Fundamentals of Business Innovation
Chapter 1
What is innovation and why does it matter?
Innovation is the process of creating value from ideas
There are differences in the novelty of the changes we introduce
There are different levels of innovation, from changing parts to changing the way they
are arranged
Innovation is making changes in order to create value
Innovation can also be about creating social value
Competition can exist between firms, or between problems and problem solvers
Innovations are driven by a quest for opportunity or a response to a threat
An entrepreneur is an individual or group who sees an opportunity and takes the risk
of trying to exploit it
An important theorist of innovation is Joseph Schumpeter
1
,
What organizations know and have learnt is a core asset which they can leverage
Paying attention to creating, capturing, and using knowledge is critical for innovation
William Baumol: “Virtually all of the economic growth that has occurred since the
eighteenth century is ultimately attributable to innovation”
Innovation involves a moving target
Individuals and organizations need to have a strategy for innovation and a plan for
implementing that strategy
Innovation also matters to policy agents, which include:
o Governments: innovation creates economic growth
o Trade and sector bodies: stimulating innovation to make for sector health and
competitiveness
o Supply chain ‘owners’: any supply network is as strong as its weakest link, so
it makes sense for firms to try to manage their supply systems and upgrade
them
Innovation is a multiplayer game and needs different bits of the network to work
together
Many small and medium-sized enterprises (SMEs) fail because they don’t see the
need for change
A common problem for successful companies is when their core competencies
become the things which make it hard to see or accept the need for change
Existing players often fail to respond fast enough to the new signals coming from
outside their industry
Innovation is not a random process, but a sequence of planned experimentation:
1. Searching for possible opportunities (generating variation)
2. Selecting a particular one (selection)
2
, 3. Implementing it (propagation)
Success in innovation is not just about having a good idea, but also about having the
capabilities to manage them
Innovation is about growth and survival
Business Innovation is improving on a new product
If you put innovators/experts near each other, they can learn from each other (Silicon
Valley)
Concentrate producers so they won’t share their secrets or work for someone else
Innovations lead to other innovations once their shared to the public
Innovations lead to new demands
Individualism is one of the strongest drivers of innovation
Control key resources
o Internally (monopoly on your own products)
o Externally (monopoly on external goods)
Protect your innovations from imitations (non-compete clause, patents, etc.)
The spread of innovation has huge societal impact (private vs. public benefits of
innovation)
What is innovation
‘The process of creating value from ideas’ - Strategic innovation management
Different areas to innovate in
o Product/service
o Process
o Delivery
o Market
Different degrees of novelty (how much it has changed compared to an existing idea)
Not about change for the sake of change, but about value creation
“An innovation is the implementation of a new or significantly improved product (good
or service), or process, a new marketing method, or a new organizational method in
business practices, workplace organization or external relations.” - OECD
Innovation is not the same as invention or change
There are a lot of intermediate products, it’s hard to say when a product is new or just
an improvement on an old product
Being able to implement the idea is a key part of innovation
Schumpeter: Innovation is recombination. Innovation/value creation in bringing
existing products together
Not innovating means stagnating and will result in ‘diminishing results on capital’
Doing more of the same will not differentiate you
Innovation is hard
Businesses need to be organized for innovation
3
, Strategic Innovation Management – Chapter 2
Innovation strategy
Innovation strategy can give us a framework for discussion and alignment
Strategy is about making a clear vision for the future
Strategic analysis begins with an exploration of innovation space – where could we
innovate and why would it be worth doing so
o Build a sense of the environment and analyze threats and opportunities
o Reflect on what resources the organization can bring to bear
o Spot where and how new markets can be created and grown
o Serve established markets in new ways
o Innovation can be mapped along four dimensions
1. Product: changes in the things which an organization offers
2. Process: changes in the way in which these offerings are created and
delivered
3. Position: changes in the context into which the products/services are
introduced
4. Paradigm: changes in the underlying mental models which frame what
the organization does
