Innovation and new business development are much
broader. They are not just about new products, but, as mentioned above, innovation
and new business development can also focus on the creation of new services, new
markets or new business models. Firms may therefore have R&D, innovation and
new business development units.
Innovation management and new business development
q
CASE 1.2 NEW BUSINESS DEVELOPMENT BY BMW AND
SIXT: DRIVENOW
DriveNow started as a car-sharing service in German municipal regions. Cars were
distributed across a city, and subscribers to the service could pick one up, open it with
their electronic key, drive around the city and leave it behind at their convenience, paying
per use. The car manufacturer BMW and rental agency Sixt started the initiative in 2011.
It was a major business model innovation for both companies, since the activity was
completely different from developing and producing high-end cars (BMW) or renting out
cars at an agency (Sixt). The initiative could even have cannibalized the existing business
of the two companies, since it could have diminished the number of cars sold or rented .
Nevertheless, the two companies decided to step into this new service since car sharing
might become successful in the future, and they wanted experience at an early stage.
They collaborated because they both had relevant capabilities. BMW had the relevant
knowledge of cars to make the required adaptations; Sixt had the relevant customer
and IT knowledge. In 2015 DriveNow operated over 5,000 vehicles in seven countries
worldwide with over 800,000 customers.
Definitions
There are many definitions of innovation, and hence many of innovation management.
A classical, and very broad, definition of innovation comes from Schumpeter (1934),
who included in innovation (1) the introduction of a new good, (2) or of a new method
of production, (3) the opening of a new market, (4) the application of a new source of
supply of raw materials and (5) a new organization of an industry. Others define the
concept a lot more narrowly, such as 'the invention, development, and implementation
of new ideas' by people within an organizational context (Garud et al., 2013). Since
innovations can concern new business models, and thus are not always based on an
invention, we define innovation in this book as 'the creation and development of
new products, services, business models or processes in firms or other organizations'.
Innovation management concerns the management of these activities. Innovation
management is the subject of ISO 56000 series standards (being developed by ISO
TC 279).
Since new business development is a newer field, there are fewer definitions.
S0rensen (2012, p. 26) speaks of the development of potential growth opportunities
by companies. He makes a distinction between the development stage and the
implementation stage of these opportunities. He limits the role of new business
developers to the earlier development stage. He also explicitly excludes strategy
development from the tasks of a new business developer: 'Business development
refers to the tasks and processes concerning analytical preparation of potential
growth opportunities, the support and monitoring of the implementation of growth
opportunities, but does not include decisions on strategy and implementation of
growth opportunities.'
Indeed, in some firms the activities of business developers are restricted to the early
phase. But in other firms, business development also includes market introduction
or creation of new markets. And we will see in Chapters 4 and 7 that, according to
some academics (notably Clayton Christensen), the creation of radical new business
opportunities (particularly 'disruptive innovations') can best be done by a separate
unit that is responsible for all activities involved, including purchasing, market
introduction and sales. We will also see that others propose that, where feasible, such
Innovation is
the creation
and
development of
new products,
services,
business
models or
processes in
firms or other
organizations.
New business
development
refers to the
creation and
development of
new products,
services,
business
models or
markets.
5
6
Innovation Management
a unit makes use of other, existing units in the firm along the business development
process. In other words, whereas S0rensen in his definition chooses to make a
sequential separation of tasks between new business development and the other units
in the firm, other academics argue for a more parallel division of tasks over time,
during the whole process.
The definition of new business development that we will use in this book is very
similar to the one of innovation, leaving out new processes and including new market:
'the creation and development of new products, services, business models or markets'.
It includes the activities involved, from idea generation to implementation and sales.
Firms may have these activities performed by a specific unit or person labelled 'new
business development' or by a dedicated 'new business developer', or they may divide
these activities over different departments along lines as described later in this book
(see Chapter 7).
These definitions show that innovation management and new business
development are slightly different but overlap strongly (see Figure 1.1). Traditionally,
innovation management was focused on research, new products and new processes
in firms. Today innovation management also includes new services and new business
models. New business development is more limited on the one hand, since it usually
does not include process innovation. But it is broader on the other hand, since it
includes the creation of new markets. The creation of a new production plant can
be part of innovation management, but not so much of new business development.
On the other hand, expansion of a service to a new country is part of new business
development, while we do not consider it to be innovation management.
Although this book covers both innovation management and new business
development, we will not always mention both fields explicitly, but just speak of
innovation and innovation management. But usually we also refer to new business
development.
The innovator
An innovator
is a person
active in
innovation
activities, either
within an
organization or
individually.
We can call people involved in innovation innovators or new business developers. They
usually come up with new ideas, and they are active in developing and implementing
those ideas. What characterizes these people? Dyer et al. (2009) mention five 'discovery
skills', which are typical activities for innovators:
Innovation Management
New Business Development
New services
processes
New products
New markets
New business models
Figure 1.1 The relation between innovation management and new business
development
Innovation management and new business development
Associating refers to connecting 'seemingly unrelated questions, problems, or ideas
from different fields'. It is at the heart of innovation: connecting different
worlds. Innovations are often combinations of ideas or knowledge from different sectors. For instance, the iPhone connected the world of computers to the
world of telecommunications, using knowledge and technologies from both
fields. Some people are good at connecting such different ideas.
Questioning refers to asking questions on why things are the way they are and
to challenging the status quo. People may wonder why millions of people all
over the world step into their cars every day to commute to work. Thinking
about such a question they may come up with alternatives, such as relocating
office buildings, new transport systems or more decentralized workplaces.
"7
Observing refers to intensively looking at what people are actually doing, with
a fresh mind in the sense of not taking the world for granted. In Chapter 3
we will elaborate on observing users. By observing them we can learn about
the actual use of our products and services and get ideas on improvements or
alternatives.
"7
Experimenting refers to learning by creating imaginary or real image prototypes
or pilots of a new product, service or business model. By making an idea or
concept real, we can learn about its impact and effectiveness. Furr and Dyer
(2014) see creating space for experimentation as the core of the task of innovation project leaders. According to them, the leader should not decide on the
direction to go themselves but should carefully create a mindset and room
for the team to experiment, instead of just working behind the desk, since
experimentation leads to better information (see Section 7.3).
"7
Networking refers to connecting to other people and institutions, internal
and external to the firm. Since innovators and new business developers often
combine knowledge and ideas from different people and fields, networking is
essential. Ancona et al. (2002) speak of high performing X-teams, teams that
have strong external relations (see Section 7.1). In Section 7.2 we will also see
that not just having a large network as such, but also the specific structure of
the network of innovators affects their performance.
X-teams are
teams with
strong external
relations.
On top of these skills, entrepreneurial alertness characterizes the innovators and new
business developers. They are always on the look-out for opportunities for innovation
and new business. Those opportunities may pop up at unexpected moments or in
unexpected situations; being alert is a precondition to detect them.
The five skills above are mainly important in the front-end stage. As we will see in
the next section, later stages require more execution-oriented skills.
1.2 Paradoxes of innovation
The fields of innovation management and new business development are paradoxical
fields, characterized by counterintuitive forces . Innovation management has to balance
those forces. Three paradoxes are outstanding. The first one concerns the tension
between uncertainty generation and reduction. The paradox involves that innovators
generate uncertainty at the beginning of a project, but they generally attempt to reduce
it as soon as possible. They generate uncertainty by creating ideas and projects for new
products, new services or new business models. At the same time, innovators and new
business developers attempt to reduce uncertainty as early as possible in the process,
Uncertainty is
a state of
missing
information
and knowledge
of relevant
aspects of a
situation and
of relations
between those
aspects.
7
Innovation Management
by doing technical and market tests, and by assessing the organizational and financial
viability of the new offering. We find an example in Case 1.2 (DriveNow). BMW and Sixt
created uncertainty by conceiving the idea of starting car-sharing services in city areas. It
was unclear whether there was enough demand, and whether they were able to manage
this activity that was completely different from their existing activities. But soon they
reduced uncertainty by exploring the market in a few cities.
At the start of an innovation project, uncertainty is high. It's often uncertain whether
the company will be able to create the new product, service or business model, it's
uncertain whether there will be a market for it, it's uncertain whether suppliers will be
able to deliver, and it's uncertain whether the competition will be ahead or not. Also, in
some cases, certain complementary products are needed, and it is uncertain whether
other firms will be able and willing to produce those. Innovators (and sometimes
their organizations) seek uncertainty, because they need to develop themselves for an
uncertain future, and the returns from uncertain activities can be high. So, innovators
have to embrace uncertainty. Uncertainty distinguishes innovation from other activities
in the firm, which may also carry uncertainties but usually to a lesser extent. The high
level of uncertainty involved in innovation and new business development also requires
different ways of working and skills than in other business activities.
But, on the other hand, innovators and their organizations generally try to reduce
uncertainty because uncertainty means risk and potential losses. So, processes,
market learning, team structures, collaborations, etc., all aim at reducing uncertainty
as early as possible in an innovation project. When uncertainty remains high in such
a project, that may even be a reason to stop the project altogether. Idea generation on
new products, services or business models increases uncertainty, since it opens new
opportunities that are still highly uncertain. But from the point of idea generation
onwards, the other innovation activities should reduce uncertainty. So, innovation is
at the same time an uncertainty creating and diminishing activity.
This discussion touches upon a second, related paradox concerning the character
of innovation activities in different phases. In general, we distinguish between
the idea development phase (the front end of innovation), in which phase the team
develops the innovative concept, and the implementation phase, in which it details
the concept and brings it to market. Innovators generate uncertainty in the front-end
phase, while they try to reduce it in the implementation phase.
The two phases require quite different activities and capabilities. The emphasis
in the front end is on creativity. The skills from the previous section - associating,
questioning, observing, and a facilitative and experiment-oriented management style
- are essential in this phase. On the contrary, in the implementation phase, sticking
to deadlines, project management, advertising, and an execution-oriented, hands-on
management style are more important. Creativity is still important to perform these
activities in an innovative way, but it's not dominant any more. In addition, some of
the creativity skills, such as networking, have to change in character. In general, in
the front-end phase the innovation team needs a diverse network to different types
of people, to be able to tap into different types of knowledge. In the implementation
phase the team needs a network that supports the tasks of the team. Such a network
will be more coherent and less diverse (see Sections 7.1 and 7.2).
As we will see in this book, there are more differences between the front end and the
implementation phase, for instance, in the applied processes. As we will see in Chapter 3,
in the front end, firms mainly apply iterative processes, whereas in the implementation
phase sequential processes are often more appropriate. Leadership styles will also differ
between front end and implementation (see Section 7.3). An important challenge for
Innovation management and new business development
firms and project teams is how to overcome the change in the type of activities and
the required competencies. A solution can be to assign tasks in the front end and in
implementation to different people, as is implicit in S0rensen's (2012) definition of new
business development, quoted above, which restricts new business development to the
front-end stage, and proposes to leave other activities to other units and people in the
firm. An alternative solution is to assign both the front end and implementation to the
same people, but to require different behaviours from these people in different phases
of the project. So, either the team leader and members are able to change their behaviour
and network over the course of the process, or the project will need a change in team
leadership and team composition. We can consider this contradiction between required
skills, leadership and network the second paradox of innovation.
In general, in popular discussions on innovation and new business development, the
creativity aspect gets most attention and implementation is undervalued. However,
effective and efficient implementation is at least as important as creativity. Firms
can spend their financial resources only once, and if they spend them on inefficient
innovation activities, the results will have too little impact for the firm and the future of
the firm is jeopardized. Also, support for these activities will diminish, since colleagues
see a lot of resources going into an activity that has little productive value. Having
a clear portfolio management approach (Chapter 5) and well-organized processes
(Chapter 6) contributes to effective and efficient implementation of innovations.
A third paradox is between incremental and radical innovation. Incremental
innovation means that the firm makes small modifications on existing products,
services or business models. Radical innovation means that the firm enters completely
new markets, applies new competencies and moves away more radically from its
existing products, services and business models. The levels of uncertainty involved in
the two types of innovation are opposite: uncertainty is relatively low in incremental
innovation, and it is relatively high in radical innovation. Therefore, the activities,
skills, processes, performance measures, leadership styles and time horizons are rather
different between incremental and radical innovation. The question is how the firm can
manage these differences. As we will see in Chapter 7, we speak of ambidexterity: the
firm has to perform well in the short term (by means of incremental innovation) and
prepare for the longer term (by means of more radical innovation). Separation between
incremental and radical innovation in distinct units can be a solution. The more radical
the innovation, the more removed the unit will be from the daily operations.
1.3 What is business model innovation?
An important type of innovation today is business model innovation. Business model
innovation has become an extremely popular topic since the publication of Business
Model Generation by Alexander Osterwalder and Yves Pigneur (2010). In that book,
Osterwalder and Pigneur give a definition of the concept, and present the Business
Model Canvas which sets out the scope of business model innovation. Their definition
is: 'A business model describes the rationale of how an organization creates, delivers,
and captures value' (p. 14). So, value is key in this definition: what it means for your
customers (create), and how you earn money in return (capture). Also, the operations
of a company are included: how you deliver value. The concept of business model as
introduced by Osterwalder and Pigneur also describes the position of companies in
the value chain: what value you provide, and what value you take from your suppliers.
In that sense it is also a description of the reason for the existence of companies, since
that is derived from adding something to a certain value chain. We can also give a
A business
model is a
description of
the rationale
of how an
organization
creates,
delivers and
captures value.
9
10
Innovation Management
broader and higher-level definition of business model: 'A story around who we serve,
what is the value proposition (what), and how we make money.' Other definitions have
been coined that focus more on the elements and connections between these elements
(Amit and Zott, 2012). Business people sometimes just refer to the financial model
when they speak about business models, referring to alternative ways to generate
income for the company, such as facilitating sharing products between customers
instead of selling them (DriveNow, see Case 1.2), two-sided platforms (such as Airbnb)
and advertising (Google).
Business model innovation is popular in the business world today. Many firms
have started discussing their business model and considering alternatives. A question
is: Why is the concept so popular these days? Should the concept always have been
popular, but did we have to wait until Osterwalder and Pigneur unveiled the term? Or
is there a trend in the business world that explains its popularity? The latter reason
is certainly important. The rise of IT and particularly the Internet and smartphones
have generated options for many new and unusual business models, in which you
earn money other than by selling products or services. Also, IT facilitates collaboration
instead of doing things internally in companies. It has made it easier to find appropriate
parties that have certain knowledge or that can supply certain products or services.
So, instead of firms doing it all themselves, it has become easier to purchase products
or services from others, or to collaborate with others who have certain knowledge. In
this way new methods of delivering products and services are created.
At the same time, the concept of business model innovation opens up completely
new arenas for innovation. You do not just have options to innovate your products or
services, but you can also innovate your channels to the customer (e-commerce), your
relations with customers, the way you work with partners, or the financial model for
your business. In fact, the concept of business model innovation has broadened the
scope of innovation managers and new business developers.
The Business Model Canvas
A business
model
innovation is
a change in
one or more
elements of
the business
model of an
organization.
The Business Model Canvas provides a tool to make a description of the business
model of an organization. The canvas has nine elements or building blocks. The
elements of the Business Model Canvas are described in Figure 1.2. In the centre is
the value proposition, which describes the value we provide to our customers. Three
building blocks on the right describe the market part of the business model (customer
segments, channels, customer relationships), three building blocks on the left describe
the supply side (key activities, key resources, key partnerships), and two building
blocks at the bottom describe the financial model (cost structure, revenue streams).
Figure 1.3 shows the canvas for the example of the business model of a supermarket.
As you can see, many supermarkets in fact provide two value propositions to two
different customer groups: providing all the groceries needed at a single place to the
once- (or twice-) a-week shopper, and providing the ingredients for tonight's meal to
the just-before-dinner shopper. The two value propositions require differences in the
assortment of services and products offered by the supermarket.
The canvas can help us to define the concept of business model innovation more
precisely. Above we defined the concept of business model as the way a company does
business. This would mean that business model innovation includes any change in the
way the firm does business. This is a very broad definition. A more precise definition,
based on the canvas, is: a business model innovation includes every innovation in
any of the elements of a business model. Usually we only speak of a business model
innovation when a major change in any of the elements of a business model takes
Innovation management and new business development
(Y
Key
partnerships
CD
~
Key
activities
Value
propositions
ii
Customer •
relationships
Customer •
segments
The most
The bundle of
Type of
important things
products and
relationships
services that
a company must
do to make its create value for a
The groups of
business model specific customer
people or
segment
The network of
work
organizations
suppliers and
I
It solves a
Key
Channels
the company
partners
customer's
resources
aims to reach
problem or
and serve
The most
How a company
satisfies
a need
important assets
communicates
required to make The reason why with and reaches
a business model customers turn to its custom ers to
work
deliver a value
on e company
proposition
over anoth er
118
.:..a.
Cost structure
Revenue streams
The cost incurred to operate
a business model
The cash a company generat es
from each customer segment
Figure 1.2 The Business Model Canvas
Note: This work is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported Licence.
(Y
Key
partnerships
Suppliers
Marketing
agencies
~
Key
activities
• Purchasing
• Marketing
• Logistics
• Branding
• Setting up
new stores
-"--
Value
II
propositions
Getting all your
groceries at one
point at a
reasonable price
I
.:..a.
Key
resources
• Warehouses
• Stores
• Expertise marketing,
logistics,
purchasing
• Brand
•
Customer
relationships
Loyalty cards
Brochures
Journa l
The once-awee k shopper
Channels
(Alternative:
getting the meal
for tonight)
118
Advertising
(Alternative:
the dai ly justbefore-dinner
shopper)
The store
Revenue streams
Cost structure
Cost of products
Costs of operations, stores, personnel
Marketing and other overheads
Customer.
segments
Sa les of products
Figure 1.3 The Business Model Canvas for a supermarket
Note: This work is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported Licence.
11
12
Innovation Management
place, or when a number of minor changes combined create a major change in the
business model. Business model innovation as defined in this way includes product or
service innovations, which are in fact special cases of business model innovation (both
usually focusing around a change in value proposition). Nevertheless, we will speak in
this book about product, service and business model innovation as separate categories,
where business model innovation refers to innovations in the business model that are
beyond product and service innovations, and which include other elements of the
Business Model Canvas such as the channel, partners or the financial model.
Types of business models
The Business Model Canvas is a general framework to distinguish and classify business
models, but it doesn't say anything about the different existing business models. What
business models are there, and how successful are they? Figure 1.4 depicts a range
of business models (partly derived from Michel, 2014). In the figure, we classify the
New structure of business model
Two-sided market model
Airbnb
Uber
Sharing
DriveNow (see Case 1.2)
New revenue/pricing model
Demand-driven pricing
Airline services
Value-based pricing
Consultancy services
Bidding
eBay
Name your own price
Priceline
Razor-and - blade business model
Gillette
Printers
Advertisement model
Google
New channel
Streaming
Netflix
Home delivery/ web-commerce
Amazon
Customer loyalty
Subscription
Netflix
All inclusive
Cruises
Total solution
Rolls Royce aircraft engines
Figure 1.4 Business models
Innovation management and new business development
Parameter
Description
Personalization
Tailoring products and services to
individual consumer preferences
Closed loop
Re - using used products
Asset sharing
Using the sam e assets for different
purposes (Uber using people's private
cars)
Usage- based pricing
Charging customers based on use instead
of up-front purchasing
Collaborative ecosystem
Collaborating across the supply cha in to
provide a product or service
Agility
Reacting quickly to changing custome r
needs
Figure 1.5 Potential success factors for business models
business models based on the most salient element of the Business Model Canvas
represented by this business model, often the financial model. But in many cases the
business models change different elements of the canvas. For instance, Uber is a twosided market, connecting drivers and customers, but Uber also applies demand-driven
pricing and Uber changes the 'key assets' element of the Business Model Canvas, since
it does not own cars as the cars are owned by the drivers.
A question is of course which business models are more successful than others. At
first sight, the reader may think that the two-sided market model is the most successful,
since we observe a few huge successes (Airbnb, Booking.corn). However, it is dangerous
to derive general conclusions from a few cases, since we do not know how many other
entrepreneurs tried to create similar business models and failed. So, we should know
the average success of a business model, not the performance of a few very successful
cases. Kavadias et al. (2016) did a more extensive study, classifying a set of 40 new
initiatives on a number of parameters. They concluded that six of these parameters
were particularly predictive of the success of business models (see Figure 1.5).
Why business models are not the same as strategy
There is quite some discussion amongst academics on the difference between business
model and strategy (Teece, 2010). Business models are about how the firm creates
and delivers value to its customers and how it captures value for itself. Strategy is
about how the firm differentiates itself from its competitors (competitive advantage)
and how the firm can create competitive advantages in the future. The strategy sets
out what the firm wants to achieve, and how it wants to do so. It also relates to the
capabilities that the company possesses or aspires to possess in the future. A business
model may facilitate the implementation of a strategy. For instance, selling products
over the Internet in addition to selling them in physical stores (a new business model)
can facilitate internationalization in a company (an element of strategy). On the other
hand, the strategy (creating a cost advantage compared to competitors) can require
business model innovation (outsourcing of production) . So, business models and
strategy are distinct, but are in close interaction.
13
14
Innovation Management
1.4 Types and classifications of innovations
Above we saw that we can distinguish different types of business model innovation
based on the elements of the canvas. The literature on product and service
innovations also distinguishes different types of innovation. Novelty is an important
criterion in those classifications. This literature makes a distinction between
technological novelty and market novelty. The resulting classification is called the
technology-market matrix (similar to the Ansoff matrix in strategy literature)
(see Figure 1.6). It refers primarily to products. Technological novelty refers to the
technology embodied in the product. Market novelty refers to the novelty of the
target customer group, or to the novelty of the preferences of the customer group.
""7
An incremental innovation is only a marginal change on both aspects, for
instance a new cell phone design which differs little from existing cell phones.
""7
Technological innovations are new with respect to technology but serve the
same function as the existing products. The digital watch was a technological
innovation compared to the traditional analogue watch, since it performed the
same function for the same customers while applying a different technology.
""7
A niche innovation uses existing technology but aims at new customers or
new preferences of existing customers. One niche innovation is a convertible
version of an existing car model, since it uses the same technology for a new
group of customers.
""7
And a radical innovation is an innovation in both technology and customers.
The first iPhone was a radical innovation, since it was new in terms of technology, particularly by combining technologies not used together in this way
before, and it created a new market, since customers purchased a product with
completely new features.
Sometimes it is not so clear where an innovation should be located in the classification.
For instance, the electric car is a technological innovation if you consider it as a
replacement of the traditional combustion engine car, but it is a radical innovation if
you consider the completely new preferences that it serves, particularly in the area of
sustainability.
Technological newness
High
LOW
High
Niche
Radical
Incremental
Technologica l
V)
V)
QJ
C
:!:
QJ
C
...,
QJ
~
"'
~
LOW
Figure 1.6 Technology-market matrix
Innovation management and new business development
The technology-market matrix addresses a limited set of elements of the Business
Model Canvas, mainly the value proposition, resources (technology) and customer
segment. In fact, we could extend the matrix with more dimensions corresponding
to elements of the canvas, such as the channel, partners and the financial model. We
would get a multidimensional matrix, which, however, cannot easily be visualized.
A classification of innovations restricted to the technological dimension only is the
modularity matrix. This classification focuses on the composition of products, as
shown in Figure 1.7. On the vertical axis are the components of a product. A component
of a car is its engine: it can be either a combustion engine or an electrical one. If the
combustion engine is exchanged for an electrical one, the component is new. On the
horizontal axis are interfaces between components. For instance, a car consists of a
chassis, engine, body, interior, electrical installation, etc. All these components are
connected through interfaces, which can be nuts and bolts but also connectors between
wiring and electrical parts, etc. Also, the spatial design of the car creates interfaces,
since it determines how different components are located in relation to each other.
Innovators can either change specific components of the car or change the interfaces
between them:
~
Incremental innovations make a marginal change to both the components and
the interfaces. An update of a car model is an incremental innovation.
~
Architectural innovations change the interfaces radically. For instance, a recumbent bicycle is an architectural innovation compared to a traditional bicycle since
it uses the same components but arranged in a completely different fashion.
~
Modular innovations change a component without changing the majority of the
interfaces. For instance, a veggie burger is a modular innovation compared to a
hamburger, since the meat is replaced but all the rest (bread, service) remains
the same.
~
A radical innovation changes both components and interfaces. Again, the first
iPhone was a radical innovation according to this classification, since Apple
developed new applications (components) and the interfaces between elements in the product were new.
~
Q)
z
Modular
innovation
Radical
innovation
Incremental
innovation
Architectural
innovation
(/)
+'
C
Q)
C
0
0..
E
0
u
01
C
·.;:::;
(/)
·x
w
Existing
Int erfaces
Figure 1.7 Modularity matrix
Source: Adapted from Henderson and Clark (1990).
New
15
16
Innovation Management
Note that the term 'radical' is used in this scheme in a different way than in Figure
1.6. Here it refers to technological aspects only: a change in both the components in
a product and their relations. In Figure 1.6 it refers to a change in the combination of
technology and market. In fact, Figure 1.7 refers to the horizontal axis in Figure 1.6,
since it is about technology only, and does not include market aspects.
1.5 Innovation and society
The economy
Innovation has an important impact on the economy. On the one hand, innovation
can destroy existing businesses, and thus hurt the economy. For instance, the spread
of computers has phased out many administrative jobs, which are now performed by
computers. On the other hand, innovation creates new business and can improve the
efficiency of existing businesses, and thus has positive effects. In general, the negative
effects occur in the short term, while the positive effects remain also in the longer
term. Therefore, economists and politicians weigh the positive effects as stronger than
the negative ones.
Innovations, and particularly product innovation and the underlying technologies,
are also assumed to have effects on the development of economies in the longer
term. At the beginning of the 20th century, Nikolai Kondratiev developed a theory
that technology development was the reason for SO-year waves in the economy.
Figure 1.8 illustrates these long-term waves . General-purpose technologies, such
as steel production, have effects in many industrial sectors, and so generate strong
economic growth. At some point in time, the growth ends and a period of recession
starts, until scientists and engineers develop new technology which diffuses through
society, leading to a new period of growth. Although the theory is attractive because
of its simplicity, it lacks sufficient clarity to be accepted by economists. One problem
is that economic figures support the waves to some extent, but certainly not fully.
Another problem is that it is unclear why these general-purpose technologies would
appear at regular time intervals. So, the evidence for the theory is thin, and it is more
an interesting thought experiment.
Steam engine
Cotton
Railway
Steel
Electrical
engineering
Chemistry
Petrochemicals
Automobiles
Information
technology
....,,.-----
.
G
R
1800
IG Growth
D
1850
1900
R Recession D Depression
1950
2000
I
Figure 1.8 Long-term Kondratiev waves in the economy
Source: Rursus (2009).
Note: This adapted work is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported Licence.
Innovation management and new business development
Innovation for society
Innovation has a strong impact on society at large. Innovation is an important means
of solving societal problems. The United Nations consider innovation one of the ways
to address global challenges, such as poverty, inequality, climate change, etc. For that
reason, innovation is even part of United Nations Sustainable Development Goals (Goal
9, Build resilient infrastructure, promote inclusive and sustainable industrialization
and foster innovation). For instance, innovation can create solutions for environmental
pollution. Electric cars solve the problems caused by exhausts from cars, and if utilities
generate the electricity in a sustainable way, can also reduce CO 2 emissions. Business
model innovation can have similar effects, such as, in the same context, sharing of cars.
If such sharing reduces ownership of cars, it decreases material use for the production
of cars and the use of space for parking in urban areas.
Many firms today include sustainable development in their innovation strategies.
Food companies create new packaging technologies for their products, that both
retain the product in good condition and have a lower impact on the environment.
They also develop vegetarian alternatives for meat products, in that way reducing the
consumer's environmental footprint considerably. Today most hamburger chains even
include those burgers in their menus. In some cases, larger 'ecosystems' have to change
to make such sustainable innovation successful. Case 4.15 describes the development
of a biobased chemical component with applications in running shoes that required
such ecosystem changes.
Recent examples of the broader societal impact of innovation are new products and
services that help solve the COVID-19 crisis. In the first place, many pharmaceutical
firms developed a vaccine against the virus. But also many other firms developed new
activities to help combat the virus (see Case 1.3). Often these innovations were of the
technological type according to the technology-market matrix in Figure 1.6: the firms
used their technological competence for new COVID-19-related markets.
( \ CASE 1.3 INNOVATION TO HELP SOLVE THE COVID - 19
CRISIS
After the first shock of COVID-19 affecting Western economies, the crisis generated
much creativity and innovation to contribute to a solution. In most cases, firms applied
their existing technology competences to develop new products or services. Textile
manufacturers in Western countries ordered face-mask-producing machines from China
and adapted their production facilities. The Spanish fast-moving apparel retailer Zaro
started producing hospital clothing. Liquor distillers produced disinfectants, and perfume
houses such as Givenchy and Dior started producing antibacterial hand cleansers.
On the other hand, innovation can also have a negative societal impact. In fact,
innovations from the past, such as cars, the use of natural resources for energy, etc., have
contributed to the current climate crisis. Other examples are the use of new technology
for warfare, such as nuclear warfare, and the threat of IT systems for privacy. Today
ethical issues arise in the use of artificial intelligence, because artificial intelligence can
reproduce prejudices if trained with historical examples. The challenge for innovators
and governments is to detect such negative consequences in an early phase, and either
to adapt the technology in a way that the negative consequences do not occur (training
an artificial intelligence system in the right way), or to create accompanying measures
to take away negative consequences, such as privacy regulations.
17
18
Innovation Management
Public policy
Direct
subsidies are
subsidies
that involve a
payment to an
organization
or person,
dependent on
the execution
of a specific
activity.
Indirect
subsidies are
financial
compensations
to an
organization or
individual for a
specific activity
but that do not
involve direct
payments. Tax
deductions, for
instance.
Externalities
are
unintentional
effects of a
specific action
or behaviour.
A benchmark
is a
comparison
between the
performance
of an entity
(country,
organization)
(by
measurement
of specific
indicators)
against the
performance
of other similar
entities.
Because innovation has such a strong effect on economies and societies, governments
are generally interested in promoting this activity. They usually provide direct subsidies
to R&D in universities and research institutes. They distribute part of those subsidies by
means of national science foundations, selecting the highest quality research proposals.
Also, many governments give tax deductions for R&D investments in companies. These
are a form of indirect subsidy. In some countries, companies pay lower profit tax on
revenues originating from products on which they own a patent. Recently, research has
shown that strong IP protection legislation and good contract enforcement policies also
stimulate companies to invest more in R&D (Brown et al., 2017), since these provide
more guarantees that they will benefit from their investments.
The justification for policies to provide tax benefits and subsidies for R&D and
innovation are so-called externalities of innovation for the economy and society.
The generators of innovation, research institutes and firms , usually only appropriate
part of the benefits generated by the innovation themselves, normally by means of
the sales prices of the innovation. Part of the benefits are left to society, for instance
in the advantages that new products or services bring, or by means of decreased prices
of products or services. For instance, if a company develops a new process for sealing
the stems of cut flowers which give them a longer lifetime, the retailer selling the
flowers will have to throw away fewer flowers and the consumer can benefit longer
from the flowers. The retailer can therefore pay the flower producer a higher price,
and the flower producer can use part of the added revenue to pay the manufacturer
for its investments in the new process. It will be clear that the manufacturer does not
receive compensation for all the benefits to the other parties, because each party only
pays part of the benefits or added revenues to its supplier. In addition, in this case
there are advantages for the environment, in the form of reduced waste of end-of-life
flowers, for which the manufacturer is not compensated. Because manufacturers only
receive part of the benefits, they would in fact underinvest in innovation.
To compensate for that, governments support innovators with subsidies and tax
reductions. There is debate in the literature about the question of whether these
subsidies replace investments by firms themselves, and thus reduce firms' spending
on innovation, or whether they stimulate such investments. Recent publications
suggest that government subsidies increase companies' spending, and that they do not
substitute for the investments of firms themselves (Dimos and Pugh, 2016). Subsidies
appear to have a particularly positive effect for industries which would otherwise only
innovate at a low level (Brown et al., 2017). So, by subsidizing innovation, governments
stimulate companies to perform innovation at a level that is in line with its economic
and societal benefits.
In the global economy of today, it makes sense for governments to focus on
specific industries. Countries or regions often have their own strengths with
respect to sectors, and governments can attempt to reinforce these. For instance,
India has built strong competencies in information technology and software, and
thus innovation in those areas can give a strong impetus to further growth in the
country. Germany is strong in the car industry, while China has high competencies
in electronics manufacturing. Each country can focus on specific industries, to keep
its position and to retain wealth for its population in the global economy.
Innovativeness of countries
Because of its economic and societal importance, governments and firms are eager to
compare their innovative performance with each other. Several benchmarks compare
Innovation management and new business development
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Regulatory environment
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General infrastructure
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Credit
Investment
Trade, competition & market scale
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Knowledge workers
Innovation linkages
Knowledge absorption
..-··
·······
GLOBAL
.
( INNOVATION i
\
INDEX
/
······
. ~~~:;~~~~~~;~~-. ---.---.-t!t-.. · - -.:.
Knowledge creation
Knowledge impact
Knowledge diffusion
---------------------------------------CREATIVE OUTPUTS
8
:
:
:.
---------
Innovation
Output
Sub-index
:•
Intangible assets
Creative goods and services
Online creativity
Figure 1.9 Innovation indicators of the Global Innovation Index 2019
Source: Cornell University, INSEAD, and WIPO; Dutta et al. (2019).
Note: Material originally provided by the World Intellectual Property Organization (WIPO). The secretariat of
WIPO assumes no liability or responsibility with regard to the transformation of this data.
innovativeness of countries. The Global Innovation Index compares countries
worldwide (Dutta et al., 2019). This benchmark considers innovation to be a process at
the national level and consequently has three main categories of indicators (indexes)
(see Figure 1.9):
""7
The input index includes indicators measuring the quality of institutions, the
availability of human capital and researchers, infrastructure for innovation,
and market and business factors.
19
20
Innovation Management
""7
The output index includes knowledge and technology outputs, such as patents,
and creative outputs, such as design patents (see Section 4.7).
""7
The third index is efficiency: how effective are actors in a country able to
convert inputs into outputs. This index takes just the ratio of outputs over
inputs. It shows how much innovation output a given country is getting
for its inputs.
The composite score adds the three indexes together. For instance, according to this
benchmark Switzerland, the UK, Sweden, the Netherlands and the US were the world's
five most innovative nations in 2015. The Global Innovation Index is very broad,
including indicators such as the quality of the logistics infrastructure and the use of
broadband in a country, factors that are important for the competitiveness of the
economy but do not necessarily have a strong direct effect on innovation.
The European Innovation Scoreboard confines itself to indicators that have a
direct relationship with innovation. It also has three categories of indicators:
""7
Enablers are the conditions for innovation;
""7
Firm activities refer to R&D and innovation activities in companies;
""7
Outputs are actual innovations in the market.
However, whereas the Global Innovation Index considers knowledge production as
an output, the European Innovation Scoreboard considers it as an input. This shows
that the two scoreboards have a slightly different focus . The Global Innovation Index
focuses on the process of knowledge production and the economic conditions for
that, while the European Innovation Scoreboard focuses more on the conversion of
knowledge into actual innovation. In 2016, Sweden, Denmark, Finland, Germany and
the Netherlands were the five most innovative countries in Europe according to the
European Innovation Index.
= 1.6 Summary
In this chapter we reviewed the basics of innovation management and new business
development, the innovation manager, the process, innovation types and public policy.
First, you learnt that innovation management deals with managing the innovation
process within a company; new business development deals with the process of
creating new business opportunities for a company. They are similar, but not identical.
Both focus on new services, products and business models; they differ in their focus
on the creation of new processes and new markets respectively. We discussed the
front-end skillset of the innovation manager, from associating and experimenting to
networking. The innovation manager has the required skillset and background to set
up and manage strategy, creativity, culture, project planning, implementation etc. in
relation to innovation activities.
We have also introduced the difference between the front-end and implementation
phase of the innovation process. In particular, we saw how uncertainty presents a
changing paradox over the phases of the innovation process, as the innovator needs
to accept and promote uncertainty for the creation of innovations, but at the same
time must try to reduce uncertainty to make the risks inherent to implementation
of innovation manageable. From a strategic point of view, it is then also important
to understand what types of innovation a company produces. First, we saw that
Innovation management and new b usiness development
21
an important aspect of innovation is to understand what a company's business
model is and how the firm can strategically innovate the ways that it creates and
captures value. The Business Model Canvas provides a clear-cut tool to analyze
this. Furthermore, we discussed how innovation can be categorized according to
market and technological newness, and according to component and interfaces
between them. Finally, we also took a moment to appreciate how innovation can
impact economies and innovativeness of countries, and how public policy can shape
innovation and vice versa.
0
1.7 Discussion questions and exercises
Discussion questions
1.
To what extent do you think that the processes and activities within a company differ between innovation
management and new business development?
a. Are new business development processes not just a subset of the innovation management
processes?
2.
Do you believe that the skills of a new business developer differ from those of an innovation manager?
3.
What do you think is a good way to balance uncertainty in the innovation process?
a. For example, would you gamble on developing different types of innovations simultaneously or would
you rather focus on developing one as soon as possible?
b. Would it be best to develop new innovations and new markets through a separate business unit (e.g.,
in an innovation department) or throughout the company (e.g ., squads and tribes)?
4.
Looking at Figure 1.6 (Technology-market matrix) and thinking about the sharing economy: where would
you place Airbnb (as an innovation) in the matrix as compared to traditional hotels?
a. And where would it fit in Figure 1.7 (Modularity matrix)?
b. How well are both matrices suited to categorize service and business model innovations?
5.
To what extent does the local government in your region or country use public policy to stimulate innovation?
Exercises
Thinking about innovative organizations, write down which ones come to mind and explain why. Use at least
one of these organizations in the following exercises.
1.
Looking at Figure 1.6 (Technology-market matrix) and Figure 1.7 (Modularity matrix) , categorize the types
of innovations that these companies produce.
2.
Fill in the Business Model Canvas for a core product or service of that organization.
a. Can you identify and fill in each element of the canvas? Why/why not?
b. Where did the company innovate in recent years and in which element of the canvas do you see most
room for more business model innovation?
3.
How does public policy shape innovation in the industry or sector that the company operates in , and vice
versa?
22
Innovation Management
Consider Uber, which is a company that has had a major influence through their innovation on the taxi market
in many countries around the world. In most countries, the adoption of their platform did not go w ithout some
public debate and changes to public policy.
1.
Investigate how Uber shaped public policy in your (or in neighbouring) countries. You may do thi s through
looking up news articles. What were the changes in public policy due to Uber? How did they achieve these
changes?
2.
Also try to study how public policy has affected Uber. How did Uber adapt its business model to (your)
specific countries? Why was it necessary to push these changes?
References
Amit, R. and Zott, C. (2012) 'Creating value through business model innovation', MIT Sloan
Management Review 53(3): 41-49.
Ancona, D., Bresman, H. and Kaeufer, K. (2002) 'The comparative advantage of X-teams', MIT
Sloan Management Review 43(3, Spring): 33-39.
Barton, D., Carey, D. and Charan, R. (2018) 'One bank's agile team experiment', Harvard Business Review (March-April): 59-61.
Brown, J.R., Martinsson, G. and Petersen, B.C. (2017) 'What promotes R&D? Comparative
evidence from around the world', Research Policy 46(2 , March): 447-462.
Dimos, C. and Pugh, G. (2016) 'The effectiveness of R&D subsidies: a meta-regression analysis
of the evaluation literature', Research Policy 45(4, May): 797-815.
Dutta, S., Lanvin, B. and Wunsch-Vincent, S. (2019) Global Innovation Index 2019.
Creating Healthy Lives The Future of Medical Innovation . http s://www.
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Innovation%20Index%202019,education%2C%20infrastructure%20and%
20business%20sophistication.
Dyer, J.H., Gregersen, H.B. and Christensen, C.M. (2009) 'The innovator's DNA', Harvard
Business Review (12, December): 61-67.
Furr, N. and Dyer, J.H. (2014) 'Leading your team into the unknown', Harvard Business Review
(12, December): 80-88.
Garud, R., Tuertscher, Ph. and Van de Ven, A.H. (2013) 'Perspectives on innovation processes',
Academy of Management Annals 7(1): 775-819.
Henderson, R.M . and Clark, K.B. (1990) 'Architectural innovation: the reconfiguration of
existing product technologies and the failure of established firms', Administrative Science
Quarterly 35(1): 9-30.
Kavadias, S., Ladas, K. and Loch, Ch. (2016) 'The transformative business model: how to tell
if you have one', Harvard Business Review (October): 90-98.
Mahadevan, D. (2017) 'IN G's agile transformation', McKinsey Quarterly, 10 January.
Michel, R. (2014) 'Innovation isn't worth much if you don't get paid for it', Harvard Business
Review (October): 78-85.
Osterwalder, A. and Pigneur, Y. (2010) Business Model Generation. Wiley.
Rursus, Simplified KondratieffWave Pattern SVC version of File:KondratieffWave.gifl 7 September
2009, 10:37
Schumpeter, J. (1934) The Theory of Economic Development. Harvard University Press.
S0rensen, H .E. (2012) Business Development. A Market-Oriented Perspective. Wiley.
Teece, D. (2010) 'Business models , strategy and innovation', Long Range Planning 43(2-3,
April-June): 172-194.
Idea
development
Part
2
Part 1
Introduction
Innovation
management
Chapter 1
Part 2
Idea development
Part 3
Selection
Idea
management
Innovation strategy
Portfolio
management
Company
---+
Sections 2.6-2.7
Part 4
Implementation
---+
Sections 7.2-7.5
Chapter 8
Chapters 4-5
Project
Idea
development
Project
selection
---+
Sections 2.1-2.4
Chapter 3
---+
Chapters 4-5
Part 5
Specific firms
Part 6
Conclusion
Specific types
of firms
The future of
innovation
management
Chapters 9-10
Chapter 11
23
Organization of
innovation
Project
execution
Chapter 6
Section 7.1
The front end of
innovation
2
Learning objectives
After reading this chapter, you will be able to:
1. Explain what defines creativity and what makes people creative
2. Identify and distinguish different types of creativity
3. Determine important sources and drivers of innovation
4. Reflect on the importance of business and social networks
5. Apply tools to improve creativity of people
6. Run a scenario-planning workshop
7. Plan and lead an effective creativity workshop
8. Design an idea management system
9. Evaluate the effectiveness of crowdsourcing platforms
2.0 Introduction
How often do we find ourselves in an ad hoe brainstorming session on how we can
improve a working process, or on what new products and services we could sell?
Indeed, most of us are familiar with brainstorming as a method to start our creative
process as a group. But what actually is creativity and why is it so important that we
understand and manage it? Why is it essential that we use the right tools to create
and select the best ideas? This chapter is about the idea development phase in our
general framework of this book (see Overview section) . It's also called the front end
of innovation. We explain how to generate ideas, what makes people creative, how
knowledge and networks affect creativity, and how you can lead creativity workshops .
So far, the chapter is about creativity at the project level. In Sections 2.6 and 2.7 we
also discuss creativity on the level of the company: how firms can enhance creativity
in the company, and capture ideas from inside and outside the company. In the next
chapter we will address how to get information from customers in this phase of the
innovation process.
Hansen and Birkinshaw (2007) distinguish between idea-poor, conversion-poor and
diffusion-poor companies, dependent on where the weakness is in the innovation
process. In this chapter we address the problems of idea-poor companies by offering
theory and tools for creativity. The topic of conversion refers to the process of selecting
and developing innovations and will be addressed in Chapters 4 and 5. Diffusion
concerns developing the idea further and implementing it in the market. This topic
will be addressed in Chapters 6 and 7.
25
The idea
development
phase is the
phase in which
the idea is
generated and
elaborated
into a more
detailed
concept
description.
The front end
of innovation
is another term
for the idea
development
phase.
26
Innovation Management
2.1 Creativity
Knowledge and problems
An open
problem is a
problem which
is not narrowly
defined.
A closed
problem is a
clearly defined
problem with
an explicit
description.
In general, we use the term 'creativity' in two meanings: the ability of people to
generate new ideas, and the outcome of that process - the ideas themselves. When
creativity refers to ideas, we mean ideas that combine two characteristics: novelty and
usefulness (Amabile, 1998). Novelty we find in the field of art, usefulness we find in
the field of business, but creativity concerns the combination of the two.
Although we tend to think that ideas come out of the blue (or out of the box),
knowledge is usually an important requirement for creativity. People need knowledge
of certain technologies, or of certain markets, to be able to come up with useful ideas.
In addition, creativity often originates from the combination of knowledge from
different domains (the 'associating' skill from Section 1.1). For instance, the idea of
creating web-commerce is a combination of the possibilities of the Internet with the
processes in retail. Creative people are good at connecting knowledge from different
domains into something new. The out-of-the-box element in such activities is usually
in the combination of specific, unexpected domains.
At the same time, creativity can be an answer to open or closed problems. In the
case of open problems, there is no explicit problem that asks for solutions, but the
idea generator comes up with the idea including the problem that can be solved. The
rise of the Internet created opportunities for innovators and entrepreneurs in many
industries to create web-commerce. In most cases, there was no defined problem or
need for a solution, but the new technology provided opportunities for innovation
and for solving problems. In the case of closed problems or needs, the creative person
develops the idea as an answer to an explicit problem or need. The American airline
SouthWest (see Case 2.1) provides a nice example of a firm becoming creative in
response to an urgent need. In fact, for other entrepreneurs in the airline industry
the example of SouthWest provided an opportunity to respond to an open problem.
Many innovations have resulted from closed and urgent problems, such as canning
food by Nicolas Appert in France in 1809 in response to a call by his government for
better means of preserving food for army and navy use than salting.
( \ CASE 2.1 CREATIVITY IN RESPONSE TO AN URGENT NEED:
SOUTHWEST
An example of creativity in response to an urgent need was the American airline South West,
which invented the budget airline business model because it had landing rights only in the
region of Texas in the US. Instead of purchasing rights in other regions, the company decided
to fly to small airports within the region. It is now the largest airline in numbers of passengers in
the world and it has served as inspiration for many other budget airlines, such as Ryanair and
easyJet in Europe, and AirAsia, Jetstar and others in Asia.
Other authors distinguish between 'value sought' and 'value created' (Ardichvili et al.,
2003). Both value sought and value created can be defined or undefined. Value sought
refers to the open/closed distinction above. Undefined value sought is an open problem,
defined value sought refers to a closed problem. Value created refers to the availability of
a solution to a problem. Undefined value created means that there is no solution available
yet. Defined value created means that there is already a solution, for which a problem needs
to be found. The authors distinguish four situations (see Figure 2.1):
The front end of innovation
Value sought
Undefined
Unidentified
Identified
Dreams
Problem solving
II
"'Cl
<I)
+-'
a
<I)
I...
u
<I)
~
a
>
Defined
Technology tran sfer
Ill
Business fo rmation
IV
Figure 2.1 Types of opportunities
Source: Ardichvili et al. (2003).
I.
Dreams. The innovator comes up with a new idea, which is a solution to a new
problem. This is what we usually consider real creativity.
II. Problem solving. In this situation the problem is defined but the solution is
undefined. An example of problem solving is the origin of Google as a company: two PhD students at Stanford University, Larry Page and Sergey Brin,
developed a better search algorithm for information on the Internet. They
saw a problem and developed a solution. They founded the company Google
based on the result.
Ill. Technology transfer. The innovator has a solution but looks for a problem to be
solved. Often, they have to carry a solution to a new environment. An example of
such technology transfer is offered by the chemical company DSM. In the 1970s
it developed a new fibre that was very light relative to its weight (Dyneema). The
company had to start searching for applications for the fibre. The solution (value
created) had been defined, but the problem (value sought) was undefined.
IV. Business formation. The innovator has a problem and a solution. They just have to
move on to implement the solution. In fact, creativity is rather low in this situation.
In general, solving needs is often an example of value sought, since there is a problem
that has to be solved, and of a closed problem type. Opportunities can be examples of
value created, since at least part of the solution will be available.
Human creativity
Some people come up with new ideas all the time; other people seldom do so. What
kind of people are creative? Three human characteristics enhance creative ability:
expertise, motivation and skills (Amabile, 1998). We have already mentioned
expertise. Creative people usually have deep expertise or knowledge in a certain domain
and connect that expertise with some degree of expertise in another domain. Many
ideas are born from deep knowledge of potential future customer groups (see Case 2.2
on the role of customer knowledge for creativity). On the other hand, expertise can
bind people to a certain way of thinking, and it can limit their scope in idea generation.
27
28
Innovation Management
Intrinsic
motivation is
motivation
that originates
from what the
person likes
to do.
Extrinsic
motivation is
motivation
that originates
from what
the person
receives in
return for
completing a
task.
Therefore, we need creativity tools (see Section 2.3) to disconnect people from their
current way of thinking. Second, people need the right motivation. The literature shows
that intrinsic motivation is better than extrinsic motivation for creativity. Intrinsic
motivation entails that people perform a task because they like to do it, or because
they want to learn or to excel in that task. Extrinsic motivation entails that people
perform a task for certain personal benefits associated with it, for instance a financial
reward or reputation. Research has shown that intrinsic motivation is generally better
for quality of ideas than extrinsic motivation. People who are motivated by the task
itself think deeper or longer about ideas relating to that task than people who want
to achieve a purpose that is not related to the task itself. Finally, creative thinking
skills enhance creativity. These are the 'Discovery skills' described in Section 1.1. As
mentioned before, the 'associating' skill is particularly important, since good ideas
often originate from the combination of knowledge from different fields. Regarding
the question of whether creative skills are 'in-born' or learned, the general opinion
amongst academics is that everybody can learn to be creative.
( \ CASE 2.2 THE ROLE OF KNOWLEDGE IN CREATIVITY
The company Quickplug produced small peat 'plugs' for the floriculture and vegetable
industries to grow young plants in. They used a special binder to hold the plugs together.
One of the owners of Quickplug had a friend who was an entrepreneur breeding orchids.
The orchid breeders planted the young plants in so-called sphagnum. a composition of
different soils. Through his friend, the owner of Quickplug acquired deep knowledge of the
orchid-breeding business. and he developed a dedicated plug for orchids, which reduced
labour costs but, more importantly, also reduced the time taken to produce full-grown
plants. Within a few years, the invention transformed the orchid-growing business.
Unsworth (2001) identifies four types of creativity, depending on the reason for people
to be creative and the type of problem. The reason can be extrinsic or intrinsic and the
problem type can be open or closed, as mentioned above. Based on the combination,
four types of creativity result (see Figure 2.2).
°""7
Responsive creativity entails that people solve a specified problem in a creative
way. For instance, as a member of a team in a car company you may be confronted with the problem that many potential car purchasers in city centres
lack appropriate parking space. You might come up with the solution of organizing car sharing instead of selling cars to individuals. The problem is clearly
at the table and it is your task as a team member to come up with a solution.
°""7
Expected creativity means that people come up with solutions to unspecified
problems as part of their duties. For instance, as a member of a brainstorming
team you come up with ideas for new strategies for the firm (e.g. to lease
printers to your customers instead of selling them).
°""7
Contributory creativity means solving a specified problem which is not part of
your duties (voluntarily). For instance, a person who is not a member of the
team that develops the leasing solution for printers comes up with an idea for
how to pre-finance the printers.
°""7
Proactive creativity means that people voluntarily come up with ideas that are
not clearly specified. For instance, a production worker comes up with the idea
The front end of innovation
I
C
Q)
0..
Expected creativity
Proactive creativity
Responsive creativity
Contributory creativity
Extrinsic
Intrinsic
0
Q)
0..
>E
+-'
Q)
::0
0I...
0...
"'O
Q)
V)
0
u
I
Driver for engagement
Figure 2.2 Four types of creativity
Source: Unsworth (2001).
of leasing printers to customers instead of selling them and communicates
this idea to their manager (or an idea management system, see Section 2.6).
This is the type of idea generation that we often refer to when we speak of
creativity and 'out-of-the-box thinking'. However, the other types of creativity
also often require deviating substantially from the current way of thinking,
and so may also require high levels of creativity.
Note that according to our reasoning above, contributory creativity and proactive
creativity will lead to higher-quality ideas, since they are based on intrinsic motivation.
Nevertheless, extrinsic motivation is often combined with intrinsic motivation
(people like what they do, even more so in creative tasks) and thus may also lead to
high-quality outcomes.
Thinking styles
What type of reasoning leads to creative ideas? What kind of questions do we
have to ask ourselves? The literature distinguishes two thinking styles in creating
opportunities: causation and effectuation. We can also call them decision rules
since they structure the way people make decisions. Causation starts with a
purpose, and subsequently searches for means to reach that purpose. On the other
hand, effectuation starts with the resources available, and creates new purposes
from those. For instance, when people have to select a meal to cook for dinner
at home, causation involves looking for a recipe in a cookbook and then going to
the supermarket to purchase the required ingredients. A cook applying effectuation
would scan the refrigerator to see what ingredients are available, and design a
meal based on those. An example of causation from the business world would
be an entrepreneur who sees an opportunity for a budget airline, but who has to
acquire the planes, the knowledge and infrastructure to realize that opportunity. An
example of effectuation was SouthWest, which already had planes, knowledge and
infrastructure, and decided to create budget services by extending its infrastructure
to local airports and starting point-to-point services without transfers (see Case 2.1).
Causation is
the generation
of ideas
starting from
a purpose or
goal.
Effectuation is
the generation
of ideas
starting from
the available
resources.
29
30
Innovation Management
Serendipity
means that
ideas originate
by chance.
Biomimicry
means that
natural
phenomena
provide
examples
which lead to
new ideas.
Design thinking is an example of causation, since it starts with understanding the
needs of the customer, and it develops innovations from there (see Chapter 3).
Finally, serendipity has always been an important source of ideas. Serendipity
means that a discovery is made by chance. Edouard Benedictus invented laminated
safety glass in 1903 when he dropped a glass flask on the floor (Roberts, 1989).
He noticed that the glass shattered but did not fall apart. There was a thin film of
collodion on the inside from earlier use, which formed a gluey substance (cellulose
nitrate) that kept the glass together and prevented it from breaking. Of course, only
people who are interested in inventing, and have knowledge of application domains,
will notice such events. 'Chance favours the prepared mind', said biologist and chemist
Louis Pasteur. That's why we label serendipity as a 'cognitive source' of ideas, since the
idea doesn't come from the outside, but the inventor develops the idea based on an
outside coincidental event. For instance, Benedictus did not act on his observation
immediately, but only did so when some time later he read an article about injuries as
a consequence of car windshields breaking in accidents. So, he needed information on
an opportunity from the outside to create his idea.
A similar cognitive source of ideas is biomimicry. It means that nature inspires
people with new ideas. A famous example is barbed wire, which was inspired by
hedges of roses or other thorny bushes that were previously used to fence off land.
Many current examples of this source of ideas are published on the website of the
Biomimicry Institute. 1
Highly creative people will pick up the information from these sources more quickly
than others. So, the sources alone are not enough, they have to be combined with
creativity and knowledge to generate innovations. Creativity can come from people
with strong creativity skills, as described above, or by purposely bringing together
sources and tools for creativity. Innovators have to acquire information from different
sources and have to recognize the market opportunities inherent in that information,
which requires creativity skills.
SUMMARIZING SO FAR
Creativity can be a reaction to open or closed problems, it can come from intrinsic or
extrinsic motivation, and it can come from an effectuation or causation thinking style.
Not always will these origins affect the content of an idea, although in general we expect
better ideas from intrinsic than from extrinsic motivation.
2.2 Sources of ideas
Trends as drivers
Ideas, or their success, often have broader societal trends as their origin. We will call
these trends 'drivers of innovation'.
Trends as drivers of innovation refer to developments in technology or society which
create the opportunities and needs for innovation (see Figures 2.3 and 2.4). For instance,
the ageing population creates new opportunities for all kind of innovations, from remote
health-care services to luxury travel services. In this case a demographic development
creates a market for innovations. The growing average income of families in combination
with growing cross-cultural interests creates new demands for distant travelling.
1
https://biomimicry.org/
The front end of innovation
( \ CASE 2.3 TRENDS AS DRIVER OF COMPUTING INNOVATIONS
A historical example of trends leading to innovation is the application of scientific
methods in engineering. Amongst other examples, this happened during the Second
World War. The US military wanted to compute the trajectory of missiles and to
decipher encrypted messages. This demand led to the development of new electronic
computing devices such as the ENIAC (Augarten, 1984). However, the application
of scientific methods had already created such computing needs in several other
fields of technology. In those days, 'human computer' was a job in several fields of
engineering. These people made calculations full time to solve engineering problems.
In the Netherlands such human computers made extensive calculations on changes
in water currents and tide heights as a consequence of potential hydraulic works (Van
den Ende, 1994). In several places in the world engineers and scientists developed
mechanical computing machines and electrical so-called analogue computers to
meet the computing needs. These activities stimulated the further development of
the digital computer. So, in this case an important driver of innovation in computing
was the application of scientific methods in fields of engineering.
Another example of a major driver for innovation is the rise of the Internet. Webcommerce creates an enormous demand for innovation, particularly business model
innovation in retail. Almost every retail chain now has its own web-channel, and we
all know the larger independent ones such as Alibaba and Amazon. Sustainability
is a similar driver for innovation at the moment, although it is still unclear what
innovations will result.
Creativity
Trend,
or 'Driver'
....
Needs and
opportunities
1
Ideas
....
Innovation
Figure 2.3 The relation between drivers and innovation
Trend
Innovation
Demographic change : ageing population
Remote health care
New technological knowledge: Internet
Web-commerce
New consumer demands : growing income
Long-distance holiday travel arrangements
Sustainability
Solar panels
Figure 2.4 Trends as drivers of innovation
Trends create opportunities or needs for innovation. For instance, new consumer
demands create opportunities that innovators can spot and can act upon by generating
31
32
Innovation Management
ideas and innovation. New technological knowledge can reach innovators by means
of network partners, such as research institutes or suppliers, or by means of actors
in their social networks. Actors in the social network may have knowledge of trends
which they bring to the new business developers.
Innovators and new business developers can scan the broader trends with the
purpose of deriving opportunities for innovation. In Section 2.4, we will explain
how trends are instrumental in creating scenarios, then in Section 2.5 on creativity
workshops, we will see how participants start to investigate current trends and develop
ideas that fit these trends. Of course, the process can also work the other way around:
people first get an idea for an innovation, and then search for a trend or application
area facilitating the successful implementation of the idea.
Business and social networks
A source of
innovation is
the industry,
organization
or person that
generates an
innovation
for another
organization .
An individual's
social
network
consists of the
set of specific
relationships to
the individual,
for instance all
relationships
aimed at giving
or seeking
advice.
Other sources of creativity and innovation are networks of companies and people.
We can distinguish between business and social networks. Business networks refer
to partners of companies such as suppliers, customers and research institutes. These
partners can all come up with options for innovation. For instance, suppliers of
concrete components can propose prefabricated houses to construction companies.
Suppliers of IT systems can suggest web activities to retailers. Customers can come
up with ideas for innovation, as we will discuss in Section 2.7 on crowdsourcing.
Research institutes may approach business partners to implement new knowledge in
innovations.
Pavitt et al. (1989) distinguished industrial sectors according to the source of
innovation (specific types of network partner).
~
In supplier-dominated sectors, such as furniture, agriculture and construction,
suppliers of machinery mainly drove innovation.
~
In scale-intensive industries, such as automotive, innovation came from internal
and external sources.
~
Specialized suppliers are firms supplying specialized products to other
companies, such as equipment manufacturers. These firms live in symbiosis with their customers, and usually develop innovations internally
which they provide to customers.
~
And finally, science-based firms exploit new scientific discoveries in fields such
as electronics, chemicals, pharmaceuticals and aerospace. They develop knowledge and innovations in-house and acquire them from universities.
In all cases, the network partners bring in new knowledge or solutions that the
focal company can combine with its activities, knowledge and solutions to create
innovations. In later publications Pavitt added the emerging information-intensive firms
as another category (Bell and Pavitt, 1995). These firms have their main source of
technological accumulation in the advanced processing of data and are typically found
in sectors such as banking, retailing and tourism.
Social networks refer to people's personal networks. They can also be influential in
stimulating creativity. Traditionally scholars considered large and diverse networks
as positive for creativity (Burt, 2004). Diverse networks have ties from the central
person ('ego') to many other people who are not connected to each other. Such
networks generate creativity since they usually give access to many different sources
of knowledge. If the ties with the network actors are weak, the network does not take
too much of the central person's time, so that they still have enough time to process
The front end of innovation
all the knowledge from the network. So, very creative people often have many contacts
in different circles.
A specific network position that is conducive to innovation is the 'broker'
position. Brokers connect two or more groups of people which are strongly
associated. The advantage of the broker position is that the received information
is processed and validated, but the central person doesn't have to do much to
combine the knowledge, while being uniquely positioned since nobody else in
the network connects the different groups. Kijkuit and Van den Ende (2010)
have shown that strong relations - existing friendships that have lasted for a
long period - can also help in generating and processing ideas. Such relations
have the advantage that people take more time to exchange knowledge that can
be relevant for the idea. They are particularly helpful in improving the idea after
being generated.
2.3 Tools for creativity
As mentioned earlier, a general belief is that, to become creative, we have to think
'out of the box', free from everything. But in fact, this is a myth. When we have
no structure at all, we start relying on cognitive schemes and scripts in our heads,
which we are often not aware of. A better option are the many creativity tools
that all rely on the same principle: generating questions that people would not
usually ask themselves. Examples of such tools are TRIZ, Systematic Inventive
Thinking and SCAMPER (see Figure 2.5). Also, we can use the Business Model
Canvas to generate ideas. People can develop alternatives for every element of
the canvas, and then combine the alternatives into completely new business
models (for the latter, see Figure 2.11, How to structure a creativity workshop).
Osterwalder, the author of the Business Model Canvas, and colleagues (2014)
have developed the 'value proposition framework' to structure creative thinking
(see Figure 2.6). According to this approach innovators have to closely investigate the
'pains' and 'gains' of products or services that a firm currently has on the market. Pains
refer to problems that the customer experiences with your product or service, and
gains refer to advantages that your product or service has compared to competitors.
Based on such an analysis, the innovator can generate 'pain relievers' and 'gain creators'
in their new value proposition.
To take the example of the supermarket in Chapter 1 (Figu-re 1.3): a pain for the
customer in the supermarket can be to stand in line before the cashier. A pain reliever
would be to make automatic cashier terminals more abundantly available to prevent
waiting. For other people, like the author of this book, a pain can be the work at home
to store all the groceries in the right place in cupboards and refrigerators. For such a
customer, a system in the supermarket that helps them to sort the products and to
place the groceries in crates according to their destination at home would be a pain
reliever.
A limitation of the approach of the value proposition framework is that the innovator
stays rather close to the current offerings of the firm. That means that innovations
resulting from an analysis with the framework will usually target existing customer
groups. Firms may miss new potential customer groups. Daan Stam and I have therefore
developed the Erasmus Value Proposition Framework that stimulates innovators
and new business developers to explore potential new value propositions in different
directions. The framework is depicted in Figure 2.7. According to this framework,
innovators can either add value to existing offerings, or decrease their price to create a
33
34
Innovation Management
l
TRIZ, the Russian abbreviation of 'theory of the resolution of invention-related tasks ', was
developed by the Soviet inventor and science-fiction author Genrich Altshuller in the 1940s, based
on the study of patents . The tool seeks contradictions in the functioning of a device according to a
list of potential variables that might be in opposition. For instance, higher acceleration of a car
increases fuel consumption per mile. Then the inventor tries to reduce the contradiction, for
instance by developing a different type of engine or using a different type of gearbox.
Systematic Inventive Thinking considers a number of changes related to an object:
•
•
•
•
•
Subtraction: remove a component
Multiplication: add a different component to an object
Division: split the project or its components to form new objects
Task unification: assign a new task to an existing object or component
Attribute dependency: create or dissolve a dependency between components of an
object.
A nice example of subtraction is Wikipedia : it removes the physical book from the encyclopedia
object.
SCAMPER was developed by Alex Faickney Osborn and Bob Eberle between the 1950s and 1970s.
SCAMPER is a thinking process that asks a series of questions regarding an object or part of it:
•
•
•
•
•
•
•
Substitute: comes up with another object that replaces the object
Combine: adds another object to the original object
Adjust: identifies ways to adapt the object into something different
Modify, magnify, minify: makes the object bigger or smaller
Put to other uses: identifies other situations where the object may be used
Eliminate: removes the object
Reverse, rearrange: develops a new concept from the original concept.
A nice example of putting something to another use are the cloud computing activities of Amazon .
Amazon owned a large computing facility for its e-commerce, and at some point in time
decided to use it to provide cloud computing facilities to other companies. So, it used part of its
business model for e- commerce (the IT infrastructure) for a new use. After a few years, profits
from this activity were higher than the profits from e-commerce.
Figure 2.5 Creativity tools
Gain Creators
Products
& Services
111111..
Pain Relievers
Figure 2.6 The Value Proposition Framework
Source: Osterwalder et al. (2014). Also on https:/ /www.strategyzer.com/.
The front end of innovation
Existing customers
Added value
''
Existing customers
Commodity
'
Value
proposition
New customers
'Blue Ocean'
''
New customers
'Disruptive innovation'
'
Figure 2.7 The Erasmus Value Proposition Framework©
low-cost alternative. In addition, innovators can either target existing customer groups
or new customer groups. The four combinations lead to:
"7
Upward: target existing customer groups with new value. This is usually the
outcome of applying the Value Proposition Framework and analysing gains
and pains.
"7
To the le~: target existing customer groups with a cheap product. Firms that
offer customized solutions can introduce standard solutions to reduce costs.
For instance, a provider of education programmes for the business market
may decide not to develop a customized solution for every client, but to offer
a set of standard courses from which a client can choose.
"7
Downward: target new customer groups with a cheap or low-end offering.
This is what disruptive innovations usually do initially (see Section 4.3). For
example, in Case 4.8 on Ryanair, the budget airline targeted non-air travellers
who could afford their low-priced tickets.
"7
To the right: targeting new customer groups with new value propositions. This
is what Blue Ocean strategies often do: targeting completely new markets
that did not exist before. A famous example is Cirque du Soleil. While the
traditional circus provided a cheap and funny show for families with lots of
animals, Cirque du Soleil created a luxury experience based on acrobatics without any use of animals, to which businesspeople could invite their business
relations.
The framework offers a broader scope than the value proposition approach of Osterwalder
et al. (2014).
35
36
Innovation Management
2.4 Scenario workshops
A scenario is a
description of a
possible future
for an industry
or other entity.
A macro trend
is a long-term
change
process in
society or the
economy that
affects a large
part of the
population.
Scenario workshops can be helpful in generating and assessing ideas for innovation.
A scenario workshop converts ongoing trends into pictures of future situations of
the industry. The purpose of a scenario workshop is not to predict the future, but to
depict possible futures of the industry. Idea creators can use the scenarios to envision
the future or futures in which their idea may fit .
Scenario workshops work from macro to meso level. The macro level concerns
society as a whole. The meso level concerns the industry: the group of companies
competing with each other. The purpose is to find out how broader changes in society
will affect the context of a company, and eventually the situation of a specific firm.
Scenario workshops usually follow four steps (Ramirez et al., 2017):
1. Generate a list of macro t rends that may be relevant for the future of the industry;
2. Score the trends on the degree of uncertainty and the impact on the industry;
3. Select two trends that have the strongest impact and that are highly uncertain;
4. Depict the future of the industry in case each of the two trends does or does not occur.
Generate a list of macro trends. Participants of the workshop are invited to generate trends
that may be relevant for their business. Trends are changes at the macro level of society,
such as the drivers mentioned in Section 2.2. There we gave the example of an ageing
population. Trends include technology trends, such as the rise of the Internet, also
mentioned in that section. The participants of the scenario workshop do not necessarily
restrict themselves to trends that are relevant to their industry, at this stage of the
workshop they can generate any trend. The participants may use the PESTEL framework
to generate trends. PESTEL stands for Political, Economic, Social, Technological,
Environmental and Legal (see Figure 2.8). You can identify trends in any of these areas.
Score the trends on the degree of uncertainty and the impact on the industry. The second
step is to score each trend on impact and uncertainty. To analyze impact, participants
can ask themselves a set of questions for each trend:
Political
Increasing requirements
for f inancial buffers
Legal
Increasing requirements
for financia l buffers
Environmental
Susta inability
investment criteria
Economic
Global ization, start-ups,
price-sens itive customers
Bank
Social
Growth of group of wea lthy
seniors
Urbanization
Technological
Ce ll phone use for payments
Crowdfunding platforms
Blockcha in
Figure 2.8 The PESTEL framework applied to the context of a bank
The front end of innovation
"""7
Does the trend create new markets?
"""7
Does it destroy existing markets?
"""7
Does it modify existing markets?
"""7
Does it create new processes?
"""7
Does it create new competition?
"""7
Does it create new relevant regulation?
Scoring the uncertainty of the trend is a bit more difficult than generating the list.
Uncertainty does not just concern the chance that the trend occurs, but also the
impact of the trend. For instance, increasing sustainability requirements are a trend
for many industries today. Usually the trend itself is certain, so the uncertainty that
the trend occurs is low. However, the degree to which the trend affects the industry
may be highly uncertain. For instance, the trend may only require existing processes
to be slightly adapted, or the trend may require a complete overhaul of processes and
products. In the latter case, the uncertainty of the trend is high. So, uncertainty refers
to both the trend itself and its impact. For scoring the impact and uncertainty of
trends, we can use the chart in Figure 2.9.
Select two trends that have the strongest impact and that are highly uncertain. In fact ,
this means you should select two trends in the upper right corner of the chart in
Figure 2.9. If there are more than two obvious choices of trends in that corner, you
can repeat the procedure in the next step for different combinations of trends with
high impact and uncertainty.
The reason for selecting trends with high uncertainty is that scenario development
aims at depicting possible futures, to prepare managers for situations that may
happen. Firms have to meet certain trends anyway. Uncertain trends are more
interesting, since firms have to take actions that they will not necessarily need in
the future. Firms should manage those actions carefully, while keeping an eye on the
context, scaling up the activities if the relevant context indeed plays out. This is the
essence of innovation management, the topic of this book.
Impact
on your business
High
Uncertainty
Low Low
Figure 2.9 Chart to score the relevance of a trend
High
37
38
Innovation Management
Trend 1
High
Trend 2
Low
High
Low
Figure 2.10 Chart to design scenarios
Depict the future of the industry in case each of the two trends does or does not occur.
Make a chart, such as the one in Figure 2.10, and fill out the trends on the two
axes . On the one side, envision the situation that the trend occurs to a low degree;
on the other side, envision the situation that it occurs to a high degree. For each
of the four combinations, describe the situation of the industry in that particular
context. It is important to realize that this description should concern the industry
as a whole, and not just the company, or the product that the company produces.
Relevant characteristics of the industry are the number and size of players in the
industry, potential new entrants, and the basis of competition between companies.
Usually the current situation of the industry appears in the bottom left quadrant
of the chart.
(:'.\ CASE 2.4 SCENARIO DEVELOPMENT FOR THE DREDGING
INDUSTRY
A study and a workshop in 2019 in the Netherlands on the dredging industry provides
an example of the scenario development methodology. The dredging industry consists
of a few global players in the Netherlands, Belgium and China. The Chinese players
were extending their role in the industry. First the workshop participants determined
trends in the industry. Important trends were:
• A number of trends creating growing demand in the longer term :
~
global warming, rising sea levels
~
growth of populations
~
urbanization in coastal areas
~
growth of seaborne trade.
• Sustainability requirement for the industry, both in equipment, for which the industry
had to reduce emissions, and in project design. New project designs should include the
natural environment far more, for instance by using natural currents in the management
of water areas (under the label 'building with nature').
The front end of innovation
• Protectionism affected the degree to which companies could compete worldwide. The
US market is closed to outsiders by law, and outsiders have all kinds of problems
entering the Chinese market. In other parts of the world the market may remain open
or be closed off for local players in the future.
Impact
on your business
Global
High
warming, rising
sea levels
Sustainability
requirements
Protectionism
Urbanization in
coastal areas
Growth of
population
Growth of trade
Uncertainty
Low Low
High
The participants put the trends in the impact-uncertainty chart shown above. With
impact they referred to a period of 5-10 years; therefore, some trends affecting demand
scored lower, since they will have an impact only in the longer term.
Sustainability requirements
Strict
Small market
Strong competition
Sustainability as basis competition
Large market
Chinese competition
Sustainability as basis competition
The innovators win
Fragmented dredging market
Protection
Free market
High protection
Large market
Chinese competition
Efficiency as basis competition
Small market
Strong competition
Efficiency as basis competition
Protected negligence
Low
Commodity market
Next, the researchers developed scenarios for the combination of two trends: sustainability
requirements and protectionism. They gave a label to each of the four scenarios. The result
is shown above. 'Protected negligence' refers to the low importance of sustainability in
that scenario.
Source: Tarakci and Van den Ende (2019).
39
40
Innovation Management
2.5 Leading creativity workshops
Conditions for a successful creativity workshop
To boost creativity and innovation, managers often organize creativity workshops.
The primary purpose is to generate ideas for innovation. Particularly in idea-weak
companies, creativity workshops can be very useful (Hansen and Birkinshaw, 2007),
but to organize an effective creativity workshop is not easy (see Figure 2.11). First,
a creativity workshop should not just generate a high number of ideas. What firms
usually need is not just ideas, but high-quality ideas.
