INTRODUCTION
What is an innovation? Innovation is the practical implementation of an idea into a new device or process.
Innovation is a match between a need/problem and a solution. In order to innovate we need creativity.
Creativity has two components: novelty and usefulness. So, an innovation has to be both new but also
better than the old solution.
What happens if a solution does not meet a need? It simply disappears.
“Innovation has become the industrial religion of the late 20th century. Business sees it as the key to
increasing profits and market share. Governments automatically reach for it when trying to fix the
economy.”
Innovation is the match between a new problem and an old solution but also the match between an old
problem and a new solution. For example, bike sharing is a new solution to an old problem. If we want to
understand the value of innovation we need to think about what is the problem that this innovation is
solving.
The reason of this definition is just to be sure we are talking of the same thing.
How big is the problem that I am solving? How big is the solution that I am offering? Little improvements
often fail.
In conclusion innovation is nothing else than a match between a problem and a solution and there can
either be a new problem or a new solution but there has to be some elements of newness either related to
the problem or to the solution. It also needs to be useful.
Why do firms care about innovation? Firms look for sustained competitive advantage. Outperforming your
rivals over a long period of time is hard to do. From 1957 to 1997, only 12 firms outperformed S&P 500;
owning just survivors would have yielded a 20% lower return than owning the S&P 500.
We see that build a sustained competitive advantage is so difficult so that this raises the question: does a
sustained competitive advantage exist?
Stationary view: identify sustained competitive advantage + shield it from competitive forces
Evolutionary view:
- Leverage existing competitive position, but recognize that any advantage is temporary
- Focus on the challenge of renewal
- Identify new opportunities
- Exit existing commitments that no longer merit opportunity cost
It's not about creating and then protecting this competitive advantage but it's about leveraging existing
competitive advantages and move from one CA to another. Instead of having one single sustained CA, firms
try to achieve a series of CA, that means to identify new opportunities and be able to change (also exiting
from some business) and to renew.
What is guiding this change, the source of product and process innovation, is the challenge of renewal that
is nothing else than innovation. So, if a firm want to be successful, it needs to understand innovation.
Innovation is the base for long term success. Without managing innovation properly, it's hard to survive.
Challenge of renewal = Innovation Firms have to innovate to survive
TYPES OF INNOVATION
How can we classify innovation?
We can only understand innovation if we understand where we are coming from, what are the existing
problems and what are existing solutions.
It's not a black and white classification: often is a matter of how we think about innovation.
Several dimensions are used to categorize innovations.
These dimensions help clarify how different innovations offer different opportunities and pose different
demands on producers, users, and regulators.
• Product vs process • Architectural vs component • Radical vs incremental
• Competence-enhancing vs competence-destroying • Disruptive vs sustaining
Product vs process
A product innovation is embodied in the output of an organization (ex.: new textile).
Product innovations are usually more visible and based on more codified knowledge. Implications for
imitation and appropriability
Process innovations are innovations in the way an organization produces or delivers goods or
services.
Saintsbury in an example of innovation in services.
If we leave architecture unchanged but we modify some of the core concepts incremental innovation
If we leave architecture unchanged but we totally change the core components modular innovation
If we change the linkages and we keep core concepts architectural innovation
If we change both the elements but also how we combine them radical innovation
We only can classify innovation if we understand what is the problem behind it and what is the current
solution to the problem. What problem are we solving with this innovation?
Architectural vs modular
A modular innovation (or component innovation) entails changes to one or more components of a product
system without significantly affecting the overall design.
An architectural innovation entails changing the overall design of the system or the way components
interact, keeping the same components.
Radical vs incremental
The radical nature of an innovation is the degree to which it is new and different from previously existing
products and processes (also called breakthrough or drastic innovation)
Competence-enhancing vs competence-destroying
Competence-enhancing innovations: build on the firm’s existing knowledge base
Competence-destroying innovations: make a firm’s existing competencies obsolete.
Disruptive vs sustaining
A sustaining innovation improves the performance of existing products.
A disruptive innovation involves products of initially lower performances than the existing product in the
market. These products do not interest established customers (they have niche demand). They are smaller,
cheaper and simpler products.
Disruptive innovation: an inferior product, coming from the fringe moving into the mainstream.
Example of hard drive disk:
14 inches: 1000 Mbyte, 200$, lower price per Mbyte
8 inches: 50 Mbyte, 40$, higher price per Mbyte
Is it rational to invest in the disruptive technologies?
Simpler, cheaper, lower margin. Small emerging markets do not seem very attractive: How do managers of
a large firm justify investment in small markets? Growth? Data?
Existing customers do not want the disruptive technology, since the products would be worthless for them
but technological progress might change the performances of the disruptive technology.
What is (isn't) disruptive innovation
Disruption is a process, not a product or service, that occurs from the fringe to mainstream.
Originate in low-end (less-demanding customers) or new market (where none existed) footholds (a strong
first position in a market, industry, etc. from which further progress can be made).
New firms do not catch on with mainstream customers until quality catches up with their standards.
Success is not a requirement and some business can be disruptive but fail. Disruption is not about an
innovation to be successful or not.
New firm's business model differs significantly from already established firms.
There is a company entering the market which is not a main company. They don't focus on existing main
stream customers but they try to attract new customers. For innovation to be distributive it does not have
to be a success; it can also be a failure. Disruptive just mean you are entering a market with a product
where current customers do not care about but you open up the market for new customers and for them
this new solution is sufficient.
Airbnb is an example of disruptive innovation: it is an inferior service but you pay less; on the other hand,
with Uber you might pay a little less but the service is exactly the same.
