Innovation as the Main Engine of Progress - Book Report/Review Example

A Literature Review on Innovation As our review of the literature will show, the word 'Innovation' has evolved into a complex concept with several meanings, and to which could be attributed the rise and fall of civilisations, the competitiveness of global economies, the profitability of firms, the survival of nations, and the explanation of both the best and the worst in everything human. Definition: What is Innovation The basic meaning of the word "Innovation" is rooted in the Latin word novare, which means 'to make new', from novus or 'new'. Innovation can therefore basically mean 'something newly introduced, such as a new method or device' (Collins, 1991, 798). Innovation was first mentioned sometime in the 15th century, the age of exploration characteristic of the Renaissance marked by the discovery of many new things in geography, science, politics, religion, and in the arts. The Renaissance freed the minds of men and women, unleashing a wave of creativity and the formation of new insights arising from and leading to a better understanding of the world (Isaak and Just, 1995, 281-326). The term 'Innovation' is closely related to another word with which it has often been interchanged or confused: 'Invention'. Markedly different in etymology but slightly similar in meaning, invention (from the Latin venire which means 'to come upon' or 'to find') is the process of creating or devising something new (Collins, 1991, 811). Offhand, we see why it is easy to confuse these two words: both mean doing something new. However, the 20th century usage of the terms 'invention' and 'innovation' by businesses has led to the development of a fine distinction in meaning to which most people agree: an 'innovation' is an 'invention' that creates economic value and wealth and that results in transformation. It can therefore be said that innovation is the successful and wealthier sibling of invention. Innovation is most succinctly defined as the 'successful exploitation of new ideas' (DTI, 2003, 9) and may be applied to products, business models, philosophies, ideologies, scientific findings, and any other reality the human mind creates, and to which could be attributed a certain measure of success in the form of dissemination, widespread belief, or the creation of wealth. One of the first in the modern era to relate innovation to wealth creation is Schumpeter (1939), who never used the word directly but attributed the economic effects of the introduction of a new good, a new method of production, opening of new markets, the conquest of new sources of raw materials, and the carrying out of new organisations in any industry. Technical and product advances were part of Schumpeter's concept of innovation, but it was only a small part, meaning that innovation does not always mean technical inventions but finding new ways of doing things. This view is shared by Drucker (1985, p. 33-35), for whom innovation is an economic or social terminology, rather than a purely scientific and technical term, describing it as the driver of entrepreneurship which he defined as a new way of doing business. He links innovation with entrepreneurship as the driving force that creates businesses to sell new products to new or existing markets and, in the process, create wealth by adding convenience to customers in new ways. Examples of innovations in the 20th century were instalment payments for farm machineries that allowed farmers to be more productive or the development of container ships that cut down shipping costs and increased world trade. In both cases, the invention of an idea led to wealth creation and became an innovation. Though all innovations proceed from inventions, not all inventions are innovations as only those inventions that create wealth can rightly be called innovations (Pisano, 2006). Innovation and Creativity Innovation and invention are both rooted in creativity which is its underlying element. Understanding creativity, what brings it about and how it could be sustained, allows us to delve more deeply into innovation to find out how it 'creates' greater wealth and economic value for businesses and society. The word creativity was first used by the philosopher William James in the late 19th century to support his philosophy of pragmatism. Creativity, from the word 'to create' which means 'to cause to come into existence' applies to the world of ideas and modes of action as much as it does to science and business. As James described it, creativity is a disorderly process marked by confusion (Simonton, 1984, 24). Although creativity that leads to innovation arises from within the human mind that is in the process of discovery, several commentators acknowledge the importance of the environment, which is described as a set of intellectual and social networks that stimulate creative thinking and provide the mechanisms that recognises and spreads the innovations Innovation therefore can be described as the end-point of a discovery process that takes place within an enabling network (Csikszentmihalyi, 1997, 32-36). Simonton and Csikszentmihalyi identify two paths in this process of discovery that leads to innovation: divergent and convergent thinking. Divergent thinking opens the mind outwards to search for solutions and ask the right questions that need answers. This mode of thinking is the tool of inventive geniuses and involves the ability to switch perspectives and make unusual associations. It has three phases: searching (for anomalies or discontinuities), incubation (allowing ideas to simmer and find solutions), and collision (recognition of a good idea). Convergent thinking or focusing down on the problem is also called zooming in and is similar to deductive thinking. This mode focuses on the essential details, screening ideas for relevance, and reduces problems to their