Traditionally, accepted wisdom was that to get a few good ideas, you first have
to generate many ideas, and then select the best ones. However, generating a high
number of ideas is rather easy today. As we will see in Sections 2.6 and 2.7, IT tools
facilitate the collection of large numbers of ideas from inside and outside of a company.
There are examples of firms collecting tens of thousands of ideas. For these reasons,
the question today is not just how to get ideas, but how to get good ideas. Creativity
workshops should therefore not just coin ideas, but also make a first assessment of
them and a first reflection on the process of implementation.
Creativity workshops usually have a second purpose: to strengthen the innovative
culture in an organization. By sitting together and working on innovative ideas, people
become more motivated to spend energy and time on innovation. Innovation may
change from an empty term to a concept with concrete contents for them. Organizing
creativity workshops also communicates the message to others in the organization
that innovation is taken seriously by the firm.
To make a creativity workshop successful, firms should answer a few questions.
The first concerns the purpose of the workshop. Do we just want ideas, irrespective
of whether they fit with the strategy and scope of the company, or do ideas have to
fit with a narrower purpose: a specific product line, specific elements of the business
model, or otherwise? Firms may for instance seek particular ideas for business model
innovation that go beyond just product or service innovation. How can we bring our
products and services to the customer in a different way, which new financial models
can we apply, or how can we change our position in the value chain? Firms may also
seek ideas that focus on sustainability, or other broader purposes.
Second, how futuristic should ideas be? Do we target the near future, and ideas
that we can start developing tomorrow? Or do we target long-term opportunity areas,
for which we will only lay the groundwork in the near future, for instance by creating
the technology, or by setting up a first venture to experiment in that area? Depending
on the intended purpose we can instruct the participants of the workshop.
Third, how do we create the right conditions for the workshop? We need a creative
atmosphere, where participants are stimulated to generate ideas. Participants should
also be able to collaborate with others, and feel free to come up with unusual ideas.
There should be an atmosphere of safety, and there should be diversity amongst the
participants so that they can reflect on each other's ideas from varying perspectives.
1.
2.
3.
4.
Criticizing ideas
No diversity in the group
Having no clear purpose for the session
Focusing on a few ideas only
5.
No follow up
Figure 2.11 Five ways to ruin a brainstorming session
The front end of innovation
With respect to group composition, it is better not to have direct hierarchical
relations in the group. It's no problem to have people from different levels, as long as
they don't have a direct authority relationship. The boss can come in at the beginning
and end, but they should leave the participants on their own in the meantime.
Research has shown that, contrary to widespread popular belief, creativity starts
better individually instead of jointly. The so-called 'nominal group technique'
reflects this idea (Stam et al., 2013). People are invited first to generate ideas
individually, for instance for 10 minutes. This phase can even last much longer if
you give the participants an elaborate individual creative task (see the workshop
description in Figure 2.12). Next, people share their ideas around the table, where they
are encouraged to share all the ideas they have. Advantages of starting by generating
ideas individually are:
1. The creativity of all the people around the table is used, whereas particularly introvert people do not always speak up if the discussion isn't structured.
2. Many people have difficulty with thinking and listening at the same time. So, a
moment of silence facilitates their creative process.
Th e nominal
group
technique is
a group ideagenerating
method
according to
which each
member of
the group first
generates
ideas
individually
before sharing
the ideas
collectively.
3. People tend to follow each other when collectively generating ideas. Individual
creativity isn't influenced by the group process, and so ideas go in more directions
if you organize the individual phase first.
If there are subgroups during the workshop, rotating the subgroups during the
programme can be a helpful way to increase communication between people with
diverse insights. By structuring the workshop in the right way, the quality of the
output improves.
Before having a creativity workshop, it makes sense to organize a scenario workshop,
as outlined in Section 2.4. The scenarios serve as a reference to position ideas in the
creativity workshop, as indicated in Figure 2.12.
2.6 Managing the internal front end
For firms to be innovative, they have to use the ideas of employees as much as possible.
Firms use idea management systems to collect these ideas. The original system was
the suggestion box, in which employees could submit ideas for improvements in work
processes, working conditions or for real innovations for the companies. The majority
of those ideas were usually for process improvements. Today, many firms often still
have those systems, often employed by Human Resources, and now administered
by means of an intranet portal. Such systems can generate substantial benefits. For
instance, Deutsche Post, now part of DHL, reported that they received over 200,000
ideas from their employees in a single year, resulting in improvements with a total
worth of hundreds of millions of euros.
Our focus here is more on the application of idea management systems to collect ideas
for innovations in products, services or business models for customers. Usually those
systems target staff and managers in the company instead of work-floor employees. In
firms employing mainly professionals these systems can target the whole workforce.
They aim to stimulate employees to think about innovations for the company, and to
communicate ideas for such innovations to the company instead of keeping them to
themselves or sharing them with colleagues only.
An idea
management
system creates
a process in an
organization
for collecting
ideas from
employees
(formerly a
suggestion
box).
41
42
Innovation Management
A creativity warkshap usually has a number of phases and steps. Assuming that the workshop shouldn't just generate
raw ideas, but that some development of the ideas and selection should take place, the following phases and steps
work out well:
Idea generation
1.
2.
3.
4.
5.
6.
7.
8.
9.
At the start of the workshop, you, as facilitator, ask participants in the introductory round to communicate
their expectations. You introduce the workshop, its purpose and its approach to the group. If you want to
challenge the group a bit more, you ask them what they will do differently when they return to their normal
duties. This can create some confusion and can even generate frustration , since people realize that there isn't
much room for innovation in their company or in their own tasks. It may work to have a short discussion per
table on this topic, and collect the results.
Give a more elaborate introduction to the creativity tools used in the workshop. These can be tools such as
nominal group technique, which involves participants first working individually on assignments, and then
sharin g the results collectively. With a simple exercise you can show them that this process yield s more and
better results than collective creativity alone. You may also explain tools such as TRIZ or Systematic Inventive
Thinking. Also let participants do some creative exercises and explain the cognitive processes behind them .
Start with an analysis phase. Trend extrapolation is an appropriate way to start thinking about the outside
world. Innovation has to fit the outside world. If you have held a scenario workshop before the creativity
workshop, you can use the trends from that workshop as a start. It will be useful to review the trends together
with participants. An option is to ask participants before the workshop starts to generate some global trends
and explain them in one sentence. You ask them to send the trends to you as pre-work for the workshop, and
you , as facilitator, group the trends into clusters with a simi lar topic, and present them during the first part of
the workshop. It works very well to put them on flipcharts on the walls. Alternatively, you can also start
analysing trends using the PESTEL framework (see Figure 2.8).
Discuss the result of the trend generation activity, ask participants to wa lk around, add more trends (on Postits) and put those on appropriate flipcharts, or start new ones. This is a good way to get the participants
interested in each other's ideas.
Introduce the concept of business model and business model innovation, give examples and show what these
can achieve. This draws attention to the topic and increases motivation in participants. Introduce the concept
of the Business Model Canvas, give examples of applications, explain its use, and ask the participants to depict
the canvas for one of their existing businesses. (This can also be pre-work if you can provide a good
introduction on the canvas, e.g. by means of a video.)
Let participants individually generate new business models using the canvas. Let them first create alternatives
for each element of the canvas, starting with the value proposition (dependent on the group; e.g . logistics
managers may start with resources). You can use the acronym SCAMPER: Substitute, Combine, Adapt, Modify,
Put to other uses, Eliminate, Reverse. Next, let them create new ideas for completely new business models
based on the newly generated elements. As an alternative you may also use TRIZ or other idea generation
tools in this phase. After this step, the participants discuss their results at the table. This phase takes relatively
long, around an hour.
If you have had a scenario workshop preceding the creativity workshop (see Section 2.4). it will be good to ask
the participants to position their ideas in the seen arias. If some scenarios are not covered, meaning that none
of the idea s fits in that scenario, you can challenge the participants to generate additional ideas for those
scenarios.
You can have the participants develop the business model ideas further by using a collective creativity
technique such as the six hats of De Bono (2016) . They discuss one business model of each of the participants
at the table, while every member of the table group takes the role belonging to one of the hats. The hats go
around the table when a new idea is selected, so that everybody experiences every role.
End of the first phase and day. You ask for feedback and have a guest speaker if you want.
Assessment
10. The second phase starts with a strategy evaluation. You give an introduction on some strategy models and
concepts, such as the five forces model and the concept of first mover advantage. You give each table the task
of applying these models to one of their business ideas (not to the existing situation of the firm , as is normally
done). Subsequently you discuss the results in the plenary group. If time is left, you can ask the participants to
apply the model to their own individual idea.
The front end of innovation
11. The second type of assessment is the business case. A really detailed business case cannot be built in this
phase. but you can give on introduction on the basic principles of business cases, and on methods to
investigate the sensiti vity of your business case to certain variations, e.g. in size of the market, prices of
resources needed, productivity, etc. This can generate important insights for the development of business
ideas, since the most important sensitivities should be investigated first, or they should be removed from the
business idea by adapting it. For instance, the exercise can show that capacity utilization of your workforce
(e.g. the call centre) has the strongest effect on the financial performance of your business idea (e.g. webcommerce). If that appears to be the case, you should start looking for ways to predict demand for services, or
to have people make reservations for activities that require the personal involvement of your employees (e.g.
let people email and call them back) .
12. Next select one idea per participant. Based on the discussions, participants choose one idea from their
individua l ideas for the rest of the workshop. If they have difficulty in choosing, you can provide some generic
selection criteria: novelty, feasibility, expected value, etc. Explain that it is a point of discussion whether
strategic fit should be a criterion. Sometimes it is better for firms to adapt their strategy to new ideas than the
other way around.
Implementation
13. Th e third phase is implementation. This means that participants create a basic project plan for their concept.
This addresses the process model (sequential , iterative, lean, etc., see Section 6.2), the people they want to
involve and the team structure. This topic is important, since if these issues remain unaddressed, people go
back to their offices with great ideas but without a clue on how to work on them .
14. If time is available, you can discuss the broader firm context for innovation in the participants' firms. How is
portfolio management organized, to what extent does the company have an innovative cu lture, and what
should be changed to create such a culture? You can also address issues such as idea management: not only is
it a way to collect ideas in companies, it also communicates the innovative culture and the importan ce of
innovation to the workforce.
15. You finish the workshop with a pitch. Every participant pitches their best idea to the whole group. It works
well to suggest the 'golden circle' by Simon Sinek to the group (available on the Internet (Youtube: The Golden
Circle: Why Does Apple Command Loyalty?), and see Section 7.3), which means that participants start with
the 'why' of their idea, then the 'how', and finally the concrete idea itself (the 'what'). But don't expect many
to follow exactly this pattern. Usually most people wi ll sti ll start with the 'what' and not the 'why'.
Nevertheless, it opens the eyes of the participants to other aspects of their ideas, and it raises the question of
how you can convince others. Give people sufficient time to prepare their pitch. Give every participant a strict
timeslot for the pitch (e.g . three minutes). It works well to give one other participant up-front the task of
asking a single question (also to practise preparing and answering questions). Organize a contest at the end to
select the best idea and the winner.
16. Collect feedback on the contest - what made you vote for a specifi c idea. Collect feedback on the workshop.
Figure 2.12 How to structure a creativity workshop
( \ CASE 2.5 GAMECHANGER
An example of an idea management system was the Gamechanger at Shell. Shell created
this system in the middle of the 1990s, initially targeting mainly R&D people, but later also
the rest of the company. The firm invited employees to submit ideas that they could not
elaborate as part of their daily activities to the company by means of this system. Shell
employed a dedicated bureau to process the ideas in the system. This bureau applied a
type of stage- gate system (see Section 6.2) to regularly evaluate ideas and to dedicate
budgets and targets for each phase in the idea's development. After each phase the idea
was evaluated by a review committee that was selected for that gate in particular. This
committee was usually smaller in the beginning, and with more senior people later in the
process. The number of ideas submitted to the system was relatively limited, in the range
of 100-200 per year. However, some very profitable innovations resulted from the system,
such as a new device to close off the leaking of oil from almost depleted oil wells, which has
resulted in the additional extraction of hundreds of millions of euros of oil per year.
43
44
Innovation Management
There are questions about how firms can get idea management systems aimed at more
radical innovations working, how they can get high-quality ideas from them, and how
they keep them functioning for longer periods. First, some important choices should
be made in the design of an idea management system. One critical question is whether
some target areas in which the company searches for ideas should be defined, or
whether the firm wants to collect all ideas that employees want to submit. The firm
could for instance specifically collect ideas that aim at sustainability, or ideas that aim
at the firm's activities in emerging economies. Some people might think that setting
such target areas would hinder 'out-of-the-box' creativity, but research has shown that
setting targets and 'inside-the-box' thinking may be as productive (see discussions in
Section 2.1 on closed problems and value sought). The decision on whether or not to
set targets will depend on current strategy considerations in the company. If there are
urgent demands, setting targets may be effective. Otherwise, leaving the idea space
open may work well. A middle ground can be to have specific target areas for ideas and
an additional open box in which ideas that fall outside these areas can be posted. Idea
submitters will understand that the chances of adoption will be lower in the latter box.
A related question is whether firms should set criteria to which ideas must conform
or which will be used as selection criteria. Since selection criteria will always exist, it is
generally better to be open about them to idea submitters. However, the question is
which criteria to include:
~
Usually novelty and feasibility will be important criteria. In fact, they may work
out a bit contradictory since more novel ideas will in general be less feasible. So,
feasibility is more a boundary condition that should not be below a certain level.
~
In addition, expected value can be important, since firms in general like innovations that generate high revenues. On the other hand, the scope of the idea
should be within reach of the company.
~
A question is whether strategi.c fit should be a criterion. On the one hand, ideas
that are completely at odds with the current strategy will usually not have a high
chance of acceptance. On the other hand, firms want to create new activities
with innovations, and it will not work always to remain within their existing
strategy. Ideas can be the trigger for strategic change. An option is to have strategi.c leverage as a criterion: does the idea add to the existing strategy, or stimulate
the generation of new strategic directions? In the Gamechanger example (see
Case 2.5) most of the time strategic considerations were not included in the
criteria. Shell kept open the option of supporting ideas that might not fit in the
current strategy and were licensed out or that led to a spin-off later on.
A second design choice is whether the firm wants to give rewards for ideas. Managers
can consider offering some prize, but research has shown that this may not always
have positive effects for higher-level employees (Baer et al., 2003). It may be better
to offer employees time to work on the idea when approved, since that fits with the
intrinsic motivation of the target employees. Also, recognition may help, by having an
'innovator of the year' or some other way to reward idea generators in an immaterial
way. By the way, in idea management systems for work-floor employees, as discussed
at the beginning of this section, it does work better to offer financial rewards.
An important way to get high-quality ideas is to stimulate employees to discuss
ideas with each other. Employees usually do not immediately submit an idea to the
idea management system. They first discuss it with colleagues, who in turn may talk
The front end of innovation
about it with other colleagues. Comments of colleagues from such discussions lead to
adaptations of an idea. Research has shown that these adaptations in general improve
the quality of ideas. This is even more so if the colleagues who discuss the ideas originate
from different departments or units but know each other very well. The reason is
that such colleagues bring new perspectives to an idea, while the strong relationship
facilitates an intense discussion (Kijkuit and Van den Ende, 2010). So, organizers of idea
management systems should encourage idea submitters to discuss the idea with others,
and preferably with people they know well in other units. Those people do not have to
agree with the idea, but the idea submitter should take their comments seriously.
To keep the system active over time, employees should be encouraged to repeatedly
submit ideas. Giving feedback on ideas, particularly rejected ideas, is important.
Ignoring ideas appears to lead to people not coming back with new ideas (Dahlander
and Piezunka, 2014). Research shows that if feedback is provided, people do come back
with new ideas, and against expectations, people whose ideas are rejected appear to
come back with even more ideas than the ones whose ideas are accepted (Deichmann
and Van den Ende, 2014). An explanation is that they feel challenged by the rejection
of their previous idea or ideas to get another idea through the selection. However,
our research also found that the chances of their new ideas being successful do not
increase. Apparently, they do not learn much from the rejection and feedback, while
the chances of success for the previously successful idea submitters increase for new
ideas. Possibly they learn by perceiving what a good idea looks like and what you need
to do to get it accepted in an idea management system.
The result of these effects could be that idea management systems would be clogged
with bad ideas from repeatedly unsuccessful idea submitters. Our advice to managers
of idea management systems is not just to tell submitters of rejected ideas why their
idea was rejected, but also to show them what good ideas looks like. Also, they could
encourage them to collaborate with colleagues who have been successful in the past.
~ CASE 2.6 IDEA CATALYSTS AT IBM
IBM collected ideas on an internal idea management system and had so-called idea
catalysts to create networks around ideas. These catalysts searched the system for
interesting ideas, and approached people in the company who might be interested in these
ideas. In this way, the company deliberately created networks around ideas. The catalysts
should have a large personal network, to be able to spot the right people for every idea.
2.7 Crowdsourcing ideas
Today, firms not only collect ideas internally but increasingly also from outside the
firm. We speak about 'idea crowdsourcing', sourcing ideas from the crowd. One of the
first companies to do so was Procter & Gamble (P&G) with its so-called 'Connect and
Develop' initiative (Huston and Sakkab, 2006, see Case 2.7). The company approached
many outside parties to come up with ideas: retired employees, alliance partners,
research institutes, etc. One of the successful outcomes was the Swiffer duster, a duster
to which the dust sticks so that you collect dust instead of moving it around. The product
was suggested to Procter & Gamble by a Japanese company, which had acquired the
basic material from a German chemical company. So, knowledge of the material literally
travelled around almost the whole world before it reached its destination.
Idea crowdsourcing is
collecting
ideas from
outside the
organization.
45
46
Innovation Management
~ CASE 2.7 CROWDSOURCING AT P&G
P&G had the idea of printing images and texts on Pringles chips. Normally the development
of such a technique would take at least a year, in which P&G would work with a printer
manufacturer to develop the technology. In this case, P&G decided to publish an open
call for an existing technique. An Italian professor at Bocconi University had recently
inherited a bakery and had started to develop a technique to print on cakes and other
bakery products. P&G purchased the technique from him and could bring the product to
market much faster than if they had developed a solution themselves.
Other companies have set up similar activities. As mentioned above, in 2006 IBM
organized a so-called 'Innovation Jam', in which they collected more than 40,000 ideas
from employees and people outside the firm (Bjelland and Wood, 2008). IBM set up
two new innovation programmes to implement a number of them. Dell created a
website, Ideastorm, to collect ideas from customers. Other firms have more limited
activities. The Dutch airline KLM (part of Air France-KLM) installed an idea generation
initiative dedicated only to its business clients.
While initiatives like these can inspire companies to innovate and give useful
directions, at the same time they have their limitations. First, a high quantity of
ideas can be a problem. We mentioned above the 40,000 ideas of IBM. In 2008 Google
collected over 150,000 ideas in its 10"100 campaign, focused on how Google could
contribute to a better world. The problem then quickly becomes how to select the best
ideas from such large sets. Not only the quantity of work involved is a problem, even
more important is the quality of idea selection. Even if you distribute the ideas over a
large number of people, every individual will have to assess tens of ideas, at least, and
probably hundreds. How much attention will you dedicate to the 41st idea that you
evaluate? Probably very little, while really good ideas may need some attention to be
recognized. In addition, the evaluations by different people will be partly subjective,
which creates another problem in combining the outcomes. So, if you generate tens of
thousands of ideas, how do you select the right ones?
Second, also the quality of ideas can be problematic. In the IBM Innovation Jam
people suggested developing solar-powered toilets and importing water from outer
space to Earth. While the solar-powered toilets might find an application somewhere
but are clearly not in the business scope of IBM, importing water from outer space is
clearly unfeasible for anybody on Earth.
Academics have discussed the quality of internal versus external ideas in companies.
On the one hand, employees raising ideas have more knowledge of the activities of the
company and its clients. As we saw above, expertise is one of the requirements for
creativity (Amabile, 1998), and employees more than anybody else possess expertise.
On the other hand, people external to the firm have expertise of other fields, which
can really contribute to the activities of the company. And customers often have more
knowledge about the use of a product than the producers, so they can come up with
better new solutions. Studies in, for instance, the area of baby products have shown
that customers had better ideas than employees of the firm (Poetz and Schreier, 2012).
~ CASE 2.8 INNOCENTIVE
lnnoCentive is a small firm posting companies' technical problems to a community of
hundreds of thousands of professionals. The former CEO of lnnoCentive, Dwayne
Spradlin, claimed that the most salient contributions from the community to the solution
The front end of innovation
of firms' problems come from highly unexpected areas. For instance, the site once posted
the problem of how to measure the progress of multiple sclerosis. Such measurement was
important to evaluate the effects of treatments. The solution came from an unexpected
field - electrical engineering. Measuring electrical currents in the body served the purpose.
A third problem with idea crowdsourcing is keeping motivation of idea submitters
high. Since firms can only accept very few of the many ideas that it receives on its
crowdsourcing platform, and cannot react to all individual ideas, many submitters are
in fact ignored. And as we noted above, being ignored leads to people withdrawing
from submitting ideas, and to frustration amongst submitters. At one time, the most
active idea submitter to the Dell Ideastorm site complained on another site about the
low degree of acceptance of ideas:
Of the almost 9000 ideas submitted less than 100 have been implemented and
that is even including easy ones like adding a link for Dell.corn to the site. 2
If idea submitters complain in such a way, idea crowdsourcing starts to work against
the crowdsourcing firm.
The intellectual property rights on ideas may be a fourth problem area (see Section
4. 7). People may not want to submit ideas to companies when they have no indication
whether they will get anything in return. On the other hand, firms may have problems
accepting the claims of idea submitters, since the firm may already be working on the
same or a similar idea, and that work will from then on be hindered by the external
claim. At one time, Procter & Gamble explicitly asked on its site for ideas for which a
patent application had already been submitted. The idea behind it was that such an
application guarantees the legitimacy of the idea submitter's ownership. Other firms
have published arrangements on their crowdsourcing platforms by which all submitted
ideas will immediately become the property of the company. It is clear that both
approaches will reduce the number of submitted ideas considerably. It might work best
if firms are able to create trust amongst ideas submitters that they will be treated fairly.
But it is yet unresolved how firms can create such levels of trust. Having an intermediary
such as lnnoCentive (see Case 2.8) can be a solution. The intermediary can guarantee
fair play to both sides and can serve as a third-party intermediary between them.
And finally, crowdsourcing firms may have problems getting external ideas accepted
within their own company. 4Not Invented Here" (NIH) problems exist in any company,
and even more so with respect to ideas that come from unknown external people with no
demonstrated expertise in the field. So, the people managing the crowdsourcing activity
may have a hard time finding internal people to adopt the ideas and to develop them
further. A solution may be to appoint internal 'idea connectors', people with strong internal
social networks who are positive towards external ideas and who may be able to convince
internal people to adopt the ideas (Whelan et al., 2011).
In spite of all these hindrances, crowdsourcing ideas may be beneficial to companies.
It can be a source of new ideas, express a culture of innovation in the company to
the outside world, and be a way to connect external parties more closely to the firm.
However, as the above hindrances show, crowdsourcing should be applied with caution.
It may be better to have a limited focus or a specific external target group limiting the
numbers of ideas, increasing their potential value to the company, and increasing the
possibilities for the company to give meaningful feedback to the idea submitters. In that
way the crowdsourcing tool may realize its full potential.
2
Jervis961, on website Seeking Alpha.
The
not-inventedhere syndrome
is the idea that
ideas that come
from elsewhere
are not useful.
47
48
Innovation Management
= 2.8 Summary
In this chapter we talked about creativity, its various sources and drivers, about what
makes people creative, which tools we can use to boost creativity, about how to lead a
creativity workshop or set up an internal idea management system, and about the role
of crowdsourcing in creativity. Particularly, we saw that creative ideas are both novel
and useful, and that anyone can be creative, with the right combination of expertise,
motivation and skill. We also noted that ideas do not often emerge out of the blue, but
may arise out of various sources. We distinguished between cognitive sources (inside
humans) and external sources, ranging from how people think to the trends they observe
and the networks they are part of. We also say that simple tools can boost creativity.
0
2.9 Discussion questions and exercises
Discussion questions
1.
If you compare the different creative thinking styles as discussed in Section 2.1 (causation , effectuation
and serendipity), which styles do you use most in your daily work, life or study?
a. You can think about what styles you apply in cooking a dinner versus writing a (research) report.
2.
Look at Figu re 2.2 (Four types of creativity). According to you, w hich of the four types of creativity are you
using in answering the discussion questions listed here?
a. Are you intrin sical ly or extrinsically driven, and are these open or closed problems?
b. W hich types are most motivating to work on for you?
3.
What was the effect of digitalization (e.g. rise of the Internet and mobile communications) on how people
shop for groceries (Section 2.2)?
a. W hich needs and opportunities arose?
b. Which innovations did companies pursue?
4.
Ann and Mohammed each perform a scenario stud y for the future of the hotel sector. Each of them develops
four scenarios, based on two dimensions:
• One of Ann's scenarios is: 'The hotel sector wi ll consist of a limited number of large hotel chains'.
• One of Mohammed's scenarios is: 'Staying in a hotel will increasingly resemble the home situation '.
Who has applied the scenario technique in the most correct way, Ann or Mohammed? Why?
5.
In idea management challenges, companies can ask for ideas with a certain goal, such as: 'How can we
become more sustainable as a company?' What type of creativity does the company ask for, in such a
case? Use the terms of Figure 2.1. (Types of opportunities) as we ll as Figure 2.2 (Four types of creativity).
6.
Have you ever participated in crowdsourcing or submitted an idea to a submission system (at work), or
have you ever made use of crowdsourcing or an idea submission system as a source of creative ideas?
a. Were the idea(s) used? Why (not)?
b. How did the structure and process of the system influence the effectiveness of the system? For example,
was there a clear set of criteria for ideas, what rewards were offered and was feedback offered?
c. Would you use the system again and why? If not. what wou ld need to change for you to use it again?
d. Do you think crowdsourcing and idea subm ission systems are a good way to boost and capture
creative ideas? What are the potential advantages and disadvantages?
The front end of innovation
49
Exercises
Conduct a scenario planning for the fast-food indu stry. You can do this alone or in a workshop w ith others. Start
by reading the instructions from Section 2.4.
1.
In the scenario-planning exercise, investigate how the fast-food industry might change in the next 5 t o 10
years. Potentially, you may investigate such axes as:
a. mobility of people as a result of a global crisis, such as COVID-19 (low mobility vs high/reta ined mobility);
b. the economic distribution of wea lth (smaller or equal gap between poor and rich vs larger gap between
poor and rich);
c. societies· preference for susta inable solutions (low preference vs high preference);
d. the strictness of regulations for new products and services (not strict vs very strict).
2. After you've detailed the scenarios. try to think about how an existing or a new fast-food company can
innovate their products. services or even business model to address the change in situation centra l to each
scenario.
Search the Internet for 'crowdsourcing' platforms. You are likely to find various examples of compan ies that offer
crowdsourcing services. For example. you may find paid services w ith dedicated crowds, such as subm itting a
webs ite design to panels of design experts or usability tests for mobile applications by a crowd of testers. Or you
may stumb le upon (market) research platforms. like Amazon 's Mechanical Turk or Prolific.ac. who have more
general crowds. You can even find platforms that are completely free and open to all users and crowds. such as
Pinterest or Flickr. where people can provide and source design ideas on various topics.
Select three platforms that differ quite substantially according to you and analyze them on the following elements:
1.
Is it an open or closed crowd? Wou ld anyone be able to participate in the crowd?
2.
What is the business model of the company that offers the services of the crowd? Do users need to pay or
is the service free of charge, and is the service open to all users or on ly a select group of users?
3.
To wh ich types of creativity (as noted by Section 2.1. Figu re 2.2 - Four types of creativity) does each platform
most likely lead?
4.
Wh ich type of platform, do you think, generates the highest quality of ideas?
References
Amabile, T.M. (1998) 'How to kill creativity', Harvard Business Review (September-October):
77-87.
Ardichvili, A., Cardozo, R. and Ray, S. (2003) 'A theory of entrepreneurial identification and
development', Journal of Business Venturing 18(1): 105-123.
Augarten, S. (1984) Bit by Bit: An Illustrated History of Computers. Ticknor and Fields.
Baer, M., Oldham, G. and Cummings, A. (2003) 'Rewarding creativity: when does it really
matter?', The Leadership Quarterly 14(4-5, August-October): 569-586.
Bell, M. and Pavitt, K. (1995) 'The development of technological capabilities', in R. Irfanul-Haque (ed.) Trade, Technology and Internatio nal Competitiveness. The World Bank, pp.
69-101.
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Innovation Management
Bjelland, O.M. and Wood, R.C. (2008) 'Inside view of IBM's "Innovation Jam"', MIT Sloan Management Review 50 (1, Fall): 32-40.
Burt, R.S. (2004) 'Structural holes and good ideas', American Journal ofSociology 110 (2, September):
349-399.
Dahlander, L. and Piezunka, H. (2014) 'Open to suggestions: how organizations elicit suggestions through proactive and reactive attention', Research Policy 43(5, June): 812-827.
De Bono, E. (2016) Six Thinking Hats. Penguin.
Deichmann, D. and Van den Ende, J. (2014). 'Rising from failure and learning from success: The
role of past experience in radical initiative taking', Organization Science 25(3, May-June):
670-690.
Eberle, B. (1997) 'Let your imagination run wild!'. Prufrock Press.
Hansen, M.T. and Birkinshaw, J. (2007) 'The innovation value chain', Harvard Business Review (June):
121-130.
Huston, L. and Sakkab, N. (2006) 'Connect and develop: Inside Procter & Gamble's new model
for innovation', Harvard Business Review (3, March): 58-66.
Kijkuit, B. and Van den Ende, J. (2010). 'With a little help from our colleagues: a longitudinal
study of social networks for innovation', Organization Studies 31(4): 451-479.
Osterwalder, A., Pigneur, Y., Bernarda, G. And Smith, A. (2014) Value Proposition Design. Wiley.
Pavitt, K., Robson, M. and Townsend, J. (1989) 'Technological accumulation, diversification
and organisation in UK companies, 1945-83', Management Science 35(1, January): 81-99.
Poetz, M.K. and Schreier, M. (2012) 'The value of crowdsourcing: can users really compete with
professionals in generating new product ideas?', Journal of Product Innovation Management
29(2): 245-256.
Ramirez, R., Churchhouse, S., Palermo, A. and Hoffmann, J. (2017) 'Using scenario planning
to reshape strategy', Sloan Management Review 58 (4): 31-37.
Roberts, R.M. (1989) Serendipity: Accidental Discoveries in Science. Wiley.
Stam, D., De Vet, A., Barkema, H.G. and De Dreu, C.K.W (2013) 'Suspending group debate and
developing concepts', Journal of Product Innovation Management 30 (Sl, December): 48-61.
Tarakci, M. and Van den Ende, J. (2019). The Dutch and Belgian dredging industry, Rotterdam
School of Management, Erasmus University.
Unsworth, K. (2001) 'Unpacking creativity', Academy of Management Review 26(2): 289-297.
Van den Ende, J. (1994) The Tum of the Tide. Computerization in Dutch Society, 1900-1965,
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Whelan, E., Parise, S., De Valk, J. and Aalbers, R. (2011) 'Creating employee networks that
deliver open innovation', MIT Sloan Management Review 53(1, Fall): 37-44.
Design thinking
3
Learning objectives
After reading this chapter, you will be able to:
1. Compare the design thinking approach with the lean innovation process
2. Explain the appropriateness of an evolutionary versus a set-based innovation process dependent
on market turbulence
3. Choose an appropriate market learning method depending on:
""7
The subphase in the idea development process
""7
Technological and market newness
4. Apply the lean innovation approach (including discovery-driven planning)
5. Exemplify co-creation with customers in different ways
6. Assess the appropriateness of design thinking versus design-driven thinking for developing
functional and hedonic innovations
3.0 Introduction
Companies have to investigate the potential market for innovation and new business
activities before they actually develop and introduce them. In this chapter we explore
the processes and methods that innovators apply to align their innovation to customer
demands. We first address two processes to get customer knowledge: design thinking
and lean innovation (Section 3.1). Both are iterative innovation processes to learn
from the needs and preferences of customers, but the two processes have a different
emphasis. Both processes are currently highly popular in the business world. Design
thinking aims to get a deep understanding (empathy) of the needs and preferences
of customers by observing them or communicating with them, while lean innovation
focuses more on texting prototypes ('Minimum viable products'). We subsequently
distinguish between evolutionary and set-based innovation processes, and classify
label design thinking and lean innovation as evolutionary processes. We evaluate the
appropriateness of the two types of processes for different degrees of market turbulence.
In this chapter we next review a series of market learning methods, which are
methods to get knowledge from customers while applying these processes. You can use
different market learning methods for both design thinking and lean innovation. To
classify these methods, we subdivide the idea development phase into three subphases:
""7
the customer study phase (Section 3.2);
""7
the ideation phase;
""7
the testing phase (Section 3.3).
The activities in the ideation phase we covered already in Chapter 2, where we discussed
creativity. In Section 3.3 we will also discuss methods in which the innovator works
51
52
Innovation Management
with the same consumers in both the customer study phase and the testing phase. We
call that 'co-creation with customers'.
In Section 3.5 we explain how the application of the different market learning
methods depends on the levels of newness of business models with respect to
technology and markets. We finish the chapter with a section on design-driven
innovation (Section 3.6), which places designers in the centre of the innovation
process, and which is particularly appropriate for so-called 'hedonic' products
and services. This chapter discusses learning from customers at the level of the
project. We do not address learning from customers at the level of the company
as a whole.
3.1 Processes to involve customers
Should customers be involved?
Social
construction
involves
users and
other relevant
social groups
attaching
meanings to
a product,
service or
business model
which can be
different from
the meaning
intended by its
provider.
User
innovation is
the creation of
new products,
services or
business
models by
users, based
on their needs.
Do we involve customers in innovation projects? Most people would say 'Yes, of
course'. The reason for the existence of every company is its customers. So, of course
we involve customers. On the other hand, two of the greatest innovators in our
society's history apparently didn't involve customers. Henry Ford is reported to have
said: 'If I had asked my customers what they wanted, they would have said a faster
horse.' Although historians who searched for the source of this quote could not find it,
we know for sure the opinion of Steve Jobs: 'People don't know what they want until
you show it to them' (Isaacson, 2011, p. 567).
In Section 3.6 we will see that Jobs' claim is right for a specific type of innovation,
which we will label as 'hedonic'. However, for functional innovations, which are the vast
majority, there are three general reasons to involve customers in innovation activities:
1. The most important reason is that we want to know our customers' needs, and
particularly their future needs. By involving them we can try to find out. In that
way, we can test our hypotheses on what customers want.
2. Customers often use existing products differently from what we think. Customers
apply products or services to their specific situation. Clayton Christensen gave the
famous example of a consultant who had to advise McDonald's on improving its
milkshakes. The consultant found that many consumers did not buy milkshakes
as expected as a dessert after a meal, but they bought them in the morning to
consume as breakfast while they had to wait in traffic jams. Milkshakes had the
advantage compared to, for instance, cereals that you can hold them in one hand
while driving your car. We call the phenomenon that people give their own meanings to products and services 'social construction' (Bijker et al., 1989).
3. Users often have ideas for new business models or even develop innovations
themselves. We call this 'user innovation'. By involving users, we can make use
of their ideas for innovations.
f)\
~ CASE 3.1 THE SOCIAL CONSTRUCTION OF WHEEL CLAMPS
An example of social construction is provided by the wheel clamp. It was invented in the
1910s as a lock for cars. From the 1950s onwards, authorities such as the police and
municipalities used it to enforce parking rules. They gave the device a new meaning, from
theft prevention to parking control device.
Design thinking
Idea deve lopment
Customer study
Empathize
with customers _.
Define
focus areas
Ideation
Generate
ideas
Testing
~
Develop
prototypes
~
Test
prototypes
Figure 3.1 The design thinking process
Design thinking
Today a highly popular way to involve customers is design thinking. The term found
its origins in the work of the US-based design firm IDEO, and referred to a process
consisting of needs determination, idea generation, selecting ideas and prototype
development. For needs determination IDEO mainly used observation of customers
(see Case 3.2). Today design thinking applies to even more repeated cycles of getting
information from customers (see Figure 3.1). Based on empathizing with customers,
e.g. by observation, the innovator defines focus areas: problems or needs for which
solutions are desirable. The process works in cycles: the innovator tests the prototypes
and gets feedback from customers. In doing so, customers' needs may become evident,
either new needs or wants behind their 'superficial' needs. Then the innovator can
generate new ideas and test them again. When the needs appear to be understood,
but the solution needs to be changed, the innovators can also directly start generating
ideas again. The process ends when a satisfactory solution has emerged.
( \ CASE 3.2 DESIGN THINKING: IDEO DEVELOPS A SHOPPING
CART
In a well-known video (called The Deep Dive') IDEO demonstrate their design process
with the example of a shopping cart. In the phase of needs determination, they go to a
supermarket to find out how people actually use shopping carts, and what problems they
have. The supermarket owners have already told them that theft of shopping carts is a
problem. On the spot they find out that safety is also problematic since shopping carts
are caught by wind on the parking lot, and that the safety of small children is at stake
when they sit in a shopping cart. Another problem for supermarket clients is finding an
attendant when they search for specific products. Eventually the IDEO designers develop
a new cart with removable baskets that you leave at the counter, and clients take their
groceries to their cars in bags that they hang on the frame of the cart. In this way the cart
is no longer an object for theft, and the cart catches much less wind.
Although originally IDEO mainly applied observation of customers as a market
learning method, in this book we present a series of methods for that purpose, because
the design thinking method leaves open how you get information from your customer.
Empathizing
is imagining
the
experiences
and feelings of
another person
in a certain
situation.
53
54
Innovation Management
Idea development
Ideation
Project implementation
Testing
--+
Figure 3.2 The lean innovation process
There are many alternative ways to empathize with customers, not just observation. As
said before, we categorize these methods according to the phase of the process in which
innovators can best apply them: the customer study phase and the testing phase.
Lean innovation
A minimum
viable product
(MVP) is a
simple version
of a product
or service, to
be put in the
market for
the purpose
of market
learning.
A pivot is an
adaptation of
the minimum
viable product
or service,
based on
outcomes of
a previous
test, as a
preparation for
a new test.
Lean innovation is an alternative process for the idea development phase. Steve Blank
of Stanford University and entrepreneur Eric Ries introduced this approach according
to which we test a product more deliberately in the market itself (Blank, 2013). They
called the approach 'lean start-up'. The approach gained a lot of attention, and the
business world broadened the term to 'lean innovation'. The process resembles the
design thinking process mentioned above, but the emphasis is more on testing than
on studying customers.
Blank and Ries learned the approach from start-up entrepreneurs. Central to this
method is executing early experiments with new products or services. So, instead of
first developing the full new offering, a simple version is created, labelled a 'Minimum
Viable Product' (MVP), which is put into the market with the main purpose of
learning about market demand (see Figure 3.2). 'Go out of the office', is one of the
adages of the approach. 'Fail small and early, and win big', is another one. Based on
the feedback, the entrepreneur adapts their offering ('pivots'), or even develops a
full new offering, and again tries it out in the market. This approach of defining
and redefining products, services or business models is often supported by the use
of the Business Model Canvas (see Section 3.3). After one or more iterations, the
entrepreneur develops the final product, service or business model, which they may
do in a traditional stage-gate process (right-hand side of Figure 3.2, see also Figure 6.2)
and they build the company around it. The project implementation phase is depicted
in Figure 3.2 (The lean innovation process) and not in Figure 3.1 (The design thinking
process), but that phase also follows after idea development in design thinking.
It will be clear that the first part of the lean approach is similar to the design
thinking process as introduced by IDEO and explained above. A difference is that the
design thinking process focuses on one group of customers and learning about their
demands before you generate ideas, while the lean innovation approach centres more
around ideas for solutions, and seeks potentially interested customer groups. Both
the design thinking and the lean innovation method aim to diminish uncertainty on
customer demands in an early phase of the innovation process, and thus to save costs
Design thinking
and effort in redeveloping a full product or service in a late phase of the process. In
that way these methods also diminish the risk of complete failures. The authors of
the lean innovation method chose the term 'lean' because of its effects of diminishing
rework later in the process, resulting in savings in effort and costs, and because the
method can reduce the cost of failures.
The lean innovation approach has become highly popular amongst innovators, not
just amongst start-ups but also in established firms. Reducing uncertainty by small
experiments is also of interest for large firms that want to increase their innovativeness
at affordable costs. The 'Go out of the office' slogan, in particular, is highly useful in
large firms, since more often than not innovators are working behind their desks, and
writing plans without presenting those plans in an early phase to customers and other
stakeholders. So, several larger firms, such as banks and utility companies, apply the
lean approach.
However, for them the approach also has downsides. The outside world can't always
distinguish between trials and real new products, and thus they may see negative
outcomes of the MVPs as failures , which hurts the reputation of the large firm. Also,
small experiments are not viable in every industry. It's hard to experiment with
minimum viable versions of harbour cranes or aeroplanes. Nevertheless, the lean
approach has a strong impact on innovation practices. The approach also affects
portfolio management (see Chapter 5). From a relatively stable plan the innovation
portfolio changes into a highly fluid and dynamic composition of projects, which the
firm adapts on a day-to-day basis.
The solution space
The two approaches discussed so far, design thinking and lean innovation, aim at
reducing uncertainty in innovation projects. They represent in fact one way to deal
with uncertainty, which is to focus on a certain solution and then to modify it after
tests. There is another way to deal with uncertainty, which is to create multiple
options and then to test all of them. We can visualize the difference between the two
approaches by using the concept of 'solution space', the range of options in which the
final solutions will reside. It is usually unclear where in the space the chosen solution
lies. Over the course of the project, as uncertainty decreases the solution space will
narrow down, until a final solution is chosen.
Figure 3.3 shows the two ways to deal with the solution space. According to the first
approach (Figure 3.3a), the team chooses a first solution within the solution space,
does research on it, and develops it into a new second solution. We can call this an
evolutionary approach. In the process of learning in this approach, the innovator
gains knowledge that disqualifies certain elements of solutions, which narrows down
the solution space. As said, design thinking and lean innovation are examples of this
approach. Pivoting in the lean approach is moving from one solution to the next in
the evolutionary approach.
According to the second approach (Figure 3.3b), innovators and business developers
develop and investigate several alternative options for an innovation. We can call this a
'set-based' approach, since one or more innovation teams create a whole set of options
(Terwiesch et al., 2002). After testing they discard several of them and continue
working on a more limited set. In both approaches the solution space starts broad
and becomes narrower over time. Both the evolutionary and set-based approaches are
types of iterative innovation processes, since they both iterate towards a solution.
And as said, both design thinking and lean innovation belong to the evolutionary type
of iterative approaches.
A solution
space is
the set of
options for
the products,
services or
business
models that
serve a specific
customer need
or that meet
the purpose of
a project team.
Iterative
innovation
processes
are processes
characterized
by cycles in
which the
project team
repeats
the same
sequences of
activities, with
the purpose
of reaching
an optimal
outcome.
55
56
Innovation Management
Test 1
Test 2
Test 3
(a)
Test 1
Test 2
Test 3
(b)
Figure 3.3 The evolutionary approach (a) versus the set-based approach (b) in
innovation
( \ CASE 3.3 THE SOLUTION SPACE OF GERONIMO.Al
An example of dealing with a broad solution space is provided by artificial intelligence
start-up Geronimo.Al. The founding team of the start-up were four alumni of aerospace
engineering and computer science university programmes. They wanted to specialize their
start-up in machine learning. Their solution space was very broad: applying machine learning
on image recognition, predictive maintenance and text analytics, etc. The founders collected
information on potential applications. and visited trade fairs in property management.
construction, maritime, etc .. searching for potential applications of machine learning. They
found information on a tender for a project for a ministry on the use of land that it leases
out to farmers. The ministry has agreements with farmers that limit the use of the leased
land to certain crops, and the start-up could monitor the actual crops that were grown
with satellite data to replace laborious physical monitoring of farmers, applying machine
learning on the data. Geronimo.Al submitted a proposal and won the tender. From a similar
tender, Geronimo.Al acquired a project of a regional government organization on predictive
maintenance of roads. Until then, regional governments had renovated roads based on a
standard time schedule combined with physical inspections. Geronimo.Al could combine
analyzes from geospatial data of the roads, traffic data and weather information to predict
quite precisely when the roads needed maintenance. As a result, the governments could
reduce the frequency of maintenance, saving substantial amounts of money. At the same
time, they executed other projects on text analysis of document management tools, image
recognition of food waste, etc. for different clients. Geronimo.Al saw that there was a large
market in the former applications, and that they had developed distinctive expertise in this
area. Therefore, the founding team decided to choose crop monitoring and road maintenance
as its main products for the market. Both products use geospatial data. The trajectory of the
start-up is a nice example of first scanning options within a very broad set, followed by
a set-based approach of several quite distinct projects, following by narrowing down the
solution set to a more selective and coherent one.
The set-based approach has the advantage that it investigates more options, but of course
at a cost. Although no definitive research is available, the expectation is this approach
Design thinking
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<1)
"'"'
1lu
~
.,
C
.0
i
iJ
:,
V)
C:
0
:,::;
0
>
0
C:
.E
C
s:
Figure 3.4 Examples of even (a) and rugged (b) landscapes
will work best in highly turbulent environments. Researchers speak of the 'landscape'
that forms the solution space for innovation. The landscape is the form of the area of all
potential solutions that are viable for the problem addressed. The figure of the landscape
shows the performance of alternative solutions in the landscape (Figure 3.4). The
landscape can be either fairly even, with few peaks and quite a smooth surface between
them (Figure 3.4a), or it can be very 'rugged' with many peaks and very skewed areas in
between (Figure 3.4b). So, the expectation is that the set-based approach will work better
in such a rugged landscape. The team improves several concepts and chooses one after
some time. In a more stable environment, the evolutionary approach will work better.
The reason is that in a rugged landscape, a team applying an evolutionary approach will
have a high chance to end up in a suboptimal solution. In more stable environments the
solution space will be more even and working from a specific position will lead you to
the optimum. It would mean that lean innovation, which is an evolutionary approach,
would not be optimal in very unstable environments, which require more systematic
exploration of completely different options.
The current literature argues nevertheless strongly in favour of the evolutionary
approach, also for turbulent environments. Research by Bingham et al. (2014) shows
that a combination of the two approaches works best: first overlooking all options
(Figure 3.3b), but then choosing one and being flexible over repeated iterations
(Figure 3.3a). They call it: 'focused in the selection, but flexible in execution'. Focus
in opportunity selection means that the manager or entrepreneur does a thorough
analysis of the market and all options, and develops a narrow definition of the
opportunity, e.g. in a niche market. Doing a broad analysis of the market first helps to
select a better option. Flexibility in execution means that they adapt the opportunity
and course of actions during execution. Lean innovation and the flexible approaches
described above are examples of flexibility in execution, but according to this approach
the entrepreneur should first do a broad search and analysis of many alternative
options, before starting to work on one of them. So, do a broad search before you
develop a narrow market opportunity at the start of the innovation process, and be
flexible in adapting it during execution.
3.2 The customer study phase
Traditional marketing techniques
How do we collect customer information in the different phases of the idea
development process? The first phase of the idea development process, the customer
study phase, aims at understanding the customer, without a clear solution in mind.
So, we cannot show ideas to customers yet. This hinders learning from the customers
A landscape
is an idealized
visualization
of potential
options for a
new product,
service or
business
model, and
their expected
market
success.
57
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Innovation Management
A customer
journey is t he
sequence of
experiences
that a
customer
has in an
interaction
with an
organization.
because they cannot react to something concrete, a prototype or a clear description
of our new business model. Therefore, we have to interpret in some way or another
what customers may need.
Traditionally, marketers do market research before they adapt a product or service.
They collect existing data on the use of current products or services, and they do surveys.
With these surveys they try to find out what customers think about existing products
or services, and they explore in which direction customers would want change. The
outcomes of such surveys are data on the 'gains and pains' of current customers that we
addressed in the previous chapter (Section 2.3).
A less traditional use of surveys, applicable for services, is making an analysis of the
customer journey, which means the 'touch points' between the customer and the
service provider (see Figure 3.5). For instance, the first contact between a customer and a
provider of a service can be the Internet. The innovator may ask in a survey how easy it is
for the customer to find the relevant information on the website. Next, the customer may
drive to a retail outlet of the service provider. The drive to the outlet (route indications)
and parking are the next contact points. Subsequently looking for a certain product in the
store, using the toilet, buying a coffee, etc., are all contact points. The firm can study how
customers experience each of these contact points in terms of satisfaction and determine
gains and pains accordingly. Figure 3.5 represents the customer experience at a furniture
retailer, such as IKEA, and shows the importance of a snack at the exit to compensate
for the negative experience of waiting in line at the checkout. The figure clearly indicates
some dips in satisfaction that need management attention.
Usually the methods above are limited in their scope: they aim at incremental
changes in current products, services and business models. Changes that are more
Excellent
Very good
C
0
-~
.E
Good
V)
·. p
0
(f)
Average
Poor
Very poor
Figure 3.5 Customer journey map at a furniture retailer
Design thinking
radical can hardly emerge from these marketing activities since, as mentioned before,
customers' reactions are based on current situations. Innovators who are interested
in more radical new business models cannot use traditional marketing techniques as
described above. For them, there are several alternatives.
Methods for more radical innovation
The first alternative is observation of customers. In Case 3.2 we saw that IDEO has
applied this technique to observe customers of a supermarket using shopping carts,
with the aim of developing a new version. Case 3.4 describes how IDEO used this
method to develop a kids' toothbrush. You can observe customers when using the
current product, or you can observe them in their daily life without using any existing
product at all. The advantage of observing customers is that the customers themselves
do not have to come up with solutions.
( \ CASE 3.4 OBSERVATION: DEVELOPMENT OF A
TOOTHBRUSH BY IDEO
In a video on Youtube, Tom Kelley, brother of the founder of IDEO, explains how they used
observation for the development of a new toothbrush for children. Observation of children
brushing their teeth showed that designers had always made an implicit assumption, which,
however, was incorrect. This assumption was that kid's toothbrushes had to be the same as
adult's toothbrushes, only smaller and skinnier. Observation showed that kids do not hold the
toothbrush as adults do, in their fingertips, but they fist it. And thus, they need a toothbrush
with a thick hold. The insight led to a new type of toothbrush, which was dominant in the
market for quite some time, and which was copied by all other kids' toothbrush manufacturers.
Another technique for more radical innovations is 'outcome-based interviews'
(Ulwick, 2002). Anthony Ulwick, founder of the consultancy company Strategyn,
promotes this technique. In outcome-based interviews you try to find out which
elements of a product or service customers find most important, and to what extent
each element functions satisfactorily. The difference between actual and expected
performance level is called the 'gap'. The technique involves asking repeated questions
on the 'why' of certain preferences. Ulwick proposes that innovators focus on the gaps
in attributes that customers find highly important, since it doesn't make much sense
to reduce a performance gap that customers do not care much about.
Innovators can also interview customers and potential customers in 'focus groups'.
The participants in focus groups have discussions with each other and the innovator
on their demands for a new product, as well as on potential options, offered by the
innovator, to meet their demands. Focus group discussions can be repeated over the
course of a development project, even into the prototyping phase. As we will see later,
we then label the method as 'co-creation with customers'.
Crowdsourcing from customers
Some authors propose applying crowdsourcing of ideas to get information from
customers. We discussed crowdsourcing of ideas in Section 2.7. An example of an
application to acquire customer information is the website Dell Ideastorm, where
An outcomebased
interview is an
interview with
a consumer
aimed at
finding out
the needs and
latent needs
related to a
certain product
or service.
A focus group
is a group
of selected
customers
who are jointly
consulted on
the needs and
options for a
new product or
service.
59
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Innovation Management
Dell invites customers to present ideas for new products. Such initiatives do not just
generate ideas for innovations, but also provide firms with a better understanding
of their customers. There is no agreement in the academic world on the usefulness
of crowdsourcing for more radical changes. The ideas on the Dell Ideastorm site are
mainly incremental, but some studies have shown that for specific types of products
customers can come up with more effective and radical ideas than product developers.
One example is baby products, where parents have been shown to be excellent idea
generators for major new products (Poetz and Schreier, 2012).
Together with sports products, baby and children's products are sectors in which
users themselves develop a lot of innovation. An example of a user innovation is the
Jacuzzi bath, named after one of the Jacuzzi brothers, who developed a pump to
treat his son's juvenile rheumatoid arthritis. From that application, another family
member developed the Jacuzzi bath, which became a niche business. Case 3.1 showed
that the wheel clamp was also a user innovation, although not by a consumer but by
a government institute. We often find such user innovations in types of products or
services that are highly important in people's lives.
Data analytics
Today we also can use data analytics in the early phase of innovation. For instance, data
analytics and artificial intelligence can reveal which customers of a telecom company,
e.g. actively travelling millennials, experience problems with the data speed of their cell
phones. The company can develop applications aimed at those customers to promote
its newest transmission speed offering (such as SG). Marketing managers in firms that
are active in e-commerce collect reviews of their current offerings on their web pages.
These can be important inputs for the development of new products or services, or
for adaptations of the business model. Also, social media can be an important source
of product, service or business model ideas, both for the improvement of current
offerings or for the development of new ones. Usually, analysis of such data leads to
information on preferences of, and potential ideas for, certain customer segments.
3.3 Market learning in the testing phase
Prototyping is
testing a
product or
service by
means of a
preliminary or
rudimentary
version of the
product or
service.
Collecting customer feedback is a bit easier in the testing phase of idea development.
In this phase the innovator can actually show to the customer what they have in
mind, so it becomes easier for the customer to give meaningful feedback. We call this
prototyping. This clearly applies to products, but services can also be tested. Examples
are US banks which created experimentation bank branches in which they trialled
new services (Thomke, 2001). New financial models can be prototyped by presenting
offerings to customers (including the financial conditions) and asking for feedback.
( \ CASE 3.5 PHILIPS HOME LAB
Some years ago, the then lighting and health-care company Philips built a Home Lab,
an artificial home and store in its research lab to be able to try out new products in a
real-world setting. Initially they even invited people to live for several days in this artificial
home to discover how they would actually use new devices. Later they also developed
a Shop Lab, in which they tried out lighting for retail, as well as a Care Lab, where they
experimented with non-core devices such as applications of lighting and communication
devices in cardiology and surgery rooms.
Design thinking
Prototyping can also be done virtually. Thomke and Fujimoto (2000) call this 'frontloading' since you confront problems earlier than in a traditional design process. Firms
build digital representations, for instance a digital mock-up of a car, before they build
a real prototype. This approach applies well to products that are too complex to build
prototypes. They can show the virtual representations to customers, or they do technical
tests on them which can provide information on the appropriateness of the design
from a safety perspective. The accuracy of information that they derive from those
representations is lower than from real-world settings, but if done in an early phase of
the design process, it can narrow down the range of options, which prevents rework in
later phases and can greatly decrease the cost and time of development later on. Frontloading refers to bringing uncertainty down early in the design process. Thomke and
Fujimoto also indicate that by doing so, the firm can sometimes find knowledge that
it could not have obtained from real experiments. For instance, in digital crash tests of
cars you can find effects of the crash on the interior of the car that are not easily evident
from a real-life test.
Front-loading
is performing
early tests
of a product,
usually by
means of
computer
simulations.
Lean innovation and discovery-driven planning
As mentioned before, testing is important in the lean innovation approach. That approach
goes a bit further than just prototyping. While innovators usually apply prototyping in
an artificially created test situation, the lean innovation approach proposes the creation
of a real-life application of the innovation. As mentioned in Section 3.1, they speak of
an MVP that includes key features of the final product, and that they actually offer to
users. In practice, the difference with prototyping is not that large, since they sometimes
inform users that the product or service is tested.
The lean innovation approach provides a structure to the testing process, based on
an analysis of assumptions embedded in the new product, service or business model.
Innovators and new business developers usually have certain assumptions about the
behaviours and needs of customers. By involving customers in the process, they can
test these assumptions, and replace them by others if they tum out to be wrong. A way
to structure experimentation in the lean approach is to make the assumptions more
explicit. You can use the Business Model Canvas for this purpose. You describe your
original idea for a new product, service or business model in the canvas. Next, in every
box of the canvas, you describe the assumptions you make in that box.
For instance, Figure 3.6 shows the example of supermarket home delivery. Figure
3.6(a) shows the business model. The most salient changes compared to the traditional
supermarket business model are indicated in blue (see also Figure 1.3 for the business
model of a supermarket). Note that a value proposition (getting the meal for tonight)
and a customer group (the daily just-before-dinner shopper) have disappeared, since
they cannot be served by home delivery. Figure 3.6(b) shows a number of assumptions
behind this business model. An assumption may be that the customer group will be
parents with children who want to save time (Customer segments) and that these
parents are willing to pay an extra fee for the service (Revenue streams). If in reality
it turns out that the customers are mainly elderly people who cannot go to the
supermarket anymore, the business case can be severely affected, since these customers
will order smaller quantities of products. After describing all the assumptions, you
select the assumptions that have the strongest impact on the success of your business
model, and you develop MVPs to test those assumptions.
'Discovery-driven planning' is an appropriate method to test such assumptions.
McGrath and MacMillan (1995) developed this method in the 1990s. In discoverydriven planning you plan a project based on its uncertainties, starting with the most
important uncertainties. Figure 3.7 illustrates an example of such a process for the
Discoverydriven
planning is
planning
a project
targeted at
the removal of
uncertainties,
starting with
the most
important
uncertainties.
61
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Innovation Management
a
4>
Key
partnerships
Suppliers
IT suppliers
Marketing
agencies
~
Key activities
Purchasing
Marketing
Logistics
Home delivery
Branding
'
Key resources .:.1'
Warehouses,
including picking
station
Expertise on home
delivery
Transport for home
delivery
~
Value
propositions
II
Getting all your
groceries at home
within a
reasonable period
ohime
Getting the meal
for tonight
Customer
•
relationships
Customer
segments
Loyalty card
Brochures
Journal
The once-aweek shopper
818
Channels
The daily
just before
dinner
shopper
Advertising
Website
Delivery service
Cost structure
Revenue streams
Costs of products
Costs of operations, including home delivery
Marketing and other overheads
Sales of products
Charges for home delivery
b
Key
partnerships
4>
Are there logistics
parties which can
do this cheaper
than we can?
·1
•
Key
activities
Value
propositions
~
II
Customer
•
relationships
Customer
segments
How much time
does picking take
per order?
What is the customer
job we are doing?
How do we get
and grow
customers?
Who are our
most important
customers?
Key
resources
What knowledge
do we need?
Do we have the
required logistical
knowledge?
Not losing time
needed to go to
the supermarket
Not having to
borrow a means
of transport for
heavy loads (beer)
Creating ability to
get supermarket
products (elderly
people)
L
Cost structure
What is the cost of a picking station?
What are the costs of drivers?
What are the costs of trucks?
What are the ICT costs?
What are the costs of accidents/damage to trucks?
How much waste do we prevent in our products?
Channels
818
How many orders
can we deliver per
hour?
How big are the
peaks in demand?
Are customers
satisfied with a
4-hour time
window ?
Are customers
prepared to
register their data?
Are customers
prepared to pay
in advance?
Revenue streams
How much are customers prepared to pay
for delivery?
How many customers?
How much less do customers buy (opportunity
purchases)?
Figure 3.6 Assumptions in the business model of home delivery of supermarket products.
This work is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported Licence
case of home delivery of supermarket products. A first MVP would be to distribute
products from a local supermarket to people in the neighbourhood who order those
products on the Internet. In this way you can test the profile of the customers who
are interested. So, lean innovation combines very well with discovery-driven planning.
Design thinking
Test of customer
job and profile
Do t est in ow n
neighbourhood wit h home
delivery wit h private car
fro m local supermarket
Test of delivery
effectiveness
Adapt business case based
on cust omer job and
profil e. Do test in city w ith
dedicated vehicle fro m
local supermarket
Test of picking efficiency
in picking station
Adapt business case based
on del ivery costs. Create
picking station with
products from local
supermarket
Test of supply process
and costs
Adapt business case based
on picking costs. Start
purchasing products from
suppliers
l
Test of demand
in other cities
Adapt business case based
on purchasing costs. Start
campa ign in new cities
Figure 3.7 A discovery-driven process with MVPs
Co-creation with customers
So far, we have discussed methods that innovators or new business developers apply in
a specific phase of the idea development process. So, you get information from certain
customers within a short period of time. A firm can also work with the same customers
over both the whole idea development process, i.e. in both the customer study and testing
phases. We call this 'co-creation with customers'. In general, the term 'co-creation' can
refer to collaboration in innovation with many different types of parties, such as other
firms or research laboratories, but here we restrict the term to customers. By working
over a longer period with the same customers, the customer can better learn what
their needs are with respect to the new product, service or business model, what the
options for solutions are, and what they would think of those solutions. By doing so, the
quality of the customer feedback improves. An option is to have this interaction partly
or fully online, as the case on Dutch Blend (see Case 3.6) shows. By working with the
same customers in a longer process, these customers can drift further off their current
images of existing products, services and business models, and make suggestions on
more radical new offerings. So, in that way we can use customer interaction for more
radical innovations.
Firms often choose so-called 'lead users' for these co-creation activities. Lead users
are advanced users who have more future-oriented demands compared to other users,
Co- creation
with
customers is
working with
the same
customers
through
the entire
innovation
process.
Lead users are
users with
advanced
needs who are
representatives
of the average
future user, or
potential future
customers who
have more
advanced
needs than
current
customers.
63
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Innovation Management
and who serve as representatives of future user groups. Such users can come up with
suggestions for improvements of existing products or even completely new products. In
some cases, lead users are not actual users of existing products yet, but non-users who
may become users in the future.
Clayton Christensen, the author of the disruptive innovation theory (see Section 4.3)
warns against focusing too much on the demands of lead users. Firms may 'overshoot'
the demands of the average user and run the risk that competitors producing simpler
alternative products take over the lower end of the market, eventually even moving up
market. The conclusion from his theory is that firms should only work with lead users
when there are strong indications that the demands of other users will move in the
same direction over time. For example, if a firm adapts its services to the availability
of new mobile technology that is currently only applied by some lead users, it may
expect that other users will acquire the same mobile technology in the future. But
if lead users are not followed by others in their demand pattern, firms should only
consider developing niche products for them, and be cautious in adapting their core
offerings to their demands.
~ CASE 3.6 CO - CREATION FOR DUTCH BLEND
The firm Sara Lee applied co-creation to develop a new tea flavour in the Netherlands.
First, it created a user community on the Internet around tea consumption . Consumers
could discuss their preferences for specific types of tea on the website. Then the company
asked for ideas for new flavours. Of course, a flavour is hard to describe on the Internet,
but nevertheless the firm started developing based on the suggestions. They invited a
couple of dozen of the participants in the community to their premises, to taste a number
of alternative teas. The process led into the development of a tea named 'Dutch Blend',
which was quite successful on the market.
Partnering
with
customers is
collaborating
with a
company
which has the
end user as its
customer.
A userdeveloper is a
member of the
development
team who is
a user of the
product or
service as well.
A form of co-creation is what Dorothy Leonard-Barton (1995) calls 'partnering
with customers'. In this form of co-creation, the firm doesn't work directly with
the end users, but with another firm that knows the end users very well. Jointly
with this company the firm develops a new product, service or business model for
the end users. An example is the chemical company DSM, after it invented the fibre,
Dyneema. This fibre was very strong relative to its weight (and not in absolute
terms). DSM had no clear applications in mind and started partnering with many
other kinds of firms to investigate options for using the material. Applications
became sails for sailing ships and bullet-proof cockpit-doors, applications for which
weight was clearly important. The fibre turned into a blockbuster product for the
company.
A final way of co-creation with customers is to have a representative of the users in
the development team. Leonard-Barton speaks of the 'user-developer'. An example
is IT companies that work in health care, which often have a medical specialist
in their team or even as CEO of the company. That person understands both the
potential demands of customers and the potential of new IT technologies. They can
give direction to development work better than either customers or IT specialists,
because they understand both the worlds of technology and application. Since such
a representative works in the team over the whole development, this model forms an
example of co-creation with users.
Design thinking
Testing during implementation and real market tests
Firms can also test products or services late during the implementation phase, when
the product is almost ready for launch. We speak of alpha- and beta-testing. Alphatesting is a test by an internal team; beta-testing is with actual users. Usually it is
already too late in this phase to make major changes to the offering. The purpose of the
tests is often to find the remaining technical errors in the product, service or business
model. An approach of beta-testing is the so-called A/B tests. Website developers
often use them. They design two versions of the website, for instance one with a blue
button and the other one with a red one, and assign customers randomly to the two
versions. Then they measure which one works best. Kohavi and Thomke (2017) give
good creative examples of the use of A/B tests. Web designers at Microsoft investigated
the effect of speeding up the response time of the Bing website by deliberately making
it a bit slower. In that way they could find out the effect of a shorter response time
without making the investment of shortening it.
Firms can try out fully developed products in the real market. This is called 'probe
and learn' (Lynn et al., 1996). It means that the firm goes to the market with its
offering to find out who the customers will be and what their demands are. The
purpose is still primarily to learn and not so much to sell products or services, but
the product or service is fully developed. The case of ING Direct (see Case 3.7) is an
example of not-intended but well-used market experimentation. The advantage of
experimenting in the market is of course that the quality of information that you
get is higher. Also, it may turn out that unexpected groups adopt your product. On
the other hand, experimenting in the market is of course very expensive, since you
have to officially launch the product. Also, when the product fails, the experiment will
damage the reputation of the firm. The firm can prevent such damage to some extent
by communicating that it is beta-testing the product instead of presenting it as the
final product.
( \ CASE 3.7 MARKET LEARNING BY ING DIRECT
ING was one of the first banks to introduce savings products on the Internet (Dunford
et al., 2010). Customers could open an account via a website and send money to the
account. Since ING didn't need branches for this service, it could offer higher interest
rates than competitors. The bank labelled the service ING Direct and used it to enter
countries where it didn't already have a presence. One of the first such countries was
Canada. However, customers in Canada didn't know the bank, and wondered whether
they could trust it. So, some of them started looking for a physical address on the website,
and after quite some searching, they found one. They stepped into their cars and drove
even hundreds of miles to this address. There they didn't find a bank branch, but an office
building with the name ING Direct at one of the bells. They rang the bell, and it turned out
that they had arrived at the call centre of ING, because that was the main activity of the
bank in the country. The managers of the call centre could have sent the visitors away,
with the explanation that 'this is an Internet product', but they didn't. Instead, they invited
them in, offered them a cup of coffee and explained what the bank was. Based on this
experience, ING started ING Cates in several big cities in the countries where it offered
this service. They were not normal bank branches, but places where people could have
a cup of coffee and get to know the bank. It was a nice example of creative application
of the results of (unanticipated) learning from the market.
Alpha and
beta tests are
tests at the
end of the
development
process. Alpha
tests are with
firm-internal
users; beta
tests are with
potential
customers.
A/8 tests are
tests in which
real users
are divided
into two
groups who
each receive
a different
version of a
service.
Probe and
learn is
putting the
fully developed
product on the
market with
the purpose
of market
learning.
65
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Innovation Management
3.4 When to use which method
In the previous sections, we have seen that we can involve customers in many different
ways during the idea development process. It also became clear that the way we
involve customers very much depends on the radicalness of our new product, service
or business model. In other words, it depends on the degree that our innovation is
different from what customers are used to. Customers generally have ideas on existing
products, services or business models, but have problems with imagining completely
new ones. Consequently, if the offering is close to existing offerings (incremental), a
quick consultation of customers, or reviews from customers on a website, may work
well. When a new offering is more radically new, customers may not be able to quickly
give reliable feedback on their preferences. In such a case more extended knowledge
acquisition on the latent demands of customers or long-term collaboration with
customers may be required. The lean innovation approach will also be appropriate in
that situation. So, if you want to involve customers in the development of a highly radical
new business model, you have to work with them quite intensely or you have to find
other ways to get to know their needs.
Dorothy Leonard-Barton (1995) developed a model positioning different market
learning methods relative to the newness of offerings technology-wise and for the
market. Empathic design is a term used by Leonard-Barton for market learning
methods that aim to empathize with the experiences of customers (Leonard and
Rayport, 1997). According to her, you apply this approach only in the middle of the
figure (the ellipse), whereas today we would consider all methods to have this purpose.
Figure 3.8 is inspired by her chart. Labels in italics describe methods used in the idea
generation phase, normal text describes methods used in the prototyping phase, and
bold labels are methods used in both phases (co-creation) .
..;,;,.
In the bottom left of Figure 3.8 we find incremental innovation, since
changes in technology and business model are small. For these innovations
relatively quick methods are appropriate, such as surveys, in which customers
do not have to make much effort to imagine what the new offering will be.
Customers can also indicate in interviews what they think of the proposed
new offering.
..;,;,.
In the middle of the figure we have medium-radical innovation. Now the
appropriate methods require the deeper, 'empathic' understanding of the customer, such as observation, outcome-based interviews, repeated focus groups,
etc. At the upper left we find radical new business models based on existing technology. That was the case with Dyneema, discussed above. The technology was
there, but it was unclear what markets existed. The firm, DSM, partners with
other companies ('partnering with customers') to find applications in new markets that were unknown to them. At the bottom right we find user-developer/
industry experts. The technology is completely new, but the market addressed
is known. An example would be to introduce new software for imaging devices
for hospitals. Since the customer would not know what the software could do
for them, it would be good to have a representative of the customer industry in
the team, someone who can jointly with technical experts come up with useful
applications .
..;,;,. And at the top right comer of the chart we find radical innovations in
technology, business model and market. In this situation there is very little
information on what the market may look like, and customers have problems
Design thinking
High
- Prototyping
- Market experimentation
- Repeated focus groups
Interviews
Focus groups
Observation
Prototyping
Lead users
Repeated focus groups
Market/
business
model
newness
Low
-
Italic type:
Customer study phase
Normal type:
Testing phase
Bold type:
Both phases (co-creation)
Surveys
Crowdsourcing ideas
Interviews
Focus groups
Lead users
Social networks
.__------------------=-...:::;..__
Low
High
Technology newness
Figure 3.8 When to use which market learning method
imagining the use or a new offering if they cannot see it and try it out. For
those reasons prototyping (including lean innovation) and market experimentation are appropriate in this setting. Companies may also try out repeated
focused groups in this situation.
3.5 Design-driven innovation
Although 'design-driven innovation' resembles the term 'design thinking', this approach
is completely opposite to design thinking as described above. Roberto Verganti from
Politecnico di Milano has introduced the term to describe the way Italian designers and
design firms develop new products (Verganti, 2008). Design-driven designers do not
ask customers for their preferences, nor do they work closely with customers. Instead,
they develop proposals for customers, which customers can accept or not. An example
is Karim Rashid, who worked for the Italian design houseware and kitchenware firm
Alessi. People like him usually live in luxurious places, and observe trends in society,
go to museums and search for new cultural changes. Based on that, they come up with
proposals for new furniture, care products, fashion products, etc.
The question is how we can relate this methodology to the design thinking approach
described above. In Candi, Van den Ende and Gemser (2016) we describe research in
which we distinguish between functional or utilitarian innovations on the one hand and
'hedonic' innovations on the other. Functional or utilitarian innovations provide a clear
benefit for the user; they perform a certain function differently from previous products
or services. For instance, a car-sharing website provides a new transport alternative for
people who do not own a car. A hedonic innovation aims at providing the customer
with new sensorial experiences, such as aesthetics and emotions, or contributes to a
person's identity. Examples are new fashion products, new styles in furniture such as
coloured beds, or Apple products with new designs. Such products sometimes are not just
new from an aesthetics perspective, but they can also provide the owner with a specific
identity. For instance, you belong to a certain group if you use an Apple MacBook.
A utilitarian
innovation is
a change in
the functions
of a product
or service for
users.
A hedonic
innovation
means either
a change in
the sensorial
or emotional
attributes of
a product or
service, or a
change in its
meaning for
the identity
of the user, or
both.
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Innovation Management
a
u
'o
a
Positive contribution
of customer codevelopm ent to
market success
0::
V)
V)
Q)
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3
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Negative contribution
of customer codevelopment to
market success
a
+'
C
Q)
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Q)
....u
C
Incremental
Radical
Hedonic newness
Figure 3.9 Market learning for utilitarian and hedonic innovation
Source: Candi et al. (2016).
We investigated the extent to which customer co-creation contributed to the
performance of these alternative innovation categories (Candi et al. , 2016). And
guess what we found? The more radical a utilitarian innovation, the more customer
co-creation adds to performance. The reason relates to the higher uncertainty in
such innovations, and the larger investments needed. So, the quality of customer
information is not better (actually, it may be less reliable) but the value of that
information for the product or service developer, who usually has to make substantial
investments for a radical innovation, is higher. And since the range of options is much
larger for the innovator (in Section 6.1 we will call this range of options the 'solution
space'), the information from customers has a stronger reducing effect on this range
of options, resulting in a stronger positive effect on the ultimate performance of the
innovation.
However, for radical hedonic innovations we found the opposite: customer
co-creation even has a negative effect on performance. The explanation lies in the
way customers adopt hedonic products and services. While customers can evaluate a
utilitarian innovation reasonably well, in some cases after a period of co-creation with
the producers, this is much harder for hedonic innovations. The adoption of hedonic
innovations is more a social process, in which people observe their peers. When some
of them start adopting an innovation, others may follow. For instance, if a producer
brought bright green shoes for men to the market, potential customers would probably
not know what to do. But as soon as they see some other men wearing green shoes,
and particularly if these people are important to them, they will consider following.
