SOURCES OF INNOVATION
How do individuals and firms generate new ideas? New ideas are generated thanks to passion, creativity
and imagination. Creativity is the ability to produce work that is useful and novel. Useful and novel may be
in contrast: as long as a product is more novel its usefulness could be reduced and vice-versa.
Ideas don’t only need to be generated, they also need endorsement and funding which doesn’t happen for
many. Selecting good ideas is important. We also want to protect and benefit from innovations.
Individual creativity
Creativity is the ability to produce work that is useful and novel.
Genius creativity is not the only way: individual creativity depends on many factors as:
• Intellectual abilities
• Knowledge
• Style of thinking
• Personality
• Motivation
• Environment
The more knowledge you have the easier it is to bring novelty (in the beginning getting to know a topic you
get the impression that everything is done but after a certain threshold you see how many things haven’t
been done yet).
“Our species is the only creative species, and it has only one creative instrument, the individual mind, and
spirit of a man. Nothing was ever created by two men. There are no good collaborations, whether in music,
in art, in poetry, in mathematics, in philosophy. Once the miracle of creation has taken place, the group can
build and extend it, but the group never invents anything. The precociousness lies in the lonely mind of a
man”
Steinbeck felt humans are only creative ones, and specifically idea lies precociously in the mind of the
individual (group can only develop from it). It’s not so: social environment and exchanging ideas are very
important. Innovation and creativity are pretty much social activities. Environment does make a huge
difference: creative people round you if you want to innovate. Beyond the individual qualities cross-
disciplinary thinking is important as well.
Innovation is nothing else than a recombination of existing idea innovation as knowledge recombination
so clearly if you know more you have more stuff that you can recombine
R&D by firms
Inside firms this happens within R&D.
Research refers to both basic and applied research.
• Basic research aims at increasing understanding of a topic or field without an immediate commercial
application in mind.
• Applied research aims at increasing understanding of a topic or field to meet a specific need.
Development refers to activities that apply knowledge to produce useful devices, materials, or processes.
Most companies focus on D as a recent trend (use of knowledge for new production), but many also on R
(simple or applied to gather knowledge).
Microsoft’s budget for research is about 1 billion (more than 500 scientists)
Why do firms spend so much money on R&D? The innovation funnel for 1 new successful product are
needed on average 3000 raw ideas, that’s why R&D investment is typically very high.
This kind of innovation happens in firms within R&D labs (firstly developed in railroad industry) and also in
informal R&D where investment is high (e.g. ARUP does engineer consulting, although no formal R&D
program but when working daily with clients you realize issue and work on solutions to it for other future
clients – bottom up initiative).
How can firms foster their employees’ creativity?
Organizational creativity is a function of:
• Creativity of individuals within the organization
• Social processes and contextual factors that shape how those individuals interact and behave Methods of
encouraging organizational creativity:
• Idea collection systems (by allowing creative pitch, submitting ideas from the bottom)
• Creativity training programs
• Culture that encourages creativity
Example: Gong meeting at Disney
Demand pull vs. science push
Marketplace is also a good source of ideas-creativity because of interaction with firms through product-
service but also with interaction direct with individual creativity because whether of demand pull or science
push.
Demand pull approach
•Innovation originates with unmet customer need (need seekers)
• Customer suggestions invention manufacturing
Science push approach
• Innovation starts with a solution
• Scientific discovery invention manufacturing marketing
However, research shows that innovation is not that simple, and may originate from a variety of sources
and follow a variety of paths.
Other sources of innovation
Innovation could come from customers-users: lead users have a deep understanding of their own needs,
and motivation to fulfill them. Von Hippel How firms can empower users to contribute to their
innovation process?
Also, universities encourage innovation within themselves (particularly engineering schools).
Governments try to encourage it as well, with subsidies and tax benefits but they are generally slower in
doing it.
Open vs closed innovation
Closed innovation it assumes that innovation should be restricted through patent and control that the
company exercise on the creation and management of ideas within the company.
According to closed innovation, successful innovation requires control and ownership of the Intellectual
property (IP). A company should control the creation and management of ideas within it.
Open innovation it assumes that firms can and should use external ideas as well as internal ideas, and
internal and external paths to market, as the firms look to advance their technology.
Closed Innovation Principles Open Innovation Principles
Not all the smart people in the field work for us.
We need to work with smart people inside and
The smart people in the field work for us outside the company. Others’ creativity is needed
as well
To profit from R&D, we must discover it, develop
External R&D can create significant value: internal
it, and ship it ourselves. R&D profit must all come
R&D is needed to claim some portion of that value.
from us
If we discover it ourselves, we will get it to the We don’t necessarily have to originate the idea to
market first and we get all the profit profit from it.
If we create the most and the best ideas in the If we make the best use of internal and external
industry, we will win. ideas, we will win.
We should profit from others' use of our IP, and we
We should control our IP, so that our competitors should buy others' IP whenever it advances our
don't profit from our ideas Control our patents business model sharing and profiting from
others’ patents as well
What is the relationship between external and internal sources?
What is the relationship between external and internal sources? If we know spillovers exist, why would
anyone invest in R&D and not rely on free riding? In order to absorb from others, you need to develop
knowledge and get an absorptive capacity. So only if you invest to a certain extent in R&D you get the
capacity to use knowledge from others, too much free riding is not feasible and you wouldn’t get much out
of it. Firms with highest internal R&D are also those with heaviest users of external collaboration networks.
Internal R&D may help firm build absorptive capacity that enables it to better use information obtained
externally. So, in most cases firms do both at the same time external and internal sources are
complementary.
Environment
Technology clusters are regional clusters of firms that have a connection to a common technology.
Environment is essential also for spillovers. Technological spillovers occur when the benefits from the
research activities of one entity spill over to other entities. Think about technology clusters (example of
Silicon Valley for software-internet and Biotech in Cambridge, MA). Where do positive spillovers come
from?
Agglomeration forces, many talented people gather there, also social interaction between employees of
different firms in non-working environment outside employee mobility + shared leisure activities
Universities receive a lot of funding if they are located in cluster regions, so agglomeration forces
strengthen. Firms get value back clearly.
Technological spillovers are more likely to materialize with mobility of labor pool and a nature of underlying
knowledge base (tacit, complex). They don’t materialize if there’s too strong protection mechanism such as
on patents. (trade secrets and Non-Compete Agreements for employees: we see more and more firms
giving up on these for example Microsoft releasing many patents).
Framework
What to know
Innovation is the outcome of a complex process where a solution matches with a need
Ideas come from inside the firm and from outside
• Inside the firm
- Organizational creativity is not just the sum of individual creativity
- Firms direct their resources toward different types of research (R&D)
• Outside the firm
- Firms need to manage this complex process by investing in absorptive capacity
- locating in fertile areas
- establishing channels to source external knowledge from users, suppliers, universities and the
government