simplest essence. Whereas divergent thinking requires breaking down a problem into manageable parts, convergent thinking relies on assembly and reduction, a two-step process involving trial and error (Amabile, 1996). Creativity depends on three essential sets of skills that would lead to innovation (Foster and Kaplan, 2001, 122-123): Conversation: ability to pass along ideas to or discuss them with others; Observation: ability to look broadly across cultures to absorb relevant information, even when its relevance may not be visible to others; and, Reflection: ability to reflect on various data and information absorbed, and allow these floating pieces to come together into a meaningful pattern or purpose. Types of Innovation A review of the varied literature allows us to summarise the classification of innovation types into many ways, depending on its effects (incremental, transformational, or substantial), areas of focus within the firm (product, process, positioning, and paradigm), or systemic categories (finance, process, offerings, and delivery). Taking off from an analysis of Schumpeter's work, Tushman and Anderson (1986) highlighted the different effects of innovation. Incremental innovation involves small changes in the status quo and do not create much wealth. There are many examples, such as a car model in a new colour or a detergent with an additive. Transformational innovation can create new markets, turn the tides of commerce, make billionaires, vanquish competitors, and inspire the next generation of businesses and products; a more recent example is the way the personal computer took on the mainframe computing industry and won. Substantial innovations are often the second generation of transformational innovations, brought about by products or systems that follow the pioneering innovation, such as the Windows operating system (over DOS) and the Boeing 747 (to the 707). These innovations are not as transformative as the products they replaced, but their effects have high impact (Foster and Kaplan, 2001, p. 114). Using areas of focus within firms as a basis, Tidd, Bessant, and Pavitt (2001) classify innovation into four types: product, new or improvements on products, such as the new iPod; process, i.e., improvement of some part of the process to bring benefits, such as SAP's Customer Relationship Management software; positioning, where a product is re-positioned in the market to target new sets of customers, as happened with some sports drinks that used to be medicinal; and paradigm innovation, where major shifts in thinking cause change, such as the advent of the PC. Christensen (1997) simplifies the classification into two - sustaining and disruptive innovation - that contain an important distinction different from the traditional models of incremental versus radical or transformational types. Sustaining innovation types are those that foster improved product performance. These could be discontinuous or radical in character, whilst others can be incremental in nature. What they have in common is that they improve the performance of established products in ways that its traditional markets have valued. Disruptive innovation, however, may not be an improvement over existing products or processes, but they can lead to transformations in the industry or the failure of established firms with track records of sustaining innovations. The common examples of disruptive innovation that he provides are the effect that Honda's small off-road motorcycles in North American markets had on market leaders BMW and Harley-Davidson and that transistors had on the vacuum tube industry. He devotes a large portion of his book to what he calls the "Innovator's Dilemma" brought about by new value propositions from disruptive innovations that may not be the best, but which become successful and lead previously successful and innovative firms to fail. Drivers and Determinants of Innovation Several authors use the terms drivers and determinants of innovation without distinguishing one from the other. However, we can make our own distinction based on our review and understanding of the literature on this topic. We can define 'drivers' as the factors of innovation that are common to all humans, whatever their values, cultures, economies, legal structures, or social network. 'Determinants', on the other hand, can be defined as the factors that make innovation possible, i.e., those that turn inventions into innovations that create wealth because of the recognition of its economic value. We can therefore distinguish between the two by summarising that drivers can lead to inventions that are turned to innovations if the determinants are present. In specifying the factors that drive and those that determine innovation, the line of distinction will therefore be those that are common to all (drivers) and those that are unique to those environments that are successful at innovation (determinants). We see the following as drivers of innovation: creativity, openness to change, a genuine need that drives the search for a solution, and a form of recognition for the problem-solver. These are specified in the works in the works of the economic thinkers such as Adam Smith, J.B. Say, and J. Schumpeter, and the academic W. Humboldt who all recognised the importance of these factors as drivers or sources of innovation and technological change (Drucker, 1987; Dosi, 1988). These drivers are related to and further specified into the determinants of innovation as factors that allow inventions and creative solutions to problems to turn into transformational and wealth-creating businesses (Solow, 1956). In other words, though the drivers may exist in a country, these may not turn into goods with an economic value in the absence of the determinants. What are the determinants of innovation Geography and Culture Geographical concentration of firms was described as a