Asking this customer up-front whether they would want to have green shoes, or
testing a few of these shoes as a prototype, would probably find a negative or at least
indecisive reaction. A producer that is led by such information will perform worse in
the market compared to one that just relies on their own intuition, particularly if that
person is experienced in doing so.
Design thinking
For innovations that are both new in terms of function and hedonic we found a
positive effect, which is attributable to the positive effects on the utilitarian aspects
of the innovation. The results of the study were a nice middle-ground in the debate on
the usefulness of customer co-development: apparently whether customer co-creation
works or not depends on the type of innovation. Also, the results clearly explain
why design-driven designers do not work with customers: it would have a negative
effect on the performance of their offerings. Figure 3.9 shows the effects of customer
co-creation for different types of innovation.
3.6 Summary
In this chapter we discussed the process of getting information on customer
needs and preferences during the idea development phase of innovation and new
business development. We first discussed two alternative but similar processes for
this purpose: design thinking and lean innovation. We saw that design thinking
starts with investigating customer needs, while lean innovation starts more from
the idea. Both aim at diminishing uncertainty on the market. We next labelled the
two approaches as evolutionary, and compared them with set-based approaches for
different landscapes.
In this chapter, we distinguished between the customer study, the ideation and
the testing phases in the idea development process. We presented a list of alternative
market learning methods to apply in the customer study and testing phases. Some
methods, such as observation, are only appropriate in the customer study phase,
while others, such as prototyping, are only applicable in the testing phase. We also
introduced the concept of co-creation with customers, which means that innovators
involve the same customers over the whole idea development process. We saw that
the choice of method depends on the radicalness of the innovation at hand in terms
of technology, market and business model. For incremental innovations, it can work
to ask customers for opinions and suggestions, whereas for more radical innovations
observing and experimenting work better. We reviewed a model illustrating the
dependency of the choice of method on the newness of the technology and market.
In the final section, we explored design-driven innovation, which applies particularly
to hedonic or experience innovation.
69
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Innovation Management
0
3.7 Discussion questions and exercises
Discussion questions
1.
In Chapter 2 we distinguished between creativity for open and closed problems (Section 2.1, Figure 2.2 Four types of creativity). What kind of creativity do you think is needed in the ideation phase of the design
thinking process (Figure 3.1)?
2.
Please read up on Google Analytics and Facebook Pixel. According to you and comparing to Sections 3.2
and 3.3, which types of customer learning do these services provide to the companies that use them?
a. Wha t may the companies, which used the services, have learned about their customers?
b. To what extent do you think your user experience on the Internet has been impacted by these services?
And how?
3.
What types of market learning do you think were used to develop the first commercial aeroplanes?
a. Do you believe customers were involved in the early stage s? W hat was the role of experimentation?
b. Do you believe customers are involved today in the development of new aeroplanes? In wh ich aspects?
c. Are aeroplanes functional or hedonic innovations? Why?
4.
Many large e-commerce and Internet companies use A/B testing to iteratively optimize their webs ites.
Think about your answer on the following three interrelated questions: (1) What are the benefits of this
method for learning about website effectiveness for specific customer segments? (2) What can these
companies learn with thi s method about their customer segments in general? (3) What are the potential
downsides of thi s method (e.g. when it comes to learning about small segments of customers)?
a. Do you believe A/B testing is a similar method to co-creation and crowdsourcing? Or is there a
difference?
b. What are the advantage of surveys or questionnaires over A/B testing , for learning about webs ite
effectiveness for specific customer segments, and for learning about customer seg ments generally?
5.
Take a look at Figu res 3.1 (The design thinking process) and 3.2 (The lean innovation process) . In your
opinion , w hat is the core difference between the two processes?
a. W hich of the two approaches wou ld be most suited if you already have an idea about w hich 'problem'
(e.g. customer need) you want to solve?
b. Do you think the two models can be combined into one model, for example w hen working on idea
development?
6.
In Section 3.1 we mentioned that Steve Jobs didn't ask customers about their demands for new products.
Explain this behaviour based on the theory in Section 3.5. According to that theory, wha t would have been
a better approach for Steve Jobs ?
• Do you agree with the theory or do you agree with Steve Jobs' original approach as the most effective
method? W hy?
Design thinking
71
Exercises
Im ag ine you are a design consultant who has been tasked with developing a new type of paper plane. Get
together w ith fellow student s or team members. Apply various forms of market learning, such as:
1.
Giving your fel low stude nts or team members some paper and asking them to fold a paper plane. After
some time, you can see which paper planes fly best and/or wh ich ones the group prefer.
2.
Folding a 'conventional' paper plane yourse lf (one that you think is seen as common) and folding a 'radical'
design paper plane (one that you think is quite unique) . Give the group some time to appreciate and
evaluate both designs. Ask them what they think of the designs and how they would improve them .
3.
Presenting the group w ith several ideas for paper planes and discussing with them what they think are
important design criteria for paper planes .
4.
Afterwards, discuss wh ich of the methods was most effective:
a. For understanding what 'customers' want in a paper plane?
b. For generating novel ideas for aeroplanes?
c. For fine -tuning aerop lane designs?
d. In what order are these methods best used?
For this exercise you're going to innovate the customer journey for choosing and buying a birthday present. First
try to apply the customer study phase of the design thinking process. To do so, you need to empathize with
the 'customers', and you need to define focus areas. Second, try also to apply the ideation phase of the design
thinking process . Some suggestion s for your investigations:
• Ask people around you how they currently choose a birthday present for friends and relatives.
• Try to find out the needs behind th is process. What does giving a birthday present mean for the giver,
and what does it mean for the receiver?
• We suggest you draw out the new customer journeys for buying a birthday present.
• Ask some re spondents for feedback on these ideas. W hat do yo u learn from the ir feedback on the
requirements for a birthday present customer journey?
• Come up with a better idea for a customer journey for buying a birthday present.
References
Bijker, W.E., Hughes, T.P. and Pinch, T.J. (eds) (1989) The Social Construction of Technological
Systems: New Directions in the Sociology and History of Technology. MIT Press.
Bingham, C.B., Furr, N.R. and Eisenhardt, K.M. (2014) 'The opportunity paradox', MIT Sloan
Management Review 56(1): 29-35.
Blank, S. (2013) 'Why the lean start-up changes everything', Harvard Business Review (May):
65-72.
Candi, M., Van den Ende, J. and Gemser, G. (2016) 'Benefits of customer co-development of
new products: the moderating effects of utilitarian and hedonic radicalness', Journal of
Product Innovation Management 33(4): 418-434.
Dunford, R., Palmer, I. and Benveniste, J. (2010) 'Business model replication for early and
rapid internationalisation: The ING Direct experience', Long Range Planning 43: 655-674.
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Innovation Management
Isaacson, W. (2011) Steve Jobs. Simon & Schuster.
Kohavi, R. and Thomke, S. (2017) 'The surprising power of online experiments: Getting the
most out of A/B and other controlled tests', Harvard Business Review 95 (5, SeptemberOctober): 74-82.
Leonard-Barton, D. (1995) Wellsprings of Knowledge. Harvard Business School Press, parts of
chapter 7, pp. 189-212.
Leonard, D. and Rayport, J.F. (1997) 'Spark innovation through empathic design', Harvard
Business Review (Nov.-Dec.): 102-113.
Lynn, G., Morone, J. and Paulson, A. (1996) 'Marketing discontinuous innovation: The probe
and learn process', California Management Review 38: 8-37.
McGrath, R.G. and MacMillan, I.C. (1995) 'Discovery-driven planning', Harvard Business Review
(July-August): 44-54.
Poetz, M.K. and Schreier, M. (2012) 'The value of crowdsourcing: Can users really compete with
professionals in generating new product ideas?', Journal of Product Innovation Management
29(2): 245-256.
Terwiesch, C., Loch, C.H. and Meyer, A.D. (2002) 'Exchanging preliminary information in
concurrent engineering: Alternative coordination strategies', Organization Science, 13(4,
July-August): 402-419.
Thomke, S. (2001) 'Enlightened experimentation: The new imperative for innovation', Harvard
Business Review (February): 66-75.
Thomke, S. and Fujimoto, T. (2000) 'The effect of "front-loading" problem-solving on product
development performance', Journal of Product Innovation Management 17: 128-142.
Ulwick, A. (2002) 'Turn customer input into innovation', Harvard Business Review 80(1): 91-97.
Verganti, R. (2008) 'Design, meanings, and radical innovation: a metamodel and a research
agenda', Journal of Product Innovation Management, 25: 436-456.
Selection
Part
3
Part 1
Introduction
Innovation
management
Chapter 1
Part 3
Selection
Part 2
Idea development
Company
Idea
management
-----+
Sections 2.6-2.7
Innovation strategy
Portfolio
management
Part 4
Implementation
-----+
Sections 7.2-7.5
Chapter 8
Chapters 4-5
Project
Idea
development
Project
selection
-----+
Sections 2.1-2.4
Chapter 3
-----+
Chapters 4-5
Part 5
Specific firms
Part 6
Conclusion
Specific types
of firms
The future of
innovation
management
Chapters 9-10
Chapter 11
73
Organization of
innovation
Project
execution
Chapter 6
Section 7.1
Innovation strategy
4
Learning objectives
After reading this chapter, you will be able to:
1. Give a description of the concept of innovation strategy
2. Explain the difference between innovation strategy and business strategy
3. Describe the technology life cycle model
4. Assess the influence of the phase in the technology life cycle on a firm's innovation strategy
5. Apply the disruptive innovation model to a specific industry
6. Describe the advantages and disadvantages of an early mover strategy
7. Explain the implications of the ecosystem or network characteristics of a market for path
dependence
8. Explain the implications of the network or platform characteristics of markets for dominance of
a single design and of single firms
9. Explain the implications of the ecosystem or network characteristics of a market for the strategy
of a firm
10. List alternative intellectual property protection mechanisms and their main characteristics
4.0 Introduction
As a company, what types of innovations do I want to develop? Do I want to focus
on new technology, new markets, new channels to my customers? And how fast do I
want to be? To answer these types of questions, in this chapter we explain the concept
of innovation strategy. The innovation strategy will help firms to determine the
direction in which to go, and to choose innovation projects. In this chapter we will
define what an innovation strategy is, and how technology and knowledge dynamics
in the firm environment affect it (Section 4.2). We address a specific example of the
dynamics of disruptive innovations, since firms often underestimate and miss these
innovations. We will also explain what we mean by disruptive innovations, and why
firms underestimate them (Section 4.3).
Next, we move to the strategies firms employ to enter markets. We will see
that timing is an essential element of an innovation strategy. We discuss strategy
in ecosystem, network and platform markets, all of which are characterized by
strong dependencies between the actions of different actors. In this part of the chapter
we move from the more general to the specific: network markets are examples of
ecosystems, and platforms are examples of network markets. We show that the
dependencies between actors in network markets lead to so-called network effects,
and we discuss how firms can win in such markets. Finally, we review alternative ways
of protecting innovations which can support the innovation strategy. This chapter
focuses mainly on the company level of the firm, since the innovation strategy refers
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Innovation Management
to the company as a whole or to specific parts of the company. However, the innovation
strategy always has strong implications for the project level, since usually projects have
to be aligned with the strategy (as we will see in the next chapter). Only Section 4.7,
on Intellectual Property, focuses mainly on the project level.
4.1 Creating an innovation strategy
What is an innovation strategy?
An innovation
strategy
outlines what
a firm wants to
achieve with
its innovation
activities, and
how it plans
to reach that
goal.
A business
strategy is
the general
strategy of
a company,
which defines
the direction
in which the
firm wants to
develop and
the decisions
it has to take
to attain that
direction.
An innovation strategy outlines what a firm wants to achieve with its innovation
activities, and how it wants to achieve that purpose. For instance, a bank's innovation
strategy may be to increase its presence for its clients, by means of channels other
than physical bank branches, web-page-based online banking services, or traditional
credit cards. As a result, it wants to create a presence on tablets and cell phones, so
that customers can check their balances and get a quotation for a mortgage from the
bank at any time and at any place. The bank wants to achieve that purpose by creating
a set of innovation projects that create these services. The innovation strategy of the
bank can be creating this presence anywhere and anytime.
An innovation strategy is different from the general business strategy of a firm.
The business strategy defines the direction in which a firm wants to develop, what
it wants to achieve, and how it wants to get there. The business strategy can aim
at internationalization, cost cutting, advertising activities, branding, offshoring,
etc. The business strategy also defines how the company differentiates itself from
its competitors in terms of market position and the capabilities that the company
possesses. A firm's business strategy includes an action plan on how to spend resources
to reach its goal. An innovation strategy has the same character as the business
strategy, but it focuses on the activities of the firm in the field of innovation and
new business development. An innovation strategy concerns specific elements of the
business strategy, particularly the offerings of the firm for customers and the business
models applied by the firm in providing these offerings.
In the past, innovation strategies were product oriented, and related to three main
elements: technology, markets and timing. So, on which technologies do we focus,
which markets do we address, and when do we want to introduce certain technologies
to the market? For instance, a company such as Signify (formerly Philips Lighting)
could focus on certain technologies, say LEDs, certain markets, say the business
market, and could aim at introducing a certain generation of LEDs in a specified
month in the market. Some authors had innovativeness instead of technology as part
of the innovation strategy, indicating how radical the new products are that a firm
brings to the market (Cooper and Edgett, 2010). Therefore, a lighting company could
have as its innovation strategy to focus on incremental changes in existing lighting
products, or, on the contrary, on creating radical new LED products.
However, today innovation strategies cover a much broader set of elements. As
the above example of a bank shows, the innovation strategy can refer to channels to
reach the customer, services, customer relations, and even ways to earn money and
to deliver the product or service. Every element of the Business Model Canvas (see
Section 1.3) can be part of the innovation strategy. So, the lighting company may
decide not to sell just lamps any more, but to also install them at the customers' sites,
or even to operate their lighting, such as lighting offices or operating street lighting
in cities. Also, the firm may innovate the financial model: the customer does not
necessarily pay for installing the lighting infrastructure, but may pay for the hours
Innovation strategy
Prospector
Aimed at being first in the market. Innovation is a well-developed function in
the firm.
Defender
Aimed at defending a market, by vertical integration, high quality,
reasonable pricing.
Analyzer
Aimed at incrementally developing the existing market and adjacencies to
that market, when analysis has shown that the risks are low. Often second
or third follower.
Reactor
Aimed at reacting to developments when they occur. Not very deliberate
strategy.
Figure 4.1 Four types of business strategy related t o innovation
Source: Based on Miles and Snow (1978).
that the light is actually used, accompanied by an agreement on service level. The
innovation strategy of the company can set out targets which affect each of these
elements, e.g. the company wants to offer lighting to customers as a service instead
of as a product.
The need for an innovation strategy depends on the innovativeness of the business
strategy of the firm . The field of business strategy distinguishes four strategies relative
to innovation (see Figure 4.1):
""?
Prospector: A prospector firm strategy entails that a firm is highly future
oriented and moves into new markets and technology. A firm like Google is
clearly a prospector company, as well as Signify in the example above.
""?
Defender: A defender firm strategy aims at exactly the opposite; it aims to
defend its existing market position, for instance by keeping prices low and
creating exit barriers for customers. The firm will only innovate when the level
of uncertainty is fairly low. For instance, a company providing maintenance
for household heating installations can just try to be amongst the cheapest in
the region, and have long-term contracts with customers, without introducing
completely new services.
""?
Analyzer: An analyzer firm strategy is in the middle in terms of innovativeness.
An analyser firm first analyzes thoroughly whether to enter a new market and
stays closer to its current competencies.
""?
Reactor: A reactor strategy entails that the firm reacts to events in the environment and does not really make a choice between one of the other strategies,
for instance because the internal organization is not aligned to one of the
strategies.
It will be clear that firms with a prospector or analyzer strategy are in the highest
need of an active innovation strategy. But in the end every firm needs an innovation
strategy, because every firm has to prepare for the future.
The broadening of the scope of innovation to the many elements of the business
model of course complicates the process of creating an innovation strategy. Whereas
Steven Wheelwright and Kim Clark in their landmark book Revolutionizing Product
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Innovation Management
Development (1992) distinguished two main components of the innovation strategy,
technology and market, today all the elements from the Business Model Canvas, such
as channels, financial models, etc., would be part of it. The structure of the portfolio
of innovation projects in firms and decisions on the portfolio become correspondingly
more complex.
4.2 Life cycles of products, services and knowledge
Life cycles
A technology
life cycle is
the pattern
a product or
service follows
in its market
development.
An important consideration in innovation strategy is the market environment of the
products, services and business models provided by the firm. The level of dynamism in
the environment changes over time according to specific patterns. A model describing
these patterns is the life cycle model of technology, developed in the 1980s and 1990s
(Utterback, 1994), but still relevant. This model describes the evolution of products or
services, and thus should be called the 'product or service life cycle', but the literature
usually speaks of the 'technology life cycle model'.
According to the technology life cycle model, products or services develop according
to three phases: the fluid phase, the transitional phase, and the specific phase
(see Figure 4.2(a)). In the fluid phase competing firms develop alternative versions
of a new product or service. For instance, in the beginning of the 1990s, firms
developed alternative search engines for the Internet, engines which could work with
or without categories of topics, and with different revenue models . An example was
Gopher, which made an index system in which it searched for files and title words .
The alternative designs competed in the market, which was at that point in time
relatively small. The delivery of the product or service in this phase is usually not
yet very efficient, since uncertainty in the market is too high to invest in process
technologies.
In this fluid phase innovators have to make difficult choices. Zunino et al. (2019)
have shown that one of the difficulties is positioning the completely new product or
service relative to existing products and services. For instance, the developers of new
cell phones with extended data processing features had to choose between names such
as 'PDA phone', 'game deck' and 'camera phone' (see Case 4.1). Eventually they labelled
the product successfully as 'smartphone'.
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Figure 4.2 The life cycle model of technology
Time
Innovation strategy
( \ CASE 4.1 ALTERNATIVE NAMES FOR SMARTPHONES
All-in-one handheld device
Arc-slider phone
Compact PDA
Connected mobile jukebox
Enterprise-class
communicator
Integrated mobile multimedia
device
Mobile game deck
Multifunctional phone
Multimedia compact
PDA
Multi purpose
communication tool
Picture mail phone
Pocket-size movie player
Qwerty phone
Smart handset
Pocket PC phone
Touch-screen handset
Social smartphone
Superphone
In the transitional phase, the market grows quickly, and usually one dominant
design has emerged. A dominant design is the architecture of the product or service
with a set of features that wins in a design battle and becomes common to most or all
products or services of a certain type. In the Internet search market, engines based on
the popularity of websites, particularly Google's, became the dominant type of search
engine. Interestingly, Larry Page and Sergey Brin, the founders of Google, had only
introduced their engine in 1997, much later than several others. A dynamic process
between producers of alternative designs, each with their cost price and features, and
customers with their specific preferences, determines which design becomes dominant.
Later in this chapter we will see (Section 4.6) that in some markets so-called network
effects occur, which have a strong influence on the emergence of the dominant design.
In those markets, a design that has the biggest user base ('installed base', see Section
4.6) in the fluid phase has a good chance of becoming dominant.
A dominant design has advantages for users and producers, since it is clear what
the product is and how they should use it. For instance, in the Internet search market,
users of search engines with many other users benefit from their advice on how to
use the site. Also, as long as no single party has the intellectual property rights on a
dominant design, the emergence of a dominant design in the market creates certainty
for innovators who want to enter the market. For instance, as mentioned in Case 4.2,
at the beginning of the 2000s, we had alternative designs of electric and hybrid cars:
different types of hybrid cars (combination of gasoline and electricity), full electric cars
(e.g. Tesla) and hydrogen cars. Car manufacturers considering entering this market
faced a high level of uncertainty as to which design to bet on. As soon as such a design
competition has played out and one of the designs has become dominant, entering
the market becomes more attractive for firms since the uncertainty is much lower and
the risk of betting on the wrong horse disappears. As a consequence of the decreasing
uncertainty and the growth of the market, innovation in process equipment (e.g. for
production) increases after the emergence of a dominant design (Utterback, 1994).
( \ CASE 4.2 DESIGN BATTLE IN ALTERNATIVE ENERGY CARS
It's not always clear in advance whether a single design will become dominant in a
market. An example can be found in new alternative energy cars. Several alternative
designs compete in the market: hybrid cars (i.e. a combination of gasoline and electricity),
full electric cars (e.g. Tesla) and hydrogen cars. Within the group of hybrid cars we find
A dominant
design is the
architecture
of a product
or service
that wins in a
design battle.
The dominant
design's set
of features
becomes
common to
most or all
products or
services in the
market.
79
80
Innovation Management
cars with parallel gasoline and electric engines which can take over from each other
(Toyota Prius), and designs with electric and gasoline engines in series, in which the
gasoline engine drives a generator that fuels the electric engine (Chevrolet Volt, Opel
Ampera). The latter type is also called a 'car with a range extender'. When this market
emerged, it was unclear how it would evolve. Would all designs compete in a grand
design competition, in which one type of car would survive? Or would there be different
design competitions, one for hybrid designs and one for full electric cars, so that the two
markets would remain separate? We now know the outcome: the all-electric car has
become the dominant design. But this was far from clear in the beginning.
A dominant design also has disadvantages since it hinders the transition to a better
alternative because of switching costs, which are the costs for customers to change to
an alternative design (see Section 4.4). The QWERTY keyboard shows a good example
of the disadvantages of a dominant design: because of our ingrained routines in typing,
we do not switch to alternatives (see Case 4 .3).
{ \ CASE 4.3 WHY WE USE THE QWERTY KEYBOARD
A famous example is the QWERTY keyboard, that became the dominant design
for good reasons . It was originally developed to prevent the hammers of a
mechanical typewriter from jamming at high typing speeds. Also, the letters
of the word 'TYPEWRITER' were put on a single row so that the typewriter
salesman could more quickly type that word while demonstrating his machines.
The QWERTY layout became even more dominant due to the routines of typists:
once a typist had worked on a machine with a specific layout, he or she (often
she) wanted a new machine with the same layout. Today, logic behind the
QWERTY ordering of the keyboard is lost, but the layout remains dominant as a
consequence of the ingrained routines of users.
In the third specific phase, the market matures. The market growth slows down, and
firms have to focus on incremental innovation to support their business.
The life cycle model encompasses the transition from one product or service
to another. According to the model, somewhere in the specific phase a product
or service can be replaced by a totally new version, with a new life cycle. The
performance of such a product or service will in the beginning still have some
deficiencies, and the diffusion is small. For that reason, the start of the new
product or service is usually depicted at a lower level than the old one in graphs
(see Figure 4 .2(b)). But after a short period, the new product or service beats the
old one in performance, and the sales also take off and start exceeding the sales
of the old one.
Examples of this pattern of successive life cycles can be found everywhere.
In computers the successive technology life cycles were: mainframe computers,
minicomputers, desktops and laptops. Or in aeroplanes: traditional propeller
aeroplanes, aluminium propeller aeroplanes (e.g. Douglas DC-3), subsonic jet
aeroplanes, and supersonic jet aeroplanes. Each new life cycle replaced the previous
one, while the old products usually also remained on the market, but within a niche
market or a smaller market segment. In aeroplanes, the last type, supersonic jet
aeroplanes, are so far mainly used in military applications (jet fighters) and have failed
Innovation strategy
in passenger traffic (Concorde). We also find examples in channels: the supermarket
largely replaced the grocery store in which the attendant took the products from the
shelf and sold them over the counter, and the hypermarket and web-commerce can be
considered as follow-ups to the supermarket.
The life cycle model can be applied on different levels, from generic product or
service classes to very specific products or services. Kotler and Armstrong (1996)
distinguish:
""?
Product categories, such as automobiles or mortgages. At this level, there is
generally little change, although we can imagine that these product categories
will at some point be replaced by something else (e.g. drones may in the future
replace automobiles and crowdfunding may replace mortgages).
""?
Product classes, such as gasoline-powered automobiles or bank mortgages.
Electric cars may soon replace gasoline-powered automobiles, and peer-topeer mortgages may at some point replace bank mortgages.
""?
Product forms, such as station wagons or web-enabled bank mortgages. SUVs
may replace station wagons, and cell-phone-enabled mortgages may replace
web-enabled mortgages.
""7
Specific products, such as a Volkswagen Golf Trendline or the Scotiabank
fixed-rate mortgage. The Volkswagen Golf Comfortline may replace the
Volkswagen Golf Trendline, and the Scotiabank flexible rate mortgage may
replace the Scotiabank fixed-rate mortgage.
In this terminology, the examples above show transitions between specific product
classes. But life cycles exist on each of these levels. For instance, specific products
or services also have their life cycles. When a firm introduces a product or service to
the market, for instance a new type of mortgage, usually initial sales take off slowly.
Also, the firm still has to find out how the product or service is used, what kind of
information customers need, etc. If the product or service is successful, in the second
phase sales take off. Subsequently a mature phase follows with steady sales. After
some time, the product or service will be replaced by a new type.
There is no general rule on the duration of life cycles of products or services (the time
until a new one replaces them). It depends on the degree that customers' preferences
change, the degree of technological advancement, legal changes, etc. Sometimes
products or services can be stable for decades. In other cases, successive generations
of products, services or business models follow each other quite quickly, even when
the previous generation is still in the growth phase. For instance, the market for the
second generation of mobile phones called GSM was still growing when smartphones
came up. Some people speak in such cases of 'hypercompetition' (Volberda, 1996).
( \ CASE 4.4 DURATION OF SUCCESSIVE LIFE CYCLES OF
BICYCLES
The standard bicycle was introduced to the market in the 1890s, after a fluid phase in
which amongst others the high bi, with the very high front wheel, was successful for some
time (Bijker et al., 1989). The standard bicycle remained dominant for many decades, until
the 1990s when racing bicycles, ATBs, recumbent bicycles, and somewhat later electric
bicycles came along. In this case, increased and more heterogeneous demand was the
most important driver of this development towards new types of bicycles.
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Innovation Management
Knowledge life cycles and the dynamics of firms
The technology life cycle model is about the dynamics of products and services
over time. Behind the technology life cycles, we often find another type of life cycle:
knowledge life cycles. Knowledge life cycles concern fields of science that provide the
opportunity to create new products. For instance, knowledge of solid-state physics
facilitated the development of transistors and integrated circuits and is therefore
behind the emergence of the information society. Internet technology facilitated the
development of many new products and services, such as Internet search engines and
web-commerce. These knowledge fields have their own life cycles in the sense that the
field has an early discovery stage and develops into growth and mature stages.
( \ CASE 4.5 EFFECTS OF DNA TECHNOLOGY KNOWLEDGE ON
PRODUCT LIFE CYCLES
An example of a knowledge life cycle is DNA technology. In the early 1950s, Francis
Crick and James Watson discovered the DNA double helix structure at the Cavendish
Laboratory within the University of Cambridge. In the 1970s and 1980s genetic engineers
used and extended this knowledge to start modifying plants and animals. Since then, the
field of genetic engineering has developed much further, of course restricted by regulatory
boundaries, and it is still not mature. Genetic engineers use the technology to speed up
traditional breeding techniques with plants, for instance by placing markers to speed
up the selection process of new varieties. Many new products and processes, such as
these markers and genetically modified crops, have come from the development of a
new knowledge area. So, a knowledge life cycle generated many new product life cycles.
A multiproduct or
multi-service
company is a
company that
commercializes
several types
of products or
services in the
market.
The evolution of companies and industries reflects this dynamic. Often, companies start
from a new technology and develop a product from it. Then, after some time when
the product market starts growing, the company applies the technology to create new
products. The company in fact exploits its expertise for new purposes. In this way a
multi-product (or multi-service) company finds its origin. After a period, which
can be quite long, the technology matures, and the degree of technology development
diminishes. Sharing technology was an important stimulus to having different product
types under one roof. Since that advantage diminishes, at this point investors often start
calling for the break-up of the company, which often happens after some time. There are
quite a few historical examples of this pattern (see Cases 4.5 and 4.6).
( \ CASE 4.6 THE DYNAMICS OF PHILIPS OVER TIME
The electronics firm Philips started in 1892 with the production of light bulbs. The firm
soon added other products to its activities, such as vacuum tubes, radios, electric razors
and medical devices. A central research laboratory, the Natlab, provided the required
knowledge for these activities, stemming from the quickly developing field of electronics.
In the 1960s the company went into computers. After having many product lines for
decades, in the 1990s Philips started spinning off activities one after the other, such as
integrated circuits in 2006 (as NXP) and the lighting division, the origin of the company,
in 2017. The main reason was growing competition from low-cost countries, particularly
China, but another reason was in fact that the rationale of having all these activities
under the one roof of the research lab had disappeared. The lab was still there, but the
Innovation strategy
synergy in core knowledge that served as a common source of innovations in different
fields diminished. Research in the lab is now often focused on a single business or product
line, and only by exception do research activities address different businesses any more.
( \ CASE 4.7 THE EFFECTS OF KNOWLEDGE DEVELOPMENT ON
COMPANY DYNAMICS: GOOGLE
A present-day example of the effects of knowledge development on the dynamics
of companies is Google, which started as a search-engine company, but soon went
into all kinds of other activities, such as roadmaps, navigation and data storage. The
underlying technologies were data search and storage technologies. Google even
went into autonomous cars, based on the same technology. In 2015 Google created a
company structure for these activities by designating Alphabet as a holding company
with the separate activities as companies under it. This action may become the first step
towards splitting up the company at some moment in time, when the maturing of the
core technologies starts to diminish the added value of having all these products under
one roof.
In the cases of Philips and Google, the multi-product firm originates from a start-up
based on a new technology (respectively, electricity and search engines). The question
is whether new fields of technology also convert established single product firms into
multi-product firms. For instance, will the genetic engineering technologies relating
to plants bring different plant-breeding companies under a single roof, to be able to
exploit joint R&D activities? To what extent will new biotech technologies stimulate
pharmaceutical firms to move into new markets to exploit their genetic engineering
knowledge?
4.3 Disruptive innovation
Two types of innovations can generate the leap from one technology life cycle model
to the next one:
1. It can be a new product or service that is, possibly after some initial technical
problems, a better product than its predecessor. Later in this chapter we will call
this a sustaining innovation.
2. It can also be a product or service with a lower performance than its predecessor,
but with other advantages. We call this one a disruptive innovation.
In the first case, the new life cycle starts at a higher level than its predecessor, in the
second case at a lower level.
Disruptive innovations deserve special attention. The term was initially coined by
Clayton Christensen from Harvard Business School. His claim was that the concept
was highly relevant for management practice, because managers miss disruptive
innovations more often than any other innovation (Christensen, 1997). The reason
is that disruptive innovations are completely at odds with the dominant orientation
in the existing 'incumbent' firms with respect to the performance that the company
wants to provide its customers. Therefore, managers are often blind to the potential
of these disruptive innovations.
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Innovation Management
Cl)
u
C
0
E
I...
0
'+I...
Cl)
CL
1
-+-..--------.
. . .-------...-------.
...
1990
2000
2005
2010
Year
Figure 4.3 The disruptive innovation model
Source: Christensen (1993). Adapted for the airline industry instead of the hard-disk-drive industry.
Christensen introduced the disruptive innovation model for hard disk drives. Figure
4.3 presents the example of the airline industry. In fact, the graph represents a figure
of successive life cycles such as in Figure 4.2 . The shape of the graphs is not a real
difference; the graph shows straight lines because Christensen used a distorted scale
on the vertical axis (a logarithmic scale). On that axis the figure shows the performance
of products or services for customers. For the airline industry: traditionally airlines
competed based on service levels. Service meant high-quality food on board, friendly
stewardesses, lounges at airports, etc. Airlines tried to create a close relationship with
their customers, supported by a loyalty programme. And customers appreciated the
resulting service. Many customers had a clear preference for a specific airline, for
instance because of the in-flight food, and business travellers often used the same
airline to collect air miles. Customers were in fact part of a community, a community
belonging to a certain airline. Airlines improved their service levels over time,
represented by the rise of the line in the graph.
But in the 1990s, budget airlines started offering air travel services. Southwest
in the US was the first to provide such services, and the company was soon
followed by others in Europe (Ryanair, easyJet) and Asia (Jetstar, AirAsia) (see
also Case 4.8). Budget airlines provide particularly cheap air travel services, pointto-point flights (no transfers), often from smaller airports. Reserving seats was
not possible (at least not initially), food on board had to be bought (it was free in
the traditional airlines), and additional charges applied to luggage. Consequently,
Innovation strategy
in many respects it was not attractive to fly with these airlines, but they were
nevertheless highly successful. They attracted new customers who had not flown
before, such as students; they had advantages such as the use of regional airports,
which could be close to the customer's final destination; and they were the first
to use the Internet to book tickets. And, of course, they were much cheaper than
the traditional airlines. They were also financially successful, partly because,
under their financial model, they paid low fees to the regional airports. They were
sometimes even subsidized by those airports, since regional governments wanted
to attract more traffic to the area.
Christensen calls innovations such as the budget airline 'disruptive innovations'.
A disruptive innovation is a product or service aimed at the low end of the market
or at new customer groups at the bottom of the market. They underperform on the
traditional performance indicator, and they have other advantages for customers, such
as, in the case of airline services, low price, easy booking and small, fast airports. Over
time, the providers of disruptive innovations often improve their product and service
on the traditional performance indicator. And increasingly, the disruptive innovation
becomes attractive for customers of the traditional firms . In that market, firms often
'overshoot' the demand of the average customer. As the airlines provided more service
than the average customer needed, part of their customer base made the transition
to the disruptive product or service. At some point even business travellers started
flying with budget airlines. In this way, the disruptors start taking over the market
from below. If traditional airlines hadn't invested in budget services by that point, they
began to find themselves in serious problems. Around 2015, many budget airlines
were highly profitable (net profits above 10% of revenues in Europe), while many
traditional airlines incurred big losses.
A disruptive innovation can thus be defined as a new product, service or
business model:
C\
"""7
with new attributes that are attractive for specific customer groups;
"""7
that is underperforming at the traditional performance attributes; and
"""7
that has the potential to improve on those traditional performance attributes.
CASE 4.8 RYANAIR: A DISRUPTIVE INNOVATION
Ryanair, headquartered in Ireland, started operations as a regional airline company
in 1985, flying between Dublin and London. The company generated losses until the
early 1990s when, after a visit to the US-based budget airline Southwest, deputy CEO
Michael O'Leary converted the company into a budget airline, supported by a European
deregulation of the airline industry in 1992. It was primarily a business model innovation.
Ryanair sold air travel, just as any other airline, and they used the same type of aircraft.
But their business model was completely different: they flew between small airports, they
didn't offer transfers but only point-to-point flights, they sold food in the plane instead of
offering it for free. They also had different financial arrangements with the airports, which
sometimes even subsidized them because of the benefits of airline traffic for regional
economies. The company was highly successful. In 2016, its revenues amounted to €6.4
billion with €1.2 billion profit (after tax) . In the same period, many traditional airlines
suffered from losses or much lower profit levels. For instance, in 2013 the larger Air
France-KLM suffered from a loss of €1.8 billion (on revenues of about €25 billion) in a
single year.
A disruptive
innovation is
a new product
or service that
targets the
low end of the
market or a
new customer
group at the
bottom of the
market.
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Innovation Management
Resource
dependency
means that
firms focus on
the needs of
parties that
provide their
resources,
which are
usually their
current
customers.
Although in retrospect it seems hard to imagine that managers in the incumbent
airline industry were not interested in the new business model, it was a logical
position from their perspective. As mentioned, airlines focused on improving
the service levels for their customers. In that situation, it was an unnatural and
counterintuitive choice for managers in the incumbent airline business to adopt
the new budget business model. That business model was completely at odds with
their ambitions, objectives and orientations in their work. In addition, the current
customers would not accept such 'lousy' services if offered by their existing airline.
So, initially hardly any airlines adopted the budget business model. Christensen
(1997) speaks of 'resource dependency': firms are dependent for their resources
on their current customers, and thus will not adopt a business model that those
customers do not accept.
Managers in the incumbent airline industry could even argue that the budget
airlines did not create problems for their business. They could see it as a division of
the market: they served the existing market, while the budget airlines served the new
low end. But they would then forget that they were in fact overshooting the demands
of their average customer. However, when they started losing customers, they would
see the danger. But often it is then too late to catch up in the market of the disruptive
innovation.
( \ CASE 4.9 DISRUPTIVE INNOVATION IN THE NEWSPAPER
MARKET
We find examples of disruptive innovations or disruptive new business models in many
industries. The entrance of Internet news websites in the newspaper industry is one.
The dominant performance attribute for newspapers is the depth of the articles: the
deeper the articles, the higher the quality of the newspaper. News websites of course
have a very low depth, and thus many journalists considered them irrelevant to their
business. But customers had different opinions. The news websites were cheap,
accessible everywhere, and up to date in real time. The average customer did not find
the shallowness of the articles to be a major problem. And soon the customer base
of newspapers started to shrink. The news websites were underperforming on the
traditional performance attributes but had other advantages. In addition, they soon
started to improve on the traditional attributes by showing news on the same topic earlier
and by adding background information.
A sustaining
innovation
is a radical
innovation that
creates an
improvement
on the
currently
dominant
performance
attributes for
customers.
Christensen emphasizes that not all radical innovations are disruptive. As we
mentioned in the beginning of this section, some radical innovations just improve
on the traditional performance attributes. An example is the CD that replaced
vinyl records. The sound quality was better (although this has been disputed more
recently by some music enthusiasts) and it had other advantages, such as ease of use.
Christensen calls such a radical innovation a 'sustaining innovation', since it creates
a major improvement in the existing performance attributes, but it does not create a
new market based on addressing preferences for new attributes.
The essence of the disruptive innovation model is not that all incumbent companies
disappear as a consequence of the disruption, because that often does not happen. For
instance, in the airline market the incumbents still exist. The essence is that a specific
pattern evolves in the market according to which some companies introduce a new
product, service or business model that is underperforming on the current dominant
Innovation strategy
performance attributes, but that has other advantages for customers, and this new
disruptive offering takes away part of the existing market. The essence is also that
this type of innovation is often underestimated by managers in incumbent companies
because of the underperforming character of the disruptive offering.
Therefore, the meaning of the term 'disruptive innovation' is more specific than just
'radical innovation', since it points to the intricacies of innovations that conflict with
companies' orientations on how to serve customers. Disruptive innovations are, more
than anything, outside the scope of managers. Managers are often blind (myopic) to
the potential of such innovations. In setting up an innovation strategy and portfolio,
firms should be careful not to miss such opportunities. Knowledge of the disruptive
innovation model, as explained above, will help firms to prevent myopia. Nevertheless,
today the term 'disruptive innovation' is used by many people as a synonym of radical
innovation and just serves as a buzzword to generate attention for radical innovation.
Companies may work to set up dedicated idea generation workshops (see Section
2.5) to generate ideas for potential disruptive innovations. However, even if such
ideas are created, it will be a challenge not to reject them in the project selection
process. Particularly when evaluating the financial prospects, managers can easily
underestimate the market for the disruptive innovation.
According to Christensen, the best way to make a disruptive innovation successful
in an existing firm is to create a separate unit for it. Only then can it get the proper
attention and support. We see this happening in the airline industry. Many incumbent
airlines have created or acquired budget airlines that they exploit as a separate company
under a different brand name. Other authors have emphasized that sharing resources
with the existing business prevents duplication of effort and loss of efficiency
(Govindarajan and Trimble, 2010). Airlines can, for instance, share maintenance
services with their low-cost subsidiaries.
Charitou and Markides (2003) have suggested other responses to disruptive
innovation than having a separate unit for the disruptive innovation, such as
leapfrogging the disruptor with a new disruption. This happened in the Swiss watch
industry. When the industry came under increasing competition from cheap digital
watches, the Swiss entrepreneur, Nicolas Hayek, developed designer watches under
the label of Swatch. The watches found a large market, and Hayek successfully counterattacked the cheap competition.
( \ CASE 4.10 DISRUPTIVE INNOVATION IN A SHIPBUILDING
COMPANY
An example of a firm in a complex product market that created a separate unit for
disruptive innovation is Royal IHC. Royal IHC is a dredging ship builder for the international
market. Around 2010 the company experienced a decreasing presence in the low end
of the dredging ship market. This low end consisted of regionally bound dredging vessel
operators, mainly dredging local rivers and harbours. This low-end market was in need
of standardized dredging ships. High-end dredging ships were too expensive for these
operations. High-end dredging ships were complex, large, custom-made vessels with the
focus on optimizing operational expenditure, due to the size of the dredging operations.
In addition, large projects such as the Suez Canal, Panama Canal, and land reclamation
projects in Dubai, Hong Kong, and Singapore had reduced the available capacity of
high-end dredging ships in the world at that time. Royal IHC successfully identified the
disruptive potential of the low-end market. In 2011 the company decided to develop a
Myopic is a
medical term
meaning
short-sighted.
In business
contexts, it
means prone
to lacking
foresight.
Leapfrogging
is competing
with an
innovator by
introducing
a newer
innovation
while skipping
its innovation.
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Innovation Management
standardized, small, low-cost vessel, the Easydredge®, which it would build on stock with
a maximum production time of one year.
The nature of this standardized vessel required a different way of thinking compared
to the core business, which was about building high-tech equipment and complex
custom-made vessels. Also, selling this new vessel required a different culture within
the salesforce, since the standardized dredging ships had to be produced and sold at a
fraction of the cost of large custom vessels.
The development of the Easydredge® started outside of Royal IHC in a joint
venture. However, the company realized the potential synergies and later continued
the development of Easydredge® in-house. The development team benefited from
high operational autonomy and received strong support from top management, which
allocated sufficient resources to the unit.
4.4 Timing of innovation
A first mover
advantage is
the odvantoge
that a player
in a market
acquires by
entering the
market early,
and thus
enlarging its
market share.
As outlined above, timing is an important element of innovation strategies. Timing
refers to when a firm brings a product, service or business model innovation to the
market. Firms can try to be first to bring a radical innovation to the market, or they
can have a second-mover strategy, and learn from the experiences of others. Both
approaches have their pros and cons. The advantage of being early is that the firm
creates a lead in the market and can benefit from other first mover advantages. We
distinguish four types of first mover advantage:
1. Learning advantages. Being first in the market gives a firm the ability to learn from
their experiences with the innovation, both in terms of its technology and in terms
of customer responses. For instance, Tesla has a lead in the market in mass-produced
electric cars and can develop specialized knowledge that competitors do not yet have,
such as in the production of dedicated batteries. Traditionally this advantage is called
'technological leadership', but in the case of a business model innovation the advantage refers to broader expertise than technology only. It has to be noted that Tesla
opened up all its patents and intellectual property to the world, so the company claims
not to exploit the learning advantages. However, of course the company also creates
knowledge, particularly so-called 'tacit knowledge', which is not easy to copy. Other
car manufacturers lack such knowledge, and thus Tesla has a lead in the market.
2. Pre-emption ofscarce assets. This advantage refers to the use of certain supplies that
have limited availability. For instance, if a company intends to set up a chain of
specialized restaurants in, let's say, Cambodian food, proper locations will be the
city centres of major cities. Once the company has established restaurants in the
largest and most trendy cities, it becomes harder for competitors to find locations
for their restaurants that are not too close to the existing restaurants. Scarce assets
also refer to the information span of consumers: once a certain firm is known for
a new product or service, the consumers will remember only that firm when they
want to purchase the product or service.
3. Installed base. This is the number of users of your product or service. This factor
mainly applies to network markets, such as platforms like Uber and Airbnb. In
those markets it is important to acquire a large number of users quickly, since the
more users you have, the more attractive your platform becomes for other users.
We will explain this further in Section 4.6, when we discuss network markets. If
you are earlier in the market, you have a better chance of creating a substantial
installed base, which also stimulates the learning advantages mentioned under 1.
Innovation strategy
4. Buyer switching costs. Buyers can become attached to the first mover because
they get used to its product, service or business model. We gave the example of
the QWERTY keyboard above (Case 4.3). Another example: if a user of an Apple
iPhone wants to move to a Samsung phone, they will have to get used to a new user
interface. Therefore, many users prefer to stick to the same brand of smartphone.
Being a follower also has advantages. The follower faces a lower risk of the innovation
being ignored or rejected, since it has already become clear that the market exists.
The follower can also save on development costs because the customer requirements
and the overall design of the product or service are already established. So, little
experimentation is needed. In addition, the first mover may already have resolved
all kinds of legal or societal problems related to the new product, service or business
model.
There are many examples of second movers that become dominant in a new
business. For instance, in 1992 Charles M. Stack founded the first online bookstore,
Book Stacks Unlimited. In 1995, Jeff Bezos followed with Amazon.com. Bezos had a
far more aggressive marketing strategy, and in that way managed to become dominant.
Stack sold his bookstore to Barnes & Noble. Another example is Laker Airways (see
Case 4.11).
( \ CASE 4.11 FIRST MOVER DISADVANTAGES: LAKER AIRWAYS
Southwest introduced the budget airline business model in 1949 in the US. Freddie Laker
started the first European budget airline, Laker Airways, in 1966. He flew between London
Gatwick and New York. initially with propeller aircraft and with unscheduled tickets (sold
on the day of travel) . In 1968 he started operations to West Berlin (at that time enclosed
by East Germany). He introduced fuel-saving measures such as instructing the pilots to
start conversations with other pilots to get information on optimal ascending speed and
reducing suitcase maximum weight. Airlines needed a licence from the British government
to fly on a particular route. Laker faced fierce opposition from British Caledonian. which
claimed to have an exclusive licence as a private 'non-scheduled' carrier for every
destination it wanted to fly to. Nevertheless, Laker opened a regular 'Skytrain' operation
to New York in 1977 and one to Los Angeles in 1978. It further expanded its flights to the
US and made attempts to get licences for Asia (Hong Kong) and Europe, but continued
to find strong opposition from competing airlines. As a consequence of this opposition,
price dumping by competitors, and an economic recession, the company got into financial
difficulties in the early 1980s and went bankrupt in 1982. Freddie Laker received financial
compensation for illegal practices (predatory pricing) from competitors in court but was
not able to revive his company. Laker Airways paved the way, particularly the regulatory
one, for Ryanair, founded in 1985 (see Case 4.8). and easyJet, founded in 1995. Those
companies also learned from the Laker example that they should start with European
flights, instead of transatlantic ones.
Firms will usually behave consistently with respect to the timing of innovation.
Some firms will choose to go for first mover advantage; others feel themselves
more comfortable with a fast follower strategy. The innovation capabilities of the
company have to match the choice of strategy. The first mover will have to be strong
in experimentation and learning from customers, while the second mover must have
strong monitoring capabilities to track first mover behaviour and experiences. Both
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Innovation Management
strategies require quick time-to-market capabilities, and, contrary to intuition, the
follower may need to be even quicker than the first mover so that it does not get too
far behind in the marketplace. In terms of business strategy, a first mover will prefer a
prospector strategy, while a fast follower will have an analyzer strategy (see Figure 4.1).
Timing is important for both a first mover and a fast follower. Firms can also be too
early to step into a new technology or market. Shell was active in renewable energy
technologies in the 1960s and 1970s, when it bought a 50% share in a renewable
energy company Solahart and became active in forestry. Later it reduced its activities
in that field, when it became unclear whether these renewable activities would fit
the core business and would generate a sufficient margin for Shell. Accordingly, the
company was probably too early in the field of renewable energy and should have
waited longer to find the right niche for itself. An example of proper timing is the
dredging company Van Oord, which entered the business of constructing offshore
wind farms in the early 2000s, early enough to remain ahead of competitors and late
enough to make the business profitable in the short run.
4.5 Ecosystem innovation
A complementary
product or
service is a
product or
service that
is required
to make a
core product
or service
successful.
Ecosystems are important for the innovation strategies of firms operating in complex
products or service markets. These are concerned with products or services that
require complementary products in order to be implemented. An example is electric
cars. Without sufficient charging stations, electric cars cannot become successful. The
charging stations are therefore complementary products for electric cars. Ron Adner
(2006) has coined the term 'ecosystem' for such products and services. An ecosystem
consists of the different producers of the core product, supplies, complementary
products and the parties needed to bring the product to the market. This definition
involves that an ecosystem is in fact a technology system which is created and managed
by different parties. An example of services that are part of an ecosystem are mobile
phone services that require a technical infrastructure but also apps to create their full
value.
C\
CASE 4.12 THE ECOSYSTEM OF THE MICHELIN RUN-FLAT
TYRE
Adner (2006, 2012) gives the example of Michelin that developed a run-flat tyre, the
PAX, in the 1990s. The PAX allowed people to continue driving for some time when
they had a flat tyre. It consisted of the tyre itself and a supporting ring . The market
clearly needed such a tyre, since many accidents happened in the US (where Michelin
introduced the tyre) due to flat tyres or low tyre pressure. There were some alternative
products on the market, but these were rather low quality, and they only addressed a
very small niche of the market. So, the expectations were positive.
Michelin introduced the PAX tyre in 1997. It was adopted on some high-end cars, but
after a few years, the system was discontinued at a big loss. The reason was improper
management of the ecosystem. Michelin was used to just selling new tyres to car
manufacturers, car dealers and repair shops. In this case, however, several complementary
innovations were needed to make the tyre a success. Car manufacturers had to adapt the
design of the car, since the tyre had a sensor which indicated to the driver when it was
flat; otherwise the driver might not know that they had a flat tyre. The car manufacturer
had to connect this sensor to the car system and create an indicator on the dashboard
Innovation strategy
to warn the driver. Tooling equipment manufacturers had to develop specific tools for
garages and repair shops to replace tyres. The garages and tyre repair shops had to
acquire the tools and train their employees to use the system. And since initially very
few cars used this system, many garages did not take the trouble to do so. The low
availability of garages and repair shops that could replace tyres discouraged consumers
from adopting the system, since they needed a garage at an acceptable distance when
they had a flat tyre. The situation eventually led to the failure of the whole product.
( \ CASE 4.13 THE FAILURE OF BETTER PLACE
Better Place was an Israeli company that introduced a system for replacing battery-packs
in electric cars at charging stations along the roads. The system had several advantages
over recharging the same battery. First, you could recharge the car quickly. But second,
the price of electric cars would drop because the battery-packs would be owned by Better
Place. These advantages would encourage the adoption of electric cars. Investors spent
more than US$800 million on the system, Better Place built several charging stations,
and Elon Musk advertised an identical system at one of his road shows. Nevertheless,
the system failed. This was due to a lack of car manufacturers that installed the system
in their cars; in fact, only Renault had a car that worked with this system.
Adner (2012) defines an ecosystem as 'an alignment structure of a multilateral set of
partners that need to interact in order to create a value proposition' (Adner, 2017).
Three types of parties determine the success of ecosystems: the core innovator,
co-innovation partners, and co-adoption partners. Co-innovation partners are
sometimes called 'complementors'. They are associated with three types of risks ,
respectively:
""7
Initiative risks: risks in the company and its suppliers that create the innovation. In fact, these are the normal risks involved in innovating.
""7
Interdependence risks: risks related to co-innovating partners that have to produce innovations that fit the core innovation.
""7
Integration risks: risks of co-adoption partners that have to adopt the product
before the end customers can really benefit from its value.
The problem with ecosystem innovations is that firms developing a product or service
that is part of an ecosystem often forget to manage the required parties. They tend
to focus too much on the first type of risk - initiative risks - the usual risks that they
and their suppliers have when developing a new product or service, and they only
address the other two types of risk at the end of their own development process.
This is even more so for companies that have little experience with ecosystems, like
Michelin. Their lack of attention to interdependence and integration risks created big
problems in their project.
Figure 4.4 shows an overview of the ecosystem in the Michelin case (Case 4.12) .
Starting from the left-hand side are the suppliers, then the tyre manufacturer
(Michelin), then the car manufacturers, the dealers, tyre repair shops, garages and
tooling equipment manufacturer. The initiative risks are on the left-hand side,
the interdependence risks are in the middle, and the integration risks are on the
right-hand side. The degree to which the actors were supporting the innovation
Co-innovation
partners are
parties that
haveto
innovate their
products or
services to
make the
core product
or service
successful.
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Innovation Management
Co-innovation
partners
Core
innovator
l
A
-/
W -+
Initiative
risks
Tyre
Manufacturers
l
Car
Co-adoption
partners
Interdependence
risks
l
Integ rat io n
risks
_,. Dealers -
-
Tyre repair
shops
_ . Users
./
Garages
Tooli ng equ ipment
manufacturers
A
W
/
Figure 4.4 The ecosystem of the run-flat tyre
is shown with colours in Figure 4.4. A dark blue circle represents a party that was
already on board, and with a plan for its activities; a middle-blue colour means that
there was a partial agreement with this party but it was not completely arranged
and there was not yet a clear plan; and a light blue colour means that the party was
in fact opposing the new system. We see that there were several supportive parties
but there were also several uncommitted ones, like the car manufacturers, the tyre
repair shops and the tooling equipment manufacturers. And there was one party
resisting the system - the garages which were not willing to invest in tooling and
in training their employees.
There are several strategies to deal with the interdependence and integration risks. For
interdependence risks, you can coordinate with the co-innovation parties, you may
decide to take on their activities yourself, you can give them exclusive licences for your
innovation, and you can create a flexible interface between your product and theirs. For
integration risks, you can make the innovation attractive, for example, by coordinating
marketing in terms of spreading the word in advance of the product's release, you can
pay certain change-over costs, and you can create a new entity to promote the channel.
For instance, Michelin could have given free training for employees of garages, and
free tooling for their owners.
Dattee et al. (2018) presented a dynamic model for the creation of ecosystems. Such
a dynamic model is necessary because, in the beginning, it is not always clear what
the product or service - and consequently the ecosystem - will look like. In addition,
ecosystems evolve over their development and growth. Firms have to accommodate
such changes, without losing all control of the ecosystem. According to Dattee et al.,
firms have to go through different phases:
1. Create visions of possible futures.
2. Start developing the ecosystem of parties to create momentum in the market, and
construct business models for all parties involved.
Innovation strategy
3. Create control points, for instance agreements that make sure that the ecosystem
will not move completely out of the control of the core actor.
4. Increase momentum further.
This model shows that developing an ecosystem is a dynamic process, which a
company cannot completely envision from the start, but which it can keep within
certain boundaries by setting control points. The example of IBM (Case 4.14) shows
that IBM failed to create such control points at appropriate moments in time. As a
consequence, it lost its position as orchestrator of the personal computer ecosystem.
~ CASE 4.14 IBM LOSES CONTROL OF ITS PERSONAL
COMPUTER
An example of a company that completely lost control of an ecosystem is IBM in developing
the PC (Personal Computer). IBM chose to go for an open architecture in order to catch up
in the market of so-called 'microcomputers'. Therefore, the company worked with external
parties that supplied parts of the product. One of those parties was Microsoft, which supplied
the software. IBM allowed the suppliers, including Microsoft, to build compatible computers
and to sell components (including software) to other computer manufacturers. As we see in
Case 4.16, the Microsoft software soon became indispensable in the IBM PC, since their other
software developers built on the Microsoft software. Since Microsoft had copyrights, it was
able to build a large business out of its software. IBM had in fact failed to create control points
in the system in order to keep some level of control. For instance, it could have negotiated
an exclusive licence with component manufacturers such as Microsoft. If so, IBM might still
have been central in the desktop and even laptop market. instead of which they were only
successful in that market for a limited period of time and eventually had to sell their activities
to Lenovo.
Firms have to manage ecosystems in a timely manner. The natural inclination in companies
is to first develop their own part of the ecosystem, and then approach other actors for their
complementary part. That approach usually means that big delays occur after development
of the core product or service, since other parties need a lot of time to develop the required
complementary products or services. The adoption process can lead to even more delays.
An active approach of involving co-innovation and co-adoption partners can prevent such
problems (see Case 4.15). In fact, the implication of the theory on ecosystems is that firms
have to involve other actors in an early stage in the development of the ecosystem, to
prevent delays and eventually even failure.
~ CASE 4.15 ECOSYSTEM ORCHESTRATION FOR A
SUSTAINABLE INNOVATION
Around 2012, the chemical company DSM developed biosuccinium, which was a biobased acid. DSM distinguished itself by a sustainability-oriented strategy. Bio-based acid
could replace fossil-based acids, which was an important component of plastics with
applications in running shoes (soles) , automotive textiles (flexible foam) and adhesives in
the construction industries (Kennedy et al., 2017). Since biosuccinium was bio-based, it
reduced the footprint of the acid as a component of plastics by about 90%. DSM created
a joint venture with a French company Roquette Freres to produce biosuccinium. To make
Control
points are
arrangements
or positions
that facilitate
that a core
actor keeps
control over the
development of
an ecosystem.
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Innovation Management
the product a success, DSM approached actors higher and lower in the supply chain
to prepare the necessary changes in their activities. To stimulate them to do so, DSM
managers had discussions with producers of end products, such as Nike, to stimulate
them to ask their suppliers for bio-based supplies. By orchestrating the ecosystem of the
product in an early phase, DSM speeded up its introduction. However, when the product
entered the market, oil prices had strongly decreased and the product was not competitive
any more. Eventually, a production facility (in Cassano Spinola, Italy) remained open but
the product was not successful. Still, the case shows that active orchestration of a supply
chain can help to create a new ecosystem.
The implications of the above are that products or services that are part of larger
ecosystems require careful management of external parties. Firms should start
managing those parties in an early phase of the project and apply strategies to get
them on board. At the same time, firms should realize that ecosystems are dynamic
during their development. Therefore, they cannot fully shape the ecosystem from the
start, and should adapt to its evolution, while keeping the dynamics within certain
boundaries so as not to lose control completely.
Network
effects mean
that the
adoption of
a product or
service by
certain actors
increases the
value of the
product or
service for
other similar
or dissimilar
actors.
4.6 Strategy in a networked market
What is a networked market?
One particular type of market in which ecosystems occur is the networked market.
Networked markets are characterized by strong network effects. In such markets,
decisions within and between groups of actors have strong positive effects on each
other and on other groups of actors. As a consequence, not just the company wins
with the best product offering and commercialization strategy, but the position of a
company or technology in the market at a certain moment in time has a strong effect
on outcomes in the market and on future competition. In other words, the market is
path dependent. There are many examples of markets with such network effects,
particularly in the information and communication technology industries.
C\
CASE 4.16 NETWORK EFFECTS IN MICROSOFT'S HISTORY
The computer operating system is an example of a product with strong network effects.
The history of Microsoft provides a salient example. Microsoft originated as a producer of
software for the so-called microcomputers, small computers such as Apple I and II, working
on a small set of integrated circuits. In the early 1980s IBM started developing such a
microcomputer, which became the IBM PC (see Case 4.14). IBM had an open approach
to this product, using components from other manufacturers to speed up development.
For the operating system, IBM approached Gary Kildall, whose company Digital Research
had commercialized the successful CP/M operating system for microcomputers. However,
Gary Kildall would not deal with IBM because, according to some accounts, he refused to
sign the standard non-disclosure agreement. IBM turned to Bill Gates' company Microsoft.
Gates' mother was a successful businesswoman and had recommended Microsoft to
IBM's chairman. Gates didn't have an operating system at that time, but he purchased a
CP/M clone from a small company (QDOS - 'Quick and Dirty Operating System'). adapted
it and sold it to IBM under the name 86-DOS. He kept the rights himself. After the IBM
PC had entered the market. Gary Kildall protested, and IBM agreed to offer customers
Innovation strategy
his operating system also. However, all other IBM PC application software already used
the Microsoft operating system, and Kildall 's alternative didn't sell. Since Microsoft could
also sell its product to other computer manufacturers, it became the standard in the
market. Once application software (complementary products) was made available for
Microsoft's operating system , it became attractive for computer manufacturers to use
this product. And once the Microsoft operating system had many users (installed base).
it became attractive for application software developers to use it in their products. And
the rest is history...
We distinguish between two types of network effect:
1. Direct network effects. Direct network effects occur within a group of actors connected to a product. The actors can be either users or complementors. In the case
of direct network effects, the greater the number of people using a certain product
or service, the higher the value of that product or service to each of those users.
An example is WhatsApp. If you were the only one in the world having WhatsApp,
the value for you is zero, since you couldn't communicate with anybody else. The
more other people use WhatsApp, the higher the value for you, since you can communicate with more people. We call the number of users of a product or service
the 'installed base'. Direct network effects have three sources:
a. Information exchange between users. People learn from each other about how
to use a product or service. The more people who have that same product
or service, the easier it is to get information on its use. For instance, if you
consider purchasing the product or service, you can ask users what they think
about it. And if you have problems with it, you can ask them for help. As
more people purchase a certain product or service, the easier it becomes to
find information. An example is Microsoft Windows: the more people use
it, the more information you can get from other users, which makes it more
attractive to new users.
b. Technology network effects. This refers to products or services that connect
people to each other by means of a technology network. An example is the
telephone or WhatsApp, mentioned above. For a product or service that is part
of a technology network, you can reach more people if more people are aligned.
c. Learning effects at the producers. If more people use a certain product or service,
the producer or producers have a larger number of customers, and thus more
resources and feedback to improve the product or service. This can translate
into higher quality or lower price for the users. In the example of a search
engine, a higher number of users generates higher advertising income (also
per advertiser, not just in total) which provides more financial resources to
improve the service.
2. Indirect network effects: These are network effects between different groups of people connected to the product. Indirect network effects result from complementary
products or services. Complementary products or services support the use of the
core product or service. For instance, apps complement the use of smartphones.
Complementors (called co-innovators in the previous section) are the parties that
develop complementary products or services. Complementary products or services give rise to two sorts of indirect network effects:
a. For complementors: The more a product or service is used, the greater the
incentive for producers of complementary products or services to develop
Installed
base is the
number of
users of a
certain product
or service
at a specific
moment in
time.
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Innovation Management
those, since the market is larger. So, a larger installed base is a stimulus for
complementors to join a product or service.
b. For users: The more complementary products or services, the greater the benefit of the core product or service to the user.
Pathdependency
means that
those firms or
technologies
that have a
larger installed
base in the
emergence of
a new market
are best
positioned to
strengthen
their position
further.
Winnertakes-all is
a situation
in which the
characteristics
of a market
facilitate that
one single
company
acquires a
major market
share in that
market.
Because of these two types of network effects, products or services that already have a
larger installed base have an advantage compared to those that have a smaller one, and
are thus better positioned to win the battle. Path-dependency means that those firms
or technologies that have a larger installed base have a stronger position and are better
able to strengthen that position further. Initial positions of firms or technologies
in the market have a strong influence on the further course of the market. Pathdependencies particularly occur in markets with strong network effects.
C\
CASE 4.17 FRYING PRODUCTS: LOW NETWORK EFFECTS
There are many markets with no dominant design. A simple example is the market for
liquid frying products. Amongst other products, people use olive oil, liquid margarine and
wrapped margarine for liquid frying. There are some direct network effects, particularly
information effects: you hear experiences from others on the performance of the product.
And there are also complements: recipes that advise using one or other of these types
of products (usually they will not distinguish between liquid and solid margarine). But
these network effects are not very strong. For instance, people know that they may use
a different product from the one the recipe prescribes, or they have both types of the
product in their kitchen cupboard or refrigerator. On the other hand, advice from others
may have a strong influence, and as a consequence the market starts to tip into a certain
direction over time (in Northern Europe olive oil is increasingly being adopted).
Network effects are a stimulus for dominant designs to emerge. We discussed
dominant designs earlier as part of the theory on life cycles (Section 4.2). We saw that
in some markets several designs can co-exist. But in markets with strong network
effects dominant designs usually do occur. And in these markets there is an additional
phenomenon. In other markets with a dominant design, usually different firms
produce products with this design. For instance, budget airlines all offer the same
service (so there is a dominant design of the service), but no airline can keep this
market for itself. Also, the all-electric car may become dominant in the market of
alternative energy cars (see Case 4.2), but there will be many firms producing those
cars.
In markets with strong network effects, a single firm may own and produce the
dominant design. We speak of a winner-takes -all situation. Firms that have a
strong market position in the fluid phase of the market may acquire a major market
share later during the life cycle. Microsoft is an example; the firms acquired a leading
market share because IBM used its software in its PC, and it retained a major market
share in the market of operating systems for desktop and laptop computers ever
since, supported by its copyrights on the software. Case 4.16 shows how small
events in an early phase of these types of markets created a position for Microsoft
early on, which had a strong influence on its position later on. In the next subsection
on platforms, we will see several other examples of such winner-take-all company
positions.
Innovation strategy
Such situations have disadvantages. The winner in the market has a monopoly,
leading to higher-than-optimal pricing and potentially to suboptimal levels of
innovation. Microsoft had a monopoly in operating systems for the PC, although
it was limited in setting prices too high since alternatives such as open source Linux
emerged over time.
Two-sided and other platforms
A notable example of products and services with strong network effects are twosided platforms. Two-sided platforms generally connect suppliers and customers
in a particular market. Examples are Uber, Booking.corn, iTunes and Airbnb.
The orchestrator, or owner, of such a platform offers services, but other parties,
the suppliers, actually provide the services. The orchestrator just visualizes the
available offerings for customers. Suppliers and customers make a transaction with
each other, facilitated by the platform. Network effects are particularly strong in
markets of two-sided platforms, since suppliers will choose the platform with the
highest number of customers, while customers will choose the platform with the
highest number of suppliers . So, once a platform leads in a market, its advantages
over others tend to grow quickly, and it becomes increasingly difficult to compete
effectively, leading to a winner-takes-all situation. An exception can be products or
services that are region-dependent, such as Uber, which faces competition in several
regions in the world (Zhu and Iansiti, 2019) .
E-commerce also has platform characteristics, but these are usually one-sided
platforms. A platform such as Amazon originally only sold its own products, so it was
a one-sided platform. Still, network effects played some role since customers would
choose a platform with a large assortment. And the largest e-commerce companies can
afford the largest assortment. Also, in the case of Amazon, Jeff Bezos cleverly created
network effects by introducing an option for readers of books or users of products to
write reviews (Spector, 2000). The more customers Amazon had, the more reviews
would appear, and the more attractive the site became for other customers. It was a
clear example of a deliberately created direct network effect. Over time, such one-sided
e-commerce platforms tend to become two-sided: they start selling other companies'
products on their platform. The platform is attractive for the producers of those other
products because of its installed base. We may also call such a platform 'multi-sided',
because it connects three types of actor: the core web shop (e.g. Amazon), other
suppliers of goods and customers.
Note that the term 'platform' has different meanings:
1. The two-sided platforms as connector between demand and supply in an industry
(as mentioned above).
2. The basic architecture for modular design, such as the product structure of car
manufacturers. We will explain this meaning in Section 5.2.
3. Core 'layers' in a technology design. For instance, a computer is made up of layers
such as the core integrated circuit (e.g. Intel), an operating system (e.g. MS DOS)
and applications. We can also call each of the core layers a platform: 'we build software on the Intel platform', or 'we build applications on the Microsoft platform'
(Gawer, 2014).
All three types of platform experience strong network effects. Otherwise, there is little
similarity between them, and the use of the same term for these three concepts is in
fact rather confusing.
A two-sided
platform is a
service that
connects two
groups of
users: usually
buyers and
sellers in a
certain market.
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Innovation Management
Who wins?
Complementary
asset: a
resource or
capability
necessary to
produce and
commercialize
a certain
product,
service or
business
model.
For firms operating in markets with strong network effects it is of course crucial to
understand how to win a standard battle. What should they do for that purpose? In
general, firms that create a market quickly and decisively have the best chance to win.
That means that they have to create the four first mover advantages from Section 4.4
(learning advantages, pre-emption of scarce assets, installed base and buyer switching
costs) but not always as the first party that enters the market (see Point 1 in Figure
4.5). Figure 4.5 displays nine types of behaviours that can help firms to create such
advantages and to increase the chances to win the battle (Shapiro and Varian, 1999;
Schilling, 2002).
Some firms are at an advantage in a design battle because they already have some of
the required complementary assets (Point 5 in Figure 4.5) or they are well positioned
to create the other conditions from Figure 4.5 . For instance, Philips and Sony were
already big players in audio and video product markets, which helped them to create
the network of partners needed to get Blu-ray adopted (Point 7, Figure 4.5). Also,
reputation can help firms in these battles, like IBM with the IBM PC. Firms with
strong reputations can convince users to adopt their product over a competitor's
(Point 2, Figure 4.5).
Firms of course have to take network effects heavily into account when developing
their innovation strategy. When they consider entering a specific market with a high
degree of network effect, they have to evaluate whether they have a good chance of
winning in that market. If so, they will have to give the project their full support
and they have to make sufficient resources available, along the lines sketched above,
so as not to lose their investments. Most firms can only manage very few of such
innovations, usually only one. On the other hand, if the degree of network effects is
low, they can take more time to develop the innovation, learn from the market and
improve. In that case they can develop a higher number of innovations concurrently.
Standardization
A standard is
a specification
of an interface
in a product,
service,
process, or
management
system that is
accepted by a
specific target
group.
A strategy that deserves special attention in the context of standard battles is
standardization. A standard is a specification of an interface in a product, service,
process, or management system, that is accepted by a specific target group. For
instance, the specification of USB is a standard for connectors in the computer market.
Standards can be important elements of dominant designs. Also, the basic architecture
of the personal computer, based on the IBM PC, is an example of a standard, although
a very complex one. Elements of the PC standard were the composition of the machine,
consisting of modules such as memory, screen, keyboard and operating system, and
the specifics of the interfaces, particularly the interfaces of the operating system with
other software.
Standards can originate in three ways:
1. In the market, just as dominant designs in general. QWERTY, as a standard for
the layout of keyboards, emerged in the market (see Case 4.3). Also the IBM PC
as a standard emerged from a market process.
2. By a consortium of companies and institutes which agree on standards up-front,
to deliberately prevent a battle in the market. An example of a standard by a consortium is the Blu-ray DVD, mentioned above. Sometimes there is still competition in the market, such as the Blu-ray consortium competing with the HD-DVD
consortium.
Innovation strategy
1
Choose the right
timing
While first mover advantages help to win the battle, firms should not be too
early. For instance, Apple was amongst the first to introduce personal computers
('microcomputers ' as they were then called) but the IBM PC (IBM Personal
Computer) became the dominant design. Amazon was not the first in the online
bookstore market, and Ryanair was not the first in the budget airline market
(see Case 4.11 on Laker) . Schilling (2002) found that fast followers are generally
best positioned. The explanation is that firms should not enter the market when
the conditions are not present yet (e.g. the technology is still underdeveloped),
but they have to be quick once the conditions are there.
2
Grow quickly
Once you decide to enter the market, penetrate the market quickly to create
your installed base. Writing biogs or making You Tube videos (particularly funny
ones) can be helpful. Some innovators write a biog on a 'how to ' question in
which they refer to their product or service. 'How to' is often googled by people.
Also setting user expectations, for instance by announcing a new product or
service well in advance, can help.
3
Innovate your
product constantly
Innovate your product even after its introduction, to adapt to the demands of
customers. To become dominant in the market, it's important to have a product
or service that fits customer demands really well. As Burke (2009) advises, it is
more important to so lve the last 10% of customer needs than the first 90%. In
2001 Bill Gates introduced the tablet PC, with a touch screen, but it largely failed.
A few years later Steve Jobs introduced the iPad, and it became a huge success.
An important difference was that Bill Gates had assumed that people would
want to hand-write on the screen, and the tablet came with a specia l pen.
The product relied on handwriting recognition, but that didn't work properly
at the time.
4
Make sure
complementary
products or services
are available
We di scussed this above in Section 4.5 on ecosystems. For instance, when
telecom companies introduced 3G networks with data transmission services,
they initially developed apps themselves because it was not yet attractive for
other companies to enter this market (Van den Ende et al., 2013).
5
Create the required
complementary
assets
Complementary assets are resources or capabilities that are needed to produce
and renew the offering quickly. Resources may be manufacturing facilities,
IT infrastructures and distribution channels. For in stance , Amazon .com needed a
strong IT infra structure to develop its e-commerce platform, so it hired several
experienced IT people (Spector, 2000). Established firms often have an advantage
on this point, since they already have capabilities in-house or under their control.
6
Lay your hand on
scarce assets
We mentioned above the example of a chain of restaurants that needs proper
locations (Section 4.4). Another example is space on smartphone screens: if you
are the first to get a place on that screen with an opp in a specific domain, you
have an advantage, since users will be hesitant to upload another similar opp.
7
Create a strong
consortium of
players
Managers create alliances or consortia to support their design. An example is the
battle between HO-DVD and Blu-ray for the DVD market. Each of the two designs
was developed by one or two parties: Philips and Sony developed Blu-ray, Toshiba
developed HO-DVD (Van den Ende et al., 2012). They both formed consortia to
support their design. The stronger such a consortium is in terms of size of players,
represented industries and strong relations between members, the higher the
chances to win the standards battle.
8
Be flexible in your
design
It sounds highly paradoxical, but research has shown that changing a design in
the introductory period can help it to survive (Van den Ende et al., 2012) . An
example is the Blu-ray consortium, which incorporated new copy protection
features in the standard of Blu-ray to attract more movie studios, which of course
didn't want their movies to be copied . By adapting design standards to the
demands of a specific group of firms or a specific industry, the initiators increase
support. When the design has become dominant, further changes are usually
marginal.
9
Protect your
intellectual property
to the right property
Intellectual property can support a party in a design battle, since it hinders
competitors from creating the same or very similar products or services. Opening
the intellectual property to outsiders may help the design to become dominant,
since it creates larger market share for the design. Firms would rather have a
smaller part of a large market than a small, and maybe even disappearing,
market to themselves. So, the right degree of intellectual property protection is
the key to success.
Figure 4.5 Nine behaviours to win a standard battle
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Innovation Management
3. By a committee created by a so-called 'standards organization', in which companies and other stakeholders participate. The International Organization for
Standardization (ISO) is the most important international standards organization.
Its members are national standards bodies of almost all countries in the world. An
example of a technical standard set by ISO is ISO/TS 19657:2017, which specifies
criteria to be fulfilled for food ingredients to be considered as natural. ISO not
only sets standards for products, but also standards for services, firm processes,
and management systems such as the well-known ISO 9001 standard for quality
management systems in firms. In addition to ISO, regional and national standards
organizations exist, and many industry associations have standardization activities, such as the US-based IEEE (Institute of Electrical and Electronics Engineers).
4. By governments. In most cases governmental standards are obligatory for the
market, but exceptions do exist, such as the voluntary Environmental Management
and Audit Scheme (EMAS) laid down in a European regulation.
We call standards that originate according to the first two options 'de facto' standards,
while we call standards from Options 3 and 4 'de jure' standards. The four different
types of standardization cannot be strictly distinguished, since many intermediary
forms occur. Above we mentioned competition between consortia in the market. Also,
standards set by standards organizations can compete in the market with firm or
consortia standards.
In general, standards should not be set too early, since the market can then stick to
a suboptimal design. When created at the right moment in time, standards facilitate
innovation, particularly process innovation and innovation by suppliers. As we see in
the case of QWERTY, in the long term, standards can hinder the transition to a new
product or service life cycle.
4.7 Intellectual property
Intellectual property is an important determinant of a firm's innovation strategy.
We speak of appropriability: the degree that a firm can capture the revenues from
an innovation. This is of course highly important: if a firm develops an innovation
and competitors can easily copy it, a large part of the revenues will be lost to those
competitors. Innovations are usually much more valuable if you can keep the innovation
and its revenues for yourself. We distinguish four ways to protect intellectual property:
patents, copyrights, trademarks and secrecy.
Patents
A patent
is a form of
intellectual
property
that gives
the owner
the right to
exclude others
from using an
invention.
Patents are the most well-known type of intellectual property rights. The reason for
having patent law is to stimulate people and firms to develop innovations. In the US
only individuals can apply for patents; elsewhere firms can also do so. There are two
types of patent: utility patents and design patents.
Utility patents protect product and process inventions. The general perception is
that patents give the applicant the right to commercially exploit the invention. But
it is the other way around: a patent gives the holder the right to exclude others from
exploiting the invention. The difference between the two meanings is not just a matter
of wording. Even if somebody has a patent on an invention, they may not be entitled
to exploit the invention for instance because there is a patent of somebody else on the
underlying technology. The right to exclude others usually lasts for 20 years. Utility
Innovation strategy
patents can also be granted for breeding techniques to create new varieties of plants,
but in Europe not on plants themselves. In the US, business processes that are created
by software packages can also be protected under patent law. For instance, a business
process such as a sophisticated automated stock dealing process based on specific
software can be patented. An innovation has to fulfil three conditions to be eligible
for utility patenting:
1. The invention has to be new (novelty). It cannot be a copy or too similar to previous inventions.
2. The invention must be useful.
3. The invention should not be obvious. In other words, it should not be easy for
other people familiar with that area of technology (so-called 'persons skilled in the
art') to invent the same device.
Novelty is an important criterion. For instance, has the invention, or something
similar, already been patented or is it already out in the public domain? In Europe an
invention can no longer be patented if the inventor has made the invention public
before applying for a patent. The first person to file a patent for a specific invention
has the right to that patent ('first to file' principle). The US traditionally had a 'first
to invent' principle; accordingly the inventor could still apply for a patent within a
year of making the invention public (called the grace period). Since 2013, the US has
also adopted the first-to-file system, but still with a period of grace of a year.
Design patents refer to the visual shape or appearance of an object, which can
be either two- or three-dimensional. It does not protect any functionality, only
appearance. In Europe a design patent initially lasts for five years and can be extended
in blocks of five years up to a maximum of 25 years. In the US design patents have a
term of 15 years. The main criterion to determine whether a design is new relative to
an existing design is that the two designs are not substantially the same in the eyes
of an ordinary observer who views the design in the same way as a normal purchaser.
A utility patent is usually filed for a specific region in the world, be it a country or
a continent. It is possible to extend the patent to other parts of the world. The patent
application procedure is rather costly, since patent attorneys have to do preparatory
work. Even though the fees for the formal application can be as low as a few hundred
euros or dollars, the total cost of the procedure will be in the thousands of euros or
dollars, usually around 20,000-30,000. The amount will be higher if the application
has to cover many countries (e.g. cost of translations) and much higher if infringement
of the patent has to be actively enforced by suing parties. Design patents are usually
less expensive. In spite of the costs incurred, patents are important intellectual
property rights, since in many cases they provide strong protection.
~ CASE 4.18 HOW DONALD DUCK BLOCKED A PATENT
On 14 September 1964, the freighter Al Kuwait capsized at the docks in Kuwait's harbour.
The ship was carrying 5,000 sheep that started decomposing in the water. Because of
the danger of pollution, the wreck had to be salvaged quickly, faster than was possible
with traditional techniques. A Danish inventor, Karl Kr0yer, developed the solution of
pumping expandable polystyrene foam balls into the ship, which made the ship float
to the surface. He applied for a patent on his invention, but a Dutch patent examiner
remembered that a Donald Duck comic showed the same idea. The patent office denied
the patent!
101
102
Innovation Management
~ CASE 4.19 PATENT BATTLES BETWEEN APPLE AND
SAMSUNG
Apple and Samsung have repeatedly battled in court on their patents. In 2012, a
jury awarded Apple $1.049 billion in damages for Samsung's infringement of several
utility and design patents. Another case was the design of the Galaxy S4G. Samsung
was found guilty of infringing the patent for the design of the iPhone (US Patent No.
D593.087). However, a subsequent design of the Galaxy was allowed: the radius of the
curved corners and size of the screen were slightly adapted, to create minor differences
from Apple's design.
Copyrights
Copyright is
an intellectual
property right
that excludes
others from
exploiting
the result of
creative work,
such as a text,
music or art.
Copyrights involve a second important type of intellectual property right. Copyrights
are granted to authors of intellectual works such as texts, music or art. Also computer
programs are copyright protected, and databases can also be, in case the information
is selected and arranged in the database in a creative way.1 As in the case of patents,
authors get the right to exclude others from exploiting the intellectual work; nobody is
allowed to copy it without the consent of the author. Copyright is granted for a much
longer period than patents, usually during the life of the author plus an additional 70
years. A difference with patents is that authors do not have to apply for copyrights,
since they are automatically granted to the author free of charge. Copyrights can
also be granted to some technical objects, particularly software. Designs can also be
protected by copyright if they are the clear result of a creative act. In that case the
design is of course protected much longer than if protected by a patent.
~ CASE 4.20 BLURRED LINES VERSUS GOT TO GIVE /T UP
In 2013 Robin Thicke published an album together with TI and Pharell Williams with
the title song Blurred Lines. He made a provocative sexy video of this song. Part of the
marketing strategy was that it would be forbidden on some channels, which indeed
happened on a broadcast channel of UK universities. The song was an immense success
worldwide, peaking at number 1 in 20 countries, and it was the longest running number
1 in 2013. It sold over 14 million copies and was nominated for two Grammies. The
children of Marvin Gaye, however, filed a suit against Thicke and Williams, claiming that
the song copied their father's hit Got to Give ft Up. The jury judged in their favour and
awarded them almost $7.4 million to be paid by Thicke and Williams. The verdict was
highly contested by experts, partly because Gaye's music was not represented during
the trial in its original form, but by a version which was created from the sheet music that
was submitted to gain copyright.
Trademarks
A trademark
is an
intellectual
property right
on a sign or
expression
to identify
the origin of
a product or
service.
Trademarks or logos are signs or expressions that identify the origin of a product
or service, which may be an individual, firm or institute. The main requirement for
the registration of trademarks is that the trademark must have some distinctive
character. In Europe, changes to trademark law have been made to keep pace with
1
If a firm hos invested substantial resources in a database. is hos a so-called ·sui generis" property right on the
database. even if the selection and arrangement of the database ore not creative.
Innovation strategy
103
technology. It is easier now to register non-traditional trademarks, such as sounds and
movements. Once registered, a trademark can be renewed indefinitely every ten years.
Trademarks give brand protection, but not protection of the design of the product or
service itself. Trademarks are usually also displayed on all company communications,
such as letters, buildings and means of transport. The use of trademarks to protect
products or services against competition only works if people recognize the trademark
as a quality indicator. The Nike and Intel logos are famous examples. In exceptional
cases of product designs being recognized as representing a particular company,
designs can also be protected as trademarks. This happened to the iconic Coca-Cola
bottle: after the design patent expired in 1951 (having been extended several times)
the bottle received trademark protection.
Secrecy
An important way to protect intellectual property is to keep the underlying technology
or chemical substances secret. The composition of Coca-Cola is still secret, which,
together with the design rights, keeps competition at some distance. The taste of
competing colas, for instance, those offered by discount supermarkets, usually
comes close to Coca-Cola but it is still different. Secrecy is a particularly attractive
tool for manufacturing processes, since they are usually not seen by outsiders. In
addition, patent enforcement is difficult on processes that are not traded on a market
but created by firms internally. However, trade secrets offer limited protection; only
improper means of discovering the trade secret are prohibited. Competitors are not
prohibited from developing and using the same technology independently or from
reverse-engineering the technology.
Open-source strategies
An alternative to intellectual property protection is the open-source approach. In
some sectors, particularly software, firms and individuals deliberately open up their
intellectual property to other inventors and the public. They invite them to use the
products and to develop add-ons or complementary products, which should also be
open. Sometimes a central authority has to grant approval to those new products.
Well-known examples of open products are the Linux operating system and the
Android mobile operating system built on it. The reason for following an open-source
strategy is usually to create a large installed base for a product in a market with strong
network effects. In such markets it may be more important to win the design battle
than to keep all technologies for yourself. The firms supporting the open standard
usually earn revenues from it by offering complementary products, such as hardware
supporting the software, applications that use the software or from services.
Using open-source software can be attractive to businesses, as it can reduce costs
and dependence on software companies. Some people presume that open source
means that there are no intellectual property rights involved, and they may believe
that they in turn have proprietary rights over the software that they have modified
or improved. However, that depends on the licence structure that applies to the
open-source software that they use. There are licences like the GNU General Public
License (GPL) that do not allow the software to become proprietary. This means that
somebody building software based on the open-source software also has to open up
its own software for free. More permissive licences such as Apache 2 allow the user of
the software to add a copyright statement to its own modified software.
Open source is
an intellectual
property
strategy in
which the
producer
of a good
deliberately
allows
anybody else
to use those
products free
of charge
under specific
conditions.
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Innovation Management
= 4.8 Summary
In this chapter we have explained what an innovation strategy entails, and how
critical it is for the future of companies. We demonstrated that the firm's innovation
strategy and business development activities depend on the phase in the life cycle of
the technology or service. We also introduced disruptive innovation as an additional
theory of life cycles, according to a more specific pattern starting with a product or
service that underperforms on traditional criteria. Dedicating attention to disruptive
innovation may prevent firms from missing such opportunities.
We also discussed timing in the market and first mover advantages and disadvantages.
We showed the importance of aligning with other parties and of creating control
points for the creation of ecosystems, and discussed such ecosystems in the specific
case of markets in which network effects occur. We showed that interdependencies
between decisions of different groups of actors in network markets give these
markets a specific dynamism, which means that firms that create a large installed
base in an early phase have a head start to become dominant in those markets. This
appeared particularly to be the case in platform markets. Finally, we presented several
mechanisms for intellectual property protection, which can support the innovation
strategy of companies.
0
4.9 Discussion questions and exercises
Discussion questions
1.
If you think about a 'prospector' - a company that aims at being first in the market - w hich organization
comes to mind? What do you think their innovation strategy is? For example, you may discuss what types
of innovations they invest in and how they develop these innovations.
a. Think about a competitor of this company that yo u would describe as a 'reactor'. What would its
innovation strategy be?
b. W hich innovation capabilities (see Section 4.4) wou ld the 'prospector' need to execute their strategy?
And what is the difference between the innovation capabilities the 'defender', 'analyzer' or 'reactor'
have?
2.
According to the disruptive innovation theory, you can best create a separate unit to develop and
commercialize disruptive innovations. Why do you think that having a separate unit is more important for
disruptive innovations than for (radical) sustaining innovations ?
3.
In Cases 4.6 (on Philips) and 4.7 (on Google), we gave two examples of multi-product (or multi-service)
firms. How would the innovation strategy of such firms in the early stages of their life cycles have influenced
them to become these large multi-product, multi-service companies?
a. Would a firm w ith a 'defender' business strategy be equally likely to become a multi-product, multiservice firm, as a company w ith a 'prospector' strategy? W hy (not)?
4.
In Section 4.5 on Ecosystem innovation, we distinguished between co-innovation partners and co-adoption
partners. What do you see as the practical relevance of the distinction between these two types of partners?
5.
Case 4.13 describes the history of Better Place. In the same section we mention the role of control points
in ecosystem creation. Imagine that Better Place wa nted to create control points in its ecosystem, how
could it have done so?
Innovation strategy
6.
105
In Section 4.6 we defined network effects for the adoption of innovations. We can also apply the concept
to the adoption of the COVID-19 measures (obligatory and/or voluntary) that were imposed by many
governments worldwide in 2020 ; such as wearing facemasks , limiting group size, discouraging travel ,
washing your hands, and keeping 1 to 2 metres distance.
a. To what extent did direct network effects exist for these measures? In other words, how did the
'installed base' (i .e. the number of users) influence other users in your country and the countries around
you? In your opinion , wh ich of the three direct effects applied most?
b. Do you believe there were also indirect network effects for 'complementors'? Why (not)?
c. Did a dominant design for COVID-19 measures arise w ithin countries?
7.
In the United States, the automatic gearshift is the dominant standard in most cars. On the contrary, in
Europe, although automatic gearshifts are on the rise due to decreasing costs and improved fuel efficiency,
the standard in most cars is still a manual gearshift. Why do you think this difference in standard s arose
between these two continents? Are these 'de facto' or 'de jure' standards?
Exercises
Consider one of the most arguably promising companies of recent years: WeWork, an American commercial
real estate company that provided flexible shared workspaces for start-ups, and services for other enterprises.
The company operated in many countries around the world, offering its services mostly in metropolitan cities.
In January 2019 the company was valued at US$47 billion. But shortly thereafter it had a failed initial public
offering (IPO) and its valuation dropped to around US$10 billion , about US$3 billion less than what it had raised
in investments to that date. The company was criticized for its lack of a working, profitable business model, and
inappropriate governance (e.g. they had their own Gulfstream jet despite the lack of profits) .
1.
From the viewpoint of network effects , we can analyze We Work's business model. For each of the direct
network effects (information exchange, technology or learning effects) analyze how WeWork generated
value by increasing the 'installed base'.
2.
In Fi g ure 4.5, we mentioned nine behaviours for getting into a strong position in a networked market.
Exp lain which of those behaviours were used by We Work.
3.
Based on your analysis in answer 1. and 2., w hy do you think We Work was arguably not able to effectively
capture the expected quantity of value?
• W hy didn't WeWork fully enjoy network effects? You may ask yourself: How is WeWork able to offer
different services from other, competing , co-working spaces? To what extent can the network effects
'grow' within a particular building or city?
In Section 4.3 we defined the concept of disruptive innovation. Which disruptive innovation is currently threatening
the market of university programmes? To get to an answer, you may consider the following list of questions:
• W hat are the current main performance indicators in the market of univers ity programmes?
• What are the sustaining innovations that universities have focused on in recent years?
•
•
Li st potential disruptive innovations in thi s market. Look to the rise in digitization for ideas.
Indicate for each disruptive innova tion on which of the main performance indicators it underperforms, but
wh ich other performance dimensions it offers over the sustaining innovation s.
• Which market segments could each of these disruptive innovations address initially? Are they opening the
market to wards the high-end segments, low-end segments, or do they open entirely new markets?
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Innovation Management
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Portfolio management
Learning objectives
After reading this chapter, you will be able to:
1. Explain the difference between reactive and proactive portfolio management
2. Apply proactive portfolio management in companies or other organizations
3. Select a balanced set of innovation projects
4. Organize the decision process on the innovation portfolio
5. Develop an innovation portfolio based on platform and modular design
6. Develop strategies to diminish resistance against innovation projects
7. Use real options reasoning in evaluating projects
5.0 Introduction
How do I as a manager choose between alternative innovation projects? Firms cannot
implement all potential innovation projects and thus have to make, sometimes
tough, choices. How should they make such choices? This chapter deals with portfolio
management, which aims at composing a set of projects that jointly implement the
innovation strategy, as discussed in the previous chapter. We first explain the more
intuitive bottom-up reactive approach versus the more organized top-down proactive
approach. We will give the Innovation Ambition Matrix as a clear example of the
proactive approach. Then we show how to organize the decision process on the
portfolio, and how to deal with resistance against radical innovation projects . Next,
we discuss how you can apply platform and modular design in products or services,
and how that can play out in portfolio management. Finally, we present some portfolio
management tools, particularly the real options approach. Together, these concepts
will help managers and companies to develop a well-structured innovation portfolio.
Just as the previous chapter, this chapter focuses mainly on the company level,
since the innovation portfolio refers to the set of projects of the company as a whole.
However, again, portfolio management has strong implications for individual projects,
which becomes clear when we give selection criteria for projects in Section 5.1 (on
project choices made within buckets). Also, the larger part of Section 5.4, on tools for
portfolio management (such as real options), describes these tools on the project level.
5.1 Reactive versus proactive portfolio management
Portfolio management is the most important way for firms to implement their
innovation strategy. Firms make two types of decision to implement this strategy:
decisions on individual innovation projects and on the portfolio of projects. Decisions
on individual projects are about the desirability of pursuing or continuing a particular
107
5
108
Innovation Management
Reactive
portfolio
management
is an approach
of portfolio
management
that starts
with collecting
project ideas
before defining
decision
criteria to
select projects.
project. The decision can be based on strategic reasons or the performance of the
project so far, or a combination of the two. We will address decisions based on project
performance in Chapter 6. Decisions on the portfolio of projects relate to the full set
of projects, and the composition of the set. This chapter is about those decisions. A
key question is whether the total set adequately implements the innovation strategy.
In many firms, the process of strategic decision making on innovation is reactive.
The process usually works as follows:
~
An employee of the company, who may be a manager, a business developer, an
engineer from R&D or a work floor labourer, or someone from outside, comes
up with an idea for an innovation;
~
Executives consider the opportunity and start making a list of criteria to make
a decision on whether to invest in the idea or not;
~
They evaluate the idea versus the criteria, and make a decision on the idea;
~
If the decision is positive, they will reconsider their decision during the execution of the project. If the project deviates from its original targets, or if
it doesn't meet the expectations, or when circumstances change, they may
abandon the project.
This process is repeated for new ideas. Portfolio management is more administrative:
after some time, an overview of all projects is completed, and the list may be adapted
if it turns out that certain projects are over- or under-represented or when the costs
are not in line with the budgets.
This process of decision making is reactive, since the initiatives come from a
diversity of sources and are serendipitous in the sense that they depend very much
on chance. Certain people see an opportunity somewhere which they consider
worth communicating to others in the firm. Their actions are not orchestrated. As
a consequence, the firm may end up with a very unbalanced portfolio of innovation
activities, in which certain types of projects are over-represented and others underrepresented or totally missing. For instance, such portfolios frequently have an
over-representation of incremental projects, since people in the company often have
ideas based on problems or opportunities resulting from their current activities. Such
opportunities are often close to existing products, services or processes of the firm,
and they usually lie within the existing business model.
Proactive portfolio management in small or medium-sized firms
(SMEs)
Proactive
portfolio
management
is an approach
of portfolio
management
that starts
with defining
categories of
innovations
(buckets) and
resources
before
selecting
projects.
A more proactive process of portfolio management doesn't start with the
suggestions raised by people in the firm, but starts with the strategy (Nagji and Tuff,
2012; Terwiesch and Ulrich, 2008). Where is it that we want to go, and what types of
projects would we need to reach our strategic goals? Anthony et al. (2014) define a
three-step process that is particularly useful for smaller firms and firms that are not
used to a structured innovation approach.
~
Step 1 involves defining what would constitute a radical project in your firm.
Radicality is characterized by high degrees of uncertainty, which may be caused
by lack of knowledge in areas that are relevant to the innovation. For instance,
starting a crowdfunding platform will be a radical innovation for a bank, since
the bank does not have knowledge of this market. It doesn't know how many
people are prepared to provide funds to unknown others, and under what
Portfolio management
conditions. It has knowledge of the risk assessment of potential investments
but has no knowledge on how to apply these in the context of such a platform.
And it doesn't have knowledge on the implications of such an activity for its
brand name. Step 1 also involves defining where there are opportunity areas
for radical innovation.
( \ CASE 5.1 RADICAL INNOVATION FOR SMEs
To define radical projects in a specific context can be hard. For example, from our own
experience: we asked a group of owners of small or medium-sized firms (SM Es) to define
what 'radical innovation' meant for them. One entrepreneur mentioned setting up a
factory in an adjacent country. This initiative required a big investment and the decision
posed a real headache for the entrepreneur. However, the question was whether it was
radical in terms of innovation. The entrepreneur already had a factory producing the same
goods in his home country. So, the investment was big, but the need for new knowledge
and the level of uncertainty were limited. Another entrepreneur, who delivered flowers to
flower trading companies, came with the example of setting up a web channel for direct
sales to end customers. The investments required were much smaller, but the needs of
customers, and potential problems in delivering a fresh product on demand created a
higher level of uncertainty.
""7
Step 2 involves defining what revenues you expect from radical innovation.
How would revenues develop if we didn't innovate (usually they would decline),
how much revenue do we already generate from our incremental innovation
(often incremental innovation will aim to keep revenues on par or slightly
increasing), and how much revenue do we want to create from radical innovation and over what time period? Based on this you decide which part of your
innovation budget you want to spend on radical projects.
""7
Step 3 involves specifying concrete innovation projects, creating teams for the
projects, and setting targets and milestones. Often it can be better to have only
a single project or very few. Overinvesting in innovation in firms that have no
strong history in innovation can backfire, since it is better for a firm to learn how
to innovate in a smaller setting. In addition, projects often fail and big failures
can backfire by killing the spirit for innovation in the firm or by creating strong
opposition against innovation.
Proactive portfolio management in large firms
Larger firms will usually have a larger set of innovation projects, and more experience
in innovation. However, large firms may also suffer from the reactive approach
outlined above. They collect larger numbers of ideas and select between them based
on a number of criteria, but in that way, they may also have blind spots, unattended
areas, in their portfolios or an unbalanced portfolio with respect to incremental versus
radical innovations, product lines or strategic priorities.
To be more proactive, large firms should first determine how much to invest in
innovation. Four factors are important in determining the budget:
1. Last year's budget (as a reference);
2. Changes in strategy;
109
110
Innovation Management
3. Opportunities in the market;
4. The growth targets of the company.
Differences in (3), opportunities in the market, explain that R&D intensity depends
strongly on the industry (see Figure 5.1). In addition, the level of opportunities in the
market can change over time. If more opportunities in the market arise, the budget
should be increased. For instance, new opportunities to create new Internet channels
for customers (web-commerce) can be a good reason to increase the innovation
budget. On the other hand, it does happen that the opportunities in certain industries
diminish, and firms should reduce their innovation budgets. This has happened in
pharmaceuticals, traditionally a large investor in R&D (see Case 5.2). The same has
recently happened in telecommunications. There is a lot of innovation going on in
mobile technologies, but mainly driven by providers of complementary products: cell
phone manufacturers and app developers. The telecom operators themselves have
invested diminishing amounts in innovation.
With respect to (4), the growth targets of a company, the firm can predict its future
revenue development under different levels of innovation. How will revenues develop
Services sector
Pape r, paper prod. & printing
Metal products
Food, beverages & tobacco
Textiles, apparel & leather
Petroleum refineries & product
Non-metalic mineral products
Furniture, other manufacturers
Iron & steel
Non-ferrous metals
Shipbuilding & repairing
Rubber & plastic products
Chemicals excluding drugs
Other transport equipment
Non-electrica l machinery
Motor vehicles
Aircraft
Professional goods
Drugs & medicines
Office & computer machinery
Sub-total electrical & electronic
0%
5%
Figure 5.1 Level of R&D intensity by industry
Source: Van Pottelsberghe (2009).
10%
15%
20%
25%
Portfolio management
if we do not innovate at all (usually strongly shrinking), what will happen if we only
innovate incrementally (usually incremental innovation will serve to keep revenues on
par), and how much radical innovation do we need to meet our growth targets? Based
on such considerations, the firm can set out its innovation budget.
~ CASE 5.2. DIMINISHING OPPORTUNITIES IN DRUG MARKETS
The opportunities to develop blockbuster drugs with broad application are shrinking.
As a consequence, pharmaceutical companies are increasingly focusing on so-called
'orphan drugs', which target specific and often much smaller patient groups ('orphans')
which have so far not been addressed. Since the costs of developing such drugs are
usually in the same range as drugs for larger patient groups, and in spite of high prices
being charged for these drugs, the profit ratios tend to be lower. As a consequence,
until recently it was a rational choice for pharmaceutical companies to set their R&D
spending at lower levels. Of course, the COVID-19 crisis has suddenly reverted this
logic: pharma firms made large investments to try to develop vaccines quickly.
The question is how spending on innovation and new business development affects
firm performance. We speak of R&D intensity: the percentage of revenues that a
firm invests in innovation. More is not always better; as the example from the
pharmaceutical industry indicates, you can also spend too much, paying excessive
costs without receiving proper returns. Research indicates that there is a curvilinear
relation between the attention given to radical innovation in company policy and its
innovation performance. Curvilinear means that more attention to radical innovation
increases performance up to a point, after which performance decreases . Firms are
on average below the peak level of attention (Vagnani, 2015). We may expect the
same for investments in innovation: there will be an optimum level in a specific
industry at a specific moment in time, and firms will in general be at the low side of
the optimum. On the other hand, Jaruzelski et al. (2011) did not find a relationship
between spending level and performance, which suggests that firms would in general
be more or less evenly spread around the optimum level.
Next, a key element of proactive portfolio management is that firms specify
categories of innovations. Large firms will usually identify more categories than just
incremental and radical. An often-used classification today is to distinguish three
'horizons' (Nagji and Tuff, 2012; see Figure 5.2):
""7
Core innovations renew your existing products or services;
""7
Adjacencies target customers, customer behaviour or technologies that partially
The R&D
intensity of an
organization is
the percentage
of its revenues
that the
organization
spends on
innovation
activities.
overlap with the current target markets, but that are new to the company;
""7
Transformational innovations create completely new markets, or overhaul the
company's existing markets.
Nagji and Tuff (2012) call their model the Innovation Ambition Matrix.
The firm may further specify categories according to the different elements of
the business model: innovations in channel, value proposition, target customer
group, technology, methods of delivery, customer contact, etc. These are different
categorizations than the core - adjacencies - transformational categories, and they
span a matrix of types of innovation. In this way the firm creates a number of 'buckets':
(combinations of) categories of innovation in which different innovation projects
Buckets are
categories of
innovations (or
combinations
of categories)
in which
different
innovation
projects can be
classified.
111
112
Innovation Management
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Figure 5.2 The Innovation Ambition Matrix
Source: Nagji and Tuff (2012) .
can be placed. Buckets are, like real buckets, containers in which managers collect
projects of the same category. The definition of categories depends very much on the
industry and on changing market conditions over time (see Case 5.3). Combinations
of categories means that the firm combines different criteria in defining the buckets,
for instance distinguishing between process, product or channel innovations within
each of the three horizons of the Innovation Ambition Matrix.
C\
CASE 5.3 CHANGING CATEGORIES OVER TIME IN THE CAR
INDUSTRY
Traditionally in the car industry the larger part of the innovation budget was spent on
'next generation' innovation projects (also called platform innovations, see Section 5.2):
complete renewals of existing models. So, in those days, car companies could have a
bucket for platform projects. Although these innovations required large investments from
the company, they belong to the 'core' category in the Innovation Ambition Matrix. Today,
Portfolio management
many car companies spend a large part of their innovation resources on completely new
types of cars, such as electrical, hybrid or even hydrogen cars, and on new mobility
concepts such as car sharing in city areas (see Case 1.2 on DriveNow). So, car companies
today can have a bucket for transformational projects.
The next step is to divide the resources over the different buckets. Here, the innovation
strategy is important. A proactive or first mover innovation strategy should result in
higher budgets for the projects that are characterized as transformational, whereas a
defender strategy might put more emphasis on incremental (or core) projects. In the
same way, strategic considerations will affect the division over channel innovations,
innovations in financial models, innovation in customer relationships, innovation in
supply chains, etc. Also, the division of budgets over buckets can change over time. For
instance, in some energy companies in the past all resources would go to incremental
projects, whereas today a relatively large part of the business development budget
will be spent on radical new business models, such as creating new business models
around renewables (e.g. solar energy).
Nagji and Tuff (2012) mention a division of 70% of the total budget for core
innovations, 20% for adjacent innovations and 10% for transformational. They claim
that an innovative company such as Google has this division of the budget. Firms in
relatively stable industries may spend a lower part of the budget on transformational
innovation, whereas start-up companies may spend a far larger amount than 10%.
C\
CASE 5.4 PORTFOLIO MANAGEMENT AND THE FALL OF
NOKIA
The case of Nokia shows how important proper portfolio management is. In the early
2000s, Nokia was by far the largest cell phone producer. It sold hundreds of millions
of copies of its GSMs per year worldwide. A decade later, it lost its market position
completely, and the company almost went bankrupt. The cell phone division was sold
to Microsoft in 2013. According to many observers, the reasons for the fall of Nokia was
failing to enter the smartphone market. But that is not true. Nokia entered the smartphone
market early, and was even leading the smartphone market up to around 2010, so until a
few years after Apple (2007) entered the market. What went wrong at Nokia, was proper
portfolio management.
Nokia applied a legacy operating system, Symbian, in its smartphones, that it owned
with three other companies. The company relied on this operating system , and hardly
invested in a future-oriented new one. In addition, it spread its investments in Symbian
between a cost-focused and a quality line of development (Lamberg et al., 2019). As a
consequence, Nokia's smartphones had an outdated operating system when Apple and
Samsung entered the market. Nokia then worked on a new operating system , Maemo,
later MeeGo, but the company underinvested in it and even discontinued the project in
2011 to go for the Microsoft operating system. So, in terms of portfolio management, the
company underinvested in transformational innovations in smartphone software for a
long period of time.
The question is, what explains these decisions, that turned out to be catastrophic.
One of the reasons given in the literature is the limited technological knowledge of top
management, particularly under the leadership of CEO (and former CFO) Olli-Pekka
Kallasvuo, who was leading the mobile phone division in 2004-2005 and became CEO
113
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Innovation Management
of Nokia in 2006. But the disruptive innovation theory may also explain the choices
made. The dominant development direction in the GSM market was reducing the size
of cell phones and increasing the battery time. In those two features, smartphones
clearly underperformed compared to cell phones. In addition, Nokia is said to have had
as a robustness check that cell phones should survive a drop from 6 feet high onto
concrete without breaking. Smartphones clearly were not able to pass such a test. So,
the orientations of managers and engineers from the GSM market can very well explain
that the opportunities of the smartphone market were underestimated, resulting in
underinvestment in transformational innovations for the smartphone market. While this
explanation is still open for further research, what is certain is that inappropriate portfolio
management and investment choices in innovation were behind the fall of Nokia.
Project choices can subsequently be made within the buckets. Here all kinds of criteria
come into play:
..;i..
For incremental projects (in the core horizon), the expected profits may be an
important criterion .
..;i..
For next generation products (also in the core horizon), changes in technology,
including channel technology, and markets will be important. Firms in more
mature industries usually have a standard period between generations of
products or services, for instance every four years in the car industry. They can
shorten or extend that period based on market and technology developments.
The same applies to web-commerce: firms completely renew the website or the
logistics infrastructure at regular time intervals. These projects are relatively
costly compared to other innovation projects, and the frequency of such next
generation projects very much determines the choice of projects in the next
generation bucket, and their size .
..;i..
Strategic reasoning tends to be key for adjacent and radical (transformational)
projects. Where do we see the biggest opportunities? Firms can also apply
financial considerations in these buckets. In the adjacent category, net present
value (NPV) calculations may still work, but as we will argue in Section 5.4,
NPV calculations will generally lead to underestimating the potential of projects in the transformational category. In fact, the reliance of companies on the
NPV methodology in general leads to highly incremental innovation portfolios
(Cooper, 2013). In Section 5.4 we will propose the use of real options methods
for these types of projects.
Day (2007) proposes a three-criteria approach for radical projects under the heading
R-W-W: Is it Realistic (R)? Can we Win (W)? Is it Worth doing (W)? The first question
'Is it realistic?' concerns the feasibility of the project. Does the market for this offering
indeed exist? Is the technology ready? The second question 'Can we win?' concerns
the position of the company in the market. If the company can execute the project
successfully but is not in a position to beat the competition, even in the longer term,
the project will still fail to provide sufficient returns. Third, the question 'Is it worth
doing?' concerns the profitability and strategic viability of the project. Does it promise
to render profits, and does it fit into our strategy?
It is not always self-evident into which bucket an innovation project should fit. Day
(2007) gives an example of an experiment by McDonald's to sell pizzas in addition
to its standard menu. While managers expected that it would be an incremental
Portfolio management
The reader should not conf use terms:
• We use the terms reactive and proact ive for portfolio management approaches .
• We saw that Prospector and Reactor were strat egies in the classification of
Miles and Snow (see Figure 4.1).
Firms can have an innovative prospector strategy and try t o reach that purpose with
a reactive portfolio management process. This would mean that the firm aims to get
ahead in the market, but waits for ideas from the work floor. Of course, implementing
a prospector strat egy w ill work better with a proactive portfolio management
approach t hat defines a clear plan for radical projects. We wou ld argue that even a
firm with a reactive, follower innovation strategy would be better off w ith a proactive
innovation process. Even if your strategy is to quickly follow others in the market, you
should set clear targets for your innovation at particular moments in t ime, and create
projects according ly, instead of being determined by the occasional provision of ideas
from employees .
Figure 5.3 Th e diff erence betw een prospector/reactor strategies and proactive/
reactive portfolio management
innovation project, since it would target the current customers and the customer
experience would not be much different, it did not fit into the existing delivery model
of responding to orders within 30 seconds. As a consequence, waiting times became
longer. In addition, the product didn't fit in with customer expectations of McDonald's
offerings. The innovation project was expected to be incremental but turned out to
be more radical.
The essence of proactive portfolio management as described above is that managers
first define categories, budgets and criteria before they select projects. In that way,
they first operationalize priorities in their innovation strategies. The reactive approach
starts with selection projects, which, as mentioned above, often leads to an unbalanced
portfolio. By the way, the reader should not mix up the terms reactive and proactive
portfolio management with prospector and reactor strategies (see Figure 5.3).
5.2 Platform and modular design
Above we defined the three horizons as core, adjacencies and transformational. A
different way to specify the three horizons in the proactive portfolio management
approach is based on the platform and modular design approach. In that approach,
you distinguish incremental, platform and radical innovations.
In a platform and modular design approach, a company defines a basic architecture
for its product or service. The firm aligns the other parts of the product or service
to this basic architecture and can easily exchange one part for another. We call the
basic architecture 'platform' and the parts 'modules'. Taking an example from the
traditional product world: car manufacturers usually define a platform for a new car, on
which they build modular variations over time. The chassis is the most important part
of the platform. The platform defines interfaces with the modules; for instance, a car
manufacturer can produce the same car with different engines. The interface between
the chassis and the engines is fixed, and the engines are different. The platform is not
necessarily limited to cars of a single manufacturer. Sometimes different manufacturers
share a common platform: a joint venture between car manufacturers PSA and Toyota
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Innovation Management
Modular
design mean s
designing a
product or
service in a
way in which
the parts can
be developed
independently
from each
other.
has developed a joint platform for the Peugeot 107, Citroen Cl and the Toyota Aygo.
It means that the three cars are built on the same chassis and share quite a number
of other parts.
We have to distinguish modular design as defined here, from modular innovation
as discussed in Section 1.4. Modular innovation means that innovators change one
module of a product to another one. For instance, vehicle manufacturers might replace
the car with a combustion engine by a car with an electrical engine. This is a modular
innovation, since the manufacturer replaces one module by another one. However,
most likely the innovation does not take place on the same platform, and the new
engine will not be replaceable by another one. In other words, the new electrical car has
an integral design, not a platform and modular design. So, a modular innovation (over
time) is not necessarily accompanied by modular design. Even if the new electrical
car has a modular design, its platform will not be the same as the platform of the old
combustion engine car. So, since there would be two different platforms involved, the
innovation would still not fit the definition of platform/modular design.
( \ CASE 5.5 MODULARITY IN WEB - SHOP AND CAR-SHARING
SERVICES
Modularity can also work in services. For instance, web-shops usually use the standard
parcel delivery services to deliver the goods, or they may use the outlets of retail chains
where customers can pick up their purchases. In such cases the delivery is modular
because the interfaces, such as the maximum size of the package and the time windows
for supplying the parcels, are bound by standards set by the delivery organization. The
web-shop may also want to specify its own delivery process in more detail. For instance,
it may want the client to have boxes at their premises in which the home delivery service
can put the supplies (for instance, cooler boxes in the case of groceries, see also Case
8.2).
Another example of modularity in services is the car-sharing service in Case 1.2.
BMW and Sixt agreed on a modular design, according to which BMW provides the cars
and takes care of the maintenance, while Sixt organizes the operations of providing the
cars, registering and charging for use. The only interface needed is the data that Sixt has
to send to BMW on the use of the cars, their location and need for repair. And the two
parties need a joint financial model.
Integral
design mean s
designing a
product or
service in a
way that the
interfaces and
the parts are
developed
interdependently.
The opposite of the platform and modular design is integral design (sometimes called
'systemic', see Section 8.2). If we take the example of a car, it means that the design
of a part and the design of the rest of the car are interdependent. For instance, when
high-end car manufacturers design a car, they often design all parts jointly, to align
them neatly to each other. We speak of integral design, since the interfaces are not set
up-front. The disadvantage is that the units developing different parts of the product
or service have to collaborate closely to design the interfaces during the development.
Figure 5.4 shows that there are different degrees of modular design, from creating
modularity only for the producer itself to creating modularity for the market as a
whole. All forms of design in Figure 5.4 are modular, except for 'integral design' on
the first row of the figure.
After the core product manufacturer has specified the platform, the modular
approach facilitates independence between organizational units. For instance, the
firm's unit that develops the engines can work independently from the unit developing
Portfolio management
Degree of
modularity
Description
Examples
Integral design
Designers develop the interfaces
The cook in a high-level restaurant
between product or service and
designs a meal in an integra l manner,
component during the development
since they develop one integrated whole,
process.
and do not think about the relations
between the parts up-front.
Modular for
The producing firm develops the
producer
interfaces up-front, before the
A computer manufacturer supplies a
laptop with two alternative hard disk
development of the rest of the product
drive capacities. The customer can
or service. The firm can replace one
choose a laptop with different hard
module by another.
drives.
A restaurant uses the same components
(such as vegetables) in different meals.
The customer can choose between
different meals without knowing that
some components are the same.
Modu lar in the
All producers in an industry use the
Car batteries are produced in a limited
industry
same interfaces.
set of sizes that all producers adhere to .
The customer does not change modules
(except for replacement) .
Modu lar for the
The customer can replace one module
The customer of IKEA can choose
customer for a
by another, interfaces are open to the
different parts of a cupboard. The stacks
single supplier
customer.
define the interfaces, and the elements
are the components that the customer
can mix and combine.
A hamburger chain sells different meals,
but customers can mix and match
components.
Modu lar for the
The customer can replace a module in
customer between
the product of a specific producer with
set to sound systems of different makes,
suppliers (for the
a module from another producer.
and vice versa.
industry)
Customers can connect the same speaker
A car owner can use tyres for their car of
a different brand than the original ones.
Figure 5.4 Degrees of modularity
the chassis or the body. The modular approach also facilitates independence between
the car manufacturer and suppliers (see also Section 8.2). A car manufacturer and a car
battery manufacturer can develop new products independently of each other, as long
as they agree on a few interfaces between car and battery: voltage, capacity, and size. In
such a case, the component (battery) is modular and firms do not have to collaborate
beyond agreeing on the interface.
Collaborating with external parties for integral design has its intricacies. Imagine
that a high-end car manufacturer wants to develop a car with a battery that fits in a
space that does not meet the standard sizes, and that he does not know in advance
the exact dimensions. In practice, this is an exceptional situation since it will be an
117
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Innovation Management
A platform
(or next
generation)
innovation is
a complete
redesign of
a product
or service,
including the
platform which
forms its core.
expensive battery due to the relatively low scale of production and high distribution
and inventory costs of replacement batteries. The car manufacturer can approach a
battery manufacturer with a request to develop the battery while the car designers
develop the car. In this situation the development is integral: the car and the part
(the battery) are developed in parallel and in mutual coordination. Not only will the
battery manufacturer have to adapt to the development of the car, but the car developer
will also have to take the requirements of the battery into account. Also, in the case
of the engine supplier above, the car manufacturer and the external engine producer
have to collaborate closely during the process to jointly develop the interfaces between
the part (the engine) and the rest of the vehicle. For such reasons collaboration with
an external party is less likely to occur in integral design.
As we mentioned in the beginning of this section, firms applying the platform and
modular design approach for their products or services can use the same approach for
portfolio management. They can distinguish three buckets: incremental innovations,
platform innovations and radical innovations. Modular innovations are part of the
incremental innovation bucket. Platform innovations are sometimes also called 'next
generation' innovations (see Case 5.3). Note that platform innovations belong to the
core category in the Innovation Ambition Matrix. Radical innovations are products
or services that are completely new, and thus do not build or renew the existing
platform. In the case of Nokia (Case 5.4) the Maemo operating system was such a
transformational innovation. So, the design strategy and the portfolio management
approach are usually in line with each other.
5.3 Managing the decision process
An innovation
funnel: is
the decision
process for
the set of
innovation
projects in an
organization
over their
development
and execution .
Both the reactive and the proactive approach to portfolio management require
management of the decision process in the portfolio. We call the process the
'innovation funnel'. The funnel describes the process according to which managers
select projects from a set of options and manage these projects with resources and
staffing. Figure 5.5 shows the funnel process. People usually depict a horizontal
0
0
0
0
0
0
I
0
Idea generation
Figure 5.5 The innovation funnel
Screen 2
Implementation
Portfolio management
119
funnel, whereas a vertical position, with the ideas running from top to bottom, would
in fact be more logical. Indeed, the picture of the horizontal funnel, as in Figure 5.5,
sometimes raises the joke that ideas roll back out at the left-hand side. Employees and
managers fill the 'mouth' of the funnel with ideas. As we have seen in Chapter 3, ideas
can also come from outside of the firm.
How does the process work?
~
Usually employees first develop ideas into concepts, which are more complete
descriptions of the idea, including users and technologies.
~
Next a review board makes a first selection. The review board is the committee that makes decisions on the innovation portfolio. At that point, there
can be three outcomes: the idea is rejected, accepted, or more information is
requested.
~
If more information is requested, the review board may give the project team
some more time to collect the information, and makes the decision some time
later (but soon after).
~
In the next phase, the project managers or team build a business case and may
do the first experiments (according to the lean methodology, see Section 3.1).
~
After that phase, the review board will make another selection.
~
After that decision, the project team develops the real innovation.
~
At the end of the development process, the review board can again make a
decision on proceeding or not.
Of course, stopping the project in the final phase is unattractive, since the firm has
already made major investments. But on the other hand, for some consumer products,
spending on marketing forms the largest investment in the process, and then it can
still be better to stop late than to proceed with bad prospects. (See also the real options
approach in Section 5.4.)
Firms apply many variants of this process. Firms can make the first selection after
building the business case, rather than before. Also, firms can form a team at different
points in the process: in the concept phase, in the phase in which the business case
is built, or after building the business case. However, in all cases a selection process
takes place. When firms apply the reactive portfolio management approach, they will
make their selection based on a list of criteria and scoring of projects on those criteria.
When they apply the proactive approach, they first define buckets and criteria per
bucket, then position the projects in the buckets and make a selection in each bucket.
The fact that the portfolio usually contains projects in different phases will complicate
the process. Resources are limited since they are already allocated to projects in later
phases, and some buckets may already be filled with such projects.
The review board can take different forms. It can consist of a single manager or
a few select managers. In small firms the owner of the company will often make the
decisions on innovation projects, alone or with advice from some other managers. In
larger firms the board may consist of a top manager (e.g. the Chief Innovation Officer),
some middle manager and potentially also one or two employees of the innovation
or new business development unit. Those employees can advise on the practicability
of the projects.
Usually the review board not only selects projects; it also allocates resources and people
to projects, and it monitors the progress of projects. Therefore, in larger companies a
project office supports the review board. This office collects all the information on
The project
office is the
unit managing
the information
on all projects
that are going
on in an
organization.
120
Innovation Management
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Idea
Commercialization
Figure 5.6 Reducing the number of ideas early in the process
projects, develops decision criteria and formats for presentation of projects, monitors the
allocation of resources, and responds to the decisions of the review board. The project
office can even consist of several employees and can have a central role in the activities of
an innovation or new business development.
During the execution of projects, review boards regularly decide upon their
continuation. This is not necessarily at the decision points of the stage-gate process
(see Figure 6.2), but when the review board oversees the complete portfolio, they decide
both on the creation of new projects and the continuation of existing projects. One
of the most difficult types of decision in this process is how long a project should be
kept alive when its success is low. As already emphasized in Section 1.2, firms should
be efficient in their innovation activities. If they keep alive projects that have little
chance of success, they in fact waste innovation budgets, with detrimental effects for
the innovative performance of the company, and in the longer term for the future of the
firm itself. So, stopping low-performing projects is a key capability in a company. Review
boards also try to reduce the number of ideas and projects early in the innovation
funnel for strategic or other reasons (see Figure 5.6). Iterative innovation processes,
such as design thinking, lean innovation and the iterative processes described in Section
6.2, can help to do so. On the other hand, there are examples of projects which took an
extremely long time to become successful, and sometimes even extremely successful. An
example of the latter is Nespresso (see Case 5.6).
(:'.\ CASE 5.6 NESPRESSO: PATIENCE TO WAIT FOR SUCCESS
The case of Nespresso shows how long it can take before a product becomes successful.
In 1976, Eric Favre, an employee of Nestle, invented and patented the Nespresso system.
In that year, he introduced it to the business market in Switzerland, but with little success.
In the 1980s, Nestle experimented with the product in the office market, in the consumer
market and in the restaurant market. It all failed! Only when Nestle introduced the 'Le
Club' community to acquire the capsules for private consumers did the product become
successful. Also, in 1990, Nestle signed a contract with an external party, Turmix, which
started to sell Nespresso machines in Switzerland. In 1994, actor George Clooney
discovered the Nespresso machine at a winter chalet in Switzerland, and he loved the
concept. George's friend and famed angel investor, PayPal founder Peter Thiel , aided
George in securing contacts. Thereafter, Nestle signed contracts with many major coffee
machine producers. In 2006, Nespresso's revenues amounted to over 1 billion Swiss francs.
Portfolio management
121
Resistance and status in project decisions
The previous section described highly rational strategic innovation processes. Both the
reactive and proactive processes were described with clear steps and criteria that can
be applied objectively. In reality, the creation of an innovation strategy and portfolio
management are far from objective. They are often political arenas, in which there are
large interests at stake. Managers often want to grow their section of the business
and fight for projects that support that target. On the other hand, innovations can be
perceived as undermining their current activities, and thereby their career chances,
and they may fiercely attempt to oppose those activities. Managers can use all kinds
of arguments to express their dislike of specific innovations (see Figure 5.7).
Important in those arenas are the social networks of people. The more connections
people have to others in the organization, the higher their chances of getting their
projects accepted. They may actively use their networks to get support. In Section 7.3
we will see that it is particularly important to convince marginal people ('fence-sitters')
to support innovation. Figure 5.8 shows that also framing of innovations in the right
way can help to get them accepted. In general, strong communication is an important
way to get projects accepted. Showing that a project is in line with the firm's identity is
part of a strong communication strategy. As Simon Sinek says in his famous 'Golden
circle' video: the 'why' is more important than the 'how' and the 'what' (see Section 7.3).
On the one hand, irrational resistance can hamper the decision process, but on
the other hand irrational support can keep alive projects which have little chance
1. We tried this before
2. This innovation does not fit our company
3. It's an interesting idea but involves too much change
4. The customer has not asked for this
5. This will be too expensive
6. Short-term economic gain is too low to result in implementation
7. Our CEO doesn't like it
An individual 's
social
network
consists of the
set of specific
relationships to
the individual.
for instance all
relationships
aimed at giving
or seeking
advice.
Framing
means
purposely
giving a certain
meaning to
a situation or
object.
8. This will compete with our existing products
9. We have other priorities
10. This is not realistic
Figure 5.7 Ten ways to kill an idea
Sethi et al. (2012) investigated another mechanism for overcoming opposition - framing. You can
frame an innovation in terms of the existing activities of the firm, or as a very different activity.
For example, car manufacturers can frame car-sharing services as very different from what they
are doing by pointing to the business model, or very similar by pointing to the function performed
(mobility) and the target customers (people in a certain income group). Sethi et al. (2012) found
that for engineers you can better frame your innovation as similar to what they are already doing,
since that will generate their support. However, for marketers you can better frame it differently.
The authors' explanation is that marketers will assume that a new unit will be created for a new
activity that is really different from theirs. Thus, the more different the new activity, the less
threatening the activity is for their position. Sethi et al.'s (2012) study also shows that
compromising the concept to satisfy the decision makers has a negative effect.
Figure. 5.8 The effect of framing of innovations on resistance
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Innovation Management
Groupthink is
the tendency
of a group
of people
to converge
their opinions
on a certain
matter as a
consequence
of group
processes.
of becoming successful. There are several reasons (Van Oorschot et al., 2013). First,
managers can show greater commitment when they want to justify earlier choices to
invest in the project. Decision makers invest new resources in a project to hide negative
information, even more so when this information would hamper their career. The new
resources, however, make the final failure of the project even more severe. A second
reason for irrational support is groupthink. When the group of people deciding on
a project continuation, which may be the team itself or a review committee, is very
cohesive, information and world views may start converging to a single viewpoint,
contradictory information may be suppressed and the majority of the group may press
dissidents to conform. Groupthink can keep projects alive despite information (partly
kept hidden) that the odds of the project succeeding are low.
We found in our research that social networks (see Section 7.2) and people's
status can also have detrimental effects (Szatmari et al., 2020). While you can use
them to convince others to get projects accepted and supported, they can also
lead to the unjustified acceptance of projects. If a project's prospects are relatively
weak, the status and network of the project manager, or the presence of a strong
project sponsor in higher management, can keep the project alive against evidence
of low quality, leading to a low performance outcome. There are many examples in
industry of project managers delivering great project results and failing miserably
in a subsequent project. In our research we found that the status of project
leaders, measured by the strength of their network, had a curvilinear effect on
performance, in the sense that the effect was positive up to a relatively high level
of status, but above that level the effect of more status became negative. And, also,
the variation in performance outcomes increased; very-high-status project leaders
delivered extremely successful results, but also extreme failures (Szatmari et al. ,
2020). So, firms should be cautious about remaining objective in their project
decisions, and not being led by the status of the project managers.
5.4 Tools for portfolio management
Financial method: NPV
How do we calculate the expected returns (ECV, expected commercial value) of an
innovation project? The most commonly used valuation method is the net present
value or NPV calculation. This method involves calculating the expected future
revenues of the project and the expected costs, and depreciating the values to what
they are worth today. To find the ECV of the project, you sometimes multiply the
revenues by a risk factor, and subtract the expected costs. Alternatively, firms can use
the internal rate of return or IRR, which is the expected rate of return (interest rate)
on the required investments from the innovation.
While these methods work well for incremental projects with low risk, it has
substantial flaws for radical and risky projects. The reason is that these projects
can have a lot of intermediate decision points, where you can take advantage of
information about the results of the project so far and about the market. These
decision points are not included in these methods.
Real options
A more sophisticated way to evaluate radical projects is a real options approach. In the
stock market, the buyer of a call option buys the right during a specified period, e.g.
half a year, to purchase a share for a predetermined fixed price. For instance, if the
Portfolio management
price of share A is 50 dollars at the moment, you can buy an option for 2 dollars to
purchase that share against a price of 50 dollars over a period of 3 months. If the share
increases in value higher than 50 dollars, you will purchase that share. Of course, you
buy the option hoping that the share will increase in value to more than 52 dollars.
Firms apply the options approach in innovation activities and other investment
decisions under the name 'real options'. It means that these firms view a project as a step
in creating an opportunity for a real investment. According to the real options approach,
firms consider projects to be options on future actions. For that purpose, they do not
consider project decisions as one-offs, but as staged decisions. Those staged decisions
are the basis of financial project evaluations. The advantage is that the flexibility and
adaptability of the project to environmental changes are taken into account, leading to
higher evaluations in general. You could say that a real options approach does justice to
the adaptability that new projects provide to firms.
In the real options approach, the assumption is that in each of the staged decisions
a project can be cancelled or put on hold:
1. You may stop the project in an early phase because of disappointing outcomes so
far;
2. After the early phase you may wait with the execution of a project until the market
looks favourable.
It might seem that including the option that a project is cancelled decreases the
expected value of the project, but the opposite is true. By including that situation in
the up-front calculation of the value of the project, counterintuitively the value of the
project goes up. The reason is that the downside risk is in fact diminished, since the
full costs of the project do not have to be found if the development of the project is not
as expected, but only part of those costs. At the same time the upside returns remain
the same. As a result, the total expected value of the project goes up compared to a
calculation of NPV or IRR, as outlined above, based on the assumption that the total
project is executed, even if the project runs badly.
( \ CASE 5.7 REAL OPTIONS APPROACH FOR AN
INTERNATIONALIZATION PROJECT
Imagine a company that wants to enter a new country with its products. Adapting the
product to national quality standards, setting up an office, hiring salespeople, establishing
a warehouse, creating the logistics etc. has a total cost of 3 million. The project has two
potential outcomes, each with 50% chance: (1) profits of 8 million in a specified period (say
five years). and (2) a return of no profit (since the adoption of the product will be low). The
second outcome is clearly a failure of the project.
Earning s
8million
Development
Cost: 3 million
0 million
A real
option is the
possibility
to pursue
a certain
project, based
on created
knowledge
or physical
assets.
123
124
Innovation Managem ent
A regular NPV calculation, with no depreciation for ease of calculation , will give
expected revenues of
½ x 8 = 4 million
and an expected value (ECV) of the project of
4 - 3 = 1 million.
A real options approach would recognize that the project consists of phases and take
the stage decisions into account. Let's assume that the project has two stages. Stage 1
is adapting the product, setting up an office and hiring salespeople, and costs 1 million.
Stage 2 concerns the warehouse and logistics, and costs 2 million, together making up the
same 3 million total project costs as above. Imagine that managers estimate the chance
that the project will be continued after the first phase as¾ (so, 75%). and that it will be
discontinued as ¼ (so, 25%). So, when the salespeople are not able to find clients, the
project is discontinued without creating the rest of the infrastructure. The reason may
be that the customers in that country don't like the product, but it may also be that new
competitors have entered the market during this stage, or the market itself is deteriorating,
all of which diminish the prospects for the market. Assume furthermore that the outcomes
of the second phase again are expected to be twofold: 2/3 (67%) chance of new profits of
8 million, and 1/3 (33%) chance of a zero outcome. Note that the overall chance of success
of the project is now the same as in the first case, since the success outcome is
213 X
¾ = ½ (50%)
and the failure outcome is
( 113 X ¾) + ¼ = ½ (50%).
However, the calculation of the expected value in the second case is different. Expected
revenues are the same:
¾ x 2/3 x 8 million = 4 million
The expected costs of the project are lower, viz.
the costs of first phase + ¾ x the costs of the second phase, if executed
= 1 + (¾ X 2)
=
1 + 1.5 = 2.5.
So, the expected value of the project is now
4- 2.5 = 1.5.
Earnings
8 million
Installation
Cost: 2 million
Phase 1
Cost: 1 million
0 million
Stop project
0 million
Portfolio management
This is clearly higher than in the first situation (1.5 versus 1) and may support the decision to
undertake the project. In this example the difference between the values is not that large. It
becomes much larger if the chance that the project is stopped after the first phase increases.
( \ CASE 5.8 SETTING UP A CHAIN OF CHARGING STATIONS
FOR ELECTRIC CARS
An electricity company, let's call it Enco, considers creating a chain of charging stations
for electric vehicles. Assume that the construction costs are 30 million, but the project
is highly uncertain. First, it may turn out that Enco will fail in this market, for instance
since the major gas station operating companies will close deals with competitors, or
because the market will move to inductive charging while Enco is installing traditional
wired charging stations. Also, the car mobility market is highly uncertain. It may turn to
electric vehicles entirely, it may end in a combination of alternative fuels, or charging
stations may not take off at all, for instance because charging is done at home and at
destinations. Enco expects earnings of 100 million in ten years in the best case, earnings
of 40 million in ten years in the medium case, and no earnings if it is unable to create a
position in this market or if the market does not take off. It estimates the chances on the
three outcomes as 20% chance of 100 million, 20% of 40 million, and 60% of no returns.
So, this is a risky project with high upside potential but also very large failure risks.
Earnings
100 million
Installation
Cost: 30 million
40 million
0 million
Let's first look at the standard NPV calculation : chances multiplied by returns minus the
costs. For reasons of simplicity, we do not depreciate the numbers in this example. The
expected value of the project is:
ECV = (0.2 x 100 + 0.2 x 40 + 0.6 x 0) - 30
= 28 -
30 and
= -2 million
This is a loss of 2 million, so it would be better for Enco not to undertake the project.
Let's now take into account the possibility that Enco abandons the project early. Let's
assume that the project has a first phase in which Enco spends 5 million for a first few test
stations in one region , and that after that phase there is a 50% chance that it stops the
project, because it becomes clear that Enco has chosen the wrong technology or because
operators of gas stations want to work with others. Only in the case that the company
proceeds, does it spend the rest of the installation costs. Looking at the whole project, the
chances of the positive market outcomes of 100 and 40 million are the same as before.
However, since there is a 50% chance that the project does not proceed beyond the first
stage, the chances of a positive outcome for the second stage are now 40% because
50% multiplied by 40% is 20%, the same as the chance in the previous situation.
125
126
Innovation Managem ent
Earnings
100 million
Installation
Cost: 25 million
Test station
Cost: 5 million
0 million
Stop project
0 million
If we now make the real options ECV calculation for the case that we proceed
after the first phase, we multiply the ECV of the second stage by 50% and subtract
the costs of the first phase:
ECV = (0.5
X
(0.4
X
100 + 0.4
X
40 + 0.2 XO - 25)) - 5 = 0.5 X (56 - 25) - 5 = (0.5
X
31) - 5
= 15.5 - 5 = 10.5 million
The result is now 10.5 million , an astonishing amount of 12.5 million higher than in
the first case .
Let's look at a third possibility, the option of waiting until sufficient market
information becomes available that we can discard the option that returns will be
zero. So far, we have assumed that we only get to know the market when we have
built either the complete chain of charging stations or trialled a small number in one
region . Let's now assume that Enco waits until it knows that there will be a market
for electrical charging . So, it waits until it can discard the option that the returns will
be zero. If the market for electrical charging does not take off at all, Enco stops the
project. The chance of that outcome remains the same as in the second situation
where it had imperfect information , 20%. At the end of the project there are two
outcomes left, 100 or 40 million , now each with 50% chance. Note again that the
overall chance that we reach these outcomes is still the same as in the previous
situations: 50% x 80% x 50% = 20% for each outcome.
Earnings
50%
100 million
Installation
Cost: 25 million
Test station
Cost: 5 million
40 million
0 million
Stop project
0 million
We can again make the real options ECV calculation:
ECV = ((0.5 X 0.8) X (0.5 X 100 + 0.5
= 0.4 X (70 - 25) - 5
X
40 - 25)) - 5
Portfolio management
= (0.4 X 45) = 18- 5
= 13 million
127
5
The difference of 0.5 million compared with the previous outcome is not large, but it is
still considerable.
So, if firms apply a real options approach to the valuation of projects, the flexibility for
stopping projects that are under way is valued positively. This creates a more positive
perspective on risky projects. While risk is generally considered to be negative from a
financial standpoint, risk in combination with flexibility in decision making can turn
out to be positive. This is even more so if the market is volatile. According to the real
options approach, managers should consider the market when deciding on projects
that are part-way through their execution. If the market is favourable, the project can
be executed, while when the market looks less favourable, the project can be put on
hold or stopped outright. Innovation projects can in this way create a set of options
that can be exercised depending on how the market develops. Jointly these projects
create flexibility for the firm as a whole to react to market changes.
A real options approach will only be effective if the firm has a clear go/no-go policy
at decision points. Managers tend to be inclined to be led by sunk costs . In other
words, if money has already been invested in a project, managers and project members
tend to proceed with the project and make new investments. To some extent the
invested money does benefit the chances of a project proceeding, since the remaining
investments become smaller, and the real options value of the project will on average
increase. But apart from this rational increase in value, feelings relating to sunk costs
can undermine the functioning of a real options approach. A real options approach
has as a prerequisite that project decisions are strict and objective, in the sense that
when the value is below a certain level, and there are no specific strategic reasons
to continue a project that does not promise to generate value, the project is actually
stopped, irrespective of the investments so far. Therefore, in an evaluation decision, it
is good to have financial managers or other outsiders who could look at projects more
objectively, as long as they don't apply a simplistic valuation criterion such as NPV on
highly risky projects.
Finally, it should be noticed that the policy of starting with cheap early actions as
mentioned in Cases 5.3 and 5.4 is at the core of lean innovation (see Section 3.1).
The real options approach provides a theoretical rationale for the lean development
approach!
Software tools
There are many software tools available for management of innovation activities,
including portfolio management. In general, these tools are called 'product life cycle
management' (PLM), since they aim to administer the whole process of developing
products, services or business models from idea generation to maintenance when in the
market. There are software products for idea management, for crowdsourcing of ideas,
for portfolio management, for management of the stage-gate process (see Figure 6.2),
and for parts registration when a product is in the market. Also, there is software for
computer-aided design (CAD) and computer-aided manufacturing (CAM) of products.
CAM software facilitates early investigation and design of manufacturing equipment
Sunk costs are
costs already
spent on a
certain project
or activity up
to the present
time. Sunk
costs should
not be included
in financial
projections of
the project for
the purpose
of evaluating
its financial
feasibility.
Product
life cycle
management
refers to the
collection
of tools for
developing
and producing
a product
or service,
including
computeraided design
(CAD),
computeraided
manufacturing
(CAM) and
product data
management.
Product data
management
is the
centralized
management
and storing of
all data with
respect to the
design and
production
of a product
or service
from idea
generation
until the end of
its life.
128
Innovation Management
and processes. Product data management software stores all data on a new product,
service or business model in a central place, including technical specifications, bill of
materials (BOM) for assembly and version control of CAD drawings. An overview of
software products can be found on the website of Capterra Inc. (www.capterra.com \ \
product-lifecycle-management-software). The use of PLM software means that all of the
people involved in developing a new product, service or business model have a common
understanding and the right updated information on what the innovation actually
entails. As we will see in Section 7.1, having such a common understanding is important
for a proper design process. On the other hand, the common design should be flexible
and adapted constantly over time to new insights and information.
= 5.5 Summary
In this chapter, we discussed alternative ways to manage innovation portfolios. We
distinguished between the intuitively most obvious bottom-up reactive approach
and the more organized top-down proactive approach. We argued that the proactive
approach generally leads to a more balanced and future-oriented portfolio of innovation
projects. We saw the importance of buckets in this approach, which could be defined
according to the radicalness of innovations (core, adjacent, transformational). We
also explained the platform and modular design approach, which is a way to design
products and services, and at the same time serves as the basis of the innovation
portfolio. We also explained the innovation funnel, which is the decision process on
projects, and how to narrow down a set of projects over time. We presented two ways
to deal with resistance: apply the right social networks and frame the innovation in the
right way. Finally, we discussed tools to be used in portfolio management, particularly
the real options methodology. Applying the concepts of this chapter helps firms to
organize a well-balanced and future-proof set of innovation projects.
0
5.6 Discussion questions and exercises
Discussion questions
1.
Why do you think it is crucial that compan ies actively apply portfolio management to their innovation
activities, and , in particular, use the proactive approach? What happens to companies when they do not
analyze their ambitions and allocate budgets accordingly?
2.
Additionally, why is it essential that companies apply an innovation funnel when selecting innovation
projects?
3.
Imagine that you are the Chief Innovation Officer of a large retail bank. You have to create a budget for
innovation for next year. What factors would determine how much money you are going to spend? What
would make the budget change compared to last year, in a positive or negative sense?
4.
Imagine that a company has an innovation funnel with a review committee, but the committee hardly ever
stops a project. As a consequence, the company has too many projects, people work on several projects
at the same time, and the projects are delayed. The company is seen by the outside world as not very
innovative. You investigate the problem and find that the committee consists only of the middle-managers
of the different business units. These managers apply a rating system on a set of predefined criteria. Each
manager usually scores their own projects high, and other projects low. As a result, all projects end with a
similar score, making it impossible for the review committee to distinguish the good and the bad projects.
Portfolio management
129
What would you do to reverse the situation? Think about the difference between a reactive and a proactive
portfolio management approach .
5.
Do you think many companies prefer to use the real options approach over the net present value approach?
Why (not)?
6.
When considering companies that operate in multiple markets, with different technologies/ products ,
which approach do you think is better to start defining a proactive innovation portfolio: the Innovation
Ambition Matrix (see Figu re 5.2), or the platform and modular design approach (see Section 5.2)? Why?
Exercises
Responsible Innovation Inc. is deciding on whether to invest in a new innovation project, involving the development
of zero-emission (i .e. during production) biodegradable batteries. The initial five-year project seeks to establish
a foothold in the consumer electronics market.
The initial cost of starting the project, involving the creation of a product prototype and market research , would
be $50 million and would be paid up-front. The chance that the company can create a working prototype and find
a favourable market is 40%. That also means that there is a 60% chance that they w ill not find a favourable market
and/or are unable to create a prototype. In the latter situation they would then be forced to discontinue the project.
Subsequently, if Responsible Innovation Inc. decides to develop the prototype further and implement the
battery innovation in the marketplace, they incur another $100 million in costs. There are three scenarios when
they bring the innovation to market:
A. The batteries are a mega hit and return $900 million in profits in the first five years. There is a 20% chance
for this scenario.
B.
The batteries find reasonable traction , but only provide medium profits of $300 million in the first five years.
Estimated chances for thi s scenario are 30% .
C.
The batteries seem unable to garner mass interest from consumers. The gains of the project would only be
$80 million in the first five years. Chances for this scenario are estimated to be 50%.
1.
Draw the net present va lue visua l model using arrows and boxes. Calculate the Expected Commercial
Value based on the net present value model.
2.
Draw the real options visual model using arrows and boxes. Calculate the Expected Commercial Value
based on the real options va lue model.
3.
Would you choose to conduct this project as innovation manager of Responsible Innovation Inc.? Why (not)?
Imagine that you are part of the management team of a large school or university. You are ta sked with deciding
on how to select projects and allocate budgets for learning innovation in the next two to eight years. Additionally,
w ith the recent COVID-19 crisis, you realize that digitalization has had a major impact on teaching and may yet
change the face of teaching in years to come.
1.
You decide to use the 'buckets' approach , as suggested by the Innovation Ambition Matrix in Figure 5.2.
Wh ich buckets would you define? That is, w hich combinations of elements of a school 's business model
would you make? You can think about target group, geographical reach , tools to use in online and offline
teaching etc. You can also think of the second exercise in the previous chapter on disruptive innovations
in university programmes.
Based on the 'buckets' you defined, you decide that several ongoing projects need to be cancelled. One of the
'to-be-cancelled' projects involves the development of new chairs for the classrooms . The project has been
ongoing for the past five years w ith practically the same group of people and is headed by one of your fellow
management team members. Why do you suppose, according to the theory in Section 5.3, that it would be hard
to convince your colleague to drop this project? How would you go about convincing them to drop the project?
130
Innovation Management
References
Anthony, S.D., Duncan, D.S. and Siren, P.M.A. (2014) 'Build an innovation engine in 90 days',
Harvard Business Review (December): 60-68.
Cooper R.G. (2013) 'Where are all the breakthrough new products? Using portfolio management to boost innovation', Research-Technology Management 56(5): 25-33.
Day G.S. (2007). 'Is it real? Can we win? Is it worth doing? Managing risk and reward in an
innovation portfolio', Harvard Business Review (December): 110-120.
Jaruzelski, B., Loehr, J. and Holman, R. (2011) 'The Global Innovation 1000. Why culture is
key', Strategy and Business (65): 31-45.
Lamberg, J.-A., Lubinaite, S., Ojala, J. and Tikkanen, H. (2019) 'The curse of agility: The Nokia
Corporation and the loss of market dominance in mobile phones, 2003-2013', Business
History: 1-32.
Nagji, B. and Tuff, G. (2012) 'Managing your innovation portfolio', Harvard Business Review
(May): 67-74.
Sethi, R., Iqbal, A. and Sethi, A. (2012) 'Developing new-to-the-firm products. The role of
micropolitical strategies', Journal of Marketing 76 (March): 99-115.
Szatmari, B., Deichmann, D., Van den Ende, J. and King, B. (2020) 'great successes and great
failures: The impact of project leader status on project performance and performance
extremeness', Journal of Management Studies.
Terwiesch, C. and Ulrich, K. (2008) 'Managing the opportunity portfolio', R&D/Business Strategy (September-October): 27-38.
Vagnani, G. (2015) 'Exploration and long-run organizational performance: The moderating role
of technological interdependence', Journal of Management 41(6, September): 1651-1676.
Van Oorschot, K.E., Akkermans, H., Sengupta, K. and Van Wassenhove, L. (2013) 'Anatomy
of a decision trap in complex new product development projects', Academy of Management
Journal 56(1): 285-307.
Van Pottelsberghe, B. (2009) 'Europe's R&D: Missing the wrong targets?', Bruegel Policy Brief
(03).
Implementation
Part
4
Part 1
Introduction
Innovation
management
Chapter 1
Part 2
Idea development
Company
Idea
management
Part 4
Implementation
Part 3
Selection
------+
Sections 2.6- 2.7
Innovation strategy
Portfolio
management
------+
Sections 7.2-7 .5
Chapter 8
Chapters 4-5
Project
Idea
development
Project
selection
------+
Sections 2.1-2.4
Chapter 3
------+
Chapters 4-5
Part 5
Specific firms
Part 6
Conclusion
Specific types
of firms
The future of
innovation
management
Chapters 9- 10
Chapter 11
131
Organization of
innovation
Project
execution
Chapter 6
Section 7.1
Managing projects
6
Learning objectives
After reading this chapter, you will be able to:
1. Describe the general purpose of innovation processes
2. Make a well-argued choice between alternative innovation processes for specific projects and
phases in the project
3. Explain the purpose and list the main elements of a business plan
4. Choose a project planning approach for innovation projects dependent on the type of uncertainty
in the project
5. Describe the main elements of agile project management
6. Choose between alternative types of control for innovation projects
6.0 Introduction
In this chapter we discuss the implementation of innovations. This phase follows
on from idea generation (Chapters 2 and 3) and the selection of ideas (Chapters 4
and 5). After selecting an idea, a project team has to convert it into a marketable
product, service or business model. That means that the idea has to be refined and
elaborated. The project team has to perform a lot of different tasks: technical work on
the innovation itself (for products) and the production processes (for all types), setting
up the marketing activities, creating the inventory management and logistics, call
centre instructions, warranty, etc. To perform these activities to a high standard and
to reduce uncertainty as quickly as possible, an appropriate process is required. This
chapter mainly discusses the implementation of innovation at the level of individual
projects.
Alternative processes for innovation are central in this chapter. The chapter has the
following structure:
1. We begin with a section on uncertainty, since uncertainty reduction is the main
purpose of innovation processes (Section 6.1);
2. Then we review alternative innovation processes, and discuss their application for
incremental versus radical projects (Section 6.2);
3. We zoom in on the purpose and elements of the business plan, which forms a core
element of innovation processes (Section 6.3);
4. We discuss how project planning for innovation projects works, which forms a
detailing of the innovation process (Section 6.4);
5. We review alternative ways that upper managers can use control on top of, and in
combination with, an innovation process (Section 6.5).
133
134
Innovation Management
We already discussed innovation processes in Chapter 3: design thinking and lean
innovation. Innovators apply those processes mainly in the idea development phase.
The emphasis in this chapter is on processes in the implementation phase, although
some overlap with idea development processes occurs. In particular, in Section 6.2
we introduce iterative innovation approaches. Design thinking and lean innovation
already belonged to that category, but here we refer to extending iterations to later
phases of the process. And while design thinking and lean innovation focused on
aligning the concept to the demands of customers, here we also take other aspects of
the project into account, such as technical and supply chain aspects. We give a more
detailed categorization of types of uncertainty in Section 6.4 (on planning), because
it has an immediate effect on the character of the project plan.