national competitive advantage framework, one of the four determinants that include factor and demand conditions, related and supporting industries, and firm strategy, structure, and rivalry (Porter, 1990, 72). Such concentration allows resources - knowledge, experience, managers, business strategies, and markets - to be closely observed and shared as to accelerate innovation and economic growth. This geographical proximity, together with similarities in cultural characteristics and value systems, also leads a large proportion of the workforce to develop adaptable skills - technical and managerial - that allow them to engage with and respond to innovation, which can be a highly instituted process with strong national and cultural differences (Nisbett, 2003), a factor that can be found even amongst cities (Dvir and Pasher, 2004). More recently, several nations mostly in Europe have developed National Innovation Systems in which firms, local organisations and institutions are involved in interactive R&D and production activities to push innovation based on geographic characteristics (Veugelers, De Voldere, Reynaerts, Rommens, Sleuwaegen, Rondi, Davies, and Aiginger, 2001) and develop a so-called National Innovative Capacity (NIC), the ability to produce new ideas and commercialise the flow of innovative technologies over the long-term. Country differences in innovation and growth reflect not just differences in labour, capital, and the stock of knowledge but also different degrees of the knowledge distribution of power or the efficiency of the innovation system as shown in technology policies, regulation regimes, and the quality of a nation's human capital. Technology Policies and Regulation The literature is likewise extensive as regards the role of government policy as a determinant of innovation. There is substantial empirical evidence of how innovation has been promoted by such factors as government and public support (Martin and Scott, 2000), government incentives and subsidies (David, Hall, and Toole, 2000), the system of intellectual property protection (Levin, Klevorick, Nelson, and Winter, 1987), anti-trust policy and protection (Porter, 2001), the promotion of joint ventures (Cassiman, 2000), innovation diffusion policies (Geroski, 2000), financial systems (Canepa and Stoneman, 2004), and investments in human capital (Lucas, 1988) have been used to drive innovation in developed and developing nations. Human Capital Several studies emphasised the importance of human capital in innovation and its diffusion (McFadzean, O'Loughlin, and Shaw, 2005; Andergassen, Nardini, and Ricottilli, 2006; Antonelli, 2007) that are influenced by factors such as literacy rates, skills and competences, and work attitudes and habits. They argue that innovation affects and depends on human capital quality on both the supply- and demand-side interactions. A more educated population would be more discriminating in their consumption and utility choices and would demand increasing levels of innovation amongst suppliers, whilst the same population would be more familiar with innovation and possess skills needed to spur greater innovation in industry and society. Protection of Intellectual Property Rights The value of inventions as a public good that needs to be legally protected has been recognised (Arrow, 1962). The protection of intellectual property rights encourages creativity and invention and facilitates the transition to innovation through the creation of economic value, as shown by Furman, Porter, and Stern (2002). Gilbert and Shapiro (1990) argued that by providing patent protection, innovators are likewise encouraged to diffuse the technology so it could be used as a foundation for further innovations. Capitalist Market Structure and Market Demand The market structure provides the economic character that encourages and rewards innovation, not only through patent protection but also through other market enhancing activities as the financial infrastructure, the rule of law, trust in business dealings, and the intensity of research and development (Scherer, Harhoff, and Kukies, 2000). They argue that an ideal market structure allows innovators to adjust prices at levels the market can bear, whilst maximising their profits and assuring wealth creation, resulting in a virtuous economic spiral that leads to more innovations due to recovery of investment and the enjoyment of public recognition. Market demand for new products and technologies also drive innovation (Shleifer, 1986). Corporate Governance Damanpour and Wischnevsky (2006) observed the importance of corporate structures and decision-making processes in generating innovation capacity. They attribute such critical factors as management leadership systems that encourage thinking outside the box, the presence of risk control and marketing processes that do not stifle creativity and bring product development closer to the customers, and the intensity of investments in research and development. Although Jensen and Meckling (1976) warned against the presence of disincentives to research and development in order to avoid bringing down investment returns, Agrawal and Mandelker (1987) countered that compensation systems can be linked to results of innovation and, together with shareholder interest in increased returns, serve to neutralise whatever obstacles may be put up by management in firms. Others (Feldman and Kelley, 2006; McAdam and Lafferty, 2004) have observed that small firms are more innovative whilst larger ones, because of their bureaucracy that affect the decision-making process, are less so, thus requiring measures such as developing an entrepreneurial spirit (Bodewes, 2002). Financial Markets The availability of capital from debt or equity from established financial markets allow innovators to pursue their own intentions. Investors are also able to develop an exit strategy