Internal
uncertainty is
uncertainty
with an origin
within the
organization,
such as
uncertainty on
the available
knowledge,
resources, etc.
External
uncertainty is
uncertainty
with an origin
external to the
organization,
such as
uncertainty
on customer
demands,
competitor
activities and
government
regulation.
6.1 Uncertainty and process models
Innovation projects are usually faced with uncertainty, both internal and external.
Internal uncertainty is generated by the project itself; the more it diverges from
existing business models and offerings of the company, the higher the uncertainty
on the availability of the knowledge required. Internal uncertainty refers to technical
problems that the project team encounters during the project. External uncertainty
refers to a lack of knowledge on what the market is willing and able to accept, and
to unanticipated events in the outside world that might affect the project. External
uncertainty was represented in Chapter 3 by uncertainty on customer needs and in the
real options theory (Section 5.4) by different market scenarios. Internal uncertainty
is decreased by problem-solving activities, generating the required knowledge.
Acquiring external knowledge can be part of these problem-solving activities. External
uncertainty can be decreased by collaborating with customers and observing the
behaviour of competitors. Figure 6.1 shows decreasing uncertainty in projects versus
increasing investments. In general, firms will want uncertainty to decrease during
the innovation or new business development process, particularly since investments
usually increase with time. If uncertainty does not decrease to a sufficient extent, the
firm may consider the project to be 'out of control'. Note that the line representing
decreasing uncertainty in Figure 6.1 is the same as the lines in Figure 3.3 showing the
narrowing down of the solution space of projects.
Idea
Commercia lization
Figure 6.1 Decreasing uncertainty versus increasing stakes
Managing projects
( \ CASE 6.1 THE 'TRAIN SCHEDULE': REDUCING DELAYS IN
PROJECTS AT MEDTRONIC
Many firms have experienced problems resulting from a lack of structure in the innovation
activities. The medical device company Medtronic had highly unstructured innovation
portfolio and project management processes. One of the problems was that the people
working on the projects kept on changing the purpose and planning of their projects, based
on new insights. For instance, when a competitor brought to the market a new product
with interesting new features, they changed the specifications of the product developed
in their project. Therefore, projects were constantly delayed and, in combination with an
overload of projects, the company was unable to bring new products to market, leading
to a loss of market share and eventually even risking the survival of the company. A new
manager created more structure in the portfolio, in the portfolio creation process and in
the management of projects. Amongst other changes, he decided that the objectives of
projects could no longer be changed along the way. Employees had to put new ideas on
the shelf to be implemented in the next future project. He called this a 'train schedule':
once the train (the project) had left the station, you had to wait for the next train to
implement your idea. In this way, the firm executed innovation projects more effectively
and timely, reversing the negative trend in market share into a positive one. The case
shows that some structured process is needed to guarantee that innovation activities
meet their objectives.
Source: Christensen (1997).
In the case of Medtronic (Case 6.1), the project members initially kept uncertainty
high over the course of the project, by changing the direction and purpose of projects
along the way. In fact, they added uncertainty to projects and kept the solution space
(see Section 3.1) broad by bringing in new requirements which the innovation would
have to meet. Their behaviour led to delays and a lack of market introductions. In
other cases, continued high levels of uncertainty will lead to an imbalance between
rising investments in the project and uncertain returns. In terms of the real options
approach, if technical issues are not resolved and the range of potential target markets
remains very divergent, there will be many market outcomes in which the project will
fail or have low value, leading to a low financial option value. So, if uncertainty remains
high, financial expectations deteriorate, and the project becomes infeasible.
Process models for innovation aim to assist in reducing uncertainty and narrowing
down the solution space. Process models stimulate innovators and business developers to
generate knowledge on specific aspects of their project, such as market information, and
to make choices so that they reduce the solution space of their project at an appropriate
point in the project's life. Another purpose of process models is to stimulate innovators
and business developers to work in an orderly fashion on their project, and to keep
management informed about what is going on.
The question is: what is the most appropriate process for specific situations? In
Section 3.1 we compared evolutionary versus set-based approaches. Here we focus
on processes that fit into the evolutionary approach. What kind of process, and in
how much detail should the process prescribe activities? Many firms use a one-sizefits-all approach in which all projects have to conform to a single process, usually a
stage-gate model (see below). The premise in this book is that the process to follow
should depend on the characteristics of the project at hand. A radical project usually
135
136
Innovation Management
needs a process with little structure and considerable room for flexibility, whereas an
incremental one benefits from a highly structured process. And a project with very
strict time targets may benefit from a parallel process. We outline the different process
types in the next section.
6.2 Process models
Sequential models
Sequential models are the first type of process model. The most important one is the
stage-gate model, which was introduced by Robert Cooper in the 1980s (see Figure
6.2). It is a sequential model consisting of stages and decision points. In every stage,
activities take place, and after every stage a review committee or a manager takes a
decision on the continuation of the project (a gate). Usually firms define up-front the
format of the deliverables from every phase, for instance in a set of forms that the
project team has to fill out. The definition of the deliverables provides guidelines for
the innovation team on what information to generate and what choices to make in
every phase of the process.
Stage-gate models have a number of phases and gates (decision points):
1. In the first phase, the idea is born. The idea can be a response to a certain problem
(closed problem), which can also be a strategic challenge, or it can be just born out
of the blue. Usually a line manager will indicate (Initial screen, Gate 1) whether
to invite the originator to develop the idea a bit further, into the description of a
concept (Preliminary investigation, Stage 1). The idea generator can for instance
have discussions with marketing and operations people to get a first impression of
the feasibility of the idea. Only if this phase requires substantial investment will
a review committee or manager do the initial screening.
2. Next, in Gate 2 the review committee or manager will decide whether the idea's
originator or others will do more detailed investigations of the concept and define
it in more detail. For instance, they may do market research and collect more
information on technical and financial aspects, and will develop the concept into
a business plan including a business case. The business case is a summary of the
financial projection for the idea.
Decision on
business
case
Initial
screen
Prel iminary
investigation
Detai led
investigation
(Bu ild bus iness
case)
Figure 6.2 Stage-gate model
Source: Cooper (1990).
Precommercialization
Post
Post
development
bus iness
implementation
review
analysis
review
Development
Testing &
validation
Fu ll production
&
Market launch
Managing projects
137
3. The review committee or manager decides in Gate 3 whether a project is justified,
and a project team is created to develop the idea further. From this point on, the
firm makes larger investments in the idea, so Gate 3 is usually an important one.
Often at this point the review committee 'freezes' the design or specification of
the concept, to prevent confusion and avoid the costs of reworking in subsequent
phases. Stage 3 refers to the further development or specification of the new
product, service or business model into a working version, and the development
of production equipment.
4. In Stage 4 the product, service or business model is tested, either in a laboratory
setting or in real life. With services it will usually be in real life, since they are hard
to test in a laboratory.
5. Stage 5 concerns the marketing and purchasing, setting up and starting to run
the production equipment. Between each of these activities the review committee
can still stop the project, but this will usually only be done as an exception since
uncertainty should already have decreased at Gate 3.
The decisions by the review committee or manager in the gates have a different
character than the portfolio management decisions discussed in the previous chapter.
In stage-gate decisions a review committee or manager evaluates the project against
its objectives. If the project outcome in the specific phase deviates too much from
the objectives, including its objectives with respect to uncertainty levels, the review
committee or manager will discontinue the project or adapt its objectives.
Separate from these decisions, at regular time intervals, portfolio management
review boards evaluate the complete set of projects against their stated objectives,
and may decide to stop or start certain projects, particularly when circumstances
change. For instance, when a new technology or market emerges, the board may
create new projects to meet these, and stop others that have become less relevant.
So, gate decisions and portfolio decisions are different. A single manager may take
gate decisions, while a review board takes decisions on the portfolio as a whole. It is
possible that the portfolio review board also makes the decisions at the gates, but this
is certainly not necessary. It should be mentioned that decisions to stop projects as
part of portfolio decision-making will be harder to explain to employees than decisions
to stop a project because of the project's disappointing results at a gate. Portfolio
decisions are beyond the control of the employees, and thus harder to accept for them,
while the team itself is responsible for the project outcomes.
Strong points of stage-gate models are the structure they provide to the project
team, and the transparency for upper management. But stage-gate models also have
several drawbacks:
~
They are rather inflexible. If the outcome of a certain phase leads to reconsidering some aspect of the project, the project has to return to an earlier
phase. And since testing happens in a late phase, these iterations can be very
cumbersome. For that reason, innovators will not always go back to the earlier
phase to improve on their ideas, and design flaws may persist in later phases
and thus the firm may end up with a suboptimal market offering.
~
They leave little room for unplanned actions and new ideas along the way.
~
They carry an element of bureaucracy, and innovators are usually wary of
bureaucracy. According to some, stage-gate models reduce creativity.
A design
freeze is a
fixation of the
specification
of the design
of a product,
service or
business model
at a specific
moment in the
development
process.
138
Innovation Management
For these reasons, firms can best apply stage-gate models to incremental projects,
since the uncertainty is low in these innovations. Therefore, the chance that the
team is confronted with unexpected information in late phases is low. Indeed, Sethi
and Iqbal (2008) found that stricter stage-gate models have a negative effect on the
performance of radical projects, since strictness in such models reduces learning
possibilities in the team.
Parallel models
A second type of process model is the parallel model, also called concurrent
Overlapping
phases
specifies a
situation in
which two
groups of
activities which
would normally
be executed
sequentially
are partly
executed at the
same time.
engineering. The approach was popular in the 1990s (Wheelwright and Clark, 1992).
In the parallel model the phases of the innovation process are not completely sequential
but overlapping. So, a new phase starts before the previous one ends. People working
on the activities in each of the overlapping phases have to communicate closely to
exchange the newest information they acquired in that phase. The advantages of such
overlapping phases are twofold:
1. First, the process is faster than the sequential model, since each phase does not
need to wait until the previous phase has ended.
2. Second, people working on certain activities get information on the effects of their
choices on other activities and can adapt those choices based on that information.
For instance, if people working on the design of a new pram work in parallel with
the people developing the marketing campaign, they may learn from the marketers
and can adapt their design accordingly, to facilitate a proper marketing campaign.
Let's say that the marketers may want to emphasize the similarities between the
design of the pram and a giraffe, and for that reason the designers can accentuate
the giraffe-like shape a bit more. Such joint working would be more difficult in a
stage-gate model, in which the product is designed before the marketing campaign
is organized.
Nevertheless, the parallel approach brings several problems. The most important is
that the interaction between the different phases leads to numerous design changes,
and thus to lots of reworking. When people start working on a specific phase and
change their course of action, the people working on another phase have to adapt.
This may lead to changes in their choices, which they have to communicate back to
the people working in the other phase, potentially leading to yet more design changes.
All in all, the quantities of reworking can become excessive, even more so when the
project is radical in nature. For that reason, few firms still use the parallel method in
its original form.
The reader may wonder why these objections do not apply to the iterative processes
that we discussed in Chapter 3 (design thinking and lean innovation), and in the next
subsection. The reason is that iterations in those processes happen in the beginning
of the innovation process, when the flexibility is still high, and changes do not require
a lot of effort. The parallel process has overlapping phases over the whole innovation
processes, also in later phases, and thus also in later phases when design changes
create much more work.
A solution to these problems is only to collect information on activities in other
phases from experts, without asking them to actually start their activities. To take
the example of the pram above, instead of having the marketing people work on the
design of a marketing campaign, the designers of the product may communicate with
marketing experts in their company on potential marketing elements of their design.
Managing projects
Based on that, they may decide to include an option in the design to commercialize it as
an image of a giraffe. Usually such a way of working is supported by a cross-functional
team (see Section 7.1), in which all relevant functions are represented, and which
accompanies the development of the new offering over time. The functional experts
give feedback in every phase based on their expertise from previous projects, without
performing the activities belonging to their phase in an early phase. Alternatively,
the firm may also design a stage-gate model which defines for every phase precisely
which activities are performed by every function. Accordingly, the marketing people
will design the basic layout of the marketing campaign in an early phase, but they delay
working out the details until a later phase. In that way large quantities of reworking
are prevented.
( \ CASE 6.2 THE INNOVATION PROCESS MODEL OF
MICROSOFT
Microsoft applies an innovation process according to which they develop a series of
intermediate products, which the company can test. The company orders the requirements
for the new product from most important to least important and divides that list into a
number of subsets. The engineers start implementing the first subset of most important
requirements. When they have finished, colleagues can test the resulting product while
they continue working on the next subset (Cusumano and Selby, 2016) .
Iterative processes
Iterative approaches are a third type of process. The essence of these processes is
reducing uncertainty on a new offering in a very early phase by iterating. The principle
of reducing uncertainty as early as possible is shown in Figure 6.3 . The design thinking
and lean innovation approaches are iterative innovation approaches for the early
phase of projects . These approaches have the purpose of reducing uncertainty,
particularly with respect to market information. By iterating in the beginning of
the development process, the degree of market uncertainty is reduced early. Note
that Figure 6.3 is almost identical to Figure 5.6 on portfolio management, when we
discussed the need to reduce the number of projects in an early phase in the innovation
funnel. This is no coincidence: decreasing uncertainty in an early phase of innovation
projects helps to make early decisions in the portfolio management process. So, the
----------------Idea
Figure 6.3 The purpose of iterative process models
Commercia li zation
Iterative
innovation
processes are
processes
characterized
by cycles in
which the
project team
repeats
the same
sequences of
activities, with
the purpose
of reaching
an optimal
outcome.
139
140
Innovation Management
two processes go hand in hand. The two figures together visualize the adagio 'Fail
early, fail cheap', but also that surviving projects should try to get a clear focus early.
While innovators apply design thinking and lean innovation in the idea development
phase, academics have introduced the so-called flexible development process (Iansiti
and MacCormack, 1997) to apply such approaches also in later phases. According to
the flexible process, firms extend the tests with their product into the implementation
phase, during the development activities. This approach had the same purpose of
reducing uncertainty as much as possible, but now also on technical matters. In the
flexible approach the innovation team keeps the design open for a longer time during
the process; so, they move the design freeze to a later stage, to also be able to test
technical aspects. Technical tests refer to integrating the different components of the
product before they are fully developed, to check the proper functioning as part of
the full product. This is in line with the purpose of reducing uncertainty early, since
otherwise the technical problems might only have appeared at the end, at market
introduction. The firm also does market tests with the resulting unfinished full
products to get early customer feedback. Based on the feedback, it adapts the concept
and continues developing the product based on the new concept definition.
C'.\
CASE 6.3 THE VALUE OF A MARKET TEST: KELLY SLATER'S
PRO SURFER GAME
The value of market tests is high in the video game industry, even in a very late phase
of the development process. The failure rate of games in this market is high: only 10% of
all games brought to the market make a profit. It is expensive to develop a video game,
but the costs of marketing are even higher. By doing a market test of an almost finished
game, the publisher of the game can still decide not to commercialize it. An example
was the development of the Kelly Slater's Pro Surfer game by Activision , a publisher of
video games in 2002. It took the company several years to develop the game, at a total
cost of over $2 million. In June 2002 the company had to decide whether it wanted to
introduce the game for the Christmas season, which is the peak time of year for sales
of video games. In that case, the company had to release the game in September of
that year. The cost of marketing the game would be over $3 million. Alternatively, the
company could first do a market test and, if positive, release the game in March of the
next year, at a lower price in a less attractive period. If the market test resulted in a
negative outcome, the company could decide not to release the game at all. Although
counterintuitive, a real options calculation shows that doing the market test first results
in a higher expected value. The reason is that if the market test shows that customers
are not interested, the company can decide not to introduce the game, saving itself over
$3 million of marketing costs, which would otherwise largely have been lost.
Source: MacCormack et al. (2004).
In general, iterative processes are better for radical projects. The reason is that
uncertainty is high, and it should be reduced early in the process, to prevent large
costs at the end (see Figure 6.1). On the other hand, iterative processes have the
disadvantage of giving little structure and transparency. We will see in Section 7.1
that frequent and intense information exchange within the team and with managers
in the rest of the organization may help to solve this problem. Case 6.4 shows that
proper information exchange is essential in innovation projects.
Managing projects
C\
CASE 6.4 PROBLEMS OF INFORMATION EXCHANGE IN A
LARGE INNOVATION PROJECT
It is important to have proper information exchange during an innovation project, within
the team and with the outside world. Van Oorschot et al. (2013) describe a large team
of over 100 people working on an integrated circuit development project for a car
manufacturer, which failed in the end because of incomplete information leading to wrong
decisions during the project. Remarkably, the steering committee only cancelled the
project after more than 1½ years, when problems had been evident for a long time. The
project started late as a consequence of problems in hiring the right staff, and remained
understaffed, but it had a fixed deadline at the end. Because of the understaffing, the
team initially decided to postpone deadlines (gates in the stage-gate model) and shorten
the time allocated to future phases. However, in those phases the team again didn't meet
the deadlines. The reason for the extremely late cancellation was that the team didn't
see that the project was out of control because of mixed information: the negative news
about the extension of deadlines was always mixed with positive news about other parts
of the project. So, the team could remain optimistic about future progress of the project,
partly based on overly optimistic future productivity, and because of selective filtering of
information. Also, the problems in the project manifested themselves as either budget
or schedule problems, so not consistently in the same way. This case shows that formal
processes alone are certainly not sufficient for successful project execution, but that the
team has to share and interpret information clearly and jointly.
Does agile work?
Agile project management is a specific type of iterative innovation process. Agile
project management relies very much on day-to-day planning and greatly reduces
the need for up-front planning. In agile project management the development tasks
in a project are divided into subtasks that the project team can execute consecutively
(see Figure 6.4). The approach is often used in IT projects and works for relatively
simple products or services, such as websites or software. It will not work for large
and complex projects like new aeroplanes or submarines. The agile approach has
some semblance to lean innovation, described in Section 3.1, since it is iterative and
divides the project into small tasks. However, there are some differences. While lean
innovation mainly concerns the relation between the project team and the market,
agile project management is more concerned with the internal organization of a
project process and team. In addition, while lean innovation centres around the early
Agile is a type of project process in which the team divides the project into small tasks that
it can execute consecutively. The approach is also called 'scrum', after the way of restarting
the game in rugby when the players stand close together, shoulder to shoulder, with their
heads down to get the ball. The same team collaboration is expected in an agile team. The
agile team divides subtasks amongst team members, which inform each other of their
progress during the so-called 'daily stand-up' (usually at the start of the day). As soon as
the team has finished the first set of subtasks, it shows the result to the so-called 'project
owner', who represents the customer. The product owner can request changes in the
presented results. The team completes the whole project iteratively in this way. During the
process, it keeps a backlog of tasks that are waiting to be executed. A scrum master leads
the process. See also Figure 7.2 for the relations in an agile team .
Figure 6.4 How agile works
141
142
Innovation Management
concept development phase of a project, agile focuses on the later development phase.
However, agile and lean combine very well, since both are flexible and iterative.
The agile approach has the advantage compared to stage-gate processes that members
of the project team have short-term deadlines, which may work as motivators,
and that they are always well informed on the activities of other team members. In
addition, the client's feedback on the project is quick and early, which prevents complete
redesigns of a product, which are time-consuming and de-motivating, after the full
version is finished. An advantage for the company is that members of development
teams closely monitor each other's activities, which improves productivity. But the
approach also has some important limitations. First, it must be possible to modularize
the product. As we saw in Section 5.2, this is not always the case. And second, the
client must be clearly identified, and a representative of the client should always be
available, and they should have the authority to make decisions. As a consequence, the
approach is often applied in Business-to-Business (B2B) markets or in projects with a
firm-internal client. Also, the client firm or department has to invest in the project by
making a sufficiently senior person available.
6.3 The business plan
A business
plan is a
description of
all the major
elements of
a project,
including
the targeted
outcomes and
the steps to
be undertaken
to reach these
outcomes.
Creating a business plan, including a financial business case, is an important part of
each of the processes discussed above. However, since the development of the lean and
agile approaches, there is debate about the usefulness of writing a business plan at the
beginning of the innovation process. Protagonists oflean innovation often quote the boxer
Mike Tyson, who once said: 'Everybody has a plan until they get punched in the mouth.' In
other words, plans often do not stand the confrontation with reality, and the same applies,
possibly even more so because of the high levels of uncertainty, to business plans. As soon
as the innovation is put on the market, often everything appears to differ from what was
anticipated in the business plan. Therefore, some people consider writing business plans
as an activity for MBA courses, but hardly relevant in practice.
Nevertheless, managers in corporate contexts and venture capitalists take business
plans seriously, and also entrepreneurs find it is highly useful to make a business plan
for their start-up. The plan is not a prediction of what will happen but is a description
of what may happen. By adding detail to the plan, all kinds of useful questions pop up.
Also, the business plan shows whether there is at least a chance that the innovation
concept will be profitable. But in response to the criticism that they are irrelevant in
real life, most innovators today consider business plans to be dynamic, in the sense
that the project leader or entrepreneur should update it regularly over time, as new
information is collected and the concept itself changes.
What are the essential elements of a business plan?
~
A description of the concept, the value proposition.
~
The target market: target customers, and the need that the innovation will
fulfil ('the job to be done').
~
Drivers of the opportunity: new technology available, new customer needs,
changes in regulations, etc. If all the conditions to create this opportunity were
present years ago, probably somebody else would already have successfully
exploited it.
~
Other elements of the Business Model Canvas: channels, customer relations,
key activities, resources needed, key partners.
Managing projects
"""7
Competition: who else provides products, services or business models that
fulfil the same need.
"""7
The team.
"""7
Risk analysis and contingency plan.
"""7
Time planning and activities (the roadmap).
"""7
The business case (financial projections).
The business case, which represents the financial projections, is an important part
of the business plan, and sometimes the part that gets most attention from senior
management. Usually it includes projections of costs and revenues over several years
(e.g. five years). Based on that overview, it is possible to calculate the net present
value (NPV, see Section 5.4), the return on investment (ROI, the ratio of revenues
to costs), and break-even time (BET, time to recoup the investments). Often firms
make such calculations by discounting costs and revenues in different years. In Section
5.4 we argued for a real options approach, particularly for highly uncertain projects,
since it gives a more realistic estimate of financial outcomes. Nevertheless, financial
projections are always quite uncertain, and it is better if management doesn't focus
too much on financial aspects only.
Important elements of the business plan are the assumptions and risks. What
are the basic assumptions behind the project, and which risks are involved if these
assumptions do not come true? Of course, uncertainty levels and their proper estimate
are essential to a business plan. Blank (2013) suggests linking the assumptions to the
different elements of the Business Model Canvas. The innovator can assess the risks
in each box. For instance, for channels: an assumption can be that retailers will be
interested in selling our new product. The risk is of course that this assumption is
incorrect. What does this mean for our plan?
In Section 3.3 we gave an example of how to deal with assumptions for the case of
home delivery of supermarket products. There we discussed discovery-driven planning
to deal with assumptions (Figures 3.6 and 3. 7). McGrath and MacMillan (1995) even
proposed quantifying all assumptions (for instance: what percentage of retailers will
want to have our product on the shelf) and integrating the validation of all assumptions
into the project plan, connected to specific phases. Later, they combined their approach
with real options thinking (MacMillan et al., 2006).
Part of the financial analysis in the business plan can also be an assessment of
the sensitivity of the financial outcomes to certain input parameters. For that
purpose, the innovator decreases and increases the input parameters by, say, 10%,
and investigates the effects on the outcome parameters. This makes clear which input
parameters are most significant for the financial result of the business case, and thus
have to get most attention.
Presenting the business plan in a clear and concise manner is an essential element.
Business plans should therefore not be longer than 25 pages. The author of the plan
can store more detailed information in separate documents. It should also have a
clear summary. Presentations on business plans should be short. The 'elevator pitch'
is well known: your plan is only good if you are able to explain it to a senior manager
within the time of an elevator ride between floors (let's hope that the building is
high ... ).
As mentioned above, business plans are no longer static but should be considered
as dynamic elements of an innovation project. Based on the outcomes of subsequent
phases, business developers should constantly update the business plan and the
143
A business
case is th e
financial
projection of a
project to show
that a project
is viable, taking
the risks into
account.
144
Innovation Management
business case. Having an updated business plan helps to create a joint understanding
of the purpose and execution of a project. It is in fact part of project data management
(see Section 5.4, Software tools) and serves the same function. In addition, it helps
senior management and the review committee to make well-grounded decisions at
milestones.
6.4 Project management
A project is
a temporary
activity with
a specific
purpose,
consisting of a
series of tasks
that need to be
completed in
order to reach
the desired
outcome.
How do you manage an innovation project? Project management focuses on the division
and planning of tasks. Firms have to manage every project, not just innovation projects,
and a broad literature is available on how to do so. A project is a temporary activity with
a specific purpose, using a defined quantity of resources and executed within a specified
period. Projects can have completely different sizes, from very small (a few weeks of
work for a single person) to extremely large, such as a multi-billion dollar and multi-party
project to construct a new subway system.
The difference between an innovation project and many other projects lies in the level
of uncertainty. Although every project has some level of uncertainty, this will generally
be higher for an innovation project, since not only technical uncertainties and internally
generated uncertainties, such as the availability of human and other resources, but also
market uncertainties play an important part. As a consequence, innovation projects
have to deal with more unexpected events. Based on De Meyer et al. (2002) and Daft
and Lengel (1986) we can distinguish four levels of uncertainty, which determine the
choice of project management approach:
1. Variation. It means that the project team does not know some relevant quantities,
such as the number of hours needed to make a marketing plan, or the exact performance of the new product on a specific feature.
2. Foreseeable uncertainty. It means that certain activities have different outcomes,
for instance the outcome of a market test. The project team does not know the
future outcome but does know which outcomes are feasible. We can also call this
type of uncertainty 'risk'.
3. Unforeseeable uncertainty. Events can happen, but the project team does not know
which events. These are also called 'unknown unknowns' (sometimes called 'unkunks'). For instance, there is a possibility that customers will like an unexpected
feature of a product.
4. Ambiguity. This refers to the absence of the correct interpretation of the situation,
because the relations between cause and effect are unclear. An example is a concept
for which it is unclear where the company will be positioned in the supply chain.
A company may have an idea of developing a service to advise on the selection of
mortgages, but it doesn't know whether it will advise the end customer or financial
intermediaries. Another ambiguity might be a drug that can be applied to different
diseases. In such situations, the interpretation of the situation is unclear.
The first three cases of uncertainty concern absence of information, which can usually
be resolved by collecting data. In the case of unforeseeable uncertainty, data on
similar cases in the past, or customer research, might give information on areas of
uncertainty. In the case of ambiguity, it is more by thinking and reasoning than by
collecting data that an answer to the situation will be found. Asking the right questions
and conversations between experts are more important in such situations than data
collection (Daft and Lengel, 1986).
Managing projects
The consequences of the different levels of uncertainty for project management
are different . In the first two situations contingency plans provide a solution.
Contingency plans involve the project team in specifying a decision tree with the
different actions that it will take depending on the outcome of a previous action.
A contingency plan requires that the project team has a Plan B, Plan C, etc. for
every situation that may occur. Such decision trees are not uncommon in project
management, but in innovation projects they tend to become rather complex,
due to uncertainty levels. If uncertainty is too high, developing contingency
plans for every situation may become too expensive or require too much time .
In the situation of ambiguity, it may be hard to develop a full contingency plan. It
may be better just to create a high-level plan, and to leave the details unspecified until
later phases. In the case of unforeseeable uncertainty, either option can be chosen:
creating a plan based on the information that is available, and creating some buffers to
deal with unforeseen events, or to stick to the more high-level plan mentioned above.
A contingency
plan specifies
how a project
team or
managers
will act under
different
circumstances
(contingencies).
( \ CASE 6.5 AMBIGUITY IN THE CASE OF RIMONABANT
Sanofi-Aventis developed the drug Rimonabant in the early 2000s. It appeared that they
could develop the drug for heart problems and to help cure obesity. For a long time,
different options remained open, which created ambiguity, since test results depended
on the chosen target disease. Eventually the firm decided to commercialize Rimonabant
for the treatment of obesity, and the EU drug administration approved the drug in
2006. However, it turned out that the drug could have very serious side effects, such as
depression and even suicide, and the EU withdrew its approval of the drug. It remains
unclear whether the ambiguity in the development phase contributed to the failure to
detect the side effects before approval.
An important phase in managing a project is planning. In Figure 6.5 we see the
different activities in planning a project. The project manager should develop a work
breakdown structure that splits all of the activities into elementary tasks. Determining
the relationships between activities can be particularly difficult. For instance, can we
develop a marketing plan when we do not yet know exactly what the concept will look
like? 'The conditions for the project schedule' in Figure 6.5 (fourth box) refer to time
and resources available. Based on the information on tasks, relations between tasks
and these conditions, the project plan can be developed, with its stages and people's
responsibilities.
A dedicated and popular methodology for project management is Prince2. The
methodology has its origin in IT projects in the UK but has gained much broader
popularity. It provides a lot of templates that project managers can use to plan their
project. Important elements of the approach that we have also mentioned above are
Determine
the tasks in
the project
-+
Determ ine the
time and
resources
needed for each
task
-+
Determine
the
relationships
between
tasks
Figure 6.5 Stages in the project planning process
-+
Determine
the
conditions fo r
the project
schedu le
-+
145
Set a project
schedule
146
Innovation Management
constant attention to justification of the project, for instance by continual updating of
the business plan, keeping a risk register with ownership of the risks, and managing
in different phases. Prince2 has seven phases: starting up a project, initiating a
project, directing a project, controlling a stage, managing product delivery, managing
a stage boundary, and closing a project. However, the fit between Prince2 and flexible
development processes is low, and it is more appropriate for sequential processes.
Alignment with the innovation process
Two considerations are essential for managing innovation projects: alignment with
the stage-gate model or other overarching innovation process, and fit with the type of
project. When firms use a stage-gate model, that model already determines the basic
structure of innovation projects. In that case, the project plan will entail detailing
this basic structure, and describing the specifics of the current project within that
structure, such as the content, length and who is responsible for the activities in the
stages, and the specifics of the deliverables at each stage. In the absence of a stage-gate
model the project manager has more freedom but will also receive less direction in
developing the project plan.
The fit with the type of project is another important consideration. As we described
above, in cases of unforeseeable uncertainty and ambiguity, which will usually be
higher for more radical projects, a high-level project plan will be more appropriate. If
the firm has a stage-gate model, it may be better to ask for an exemption from using
that approach. Another option for a high-risk project is to define a very long concept
phase which includes a number of activities that would otherwise be done in later
phases, and then have a relatively quick progression through the other phases, which
serve more as a quality check. For instance, the project team may resolve the main
technical and market uncertainties in the extended concept phase. Then, after that,
it executes the project using a more traditional project management approach. If the
objectives are not completely set, the team may also use an agile approach in that
second phase. In fact, the project team then divides the project into two main phases
in the same way as the lean approach (Section 3.1).
6.5 Control of innovation projects
Innovation processes, as described in this chapter, don't just serve the purpose of
diminishing uncertainty. Managers also use them to control innovation activities, to
monitor their content and give direction. They give managers options to make decisions
on projects, particularly in gates or other decision points. Two questions are central for
managers: to what extent they want to be involved in innovation activities, and in which
way they want to exert their controlling role.
Managers often use the wrong criteria to determine their degree of involvement
in projects: high levels of investment stimulate them to start studying the details of
a project and to interfere in its targets (Wheelwright and Clark, 1992). Because the
firm usually makes the highest investments at the end of projects, for marketing or
production, managers also start to interfere in a late phase. In that phase, however,
the room for change in the project is very limited. If managers want to have a real
influence, they should get involved in projects in a much earlier phase, as early as in
the concept phase.
There are different reasons for senior managers to be involved in projects. First,
they exercise their influence in selection and continuation decisions, but managers
Managing projects
can also have good ideas about the content of the project. Managers oversee the total
portfolio; they are aware of trends and competition. This is all knowledge that can
help them to make the selection decisions, but it can also be helpful in specifying
the content of a project on a more detailed level. In addition, managers usually have
experience in executing projects themselves, and this experience can be useful in
guiding and supervising others in projects.
When managers want to steer projects, they can do so in three ways:
Outcome control means that managers set targets for the result of the project.
They can do so in different ways. Senior managers can define the outcome in terms of
the product, service or business model. This is called the project performance. For
instance, the project aims to set up a working web-commerce site for the company
within six months . Managers can also define the outcome in terms of market
performance: e.g. the outcome of the project should be a 10% share of web sales
in the total sales of our company within two years. The advantage of setting only
the project performance is that the timeline can be shorter, and that meeting the
target mainly depends on technical uncertainty, not on market uncertainty. The
advantage of the second approach is that it provides the team with more freedom to
make optimal choices, that the team is focused on the market, and not just on the
product, service or business model, and that the company gets what it really wants:
market outcomes. The first disadvantage of this approach is that it is much longer
before the result can be evaluated; in the meantime, team members or the team leader
may have moved to another position, and it becomes unclear who has to be rewarded
or blamed for the outcome. Second, the result of the project will also be affected by
market circumstances, and it becomes unclear to what extent the result of the project
can be attributed to the team.
( \ CASE 6.6 THE USE OF OUTCOME INDICATORS FOR A
MARGARINE PROJECT AT UNILEVER
A margarine project at Unilever provides a nice example of the use of market performance
indicators in outcome control. The purpose of the project was to develop a new liquid frying
margarine for Europe (see also Case 10.2). Tex Gunning, the top manager responsible for
the project, gave the team as a target to acquire a 10% market share in the European
market for shallow frying products. He left it to the team to decide how to acquire such a
market share with a new product. The advantage was that the team was not restricted
by any kind of product specification in the design of the innovation. Thus, it created a lot
of room for creativity and team commitment. Also, it focused the team on market share,
which usually translates easily into profits in a volume market such as margarine. On
the other hand, it would only be possible to evaluate the outcome of the team against
the target quite some time after the introduction of the new product, and thus some time
after the end of the project. In this case, the outcome indicators worked quite well, since
the team developed a product with as little variation as possible for different countries,
in that way creating high volumes and thus extensive scale effects and high margins.
By focusing the team on market share, it not only focused on developing an appealing
product from a customer's perspective, but also on scale effects in production. See also
Case 10.2.
Source: Edens et al. (2004).
147
Outcome
control refers
to the
specification
and evaluation
of desired
outputs that
the project
team should
deliver.
148
Innovation Management
""7
Process
control
concerns
mechanisms
that specify
which
behaviours
of team
members are
appropriate.
Clan
control relies
upon a
socialization
process among
managers and
team members
to align goals
and to create
shared norms
and values
between them.
Process control is the second way to steer projects. With process control, the
senior managers instruct the team how to execute the project. This type of
control is also called behavioural control. For instance, the manager may instruct
the team to do market research in a specific way, to test the product, service or
business model in a specific phase and way, etc. The advantage is that the team
can benefit from the experience of the senior manager, and that the instructions
of the senior manager prevent disagreement in the team on the actions to take.
On the other hand, the team usually has more information on the technical
and market context of the new product, service or business model than the
senior manager, and thus can make more informed decisions itself. Therefore,
research has generally shown process control to have a negative effect on the
performance of innovation projects (Bonner et al., 2002). Nevertheless, this
type of control can be useful for inexperienced teams with a more experienced
senior manager.
""7
Clan control is the third type of control. With clan control, the senior manager
creates strong relations with the team leader, and possibly also with the team
members. The purpose of clan control is to align values and strategic priorities
between the senior manager and the team. The senior manager can, for instance,
have regular meetings with the team leader or have a drink with the whole team.
The advantage of clan control is that it doesn't need concrete directions in terms
of outcomes or behavioural prescriptions, which are always hard to specify in the
uncertain situation of an innovation project. In the end, the specified targets or
behaviours may appear to be counterproductive at some point in time. With clan
control the senior manager shares values and strategic considerations with the
team. These are more abstract than instructions on how to execute the project,
but they may be as effective in guiding the project, since the team itself can apply
these values and strategic considerations to the project in unanticipated situations.
Research shows shows that a combination of outcome control and clan control has the
best results for projects (Rijsdijk and Van den Ende, 2011). Seemingly, tight relations
between the senior manager and the team add to the specifications of outcome control
because the purposes set in the outcome specifications are better understood by the
team leader and members. The 'why' of a project is highly important (see also Section 7.3,
on identity). Furthermore, strong relations may help to put the outcome specifications
into perspective and may facilitate their adaptation when the circumstances require
such adaptations or when better alternative outcomes become feasible. Clan control in
combination with such 'adaptive' outcome control will therefore work particularly well
for radical projects, since senior management will have problems with providing detailed
specifications for such projects. Having good relations with the project team will then
work better in choosing the right actions in unanticipated circumstances.
Stage-gate models usually involve both outcome and process controls (Sethi and
Iqbal, 2008). The model defines which deliverables the team should meet for each gate.
The deliverables can refer to the product, service or business model itself. For instance,
the model can specify that the concept has to meet certain quality requirements
or certain expected profit levels at a certain gate. The deliverables can also refer to
behaviours of the team, for instance that the team should perform a certain quality
test in a certain way. The results of research on the effects of controls suggest that
firms can best focus on setting outcome controls in the gates, instead of behaviour
controls (Rijsdijk and Van den Ende, 2011).
Managing projects
149
= 6.6 Summary
In this chapter we discussed processes and project management for innovation and
new business development activities. We discussed the details of alternative methods.
A general conclusion is that firms' best choice of the process and project management
methods is dependent on the characteristics of the project, and is especially dependent
on the degree of uncertainty. This means that firms should apply different approaches
for different projects. In practice, few firms do so. To keep management simple, many
firms have a standard process for all innovation activities. This may be optimal from
a simplicity perspective, but not from a performance perspective. In this chapter we
also discussed different types of control that managers can apply, on top of their role
in the decision points in innovation processes.
We can characterize the approach of this chapter as task perspective, since we dealt
with the order and planning of tasks. In the next chapter we will look at innovation
projects from a people perspective. Amongst other topics we discuss teams and
leadership. Of course, the task and people perspectives are closely connected. As we will
see, team structures and processes have to fit with each other. Also, leadership is very
closely connected to the control modes discussed in this chapter. While control refers
to tasks , leadership is concerned with people, but the purposes and approaches are
closely connected and support each other. In Chapter 11, I will argue that the process
or task perspective of this chapter and the people perspective of the next chapter
represent two fundamental perspectives in the field of innovation management and
new business development. They represent different paradigms or perspectives, but
they are at the same time closely connected.
0
6.7 Discussion questions and exercises
Discussion questions
1.
In Section 6.1, we discussed why it is essential for companies to reduce uncertainty in their innovation
process. How does the stage-gate model decrease uncertainty?
a. Does it decrease uncertainty in a different way than the iterative model?
2.
Many large companies have stage-gate models. ABN AMR0, a large Dutch bank, for example, has the
DARE system, which comprises four stages: prove problem, prove solution, prove they pay, prove it scales.
At each stage there is a classic gate, in which the project can be killed or can receive further investments.
However, projects are allowed to iterate between the steps and may receive (advance) feedback from
panel members.
a. Would you categorize this model as a stage-gate model according to Section 6.2? Why (not)?
3.
Have you ever worked with an agile project management approach? If so, what do you consider the
most important addition to a traditional project management approach? Are there, in your experience,
disadvantages to the agile way of working?
4.
Case 6.5 describes the development of the drug Rimonabant. Can you describe how the ambiguity in the
development process may have contributed to the unexpected side effects?
5.
Management can use the stage-gate model to control the innovation process in projects. Which of the
three types of control from Section 6.5 will they most likely use? Which element(s) of the stage-gate model
serve(s) the type(s) of control?
150
Innovation Management
Exercises
BioNTech is a company that specializes in cancer treatment therapy using an mRNA approach. In January 2020,
the CEO of BioNTech, Ugur $ahin, had the idea to apply a similar approach to developing a vaccine against
SARS-CoV-2, the virus that causes COVID-19.
1.
The first decision that the CEO considers is how to integrate this new innovation project w ithin the existing
organizational structure. Wh ich one of these organizational structures would you implement for the COVID19 project at BioNTech? Briefly explain why.
2.
Imagine you were designated as the project manager of the COVID-19 project at the start of the idea .
Before determining a project management approach, it is important to evaluate the uncertainty that is
associated with the project. Describe briefly how each of these levels might apply to the case of BioNTech's
COVID-19 project.
3.
As project manager, there are several ways to control and steer the project. Section 6.5 discusses three
ways in wh ich project managers can exercise control. The first type of control that is discussed is outcome
contro l. Describe in your own words the two different ways in wh ich outcome co ntrol can be defined, and
provide two examples of how you can apply these two different types of outcome contro l as the project
manager of BioNTech's COVID - 19 project. Describe one advantage and one disadvantage of each of these
types of outcome control . Finally, explain what type of outcome control you th ink is most appropriate.
Start- up company Innovation in Motion introduced smart curtains for the consumer market. It uses a 'retrofit'
curtain motor that can be insta lled out- of-the - box by anyone on virtua lly any curta in rail. The company is
considering developing a product for the business market. Develop the basic elements of a business plan for
this idea. Think particularly of the following elements:
1.
The target market wh ich business wil l be most interested, and w hat need wi ll the product fulfil ('the job
to be done')?
2.
Drivers of the opportunity: new technology available, new customer needs, changes in regulations, etc. If all
the cond ition s to create this opportunity were present years ago, somebody else wou ld probably already
have successfu lly exploited it.
3.
Competition: who else provides products, services or business models that fulfil the same need?
4.
Channels: how do you reach your customers?
5.
Road map: wh ich activities wou ld you start with?
References
Blank, S. (2013) 'Why the lean start-up changes everything', Harvard Business Review (May):
65-72.
Bonner, J.M., Ruekert, R.W. and Walker, O.C. (2002) 'Upper management control of new
product development projects and project performance', Journal of Product Innovation
Management 19(3): 233-245.
Christensen, C. (1997) 'We've got rhythm! Medtronic's cardiac pacemaker business', Harvard
Business School Press Case 8-698-004.
Cooper, R.G . (1990) 'Stage-gate systems: A new tool for managing new products', Business
Horizons (May-June): 44-54.
Cusumano, M.A. and Selby, R.W. (2016) Microsoft Secrets: How the World's Most Powerful Software Company Creates Technology, Shapes Markets, and Manages People. The Free Press.
Managing projects
Daft, R.L. and Lengel, R.H. (1986) 'Organizational information requirements, media richness
and structural design', Management Science 32(5): 554-571.
De Meyer, A., Loch, C.H. and Pich, M.T. (2002) 'Managing project uncertainty: From variation
to chaos', MIT Sloan Management Review (Winter): 60-67.
Edens, B., Leeman, D., van Nuenen, J., van den Ende J. and Jans, R. (2004) 'Liquid Gold:
Innovation on a European Scale', Rotterdam School of Management, Erasmus University.
Iansiti, M. and MacCormack, A. (1997) 'Developing products on Internet time', Harvard Business Review (September-October): 108-117.
MacCormack, A. and D'Angelo, E. (2004) Activision: The 'Kelly Slater's Pro Surfer' Project. Harvard Business School 9-605-020
MacMillan, I.C., van Putten, A.B., McGrath, R.G. and Thompson, J.D. (2006) 'Using real options
discipline for highly uncertain technology investments', Research-Technology Management
49(1): 29-37.
McGrath R.G. and MacMillan, I.C. (1995) 'Discovery-driven planning', Harvard Business
Review (July-August): 44-54.
Rijsdijk, S.A. and Van den Ende, J. (2011) 'Control combinations in new product development
projects', Journal of Product Innovation Management 28(6, November): 868-880.
Sethi, R. and Iqbal, Z. (2008) 'Stage-gate controls, learning failure, and adverse effect on novel
new products', Journal of Marketing 72 (January): 118-134.
Van Oorschot, K.E., Akkermans, H., Sengupta, K. and Van Wassenhove, L. (2013) 'Anatomy
of a decision trap in complex new product development projects', Academy ofManagement
Journal 56(1): 285-307.
Wheelwright, S.C. and Clark, K.B. (1992) Revolutionizing Product Development. The Free Press.
151
Organizing for
innovation
7
Learning objectives
After reading this chapter, you will be able to:
1. Choose between alternative team structures for an innovation project
2. Judge the appropriateness of agile team structures for your projects
3. Choose between alternative organization structures for innovation in a company
4. Identify social networks in an organization that are conducive for different types of innovation
5. List the main requirements for leadership of innovation
6. Describe how deep versus broad knowledge affects innovation
7. Describe how different tensions create an innovative culture
7.0 Introduction
In this chapter we review the organizational conditions needed to be successful in
innovation. We will show that having the right organization and culture is key to
innovation success. 'Organization' applies to two levels: the level of the project team,
and the level of the organization as a whole:
~
In Section 7.1 we discuss alternative project team structures. We also discuss
the importance of creating joint representations in team communication during the innovation process.
~
In Section 7.2 we introduce four alternative organization structures at the firm
level, according to different degrees of separation from the existing business.
We will discuss the advantages of separation versus integration of innovation in the business activities in a company. We will argue that the degree
of innovativeness (radical versus incremental) and the type of company (e.g.
knowledge intensity) affect the choice of organization structure.
In Sections 7.3 to 7.5 we will explore the specifics of knowledge needed for innovation, of
leading innovation teams and units, and the requirements for an innovation culture. All in
all, this chapter provides the main foundations for setting up an innovative organization.
7.1 Team structures
Cross-functional teams are common for innovation projects. As the term indicates, a
cross-functional team has members from different functions that are relevant for the
innovation. Traditionally, in the manufacturing industry usually R&D, engineering and
153
A crossfunctional
team is
a project
team with
representatives
from each of
the important
business
functions for
the project.
154
Innovation Management
marketing were represented (Wheelwright and Clark, 1992). R&D was responsible for
developing the product technology and the design, engineering was responsible for the
new production processes and marketing for commercializing the product. Usually the
R&D department housed the innovation teams. In the present-day broader innovation
context, innovation or new business development units may house the team, and,
in some industries, they may be located in the marketing department. Teams are
composed of other functions than the ones above. For instance, IT, logistics and
finance may be represented in a business model innovation team. If specific elements
of the business model are new, then it is more important to represent those functions
in the team. For instance, if a business model innovation involves a new revenue
model, such as the transition from product selling to service selling (servitization, see
Section 10.3), it will be useful to have representation from the finance department.
The literature distinguishes four types of team structure: functional, lightweight,
heavyweight and autonomous. The differences are in the lines of authority. Figure
7.1 shows the types of team structure for a collaboration between engineering,
manufacturing and marketing departments:
1. Functional Team Structure
2. Lightweight Team Structure
Function
Manager
(FM)
Project
Manager (PM)
3. Heavyweight Team Structure
..··
·····
Liaison (L)
4. Autonomous Team Structure
........................
Con- ·;
cept
!
............................. -·
.......... ··············- ··...
PM
Con- \
cept j
L
FM
= Functional manager
PM = Project manager
Figure 7.1 Four types of team structure
Source: Clark and Wheelwright (1992).
L
L
L = Liaison
Organizing for innovation
"""7
A functional team is coordinated by the functional managers, who coordinate
tasks between people in their respective units. You would not always call such
a structure a team - it's more a regular work structure.
"""7
A lightweight team consists of members in different functional units coordinated by a 'lightweight' project manager. 'Lightweight' means that the authority of the project manager is limited. They will create time plans and inform
and remind the team members of planning and deadlines. However, they will
not have the authority to make major changes in the definition of the project
itself. The project manager will usually be a junior employee.
"""7
A heavyweight team has a project manager with far more extensive
authority. A heavyweight project manager has more control over the
project team members, particularly since they have a say in their yearly
evaluations . Also, they have more responsibility for the final outcome
of the project. The heavyweight project manager may make decisions to
change the course of the project. In some cases, a heavyweight team will
be separated from the functional units and be co-located.
"""7
An autonomous team has a project leader with full say about the team members who are part of their unit. The project leader is the only person evaluating the team members, and they, or the team as a whole, have a strong say
in the targeted team output.
The difference between an autonomous team and the separated unit discussed in
Section 4.3 (on disruptive innovation) is in the representation of functions and the
financial accountability. An autonomous team will usually transfer the result of the
development work to the existing organization, which will be responsible for sales.
Also, supplier relations are from that moment on managed by the existing purchasing
department. In Section 7.2 we will see that a separate organization will go a step
further in autonomy than an autonomous team, since a separate organization (we will
call it 'separate business unit') will commercialize the innovation itself and have full
profit and loss responsibility.
In addition to the four team structures described above, we have agile or scrum
teams. Agile teams execute the agile innovation process described in Section 6.2. This
process is iterative, and is overseen by a product owner, who is responsible for the
outcome of the project, and who gives feedback during the process on intermediate
results. The team is managed by a scrum master, who is mainly responsible for the
process in the team (see Figure 7.2). Internally, the team has a flat structure in which
team members give feedback to each other and divide tasks between them. The task
cycles are very short: every morning during the so-called 'daily stand-up' the team
members report on their progress and planning. In terms of the four team structures
above, the team most resembles the autonomous team. The main difference is that
the team is not fully responsible for the outcome, since that is the duty of the product
owner (who is not a member of the team) .
The choice of team structure depends on the purpose of the team, and
particularly on the degree to which the innovation is new. The newer the
innovation, the more autonomous the team should be. As mentioned above,
more novel projects are usually confronted with higher degrees of internal and
external uncertainty. Higher uncertainty in the project requires flexibility to
react to unanticipated events and strong integration of functions to be able to
generate original solutions to those events. Both flexibility and integration are
155
An agile or
scrum team is
a team that
applies a
short-cycled
work process
with small
tasks and
frequent
horizontal
communication,
with the
purpose of
being flexible
in reacting
to customer
demands and
other external
changes.
156
Innovation Management
•••
•
••
•
••
I
I
I
I
.T !'. ··.\
--·········-- "' "'•
Scrum
Master
••
Product
Owner
••
I
I
'\. /
••
••
•
••
••
•••
I
•••
1t1t1t
Development
Team
"'
-
I
I
••
•
••
•
•••
••
Scrum Team
Figure 7.2 The structure of an agile or scrum team
facilitated by autonomous or heavyweight teams. On the other hand, the stronger
link with other similar activities tends to enhance efficiency and functional quality
in functional and lightweight teams . For incremental business model innovation,
in which the project manager can define tasks more easily up-front and for which
flexibility is less needed, functional or lightweight teams are more appropriate. The
consequence of these requirements is that ideally firms apply the team structure
to the type of innovation, but in practice many firms apply the same or similar
team structures for every project, irrespective of its newness.
Flexibility and external relations
Not only should the team structure depend on the type of project, it should also
be flexible over the course of a project. Research by Sting et al. (2015) has shown
that during the course of a team's activities it may become evident that objectives
cannot be attained as anticipated. For instance, the technology may appear to
be more difficult to develop or competition could be emerging in a field. Just
continuing on the same path and taking more time to reach the original goals
appears not to be the best avenue to success. Making midcourse corrections or
pivoting provides better chances (Ott et al., 2017; see also Section 3.1) than either
sticking to the initial objectives or starting with a very broad strategy and leaving
many options open. This may mean that a project changes in terms of radicality,
either becoming more incremental or more radical, and that the team structure
should also be adapted along the way.
Having external people in teams or innovation units can be useful. Even when a team
is autonomous, being composed of internal people only may still blind the team to all
kinds of options. In addition, external relations benefit the performance of a team.
Ancona et al. (2002) speak of X-teams: teams that have many external relations. The
relations serve to lobby for resources, to gather information, and to align to other groups
inside and outside the company. They distinguish three functions of external relations:
~
Ambassadorship connects the project to the power structure of the company.
The team has to create a strong reputation for itself, lobby for resources and
keep track of potential threats to the team activities.
Organizing for innovation
"""7
Scouting monitors for relevant information. The team has to investigate markets, technologies and competitor activities.
"""7
Task coordination. The team has to coordinate with other teams, to align tasks
and activities. The team can also coordinate schedules and deadlines to make
sure that support services are available at the right time.
157
According to Ancona and Caldwell (2004, p. 437), the intensity of each of these
activities should depend on the phase of innovation. In the early phase, scouting
and ambassador activities are important. However, if scouting continues too long
over the course of the project, it can be a sign of a lack of focus in the team, and
excessive ambassador activities over the whole project appear not to be related to
performance. Task coordination should be done over the whole period of the project
since it remains important. To support the external networks, teams should be
flexible and have 'outer-net' members who join the team for a limited set of tasks.
Also, core membership can be flexible, with members joining or leaving the team.
C\
CASE 7.1 THE INFLUENCE OF TEAM COMPOSITION IN AN
AUTONOMOUS TEAM
A classic case of a team that was autonomous but over-influenced by internal people was
the so-called Kittyhawk project at Hewlett Packard in the 1990s. The autonomous nature of
the team and the revolutionary objective were emphasized by it being housed in containers
in a corner of the parking lot, and by the name of the team, which referred to the place
where the Wright brothers developed their first aeroplane. The team had to develop a very
small next-generation hard disk drive for which they also had to find application options.
They found several of such options, amongst others a storage device for the Nintendo
game console. However, Nintendo had a price limit of $50. Influenced by the history of the
team members in the computer world, they chose a more familiar-looking application, in
handheld PDAs (Personal Digital Assistant), in spite of several technical uncertainties in
this application. These uncertainties concerned, amongst others, the required development
of handwriting recognition software. Because handwriting software did not become
available until later, the project failed. In retrospect, the Nintendo option would have been
more attractive. If the team had brought in more external people, it might have been more
open to this option.
Source: Christensen (2006).
Representations of the concept
To function properly, teams do not just need the right structure and functional
representation. They also have to communicate effectively internally. An essential
element of communication is the representation of the innovation concept that the
team creates. The representation of the concept is the image that the team members
communicate amongst each other. Seidel and O'Mahony (2014) distinguish three
elements of the representation (see Figure 7.3):
"""7
A story can refer to a situation that shows the need for the new concept. For
instance, the development team of an e-book used the story of a person they
knew who had to read a lot of books and papers but could not carry them all on
a trip. Such a story helps the team to have a joint understanding of the project.
A
representation
of an
innovation is
the image of
the innovation
that the
innovation
team creates
in its communications.
158
Innovation Management
Time
Representations of
product concept at Ti me 1
(Story 1, Metaphor 1,
Prototype 1)
Representations of
product concept at Time 2
(new "Prototype 2 ")
Representatio ns of
product concept at Ti me 3
(new "Sto ry 2 ")
Linking to
constraints
Linking to
constraints
Figure 7.3 Dynamics of representations
Source: Seidel and O'Mahony (2014).
""7
Metaphors refer to well-known concepts from other contexts, which help to
give meaning to the new concept. For the concept of the e-book, a metaphor
could be a 'computer' or a 'book'. The implication of considering it as a book
would be to speak of 'pages' instead of megabytes when discussing memory. In
Case 4.1 we showed how many metaphors the developers of the smartphone
had available.
""7
Prototypes can be physical prototypes for products, and detailed descriptions
in the case of services or business models. Having the team's agreement on
the representation of the concept increases effectiveness, since it helps to get
all team members to work in the same direction.
( \ CASE 7.2 JIBO: DESIGNING A SOCIAL ROBOT
The lack of a single representation of the project team seems to have been a reason for the
low success of the Jibo social robot project. In 2012 MIT robot scientist Cynthia Breazeal
came up with the idea for Jibo. The robot would have to be a companion of people in
daily life. The initiative had a crowdfunding campaign on lndiegogo, which was the most
successful of their campaigns at that time. In total the Jibo start-up collected over 70 million
dollars. The team quickly grew to over a hundred people. The robot would be a physical
object slightly resembling a small version of a human, moving its head when speaking.
In 2017 Time showed the robot on its cover as one of the best inventions of that year.
The company launched the robot in that same year, with a price of 899 dollars. However,
consumers considered it similar to products such as Amazon Alexa, with much lower price
points, and sales were disappointing. The company soon withdrew the product from the
market. Jibo robots themselves told their owners that support would end, so that they
would also cease to function properly.
In retrospect, Kotelly (2019) mentions the lack of an explicit method to support
rapid learning as one of the causes for the failure. However, the team did have a tool
to study customer preferences, which was a smartphone taped to a model of the robot
Organizing for innovation
that designers moved manually. This resembles a minimum viable product. But it seems
that the team members did not create a joint vision of the product based on outcomes of
customer tests. So, at some occasion an executive could propose that the robot should
dance when music was played, and the next day it did. At another occasion an executive
said that he expected Jibo to act as though it was alive, but team members didn't agree.
And more importantly: the product team was distracted by competing products in the
market, such as Amazon's Alexa. For instance, since Alexa had a timer, the team also
included a timer. The lack of consistency in vision may have been one reason that the
product lacked distinctiveness, that the project was delayed several times, from 2015
eventually to the end of 2017, and that Jibo became too expensive. The process of the
project and its outcome suggest that teams should focus on customer preferences as
coming from customer interaction. And that a team has to build a joint repertoire to create
a consistent product.
There is some overlap between these representations and product data management,
that we mentioned in Section 5.4. In product data management, the development
team stores data on the concept in a central database. The representations above are
linguistic and physical representations, while the databases contain pure data. What
the two types of representation have in common, however, is that the team should
update them frequently. Seidel and O'Mahony (2014) describe three practices to
update the information:
1. Linking it to constraints. This is a way of validation, particularly by executing
tests, but also by doing calculations on the business case and collecting information on costs of supplies. In fact it includes many of the validation activities
of the team .
.2. Collective scrutiny refers to actively sharing the representation in the team and
with people in the team's network and discussing frequently whether this representation best meets the project objectives, in the light of the information
available.
3. Active editing refers to summarizing the conclusions from the two previous activities, converting it into new representations, and removing the old representations
from the repertoire of the team members and others.
If a team has not integrated these updating processes, it runs the risk of sticking
too early to a single representation. The team members will then not remain open
to other and better options in the light of new information. Only by discarding old
representations and creating new ones can teams end up with a high-quality solution,
in terms of technological choices, customer focus and financial viability.
Note that this model fits very well with the iterative processes we described in
Sections 3.1 and 6.2. In Section 3.1 we dealt with design thinking and lean innovation.
What the model above in fact describes is how teams should deal with the pivoting
process in lean innovation. The difference is that lean innovation focuses on the
customer, whereas the process above also includes technical and other aspects.
Furthermore, note that the process above is also an example of the evolutionary
processes described in Section 3.1 (Figure 3.3a). But whereas we discussed earlier
how these processes work, and what they mean for uncertainty reduction, here the
emphasis is on the required team communication to make these processes function
properly.
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Innovation Management
7.2 Organizing innovation at the firm level
Firms have to organize innovation and new business development at the level of the
company. It means that the firm creates an organizational structure for innovation.
In this section we discuss four alternative structures:
1. Separate business unit
2. Innovation unit
3. Innovation manager
4. Integrated in the business
Ambidexterity
is the
ability of an
organization
to combine
exploration
and
exploitation .
Exploration
refers to the
creation of
the future of
the company,
while
exploitation
refers to the
improvement
of existing
activities.
The four options range from structures that are completely separate to those that
are completely integrated in the existing business. As we see below, more disruptive
innovations can be better developed in a separate organization, while more incremental
innovations can be better developed in a unit that is integrated into the business. As
you can also see, there is some similarity with the four types of team structure in the
previous section, although in the opposite order. We will discuss this similarity in the
final chapter, in Section 11.3.
The degree of separation of innovation from the existing business has been central
in literature on ambidexterity (Raisch et al., 2009). This literature addresses the
question of how companies can combine improving their existing activities, called
'exploitation', and creating completely new activities, called 'exploration'. In other
words, this literature addresses how to combine incremental and radical innovation
in firms. Scholars discuss two alternative options: structural ambidexterity, which
means separating radical innovation (exploration) from the core activities of the
company (exploitation), versus contextual ambidexterity, which means that the
radical innovation activities are integrated with other activities in the company. From
the above it will be clear that these two options are the extremes on a spectrum.
And integration with other activities can mean many different things: the radical
innovation activities can be integrated with other innovation activities, such as
within an innovation or new business development department, or they can be
integrated with activities such as marketing or operations. Therefore, we use a more
fine-grained categorization of four organizational forms in this section than the two
types of ambidexterity. In other words, while it is useful to think about the proper
organization of innovation activities in companies, we have to be more specific than
just distinguishing between full separation and full integration.
Option 1: Separate business unit
A separate business unit for innovation manages the full process of innovation projects,
including their development and commercialization (see Figure 7.4). Such a unit
manages one or more innovation projects. It thereby creates new businesses for the
company. Separate business units are currently a popular way of organizing innovation
and new business development activities. The difference from an autonomous team is
that the separate business unit has a more independent status, and performs the full
set of activities, including sales and purchasing. Sometimes it even has the legal status
of a separate company, under the ownership of the parent company.
Separate business units are recommended for radical innovations. The separation of
activities from the normal activities of the company can create the proper innovative
atmosphere and focus needed to make radical innovation successful. The separation of
activities also facilitates the application of different rules compared to the normal firm
Organizing for innovation
~-------------1
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business
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activities. For instance, higher management can apply different control mechanisms,
such as regular face-to-face meetings with the project leader instead of the standard
stage-gate model (from Figure 6.2) .
One of the most prominent defenders of separate business units for innovation
is the author of the disruptive innovation model, Clayton Christensen. As we
explained in Section 4.3, disruptive innovations underperform on the traditional
performance attributes in an industry, and therefore employees of companies usually
do not appropriately value their potential. Also, they focus on new customers or on
new preferences of existing customers, that is, new to the existing sales staff. Since
disruptive innovations are usually lower priced than existing offerings, initial revenues
are low. While companies often reward salespeople based on revenues, the salespeople
who underestimate the disruptive innovation's eventual volumes will consider it to be
more of a burden than an opportunity. For these reasons disruptive innovations will
seldom flourish when developed within the firm's existing organization. Christensen
mentions that you need an organization that celebrates with a party when the first
low-cost product is sold. The existing sales organization will not do so. A separate
business unit creates the right spirit for success.
Examples of such separate business units abound. In the airline industry,
traditional European airlines often own one or more subsidiary budget airlines. By
organizing them as separate business units, they can operate more flexibly, and the
new businesses do not inherit the cost structure of the parent airline. Newspapers
often have a separate business unit for their Internet news sites. Some conditions can
help to make the separate business unit successful (Govindarajan and Trimble, 2010):
""7
External people can help to break away from the rules and routines of the parent company. As we have seen in the case of the Kittyhawk project (Case 7.1),
a common knowledge base in the team, stemming from the existing business,
161
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Innovation Management
can hinder addressing new, unknown markets. New members in the business
unit may not be hindered by preferences for existing markets.
""7
New communication lines. A radical innovation may require new communication lines. For instance, in an electric car the engineers developing the brakes
should communicate in a new way with their colleagues developing the electricity generation system, since the brakes now generate energy (see Case 8.3).
Engineers from the old combustion-engine world are not used to this line of
communication, and if no new engineers participate, such a communication
line may not function properly.
""7
New job descriptions. The radical project may require new jobs, such as 'growth
hackers' in an IT-based new business model.
""7
Different performance metrics. Top management should not reward people in
the separate business unit on the existing indicators, which may be revenues
or margins. Instead, they should reward them based on indicators that are
more closely related to learning, such as the success of their experiments or
number of customers.
Some authors (Govindarajan and Trimble, 2010) have adapted the concept of
separate business units by emphasizing that firms can use certain capabilities of the
existing organization. They call the existing organization the 'performance engine', to
emphasize that it is usually very experienced in its activities. By using the performance
engine, firms avoid duplication of effort and realize more scale advantages. For
instance, a low-cost airline that is part of a traditional airline company may use the
same aeroplane maintenance infrastructure. In fact, the existing organization can
deliver every function that remains unchanged by the disruptive innovation. Still,
as mentioned above, managers should be careful since, even when the functions
themselves remain unchanged, the connections between them may change and
require new communication lines.
Apart from the potential loss of synergy and scale, separate business units for
innovation carry the risk of relationship problems with the rest of the organization.
Employees in the existing organization may be jealous of the freedom and facilities in
the separate organization, even more so when this organization does not yet generate
any income. Cases are reported in the literature in which employees of the regular
organization even had walls built in the corridor to put the separate unit at a greater
distance from themselves, so as not to be confronted with these free-riding colleagues
in their daily lives. Such problems show that proper communication of the reasons to
have such units in the company is essential.
A venturing
unit is a
unit in an
organization
that
accommodates
and supports
a number of
innovation
projects that
are relatively
independent
from the
rest of the
organization.
Ventures and spin offs
Some large firms create a specific type of separate organization to promote innovation
and new business development on a more permanent basis: a corporate venturing
unit. Corporate venturing aims at employees who want to create their own innovation
activity in a small independent unit. The employees form a team and make a proposal
to the venturing unit management, which may fund the project for a specific period
of time. Sometimes, but not always, management of the venturing unit involves one
or more business unit managers in evaluating specific project ideas. The advantage
of involving them is that the standing business will more easily adopt the venture
later; a disadvantage is that the standing business does not accept ideas that are far
removed from, or competing with, their business, even if those ideas are commercially
Organizing for innovation
CONCEPT
(Inspiration)
""I
• Unique Business
SEED
(Reduction)
~ ALPHA
/
(Integration)
• Business model
'
~
• Pricing, busines
Concept
functional spec
• Identify customer
segments
• Competitive landscape
'
)
• Validated business
plan, forecast
• Product/service spec,
• Product/service
BETA
(Testing)
dema
segment and
competitive
positioning
• Priority whole product
partners
• Proven revenue and
sales madel
performance test
• Limited commercial
• Initial product stable,
roadmap
• Validated marketing
strategy; positioning,
go-ta-market plan
• Marketing plan
• Delivery, support
model
, Final test af all
operating elements
• Delivery, customer care
performing
• HR plan
, Staffing ramp
• Operating precesses
execution
• Segment expansion
plan
• CEO/Founder with
vision
• Core team
'I
• Product/service
launch
• Research , validate
MARKET
CALIBRATION
(Opemt;onol(
• Full team, partners
Figure 7.5 Bell-Mason Framework for corporate venture development
©2020 Bell Mason Group
Source: http://www.bellmasongroup .com/ approach/.
attractive. Usually the team must report regularly on its progress to get new rounds
of funding from the venturing unit management. Firms often use the so-called BellMason framework or a similar framework to manage the ventures. The Bell-Mason
framework is a stepwise approach, similar to a stage-gate model (see Figure 6.2), but
more targeted to ventures (see Figure 7.5).
Sometimes, the firm creates a separate legal entity for each venture, and the employee
may even have to change their employment contract to the new entity. In other cases,
employees may remain employed by the firm itself. In all cases, employees get a certain
stake in the success of the venture. They develop their idea into a full-blown product,
service or business model, and bring it to the market. If the venture team is successful,
at some point the firm will reintegrate it into the business. Usually the firm does so
after the venture has become successful in the market. Some companies reintegrate
the venture before market introduction of the venture's offering. This approach has the
advantage that the new offering fits into the daily activities of the firm, but it may hinder
adoption of the activity in the existing business, since its success is not yet proven. If the
venture is successful but the resulting offering appears to have little synergy with the
rest of the business, the firm may spin off the venture. The team will then continue as
a new company, usually compensating the parent company in the form of shares. If the
venture has little success, the firm may still sell it off to the team or another company,
although most likely at a loss.
Option 2: Innovation unit
The second option is to create an innovation unit that collaborates with the business
units of the company (see Figure 7.6). The firm can also label the unit as a new
business development unit. An innovation unit develops new concepts and elaborates
the design in detail, but one of the business units commercializes the concept. For
that purpose, at some point the innovation or new business development unit hands
over the concept to the business unit. This option is very much like the traditional
R&D department, which fulfils the role of an innovation unit in product companies.
In that situation, R&D is responsible for technology and product development, and
thereby for the major part of innovation activities. After R&D finishes the design and
163
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Innovation Management
Innovation
unit
Senior management
Business 1
Business 3
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The
capabilities
of an
organization
are the
specialist
knowledge,
skills and
resources of
the company,
including their
combination .
development of a new product, the marketing and operations departments usually
become responsible for commercialization.
Today other types of firms than manufacturing firms, such as service firms , also
create innovation units. These units do not distinguish themselves from the rest of the
company by means of their technological knowledge, like R&D departments, but by
means of their knowledge and experience in innovation or new business development
activities. Some manufacturing companies recognize the importance of services and
new business models and set up a new business development unit on top of their R&D
departments.
The difference between the innovation unit and the separate business unit discussed
above is that the innovation unit collaborates far more with the existing business. As
stated, the business units commercialize the innovations. Also, innovation units may
be more open than separate business units to accepting assignments from the business
units. Those assignments may involve requests to develop specific innovations.
As a consequence of the closer connection to the existing business units, the
innovation will be more inclined to use the existing capabilities of the company
and to leave part of the innovation activities to the business units. The advantages of
performing part of the activities on their own will be clear from the previous section:
separation creates focus on the innovation activities, separation leaves room to set
the right performance indicators for innovation and design the right processes, and
it neutralizes most of the opposition from the existing business. On the other hand,
integrating a large part of the innovation or new business development activities
into the existing business units has the advantage that the firm does not have to
hire dedicated people for the tasks, that people in the business units have a high
level of knowledge of the business activities, that they are closer to the market, and
Organizing for innovation
165
that the core business can carry part of the costs of the innovation activities. On
the other hand, the business units may have different priorities from the innovation
unit, which may lead to delays or complete abandonment of the innovations that
come from the innovation unit. Also, a not-invented-here (NIH) attitude may prevent
business units from spending time and money on the innovations that come from the
central innovation unit (see Case 7.5). Such a not-invested-here attitude entails that
employees reject ideas and innovations that come from elsewhere, either from inside
or outside of the company.
C\
CASE 7.3 PROS AND CONS OF A SEPARATE UNIT IN A BANK
The bank lnnoFin was very innovative and created a dedicated innovation lab for futureoriented innovation ('Horizon 3 innovation', see Section 5.1). The bank organized all
shorter-term incremental innovation within the business units. The firm set up innovative
scrum teams in both the innovation lab and in the business units. Having a separate
innovation lab guaranteed that the bank prepared for the future. The innovation lab had
to develop the concepts for new offerings for customers and then hand them over to
the business units, which had to implement them . Implementation included checking
whether the propositions were in line with the many regulations for the financial sector.
However, the business units gave priority to their own innovations. Long delays in the
implementation of the future-oriented propositions of the innovation lab were the result.
Above we saw that disruptive innovations can best be developed in separate units.
The situation is different for radical innovations in the field of technology, also called
technological innovations (Section 1.4), or supply-side disruptive innovations (while
'normal' disruptive innovations can be called demand-side disruptive innovations).
When the technology forms the main new element in the innovation, an innovation
unit or an R&D department that works more closely with the business is more
appropriate. It has the specialist knowledge to work on such technology-oriented
innovations. Even if the technology is new, the innovation unit will want to learn about
the innovations, since R&D people are often eager to explore new knowledge areas.
The same holds for innovations that require completely new specialist knowledge in
other areas, such as new financial evaluation criteria in the insurance industry. The
existing risk assessors in insurance companies will in general be happy to develop
these. 1 Also, it is better for changes in the architecture of products to be developed
by an innovation unit, since the task is to reassemble existing components into a
new composition (Gans, 2016). In such cases, firms need to integrate their various
component development units tightly to facilitate the required collaboration.
However, when technological innovations also challenge the identity and overall
strategy of the company, creating a separate business unit can be required. An example
is the transition from traditional film photography to digital photography. Firms
like Kodak and Polaroid were not able to make the transition within their existing
organizations, because the new technology undermined their existing camera and film
revenue model (Gans, 2016).
1
This will not apply for new assessment methods such as risk assessment by the participants in crowd sourcing
initiatives (see Section 2. 7), who can evaluate each others' innovative ideas. Such methods will in general be distrusted by existing risk assessors.
Technological
innovations,
also called
supply-side
disruptive
innovations,
are innovations
that mainly rely
on radical new
technology,
usually for
existing
customer
groups.
166
Innovation Management
Option 3: Innovation manager
The third option involves having an innovation manager who coordinates the
innovation and new business development activities in the firm, while business units
perform the activities themselves (see Figure 7.7). The business units may again have a
department or team within the business unit for this purpose, or employees dispersed
in the business unit may perform the innovation activities (See 'D' of Development
in Figure 7.7). The innovation manager may come up with ideas, select projects and
organize portfolio management at the firm level. Either the business units or the
innovation manager provide resources for the innovation projects. The innovation
manager does not necessarily operate alone, but may have a supporting team or unit.
The innovation manager will usually report to top management. The main difference
between the innovation manager and the separate business or the innovation unit is
that the innovation manager and their team do not execute activities themselves; they
only coordinate. The business units perform the execution of the innovations. The
advantage of the innovation manager solution is that the business units have a high
expertise level in their activities, and they can apply this expertise when developing
innovations. Also, the high level of involvement of the business units facilitates the
dissemination of the innovations.
However, a disadvantage is that the level of centralized control is limited, and
therefore the coherence and speed of the innovation programme are limited. Business
units have their own priorities, and these are not always in line with what the firm
would prefer. For instance, people in the business units do not always see the advantage
of large-scale operations, while the firm may have scale of activities as a priority. Also,
business units may not always dedicate enough resources to innovation, leading to
low speed, even if a budget from the innovation manager is available. When they have
implemented the innovation only once or a few times, they may lose interest in it and
return to their earlier activities, leaving the innovation in a loss-making condition.
Senior management
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communi cation s
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Organizing for innovation
Senior management
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Figure 7.8 Integrated in the business
Option 4: Integrated in the business
In the fourth option, the innovation or new business development activities take place
fully in the business units (see Figure 7.8, the 'D' stands for Development). Each business
unit performs these activities aimed at its own market. The heads of the business units
may coordinate the innovation activities in their business units with each other, or
the activities may happen without mutual coordination. Firms organize innovation
activities to be fully integrated into the business units because they want to perform
them as closely as possible to the existing business, to make optimal use of the available
knowledge in the business. Also, the firm may only want to perform incremental
innovation that fits best with the existing activities. Finally, the business units may cover
such different markets that very little synergy exists between innovation activities aimed
at the different markets.
On the other hand, full integration of innovation in the business units may lead to a
lack of coherence and synergy between innovation activities in the company (see Case
7.4). Also, the absence of any corporate innovation raises questions on the identity of
the company. If there is no coherence in innovation, does the firm have a strategy for
the future, or is the firm in fact a conglomerate of different companies, which are only
combined for historical reasons or with the purpose of creating sufficient market power?
~ CASE 7.4 INTEGRATION OF NEW BUSINESS DEVELOPMENT
IN AN ENGINEERING COMPANY
Engineering company lnfraCo was active in infrastructure, energy and water management.
The company had a new business development unit, but that unit was completely
focused on developing IT solutions for the firm's existing markets. The firm left all other
167
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Innovation Management
innovation activities to the initiative of the business units. Some employees in those units
were very committed to creating new propositions for customers other than IT solutions,
but they had no budget to work on them . Some of them decided to work on innovations
anyway, which meant that they did not reach their normal targets with respect to revenue
generation and billable hours. Supervisors accepted that situation, which allowed them
to continue working on the innovation projects. However, as a result lnfraCo had a very
unbalanced innovation portfolio, since the individual choices of committed employees
determined the selection decisions of projects. Also, the speed of the projects was low,
since employees usually worked on them alone.
Comparison of options
The four options described above differ in terms of degree of separation from the existing
business, from full separation in Option 1 (Separate business unit for innovation) to
full integration in Option 4 (Fully integrated in business units) . The difference can also
be expressed in terms of timing of responsibilities during the development process,
as shown in Figure 7.9. A separate business unit for innovation will perform the full
process of innovation, including sales. An innovation unit hands over the innovations
to the business during or after development. In the two other options - the innovation
manager and fully integrated - the business units perform the activities from beginning
to end, with or without coordination by an innovation manager.
Firms can combine several of these four options. Firms can have separate business
units for innovation, an innovation unit or a business development unit that works
with the business, and innovation in the business units, coordinated by an innovation
manager (or the innovation unit) or not centrally coordinated. A division of tasks may
be the basis of a combination of different options, according to which different units
develop different types of innovation:
~
disruptive innovation in the separate business unit for innovation;
~
technological and radical sustaining innovation in an innovation unit;
~
incremental innovation in the business.
Selection
1
Separate business
2
Innovation unit
Implementation
Business units
Ul
I...
Q.)
E
------------------+ t;
0
:::J
u
Control by Innovation Manager
3
4
Business units
!
Business units
Figure 7.9 Division of tasks over time in the four options
Organizing for innovation
Having different types of units for innovation also has disadvantages . The units
may compete instead of collaborating with each other. For instance, innovation
units within the business units may compete with the innovation unit. The notinvented-here syndrome can be one of the reasons for such competition. The
innovation lab may involve people from the business in their projects from the very
beginning, even in the idea generation process, to solve this problem. In this way
it creates a sense of ownership of the new business propositions in the business
units .
Which factors determine the choice between alternative arrangements? A first
consideration is the composition of the portfolio of innovation in the company. As
mentioned above, the more disruptive innovations are, the more separate should
be the unit that develops the innovation. The firm can develop the incremental
innovations in the portfolio in the business units. Each of the different types of units
develops some part of the innovation portfolio, and the composition of the portfolio
determines the organizational forms that the firm applies.
Blindenbach-Driessen (2017) mentions two other important considerations for the
choice between options: the knowledge intensity of the firm and the complexity
of the products or services. Highly knowledge-intensive firms , such as hospitals
or engineering companies, have a lot of specialized knowledge dispersed in the
company. This knowledge will usually be highly relevant for innovation. Integrating
innovation into the existing business facilitates using that knowledge in innovation
and new business development activities. The same holds for highly complex products
or services: it promotes the performance of innovation in the business units. When
knowledge-intensive firms integrate innovation, they have to create appropriate
mechanisms to make sure that the employees involved make sufficient progress.
We will get back to this issue in Chapter 10, when we discuss project-based and
multinational firms .
Other factors affecting the choice between options are strategy and culture.
Firms with a follower strategy can leave innovation more to the existing business,
while companies with an innovative strategy will create a separate unit to make
sure that innovation gets proper attention. Culture can play out in two ways: firms
with a conservative, innovation-avoiding culture may decide to organize innovation
separately from the existing business, to prevent it from becoming stifled. However,
to change the culture such firms may deliberately give innovation assignments to
employees in the business units.
C\
CASE 7.5 COMPETITION BETWEEN THE INNOVATION LAB
AND EXISTING BUSINESS UNITS
Agricultural food producer FruitCo had an innovation lab to create products and
production processes for the future. The business units of the company were pretty well
autonomous, since the company had taken over other businesses in the past that now
continued as business units in the company, fairly independently from each other. The
business units had their own innovation units, which had little connection with the lab. As
a consequence, a not-invented-here syndrome blocked all of the lab's innovations from
implementation. To solve the problem, the firm appointed an innovation head from one
of the business units as head of the innovation lab. The firm also organized social events
in which representatives of different units got to know each other better. However, the
interventions did not solve the problem in the short run .
169
The
knowledge
intensity of an
organization
is the degree
that specialist
knowledge is
central to the
activities of
the company
and the extent
to which said
knowledge
is distributed
throughout the
company.
170
Innovation Management
Team structures and organizational structures
A mechanistic
management
system is
characterized
by a high
level of
structure and
specifications
of tasks in a
company, and
by centralized
decisionmaking and
control.
An organic
management
system is
characterized
by a low level
of structure
and definitions
of tasks in a
company, with
decentralized
decisionmaking and
low levels of
control.
Hierarchy is
the structure
by which
managers
exert control
over the
activities
of their
subordinates
(either lower
managers or
work-floor
employees).
How do the team structures from Section 7.1 fit with the four organizational structures
for innovation? First, we observe that we define team structures and organizational
structures at different levels. Team structures apply to projects, whereas organizational
structures relate to the level of the company as a whole (see the figure in the Overview
section of the book). As a consequence, firms can apply different team structures as
part of their organizational structure. The separate business unit for innovation will
usually have autonomous teams within the unit. The teams can have a cross-functional
composition, in the sense that the members of the teams have different functional
backgrounds. But the relationships between the functions within the business units
will be limited, in spite of the plea above to use the existing capabilities of the company
('the performance engine').
The innovation unit can also have cross-functional and autonomous teams, but
the links with the existing business will generally be stronger. For innovation in
the business units, heavyweight and lightweight teams are appropriate structures.
The business unit manager can collect people from the different units, operations,
marketing, etc., within the business unit, and compose a team for each project. Again,
the choice of team structure may depend on the radicalness of the project for the
business unit.
Organizing for innovation in the rest of the company
So far, we have discussed the organization of the innovation and new business
development activities in the company. But how do you organize the normal business
activities within companies that aim to be innovative? The traditional idea is that
innovative companies should have very little structure. In the 1960s, the academics
Bums and Stalker, in their famous book The Management ofInnovation (1961), which was
based on a study of the Scottish electronics industry, distinguished mechanistic and
organic management systems. Mechanistic systems consist of very specific definitions
of each employee's tasks, a strong hierarchy and a lot of vertical communication (between
superior and subordinate). An organic system, on the contrary, has a low level of task
specification, which can be adapted to personal capabilities and changing circumstances,
a flat hierarchy, and a lot of lateral communication. Bums and Stalker claimed that
innovative companies should strive for organic systems. A famous quote in their book is:
'Of course, nobody knows what his job is in here' (p. 93). According to Bums and Stalker,
such an unspecified organizational structure is best suited to adapting to a fast-changing
environment.
The organic form appears very often in start-up companies. But larger firms,
including innovative ones, are usually more structured. An important reason is that
organic structures tend to score low on productivity. As we will see in Section 7.5,
where we discuss innovative cultures, innovative firms have to combine performance
management and support. And performance management is difficult if tasks are not
clearly prescribed. Nevertheless, some companies still experiment with self-organizing
teams, even for operational tasks. Self-organizing teams can refer to teams without any
hierarchy, or teams that decide on task allocation themselves. Some people consider agile
teams (see Section 7.1) as self-organizing, but that is not completely correct, since these
teams have clearly prescribed structures and work processes.
A recent study investigated the effects of hierarchy on the innovation process itself
(Keum and See, 2017). One would expect that in these activities, which are characterized
by uncertainty and ambiguity, organic organizational forms would perform better
Organizing for innovation
than in other activities. The authors found that flat structures were indeed positive for
idea generation, but that hierarchy was better for idea selection. In idea generation, flat
structures can create a productive competition between employees in which they try
to outperform others or earn respect by generating good ideas. Hierarchy creates fear
of negative reactions to risky ideas in idea generation. On the other hand, hierarchy
is better in the selection phase of ideas since flat structures promote the selection of
people's own ideas. In addition, in a study of the fashion industry, the authors found
that hierarchy was positive for companies in firms producing commodity products
and in firms producing trendy products with very quick cycle times, but hierarchy was
negative for firms producing trendy products with regular cycle time. The implication
is that firms that have a focus on efficiency (commodity) or on innovation (trendy)
with high-speed turnarounds should have more hierarchical structures. Only firms
producing innovative products with low turnaround requirements benefited from
flatter structures. So, the traditional expectation that flat structures are in general
positive for innovation only applies to situations in which time pressure is modest.
Since firms in most innovative sectors have to be quick to innovate, this research
strongly modifies the traditional view. Generally, some degree of hierarchy appears
not to be at odds with innovation.
Another aspect of management that affects the innovativeness of an organization
is 'management innovation'. Management innovation refers to changes in the
organization's strategy, structure and processes that affect the work of its members
(Damanpour, 2014). Academics claim that to be successful, firms have to apply
management innovation. The reason is that the firm has to align the organizational
structure and processes to new products, services or business models that the firm
produces or applies. On the other hand, it should be realized that management
innovation can only create performance improvement if combined with such
innovations. Just changing management structures over time, without the underlying
need generated by changes in the core activities of the firm , will not improve firm
performance. On the contrary, changes occurring too frequently can generate
uncertainty and inefficiencies for employees, reducing performance.
171
Management
innovation is
a change of
management
systems and
management
behaviours
in an
organization.
Social networks
In addition to the formal structures in companies, informal social networks of
employees and managers in organizations become increasingly important. Employees
have informal networks that can be conducive to innovation and new business
development. We discussed the role of networks for creativity in Section 2.2, where we
saw that large and diverse networks are good for creativity, since they connect people
to diverse sources of knowledge. We also saw in Section 7.1 that external networks are
important for the performance of innovation teams. Large and diverse networks are
generally more suitable for radical innovation, and for the front end of innovation. Closed
networks are better at supporting incremental innovation and for implementation of
innovation (see Figure 7.10). 'Strong ties', which means relations with people who know
each other very well, are good for knowledge exchange. Strong ties are also good for
the execution of innovation initiatives. If you know people elsewhere in the company,
they can help you in executing your project. Particularly in more flatly organized firms,
such networks can be of paramount importance. Firms that want to be innovative
can facilitate this strategy by creating many networks in the organization. Rotating
people and staffing projects with people from different parts of the organization can be
conducive to network creation in a company.
The social
networks of
an individual
consist of the
set of specific
relationships to
the individual,
for instance all
relationships
aimed at giving
or seeking
advice.
172
Innovation Management
Figure 7.10 A diverse network (left) and a closed network (right)
7.3 Leadership
Team leadership
How do you lead an innovation project? As noted before, innovation needs new ideas
and is characterized by high levels of uncertainty. The effect is that innovation teams
have to work in an environment of creativity, lack of information on what to do, and
of repeated reworking. In addition, innovation projects need to receive appropriate
support from the rest of the organization, while at the same time soliciting sufficient
feedback. How do you lead a project and team in such a situation?
In general, the leadership literature has shown that leaders with high levels
of openness, extraversion, cognitive ability, energy, stress tolerance and selfconfidence are more effective. On the other hand, low agreeableness, which can
be part of leadership behaviour, does not contribute. In other words, a leader who
communicates well and is open to influences from others does a better job in leading
innovation.
Leading creativity is an important element in the leadership of innovation activities.
Creativity is not just needed at the start of an innovation activity, but is required
throughout the process, since the team has to constantly adapt the concept to changing
situations. The question is, who is supposed to be creative: the leader alone, or the
team? Based on these two dimensions, Mainemelis et al. (2015) distinguish four types
ofleadership style (see Figure 7.11):
~
Directing. The leader is creative, and expects the team around them to act
on their ideas. Some artists are examples of this first type. The authors call
this style 'directing' because the leader directs their subordinates in execution.
Elon Musk (initiator of Tesla, SpaceX, Zip, Hyperloop) is an example, since he
comes up with new ideas and finds other people to implement them.
~
Facilitating. The leader helps others to become creative, but does not try to be
very creative themself. This is the opposite of directing.
~
Integrative. The leader challenges both themself and the team to become creative. This is a combination of the two styles above. An example is Steve Jobs,
who assumed that he himself was the most creative, but who also made use
of the creativity of his people.
~
Non-leadership. The leader does not expect themself nor the team to be very
creative. The leader is in fact not leading creativity.
Organizing for innovation
V)
C
0
·.;::;
::::,
Directing
Integrating
Non
leadership
Facilitating
.!:l
·;::
+'
C
0
u
QJ
>
·.;::;
0
~
u
V)
·,._
QJ
--0
0
QJ
_J
Follower's creative contributions
Figure 7.11 Leadership styles for creativity
Source: Mainemelis et al. (2015).
The choice of leadership style not only depends on the personality of the leader, but
also on the team members' expertise in creative tasks. In the case of low expertise,
the leader may have to choose the directing style in order to show the team the way.
Edmondson (2016) mentions four types of activity for a leader of innovation teams:
""7
Fostering an adaptable vision is very much in line with preparing the team for
uncertainty. Team members shouldn't become demoralized when the vision
of the team changes over time, but they should accept such changes as normal practice. At the same time, the leader should emphasize the unchanging
nature of the underlying principles and of the values that the project pursues.
Edmondson (2016) uses the example of a five-year project to create a smart
city in Portugal, with green and high-tech IT applications. The purpose of the
project gave the team a strong shared identity, which helped them overcome
many changes in the project.
""7
Enabling psychological safety. A leader can create a safe environment by emphasizing that risk-taking and failures are accepted, and by emphasizing the value
of diversity of expertise in the team. Socializing activities at the start of the
project also support such an environment.
""7
Facilitating the sharing of expertise. Leaders can organize face-to-face meetings,
particularly at the beginning of a project. In such meetings, professional values
should be aligned. Edmondson gives the example of builders, who value reliability and getting it right the first time, and software engineers who are used
to experimenting. If these people have to collaborate, the leader should make
such differences in values explicit and get them accepted to create mutual
understanding.
""7
Promoting execution-as-learning. Leaders should encourage a vision of execution
that is aimed at learning, instead of following a pre-set plan.
Furr and Dyer (2014) emphasize that a leader of an innovation project should prepare
the team for uncertainty and share with the team that it is normal to feel uncomfortable
under uncertainty. On the other hand, the leader should limit uncertainty to some
extent, for instance by setting a 'time box' (e.g. a number of months) to resolve some
basic uncertainties around a project. The leader has to encourage the team to try out
173
174
Innovation Management
Transactional
leaders
manage their
subordinates
by means of
transactions
aimed at
desired
outcomes in
exchange for
rewards.
Transformational leaders
manage their
subordinates
by motivating
and supporting
them to work
towards
desired
outcomes.
options that are outside of the core of the project and acknowledge that it is normal
that such options may prove to be unfeasible. Notice that this is in line with the setbased approach discussed in Sections 6.1 and 7.1. The leader of the team should be
the 'chief experimenter': the one stimulating the team to experiment to find answers
to important questions, instead of answering those questions themselves. The leader
should try to stay away from making decisions on the final design or the outcome
of the project, but at some point, the leader should have the courage to stop certain
directions of investigation, or even to pull the plug on the project altogether. Furr and
Dyer (2014) also emphasize that the leader should be able to create an appropriate team
for the task, with the right competencies, particularly competencies for learning on the
innovation process itself. It can mean hiring design experts or specific technical experts
with competencies that are hard for the team leader to judge.
What type of leader is appropriate to meet the above requirements? In general,
the leadership literature makes a distinction between so-called transactional and
transformational leaders. Transactional leaders consider their relations with
subordinates as transactions: they expect certain outcomes from their subordinates,
and they reward them appropriately in return. Transformational leaders aim more
at expressing a vision of the future, intellectually stimulating their subordinates,
and considering their individual situations in supervising and rewarding them. In
general, they are more involved in the individual development and performance of
their people. Transactional and transformational styles are not completely different;
often they are highly correlated, since both types of leader are more active compared
to the more inactive 'laissez-faire' leaders. But insofar as they are different, research
shows that transformational leaders are more effective for innovation activities. The
reason is that the details of such activities cannot be determined in advance, and
thus determining the right outcome and reward is difficult. In fact, we saw similar
phenomena when we discussed control in the previous chapter (Section 6.5). Outcome
control was positive, but it was even better in combination with clan control, which is
close to transformational leadership.
Ancona et al. (2019) distinguish between three types of innovation leaders:
1. Entrepreneurial leaders. These leaders seize opportunities, lobby for resources and lead
the journey to implementation. They have self-confidence and a willingness to act,
they think strategically within their organization, and have the ability to attract others
to work with them.
2. Enabling leaders. These leaders focus on enabling others to be innovative. They
need to coach, connect people to each other, and communicate relevant information to the people in the organization.
3. Architecting leaders. These leaders focus on creating the conditions in the organization to facilitate innovation. They respond to external changes and adapt the
organization when and where needed. They set the criteria to make decisions on
innovation projects, in line with the firm's strategy.
These three different leadership styles all promote innovation, but usually at different
levels in the organization. The entrepreneurial leadership style fits with project
managers, enabling leaders will usually operate as middle managers, and architecting
leaders operate at the company level. The three styles fit with each other and can be
conducive to making an organization more innovative.
Leadership characteristics not only depend on the level in the company, but also
on the phases in the innovation process. The more transformational and enabling
Organizing for innovation
leadership styles apply mainly at the beginning of the innovation process, the phase
in which the team develops a concept. In that phase a lot of creativity is needed, for
which experimenting and learning are key. In later phases, learning is still important,
since the activities in those phases, such as setting up operations and marketing,
also score high on uncertainty, but the overall level of uncertainty decreases, since
the concept as a whole will now be set. At the same time, in those phases planned
execution and reliability become increasingly important. The team should quickly and
efficiently create all the necessary infrastructure and processes for the new offering.
While knowledge exchange between team members and shared values remains
important, more traditional management capabilities, such as time planning, creating
work breakdown structures and critical path analysis, become key in this phase. More
entrepreneurial and transactional styles will fit better in this phase. An important
challenge for team leaders is making the transition between the phases.
We can speak of ambidextrous leaders, leaders who can behave in different
ways: emphasizing learning, experimenting, and accepting mistakes and knowledge
exchange in the early phases of a project, while emphasizing proper execution and low
fault tolerance in the later stages. Time-dependent ambidextrous leadership involves
that the behaviours of a leader change over time. Another option is to change the
leader of the project, but that can have detrimental effects on the continuity of the
content of the project, since the new leader will not understand the background of all
the choices made. If the same leader stays on the project, they may make some changes
to the team to change the way of working. Getting more operations or marketing
people from the standing organization in the team can be helpful. Also, the team
leader should express clearly that the new phase in the project requires different skills
and behaviours. They may also explain the changes in their own behaviour in order
to remain authentic.
Ambidextrous leadership can also relate to different parts of the organization (see
also Section 7.2). The leader manages the core business from a traditional perspective,
emphasizing growth and efficiency, while they manage the innovation activities, such
as corporate ventures or innovative separate units, from a learning and innovation
perspective. Such a dual management style can create serious tensions amongst
managers in the company, since the core business may need investment for its survival,
which makes it hard to justify investment in innovation activities. The question is how
the CEO of the company can manage these tensions. Tushman et al. (2011) give two
alternative management models to deal with the tension: a hub-and-spokes model,
in which the CEO has contacts with the managers from different units, who have no
joint decision-power (network at the left in Figure 7.10), or a ring team, where the
managers of the units jointly decide on the investment portfolio (network at the right
in Figure 7.10). The ring team has the advantage of creating more support for the total
investment portfolio, but it will be a challenge for the CEO to defend the investments
in innovation against other priorities.
Getting support
The other highly important task of a leader of innovation activities is getting support
in the organization. It can be helpful for the team leader to first determine which
stakeholders are strongly interested, and which stakeholders actually have the power
to interfere in the project (see Figure 7.12). The ones combining interest and power
should get particular attention.
175
Ambidextrous
leaders are
leaders who
can manage
both activities
aimed at
exploration
and activities
aimed at
exploitation,
each in an
appropriate
but different
way.
Stakeholders
of an
organization
are persons
or groups
that have an
interest in the
behaviour
of the
organization.
176
Innovation Management
High
Keep satisfied
Manage closely
Monitor
Keep informed
Stakeholder
power
Low
Low
Hrgh
Stakeholder interest
Figure 7.12 Stakeholder interest-power matrix
Team leaders should have the right network of friends and acquaintances to be
effective in creating support. We already discussed networks of people in Section 7.2,
where we discussed the use of networks to find information. Disconnected networks
appeared to be particularly beneficial for collecting information. Here we focus more
on getting support, the political use of networks. People with large networks of
course have an advantage in this respect, since they can mobilize the right people.
Battilana and Casciaro (2013) emphasize that leaders of innovation teams should have
the right connections to support their project, depending on the innovativeness of
the project. They mention in particular so-called 'fence-sitters', people who have no
direct interest in the innovation project. Having relations with such people is often
beneficial for your project because, if they can be convinced of its value, they can
have a positive influence on others. On the other hand, Battilana and Casciaro have
found that close contacts with resistors are not always beneficial. They work well for
incremental projects, but for radical projects such relations may even backfire, since
the resistors may convince you as innovator that your project has major deficiencies.
And as we have seen in Section 5.3, compromising on your project with resistors is not
always positive for the outcome.
Organizational identity
Th e organizational identity
is the set of
perceptions
of the
image of an
organization
by its members
and by the
outside world.
An important consideration in getting support for innovation ideas is to frame them
in the organizational identity. Identities are key for people. Identity, such as being
part of a certain peer group, determines much of people's behaviours. Think of the
strong group identity of teenagers, which influences a lot of their behaviour. In the
same way the identity of companies is important for their employees. A restaurant can
have the identity of supplying the highest quality of food, in traditional combinations.
Employees of such a restaurant will strongly resist ideas for new dishes that deviate
from this identity. For that reason, the innovator should think hard about how to
frame an innovation idea in the corporate identity. In a famous video 'The Golden
Circle', Simon Sinek eloquently explains the importance of corporate identity for
employees and customers of a firm, when he argues that the 'why' of an activity is more
important for employees and customers than the 'how' and 'what', while innovators
defending their innovation tend to start with the 'what' instead. He gives the example
Organizing for innovation
of Apple, that aims to 'change the status quo' (why) by designing beautiful and userfriendly products (how), and by selling computers (what). By explaining the reason to
be involved in an activity, employees and customers feel more committed than by just
telling them what the activity entails.
The same applies to selling business ideas. By explaining how they serve the
corporate identity, the recipient of the message will be more affected than just
mentioning financial, technological or market attractiveness. Thereby corporate
identity itself is not a fixed given. The innovator can define the corporate identity
as being narrow or broad. For instance, a narrow definition of the identity of a firm
can be to provide baby food of good quality. A broader definition can be to provide
everything a baby needs to grow healthily. A business idea to provide medical items or
healthy additives for babies would fit in the latter definition of identity, not in the first
one. And in the example of the restaurant above: if an innovator frames the identity
of the restaurant as 'the highest quality experience', employees may more easily accept
a new dish that uses high-quality ingredients in a new combination. Defining the
identity in a broader way can help to get an innovation accepted.
7.4 Knowledge for innovation and new business
development
The need for knowledge
Knowledge is essential for innovation and new business development. We have
already seen in Section 2.1 that creative people need knowledge of certain relevant
domains, and that ideas often originate in the combination of different types of
knowledge. And knowledge, for instance on marketing, is also essential for the
implementation process of innovation projects.
We can identify different types of knowledge. First, there is technological
knowledge. This is usually the domain of the R&D unit. Technological knowledge is
central in product innovations, for instance electric cars require lots of IT and artificial
intelligence knowledge. Technological knowledge can also be essential for service
innovations, such as new 4G mobile services which require the development of a new
network technology. The producers of the network technology, such as Huawei and
Ericsson, develop this knowledge, but also telecom operators need to acquire part of
this knowledge to be able to implement these networks successfully.
A second key type of knowledge is market knowledge. Dependent on the type
of innovation, this can be knowledge of the existing market or new markets. For
instance, we saw in Section 4.3 that disruptive innovations do not usually involve
new technological knowledge but aim at new customers or creating new preferences
for existing customers. The literature makes a distinction between exploitative market
knowledge, aimed at existing customers, and explorative market knowledge, aimed at
new customers. For disruptive innovation, explorative market knowledge is needed.
Third, firms need other kinds of functional knowledge. In fact, each element of
the Business Model Canvas corresponds to particular types of knowledge that are
needed for introducing and supporting the business model. For instance, firms need
knowledge of their distribution channels (often in sales), of their customer relations
(marketing), key activities (operations, technology and others), suppliers (purchasing,
alliance management) and financial models (finance). Innovators can require all these
types of knowledge when developing and introducing new products, services or
business models. Some of the knowledge may already be available in the firm , but
177
178
Innovation Management
The depth of
knowledge
of a person
or company
refers to the
extent to which
the person or
company has
knowledge
of specific
domains.
The breadth
of knowledge
of a person or
company refers
to the number
of domains
of which the
person or
company has
knowledge.
they have to develop the new knowledge needed. And finally, firms have knowledge
of managerial processes and activities. The contents of this book provide an example
of such knowledge.
Firms can have deep or shallow knowledge in each relevant domain. Deep
knowledge means that the firm has extensive knowledge in the particular domain,
including all kinds of details. For instance, a telecom firm can have deep knowledge
of a certain customer segment, e.g. sales representatives, including their potential
preferences and needs. A firm can also have shallow knowledge of a certain domain.
For instance, the telecom operator may have a shallow knowledge of Internet routing
technologies, since that field is somewhat peripheral to its activities. The same applies
to management knowledge. Some firms have deep knowledge in a certain management
field, such as innovation management, and possess the latest insights by attending
conferences, taking courses, reading books or communicating with other firms. These
firms will in general also have a strong innovation capability: they have the knowledge,
the people and the organization to effectively create new businesses. Others are less
knowledgeable and have more superficial knowledge in management and innovation.
On the other hand, firms can have broad or narrow knowledge of domains.
Broad means that the firm has knowledge of many relevant domains . Narrow
means that the firm has knowledge of a few domains only and may rely on others
for knowledge of other domains.
Also, the search for new knowledge can be deep or broad. Deep searching means
that firms or individuals search for new knowledge in a field in which they already
have a strong expertise. Insurance companies developing new knowledge on risk
management are an example of deep knowledge search. Broad search means searching
in new domains, in which the firm or the individual has no or only superficial
knowledge. The breadth of the search can refer to knowledge dimensions (distant fields
of knowledge) or organizational dimensions (searching outside the boundaries of the
company) (Rosenkopf and Nerkar, 2001). Katila and Ahuja (2002) show that search
depth in firms has a curvilinear effect on the number of new product introductions,
in the sense that the number of new product introductions increases up to a certain
point, after which it decreases, while search breadth has a linear positive effect on new
product introductions. An explanation is that firms which are searching too deep take
too long to convert the results into innovations.
Literature has also shown that the possession of a broad knowledge base in firms
has its strongest benefits if firms also have strong knowledge integration mechanisms
(Zhou and Li, 2012). Knowledge integration mechanisms can be teams, in which
knowledge is exchanged and combined, or IT systems which share knowledge between
employees from different units and functions.
7.5 Culture of innovation
An innovative
culture is a
set of values
and goals in
companies
that support
innovative
behaviour.
How can a company create a culture of innovation? What is a culture of innovation? In
general culture is about a set of shared attitudes, values, goals and practices in a certain
group or country. Here we focus on the culture of organizations - what distinguishes
the organization from other organizations. For instance, an organization can be
strongly directed at efficiency in its practices and values. An innovative culture means
that an organization is strongly directed towards innovation in its practices, values and
goals. A well-known example of a company with a strong innovation culture is Google.
Google uses symbols to emphasize its culture, such as the slides between floors in
some Google offices. They show: 'We do things differently; we are open to innovation'.
Organizing for innovation
An organization with an innovative culture thus consists of a majority of people that
give high priority to innovation. Top management can take several actions to create
such a culture. In the traditional view, these actions are all directed at giving employees
a high degree of freedom to choose their own activities, and allowing them to fail in
those activities, particularly if they are innovation related. A more specific approach is
provided by Theresa Amabile (1997), who claims that top management should create
six elements in the organization to create a climate that is supportive to creativity:
1. Organizational encouragement. Managers in the organization should encourage
people to be creative. One way to do so is by implementing an idea management
system (see Section 2.6). Such a system not only collects ideas, but also demonstrates that the company values ideas. Proper evaluation of ideas also encourages
people to be creative.
2. Supervisory encouragement. The supervisors of teams should set appropriate targets, value individual contributions and show trust in their teams.
3. Work group encouragement. Teams should be diverse, have open communication
and challenge and support each other's work.
4. Resources. People should have sufficient resources to be creative.
5. Challenge. People should feel that they are expected to work hard on important
projects.
6. Freedom. Control over one's own work should be given, and freedom to decide how
to perform tasks.
As can be seen, the approach has some elements of setting targets, but the main
emphasis is on leaving people free to do what they like to do and to decide how to do it.
This emphasis on freedom is in line with Amabile's general theory on the three sources
of creativity (see Section 2.1), of which intrinsic motivation is one. Freedom stimulates
people to become intrinsically motivated and to act in line with this motivation.
As we mentioned before, when we discussed the organic organizational structure
(Section 7.2), an approach which creates a lot of freedom may have an important
disadvantage: it may hamper the efficiency and effectiveness of the organization. People
may become more creative, but they may not be induced to be productive, harming
the short-term productivity of the firm. In addition, even the second part of the
innovation process itself, implementation, may be hindered by such an organizational
context, since implementation requires a structured approach (see Section 6.2 and
Section 7.3 on Leadership above), efficiency and goal orientation, values that may be
at odds with high levels of freedom in a firm. Bahcall (2019) gives the example of GE,
Nokia and RIM (the producer of the BlackBerry smartphone) which all claimed to have
an innovation culture shortly before their market values plummeted.
More recent approaches to innovation culture consider the topic from the perspective
of tension: the tension between giving freedom and managing performance. Gibson
and Birkinshaw (2004) claim that innovative organizations need both strong
performance management and support for employees. It means employees are
stimulated to perform to a high level, and at the same time get support to do so.
Performance management includes setting ambitious goals and issuing creative
challenges for people in organizations, and rewarding people based on reaching their
goals. Support refers to giving people autonomy and sufficient information to perform
their tasks and developing the capabilities that people need. Performance management
and support together appear to create an ambidextrous organization (see Section 7.2),
Performance
management:
the way a
company aims
to improve the
performance
of employees,
for example,
by setting
individual
goals in line
with the
strategy of the
firm or unit.
179
180
Innovation Management
which is an organization that is both productive in the short term and creates the
required change for the future. So, it is more the combination of seemingly opposing
management principles (performance management and support) that creates an
innovative organization.
Safi Bahcall (2019), a physicist by origin, moves to the requirements side of the
tension. He claims that it is not so much 'soft' cultural factors, but 'hard' structural
factors that characterize an innovative company. He mentions four such factors:
1. Equity fraction. How many of your incentives reflect the outcome of projects,
instead of rank, within the organization? 'Incentives' refers to hard motivators,
such as pay, but also to soft ones, such as recognition: the higher the fraction of
incentives from projects, the more innovative the organization.
2. Fitness ratio. This is the ratio between the returns from working on the area of
your skills, which usually is your project work, versus the returns from political
activities in the firm, such as lobbying for promotion. A higher return from project
work leads to more innovative companies.
3. Management span. The higher the management span (the number of people reporting to a single manager), the lower the number of managers relative to work-floor
employees, and the lower the chance of making promotion in the hierarchy. So, a
wide span increases the focus on the work done, the importance of peer-to-peer
assistance in the company instead of managerial control, and thus leads to a more
innovative organization.
4. Salary growth. Low salary growth, and consequently higher performance-based
bonuses, increase the focus on project work, and thus innovativeness.
All in all, Bahcall argues that such structural measures, instead of soft cultural ones,
create a focus on project work instead of aiming for promotion in the firm hierarchy,
and thus are inducive of an innovative organization.
Gary Pisano (2019) seeks more a balance between freedom and requirements.
He proposes that every element of the traditional concept of an innovative culture,
providing freedom, is balanced by an element stating requirements:
Traditional element
Balancing element
Tolerance for freedom Intolerance for incompetence: high-quality standards for
employees
Experiment
Rigorous discipline to meet the targeted learning
outcomes of experiments
Psychological safety
managers
Brutal candour: speak up honestly against higher
Collaboration
Individual accountability for your decisions
Flat organization
Strong leadership, setting clear goals and communicating
them clearly
Such a balancing approach of innovation culture is more convincing than just putting
emphasis on freedom and autonomy. As stated above, just providing freedom may
lead to a non-performing organization. Creating a balance between freedom and
setting requirements is more conducive to setting the stage for both creativity and
implementation. And that is what innovation needs.
Organizing for innovation
181
= 7.6 Summary
In this chapter we reviewed four ways of organizing teams and four ways to organize
innovation and new business development in the company as a whole. We looked at
the reasons for applying each of these organizational structures, and the combination
of different structures. The type of innovation is one of the main reasons for the choice
between structures, but the knowledge intensity and complexity of the activities of the
company and strategic considerations also play a role. For instance, high knowledge
intensity of the company is a stimulus to organize innovation close to the normal
day-to-day activities. We discussed alternative organizational forms in the rest of
the company, and different visions on leadership and on innovation culture. Taken
together, this chapter gives the reader insight into how to organize and stimulate
innovation in a company, depending on the circumstances.
0
7.7 Discussion questions and exercises
Discussion questions
1.
Imagine you are part of the innovation department of a large car manufacturer. You are asked to put
together a team to develop a new business model for the car manufacturer (see Figure 7.1, Four types of
team structures) . Which type of team structure would you prefer to use and why?
a. After two years of re searching, developing and testing , you and your colleagues start a separate
business unit to begin implementing the new business model. Your first task is to put together a new
business development team that will make sure that the business unit keeps exploring opportunities
to expand its business. Would you pick the same type of team structure as in your previous answer
or another one? Why?
2.
In w hich of the four team types, as depicted by Figu re 7.1, do you believe the risk of conflict among team
members wi ll be the highest? Why?
3.
What do you consider the most important advantage of the innovation-manager structure compared to
the innovation-un it structure? For wh ich type of firm would you think this advantage is the most important?
4.
Going back to the exercise in Chapter 6 on the BioNTech vaccine against COVID-19, their website stated
that the aim was to make it available to the public as quickly as possible - worldw ide. Appropriately, the
project name was 'Project Light Speed'. To achieve this goal, the CEO decided to put 40 of his best people
on the project, rescinded their leave rights and vacation , and stimulated overtime with generous overtime
compensation .
a. According to Gibson and Birkinshaw's (2004) approach to innovation cultures, is this an example of
performance management or support for employees?
b. Discuss which of the four options for organizing innovation from Section 7.2 this solution resembles
most.
5.
At the end of Section 7.2 we discussed the importance of informal social networks for innovation . How
could firms use (some of) the team structures from Section 7.1 to create such networks?
6.
In Section 7.3 we mentioned the option to change team leadership between idea development and
implementation phases. W hat do you think is a downside of this approach and how can firms diminish
this downside?
182
7.
Innovation Management
Case 1.2 described the DriveNow initiative of BMW, a car sharing service for end-consumers. How do you
think that this initiative fits in with the perception of the corporate identity of engineers in BMW? How could
management increase the fit between the initiative and the identity perception?
8.
In Section 7.5 we describe both soft and hard factors to create an innovative culture. Which of the two
would you prefer? Why?
Exercises
The following exercise is for a group of at least six people. Divide the group in two subgroups, each consisting
of half of the total group:
• Team A is a functional team. This means that every member of the group has a specific field of expertise
(idea generation, idea development. production , general manager) and experts perform the tasks below,
without interfering in each other's activities. After performing a task, the person hands over the task to
the next responsible person . The exception is the manager, who is responsible for the project moving
on from function to function in a timely manner.
• Team B is a self-organizing autonomous team. The members perform the tasks jointly, possibly under
the supervision of a leader or not (that's the choice of the team).
Each team has to come up with and implement their own paper plane design (for reference see the exercise in
Chapter 3). When finished, reflect with everyone involved on the team the processes involved in creating the
paper plane:
1.
How did the collaboration go in each team? Was there much conflict? In which team?
2.
How creative were you? Did you feel everyone could contribute?
3.
Was there a difference in effectiveness of the various team structures, in terms of meeting requirements,
resource usage and speed of development?
4.
Was there a difference in creativity of the outcomes?
Take the example of DriveNow from Case 1.2. Imagine that the managers of the initiative want to introduce the
service in a big metropolitan city that is currently struggling with a large shortage of parking spaces. On the
surface it seems that DriveNow has a great opportunity for expanding its business and can provide a clear-cut
solution for the city. However, to implement the service DriveNow has to put hundreds of cars in the city, using
the already scarce parking spaces available. To further analyze this problem and to figure out from which
stakeholders they need to gather support. DriveNow has asked you to conduct a stakeholder analysis .
1.
Make a stakeholder analysis of the parking problem of DriveNow in the new city. Who are the key
stakeholders that are related to this problem?
2.
Draw the stakeholder interest-power matrix and put the various stakeholders within the matrix. Can you
argue why you put them there?
3.
How would you deal with the stakeholders in the upper right corner?
Organizing for innovation
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Open innovation
8
Learning objectives
After reading this chapter, you will be able to:
1. Describe three alternative forms of open innovation
2. Choose with good reasoning between collaboration and developing innovation by oneself
3. Explain the two main management challenges in collaboration projects
4. List formal and informal governance mechanisms
5. Describe the purpose of a corporate incubator
6. Explain three important success factors for the emergence of innovation clusters
8.0 Introduction
Collaboration with parties outside the firm is essential in innovation and new
business development. However, whereas collaboration has been common practice
in these activities for decades, in 2003, Henry Chesbrough gave it a strong stimulus
by introducing the concept of 'open innovation'. Open innovation means that firms
interact with their innovative context in managing their innovation activities. We can
distinguish three elements of open innovation:
1. Outside-in: Acquiring knowledge and innovation from outside the firm (Section
8.1);
2. Collaboration: Collaborating with outside parties in innovation (Sections 8 .2-8.3);
3. Inside-out: Exporting knowledge and innovation to the outside world (Section 8.4).
While the first two elements existed before Chesbrough introduced the concept of
open innovation, the deliberate idea of exporting knowledge and innovation to
the outside world was novel. So, whereas firms had usually considered knowledge
or people leaving the firm as undesirable but sometimes inevitable, Chesbrough
proposed making the transfer of knowledge or innovation to outsiders, in return
for financial compensation or a stake in the new activities of others, into a part of
the open innovation strategy. The diffusion of new information and communication
technology facilitated the trend towards open innovation, since many new tools for
collaboration became available.
Open innovation requires a new attitude from companies. Instead of wanting to
do everything themselves, they should be open towards innovative activities around
them, being prepared to collaborate, to acquire innovations, and to share their
own technology and innovations with others when this contributes to success (see
Figure 8.1). Open innovation should be embedded in the firm's strategy. Since open
innovation refers to the strategy of a company as a whole, we consider this chapter
mainly to be at the company level of innovation. However, we often also discuss
phenomena at individual project level.
185
Open
innovation
is the use of
purposive
inflows and
outflows of
knowledge
to accelerate
internal
innovation,
and expand
the markets for
external use
of innovation
(Chesbrough,
2003).
186
Innovation Management
Research
results
Licensing-in
technologies
Crowdsourcing
ideas
Start-up
companies
Outside-in
Innovation process
Sharing ideas
Collaborating
Licensing-out
Spin-off
companies
Figure 8.1 Forms of open innovation
In this chapter we will address the three elements of open innovation as indicated
above. Next, we show how the collaboration strategies of companies have effects on
the phenomenon of integration and disintegration in supply chains (Section 8.5). We
also describe the phenomenon of innovation clusters (Section 8.6). We addressed one
part of the outside-in element of open innovation - crowdsourcing ideas from outside
of the firm - in Section 2.7, and will therefore not discuss it in this chapter.
8.1 Acquiring knowledge and innovation
Traditionally firms developed knowledge and innovations in their R&D departments.
Open innovation means that firms search externally for knowledge and innovation.
A famous saying, attributed to Bill Joy, the founder of Sun Microsystems, helps to
understand the reasoning behind this approach: 'no matter who you are, most of the
smartest people work for someone else.' So, it is better to work with outside parties to
get access to knowledge that you do not possess yourself. To obtain this knowledge,
firms work with research institutes, individual inventors, and other firms. For
instance, firms can subsidize knowledge development in universities and research
institutes, so that they are the first to gain access to the results. Often the research
institutes will also want to diffuse the knowledge to the rest of the world, but the
sponsoring organization can negotiate a period for exclusive use of the information.
Research has shown that firms also need internal capabilities to be able to acquire
external knowledge: capabilities to be able to process the knowledge from outside.
Cohen and Levinthal (1990) have argued, maybe counterintuitively, that firms need
internal R&D for this purpose. They speak of the 'absorptive capacity' provided by
internal R&D. Absorptive capacity means that firms are able to assimilate, understand
and integrate outside knowledge. They need internal experts to assess and evaluate
the content of external knowledge. Only then can firms convert the external
Open innovation
knowledge into innovations. Also, so-called 'technology gatekeepers' can facilitate
the absorption of external knowledge. Technology gatekeepers are employees who
monitor external technological knowledge developments, and inform colleagues about
interesting opportunities.
In addition to knowledge, firms can acquire external innovations. In fact, they then
acquire the result of outside knowledge. Firms can acquire innovations in different
ways: they can buy external parties or take a financial stake in them. The latter
approach has become quite popular. Large companies acquire start-ups, sometimes
for considerable amounts of money, to be able to integrate the innovation of the
start-up into their own activities (see Case 8.1). Firms can also take a licence on a
technology that outside parties have developed, and on which those parties have
intellectual property rights.
Firms can acquire such external innovations in different phases of development.
In a very early phase firms can acquire ideas by hiring people who have an idea for
an innovation or they can acquire a licence. They can acquire innovations that are
much closer to the market, that is market-ready products or services, for instance by
buying a start-up that has already developed the product and is ready to bring it to
market. And they can wait even longer and buy companies that have already proven
the success of their products or services on the market.
( \ CASE 8.1 ACQUISITION OF DOLLAR SHAVE CLUB BY
UNILEVER
Mark Levine and Michael Dubin established the Dollar Shave Club in 2011. They
offered subscriptions to customers for regular deliveries of razor blades. They mailed
the customers a set of blades every month for a fixed price, claiming that the blades
were high quality and cheaper than competing brands. They did not produce the blades
themselves but purchased them from an outside supplier. Their innovational addition was
the delivery model. In 2012, through a highly unusual and creative video that went viral,
CEO Michael Dubin gained a lot of attention and thousands of new customers. Over time,
the company added several related products to its product portfolio, and it had several
rounds of fundraising from venture capitalists to finance its activities. In 2016 Unilever
acquired the company for the incredible amount of $1 billion. For Unilever the acquisition
provided a learning opportunity on new e-commerce business models.
Nambisan and Sawhney (2007) have theorized on the consequences of timing
decisions in relation to the cost of external innovations. In an early phase the cost of
acquiring an idea is low and the reach is large, which means that the firm can easily
monitor a large number of outside ideas (see Figure 8.2). In this phase, however, the
risk is high since the idea has not proven itself yet, and the time-to-market will be long.
In later phases the risks decrease, since the outside party has already shown that the
idea is feasible and successful on the market, so the time-to-market decreases, but the
cost will go up, often considerably, as the example of the Dollar Shave Club in Case 8.1
shows. In that phase the reach goes down, since the number of options for acquisition
has decreased.
Nambisan and Sawhney (2007) emphasize that the middle category, which they
call 'market-ready ideas', is an attractive one. Those are ideas that are more mature
than initial ideas, in the sense that the inventor has selected a market for those ideas
and developed them into more fully developed concepts. But the rest of development
Technology
gatekeepers are
employees of
organizations
who monitor
relevant
technology
developments
outside the
organization,
and facilitate
the transfer
of that
knowledge
to the
organization.
187
188
Innovation Management
HIGH
HIGH
LOW
LOW
-
~-··..
••I I
Figure 8.2 Effects of acquisition of innovations in different phases of development
Source: Nambisan and Sawhney (2007) .
Innovation
capitalists:
people who
buy raw ideas,
develop them
further into
market-ready
ideas, and sell
those ideas
to firms in
exchange for
a share in the
revenues.
still has to be done. For those ideas the risk has decreased, but the cost is still low.
Nambisan and Sawhney (2007) introduced the concept of 'innovation capitalists':
people who buy raw ideas, develop them further into market-ready ideas, and sell
those ideas to firms in exchange for a share in the revenues.
The choice between the alternative acquisition options of external knowledge
and innovations depends on the characteristics and strategy of the acquiring firm.
Firms with an innovative culture and low levels of not-invented-here syndrome (see
Section 7.2) can acquire ideas in an early phase and develop them quickly into a
marketable product or service. Firms with a less innovative culture, which are more
bureaucratic or have a higher level of not-invented-here syndrome may wait longer
and purchase new products or services when they have already proven themselves on
the market, of course at a much higher price. Usually, the acquiring company will try
not to just capture the new revenues generated by the acquisition, but to integrate
the acquired activities in a way that is advantageous to its existing business.
8.2 Collaboration between firms
Why collaborate? Capabilities
There are several reasons to collaborate. Firms do not possess all the capabilities and
knowledge they need, and developing them can take a long time. If the capabilities are
available outside the company, it may be faster and more cost-effective to work with
other parties to acquire the needed capabilities:
~
Scientific knowledge. Whereas in the past many large firms had their own R&D
departments to develop such knowledge, today they increasingly rely on collaboration with research institutes for this purpose.
~
Commercial capabilities. Firms may be capable of developing a new offering
for customers, but they do not always have the commercialization capabilities or the channel to the customer to sell the offering. For instance, biotech
Open innovation
189
companies have the capability to develop drugs, but they do not have the
capability to commercialize them.
On the other hand, pharmaceutical companies may not have the technological
capability to develop specific drugs based on biotechnology. Biotech companies and
pharmaceutical companies therefore often collaborate in drug development. In this
collaboration, usually the pharmaceutical companies are the financing, and thus risktaking, party. They pay substantial amounts of money, into the hundreds of millions
of dollars, for the development of the drug. If the drug becomes successful, the
pharmaceutical firm easily reaps its investments from the sales of the drug.
Business model innovation also often requires collaboration for reasons of acquiring
capabilities. Well-known examples are European car companies introducing car-sharing
services in city areas. BMW collaborated with car rental company, Sixt, to introduce
its car-sharing DriveNow system in German cities (Case 1.2). While for BMW such an
initiative mainly serves the purpose of anticipating a potential future and promoting
its cars to new users, Sixt has capabilities in registering car use, screening potential
users, maintaining rental cars, etc. that are important in an initiative like this. So,
BMW derives important advantages of collaboration with such a partner in time-tomarket and risk control. In other cases, in which firms possess most of the required
capabilities themselves, they can also create the product, service or new business
model alone. Other examples of collaborating for innovation are companies that hire
advertising agencies, manufacturers of production equipment or call centres for their
innovations.
To make collaboration successful, firms need to create specific collaboration
capabilities. Many firms have alliance managers, who are involved in every alliance
to create clear agreements between parties. Since these officers also aim to defend the
firm's interests, and thus put a strong emphasis on legal aspects, they may sometimes
hinder instead of enhancing innovation, amongst other reasons by delaying setting
up the collaboration. Some firms, like Unilever, have appointed a collaborative
innovation manager, who is dedicated to innovation and has a better understanding
of the requirements for creativity and innovation. For instance, while an alliance
officer or legal expert would want to assign the property rights to the party that came
up with a creative idea, such a collaborative innovation manager may be more open
to other arrangements, such as sharing all intellectual property that results from an
innovation activity. A more 'open innovation' attitude (see Section 8.0) can foster
innovation, since it creates a more open atmosphere and takes away the hindrances
formed by an overemphasis on the collaborating companies' private interests.
Alliance
refers to a
collaboration
activity
between
two or more
organizations.
An alliance can
be temporary
or permanent.
Why collaborate? Low interdependence
Autonomous
innovation
A second reason to collaborate is low interdependence between products or services and
their parts. In other words, it refers to the modularity of the product or service. As we
have seen in Section 5.2, modularity refers to the degree to which a product or service
consists of different elements that firms can develop and deliver independently from
each other. A high degree of modularity leads to a low intensity of collaboration, which
we call 'autonomous innovation'. It facilitates the division of tasks across different
actors in the supply chain. The economics literature calls it 'arm's length relations'. An
example is the earphones of a smartphone. If the smartphone producer has decided
on the interface between the earphones and the smartphone, it can easily outsource
the development and production of the earphones to a supplier. Collaboration on the
development process is no longer needed.
is the
development
of a part of
a product
or service
independently
from other
parts.
Autonomous
innovation
is identical
to modular
design (see
Section 5.2) .
190
Innovation Management
The opposite of modular is 'integral design' (see Section 5.2). When
interdependence is high between the overall product or service and its modules, the
product or service as a whole and any components have to be designed in mutual
coordination. Therefore, the units developing the module and the product as a
whole have to collaborate closely during the process to jointly develop the interfaces
between the component and the rest of the product or service. This is what we
call 'integral design'. As an example, imagine that a bank develops a consultancy
service for its business customers, having elements such as financial advice, strategic
advice, etc. It is difficult to outsource the development of part of that new service
to an outside party, since it is unclear up-front how the elements of the service fit
together. In such a case the degree of interdependence of the parts is high, and
collaboration with an external party is less obvious because of the intricacies of
intense collaboration if different parties are involved.
( \ CASE 8.2 INTEGRALITY IN THE DESIGN OF THE LOGISTIC
PROCESS OF A WEB-SHOP
Mirroring
hypothesis is
the idea that
the structure
of a product
or service is
similar to the
structure of the
units within
a firm or the
configuration
of firms
producing that
product or
service.
Web-shops usually use standard parcel delivery services to deliver the parcels, or they
may use the outlets of retail chains where customers can pick up the parcels. In such
cases the delivery is modular because the interfaces, such as the maximum sizes of
the packages and the time windows when the parcels can be supplied, are bound by
standards set by the delivery organization. The web-shop may also want to specify its
own delivery process in more detail. For instance, it may want the client to have boxes at
their premises in which the home delivery service can put the supplies (for instance, cooler
boxes in the case of groceries). In such a case the internal systems of the web-shop and
the delivery process are interdependent. Therefore, the web-shop may prefer to create
its own IT system and delivery processes since developing the dedicated interfaces
with another party is cumbersome. So, interdependences between product and module
stimulate integral design by one party.
In this case, the interdependence also creates asset specificity. This means that the
parts that each party develops only have value in the relationship with the other party.
For instance, if the logistics party has created the boxes for use at home for the webshop, and the web-shop suddenly decides to cancel the project, the logistics party may
not be able to use the boxes for anybody else. Alternatively, the web-shop may become
dependent on the logistics party during the project. Asset specificity hinders collaboration
with an outside party, since it makes firms dependent on the relationship and on the
behaviour of the other party. If parties want to collaborate despite the potential problems,
they need very good agreements up-front, or there should be a high level of trust, to
prevent unanticipated risks.
As we see, modularity has implications for organizing: high modularity facilitates
collaboration between different units or companies. Based on this phenomenon,
academics have developed the 'mirroring hypothesis': the configuration of
a product or service and the overall configuration of the organizational units
or firms producing that product or service mirror each other. It means that if
certain parts are connected in specific ways in a product, you will find units in the
organization that are responsible for each part communicating with each other in
the same way as the product's parts communicate with each other. The idea for
the similarity of a product and organization appeared in the book The Soul of a
Open innovation
New Machine by Tracy Kidder (1981). Tom West, the head of a group of engineers
at a computer company, opens up a computer newly brought to the market by
a competitor. He remarks that the design of the machine reflects exactly the
design of the competitor's company structure. The message of this is that not
only do organizations reflect the product they develop, but that products reflect
the organizations developing them. This applies to both the structure of units
within companies, as well as the collaboration pattern between companies . The
implication is that firms have to be careful: when you design a new product with a
different structure, you have to make sure that the business units and companies
involved create new communication lines between them (see Case 8.3).
( \ CASE 8.3 THE MIRRORING HYPOTHESIS IN BMW
The implications of the mirroring hypothesis are seen in the example of hybrid cars.
Hybrid cars have a different overall design from traditional combustion engine cars. For
instance, the brakes of a hybrid car generate electricity during braking. For that reason,
the brakes have to communicate with the electrical system in the car. It means that in the
design of the car, the brake developing unit has to communicate with the electricity power
developing unit. These units didn't have to communicate with each other when they had
been developing traditional cars. Govindarajan and Trimble (2010) report that problems
in the communications between the brake specialists and the electricity power specialists
in BMW hindered the design of the company's first hybrid car in 2007. Chris Bangle, head
of design at BMW at the time, created a dedicated team to solve the communication
problem between the two groups.
Based on the two considerations of the availability of capabilities in the market and the
degree of interdependence between overall product or service and the part, Chesbrough
and Teece (1996) have developed a model for the choice between collaborating and
innovating alone. They distinguish four options (see Figure 8 .3):
QJ
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Go virtual
Ally with caution
Ally or
bring in-house
Bring in-house
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Autonomous
Systemic
Type of innovation
Figure 8.3 Collaboration versus in-house development
Source: Chesbrough and Teece (1996).
191
192
Innovation Management
1. 'Go virtual'. The innovation is modular (autonomous) and the capabilities exist
outside. Collaboration ('go virtual') is most obvious. The case above of BMW and
Sixt is an example (provided that they organize the innovation in the modular
way as described). However, Chesbrough and Teece (1996) point to the example
of IBM, that took this approach for developing the IBM PC. We described this
example in Case 4.14. IBM chose a modular design and outsourced all parts development, including the software, to outside suppliers, and they left the sales in the
hands of independent retailers. In this way they were able to innovate quickly and
acquire a large market share (41 % in 1985 (Chesbrough and Teece, 1996)). They
even set the industry standard for the design of the personal computer. But since
competitors could acquire all of the components themselves, IBM was not able
to retain its dominance. It introduced the next generation of personal computer,
with the OS/2 operating system, but other parties did not follow, and it did not
become very successful.
2. Ally or bring in-house. If the innovation is modular (autonomous) but the capabilities do not exist outside of the company, it can either develop them itself or have
them developed by somebody else. For instance, if the aforementioned bank, that
wants to develop a consulting service for its business customers, needs certain
software to support this new service, provided that this software runs independently of the bank's other software, it can either develop it itself or outsource
it to an IT supplier. However, if the capabilities are not available externally, the
advantages of collaboration are less pronounced since the other party also has to
develop the capability.
3. Ally with caution. When the innovation is integral (called 'systemic' in the scheme)
and the capabilities exist outside, it still makes sense to collaborate. However,
because the innovation is integral, the partners make so-called 'asset-specific
investments': investments that only have value for a single other party (see Case
8.2). Such investments create the risk of hold-up: they become dependent on the
other partner, and cannot easily switch to a third party, because the activities of
the two are dependent on each other. This all hinders collaboration.
4. Bring in-house. Finally, if the innovation is systemic and the capabilities do not
exist outside, collaboration is difficult, as we see in the example of the web-shop
of Case 8.2. In such a case it may be better if you develop the innovation yourself.
Other reasons to collaborate
The choice to collaborate depends on more reasons than the availability of
capabilities and the degree of modularity. Another reason is the availability of
capital: collaboration provides the opportunity to share costs. Also the availability
of suitable, trustworthy partners can be a reason to collaborate. However, if the
innovator works with another party in order to spread the risks, they will also have
to share the returns. In fact, the partners reduce the size of the project to half its
total size, at the cost of the effort of collaborating.
In addition to the capability argument mentioned above, financial considerations
are a reason for pharmaceutical and biotech companies to collaborate. As mentioned
above, pharmaceuticals invest hundreds of millions in biotech projects. We can look
at this behaviour from a real option perspective. Usually the alliance partners agree
on milestones at which the pharmaceutical company makes its investments in the
collaboration, that is in the activities of the biotech, dependent on the results so far
Open innovation
and on external circumstances. The pharmaceutical firm may also ask for adaptations
in the project at a milestone. And the pharmaceutical company may decide to end
the alliance. Every alliance is an option for the pharmaceutical firm, which it can
exercise at the milestone by investing again and continuing to the next phase or by
abandoning the project. The literature distinguishes between growth options and
deferral options. Growth options aim at creating new options, that is new projects,
for the future. Deferral options are more defensive, to prevent missing the boat. The
firm invests and applies a 'wait-and-see' attitude: the pharmaceutical firm invests
relatively little in the biotech, just enough to keep the opportunity to invest more
heavily in the biotech in the future.
193
Growth
option is an
investment in
a company or
project with
the aim of
growing the
investment in
the future.
8.3 How to collaborate
Coordination of tasks
Collaborating firms have to manage two elements of the collaboration: coordination
of tasks and appropriation of returns (Dekker, 2004):
""7
Coordination of tasks refers to the alignment of the partners' activities. The
more the tasks are interdependent, as a consequence of the systemic nature
of the underlying innovation, the more coordination is needed.
""7
Appropriation of returns refers to safeguarding the returns on investments.
Parties have to make sure that their partners do not opportunistically appropriate the returns on their investments, or too large a part of those returns.
The activities of coordination of tasks and appropriation of returns can also be
summarized as 'coordination and control', in which coordination refers mainly to
tasks, and control refers mainly to the appropriation of returns.
Collaboration activities need a governance mechanism to manage the collaboration.
Governance mechanisms have different levels of integration. A very loose governance
mechanism only agrees on a few rules or agreements and leaves all the rest to the
partners. The rules can refer to the price that the parties charge each other for certain
activities or results of the collaboration. The basic theory of firms and collaboration,
transaction cost theory, calls such governance mechanisms 'arms-length', since the
parties remain at a distance from each other from a governance perspective.
A more integrated governance mechanism is an alliance based on a contract. In
such an alliance, usually two firms close a contract for a joint project. In the contract,
the firms set targets for the project and agree on the division of costs and benefits.
Also, the contract specifies the milestones at which the companies can comment on
the activities of the team and can set targets for the next phase. Further, as mentioned
above, the milestone serves as the point of investment or a decision to abandon the
alliance.
Setting up a contract is not easy. One of the reasons is that innovation is an uncertain
activity, so the contract can never specify how to behave for all situations that may
occur. So, during the project the partners have to make choices in unanticipated
situations. Also, the costs and duration of activities can be uncertain at the start of the
activity. Therefore, the partners have to agree on when they will set certain financial
agreements, but they cannot agree in advance on the content of those agreements.
Differences between partners' interests may hinder making such choices later on. For
these reasons, the partners often create a steering committee to manage the alliance.
The committee has members from both partners. It takes the daily decisions and
Deferral
option is an
investment in
a company
or project to
secure the
ability to invest
more in the
future.
A contract
is a written
agreement
between
parties to
specify the
conditions of a
joint project or
activity.
194
Innovation Management
A joint
venture is an
independent
organization
owned and
governed by
two or more
parties, usually
for a specific
collaborative
activity.
Trust is the
willingness
of a party to
be vulnerable
to the action
of another
party based
on positive
expectations
regarding the
other party's
motivation and/
or behaviour.
informs the parent companies on the progress of the alliance. Sometimes the partners
also create technical committees, for the coordination of activities on subtasks of the
overall project.
An even more integrated governance mode is a joint venture. The parties
create a separate new legal entity and both agree to invest a certain percentage.
They appoint executives and a board of directors for the entity and agree on the
division of investments and shares. From that point on, they can leave the decisionmaking to the executives of the joint venture. In terms of transaction cost theory,
a joint venture represents a more integrated governance form, which is closer to
'hierarchical control' as it exists within the firm . The executives can run the joint
venture as if it is an independent company. However, in specific cases, e.g. in large
disputes, management of the parent companies can still interfere in the actions of
the joint venture.
The structures mentioned so far are examples of formal governance. In addition,
informal governance is highly important. Trust is defined as 'the willingness of a
party to be vulnerable to the action of another party based on positive expectations
regarding the other party's motivation and/ or behavior' (Malhotra and Lumineau,
2011 , p. 982). Trust is an example of informal governance. Particularly in the case
of high uncertainty, trust between partners is highly important. When parties
trust each other, they can rely on good outcomes from decisions in unanticipated
situations. It facilitates governance of the alliance. We will elaborate on the role of
trust below.
C\
CASE 8.4 PROBLEMS IN A COLLABORATION PROJECT DUE
TO UNCERTAINTY
An initiative to create mobile banking services far ahead of their time was a project
between Postbank and telecom provider Telfort in the Netherlands in 2000. Postbank
was one of the Netherlands' largest retail banks with more than seven million customers
(today Postbank is part of ING). At that time more than one million of its customers
used the bank's existing Internet banking facilities. Telfort was a medium-sized telecom
operator with 920,000 postpaid and prepaid clients on its GSM network (today Telfort
is owned by KPN). The purpose of the project was to be the first to introduce mobile
banking to the Netherlands. The customers of the bank were offered a free GSM phone
with so-called WAP software. The free phone was offered so that the service would be
attractive to customers, and the preinstalled software on the phone would help them to
use the banking services.
For the telecom operator this project offered the possibility of extending its customer
base considerably. The project aimed at 500,000 customers, which meant that Telfort
would extend its customer base by more than 50% in one step. For the bank, the project
provided an opportunity to promote the use of its electronic services by means of a
new channel. The bank wanted to offer several basic services on a mobile network,
for example electronic transfers and balance retrieval. Every user that applied for this
service received a free mobile phone, with a free prepaid budget of 25 guilders (€12)
and the only obligation was to increase the budget by the same amount within a few
weeks. Renewing the phone's credit could be done from the bank account by means of
the banking application.
The project became highly problematic, partly due to unanticipated events. One of
these was that the national bank of the Netherlands required more checks than originally
Open innovation
anticipated to be sure that the right person was using a bank account, and that users had
no unauthorized access to other accounts. As a result, for every transaction, the bank had
to make sure that the GSM phone, the phone number and the bank account all belonged
to the same person. These additional checks made the project far more complicated than
originally anticipated, and the bank had to hire tens of additional software engineers. The
cost of the project surged, and the original division of costs and returns between the two
parties became inappropriate. To make new agreements during the project appeared to
be impossible. In addition, there was a fixed time limit on the project because the bank
wanted to use the phone as its usual summer gift. In the end, the bank provided the
phones to its customers, but the banking software was deficient and hardly anybody
ever used it. The project ended in a big loss for the bank. The project shows that it is
hard to collaborate under high uncertainty, even more so when the different tasks are
interdependent. In this case an outside event - the requirements of the national bank
- created interdependence between different tasks: development of the phone and
development of the banking application.
Contracts
As mentioned above, the partners can create a contract up-front, but due to uncertainty
they cannot accommodate all potential circumstances. In the case of unanticipated
events, they will have to come to an ad hoe agreement, which again is easier if there
is already trust between them.
Contractual agreements can have different forms. One party may make the
investments and get the returns and give a share of the returns to the other party.
This is usually the case in drug development collaborations between pharmaceutical
firms and biotech companies. The pharmaceutical firm usually bears the costs of the
development, which run into the hundreds of millions of euros or dollars. If the drug
gets approval and becomes successful, which happens in a minority of the cases, the
biotech firm gets a share of the profit.
The allocation of patents is an important element of contracts. Research has
shown that in vertical collaborations between suppliers and buying companies, it is
best to leave the intellectual property rights to the supplier (Leiponen, 2008). This
motivates the supplier to develop a high-quality product that meets a broader market
need. If the buyer contributes to the development financially or otherwise, the buyer
can demand an attractive price for the final product or service of the supplier, or the
buyer can negotiate a period of exclusive use of the resulting product or service. In
that way the buyer can recoup its investment. In the case of collaboration between
pharmaceutical firms and biotech firms, the patent is usually left with the biotech
(supplier), and the pharmaceutical firm negotiates exclusivity and pays part of the
revenues to the biotech. The fee for the biotech will depend on the success of the drug:
the better it performs, the higher the percentage of the revenues.
Alternatively, firms may apply for a joint patent. In that case they can each limit
the other party's use of the new product or service outside of the collaboration. For
instance, if a fragrance producer X and a detergent producer Y jointly develop a new
fragrance, they may acquire a joint patent. This would facilitate the sale of a variation
of the new fragrance to other detergent producers, since detergent producer Y would
share in the benefits. However, such a joint patent also bears a danger: if one party
decides, for instance because of cannibalization of other products or services from its
portfolio, not to commercialize the new product or service (in this case the fragrance),
the other party cannot move forward either, which of course hurts that party. A
195
196
Innovation Management
solution can be to agree up-front that in such a situation the other party has the right
to apply the patent on its own. So, appropriate division of intellectual property rights
over the collaborating parties should be part of collaboration agreements.
Trust
Formal
governance
means written
agreements
or institutional
arrangements
that govern a
certain project
or activity.
Parties can also base their collaboration on trust. Trust involves both parties expecting
that the other party will take its interests into account in the case of unanticipated
events. The advantage of trust is that it is flexible under different situations, which
contracts are not, as we saw above. However, trust is of course a soft mechanism to
control collaborations, since parties never know whether the other one is behaving as
expected.
There has been debate in the literature on the question of whether trust is
complementary to formal governance mechanisms, such as the structures and
contracts mentioned above, or whether it substitutes formal governance. If it
complements, more formal governance will lead to more trust, because creating
contract rules and arrangements gives parties the confidence that the other party
will not misuse its position. As a consequence, they trust each other more. According
to the complementarity view, trust also leads to more formal governance, since
the parties are less afraid to enter formal arrangements or to draw up a detailed
contract. In the view that trust substitutes for formal governance, the more trust,
the less formal governance. The reason would be that the parties do not need formal
governance, since they trust each other and rely on finding a joint solution in the case
of unanticipated events. So, the collaboration only needs formal governance when
trust is low. Also, according to this view, more formal governance leads to lower trust
since it signals mistrust.
Dekker (2004) proposes a middle road: at low levels of trust and formal governance,
the two enhance each other (so the complementarity view applies) . But at higher levels
of formal governance, the two may substitute for each other since trust is a cheaper
and simpler solution to organizing arrangements. Also, at those levels more formal
governance starts damaging trust. For practical purposes, firms may expect that when
they start developing formal governance, this will enhance trust, but they should be
cautious because at some point adding governance mechanisms starts to hinder trust.
Also, they may understand that if they work with a trusted partner, they should still
create formal governance up to a certain level, but not to an excessive degree.
Malhotra and Lumineau (2011) distinguish between two different types of trust:
~
Goodwill trust means that a party relies on the good intentions of another
party to behave in a trustworthy manner. The description of trust above refers
to goodwill trust.
~
Competence trust means that a party relies on the ability of the other party to
behave in an appropriate manner.
These authors also distinguish between coordination provisions in contracts and
control provisions:
~
Coordination provisions refer to the exchange of reports during the project and
the right to monitor each other's activities.
~
Control provisions are related to the confidentiality of information, termination
of part of the agreement and lawsuit provisions.
Open innovation
197
Malhotra and Lumineau found that coordination provisions have a positive effect
on competence-based trust because, while negotiating the coordination provisions,
partners create a shared language, and thus get to know each other better. Contrarily,
control provisions in contracts have a negative effect on goodwill trust, since they focus
partners on a business mindset instead of an ethical mindset. But control provisions
also have a positive effect on competence-based trust, because in negotiating the
control provisions partners have to clarify their internal abilities to comply with the
provisions. So, while according to Dekker (2004) the effects of formal control on
trust depend on the level of control, according to Malhotra and Lumineau the effects
depend on the type of trust.
A question is of course how to create trust between parties. The most important is
by repeated collaborations. Once parties have worked with each other, they know
each other's behaviour, which reduces uncertainty. Even if some of the experiences
were not positive, they may know how to deal with the difficulties in dealing with
the other party, which gives confidence in good outcomes from the relationship. Of
course, if previous collaborations have resulted in too many problems, partners will
probably decide not to collaborate again. When partners work with each other for the
first time, representatives of the partnering companies can have extensive face-to-face
sessions to discuss the joint project, in that way creating trust between them.
8.4 Collaborating with start-ups and selling off innovation
Corporate incubators
So far, the discussion has been about collaboration between established firms or other
organizations. Firms can also work with venture initiatives and start-up companies. We
discussed ventures in Section 7.2. The alternative is to have a corporate incubator.
Corporate incubators are more institutionalized ways to promote the radical initiatives
or activities of start-ups. Corporate incubators are centres that host a number of startups. They offer facilities for the start-ups such as office space. But usually corporate
incubators also offer coaching and financial support to start-ups.
Originally mainly universities and governments created incubators (which we
will discuss in Section 9.4). But recently also firms have started to do so, as part of
their open innovation programmes. The firm or institute which creates the incubator
serves as a sponsor of the incubator and its start-ups. The incubator can host former
employees of the company who want to create a spin-off and to start their own
business. It can host external entrepreneurs. In that case, the sponsoring firm will
usually invest in these start-ups.
Firms create incubators to be able to monitor new developments in technologies and
markets, but also to be able to acquire the start-up if the product or service becomes
strategically interesting for the firm. After some time, the firm can decide to take
over the start-up altogether, or let it leave the incubator. Even in the case of former
employees in the incubator, firms may re-integrate the activities in the company if
they turn out to have synergy. The purpose of these activities for firms is to learn and
to boost their innovation and new business development performance. The difference
with venturing programmes is the larger distance of the start-ups in the incubator
from the activities and organization of the sponsoring firm.
A corporate
incubator is
a unit within a
company that
supports startups, usually
by providing
space and
support
services.
198
Innovation Management
C\
CASE 8.5 CORPORATE INCUBATOR AT AN ENERGY
COMPANY
The energy company EnCo aimed at implementing a more innovative strategy than an
average energy company. However, the market for energy was very competitive, and the
business units of the company were very much focused on purchasing and selling energy at
attractive prices to beat the competition. To create innovation, top management started to
invest in start-ups that were active in related activities, and could make use of, or stimulate,
the current market of the company. One of the investments was in a start-up developing
remotely controlled thermostats. The product was quite successful, and the company could
sell it with an energy contract. After some time, EnCo invested more regularly in start-ups,
and invited them to take offices in a dedicated part of its headquarters, together with
employees' ventures applying new types of innovation for EnCo. For instance, one of the
ventures set up by employees developed a heat pump to extract energy from the ventilation
systems of houses, collaborating with a company in the heating systems business.
Spinning off innovations
Spinning off is
outsourcing
an innovative
unit or project
of a company
into an
independent
new company.
Spinning off activities is an important means of inside-out innovation. Actually, a
research project on departed employees from Xerox who had started their own business
was the trigger for Henry Chesbrough's (2003) idea of open innovation (see Case
8.6). Spinning off projects as start-ups can be part of an open innovation approach.
If an employee starts a new company, the parent firm may take a financial stake and
support the initiative. As mentioned above, later on the parent firm can sell its part in
the company or buy the whole company back if the innovation turns out to fit better
in its strategy than originally anticipated. In this way the parent company can create
a 'cloud' of smaller companies around it that can serve as a learning environment for
innovation for itself. The parent can observe the ideas and their market performance
closely and adapt its strategy accordingly.
C\
CASE 8.6 THE VALUE OF BUSINESSES OF DEPARTED
EMPLOYEES FROM XEROX
The printer company Xerox is well known for the many innovations it developed in the field
of computers and printers in the 1970s and 1980s, particularly in its Palo Alto research
lab, without commercializing them. For instance, Xerox developed the icon, the mouse,
the WYSIWYG (what-you-see-is-what-you-get) screen, etc. Steve Jobs once got a tour of
the lab and immediately started including some of these innovations in his own products.
Engineers involved in research and innovation at Xerox became frustrated by the lack of
commercialization, and many left the company to start their own businesses, using the
technology they had developed but which Xerox did not want to commercialize. Several
had success and their companies grew quickly. Much later, the scholar Henry Chesbrough
collected information on the market value of those companies, and it appeared that the
total market value was higher than the market value of the parent company, Xerox! This
observation was an inspiration for writing his book Open Innovation (2003). Chesbrough
concluded from his observations that firms should not consider such employees' leaving
as an undesired phenomenon but that they would do better to exploit the unapplied
technologies by creating spin-offs. The advantages are that firms may make money by
the commercialization of such spin-offs, and that they keep the option of re-integrating
the spin-off if they see that the technology has become useful for themselves.