that would reward them for taking a large part of the risk in the innovative firm (Gupta, 2000). Funding may not be one of the main drivers of innovation because it can be sourced from investors, but it is necessary to turn new ideas into a means of wealth creation (Himmelberg and Petersen, 1994). Other Classifications In a study of health care innovations, Fleuren, Wiefferink, and Paulussen (2004) identified fifty determinants in their field, classified into five different groups: socio-political, organisational, personal/user/health professional, related, and facilities for implementation of the innovation. Their study showed that when introducing innovations to health care, it is important to gain insights into the determinants that facilitate or impede the introduction of the innovation so as to be able to design an appropriate strategy for success. They conducted a Delphi study to obtain an overview of the innovation determinants to achieve consensus and increase the likelihood of success. They also argued that due to the aspect of change - incremental, transformational, or substantial - that is inherent in every innovation, those who would wish to introduce such changes need to be aware that barriers exist, and that overcoming these barriers may require its own sets of innovations. Barriers to Change and Innovation Lewin (1951) conceptualised change arising from adapting to innovation as a three-stage process involving unfreezing (the existing organisational equilibrium), moving (to a new position), and refreezing (in a new equilibrium position). Schein (1987) elaborated that unfreezing involves disconfirmation of expectations, creation of guilt or anxiety, and provision of psychological safety that converts anxiety into motivation to change. Moving to a new position is achieved through cognitive restructuring, often by identifying with a new role model or mentor and scanning the environment for new information. Refreezing occurs when the new point of view is integrated into the total personality and concept of self and significant relationships. We apply this framework to study reactions to radical change. Hackman and Wageman (1995) list four general principles for overcoming barriers: Success relies on meeting the needs of those who will be affected. Change is an effect caused by processes in which the causal systems are complex but understandable. Most people are intrinsically motivated to try hard and to do well. Simple statistical methods linked with careful collection and analysis of data can yield insights into the causes of problems within those change processes. By focusing on work processes, explicit identification and measurement of internal and external requirements, analysis of variances, use of cross-functional teams, management by facts (data), learning and continuous improvement, the use of process management heuristics, data collection, analysis, hypothesis formation and testing, barriers can be overcome and innovations can be devised and introduced steadily and continuously. Measures of Innovation Innovation is difficult to measure, although several governments and firms attempt to quantify their level of innovation. Firms monitor employee patents, new product introductions, product technology maps, product profitability, R&D productivity behaviour, and dynamic performance analysis (Midgley and Dowling, 1978; Greenan and Guellec, 1998). Countries and governments monitor the determinants: human capital (outputs of the educational system), legislation and implementation related to patents and corporate governance, liberality of financial capital markets, incentives for investments, geographical clusters, and creativity (Rogers, 1995; Keep and Mayhew, 2003; Lanjouw and Schankerman, 2004). The most common graphic measurement of innovation is the S-Curve, best described by Fisher and Pry (1971), who argued that all products grow by substitution for existing products. The S-Curve, so-called after their shape, show a classic pattern of slow initiation, followed by rapid progress, which is then followed by deceleration as an asymptote or limit is reached. The curve describes how innovations behave as it is introduced to the public, grows in usage, and is then substituted by new innovations. 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(1995) Diffusion of innovations (4th ed.). New York: Free Press. Schein, E. (1987) Process consultation, Vol. II. Wokingham: Addison-Wesley. Scherer, F.M., Harhoff, D. and Kukies J. (2000) Uncertainty and the size distribution of rewards from technological innovation. Journal of Evolutionary Economics, 10, 175-200. Schumpeter, J. A. (1939) Business cycles: A theoretical, historical, and statistical analysis of the capitalist process. New York: McGraw-Hill. Shleifer, A. (1986) Implementation cycles. Journal of Political Economy, 94, 1163-1194. Simonton, D.K. (1984) Genius, creativity, and leadership. Cambridge, MA: Harvard University Press. Solow R. (1956) A contribution to the theory of economic growth. Quarterly Journal of Economics, 70, 65-94. Tidd, J., Bessant, J. and Pavitt, K. (2001) Managing innovation: Integrating technological, market and organizational change. New York: John Wiley. Tushman, M.L. and Anderson, P. (1986) Technological discontinuities and organization environments. Administrative Science Quarterly, September, 439-468. Utterback, J.M. (2003) Disruptive technologies: Predator or prey MIT Working Presentation. Available from: [5 February 2007]. Veugelers R., De Voldere, I., Reynaerts, J., Rommens, K., Sleuwaegen, L., Rondi, L., Davies, S. and Aiginger, K. (2001) Determinants of industrial concentration, market integration and efficiency in the European Union. Brussels: European Commision-DG ECFIN. Figure 1.a: Ideal S-Curve adapted from Fisher and Pry (1971) Figure 1.b: Diffusion and Substitution in Car Subsytems [Source: Utterback, 2003, 14] Read More