Open innovation
199
Licensing out technology
Another way to bring technology to the outside world is by licensing it. In that
case, firms first guarantee ownership of the technology, usually by patenting it, and
subsequently sell licences to use the technology to one or more other firms.
8.5 Integration and disintegration in supply chains
Collaboration decisions of companies have consequences for the dynamics of the
supply chain in which firms operate. Supply chains can integrate through firm
mergers or because firms decide to start doing certain activities themselves. Supply
chains can disintegrate because firms sell off activities or split into different firms.
Such dynamics often occur for the same reasons as the factors discussed above
for determining collaboration, and the dynamics of supply chains to some extent
resemble patterns of collaborations. That's why we address this topic here.
Above we explained that the degree to which an innovation is integral versus
modular affects the choice between collaboration and doing-it-yourself, and the
type of collaboration, which is more intense for integral innovation. The degree
of integrality versus modularity also affects the dynamics of supply chains (see
Figure 5.4 for definitions of integrality and modularity). If a technology becomes
integral having been modular in the past, for instance as a consequence of radical
innovation, the production of the parts and the production of the product as a whole
may be integrated in a single firm. We speak of vertical integration. An example is
the car and battery industries when electric cars were brought out. While car batteries
had always been a separate business from the car industry, the performance of the
batteries became so important for the performance of the car that Tesla established
a large battery factory. Case 8. 7 gives the example of integration in the market of
navigation products.
( \ CASE 8.7 INTEGRATION IN THE SUPPLY CHAIN OF
Vertical
integration
is integrating
historically
different parts
of the supply
chain into a
single firm,
by internal
innovation or
by mergers.
NAVIGATION PRODUCTS
We find an example of integration of a supply chain in the market of geographic information
data for digital mapping by the providers of navigation and location-based services. In
the early 2000s, companies such as TeleAtlas and Navteq collected geographic data,
while software and telecom companies such as Google, TomTom and Nokia developed
software to offer services to customers using this data. Around 2007 a vertical merger
and takeover wave went through the industry, combining the providers of geographic
data and the software providers. Google as a software provider started collecting its own
data. The data were so essential to the software, that the software developers wanted
to have their own data sources.
On the other hand, when technologies become more modular, which usually happens
in the course of the life cycle (after the technology becomes the dominant design, see
Section 4.2), industries may split up and become vertically independent. We speak
of vertical disintegration. For instance, when smartphones were first brought
to market, telecom companies also developed software applications (apps) such as
simple games. However, over time, the interfaces between cell phone technology and
the apps became more standardized, and independent app developers could enter
Vertical
disintegration
is the opposite
of vertical
integration:
separating
activities in the
supply chain
into different
firms.
200
Innovation Management
App developers
Applications
Google
Operating system s
Vl
Cell phone hardware
0
+'
Samsung etc.
0
I...
Subscription s
Entrance points / routers
QJ
0..
0
E
Mobile service
providers
0
u
QJ
Licensed spectrum
ai
f-
Mobile network
operators
(a)
(b)
Cell towers
Switching equipment
Figure 8.4 The change in the mobile telecom value chain over time between
2000 (a) and the 2010s (b)
Horizontal
integration is
increasing
the number
of different
products or
services of
a company
for the same
or similar
markets,
by means
of internal
innovation
or merging
with other
companies
Horizontal
disintegration
means that
companies
split up
according to
the product or
markets that
they serve.
the industry. In this industry, the standardization was limited, since the different
systems (iOS, Android, Windows) had different standards. Nevertheless, a separate
app industry originated, based on the modularity of the mobile technology. Figure 8.4
shows the changes in the mobile phone supply chain between 2000 (a) and the 2010s
(b).An exception to the disintegrated supply chain on the right-hand side is Apple,
which integrates cell phone hardware and operating systems. Another example is the
computer industry. Initially the major computer manufacturers integrated the full
supply chain because the designs of the different parts were highly interrelated. They
produced their own integrated circuits, developed their own operating systems, and
had their own customer relations. Over time components became more standardized,
and companies disintegrated vertically.
Integrality and modularity of design are not the only reasons for vertical integration
and disintegration in supply chains. The size of companies in a specific part of the
supply chain can stimulate other parts to strive for complementary sizes. For instance,
in many countries supermarkets chains are very large, and do not want to deal with
multiple suppliers for the same product. This forces suppliers to increase to a large size
so that they remain a relevant supplier. Another reason is profitability: if a certain part
of the supply is far more profitable than the part next to it, the less-profitable part will
try to include the more profitable neighbouring activity. This may have been a reason
for Google's development of its own databases of geographic information.
We also see dynamics in horizontal integration and disintegration between
industries, although for slightly different reasons. Horizontal integration means
that companies increase the number and diversity of products or services that they
produce. Google is a highly horizontally integrated company since it produces many
different products and services, such as a search engine, an Internet browser, an
operating system (Android). In Section 4.2 (subheading Knowledge life cycles and
the dynamics of firms) we explained that knowledge development can be a reason
for horizontal rearrangements of the value chain. Over the life cycle of a knowledge
area, often firms initially integrate many different activities. After dominant designs
have been established, they may disintegrate horizontally, separating different
product or service types into different companies. Towards the mature phase of
the knowledge life cycle they may re-integrate. Increasing research intensity in a
sector can create a new horizontal integration process in a disintegrated sector. For
instance, genetic engineering has increased the research intensity in the vegetable
breeding sector (see Case 8.8).
Open innovation
C\
201
CASE 8.8 RESEARCH INTENSITY AND HORIZONTAL
INTEGRATION IN THE PLANT BREEDING SECTOR
Breeding is the activity of creating new varieties of crops. Traditionally breeding was
a craft. The most common approach was to cross plants from the same crop that had
different characteristics. For instance, a breeder of corn could cross plants with high
productivity with plants yielding corn with a superior taste, and hope to create plants
with the two characteristics combined. Breeding was a lengthy process since the breeder
had to repeat the process many times to get a homogenous variety. It could take about
ten years to create a single new variety. In the 1980s genetic engineering speeded up
this process because, instead of planting numerous crossings, the breeder could select
the right ones based on the genetic codes of the plants (see also Case 4.5). Also, in some
parts of the world, the breeder was allowed to insert new genes in a variety (genetic
modification). As a consequence, the research intensity of breeding increased strongly.
Breeding companies created research laboratories, and to exploit this research efficiently
they integrated horizontally by bringing new crops into their companies. They usually did
so by acquiring other breeders or by merging. This process first happened in breeders
of large agricultural crops such as corn and cotton , and subsequently in breeders of
vegetables. In the 2020s this process also seems to have started in the breeding sector
of floriculture (flowers and plants). It's an example of how the application of a new field
of scientific knowledge (genetic engineering) stimulates horizontal integration in a sector.
So, changes in technologies and products affect both horizontal and vertical integration
and disintegration, albeit in different ways. Firms' decisions to collaborate are closely
related to their decisions to integrate or disintegrate. For instance, above we explained
that firms can choose between collaboration and doing activities themselves (see
Section 8.2). In the same way, firms can choose between collaboration and acquiring
another firm to be able to perform the activity. A firm can also choose between
performing the activity itself and disintegrating and subsequent collaboration with
an outside party. The reasons behind such decisions are highly similar, such as
integrality and modularity of technology, the phase of the knowledge life cycle, and
power relations in supply chains.
8.6 Innovation clusters
Firms can take advantage of other companies and research institutes in the region
when innovating. We speak of innovation clusters or business clusters. In such
a cluster, firms can learn from each other by exchange of knowledge, e.g. explicit
information sharing, or by the movement of personnel between companies and
research institutes. Also, specific firms can become suppliers to other firms, in this
way creating innovation.
The most well-known and typical example of an innovation cluster is Silicon
Valley. It's the region between San Francisco and San Jose in California, a vibrant
region which is the origin of many major innovations in the field of information
and communication technology. Dozens of large technology firms and a few famous
universities are located there. Amongst technology firms, Google, Facebook and
Apple have their headquarters here. Famous universities are Stanford University and
Berkeley (officially, University of California, Berkeley). In addition, a large number of
start-ups and venture capitalists populate the region.
Innovation
cluster is
a region
hosting many
organizations
and talent in
a specific field
of expertise,
leading to a
high level of
innovation
and competitiveness.
Silicon Valley
is the region
between San
Francisco
and San Jose
in California,
with many
companies
and talent and
a high level
of activity in
the field of
information
and
communication
technology.
202
Innovation Management
~ CASE 8.9 THE ORIGINS OF SILICON VALLEY
Just before the Second World War, Stanford graduates William Hewlett and David
Packard founded a company for electrical devices, originally in the garage of one of their
parents. In the 1950s, Stanford professor Frederick Terman stimulated entrepreneurial
activities by creating an industrial park on the premises of the university, to which
Hewlett and Packard relocated their company. In 1953, William Shockley, one of three
inventors of the transistor at Bell Labs, started a laboratory to do research on the device
in the region where his mother lived. Shockley was such a bad manager that eight
engineers left his institute to found the company Fairchild to produce transistors. Later,
two of the eight founders, Robert Noyce and Gordon Moore, left Fairchild and created
Intel. The success of these companies and the availability of advanced knowledge in
the universities stimulated others in the region to start similar activities. As a result,
the region acquired the name 'Silicon Valley' from the basic material for manufacturing
transistors, which is silicon (the main component of sand) .
Steve Jobs and Steve Wozniak, founders of Apple in the 1970s, were dropouts
from two schools in the region, Reed College and UC Berkeley. They benefited from the
knowledge exchange in the so-called Homebrew Computer Club for hobbyists. Two
Stanford PhD graduates, Larry Page and Sergey Brin, created Google in 1998 (they
had already registered the website in 1997), and one of their first investors was former
Stanford PhD graduate and founder of Sun Microsystems, Andy Bechtolsheim, even
before they formally created the company.
The question is what explains the location of all these activities in this particular
region. Case 8.9 shows that the presence of people with specific knowledge
combined with an entrepreneurial spirit explains the emergence of Silicon Valley
in that particular region. But we see that chance was also important (the mother of
William Shockley living there). Also, the law on competition clauses in employees'
contracts played a role: in California it is forbidden to have an anti-competition
clause in employment contracts. That facilitates employee mobility, such as in the
case of Shockley's employees. Later on, the innovation cluster was reinforced because
the presence of such companies attracted others. Today the region is still vibrant
and immensely popular, both for start-ups and established companies in the field
of IT. For start-ups it is important that there is high availability of venture capital
in Silicon Valley, and a lot of experienced venture capital investors, which facilitates
the start-up process. Amongst other reasons for starting a business there, Silicon
Valley venture capitalists pay a far larger amount of money for the same quantity
of shares in the company than investors in other parts of the world. On the other
hand, the exorbitant prices of real estate in Silicon Valley diminish the attractiveness
of the region today.
Governments in other parts of the world attempt to mimic the success of Silicon
Valley by establishing industrial parks or campuses. They try to attract a collection of
firms in the same or similar industries and hope to generate a similar dynamic to Silicon
Valley's. A successful example is the high-tech campus in Eindhoven in the Netherland,
where many companies in the fields of electronics and consumer products, such as
Philips and ASML, are located. ASML produces lithographic machines, which are the
machines that produce chips (integrated circuits). While the company originated as
a spin-off of Philips, it now leads the world in this industry. Another example is the
campus of the technical university of Aachen (Case 8.10).
Open innovation
C\
CASE 8.10 THE INNOVATION CAMPUS AT AACHEN
(GERMANY)
An interesting example of an innovation cluster is the campus of RWTH Aachen
University in Germany. This university has created an extensive campus with collective
business buildings. Each building houses companies in the same field , such as production
technology. Both growing start-up companies and units of large established companies
have offices in these buildings. In addition, every building houses a university service
centre, run by university professors in that particular area. The centre provides different
types of services, such as executive education, consulting and community services. The
community services enable the centre to invite companies to participate in seminars
for joint learning. Not just the companies with an office in the building but also other
companies can become members of these centres, on payment of a yearly fee . The
concept creates an innovation ecosystem between the university and the business
world.
Note that the clusters are a different type of ecosystem than the ones discussed in
Section 4 .5. In that section, we discussed ecosystems that are in fact technology
systems, which consist of different products or services, produced by different parties.
Here we refer to a knowledge or innovation ecosystem: several companies and
knowledge institutes in the same region share knowledge and expertise.
Success factors for such attempts are the availability of knowledge in a specific
area or discipline that is in a dynamic phase, sufficient talent that is mobile between
employers, venture capital, incubators, legal advice and other facilities for start-ups,
and an entrepreneurial spirit, amongst university executives and academics as well
as companies. And it may be good to have some role models for people considering
starting a company, since it strengthens their belief in the potential positive outcome
of the endeavour (increasing self-efficacy, see Section 9.2).
= 8.7 Summary
In this chapter we discussed different forms of open innovation: acquiring knowledge
and innovation from outside the firm, collaborating with other firms, collaborating
with start-ups, and bringing knowledge and innovation to the market. Firms do so
to speed up their innovation processes and to make them more efficient. Important
factors behind the choice for these forms of open innovation are the existence of
capabilities outside the firm that the firm does not possess itself, and the degree of
modularity (autonomy) of the innovation. We reviewed several governance mechanisms
of collaboration projects, both formal and informal. We saw that the collaboration
strategies of firms have an effect on horizontal and vertical integration in industries
and supply chains. Finally, we discussed regional facilitators for collaboration, in the
form of innovation clusters.
203
204
0
Innovation Management
8.8 Discussion questions and exercises
Discussion questions
1.
According to the literature on open innovation , thi s approach should be a consistent strategy in companies.
Look at the Innovation Ambition Matrix in Fig ure 5.2 . In which part of the matrix wou ld you expect most
examples of open innovation? W hy?
2.
In Section 8.2, we mentioned two main reasons to collaborate. To what extent are these reasons facilitated
in an innovation cluster? Wh ich of the two is facilitated most?
3.
Firms can choose to collaborate:
• to acquire certain capabilities
• because they have to acquire a certain product or service, and there is high dependence between their
innovation and the innovation of the other party (systemic innovation) .
For both situations, explain if they may expect problems in the coord ination of tasks and in the appropriation
of returns, and if so, what kind of problems.
4.
In Chapter 7, Section 7.2, we discussed venturing (under Option 1, Separate business unit). In this chapter
we discussed corporate incubators (Section 8.4). In terms of how large companies develop new innovations,
w hat do you think are the key differences between these two types of arrangements?
5.
Do you know an innova tion cluster in your region or country? If so, what explains its origin? W hich
advantage does it give to new start-ups?
Exercises
In January 2020, BioNTech initiated the development of a vaccine against COVID-19 (see also the exercises at
the end of Chapters 6 and 7). In March 2020, it was announced that BioNTech wou ld collaborate with Pfizer in
developing and distributing the COVID-19 vaccine.
1.
There are several reasons mentioned above w hy organizations engage in collaboration. Looking at the
collaboration between Pfizer and BioNTech , identify two reasons w hy BioNTech decided to collaborate
w ith Pfizer.
2.
Pfizer is a large diversified pharmaceutical firm. BioNTech is a much smaller scale up. Consider the three
types of governance of collaboration projects from this chapter. For each type of governance, identify w hat
risks BioNTech , as the smaller party in the collaboration , may experience. Wou ld the same risks exist for
Pfizer? Also, find out on the Internet w hich form of governance they used.
We described in thi s chapter (Section 8.1) that firms acquire start-ups or scale-ups to increase their innovation
performance . Siemens is a large electrical equipment company (e.g., trains, nuclear power plants, medical
equipment, household appliances). Search on the Internet for some companies Siemens has taken over in recent
years.
1.
List the reason s w hy you think that Siemens acquired these companies. For example, were they looking
to cut out competition , were they looking to improve/co mplement their existing capabilities, or to obtain
entirely new capabilities?
2.
In hind sight, to w hat extent do you think it was a good choice for Siemens to take over each of these
companies? Wo uld it have been better for them to have developed the capabi lity or innovation in-house
for some of these cases?
Openinnovatlon
References
Chesbrough, H.W (2003) Open Innovation: The New Imperative for Creating and Profi.ting from
Technology. Harvard Business School Press.
Chesbrough, H.W. and Teece, D.J. (1996) 'When is virtual virtuous?', Harvard Business Review
(January-February): 65-73.
Cohen, WM. and Levinthal, D.A. (1990) 'Absorptive capacity: A new perspective on learning
and innovation', Administrative Science Quarterly 35(1): 128-152.
Dekker, H.C. (2004) 'Control of inter-organizational relationships: Evidence on appropriation
concerns and coordination requirements',Accounting, Organizations and Society 29: 27-49.
Govindarajan, V and Trimble, C. (2010) 'Stop the innovation wars', Harvard Business Review
(July-August): 76-83.
Kidder, T. (1981) The Soul of a New Machine. Little, Brown & Company.
Leiponen, A. (2008). 'Control of intellectual assets in client relationships: Implications for
innovation', Strategic Management Journal 29: 1371-1394.
Malhotra, D. and Lumineau, F. (2011) 'Trust and collaboration in the aftermath of conflict: The
effects of contract structure', Academy of Management Journal 54(5): 981-998.
Nambisan, S. and Sawhney, M. (2007) 'A buyer's guide to the innovation bazaar', Harvard
Business Review (June): 109-118.
205
Innovation in
specific types of
firms
Part
5
Part 1
Introduction
Innovation
management
Chapter 1
Company
Part 2
Idea development
Part 3
Selection
-----------------
--------------------
Idea
management
_.
Section s 2.6-2.7
Project
Idea
development
Section s 2.1- 2.4
_____Chapter 3 ____
Innovation strategy
Portfolio
management
Part 4
Implementation
_.
_.
Project
selection
Chapters 4-5
--------------------Part 5
Specific firms
Part 6
Conclusion
Specific types
of firms
The future of
innov ation
management
Chapters 9-10
207
Organization of
innovation
Sections 7.2-7.5
Chapter 8
Chapters 4-5
_.
------------------
Chapter 11
Project
execution
Chapter 6
Section 7.1
------------------
Entrepreneurship
Learning objectives
After reading this chapter, you will be able to:
1. Describe the main differences in innovation activities in start-ups and established firms
2. Explain what makes a person an entrepreneur
3. Give examples of specific behaviours of entrepreneurs in the entrepreneurial process
4. Describe team formation of a start-up
5. Distinguish between alternative financial valuation methods for a start-up
6. Explain what an incubator can do for a start-up
9.0 Introduction
Start-ups are an important locus of innovation. They generate new products, services
and business models, often more quickly and effectively than established companies.
The question is what is special in the conditions and way of creating innovation in
start-ups compared to mature firms. So far in this book, we have discussed the
different innovation activities, from idea development to implementation. We
will argue that some of these activities are very similar in start-ups compared to
established firms. For instance, start-up entrepreneurs also generate ideas for their
activities. Sometimes the idea itself is the reason to start the company, and if they
want to start a business but do not have a good idea yet, they can use the techniques
we mentioned in Chapter 2. Start-ups also have to learn from the market and can
use the techniques we discussed in Chapter 3. Also, the further development of the
idea will follow patterns that are very similar to the ones sketched out in Chapters
6 and 7.
On the other hand, we will see that start-ups have different capabilities, and
the innovation process in start-ups differs in several respects from the process in
established firms . In addition, start-ups have to set up an organization themselves.
We also devote attention to the characteristics of entrepreneurs, to the start-up team,
to valuation of the start-up and the function of incubators.
9.1 Start-ups and innovation
Start-ups have an important role in innovation because they are a major source of
innovation. Start-ups can change a whole industry. Airbnb was a start-up that changed
the accommodation business. Uber changed the taxi business. These are salient
examples, but we also see start-ups on a more modest scale. You may know a new
local company delivering food to your home or a new hairdresser with a new approach
in your neighbourhood.
209
9
210
Innovation Management
Fundraising is
seeking
financial assets
to finance a
certain activity,
in this case the
creation and
first activities
of a start-up
company.
A legal
structure is
the formal
structure of
a company,
such as sole
proprietorship,
limited
company,
commercial
partnership,
etc.
There are important differences between innovation activities in start-ups and
established firms. A start-up founder experiences stronger personal consequences
of the outcome of the endeavour than innovators in established companies. If
an innovator's project in a large company becomes a success, the company may
reward them by recognition or financially. Although some companies aim also to
celebrate failures, in order to keep people motivated, project team members may
feel ashamed in front of their colleagues if the project fails . For an entrepreneur,
the success of their project may mean that they guarantee an income for the future
and may even mean that they are financially independent for the rest of their life.
If the start-up fails, the entrepreneur loses their own investment, and is jobless
afterwards.
There are also substantial differences in the activities and process. Whereas in large
firms innovators can acquire funds from the resources of the company, entrepreneurs
have to do far more active fundraising and have to find outside investors.
Entrepreneurs need to set up a company, which means choosing a legal structure,
creating the entity, and starting the activities. They have to create production facilities,
logistics, distribution channels and marketing activities for their products or services,
elements that often already exist for innovators in large companies. Usually after a
short period of time, an entrepreneur has to hire new colleagues, negotiate salaries, etc.
They have to create financial systems and human resource management. In general, an
entrepreneur has a much broader package of activities compared to innovators in large
firms. This makes the life of entrepreneurs quite different from that of their corporate
innovation colleagues.
Innovators in large firms also have some activities that entrepreneurs do not, such
as portfolio management. Also, the strategy of start-ups can be more straightforward
than in large firms. What entrepreneurs and innovators in large firms have in common
is that they both have to spend a lot of time on activities that are not directly related to
the business opportunity. For entrepreneurs, setting up the company and negotiating
the division of shares, for instance, takes a lot of time and attention. In the same
way, corporate innovators have to spend a lot of time on the firm's hierarchy and
bureaucratic requirements.
What types of innovations do start-ups create?
Start-ups have large advantages over big firms in terms of flexibility and speed of
action, but they also have their limitations. We have already mentioned that resources
are usually more limited. But start-ups also miss deep expertise in specific areas,
knowledge that established companies have been able to build up over time. This can
include expertise in production, marketing or patenting and other legal activities.
As a consequence, start-ups are generally very good at creating business
opportunities, but not in all fields and situations. Their limited resources usually
prevent them from creating a business that requires high up-front investments.
So, it is unlikely that a start-up will invent and develop a new type of aeroplane.
For instance, development of the Airbus A380 cost around €13 billion, and the
Boeing Dreamliner is reported to have cost $32 billion. A start-up will never
be able to collect such amounts of money. Nevertheless, there are exceptions:
Tesla developed a new car that created extensive manufacturing facilities, a
huge investment. The acquisition of the required funds was largely owing to the
private funds and enormous fundraising capabilities of Elon Musk. Start-ups also
created several budget airlines (see Case 4.8, Ryanair), which also require huge
Entrepreneurship
211
investments. In that case, the possibility of leasing aeroplanes has facilitated the
entrance of start-ups into this industry. Finally, it's unlikely that start-ups develop
innovations that require replacing an existing widespread standard.
Start-ups can collaborate with established companies to acquire capabilities that
they are lacking themselves. For instance, biotech companies developing new drugs
do not have the specialized marketing capabilities and distribution channels needed to
get the drugs accepted by physicians and to bring the drugs to patients. They therefore
almost always team up with an established pharmaceutical firm for these activities.
Start-ups will usually stay away from head-to-head competition with large firms.
Usually a start-up's strategy will be to focus on an opportunity in such an early phase
that it creates a new market niche, in which large firms do not operate. Later they
can undertake head-to-head competition with large companies. This was the process
followed by Red Bull, which entered the market with an energy drink and started
competition in the very crowded market of sodas (Case 9.1).
0
CASE 9.1 RED BULL: HOW A START- UP ATTACKS A MARKET
OF LARGE ESTABLISHED COMPANIES
Red Bull is an example of a start-up that was able to enter the existing and highly
'fortified' market of soft drinks, which huge companies such as Coca-Cola dominated. The
Thai entrepreneur, Chaleo Yoovidhya, and an Austrian, Dietrich Mateschitz, founded the
company. Yoovidhya had already introduced an energy drink to the market. It was called
Krating Daeng and had a high concentration of caffeine. Mateschitz tried it out when
visiting Thailand and liked it. He approached Yoovidhya and jointly they created Red
Bull GmbH in 1987. Red Bull is the English translation of Krating Daeng. They launched
the product during the Grand Prix of Monaco, and subsequently in Austria and other
countries. They consistently associated the product with adventure sports. This strategy
has had its price: several men have died while training or taking part in Red Bull extreme
sports events. However, the company has become a multi-dollar revenue generator that
is able to compete with incumbents, not just in energy drinks but also in soft drinks.
In spite of their limitations, start-ups have enormous potential to create new
industries, or to overtake existing industries. They are a major source of innovation.
Survival rates
Entrepreneurship is a risky activity. Many entrepreneurs fail. A study by Alfred Nucci
in 1999 showed that 81 % of entrepreneurs in the US survive for one year, 65%
survive for two years, 40% survive for five years, and 25% for ten years (Bygrave and
Zacharakis, 2011, p. 3). So, the chance of becoming successful is small.
9.2 Who becomes an entrepreneur?
What kind of people become entrepreneurs? First, the personal characteristics that
we mentioned in Chapter 2 on creativity also apply to entrepreneurs. Entrepreneurs
have to start with a creative idea, so knowledge, motivation and creative thinking skills
are also important for entrepreneurs (see Section 2.1). But in addition, entrepreneurs
need to believe in their abilities to convert their idea into a success. So, self-efficacy,
Self-efficacy is
a person's
conviction that
they are able
to perform a
particular task
successfully.
212
Innovation Management
Internal locus
of control is
the conviction
of a person
that they have
control over
what happens
in their life.
Underexploited
opportunities
are options for
new products
or services that
a company
or other
organization
can develop but
in which it does
not actually
invest.
the conviction that they are able to realize your goals, is important for entrepreneurs.
Entrepreneurs also appear to have a high 'internal locus of control' (Bygrave and
Zacharakis, 2011, p. 52). This means that they have a strong desire to control their
own future and activities. A rather curious physical characteristic that distinguishes
entrepreneurs from other people is the relation between the length of the forefingers
and the ring finger. Entrepreneurs often have a longer ring finger than forefinger,
while it is the other way around for non-entrepreneurs. The reason has to do with
hormone levels in the uterus during pregnancy of the entrepreneur's mother (Nicolaou
et al., 2018). And finally and most importantly, parental entrepreneurship is a strong
predictor of entrepreneurship in their children.
In addition, environmental factors influence the decision to become an
entrepreneur. An important one is necessity. For this reason, in poor countries we
usually find a high number of entrepreneurs, and also many seniors in developed
economies start a business of their own out of necessity. Employees losing their jobs
often start a business to generate new income. On the other hand, underexploited
opportunities in an existing business can stimulate employees to start their own.
In 1982, John Warnock and Charles Geschke left Xerox to found Adobe in order to
create a document format (Postscript) that facilitated exchange with printers. While
working at Xerox they saw an opportunity for this application which drove them to
create the company. They named the company after a creek that ran behind their
houses.
An environment with many other entrepreneurs also stimulates entrepreneurship.
Silicon Valley is a perfect example. There are so many start-ups around, and so many
of them are successful, that other people feel stimulated to start one themselves.
Everett Rogers called this 'Silicon Valley fever' in a book with that title (Bygrave and
Zacharakis, 2011, p. 52).
9.3 The entrepreneurial process
Bricolage is
the approach
according
to which
entrepreneurs
use the means
that they
have at hand,
instead of
searching for
the optimal
means.
Start-ups often apply the lean innovation process that we introduced in Section 3.1.
In fact, the authors of the lean innovation process, Steve Blank and Eric Ries, derived
this practice from the activities of start-ups, and transferred it to the world of large
firms. The essence of lean innovation - getting information on the viability of a new
business opportunity or innovation as soon as possible - is enormously important for
start-ups, which have limited funds and thus have to redesign their efforts quickly if
the innovation concept appears not to be viable. On the other hand, Cohen et al. (2018)
emphasize that entrepreneurs should think deeply and intensely about all aspects of
their business opportunity before executing their first experiments. Otherwise they
may choose a specific pathway too early, from which they cannot easily move away
later on. We already mentioned this in Section 3.1, when we discussed alternative ways
to deal with the solution space.
There are some more characteristics of start-ups, other than applying the lean
process in their approach to innovation. Two of them are 'bricolage' and 'effectuation'.
Bricolage means that entrepreneurs use the means that they have at hand, instead of
searching for the optimal means. For instance, start-ups sometimes use empty office
buildings or abandoned factories for housing or operations, since they are cheap and
available. Bricolage refers to improvisation to get to your goal.
The concept of effectuation is very close to bricolage and refers to decision rules or
thinking styles that start from what you have available instead of what you want to
Entrepreneurship
achieve. We explained effectuation in Section 2.1 under Thinking styles. Four elements
are distinguished in the literature when start-ups apply effectuation (Sarasvathy,
2008):
~
'Affordable loss', where you don't focus on profits or average returns, but on
possible losses and to what extent you can cope with them.
~
'Crazy quilt', which means that you work with people you trust (and not necessarily with the best one in a specific field); a quilt is a collection of cloth
patches - the choice of collaborators may form a weird collection.
~
The 'lemonade principle', which means that you consider unexpected events
as opportunities; the term originates from the saying: when life gives you
lemons, make lemonade.
~
The 'pilot-in-the-plane' principle, which means that you react to what happens
instead of fully planning your actions. So, you would rely on human actions
more than on structural factors such as new technology or markets.
Established firms can also apply these processes and principles, but start-ups are more
in need of resources, and since all of these principles tend to diminish the need for
resources, start-ups apply them more often.
Team formation
While setting up the company and developing the product or service, the founders
have to create a team which reflects the required core capabilities. An innovation
frequently requires expertise in some specific areas. The founding team will often
reflect these fields of expertise (see Case 9.2). These will be the fields that really
require new insights. In other fields in which the start-up can apply the standard
technology or processes, the founding team can hire people as employees, not as
part of the founding team. These people bring in expertise, but they may participate
to a lesser extent in the creative combination of different types of knowledge.
Nevertheless, members of the team often find each other by chance, as can be
seen from the case of X2AI (Case 9.3).
0
CASE 9.2 SIREN CARE: HOW THE FOUNDING TEAM
REFLECTS THE REQUIRED EXPERTISE
Diabetes patients can suffer from disastrous effects of small wounds on their feet. The
wounds do not heal and eventually even a foot amputation may be needed. Prevention
is difficult, since the patients do not feel the cause of the wound, such as a small stone or
shoelace in their shoe. The start-up Siren Care developed socks with electric fibres that
give a signal if a wound is starting to develop, based on the temperature increases that
happen in such a case. The start-up had to create new knowledge or technology in three
fields: medical treatment, sensors and electrical wiring, and textiles. The composition of
the founding team reflects these fields: medical, IT and textile. It consists of CEO Ran Ma,
a biomedical engineer, Jie Fu, experienced in hardware and IT, and Henk Jan Scholten,
a textile expert. They hire employees with expertise in supply chain management,
marketing, etc.
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Innovation Management
0
CASE 9.3 X2AI: HOW ENTREPRENEURS FIND EACH OTHER
X2AI develops software for mental health problems. Patients can communicate with the
program about their problems. The program asks them specific questions based on the
input they deliver and gives them options for treatment or actions. The founders met
while staying in the same dormitory in the Silicon Valley region . By coincidence one of
them , a business student who visited the region to look for opportunities, met the other,
an engineer who was working on software, and who slept on the bed next to him. After
some days they started a conversation and decided to jointly create the company.
Marketing and sales
Firms can apply bricolage in commercializing the new product or service, by seeking
smart sales tricks. The approach is sometimes called 'guerrilla marketing'. Using
channels for new purposes can be an option. For instance, a founder of a start-up
operating in the consumer market may give an interview on a television show on
their start-up, or on a related topic. As a result, the start-up may acquire many new
customers. Another trick of start-up founders is writing a blog on a 'How to .. .' or a
'What is the difference between .. .' question related to their product or service, to give
a helpful answer to the question and in doing so mentioning the product or service
of the company.
Viral marketing is another option. The start-up creates a funny video on a topic
related to its product or service. If the video is funny enough, people will forward it to
their relatives, creating buzz at a very low cost. An example is the commercial for the
Dollar Shave Club (see Case 8.1), that had exceptional simplicity and humour and had
millions of watchers on YouTube.
Scaling up
Scaling up is
the process
in which a
start-up enters
the phase
of volume
production.
Important in the development of a start-up is the scale-up phase. In this phase,
the start-up needs expertise from existing businesses, e.g. on operations, the use
of distribution channels, financial models, etc. The start-up may hire experienced
people from established companies for this purpose. In this phase the founders of
the company may also attract new executives to work with them in the executive
committee or take a step back to create room for such executives. Not every founder
of a successful start-up is the right person to lead the firm in the growth phase, when
the emphasis shifts to efficiency, execution, and internal and external collaboration
based on explicit contracts, while in the first period management relied on creativity,
trust and loyalty. It is similar to the problem of leadership in innovation teams in the
idea development versus the implementation phase, discussed in Section 7.3. When
the start-up scales up the activities, it may require new leadership.
Business
angels are
former
entrepreneurs
who use
their financial
assets to
invest in startups, usually in
combination
with an
advisory role.
Financing the start-up
An important activity of start-ups is fundraising. The founders of the company can
start with their own savings, but these are usually only sufficient for a very short
period. Soon they need additional money. Start-ups will usually start raising money
from so-called 'business angels': former entrepreneurs who have earned sufficient
money to invest in new firms. The term 'angel investor' had its origins at the beginning
of the 20th century when these people financed the theatres that were going through
difficult times. Angel investors usually do not just provide funds, but also give advice
to the new entrepreneur. In most cases their reason for investing is not just earning
Entrepreneurship
money but also being able to transfer their knowledge to new generations and to stay
aligned to current developments in business. In return they get a small part of the
shares in the company, which may in exceptional cases grow to extremely high value.
In the next phase, start-ups usually need higher investments, for instance to create
production or marketing campaigns. Venture capitalists are more appropriate parties to
support the business in this phase in view of the higher amounts of money involved.
Venture capitalists are more profit seeking than angel investors. They usually invest in
a portfolio of start-ups according to a preset strategy and preset criteria, with the aim
of earning high profits on a few of them. By making these risky investments, venture
capitalists tacitly or explicitly apply real options thinking (see Section 5.4). They get
part of the shares of the start-up in return. Especially in the US, this part is small, since
venture capitalists want the founders to keep sufficient equity (shares) to stay motivated
and committed to tum the start-up into a success.
Valuation
When acquiring investments from business angels or venture capitalists, the valuation
of the company is important, since it determines the quantity that the outside investor
receives. Two types of valuation are relevant for valuing start-up companies (Bygrave
and Zacharakis, 2011):
~
present value of future cash flows;
~
market-comparable valuation.
In the present value of future cash flows capitalization, the value of the company is
dependent on the expected future free cash flows. The valuator sums these cash flows
for several years, adds the residual value of the company after the number of years,
and depreciates the result to the present time. In the case of a fast-growing start-up
there are often no free cash flows, since the company uses all income for its growth.
So, the value would then be dependent on the expected future value of the company
only, which in fact substitutes the problem of the present valuation of the company
by the problem of determining its future value.
In the market-comparable valuation, a measure of income of the company is taken,
such as EBIT or EBITDA (earnings after taxes). Then the valuator determines the price
to earnings ratio (P /E ratio) for publicly traded companies in the same industry. They
take the same measure for earnings as the measure that was taken for the earnings of
the focal company. The valuator then reduces the P/E ratio somewhat to compensate for
the fact that the shares of the start-up company cannot be traded on the market. The
resulting market value of the focal company is P/E multiplied by the earnings, in which
P/E stands for the slightly reduced P/E ratio. P/E ratios are generally between 3 or 4 for
slow-growing industries and companies, up to 25 for very fast-growing industries and
companies. Next, based on the ratio between the computed value of the company and
the amount of money invested by the angel investor or venture capitalist, the valuator
can easily compute the number of shares that the investor receives.
Of course, this second procedure only works if the start-up company is already
generating revenues. Also, the procedure can only take the future growth of income of
the start-up into account by increasing the P/E ratio to a higher level than the industry
standard. Since this higher P/E ratio will be somewhat arbitrary, in such cases a modified
method is feasible. According to that method, the valuator estimates the earnings of the
company in a certain future year X. Then, based on the procedure above, the valuator
determines the value of the company in Year X. Next, they take the amount of money
The valuation
is the
determination
of the value of
a company for
an investor or
acquirer.
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Innovation Management
that the business angel or capital investor wants to invest, and determine what amount
of money would be equivalent to the value of that amount in Year X. For that purpose,
the valuator multiplies the amount of money by a certain interest rate for each year
between the present and Year X. This interest rate compensates for the risk that the
start-up company ceases trading or goes bankrupt between now and Year X. So, the
interest rate ranges from 80% per year for a start-up in the seed phase, to 40% for
a start-up that is close to market introduction (Bygrave and Zacharakis, 2011). The
ratio between the value of the company in Year X and the amount of money that the
investment should represent in Year X based on the interest rate determines the number
of shares that the investor receives in exchange for their investment.
Bootstrapping
Bootstrapping
means funding
a start-up
stepwise from
the returns of
its own initial
activities.
Start-ups can reduce their need for funds by a tactic called 'bootstrapping'. This
means that the start-up tries to limit the need for funds by getting some revenues
from its activities and using those to finance the next round of activities. The term
has its origin in the tape in the back of boots, and the metaphor that people could lift
themselves by pulling these tapes. The metaphor is used in the book The Surprising
Adventures of Baron Munchhausen, in which the baron pulls himself out of a swamp
by pulling his hair. The term is also used in 'booting the computer', which means
that the computer starts itself by first loading the software needed to start from the
disk memory to the RAM (Random Access Memory) and then using that software to
actually start the operation of the computer.
A good example of bootstrapping is provided by Steve Jobs, who sold his first
set of 50 mini-computer kits to a retail chain. He received confirmation of the deal
that specified that he would receive a certain amount of money upon delivering the
computers. With that document he went to suppliers of the parts he needed, who
appeared to be prepared to supply the materials and accept payment upon receipt
of the payment by the retail chain. Another example is the aforementioned cheap
'guerrilla' marketing techniques.
0
CASE 9.4 HEALTHTAP, WITH ANGEL INVESTOR ERIC
SCHMIDT
The CEO of Google, Eric Schmidt, invested in a start-up called HealthTap. HealthTap
creates communication between medical patients and a large network of physicians
(over 100,000 in 2017). The patient can log in and the opp connects them to a physician
who is available at that moment in time. The patient can also choose to search for advice
from a database of replies to earlier queries. Eric Schmidt was one of the angel investors
in the start-up by means of his investment fund, and he provided them with solicited or
unsolicited advice. So, angel investors do not just invest in start-ups, but also use their
Incubators are
organizations
that
facilitate the
development
of start-ups,
usually by
providing
office space
and support
services.
entrepreneurial experience to assist them in their activities.
9.4 Incubators
Incubators aim to facilitate the start-up process and activities. We have already
encountered corporate incubators in Section 8.4. Here we address incubators that
are initiated by other institutes, such as regional governments, universities or other
research organizations. These incubators primarily aim to support the transfer of
Entrepreneurship
knowledge from research to the economy and to stimulate the regional economy
by facilitating entrepreneurship. Universities have incubators primarily to support
students who want to become entrepreneurs and sometimes to commercialize
their intellectual property. Such incubators are centres that offer several facilities to
support the start-ups. The basic facility is cheap office space. In addition, in many
cases incubators offer coaching and other support services. Sometimes experienced
entrepreneurs serve as coaches, in other cases staff members of the incubator do so.
The coaching can concern all aspects of the start-up's activities: how to test an idea,
how to set up your legal structure, and, importantly, how to raise funds. Incubators
often organize fundraising events themselves, in which they invite a number of
venture capitalists or business angels to listen to a number of pitches by start-up
entrepreneurs, and to invest in selected ones.
Business angels can also set up incubators. An example is 500 Startups, with sites
in Silicon Valley, Mexico City, Kuala Lumpur, San Francisco, and other cities. 500
Startups is a combination of investment fund and incubator. It has a very rigorous
selection process, out of which only a small percentage, which can be up to only 1 out
of 20, of applicants survive. It funds the selected start-ups with a certain amount of
money, e.g. $100,000, in return for 5% of their equity. In this way it is able to finance its
own activities from successful start-ups, which even in this incubator are only a limited
number of the total set. Nevertheless, while the incubators were only established in
2010, they have already participated in several of their start-ups' stock market flotations
with IPOs of over a $100 million each (of which they received a small percentage).
0
CASE 9.5 INCUBATORS OF THE SPACE ORGANIZATION ESA
The European Space Agency (ESA) has research centres in several of its 22 member
states; ranging from research to testing facilities, from astronaut training to space mission
control centres. Beyond these facilities, ESA has established Business Incubation Centres
in 60 different locations, operated by local partners. The main purpose is to support
regional economic activity by attracting entrepreneurs who build new products and
services based on space technology and infrastructure (e.g. satellite systems), for nonspace-related markets.
= 9.5 Summary
In this chapter we discussed an important type of innovating firm: start-ups. Start-ups
are new companies created to develop and commercialize an innovation. We discussed
what kind of people usually become entrepreneurs, and what types of innovation
they can develop. We saw that people with high efficacy and high internal locus of
control, and with parents who are entrepreneurs, often also become entrepreneurs .
Also, we compared the process and activities of start-ups with those of innovators in
established firms. Large parts overlap, but start-up entrepreneurs have to set up a
company and acquire finances, while innovators in established firms have to deal with
existing processes in their firm, convince managers and overcome resistance to their
innovation. We presented some alternative valuation techniques for start-ups. Finally,
we discussed the role of independent incubators for start-ups .
217
218
0
Innovation Management
9.6 Discussion questions and exercises
Discussion questions
1.
Why do you think people become entrepreneurs? What drives them to take the risk of building their own
company and being self-employed?
2.
What do you think defines a start-up? Are all young and small companies always defined as start-ups or
do you think there is a different qualification?
3.
In this chapter we introduced several concepts that apply to start-ups: bricolage, effectuation and
bootstrapping. Can you relate these concepts to each other? Are they distinct, do they overlap, or is one a
specific example of one of the others?
4.
In which industries do you expect many start-ups? In which industries would you not expect start-ups?
a. Do you know a start-up in one of the latter industries ? If so, w hat explains its existence, in spite of the
fact that you would not expect start-ups in this industry?
5.
It can often be hard for entrepreneurs to raise the necessary financial resources from (angel) investors.
Why do you believe this is the case?
a. W hat are the aspects of new businesses that make it hard for investors to estimate their va lue?
Exercises
Go to the webs ites of Startup Nation and/or Crunch base (finder.startupnationcentral.org , www.crunchbase.com/
discover/organization .compan ies).
Take some time to investigate the data of the companies/ start-ups listed on these websites .
1.
What kind of information can you publicly find?
2.
How many start-ups and scale-ups are there in your country or neighbouring countries?
3.
What are the fastest-growing start-ups according to the database? Which company has most recently
received a large investment? Had you heard of these companies before?
4.
Can you also find entrepreneurs that have founded multiple companies? Are all of the companies they
founded successful?
Come up w ith an idea for a new business. Make the following analysis:
Envision four scenarios, divided over two conditions:
• There appears to be a small market for your company vs. there appears to be a large market;
• You have to finance your start-up with own funds (bootstrapping) vs. it appears easy to find external
funding.
For each of the four resulting scenarios, draw the Business Model Canvas of your innovation, adapted to the
conditions. Then answer the following questions:
1.
How does your business model change over the scenarios?
2.
Where can yo u cut costs the most w hen you have to bootstrap?
3.
Where do you believe you could grow the most when it's easy to find investme nts?
4.
Wha t probability wo uld yo u give each scenario? W hat research wo uld you need to determine the
probabilities?
5.
What research wou ld you need to assess the feasibility of each business model?
a. For example , yo u may have to extend the range of scenarios to six , by adding the dimensions of
'technical feasibility' or 'ease of innovation development' (low vs. high).
6.
Finally, do you feel you could pursue this idea and/or one of the business models? W hy (not)?
Entrepreneurship
References
Bygrave, W. and Zacharakis, A. (2011) Entrepreneurship. Wiley.
Cohen, S.L., Bingham, C.B. and Hallen, B.L. (2018) 'The role of accelerator designs in mitigating
bounded rationality in new ventures', Administrative Science Quarterly 64(4): 810-854.
Nicolaou, N., Patel, P.C. and Wolfe, M.T. (2018). 'Testosterone and tendency to engage in
self-employment', Management Science 64(4): 1825-1841.
Sarasvathy, S.D. (2008) Effectuation: Elements of Entrepreneurial Expertise. Edward Elgar.
219
Innovation in
project-based and
multinational firms
10
Learning objectives
After reading this chapter, you will be able to:
1. Explain the influence of dispersed organizational settings on innovation and new business
development
2. Distinguish proactive and customer-oriented innovation and new business development in
project-based firms
3. Explain the two core (conflicting) purposes in innovation in project-based and multinational
firms
4. Choose an appropriate organization for innovation and new business development in project-based and multinational companies
5. Explain the meaning of servitization
6. Describe the main problem in innovation in health care
7. Describe different options for the organization of innovation in servitizing product firms
10.0 Introduction
In this chapter we will address innovation and new business development in two
types of firms: project-based firms and multinationals. They have in common that
they are both distributed firms, in the sense that knowledge and innovation-related
activities are more spread across the company compared with single-division firms or
firms with more concentrated product portfolios and markets. Project-based firms
undertake broader assignments for their clients and consequently have a different
structure than product or other service firms. Examples are IT solution providers,
construction companies and consultancy firms. Even if such firms operate in a single
country, their sales and operations are spread over different units and projects.
Multinationals operate in different countries and consequently often have sales,
operations and innovation activities in different locations, which poses challenges to
innovation activities.
Both project-based firms and multinationals have to meet the challenge in their
innovation and new business development activities of integrating knowledge from
different units in the firm and diffusing the resulting innovations back to those units.
In addition, multinationals must balance synergy creation versus responding to local
needs. We discuss the solutions to these tensions in these two types of firms in this
221
222
Innovation Management
chapter. Also, we address the challenges of innovation in health-care organizations and
in product firms that add services to their products or sell their products as services
(servitization).
10.1 lnnovotion in project-based firms
How do project-based firms innovate?
Project-based firms are firms that do everything in the form of projects. Examples
are contractors in the construction industry, IT solution providers, engineering
consultancies and management consultancies. A typical example of a product of a
project-based firm is an IT solutions provider who builds a new IT system for a bank as
a client. Such projects involve an innovation for the client, so project-based firms have
innovation for clients as a core competence. But as the saying goes: 'The shoemaker's
children go barefoot', and project-based firms are usually not good at innovating for
themselves. As we will explain, this has much to do with the distributed character of
the knowledge base in project-based firms.
There are in general two ways of innovating for project-based firms. The first is a
reactive, customer-oriented process, which involves innovating on a customer's
project. This means that the project-based firm performs a project for a customer
in which it includes some innovative part, which it can apply in the future for other
customers. So, for instance, a contractor builds an office block with an innovative
air-conditioning installation which is new to the contractor and the customer. The
customer is of course aware of the innovation, and if it is more expensive, they will
pay an extra price. The customer may (also) pay for the cost of the provider learning
about the innovation, or these costs may be shared between the project-based firm
and the customer. This way of innovating is an attractive option for the project-based
firm, because it is certain of an income from the innovation, and it already has its first
customer for the innovation. In fact, the cost of the innovation is fully or partly paid
by the customer.
However, this approach also has disadvantages, two in particular. The most
important one is that the project-based firm will be inclined to adapt the innovation
to the specific needs of the first customer, but those requirements do not necessarily
coincide with the needs of the larger market. In many cases, the first customer will
be an innovative company, which is not necessarily representative of the average
customer. The project-based firm may therefore have to adapt the innovation again
for other customers, or a permanent misfit may remain between the innovation and
other customers' needs. Second, this innovation approach will always be targeted at
existing customers and will be unlikely to recruit new customers. So, by applying this
approach the project-based firm may run straight into the innovator's dilemma as
depicted by Clayton Christensen: overshooting the main market and missing potential
disruptive innovations for new customers (see Section 4.3).
A project-based firm can also develop a process innovation in a customer project. For
instance, an IT solution provider uses a new IT language for programming. In this case,
the customer may or may not be aware of the innovation, and may or may not pay extra
for it. Again, the disadvantage may be that the process innovation only fits the demands
of the first customer, although this risk is lower since process innovations are usually
less customer specific.
The second way of innovating for project-based firms - proactive innovation - is
by initiating innovation or new business development projects itself. In such a project,
Innovation in project-based and multinational firms
223
the project-based firm describes, develops and tests the innovation before selling it. In
fact, this is the way in which most other companies innovate. In such an innovation
project, the project-based firm develops a new product or service that it can sell to
existing or new customers. If the innovation concerns a new process, it can later apply
this process itself. The main advantage of this approach is that it is a more proactive
way of innovating, since the project-based firm takes the initiative more clearly itself.
The project will aim more at a market as a whole, and not just at a single customer
as in the reactive approach. Also, the project-based firm can give more direction to
the project. In a proactive innovation project, the project-based firm may address
completely new customer groups, or yet unmet needs of existing customers. So, it
can also address disruptive innovations. On the other hand, of course both the costs
and the uncertainty will be higher, since there is no outside paying customer yet.
Many project-based firms only have a reactive process, usually with a rather
negative effect on overall innovation performance. In better cases, project-based firms
apply the two innovation processes in parallel. On the one hand, the firm operates a
reactive process in response to explicit customer demands. Often the business units
will perform these activities. On the other hand, it may have a proactive process of
defining and creating new services. Often a central innovation manager, innovation
unit, or new business development unit will initiate these activities. The business
units can still take care of the execution. A challenge is to bring the two processes in
line with each other, since conflicts can easily occur. Coordinating the processes is
even more challenging if the firm operates in different countries, which many projectfirms do, since the innovation activities take place in different countries. A central
innovation manager or innovation unit should align the activities (Option 2 or 3 in
Section 7.2), reporting to the executive board, and supported by national coordinators.
How to run innovation projects
How should project-based firms run the proactive innovation or new business
development projects? Project-based firms cannot simply apply the project-management
and team approaches we discussed in Chapters 6 and 7. The reason is that the company
context is quite different from mass-manufacturing or mass-service firms, and the
theory we discussed in those chapters fit best to those kinds of companies. Projectbased firms have a different structure. They are usually organized partly around certain
competencies, for instance 'tunnelling' and 'road construction' in a project-based
construction firm, and at the same time they are organized around certain customer
segments, such as 'government', 'offshore', etc. Matrix structures are quite common
in these kinds of firms. In addition, these firms may have supporting departments for
marketing, purchasing, etc. This means that the traditional functional structure does
not exist. In addition, employees in project-based firms often work more autonomously
than in other types of firms. Many employees have direct customer contacts, and
they are used to organize projects, including collecting resources, themselves. All in
all, activities are more distributed in project-based firms than in more functional or
divisional companies.
Blindenbach-Driessen and Van den Ende (2010) studied the success factors for
innovation projects in project-based firms. The question was whether the normal
success factors, such as having a cross-functional team or having a structured process,
would also apply to proactive innovation projects in project-based firms. We had to
adapt our vocabulary; for instance, in the absence of functional departments we had to
replace 'cross-functional team' with 'multidisciplinary team'. We compared functional
A matrix
structure is a
firm's internal
organization
according to
which it has
functional
units according
to specific
expertise,
and crossfunctional
units according
to specific
products or
markets that
the firm serves.
224
Innovation Management
firms (product and mass-service firms) with project-based firms in the same industries
and found that:
""7
While cross-functional teams contribute to the performance of innovation
projects in functional firms, multidisciplinary teams do not contribute to the
success of those innovation projects in project-based firms. Our explanation
was that cross-functional teams serve to integrate knowledge from different
functions, but that project-based firms have little need for dedicated mechanisms to integrate knowledge, because they are already used to doing so
in their customer projects. So, it's relatively easy to integrate knowledge in
innovation projects, even if there is no multidisciplinary team.
""7
A structured innovation process didn't increase success in project-based firms.
Our explanation was that project-based firms are used to a fairly strict way
of organizing customer projects, and innovation projects need more flexible
processes. So, the innovation processes they apply are too rigid, which does
not contribute to success.
""7
A heavyweight project manager, on the other hand, did have a positive
influence on innovation projects in project-based firms, and much more than
in functional firms. This is because the diffusion of innovation is a particularly
difficult process in project-based firms. You can't just send the product to the
factory, as in a product firm, or start the operations, such as in mass-service
firms. In a project-based company, you always need other people to sell your
innovation concept to the customer, or to apply the innovation to the processes.
And a heavyweight project manager is better able to get other people committed.
The general lesson is that the application of management practices in innovation
projects, such as cross-functional teams or heavyweight project managers, depends
on the firm's context. A project-based firm is a highly distributed organization, where
people work fairly autonomously in a matrix organization. In such a context innovation
or new business development projects have to be run differently from similar projects
in a functional context. For instance, a highly mono-disciplinary project team can even
work better in such a firm, since it is easy to acquire knowledge from other disciplines
in the project context. The bottleneck comes later, when the result of the project has
to be commercialized.
~ CASE 10.1 COORDINATION OF INNOVATION IN AN
ENGINEERING COMPANY
Engineering company WaterCo develops and manages hydraulic projects, infrastructure
projects, chemical installation projects etc., and operates in several countries, with
different disciplinary units in each country. The company performs future-oriented
research projects for customers, often government agencies, financed by those customers.
Although the company develops new technologies in those projects, implementation on
markets is often not guaranteed. To improve this process and facilitate implementation, a
central new business development unit defines proactive innovation projects. As a result
of those projects, the firm can make offerings to customers. However, employees have
to perform these projects on top of their customer-oriented projects and with limited
budgets. Often also these projects are delayed. To improve these innovation projects,
the new business development unit appoints experienced project managers on each
innovation project.
Innovation in project-based and multinational firms
225
Innovation in health care
A similar sector to project-based firms is health care. Traditionally in most countries health
care was part of the public sector and not very innovative. The main topics of innovation
were medical treatments, in which medical specialists aimed to adapt their treatments
to the most recent medical knowledge. But innovating patient services or creating new
business models was unusual.
Recently, in many countries the pressure to reduce the costs of the excessively expensive
medical sector has increased, and also patients require higher service levels: for
instance, in consultation hours and means of communication with the doctors. Doctors
and entrepreneurs have started specialist medical clinics, which focus on executing a
limited set of treatments in a high-quality and cost-effective manner. Hospitals invest
in customer service, for instance by improving their customer scheduling systems. Also,
they attempt to reduce their operating costs, for instance by transferring non-specialized
tasks from specialists to administrative or lower-educated medical personnel.
However, these kinds of innovation processes in hospitals meet specific barriers.
Hospitals are highly complex organizations, and risks for patients should be avoided
at all costs. So, innovation and new business development activities will always have
to go through rigorous tests or risk assessments before being implemented. But also,
the professional identity of medical specialists can be a barrier, particularly for
innovations that may affect their professional image. For instance, it appears to be
hard to get specialists to communicate with patients by email or electronic device.
Although such communication may be handy for patients and may give the option
of providing more real-time monitoring of patients' conditions, doctors often resist
such changes since they consider them to decrease the quality of their communication
and treatment. The COVID-19 crisis has changed their attitude with respect to online
communication, but then it was for medical reasons, not because of the service level
for customers, which confirms the point above. The disruptive innovation dilemma
(see Chapter 4) is particularly strong in this sector. Also, reorganizing in hospitals
to create more specialist clinics for a limited set of treatments can meet substantive
resistance since specialists consider that it diminishes their professionalism.
In line with recommendations from disruptive innovation theory (Section 4.3),
a way to overcome such problems can be to create a separate unit with strong topmanagement support. Staffing such a unit with experienced professionals will also
help. Members of such a unit will have to create strong networks with professionals
in other parts of the organization to get support for their projects. An alternative is
creating financial incentive systems for doctors to participate in innovation, although
this option may be hindered by the high salary level that medical specialists already
enjoy, and objections from politicians or society.
10.2 lnnovc:ation in multinationals
International innovation strategies
Multinational firms operate in different countries or regions. Synergy of activities
in different countries and regions is often one of the main sources of competitive
advantage for multinationals. Multinationals can achieve synergy in operations, e.g.
production, but also in expertise. For instance, specialized logistics knowledge can be
a source of competitive advantage for supermarket chains, which they can exploit in
different regions in the world. On the other hand, multinationals also have to take into
account the specifics of customer demand in different regions in the world.
A
multi®tional
is a firm that
has operations
in more than
one country.
226
Innovation Management
Innovation and new business development in multinationals also have to serve
these two rather opposing goals: creating synergy and serving local demand. In
addition, innovation and new business development in multinationals have to serve
a third one: taking advantage of specialist knowledge in specific regions in the
world. For instance, cities like Paris, Milan and New York are known for their high
fashion and lifestyle products. Multinationals operating in those industries will want
to have an innovation activity in those cities, to take advantage of the newest trends.
Silicon Valley is known for its advanced ICT knowledge. Multinationals in those
markets will want to have a development centre in that region. In order to tap into
specialist regional knowledge and to serve local or regional markets, multinationals
often create multiple research and innovation centres over the world.
We can distinguish four strategies guiding the innovation and new business
development activities of multinationals (Bartlett and Ghoshal, 1997):
1. Centre-for-global strategy. In this strategy, the multinational targets its innovation
and new business development to the global market. The multinational develops the
same products or services to be used across the globe. There are multiple examples in
the IT industry. Apple and Google both develop products and services for the worldwide market, with only marginal local adaptations, which may be targeted at local
regulations. They usually also apply the same financial model, e.g. Google applies
its advertising model all over the world. In this strategy, the firm doesn't necessarily
develop and produce the worldwide product or service in its home country, but
develops each product or service in their portfolio in one specific place in the world.
The essence of this strategy is that the firm develops the same products or services
for the worldwide market. The advantages of such a centre-for-global strategy are
clear: the company creates enormous synergies and scale advantages in design,
development, production and commercialization. The firm can also advertise the
product or service on global media channels. On the other hand, the firm runs the
risk of misalignment with local demands. Therefore, a condition for this strategy is
that the worldwide market is quite homogeneous, as is the case for many IT services
and electronics products. For food and personal care, cultural differences in consumer preferences between regions are more pronounced, and firms will therefore
apply this strategy less often, although there are even possibilities for those kinds
of markets, as Case 10.2 ofliquid margarine shows.
2. Globally linked. In this strategy, the firm also commercializes its products or services worldwide, but it makes use of sources in different parts of the world. The
firm employs research centres in different regions, to tap into local knowledge,
and use this knowledge in product development in other locations. For instance,
Microsoft has its main research and innovation centre in Seattle, in the USA,
but it also operates research centres in the UK, China and India. According to
this strategy, the firm can also distribute its product development over different
locations, to make use of cheap resources. Many IT and service firms, such as
IBM, have IT development centres in India, often in Bangalore, to take advantage
of relatively cheap local labour. These centres may not develop full products, but
they have a supporting role. It is clear that this strategy has the same synergy
advantages as the centre-for-global strategy, but that it makes better use of the
worldwide market for expertise and labour. On the other hand, the firm has to
spend more energy and resources on coordination between the different locations.
3. Locally leveraged. According to this strategy, a firm develops a product or service
for a specific market, and if it becomes successful in this market, the firm adapts
Innovation in project-based and multinational firms
it for another market. A nice example is the ING Direct savings product (Dunford
et al., 2010; see also Case 3.7). The international bank ING developed this online
savings product in the early days of the Internet, to penetrate countries where
the bank had no presence. The bank developed the product first for Canada. After
it became successful, it introduced the service in other countries, one by one.
In every country it adapted the service to local conditions and regulations, supported by a separate country organization. Such a strategy has the advantage that
the offering can be adapted more closely to local demands, and that the initial
investments can be lower, because the firm has to take only the situation of a
single country or region into account. Also, the first country serves as a test site
for the larger market. On the other hand, the firm loses synergy and control of
its products and services. A typical problem that emerges if the firm already has
a presence in the target countries is the so-called 'not invented here' syndrome
(Bartlett and Ghoshal, 1997). Local units of the multinational will oppose the new
product or service that comes from another country because they see it as not
fitting with their local market. Top management will have to push the product or
service to the local market to overcome such resistance. Another way to overcome
the resistance is involving the second country in an early phase of development
of the new product or service for the first application.
4. Local-for-local. This strategy involves firms developing dedicated products, services
or business models in every country. As mentioned above, this strategy is often
applied in culturally sensitive markets such as foods and home care, although
top brands in high-level perfumes and high-end fashion often have worldwide
coverage with very similar products. It is clear that this strategy has the advantage
of being a close fit with local demands, but the disadvantage of a loss of synergies
and scale effects.
Over time, there has been a general trend from local strategies to global strategies.
For instance, some decades ago television set producers applied a local-for-local
strategy. They had different products for every country in the world in order to meet
local regulations and standards, supported by development centres in every country. Of
course, today television sets have become a global market with global products, although
some country-specific differences may still occur. In general, cultural convergence in
the world facilitates this trend. The case of liquid margarine (Case 10.2) shows that
even in food products multi-country market strategies can win from national strategies,
although accompanied by high internal resistance in the company.
C\
CASE 10.2 INTERNATIONALIZATION OF LIQUID MARGARINE
A great example of internationalization of an originally local-for-local product and the
challenges that such a change brings with it is the development of liquid frying margarine
by Unilever. Until the end of the 20th century the liquid shallow frying market in Europe
was mainly local. Every country had its own frying products, usually wrapped solid
margarine in northern and mid-Europe, and mainly olive oil in southern Europe. Around
2000, Tex Gunning, manager of food products in Europe and at the same time manager of
the Belgium-Dutch-Luxembourg (Benelux) country organization, set up a project team to
develop a liquid frying product for Europe. Unilever had made attempts to develop liquid
frying margarine for specific countries, but thus far with little success. The team went out
to study consumer behaviour to search for a single product attribute that would appeal to
everybody in Europe, both margarine and olive oil users. While observing a Portuguese
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Innovation Management
GlocaU-zation
is selling
low-end
products from
developed
economies
for the
mainstream
market in
emerging
economies.
woman cooking, they heard her saying that she was always afraid in the kitchen while
using olive oil, because of the spattering. This triggered the project team. Unilever R&D
appeared to have a gas available that, if added to the margarine in small quantities,
prevented spattering. That generated the idea of the core slogan for the product: 'Doesn't
spatter, doesn't burn'. However, users in the Benelux, where the innovation centre was
located, were used to the browning of margarine in the pan. Unilever had even used
the beautiful browning of some of its products as a core attribute in its commercials in
these countries. The project team designed the new liquid product without any additives
for browning, so that it remained pale in the pan, to be able to appeal to olive oil users.
The resistance against the new product amongst marketing managers in the local
organization in the Benelux was fierce, since they were convinced that consumers in the
Benelux would never adopt this non-browning product. Only the strong communication
skills of the project team, organizing several meetings with the marketing managers, and
the strong position and support of Tex Gunning made the project survive. The product
eventually was highly successful.
This case shows that the transition from a local-for-local strategy to a centre-forglobal strategy (in this case: centre-for-region strategy) is not easy and requires an
appropriate organizational structure and strong management support. At the same time
the case is a nice example of customer-focused design thinking. See also Case 6.6.
Source: Edens et al. (2004).
Frugal innovation
Frugal
innovation
means
developing
an innovation
for a specific,
usually
low-income,
customer
group in an
emerging
economy.
Reverse
innovation is
an innovation
process
according
to which a
company
develops a
dedicated
product for
an emerging
economy, and
then applies
an adapted
version of the
innovation
in a specific
niche market
in a developed
economy.
Local strategies become more important in emerging economies. When average
income in those countries starts to rise, initially many firms try to sell their lowend products or services in those countries, but often not very successfully. Immelt
et al. (2009) labelled this approach as 'glocalization'. Firms found out that to be
successful in this so-called 'bottom of the pyramid' they had to develop dedicated
products and services which fitted local requirements more closely than their low-end
products from the developed world. The new trend was called 'frugal innovation',
since developers tried to use simple and cheap technologies as much as possible. A
good example is Gillette, that developed Gillette Guard, a simple and cheap razor
for India. The example shows that such frugal innovations require extensive market
learning. It took 20 Gillette developers 3,000 hours in total with over 1,000 consumers
to learn about local shaving behaviours. Gillette made a TV commercial in which it
mixed modern and traditional Indian culture. The frugal innovation trend means a
revival of the local-for-local strategy.
In some cases, firms apply these frugal innovations for specific purposes in their
main markets. Immelt et al. (2009) labelled this trend as 'reverse innovation'. They
gave the example of a cheap ultrasound machine that the firm GE had developed for
China, using technology from other parts of the GE organization. The machine was
a frugal innovation: it was much simpler and cheaper than the normal ultrasound
products of the company. The firm subsequently developed an adapted version for use
in a specific application in their home market of the US: a simple ultrasound machine
for use in ambulances. In fact, this strategy is an example of the locally leveraged
approach: first developing a product for an emerging economy, and then transferring
it to other countries. GE overcame the not-invented-here syndrome because the head
of the global development organization was also responsible for the local team. In this
way, information exchange between the local and global units starts in an early phase,
which facilitates the diffusion of the local product or service later on.
Innovation in project-based and multinational firms
International organization
The four strategies above concern the coordination of the innovation and new
business development activities. They do not fully determine where firms locate
their development activities, and how they are embedded in the structure of the
multinational.
Von Zedtwitz and Gassmann (2002) developed a typology of four ways in which
firms organize international R&D (see Figure 10.1):
Market-driven R&D
Global R&D
National treasure R&D
Technology-driven R&D
Dispersed
Development
Fo llows
production,
technica l
service,
and sales
i
Domestic
Domestic
Dispersed
Research
Follo ws know- how
and development
Figure 10.1 Organizational forms for international R&D
Source: Von Zedtwitz and Gassmann (2002).
1. National treasure R&D: At the bottom left we find the traditional approach of a single
R&D centre, usually in the home country of the company and at the corporate level.
The centre usually applies a centre-for-global strategy and develops all of the company's new technologies, products and/ or services for the world market. The advantage
is the economies of scale, but the connection with local markets and with business
unit activities will be limited, nor does the company benefit from local specialized
knowledge elsewhere in the world. Steel companies, car companies and chemical
companies usually apply this organizational form.
2. Technology-driven R&D: This involves having research centres in different places in
the world, but development activities are centralized. In this way, firms can benefit
from expertise in specific regions in the world (bottom right in Figure 10.1). As
mentioned above, Microsoft has research centres in different places in the world,
but does most of its development work centrally in Seattle in the USA. It is a nice
example of a globally linked strategy.
3. Market-driven R&D: At the top left we find market-driven R&D. It involves the firm
having a strong R&D centre but combines it with overseas development units. A
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Innovation Management
central research unit develops the basic knowledge, with which local development
units can develop innovations aimed at local markets. The company can have different strategies: local-for-local, locally leveraged, by which it transfers innovations
from one country to another, or a globally linked strategy, by which it picks up local
innovations and develops them into a standard for the rest of the company. A firm
having this structure and applying a local-for-local strategy is the Dutch energy company ENECO, which has innovation centres both in the Netherlands and in Belgium.
Each of the centres develops innovations for its own country.
4. Global R&D: At the top right we see that the company has research and development
centres distributed around the world. Usually the work in these centres is coordinated
by a central strategy to develop products or services for the global market, so they
operate a globally linked strategy. But specific innovation centres may be responsible
for part of this global strategy.
Von Zedtwitz et al. (2015) have shown that the trend with respect to internationalization
strategies is even more varied. They distinguish between the creators of the concept
and the developers of the product or service. While the typology above assumes that
the people generating an idea for a new product or service are co-located with the
people who do the development work, this is not necessarily the case any longer.
For instance, local teams can develop concepts, while global units can develop the
corresponding product, which can be first applied locally and next globally. Many
patterns are possible.
10.3 Servitization: adding services to products
Increasingly, product firms are adding services to their portfolio of offerings, and they
can even replace the sales of products by the sales of services. A typical example is
printer manufacturers, which can sell their printers to customers but they can also
provide them as a service, according to which the customer pays per copy or per hour
of use. Xerox became big in the 1960s by inventing this business model (see Case
10.3).
q
CASE 10.3 XEROX AND THE SERVICE BUSINESS MODEL
In 1960 Xerox had developed a new so-called 'dry copier', which was far better than the
wet copiers that were then on the market. Xerox, which was a small company in those
days, introduced the concept of paying per copy, instead of purchasing the machine. The
A service level
agreement
(SLA) is an
agreement
between a
supplier of a
service and
a customer,
specifying the
dimensions
and level of
performance
that the
customer will
receive for this
service.
new business model appeared highly lucrative since customers made far more copies
with the new machines than they had done with the old ones. They had budgeted based
on the numbers of copies from the old machines. But now their spending, and thus the
income for Xerox, was much higher. Within 10 years, Xerox generated more than a billion
dollars in revenues per year with the new business model.
Firms in other industries also introduce service business models (see Case 10.4).
Signify (formerly Philips Lighting) offers a service model to municipalities, according
to which the city pays for the hours that streetlamps are operational, or even for
the quantity of lumens that are emitted. The service includes an SLA (service level
agreement) with respect to the uptime of the streetlights. The business model takes
away the burden of maintenance for the municipality, while Philips is motivated to
Innovation in project-based and multinational firms
use cost-efficient lamps to reduce the energy costs. In addition, Philips can include
other services in the model, such as security services by monitoring streets based on
sensors in the lampposts. In other cases, product firms provide consultancy services
to their customers. For instance, providers of medical equipment can advise hospitals
on the efficient use of the equipment, based on aggregated data from other users.
Such consultancy can be part of the tendering process for the sale, in which case it is a
free service for the customer. However, the medical firm may also sell the consultancy
service at a price, independently from the sales of new equipment.
C\
CASE 10.4 SERVITIZATION FOR LIFE RAFTS: WILHEMSEN
The company Wilhelmsen produces and sells inflatable life rafts for ships. These life
rafts have to be inspected regularly, e.g. once every two years, and Wilhelmsen also
provides the inspection service. In the past, for that purpose the life raft had to be taken
from the ship, inflated, inspected, and folded again. The service was usually delivered at
the location of the ship, since ships only seldom visit their home harbour. However, the
process could take a few days, during which the ship had to wait. In addition, in some
harbours, ships disembarked or embarked in open waters, since the harbours were not
deep enough. In those cases, taking the life rafts off the ship was in fact illegal, since the
ship remained at sea without life rafts. Wilhelmsen therefore converted its sales model
into a service model. Instead of selling the life rafts to the customer, the customers paid
a fee per use. Now Wilhelmsen could take the life rafts off the ships and immediately
replace them with substitutes. This reduced the cost of inspection for Wilhelmsen but
much more so for the customers. In addition, illegal situations no longer occurred. The case
is a nice example of how servitization can benefit both the supplier and the customer, and
can lead to operational efficiencies.
Servitization creates specific organizational challenges in the providing firm (Ulaga
and Reinartz, 2011). Product firms usually have a well-organized product innovation
process, where the roles of R&D, marketing, engineering and other functions are
well specified. When they start servitization as an innovation activity, they need
organizational change to support its development and delivery. They should be
ready to inspect the installations, to deliver on-time service, to monitor their own
performance, etc. They have to create the appropriate IT to support these processes,
and they should create sufficient experience to be able to set appropriate prices and
conditions for these contracts.
One of the key challenges is selling the services. Salespeople in product firms
are used to selling products, not services. In addition, firms usually reward their
salespeople based on revenues, and the revenues from services are only generated
over the years. So, salespeople in product firms are not particularly motivated to sell
services. It often happens that salespeople use the new services to raise interest from
new customers, but once in a conversation they try to sell products (Moore, 2007).
Alternatively, firms can set up a separate sales department for services, but that can
lead to competition between product sales and service sales for the same customers.
Simple solutions to this dilemma are hard to find. A separate sales organization, which
collaborates closely with product sales, can be a solution.
It will be clear that firms add to their complexity by adding services to the product
portfolio. The firm starts to resemble the project-based firms discussed above. Also,
innovation and new business development activities have to become more dispersed,
231
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Innovation Management
as in project-based firms. If the servitizing product firm operates on an international
scale, it has to coordinate customer-responsive new service development in different
countries, self-initiated service development and product development. Appropriate
portfolio management and coordination systems should be in place for this purpose.
= 10.4 Summary
In this chapter we discussed three types of companies that need a more dispersed
innovation and new business development process and organization: project-based
firms, multinationals and servitizing product firms. We saw that each of these types
of firm has to balance customer-oriented innovation with proactive or centrally
initiated organization. In project-based firms the innovation unit or the innovation
manager option from Chapter 7 will work best. We presented a set of four options
for multinationals, with a more centralized versus a more decentralized emphasis. We
showed that the identity of medical specialists is an important driver, but sometimes
also a barrier, for innovation in health-care institutes. Servitizing product firms have
different options for the organization of innovation, either integrating organization of
innovation and new business development for products and services or keeping them
separate.
0
10.5 Discussion questions and exercises
Discussion questions
1.
As we explained, project-based firms can have reacti ve and proactive innovation activities. Why would
yo u think that it is important to align the two processes to each other? How would you advise managers
in these firms to do so? Think of the portfolio management approaches we discussed in Chapter 5.
2.
Imagine that you work as a consultant in a consultancy firm. Why wou ld you engage in innovation
activities ? Why wouldn't you?
3.
Case 10.2 describes a margarine innovation project in Unilever. The project was successful in targeting
an international market for a product category in which the company had developed specific products for
different countries. What do you consider the main success factors for the project? You can also look at
Case 6.6, which describes the same project.
4.
In this chapter, we described innovation in project-based firms and multinational firms as two types of
distributed firms. To what extent do you see similarities in the dilemmas in those two types of firms when
it comes to innovation?
5.
In the subsection on innovation in health care, we described how professional identity perceptions of
medical specialists affect the choice and execution of innovation activities. How would you expect that
similar phenomena occur in companies such as consultancies, with specialists in specific areas? How may
professional identity perceptions of these specialists affect the direction of innovation activities in those
firms?
6.
In Section 10.3, we argued that it may be better for companies with a servitization strategy to have a
separate sales department for services. To what extent would you expect that this also applies to the
innovation unit? In other words, what are the potential advantages and disadvantages of separating
product and service innovation in these companies?
Innovation in project-based and multinational firms
233
Exercises
Take the engineering company WaterCo from Case 10.1. In that case description, you read that the innovation
projects had insufficient budget to be executed in a timely manner. Imagine that the company has improved this
situation. The central new business development unit has created budgets for each project, and it distributes
these budgets over the project team members of each project, in line w ith their tasks in the project. The central
unit finds out that the speed of projects is sti ll insufficient. Look at the success factors from the research by
Blindenbach-Driessen and Van den Ende, as described in Section 10.1. From the perspective of these success
factors, w hat would you do to improve the speed of the projects further?
In this chapter, we have seen four internationa l innovation strategies. Imagine that yo u are the CEO of a
multinational company that produces and sells personal care products all over the world. You wa nt to implement
a new sustainab ility strateg y for the entire company. It means that you want to make sure that all of you r current
and new products are produced in a more sustainab le manner. For in stance, by sourcing more sustainab le
materials or altering the production process. Additiona lly, you want the products to be used more sustainab ly.
For instance, by innovating the packing of the products. Imagine also that your company has a market-driven
R&D organ ization (see Fi gure 10.1).
1.
Wh ich of the four internationa l innovation strateg ies wou ld you apply to implement this strategic change
in the company? Why?
2.
How wou ld you create the requ ired change in the central R&D department?
References
Bartlett, C.A. and Ghoshal, S. (1997) 'Managing innovation in the transnational corporation',
in M.L. Tushman and P. Anderson (eds) , Managing Strategic Innovation and Change. Oxford
University Press, pp. 452-476.
Blindenbach-Driessen, F. and Van den Ende, J. (2010) 'Innovation management practices
compared: The example of project-based firms', Journal of Product Innovation Management
27(5, September): 705-724.
Dunford, R., Palmer, I. and Benveniste, J. (2010) 'Business model replication for early and
rapid internationalisation: The ING Direct experience', Long Range Planning 43: 655-674.
Edens, B., Leeman, D., van Nuenen, J. , van den Ende J. and Jans, R. (2004) 'Liquid Gold:
Innovation on a European Scale', Rotterdam School of Management, Erasmus University.
Immelt, J.R., Govindarajan, V and Trimble, C. (2009) 'How GE is disrupting itself', Harvard
Business Review (October): 56-65.
Moore, G.A. (2007) 'To succeed in the long term, focus on the middle term', Harvard Business
Review (July-August): 84-90.
Ulaga, W. and Reinartz, W.J. (2011) 'Hybrid offerings: How manufacturing firms combine
goods and services successfully', Journal of Marketing 75 (November): 5-23.
Von Zedtwitz, M. and Gassmann, 0 . (2002) 'Market versus technology drive in R&D internationalization: Four different patterns of managing research and development', Research
Policy 31: 569-588.
Von Zedtwitz, M., Corsi, S., S0berg, P.V and Frega, R. (2015) 'A typology of reverse innovation',
Journal of Product Innovation Management 32(1): 12-28.
Conclusion
Part
6
Part 1
Introduction
Innovation
management
Chapter 1
Company
Part 2
Idea development
Part 3
Selection
Part 4
Implementation
-----------------
--------------------
------------------
Idea
management
---+
Sections 2.6-2.7
Project
Idea
development
Sections 2.1-2.4
, _____Chapter 3 ____
Innovation strategy
Portfolio
management
---+
Sections 7.2- 7.5
Chapter 8
Chapters 4-5
Project
selection
---+
---+
Chapters 4-5
---------------------~
Part 5
Specific firms
Specific types
of firms
Chapters 9-10
235
Organisation of
innovation
Part 6
Conclusion
The future of
innovation
management
Chapter 11
Project
execution
Chapter 6
Section 7.1
------------------
The future of
innovation
management and new
business development
11
Learning objectives
After reading this chapter, you will be able to :
1. Describe the current state of the innovation and new business development fields
2. Explain how the current positioning of innovation management originated from the history of the
discipline
3. Distinguish between three main theoretical perspectives in the field
11.0 Introduction
In this chapter we will look at the fields of innovation management and new business
development as disciplines. Innovation itself is as old as humankind, but the disciplines of
innovation management and new business development are more recent. A question is how
the discipline of innovation management will evolve in the future. More particularly, will
the discipline develop a core theoretical framework? In this chapter we will briefly touch on
the current developments in the field of innovation and the history of the discipline. Then
we will sketch three perspectives in the field of innovation management that can serve as
frameworks to distinguish different approaches . Practitioners may apply these perspectives in
their application of innovation management or new business development.
11.1 Innovation in practice
As we have seen in this book, innovation management has become an established activity in
the business world. Today, many companies have an innovation or R&D unit. Some companies
do not have such a unit, but they innovate within the marketing department or within their
daily activities, such as often happens in project-based firms (see Section 10.1). Public institutes
and not-for-profit firms often do not have an innovation unit, but nevertheless innovation is
usually rising on their agendas .
New business development is less widely accepted. New business development has an
emphasis on business model innovation and creating new markets . In some firms, particularly
in B2B environments, new business development units are more an extension of the sales
department. You could call that 'business development' but not 'new business development',
since the products, services and business models that they offer are not new to the firm.
237
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Innovation Management
An interdisci plinary field
is a field
of science
in which
academics
integrate
theories from
other fields.
To different degrees, firms have developed a consistent approach to innovation
management. For instance, R&D usually focuses on product and process innovation only,
whereas sales and marketing usually limit their activities to market- or customer-driven
innovation. Both types of innovation leave large areas of innovation, and particularly business
model innovation, unaddressed. Also, many public and not-for-profit organizations can
greatly improve their organization of innovation. They should make explicit choices in how to
organize innovation, e.g. by setting up an innovation or new business development unit, or
by nominating an innovation manager, and they can coordinate innovation much better than
they currently do. So, many organizations have a lot of room for improvement in this area.
On the other hand, the good news is that innovation management is increasingly
institutionally embedded as a discipline. There are dedicated professional organizations,
such as the PDMA (Product Development and Management Association), and the Academy
of Management has for a long time had a dedicated division (Technology and Innovation
Management). There are dedicated journals, such as the Journal of Product Innovation
Management, and there is a plethora of conferences in the field, such as the PDMA conferences,
IPDMC (International Product Development and Management Conference) and the R&D
Management Conference. In addition, many educational programmes and courses in innovation
management exist, such as master's programmes in universities and in professional colleges.
And there are many consultancy firms dedicated to innovation management.
Such an institutional infrastructure is still lacking for the field of new business development.
So far, there exist hardly any specialized academic or professional institutes targeted at new
business development. Professionals in this field usually come from other domains, and are
self-educated in new business development. So far, new business development serves as a
sub-discipline of innovation management, marketing or entrepreneurship.
In spite of its widespread relevance for industry and its institutional setting, administrators
of business schools usually do not consider innovation management as one of the core
fields of business administration. Strategy, finance, marketing, organization and operations
management usually count as core fields. In this view, organizational behaviour and personnel
management are considered to be part of organization. However, innovation management is
seen as an interdisciplinary field between the core fields.
The question is how innovation management, including new business development, can
become more established in the field of business administration. In the remainder of this
chapter, we will discuss the extent to which developing a core set of theoretical perspectives can
contribute to its position in the field. We will argue that developing such a set of perspectives
will help academics and business people to have a better orientation in innovation management
and new business development.
11.2 The origins of the field
Invention
Factory is
a label for
industrial R&D
laboratories
according
to which
they have
to produce
inventions in
a productionwise manner.
Let's first have a look at the origins of the field of innovation management. It's hard to determine
when exactly the field originated. The managers of early industrial research laboratories had
explicit opinions on research management. Thomas Edison did not just produce technical
inventions, but he also created the 'Invention Factory' as his biggest invention. It was a
laboratory in which he organized systematic invention as a daily activity. Gilles Holst, the first
director of the research laboratory of the electronics company Philips in the early 20th century,
had 'ten commandments' on how to organize the laboratory (Figure 11.1). The rules stipulated
that the researchers in the lab got a lot of freedom and could participate in scientific discussions.
But there was also a rule that said 'let the leading figures be aware of their responsibility towards the
company'. In that way they would direct the free work of the researchers towards the right goals.
Some of these rules still have value today, such as the rule to form multidisciplinary teams. But
the field of innovation management was still not a discipline at that time.
The field of innovation has its origins in the 1960s and 1970s, when academic researchers
started studying the process of innovation in a systematic manner. The book The Management of
Innovation by Tom Bums and G.M. Stalker (1961) was not a study of innovation in particular but
more a sociology of industrial practices. These authors made a distinction between organic and
The future of innovation management and new business development
1. Engage competent scientists with academic research experience.
2. Do not pay too much attention to the details of their previous experience.
3. Give them a good deal of freedom and give some leeway to their particular preferences.
4. Let them publish a nd take part in international scientific activities.
5. Steer a middle course between ind ividualism and strict regimentation; base authority on real
competence; in case of doubt prefer anarchy.
6. Do not split up a laboratory according to different disciplines, but create multi-disciplinary teams.
7. Give the research laboratory independence in choice of subjects, but see to it that leaders and
staff are thoroughly aware of their responsibil ities towards the future of the company.
8. Do not run the research laboratory on budgets per project and never allow product divisions
to have budgetary control over research projects.
9. Encourage transfer of competent senior people from the research laboratory to the development
laboratories of product divisions.
10. In choosing research projects, be guided not on ly by market possibilities but a lso by the state of
development of academic science.
Figure 11.1 The ten commandments of Gilles Holst
Source: Casimir (1983), p. 237.
mechanistic systems of management (see Section 7.2). The organic system had very little hierarchy
(much like the self-organizing teams of today) that functioned best in dynamic contexts. Mechanistic
systems with a lot of structures and rules were more adapted to stable environments.
The so-called 'SAPPHO studies' at the Science Policy Research Unit (SPRU) in the UK studied
success factors for innovation projects. The book Managing the Flow of Technology (1977) by
Thomas Allen from MIT described internal and external communication processes in R&D
organizations. Amongst other factors, he showed that a larger distance between engineers'
desks had a strong negative impact on the frequency of communication between them. Figure
11.2 compares the content of a 1970s book, Managing Technological Innovation (Twiss, 1974),
with the content of this book. The two books do have some similarities, such as project
selection and organization of innovation. On the other hand, all kinds of new approaches,
new types of innovations and more specific models have been developed since Twiss wrote his
book, such as design thinking, lean innovation, disruptive innovation and open innovation.
In the 1980s Robert Cooper developed the stage-gate approach to product development,
based upon earlier phased review processes at NASA (Cooper, 1993) (see Figure 6.2). Cooper
also developed a set of success factors for the implementation of the approach. Important ones
were the quality of execution of the different activities, customer and supplier involvement,
and the attractiveness of the market targeted by the new product. The approach became highly
popular in the business world. Firms developed their own version of the approach, including
their own definition of gates and deliverables in the gates.
The authors of the book Third Generation R&D (Roussel et al. 1991) developed a more
strategic approach to innovation. The three authors, all managers at the Arthur D. Little
consulting firm, distinguished three generations:
1. The first generation, in which research and innovation were mainly driven by research.
2. The second generation, in which the researchers organized their activities in projects,
which were partly financed by the business units of the company.
3. The third generation, in which the firm developed a research and technology strategy at
the firm level, and the firm organized a set of innovation projects that jointly implemented
the strategy.
239
240
Innovation Management
Managing Technological Innovation (1974)
Innovation Management (2021)
1. The process of technological innovation
1. Innovation management and new business
+----+
2. Strategies for research and dev~lopment
development
The front end of innovation
Design thinking
Innovation strategy
Portfolio management
Managing projects
Organizing for innovation
Open innovation
Entrepreneurship
Innovation in project-based and multinational
firms
11. The future of innovation management and new
business development
3. Technological forecasting fo r decision
2.
3.
making
4. Creativity and problem solving
4.
5. Project selection and evaluation ,
~ 5.
6. Financial evaluation of researc h and - - - 6.
development projects
~
7·
7. Research and development~ rogramme
planning and control
8.
8. Organization of innovation
9.
10.
Figure 11.2 The content of Twiss (197 4) Managing Technological Innovation compared with the
current book
Third
generation
R&D is a
framework
for innovation
according to
which firms
have to align
all innovation
projects to the
strategy of the
company.
The third generation R&D created the basis of what we call today 'portfolio management of
innovation'.
Major steps in this line of strategic thinking in innovation management were made by the
Japanese-Harvard school in innovation management in the 1990s (see Figure 11.3). Harvard
professor and later dean, Kim B. Clark, and University of Tokyo professor, Takahiro Fujimoto,
laid the groundwork with their studies in the car industry, and the resulting book, Revolutionizing
Product Development by Wheelwright and Clark (1992), serves as a landmark. The book
introduced a myriad of concepts that became standard in the innovation management
field, many of which survive today: the development strategy framework, aggregate project
plan (portfolio), the funnel, cross-functional teams, gap analysis, parallel development
(concurrent engineering), four team structures, and quality function deployment. According
to the development strategy framework, firms should have a clear market and technology
strategy and should base their project choices on this strategy. According to Wheelwright and
Clark, firms should create their aggregate project plan, which we today call the innovation
portfolio, by balancing incremental (derivative), generational (or platform) and breakthrough
(or radical) product development projects (see Section 5.2). A recurring approach in the book
Revolutionizing Product Development was an analysis of the performance of products over time,
We fi nd typica l examples of the type of thinking of the Japanese-Harvard school in innovation
management in Wheelwright and Clark (1992). They analyze the market performa nce of two
competitors, Northern and Southern, in the compact stereo equipment market. They determine the
decreasing price and cost of products over time of each of the two firms, and how new products
affect the trends. Originally both firms had a two-year new product introduction cycle. At a certain
point in time, Southern shortened the cycle to 1.5 years, applying the concepts of the JapaneseHarvard school, such as clarity of development goa ls, cross-functional and relative ly autonomous
teams, strong leadership and focus on time-to-market. The authors labelled t he set of changes in
Southern as a new 'development capability'. Because of its lead in the market, Southern extended its
market share and was able to earn a price premium. Due to its decreasing market share, Northern's
cost per product started to increase. As a response, Northern also reduced its time-to-market,
however, by just speedi ng up its existing processes, and without introducing the required
organ izationa l changes. As a consequence, the product and the production process of Northern
started suffering from errors, and the manufacturing costs went up even more. The ana lysis clearly
shows how the Japanese-Harvard school combined the analysis of internal organization and
processes, and the performance of the firm in the market, in th is case in terms of product prices and
market share.
Figure 11.3 The paradigm of t he Japa nese-Harvard school
The future of innovation management and new business development
coupling this performance to the firm-internal innovation capabilities on the one hand, and
to the market context of the products of the company on the other. The approach of matching
internal organization to the performance of products in the market forms the core paradigm
of the Japanese-Harvard innovation school.
The Japanese-Harvard innovation school's paradigm of positioning the firm's products
in the market is clearly visible in the work of Clayton Christensen. Christensen received
his doctorate from Harvard in 1992, the same year that Revolutionizing Product Development
appeared. Christensen had a background as an entrepreneur but had returned to academia
where he developed the disruptive innovation model (Christensen, 1993). Christensen
emphasized that firms should be aware of potential disruptive innovations in their markets and
respond appropriately by including disruptive innovations in their own portfolio (see Section
4.3). Just as in the Japanese-Harvard approach, Christensen's model (Figure 4 .3) positions the
performance of firm's products over time in the market. So, we can consider his theory as an
offspring of the Japanese-Harvard school in innovation management.
In the 2000s, quite a number of new approaches emerged in the field of innovation
management. Not only was innovation a dynamic activity, innovation management as a
discipline increasingly became so. New approaches were:
""7
Open innovation (2003) by Henry Chesbrough, from the University of California,
Berkeley. See Chapter 8.
""7
Design thinking, by IDEO and others. It began in the 1990s, but became highly popular in the 2000s. See Chapter 3.
""7
Lean innovation, introduced by entrepreneurs Eric Ries and Steve Blank in the early
2010s. See Sections 3.1, 3.3 and 6.2.
""7
Ecosystem innovation, in the same period, by Ron Adner from the Tuck School of
Business at Dartmouth College. See Section 4.5.
The conclusion is that the discipline of innovation management emerged in the 1960s and
1970s, and has matured since then, particularly through the contributions of the JapaneseHarvard school of thought. Since the 2000s the field has become highly dynamic and more
diverse, with contributions from different academic and business sources. Also, the business
impact of the field grew tremendously in that period; concepts such as disruptive innovation,
design thinking, pivoting and lean innovation became highly popular in the business world.
Although the richness and relevance of the field increased strongly in that period, the field
became more fragmented, due to the different origins of new approaches. The question is
whether we can bring more synergy to perspectives in the field.
11.3 Towards a theory of innovation management and new
business development
The field of innovation management has grown and gained impact, but does it have a
theoretical foundation? Such a foundation helps to move a field forward, since it invites
academics to contribute, and it provides synergy and cohesion to the business community
practising in the field. The development of the field of new business development also depends
on the development of a common body of theory. To what extent do we have broader theories
on innovation management and new business development? Are there one or more theories
that embody the core of the field of innovation management, which are not obvious and can
guide business practice? There is no consensus on this point, but we will make a proposal to
distinguish a few perspectives in the field.
First, we have to mention that we can distinguish two levels in innovation management: the
firm level and the project level (see Figure 11.4). These are consistently distinguished in this
book and are also evident in the literature. Several authors have described innovation processes
on the firm level. In an article in Harvard Business Review, Hansen and Birkinshaw (2007)
241
242
Innovation Managem ent
Idea development
Selection
---------------------
Implementation
,--------.:'
Innovation strategy :
Protfolio
management
Idea
management
Idea
development
----+
Project
selection
----+
Organization of
innovation
----+
Project
execution
Figure 11.4 The innovation p rocess a s d epicted in thi s book
The
innovation
value chain
is a model of
innovation
activities that
firms have to
perform in their
natural order.
described the 'innovation value chain', which stands for the set of activities that firms have
to perform to be successful in innovation. They distinguished three main types of activities:
1. Idea generation, which can be internal, external or cross-unit in the firm.
2. Conversion, which includes both selection and development.
3. Diffusion, which covers both firm-internal diffusion and commercialization in the market.
Compared with our model, the addition of diffusion as a separate phase is interesting. As
we indicated in Chapter 10, diffusion is a problematic process in innovation, particularly in
project-based firms and in multinationals. The message of Hansen and Birkinshaw (2007) is
that the different types of activities form a chain, and, just as the strength of a chain depends
on its weakest part, the success of innovation in firms depends on the activity with the lowest
performance.
David Teece (2007) proposed a similar model in his paper on the microfoundations of
dynamic capabilities. Dynamic capabilities are a firm's capacity to change itself over time,
to create and adapt to changes in the environment. Dynamic capabilities include capabilities
to innovate products, services and business models. Teece distinguished three types of
activity: sensing, seizing and reconfiguring. Sensing refers to acquiring knowledge from the
environment and generating ideas for new business models, seizing refers to selecting certain
options and developing them further, and reconfiguring refers to implementing the activities
and restructuring the organization for that purpose. Teece's main premise is that companies
need to perform each of these activities at a sufficiently high level to be successful in innovation.
Much of the other literature in innovation management focuses more on the project level.
In a seminal paper from 1995, Shona Brown and Kathleen Eisenhardt reviewed the literature
on innovation management at the project level. They distinguish three streams of research:
1. Rational planning, which considers product development very much as a planned activity,
the success of which depends most on the quality of the different activities that are performed. An example is the work of Robert Cooper on the stage-gate model and on success
factors for innovation (see Section 6.2).
2. Communication web, which considers product development very much as information
exchange and communication. See Section 7.2 on networking.
3. Disciplined problem solving, which emphasizes the importance of information processing in
product development, for instance by cross-functional teams. This approach dedicates a
lot of attention to the influence of higher management in product development, by means
of heavyweight project leaders (see Section 7.1) and 'subtle control'. Higher management
could exert subtle control by communicating a vision on the purpose of a project, but leaving the team free on how to attain that purpose. Also 'product integrity' is an element of
this approach: the alignment of the product with corporate goals. This approach overlaps
strongly with the Japanese-Harvard approach outlined above.
The future of innovation management and new business development
Product Characteristics
Product advantage
Product meets customer needs
Prod uct price
Product technological sophistication
Product innovat iveness
Firm Process Characteristics
Structured approach
Predevelopment task proficiency
Marketing task proficiency
Technological proficiency
Launch Proficiency
Reduced cycle time
Market orientation
Customer input
Cross-functional integration
Cross-functional communication
Senior management support
Firm Strategy Characteristics
Marketing synergy
Technological synergy
Order of entry
Dedica ted human resources
Dedicated R&D resources
Marketplace Characteristics
Likelihood of competitive response
Competitive response intensity
Market potential
Figure 11.5 Success factors for innovation projects
Source: Henard and Szymanski (2001).
Eisenhardt and Brown didn't consider these research streams as theories, but instead tried to
create an overarching theory themselves.
Henard and Szymanski (2001) did a meta-analysis of success factors in the new product
development literature, which they categorized into four types (see Figure 11.5). In fact, their
analysis fits very well into Brown and Eisenhardt's rational planning stream above. Crossan and
Apaydin (2010) did a review of the literature on organizational innovation. They distinguished
three types of determinants of innovation: leadership, managerial and business processes.
Managerial factors referred to organizational factors, such as strategy, structure, resource
allocation, etc. Melissa Schilling gave an overview of topics and theories in the field of innovation
management at a conference in 2016, showing the diversity of theories (see Figure 11.6).
Based on this and other literature, we distinguish three theoretical perspectives in the field
of innovation management and new business development: a process perspective, a people
perspective, and a strategy perspective. We address each of them below.
Success
factor refers
to a condition
affecting the
success of
an activity.
In our case,
a condition
affecting the
success of an
innovation
project.
Creativity: intrinsic motivation, networks and creativity, social capital, self-efficacy, social networks.
user innovation
Industrial dynamics: S-curves, dominant designs, disruptive innovation , increasing returns,
modularity and architectural innovation, first mover advantages
Innovation strategy: portfolio management, real options
Managing projects: open innovation, ambidextrous organization, loosely coupled organization,
ecosystems
Others: dynamic efficiency, complexity theory, morphing innovation to markets, packaging strategic
innovation with other innovation, people collaboration across silos
Figure 11.6 Theories in the field of innovation management
Source: Adapted from Melissa Schilling, Presentation at Academy of Management Meeting, August 2016, Anaheim, US.
243
244
Innovation Management
The process perspective
A process
model is a
representation
of a standard
process
that people
follow in their
activities, in
our casein
innovation
activities.
The process perspective considers innovation and new business development activities mainly
as a series of activities that people perform in a certain order. Explicit process models guide
the order of activities. We have discussed sequential, parallel and iterative process models
in Chapter 6. According to the process perspective of innovation, the success of innovation
activities depends strongly on the order in which the firm performs the activities and on the
quality of execution. The process perspective has a lot in common with the rational planning
approach of Brown and Eisenhardt (1995), mentioned above, because of the emphasis on
processes and activities. The process perspective includes the design thinking and lean
innovation approaches, since both approaches emphasize the importance of following the right
process in innovation activities.
We can distinguish processes for innovation and new business development on the firm and
on the project level. On the firm level, processes for innovation and new business development
encompass all activities in the firm directed at the development of innovation. The innovation
value chain of Hansen and Birkinshaw (2007) is an example of the process model on the
firm level (see above). Processes at the firm level include portfolio management processes
and monitoring processes of projects. Processes on the project level concern the activities
as performed in a specific project, and the order in which they are done. These include idea
generation, concept development, selection, development and implementation. The different
processes described in Section 6.2 are process models on the project level.
Different process models propose different orders and ways of executing the innovation
activities. As indicated in Chapter 6, the core premise of process theories is that the choice
of project process depends on the level of uncertainty and complexity in a project. The higher
the degree of uncertainty, the more iterative the process, whereas the higher the degree of
complexity, the more sequential the process should be. Another general assumption of
process models is that the different activities form a chain, and that the strength of the chain
depends on the weakest link. The quality of the other activities cannot compensate for the low
proficiency of a firm or project team in one activity in the process.
We can summarize important elements of the process perspective on innovation and new
business development as follows:
'"7
Innovation performance at the firm level depends on the proficiency with which the
firm executes the main activities needed for new business development (knowledge
acquisition, idea generation, selection, implementation and commercialization).
'"7
Innovation performance at the firm level depends more strongly on the weakest of
the proficiencies with which the firm executes each of the main innovation activities
(knowledge acquisition, idea generation, selection, implementation and commercialization) than on the average proficiency with which the firm executes these activities.
'"7
The higher the degree of uncertainty, the more positive the effect of an iterative innovation process in an innovation project on the performance of the project.
'"7
The higher the degree of complexity, the more positive the effect of a sequential process in an innovation project on the performance of the project.
The people perspective
The people perspective of innovation and new business development focuses on people and
the relations between them. This perspective builds on the creativity and team literatures in
the field of organizational behaviour, on network literature, and on organization theory. In
terms of Brown and Eisenhardt's three approaches (1995), the people perspective fits best with
the communication web research stream, but it also has elements of the disciplined problemsolving approach, since the latter emphasizes the importance of cross-functional teams.
The people perspective of innovation management focuses on the people that are active
in innovation, and on their goals and capabilities. The perspective emphasizes that you
The future of innovation management and new business development
need the right people and appropriate forms of collaboration between those people to make
innovation successful. The creativity literature shows that creativity skills, expertise and
intrinsic motivation enhance creativity (Amabile, 1998; see Section 2.1). Also, non-redundant
networks of people with many weak ties are positive for creativity (see Sections 2.2 and 2.6).
For implementation we need people to have stronger ties and more cohesive networks. As
we have shown in Section 7.1, cross-functional teams have a positive effect on innovation
performance. The higher the degree of uncertainty in the project, and the more complex the
task, the more autonomous the team should be.
Studies on the degree of separation of innovation activities from the daily business, as
described in Section 7.2, are also an element of the people perspective on innovation. As we
have shown in that section, the extent to which a project team or unit should be separated from
the daily activities in a firm depends on the degree of uncertainty in the innovation activities.
A project developing a highly novel new product, service or business model will benefit from
more separation to facilitate the acquisition and generation of new knowledge, and to create
new external relations. We have also shown that more incremental innovation activities can
very well be integrated in the daily activities, particularly in project-based firms (see Section
10.1). We consider this issue part of the people perspective on innovation because we separate
innovation mainly to create the right goals and context for the people involved. We must admit
that creating the right context for people is not the only reason for separation of innovation,
since separation also facilitates having a different innovation process from the rest of the firm.
The degree of separation from the operational activities is evident in three typologies that
we have seen in this book: the four types of team structures (Section 7.1), the four modes of
organizing innovation (Section 7.2) and the four strategies for the international organization
of innovation (Section 10.2). In Figure 11.7, we integrate these three typologies. From top
to bottom, innovation becomes more decentralized in each of the columns of the figure, and
integration with the operational activities increases. At the top, a central leader steers the
innovation activities. Usually, strategic considerations at the firm level are prominent in the
targets of the team. Lower in the matrix, decentralized influence in the company is larger. It
usually means that specific customers have a stronger say in the development of the innovation.
A small exception to the scheme is 'Globally linked' in the final column: the decentralized
innovation units are usually part of the central innovation programme, and have no structural
connections to local business units. They do have connections to local research institutes or
partners. Some combinations of the modes can also occur. For instance, firms that integrate
innovation in the business (third column, at the bottom) can employ different team structures
within the business (second column), even autonomous ones. The same holds for the localfor-local innovation activities in multinationals that can be performed by autonomous teams.
Description
Team structures
Modes of organizing in International
the firm
innovation strategies
Separate
Autonomous
Separate business unit Centre for global
strategy
Central leadership with Heavyweight
strong links to the
business
Innovation unit
Globally linked
Coordinated by central Lightweight
manager, execution in
business
Innovation manager
Locally leveraged
Integrated in business
units
Integrated in the
business
Local for local
Functional
Figure 11.7 Integ rated typolog ies of organ izatio na l forms
245
A typology is
a classification
of certain
concepts
or objects
according
to a specific
criterion. In
ourcase: a
classification of
organizational
forms,
according to
the degree
of separation
between units
that they
create.
246
Innovation Management
We can summarize important elements of the people perspective of innovation management
and new business development as follows:
~
Creativity skills and the intrinsic motivation of people active in innovation have a
positive effect on innovation performance.
~
Access to the diverse knowledge of people active in innovation has a positive effect on
innovation performance.
~
The higher the degree of uncertainty and complexity in an innovation project, the
more positive the effects of separation and centralization of innovation activities on
innovation performance.
The strategy perspective
The strategy perspective of innovation and new business development focuses on the decisions
made, both in the choice between projects and within projects. The basic assumption of the
strategy theory of innovation management is that the success of innovation activities depends
very much on the quality of the innovation strategy of the firm, on the alignment of the
selection of projects with that strategy, and on the alignment of projects with the innovation
strategy. Important elements of this perspective are that firms need a clear innovation strategy,
and a well-organized portfolio management system, to make sure that they execute the right
activities at the right time. Also, firms need to monitor activities constantly, and shouldn't be
afraid to stop projects when they no longer fit the strategy.
The strategy perspective of innovation and new business development fits most closely to
the disciplined problem-solving research stream of Brown and Eisenhardt (1995). This theory
of innovation management finds its origins in Third Generation R&D and in the JapaneseHarvard school of innovation management in the 1990s (see above). The open innovation
approach of innovation also fits best in this perspective, since it emphasizes the need for
an open innovation strategy. The open innovation approach dedicates little attention to the
processes and people needed for the execution. Also, the ecosystem approach of innovation
fits best in the strategy perspective, since the core issues are about the strategies and business
models needed to keep all partners aligned in the ecosystem (see Section 4.5).
We can summarize important elements of the strategy perspective of innovation and new
business development as follows:
"'?""
Setting targets for innovation activities in terms of achievements on the different elements of the business model (value proposition, channel, market segments, etc.) over a
specific timeframe has a positive effect on the innovation performance of the firm.
~
Balancing innovation activities between different degrees of radicalness of projects
(incremental, generational, disruptive, radical) has a positive effect on the innovation
performance of the firm.
~
Consistency in monitoring of innovation projects and in go/no-go decisions on innovation projects has a positive effect on the innovation performance of the firm.
How to combine perspectives
Of course, the distinctions between the perspectives are not clear-cut. Above we have
indicated that we consider the separation-integration theory of innovation as part of the
people perspective, but that it also has implications for processes. Also, portfolio management
includes the monitoring of projects, which requires clear processes. Sometimes the perspectives
come very close to each other: decisions on projects based on portfolio considerations fit
within the strategy perspective, whereas decisions on projects based on the outcome of the
projects themselves fit more with the process perspective, since the latter have more to do
with the quality of execution of those activities. Nevertheless, such examples emphasize that
The future of innovation management and new business development
distinguishing between the approaches improves clarity between different approaches and
trends in the fields of innovation management and new business development.
Also, academics can study phenomena within innovation management from different
perspectives. For instance, they can study design thinking from a process perspective
(Blank, 2013), whereas they can study the marketing-R&D interface (closely linked to
design thinking) from a people perspective (Leenders and Wierenga, 2002). Nevertheless,
distinguishing between the three perspectives provides orientation in studying the literature
on innovation management and new business development. Academics can position their
theories relative to the three perspectives. Also, practitioners can choose the perspective that
best fits the circumstances or their preferences. For these reasons, distinguishing the three
perspectives can contribute to the development of the discipline of innovation management.
247
The
marketingR&D interface
is the degree of
communication
between the
marketing
and R&D
departments in
a company.
11.4 Summary
In this concluding chapter we reflected on the fields of innovation management and new
business development. We briefly summarized the current state of the fields in the business
world. While innovation management is a fairly established field of activity, new business
development is still new. We were taken through an overview of the history of the field of
innovation management. Subsequently the chapter distinguished between three perspectives
in the field: the process perspective, the people perspective and the strategic perspective.
Distinguishing between these perspectives may help the field to move forward in reaching a
higher level of maturity and in strengthening its position between other disciplines in the field
of business administration.
0
11.5 Discussion questions
1.
In this chapter, we described the origin of the field of innovation management in the research laboratory in large
companies. To which of the four organizationa l structures discussed in Section 7.2 does this resemble most? What do
you think explains the emergence of the other three structures in later times?
2.
Above we saw that a lready in the early 20th century, Gilles Holst, as head of a research laboratory, had certa in ru les
('commandments') for managing innovation. In Section 7.5, where we discussed an innovation culture, we saw that
some authors advise seeking a balance between creating freedom and setting certain requirements for innovators. To
what extent do you find these two elements of an innovation cu lture in the commandments of Gilles Holst?
3.
Academic disciplines usually have different elements: a core set of theories, an active community, and institutions that
support the discipline, such as journals, academic societies and conferences. What do you think are the strongest of
these elements for the discipline of innovation management? And for new business development?
4.
In Section 11.3, we described three perspectives in the fie ld of innovation management. How do these perspectives
match with certain chapters of this book? Which chapters fit in different perspectives?
References
Allen, T.J. (1977) Managing the Flow of Technology: Technology Transfer and the Dissemination of Technological Information Within the R&D Organization. MIT Press.
Amabile, T.M. (1998) 'How to kill creativity', Harvard Business Review (September-October): 77-87.
Blank, S. (2013) 'Why the lean start-up changes everything', Harvard Business Review (May): 65-72.
Brown, S.L. and Eisenhardt, K.M. (1995) 'Past research, present findings, and future directions', Academy
of Management Review 20: 343-378.
Burns, T. and Stalker, G.M. (1961) The Management of Innovation . Oxford University Press (reprinted
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Casimir, H.B.G. (1983) Haphazard Reality: Half a Century of Science. Amsterdam University Press,
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Leenders, M.A.A.M. and Wierenga, B. (2002) 'The effectiveness of different mechanisms for integrating
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Teece, D.J. (2007) 'Explicating dynamic capabilities: The nature and microfoundations of (sustainable)
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Wheelwright, S.C. and Clark, K.B. (1992) Revolutionizing Product Development. The Free Press.
Index
Page numbers in italics indicate figures
A
Absorptive capacity 186-187
A/B tests 65
Academy of Management 238
Active editing, representation 158, 159
Activision 140
Adner, Rod 90, 241
Adobe 212
Aeroplanes 80-81
Affordable loss 213
Agile project management 141-142, 141
Agile teams 141, 155, 156
Ahuja, Gautam 178
AirAsia84
Airbnb 10, 13, 88, 97, 209
Airline industry
creativity 26
disruptive innovation 84-86, 84, 87
first mover disadvantages 89
innovation costs 210-211
separate business units 161
Alessi 67
Alibaba31
Allen, Thomas 239
Alliance, collaborative innovation 189,
193-194
Alphabet 83
Alpha-testing 65
Altshuller, Genrich 34
Amabile, Theresa 179
Amazon
Alexa 158, 159
cloud computing activities 34
complementary assets 99
E-commerce 31
follower advantages 99
marketing strategy 89
network effects 97
Ambassadorship 156
Ambidexterity 9, 160
Ambidextrous leaders 175
Ambiguity 128, 145, 170
Analogue computers 31
Ancona, Deborah 7, 156-157, 174
Angel investors 214-216
Ansoff matrix 14
Anthony, Scott 108-109
Apaydin, Marina 243
Appert, Nicolas 26
Apple
corporate identity 177
dominant design 99
first mover disadvantage 99
hedonic innovation 67
innovation, centre-for-global strategy
226
iPhone 14, 15, 89
origins 201, 202
patent battles 102
supply chain integration 200
Architecting leaders 174
Architectural innovation 15
Arm's length relations 189, 193
Armstrong, Gary 81
Artificial intelligence (AI) 17, 56, 177
ASML202
Asset-specific investments 190
Associating, innovator skill 7, 26, 28
Autonomous innovation 189
Autonomous Team Structure 154, 155,
157,170
B
B2B markets 142
Bahcall, Safi 179, 180
Bangle, Chris 191
Banking
bank service prototyping 60
collaboration, uncertainty problems
194-195
ING Direct, online banking 65,227
ING, team reorganisation 4
innovation strategy 76, 165
interdependent collaboration 190, 192
product life cycles 81
Barnes & Noble 89
Battilana, Julie 176
Bechtolsheim, Andy 202
Behavioural control 148
Bell-Mason framework 163,163
Benchmarks 18-19
Benedictus, Edouard 30
Beta-testing 65
Better Place 91
Bezos, Jeff 89, 97
Bicycles 81
Bill of materials (BOM) 128
Bingham, Christopher B. 57
Biomimicry 30
Biotech companies 188-189, 192-193,
195,211
Birkinshaw, Julian 25, 179-180, 241-242,
244
Blank, Steve 54, 143, 212, 241
Blindenbach-Driessen, Floortje 169,
223-224
Blue Ocean strategies 35
Blu-ray consortium 98, 99
BMW
DriveNow initiative 5, 8, 10, 116, 189,
192
mirroring hypothesis 191
new business development 5, 189
Booking.corn 13, 97
Book Stacks Unlimited 89
Bootstrapping 216
Brainstorming 25, 28, 40
Breazeal, Cynthia 158
Bricolage 212, 214
Brin, Sergey 27, 79, 202
Brokers 33
Brown, Shona 242-244, 246
Buckets
decision process management 119
definition 111
249
portfolio management categorization
111-113
Burke, Andrew 99
Burns, Tom 170, 238-239
Business angels 214-215, 217
Business formation 27, 27
Business model
canvas
business plan 143
functional knowledge 177
idea generation 33
innovation strategy 76, 78
key elements 10, 11, 12
supermarket 10, 11 , 61, 62
definition and concept 9-10
innovation
BMW/Sixt collaboration 5
collaboration, capabilities acquisition
189
concept and scope 9-10, 238
definition 10
portfolio management 113
product and service types 14-16
team structures 154-156, 154, 156
trends as drivers 30-32
service 230
strategy, comparison 13
success factors, potential 13, 13
types 12-13, 12
value chain 9
Business Model Generation (Osterwalder and
Pigneur) 9
Business networks 32
Business plan 142-144
Business strategy 76, 77
Business units, innovation activities
innovation manager 166, 166
integrated 167-168, 167,170
Buyer switching costs 89
C
Caldwell, David 157
Candi, Marina 67
Car industry
alternative energy, innovation strategies
77, 79-81,162
DriveNow initiative 5, 8, 10, 116, 189,
191
ecosystem innovation 90-91, 92
integral design 116-118, 199
mirroring hypothesis 191
modularity matrix 15, 15
platform and modular design 115-116
portfolio management 112-114
prototyping 61
Casciaro, Tiziana 176
Causation 29-30
Charitou, Constantinos D. 87
Chesbrough, Henry 185, 191-192, 191 ,
198,241
Chevrolet 79-80
China18
250
Index
Christensen, Clayton 5, 52, 64, 84-86, 161,
222,241
Cirque du Soleil 35
Clan control 148, 174
Clark, Kim 77-78, 240-241, 240
Clooney, George 120
Coca-Cola 103, 211
Co-creation with customers 63-64, 67,
68-69
Cohen, Susan L. 212
Cohen, Wesley 186-187
Co-innovation partners 91, 95-96
Collaboration between firms
capabihties acquisition 188-189
coordination and control
contracts 193-196
governance mechanisms 193-194
trust 196-197
innovation spin-offs 198
low interdependence 189-192, 191
start-ups 197-198
Collective scrutiny, representation 158, 159
Communication web 242, 244
Complementary assets 98, 99
Complementary product/service 90, 95-96,
99
Complementors 91, 95-96
Computer-aided design (CAD) 127
Computer-aided manufacturing (CAM)
127-128
Computer technology
artificial intelligence (AI) 17, 56, 177
copyrights 102
driver of innovation 31
ecosystem innovation 93
IBM innovations 45, 192
innovation clusters 201-202
multinational firms, innovation
strategies 226-227
network effects 93-97
organizing innovation 157
software tools 127-128
standardization 98
supply chain integration 199-200
see also Information technology
Concurrent engineering 138-139
Constraints, representation 158, 159
Contingency plan 145
Contracts 193-196
Contributory creativity 28, 29
Control of innovation projects 146-148
Cooper, Robert 136, 239, 242
Copyrights 102
Corporate identity 176-177
Corporate incubators 197-198
Costs, development and innovation
business case 143
buyer switching 89
collaborative investment 192-193
experimentation risks 65
external innovation, acquisition 187, 188
lean innovation 55
low-performing projects 120
market tests, value of 140
patents 101
portfoho management, SMEs 108-109
project-based firms 222-223
real options approach 122-12 7
sunk costs 12 7
Covid-19 crisis 17,111,225
Crazy quilt 213
Creativity
contributory 28, 29
expected 28, 29
human 27-29, 29
knowledge and problems 26-27
leadership style 173-174, 173
'out-of-the-box' 28-29, 33, 44
proactive 28-29, 29
responsive 28, 29
skills 8, 244-245
thinking styles 29-30
tools 33-35, 34-35
workshops
effective objectives 40-41
phased structure 41-43
Crick, Francis 82
Crossan, Mary 243
Cross-functional teams 4, 153-154, 223224, 242,244
Crowdsourcing
customer involvement 59-60
ideas 45-47
InnoCentive 46, 47
P&G initiatives 45-4 7
Culture of innovation. see Innovative
culture
Customers
co-creation 63-64, 67, 68-69
crowdsourcing 59-60
customer journey 58-59, 58
feedback60
innovation process involvement 52
observation of 53, 59
partnering with 64, 66, 67
D
Daft, Richard 144
Data analytics 60
Dattee, Brice 92-93
Day, George S.114-115
De Bono, Edward 42
Decision process management
framing 121, 121
groupthink 122
innovation funnel 118-120, 118
irrational support 121-122
project office 119-120
resistance and status 121-122, 121
review board 119-120, 120, 136-137
Deep knowledge 27-28, 178
Deferral option 193
Dekker, Henri 196
Dell, Ideastorm 46, 47, 59-60
De Meyer, Arnaud 144
Denmark20
Design-driven innovation 67-69, 68
Design freeze 137,140
Design patents 101-102
Design thinking
causation 30
concept 53
contemporary approaches 241
iterative innovation process 53-54, 53,
55,139-140,139
lean innovation comparison 54-55
process perspective 244
Deutsche Post 43
Digital Research 94
Directing leadership 172
Disciphned problem solving 242, 244, 246
Discovery-driven planning 61-62, 63,143
Discovery skills 6-7, 28
Discussion questions
entrepreneurship 218
idea development phase 48
innovation management origins 247
innovation process and business models
21
innovation strategy 104-105
iterative innovation and market learning
70
open innovation 204
organizing innovation 181-182
portfoho management 128-129
project-based and multinational firms
232
project management 149
servitization 232
Disruptive innovations
airline industry, impact on 84-86, 84
concept 83, 241
definition and scope 85
demand-side 165
diversification opportunities 87-88
Erasmus value proposition framework 35
firm level organization 160, 161, 165,
168-169
health care 225
lead users 63
management responsibilities 5-6
market knowledge 177
missed opportunities 83, 161, 222
supply-side 165
team structures 155
DNA technology 82
Dollar Shave Club 187, 214
Dominant design 79-80, 96, 98, 99
Donald Duck, patent block 101
Dreams 27, 27
Dredging industry, scenario development
38-39
DSM 27, 64, 66, 93-94
Dubin, Michael 187
Dutch Blend 63, 64
Dyer, Jeff H. 6-7, 173-174
Dynamic capabihties 242
Dyneema 27, 64, 66
E
easyJet 84, 89
Eberle, Bob 34
E-commerce/Web commerce
business model options 10
cloud computing 34
creativity 27
data analytics 60
driver of innovation 31
innovation hfe cycles 81, 82
interdependent collaboration 190
modularity 116
one-sided platforms 97
outcome control 147
portfoho management 113
Economy, impact of innovation 16, 16
Ecosystem innovation
co-innovation/adoption and risks 91-94,
92
contemporary approaches 241
control points 93
definition and scope 90
dynamic model 92-93
theoretical foundation 246
Edison, Thomas 238
Edmondson, Amy C. 173
Effectuation 29, 212-213
Eisenhardt, Kathleen 242-244, 246
Electric cars
charging station chain, project evaluation
125-127
Index
complementary product/service 90, 91
first mover advantages 88
innovation classification 15
life cycle model 79-81
societal impacts 17
supply chains, integration 199
technological knowledge 177
'Elevator pitch' 143
Empathy, with customers 53, 66, 67
Enabling leaders 174-175
EnCo 198
ENECO230
ENIAC31
Entrepreneurial leaders 174, 175
Entrepreneurial process
approaches 212-213
bootstrapping 216
fundraising and investment 214-216
marketing and sales 214
scaling up 214
team formation 213-214
valuation 215-216
Entrepreneurs
business plan 142
environmental factors 212
health care innovation 225
internet opportunities 27
lean innovation influence 54, 54, 212
personal and company responsibilities
210
personal characteristics 211-212
survival rates 211
Entrepreneurship
incubators 216-217
process 212-216
start-ups and innovation 209-211
Environmental Management and Audit
Scheme (EMAS) 100
Equity fraction 180
Erasmus Value Proposition Framework 33,
35,35
Ericsson 177
Europe
patents 100-101
standardization 100
trademarks 102-103
European Innovation Scoreboard 20
European Space Agency (ESA) 217
Exercises
entrepreneurship 218
idea development phase 49
innovation process and business models
21-22
innovation strategy 105
iterative innovation and market learning
71
open innovation 204
organizing innovation 182
portfolio management 129
project-based and multinational firms
233
project management 150
Expected creativity 28, 29
Expected value
idea selection 42, 44
portfolio management 123
Experimenting, innovator skill 7
Expertise
collaboration activities 189
crowdsourcing 46
entrepreneurship 213-214
health care innovation 225
human creativity 27
innovation ecosystem 203
leadership facilitation 173
multinational firms 225-226
multi-product/service enterprises 82-83
organizational capabilities 145, 164-165,
244-245
process models 138-139
Exploitation
disruptive opportunities 87
innovation, firm level 160
knowledge life cycles 83
market knowledge 177
multinational firms 225-226
patents 100
Exploration 160, 177
Externalities 18
External relations 7, 156-157, 161-162,
245
Extrinsic motivation 28-29
F
Facebook 201
Facilitating leadership 172
Fairchild 202
Favre, Eric 120
Feasibility 42, 44
Finland20
Firm level, organizing innovation
business unit integration 167-168, 167
innovation manager 166, 166
innovation unit 163-165, 164
options evaluated 168-169, 168
separate business unit 160-163, 161, 163
structural options 160, 245, 245
Fitness ratio 180
500 Startups 217
Flexibility, team structure 156-157
Flexible development process 140
Focus groups 59, 66, 67
Ford, Henry 52
Formal governance 196-197
Framing 121, 121
Front-loading 61
Frugal innovation 228
FruitCo 169
Frying products 96,147
Fu, Jie 213
Fujimoto, Takahiro 61, 240
Functional innovation 67, 68
Functional knowledge 177-178
Functional team structure 154, 155, 156
Fundraising, start-ups 215-216
Furr, Nathan 7, 173-174
Future cash flows 215
G
Gassmann, Oliver 229, 229-230
Gates, Bill 94-95, 99
Gaye, Marvin 102
GE 179,228
Gemser, Gerda 67
Germany 18, 20, 203
GeronimoAI 56
Geschke, Charles 212
Gibson, Cristina 179-180
Gillette228
Global Innovation Index 19, 19
Glocalization 228
GNU General Public License (GPL) 103
Google
business strategy 10, 77
dominant design 79
evolving dynamics 83
innovation budget 113
innovation, centre-for-global strategy
226
innovative culture 178
origins 201, 202
problem solving 27
supply chains, integration 199, 200
10"100 campaign 46
'Go out of the office' slogan 54
Gopher78
Govindarajan, Vijay 191
Groupthink 122
Growth option 193
Guerrilla marketing 214, 216
Gunning, Tex 147, 227-228
H.
Hansen, Morten 25, 241-242, 244
Hayek, Nicolas 87
Health care innovation 225
HealthTap 216
Heavyweight project manager 155, 224,
242
Heavyweight team structure 154, 155, 156,
170
Hedonic innovation 67, 68
Henard, David 243
Hewlett Packard
Kittywake project 157, 161-162
origins 202
Hewlett, William 202
Hierarchy, innovation process 170-171
Holst, Gilles 238, 239
Horizontal integration 200-201
Huaweil77
Hub-and-spokes model 175
Human computers 31
Human creativity 27-29
Hybrid cars 79-80, 191
Hydrogen cars 79-80
IBM
ecosystem innovation 93
idea catalysts 45
innovation and collaboration 192
innovation, globally-linked 226
Innovation Jam 46
network effects 93-95, 98
standardization 98
Idea(s)
creativity workshops 40-43, 40
crowdsourcing 45-47
development phase 8, 25
generation
customer involvement 53-54, 58-59,
58
data analytics 60
disruptive innovation 87
iterative innovation processes 52-57,
53-54,56-57
organizational structure 170-171
software tools 127-128
human creativity 27-29
implementation phase 8
management systems 28-29, 43-45,
127-128,179
managerial resistance 121, 121
rewards 44
sources
business and social networks 32-33
251
252
Index
trends as 'drivers of innovation' 30-32,
31
IDEO
design thinking 59, 241
shopping cart design 53
toothbrush development 59
IKEA58,58
Immelt, Jeffrey R. 228
Incremental innovation
classification 14, 15
firm level organization 160, 167, 168,
245
innovation budget, large firms 113, 114
key features 9
life cycle model 80-81
networking 171, 176
platform and modular design 118
portfolio management 109
stage-gate model 137-138
team structures 156
testing phase methods 66
Incubators
corporate 197-198
start-ups 216-217
India 18
Information-intensive firms 32
Information technology (IT)
agile project management 141
business model options 10
business networks 32
cloud computing activities 34
ethical issues 17
idea facilitation 40
innovation clusters 201-202
innovation, multinational firms 226
innovation, project-based firms 222
knowledge integration 178
leadership, innovation project 173
navigation products 199
representation of the concept 157
separate business units 162
servitization challenges 231
technological knowledge 177
InfraCo 167-168
ING 4, 65, 227
InnoCentive 46, 4 7
InnoFin 165
Innovation
culture 40, 4 7, 169, 178-180
definition 5
economic impacts 16, 16
funnel118-120,118,120
national comparisons 19, 20
niche 14
paradoxes 7-9
people perspective 244-246
process perspective 244
representation of the concept 157-159,
158
societal impacts 17
strategy perspective 246
success factors 243, 243
types and classifications 14-16, 14-15
uncertainty, scenario development 36-39
see also individual entries
Innovation Ambition Matrix 111-113, 112
Innovation capitahsts 188
Innovation clusters 201-203
Innovation ecosystem 203
Innovation management
business adoption 237-238
definition 6
discipline origins 238-241, 239-240
firm and project levels 241-242, 242
institutional organizations 238
key features 3-4
new business development relationship
4,6,6
theoretical foundation, perspectives
241-247,242-243,245
Innovation manager 4, 166, 166, 168, 223,
238
Innovation process
concepts 51-52
hierarchical effects 170-171
idea development phase 25
iterative 52-57, 53-54, 56-57, 139-142,
139,141
overlapping phases 138
phased activities 8
project-based firms 222-223
servitization challenges 231-232
structured 224
Innovation strategy
business elements 77, 77, 169
creation 76-78
definition 76
disruptive innovation 83-88, 84
ecosystem 90-94, 92
life cycles 78-83, 78
portfolio management 113
sustainable development 17
theoretical foundation 246
timing 88-90
Innovation unit 163-165, 164,168, 168170, 223
Innovation value chain 242, 244
Innovative culture 40, 47,169, 178-180
Innovator 6-8, 32
Installed base 88, 95, 96, 99, 103
Institute of Electrical and Electronics
Engineers (IEEE) 100
Integral design (integrality) 116-118, 190,
199-201
Integrative leadership 172
Intel 103, 202
Intellectual property rights
contracts 195-196
copyrights 102
crowdsourcing 4 7
innovation licencing 187
innovation strategy 99, 100-102
open-source strategies 103
patents 100-102
protection benefits 18
secrecy 103
Internal front end, management 43-45
Internal locus of control 212
International Organization for
Standardization (ISO) 5, 100
International Product Development and
Management Conference (IPDMC)
238
Internet
business model options 10
customer surveys 58
disruptive innovation 86
driver of innovation 31
entrepreneurs 27
knowledge life cycles 82
online banking 65
search engine design 78-79
Intrinsic motivation 28-29, 44, 179, 245
Invention Factory 238
Iqbal, Zafar 138
Iterative innovation processes 55, 139-142,
139,141
iTunes 97
J
Jacuzzi bath 60
Japanese-Harvard innovation school 240,
240,246
Jaruzelski, Barry 111
Jetstar 84
Jibo, robot project 158-159
Jobs, Steve 52, 99, 172, 198, 202, 216
Joint venture 194
Journal ofProduct Innovation Management
238
Joy, Bill186
K
Kallasvuo, Olli-Pekka 113-114
Katila, Riitta 178
Kavadias, Stelios 13
Kelley, Tom 59
Kelly Stater's Pro Surfer game 140
Kidder, Tracy 190-191
Kijkuit, Bob 33
Kildall, Gary 94-95
KLM46
Knowledge
breadth of 178
depth of 178
ecosystem 203
external, acquisition of 186-187, 245
functional 177-178
intensity 169
life cycles and dynamics of firms 82-83
market177
role in creativity 26-28, 171
specialist regional, advantages of 226
tacit 88
technological 177
Kodak165
Kohavi, Ron 65
Kondratiev, Nikolai 16, 16
Kotelly, Blade 158-159
Kotler, Philip 81
Krnyer, Karl 101
l.
Laker Airways 89
Laker, Freddie 89
Landscape, solution space 57, 57
Leadership
activities and vision 173-174
ambidextrous 175
leading creativity 172-173, 173
organizational identity 176-177
start-up, scaling up 214
styles 9, 172-174
support sources 175-176
team 172-175, 173
technological 88
transactional 174, 175
transformational 174-175
Lead users 63-64, 67
Lean innovation
agile project management 141-142
contemporary approaches 241
discovery-driven planning 61-62, 63, 66
idea development phase 50, 54-55, 54
iterative innovation process 139-140,
139
'lean start-up' 54
portfolio management 113-114
process perspective 244
real options approach 122-123, 127
representation of the concept 159
Index
start-up entrepreneurs 54, 212
Leapfrogging 87
Learning advantages 88
Lemonade principle 213
Lengel, Robert 144
Lenovo 93
Leonard-Barton, Dorothy 64, 66
Levine, Mark 187
Levinthal, Daniel 186-187
Life cycle models
knowledge and dynamics of firms 82-83
technology, product and services 78-81,
78
Lightweight team structure 154, 155, 156,
170
Linux 97, 103
Lumineau, Fabrice 196-197
M
MacMillan, Ian C. 61-62, 143
Macro trends 36-39, 36
Mainemelis, Charalampos 172, 173
Malhotra, Deepak 196-197
Management innovation 171
Management of Innovation, The (Burns and
Stalker) 170, 238
Management span 180
Managing Technological Innovation (Twiss)
239,240
Managing the Flow of Technology (Allen) 239
Ma, Ran213
Market-comparable valuation 215-216
Marketing
banking4
business development 5
cross-functional teams 153-154
data analytics 60
first mover advantages 88
follower advantages 89
guerrilla marketing 214, 216
innovation costs 119
traditional techniques 57-59, 58
viral 214
Marketing-R&D interface 247
Market knowledge 177
Market learning
design-driven innovation 68-69, 68
idea development phase 51, 54
ING Direct 65
market tests, value of 140
testing phase 60-65, 62-63
Markides, Constantinos C. 87
Mateschitz, Dietrich 211
Matrix structures 223
McDonald's 52, 114-115
McGrath, Rita G. 61-62, 143
Mechanistic management system 170,
238-239
Medium-radical innovation 66
Medtronic 135
Metaphors, representation 158, 158
Michehn 90-92, 92
Microsoft
NB tests 65
ecosystem innovation 93
innovation failure 99
innovation, globally-linked 226, 229
innovation process model 139
network effects 94-97
Nokia acquisition 113
Minimum Viable Product (MVP) 54, 61-62,
63
Mirroring hypothesis 190-191
253
Mobile telecommunications
ecosystem innovation 90
knowledge for innovation 177
portfolio management 103, 113-114
supply chain integration 199-200, 200
see also Smartphones
Modular design 116, 117
Modular innovation 15, 116, 118
Modularity
degrees of 116, 117, 189-191, 199
matrix 15-16, 15
service industries 116
Moore, Gordon 202
Motivation
extrinsic 28-29
intrinsic 28-29, 44, 179, 245
Multidisciplinary teams 224
Multinational firms
frugal innovation 228
innovation, international strategies
225-228,245
international organization 229-230, 229
Multi-product (or multi-service) company
82-83
Musk, Elon 91, 172, 210
Myopia (in business) 87
implementation phase 9
innovation management relationship
4,6,6
key features 3-4
knowledge for innovation 177-178
people perspective 244-246
process perspective 244
Sixt 5
strategy perspective 246
success factors 243, 243
theoretical foundation, perspectives
241-247,242-243,245
Newness 66, 67-68, 156
Newspaper industry 86, 161
Niche innovation 14
Niche market 57, 64, 80
Nike 103
Nintendo 157
Nokia 113-114, 118,179,199
Nominal group technique 41
Non-leadership 172
Not Invented Here (NIH) problems 47,165,
169,188,227
Novelty 14, 14, 26, 42, 44, 101
Nayee, Robert 202
Nucci, Alfred 211
N
0
Nagji,Bansilll-112,112,113
Nambisan, Satish 187-188
Navteq 199
Nespresso 120
Nestle 120
Netherlands, The
collaboration, uncertainty problems
194-195
dredging industry, scenario development
38-39
Dutch Blend, co-creation 63, 64
ENECO, innovation centres 230
human computers 31
innovation campus, Eindhoven 202
innovativeness 20
Net present value (NPV) 114, 122, 143
Networked market
first mover advantages 88
key features 94
network effects 94-97
path-dependency 96
standardization 98
Networks and networking
business 32
business consortiums 98, 99
communication web 242, 244
'idea connectors' 4 7
innovation phases 8
innovator skills 7
network effects
advantageous behaviours 98, 99
complementary assets 98
concept 94
direct 95
dominant design 79, 96
indirect 95-96
platforms, one/two-sided 97
political use 176
social 32-33, 60, 121-122, 171, 172
trends, innovation drivers 31-32
New business developer 4, 6-8, 32
New business development
BMW5
business adoption 237-238
definition 6
Observing, innovator skill 7
O'Leary, Michael 85
O'Mahony, Siobhan 157-159
One-sided platforms 97
Opel 79-80
Open innovation
collaboration between firms
capabilities 188-189
financial reasons 192-193
low interdependence 189-192, 191
methods and activities 193-197
contemporary approaches 241
corporate incubators 197-198
forms 186
innovation clusters 201-203
key elements 185
knowledge and innovation acquisition
186-188,188
licensing out technology 199
spinning-off activities 198
supply chains, integration and
disintegration 199-201, 200
theoretical foundation 246
Open Innovation (Chesbrough) 198, 241
Open-source strategies 103
Organic management system 170, 238-239
Organizational identity 176-177
Organizational structures 170
Organizing innovation
firm level
innovation manager 166, 166
innovation unit 163-165, 164
organizational structures 170
separate business unit 160-163, 161,
163
structural options 160, 245, 245
innovative culture 169, 178
knowledge for innovation 177-178
leadership
organizational identity 176-177
support sources 175-176, 176
team 172-175, 173
management systems 170-171, 238-239
new business development 177-178
organizational capabilities 164-165
254
Index
team structures
cross-functional 4, 153-154, 170
flexibility and external relations
156-157
representation of the concept 157159, 158
types and activities 154-156, 154,
156,170
Osborn, Alex F. 34
Osterwalder, Alexander 9-10, 33
Outcome-based interviews 59
Outcome control 147, 174
'Out-of-the-box' creativity 28-29, 33, 44
p
Packard, David 202
Page, Larry 27, 79, 202
Parallel model 138-139
Partnering with customers 64, 66, 67
Pasteur, Louis 30
Patents
contract allocation 195
definition 100
design 101-102
joint 195-196
utility 100-101
Path-dependency 96
Pavitt, Keith 32
People perspective of innovation 244-246
Performance engine 162
Performance management 170, 179-180
PESTEL framework 36, 36, 41
Pharmaceutical industry
capabilities acquisition 189, 211
collaborative investment 192-193, 195
Covid-19 crisis 17, 111
multi-product firms 83
R&D intensity 111
Philips
Blu-ray consortium 98, 99
evolving dynamics 82-83
Holst's laboratory rules 238, 239
HomeLab60
innovation cluster 202
service business model 230-231
Pigneur, Yves 9-10
Pilot-in-the-plane principle 213
Pisano, Gary 180
Pivoting 49, 54
Plant breeding, research intensity and
horizontal integration 201
Platform and modular design 115-118, 117
Platform innovation 118
Platforms, one/two-sided 97
Polaroid 165
Portfolio management
concept origins 239-240
decision process management 9, 118,
118-120, 120
platform and modular design 115-118,
117
proactive 108-115, 110,112,115
reactive 108, 115, 115
reactive versus proactive 107-108
tools
net present value (NPV) 122
real options 122-127, 159
software tools 127-128
Postbank 194-195
Price to earnings ratio (P/E ratio) 215
Prince2 145-146
Proactive creativity 28-29, 29
Proactive innovation 222-223
Proactive portfolio management
'buckets', project combinations 111-113
definition 108
'horizons', innovation categories
111-113
Innovation Ambition Matrix 111-113,
112
innovation budget 109-110
large firms 109-115, 110, 112, 115
R&D intensity 110, 111
small or medium-sized firms (SMEs)
108-109
Probe and learn 65
Problem, open/closed 26
Problem solving
creativity 27, 27
disciplined 242, 244, 246
Process control 148
Process innovation 6
Process models
agile project management 141-142, 141,
146
iterative 139-142, 139
Microsoft 139
parallel 138-139
process perspective 244
stage-gate 136-138, 136,146,148,239,
242
uncertainty 134-136, 134, 146
Process perspective of innovation 244
Procter & Gamble (P&G)
'Connect and Develop' initiative 45
crowdsourcing 45-4 7
Product data management (PDM) 128
Product development
approach expansion 239-241, 240
globally-linked 226
internationalization of regional product
227-228
servitization challenges 231-232
stage-gate model 239
theoretical foundation 242
Product Development and Management
Association (POMA) 238
Product innovation
creativity workshops 40
crowdsourcing 59-60
economic impacts 16, 16
network effects 99
servitization challenges 231-232
technological knowledge 177
types and classifications 14-16, 14-15
Product integrity 242
Product life cycle management (PLM)
127-128
Project-based firms
health care innovation 225
innovation approaches 222-223, 245
innovation, operational factors 223-224
product and services 222
Project management
business plan 142-144
control of innovation projects 146-148
information exchange problems 141
innovation process alignment 146
market performance 147
planning 145-146, 145
process models
agile project management 141-142,
141,146
iterative 139-142, 139
parallel 138-139
sequential 136-138, 136,146,148
uncertainty 134-136, 134,146
project, definition 144
project performance 147
uncertainty levels 144-145
Prototype, representation 158, 158
Prototyping 60-61, 67, 67
PSA115-116
Public policy 18
Q
Questioning, innovator skill 7
Quickplug 28
QWERTY keyboard 80, 89, 98
R
Radical innovation
customer involvement 59
disruptive opportunities 87-88
firm level organization 160-161, 165,
168
idea management systems 43-44
innovation budget, large firms 113
innovation performance 111
integral design 199
iterative processes 140-141
key features 9
market learning 66-67
modularity matrix 15, 118
networking 171, 176
portfolio management 108-109,
114-115
project management 146,148
stage-gate model 138
technology-market matrix 14-15
Rashid, Karim 67
Rational planning 242, 244
Reactive portfolio management
definition 108
large firms 109, 115, 115
process 108
Reactive process 222
Real options
collaborative investment 192-193
definition 123
portfolio management 122-127, 159
project management 135,143
project scenarios 123-127
RedBull211
Renault 91
Research and development (R&D)
academic literature 238-241
cross-functional teams 153-154
global230
government subsidies 18
innovation unit compatibility 163-165
international organization 229-230, 229
key feature 4
knowledge acquisition 186-187
knowledge life cycles 83
management Conference 238
market-driven 229-230
national treasure 229
R&D intensity 110, 111
technological knowledge 177
technology driven 229
third generation 239-240
Resource dependency 86
Responsive creativity 28, 29
Reverse innovation 228
Revolutionizing Product Development
(Wheelwright and Clark) 77-78,
240-241
Rewards for ideas 44
Index
Ries, Eric 54, 212, 241
RIM 179
Rimonabant 145
Ring team 175
Rogers, Everett 212
Roquette Freres 93-94
Roussel, Philip 239-240, 246
Royal IHC 87-88
RWTH Aachen University 203
Ryanair35,84,85,89,99,210-211
s
Salary growth 180
Samsung, patent battles 102
Sanofi-Aventis 145
Sara Lee 64
Sawhney, Mohanbir 187-188
Scale-intensive industries 32
Scaling up, start-ups 214
SCAMPER 33, 34, 42
Scarce assets 88, 99
Scenario workshops 36-39, 36-38
Schilling, Melissa 99, 243
Schmidt, Eric 216
Scholten, Henk Jan 213
Schumpeter, Joseph 5
Science-based firms 32
Science Policy Research Unit (SPRU),
SAPPHO studies 239
Scouting 157
Scrum teams 141, 155, 156, 165
Secrecy, intellectual property 103
Seidel, Victor 157-159
Self-efficacy 211-212
Self-organizing teams 170
Separate business unit 140-143, 155,161,
168-169,168
ventures and spin-offs 162-163, 163
Serendipity 30
Service innovation 14-15, 14, 40, 177-178
Service level agreement (SLA) 230-231
Servitization 230-232
Set-based approach 173
Sethi, Rajesh 121, 138
Shell 43, 90
Shockley, William 202
Signify (Philips Lighting) 76, 230-231
Silicon Valley 201-202, 212,214,226
Sinek, Simon 42, 121, 176-177
Siren Care 213
Sixt
DriveNow initiative 3, 8, 10, 116, 189,
192
new business development 5, 189
Small or medium-sized firms (SMEs)
108-109
Smartphone
alternative names 79, 158
business model options 10
development outsourcing 189
first mover advantage 89
network effects 95-96
Nokia's innovation errors 113-114
Social construction 52
Social networks 32-33, 60
Society, impact of innovation 17
Solahart 90
Solution space
concept 55
evolutionary approach 50, 55, 57
landscape 57, 57
process models 135
set-based approach 49-51, 56
Sony, Blu-ray consortium 98, 99
S0rensen, Hans E. 5-6, 9
Soul of a New Machine, The (Kidder)
190-191
SouthWest 26, 29-30, 84, 89
Specialized suppliers 32
Spin-offs 163, 198
Spradlin, Dwayne 46
Stack, Charles M. 89
Stage-gate model 136, 136-138, 146,148,
239,242
Stakeholders 175-176, 176
Stalker, G.M.170, 238-239
Stam, Daan 33, 35
Standardization 98, 100
Stanford University 201, 202
Start-ups
collaboration 198, 211
entrepreneurial process 212-216
entrepreneurial responsibilities 210
incubators 216-217
innovation clusters 201-203
innovation opportunities 210-212
larger firm acquisitions 187
Sting, Fabian 156
Story, representation 157, 158
Strategic fit 44
Strategic leverage 44
Strategy, business model comparison 13
Strategyn 59
Strategy perspective of innovation 246
Subsidies, direct/indirect 18
Sunk costs 127
Supermarket
business model canvas 10, 11
carts, design process 53
discovery-driven planning 61-62, 63,
143
innovation life cycles 81
supply chains 200
value proposition framework 33
Supplier-dominated sectors 32
Supply chains, integration and
disintegration 199-201, 200
Surprising Adventures ofBaron Miinchhausen,
The 216
Sustainability
creativity workshops 40
driver of innovation 31
ecosystem innovation 93-94
innovation strategies 17
manufacture 14
scenario development 37-39
UN policies 17
Sustaining innovation 86
Swatch87
Sweden20
Switzerland 20
Systematic Inventive Thinking 33, 34, 41
Szymanski, David 243
T
Tacit knowledge 88
Task coordination 157
Team leadership 173-174
Team structures
agile/scrum teams 155,156
appliance 155-156
cross-functional 4, 153-154, 223-224,
242,244
external relations 15 6-15 7
flexibility 156-157
multidisciplinary 224
organizational structure relations 170
representation of the concept 157-159,
158
self-organizing 170
types 154-156, 154
Technological innovations 14, 17, 165
Technological knowledge 177
Technological leadership 88
Technology
gatekeepers 187
innovation clusters 201-203
licensing 199
network effects 95
open-source strategies 103
smartphones 78-79, 81
sustainable development 17
transfer 27, 27
user-developer roles 64
see also Computer technology;
Information technology
Technology life cycle model
concept 78, 78
dominant design 79-80
fluid phase 78
product and service categories 81
specific phase 80-81
transitional phase 79-80
Technology-market matrix 14-15, 14
Teece, David 191, 191-192, 242
TeleAtlas 199
Telfort 194-195
Terman, Frederick 202
Tesla 79-80, 88, 199, 210
Thicke, Robin 102
Thiel, Peter 120
Thinking styles 29-30
Third Generation R&D (Roussel et al) 239240, 246
Thomke, Stefan 61, 65
Tom Tom199
Toshiba 99
Toyota 79-80, 115-116
Trademarks 102-103
Transactional leadership 174, 175
Transaction cost theory 193
Transformational leadership 174-175
Trends, scenario workshops 36-39, 36-39
Trimble, Chris 191
TRIZ 33, 34, 41
Trust, collaboration 194, 196-197
Tuff, Geoff 111-112, 112, 113
Turmix120
Tushman, Michael L. 175
Twiss, Brian 239, 240
Two-sided platforms 97
Tyson, Mike 142
u
Uber 13, 88, 97, 209
Ulwick, Anthony 59
Uncertainty
business plan 142, 143
collaboration problems 194-195
external 134, 134
internal 134
leadership, innovation project 173-174
levels of 144
organizing innovation 170-171, 175,
244,245
portfolio management 108-109
proactive innovation 223
process models 134-136, 134,139,
139-140,146,244
255
256
Index
team structures 155
technical 157-159
Uncertainty
concept 7
hfe cycles of innovation 78, 79
paradoxes of innovation 7-8
prototyping 61
solution space 55-57, 56-57
trends 36-37, 37
Underexploited opportunities 212
Unilever
Dollar Shave Club acquisition 187
margarine project 147, 227-228
United Kingdom (UK) 20, 145, 239
United Nations (UN) 17
United States (US)
bank service prototyping 60
innovativeness 20
patents 100-101
Silicon Valley 201-202, 212,214,226
venture capitalists 215
University of California, Berkeley 201
Unsworth, Kerrie 28-29
User-developer 64, 66, 67
User innovation 52, 59-60
Utilitarian innovation 67, 68, 69
Utility patents 100-101
V
Valuation, start-ups 215-216
Value chain 9
Value created 26-27, 27
Value proposition framework 33, 34, 35
Value sought 26-27, 27
Van den Ende, Jan 33, 35, 67, 223-224
VanOord90
Van Oorschot, Kim E.141
Venture capitalists 215, 217
Venturing unit 162-163, 163
Verganti, Roberto 67
Vertical disintegration 199-201
Vertical integration 199, 201
Viral marketing 214
Volkswagen 81
Von Zedtwitz, Maximilian 229-230, 229
w
Warnock, John 212
WaterCo224
Watson, James 82
Web commerce. see E-commerce/Web
commerce
Web-shops, integral design 190
Website developers 65
West, Tom 191
WhatsApp 95
Wheel clamps 52
Wheelwright, Steven 77-78, 240, 240-241
Wikipedia 34
Wilhelmsen 231
Williams, Pharrell 102
Winner-takes-all 96-97
Wozniak, Steve 202
X
X2Al214
Xerox
innovation spin-offs 198
missed opportunities 212
service business model 230
X-Teams 7, 156-157
y
Yoovidhya, Chaleo 211
z
Zunino, Diego 78