Strategic selection is choosing out of all the things you could do, the ones you will do
o Play to your strengths
o Understand how you fit into wider systems and where we could create a
competitive advantage through innovation
o Determine your strategic posture
Strategic implementation
o Make a simple project plan
o Think through and challenge the underlying strategic concept
Make sure others see your strategic vision
Clearly communicate your innovation strategy
There is a core role for leadership to provide vision and direction
Strategy
Strategy is what an organization does to reach it goals
Innovation is not the end goal, but the means to get there
According to high-school economics, a company is a rational actor whose goal is
profit maximization, but this isn’t the case in the real world
Strategy is about making risky choices
Behavioral theory of the firm
A firm is a coalition of participants
Multiple actors influence what the firm can or cannot do
The firm has no unambiguous objective function
Each group of participants will have their own objective
Information is not free, it has a price
Decision makers are boundedly rational
Organizational goals
The goals of a firm are reached through a bargaining process
The bargaining power of different participants determines how much they can
influence goals
The bargaining power of different participants depends upon how unique their
contribution to the company is and on their legitimacy
Contributions and inducements
All participants have aspiration levels of how much change they want
A participant doesn’t optimize, it searches for satisfaction
4
Chapter 1
What is innovation and why does it matter?
Innovation is the process of creating value from ideas
There are differences in the novelty of the changes we introduce
There are different levels of innovation, from changing parts to changing the way they
are arranged
Innovation is making changes in order to create value
Innovation can also be about creating social value
Competition can exist between firms, or between problems and problem solvers
Innovations are driven by a quest for opportunity or a response to a threat
An entrepreneur is an individual or group who sees an opportunity and takes the risk
of trying to exploit it
An important theorist of innovation is Joseph Schumpeter
1
,
What organizations know and have learnt is a core asset which they can leverage
Paying attention to creating, capturing, and using knowledge is critical for innovation
William Baumol: “Virtually all of the economic growth that has occurred since the
eighteenth century is ultimately attributable to innovation”
Innovation involves a moving target
Individuals and organizations need to have a strategy for innovation and a plan for
implementing that strategy
Innovation also matters to policy agents, which include:
o Governments: innovation creates economic growth
o Trade and sector bodies: stimulating innovation to make for sector health and
competitiveness
o Supply chain ‘owners’: any supply network is as strong as its weakest link, so
it makes sense for firms to try to manage their supply systems and upgrade
them
Innovation is a multiplayer game and needs different bits of the network to work
together
Many small and medium-sized enterprises (SMEs) fail because they don’t see the
need for change
A common problem for successful companies is when their core competencies
become the things which make it hard to see or accept the need for change
Existing players often fail to respond fast enough to the new signals coming from
outside their industry
Innovation is not a random process, but a sequence of planned experimentation:
1. Searching for possible opportunities (generating variation)
2. Selecting a particular one (selection)
2
, 3. Implementing it (propagation)
Success in innovation is not just about having a good idea, but also about having the
capabilities to manage them
Innovation is about growth and survival
Business Innovation is improving on a new product
If you put innovators/experts near each other, they can learn from each other (Silicon
Valley)
Concentrate producers so they won’t share their secrets or work for someone else
Innovations lead to other innovations once their shared to the public
Innovations lead to new demands
Individualism is one of the strongest drivers of innovation
Control key resources
o Internally (monopoly on your own products)
o Externally (monopoly on external goods)
Protect your innovations from imitations (non-compete clause, patents, etc.)
The spread of innovation has huge societal impact (private vs. public benefits of
innovation)
What is innovation
‘The process of creating value from ideas’ - Strategic innovation management
Different areas to innovate in
o Product/service
o Process
o Delivery
o Market
Different degrees of novelty (how much it has changed compared to an existing idea)
Not about change for the sake of change, but about value creation
“An innovation is the implementation of a new or significantly improved product (good
or service), or process, a new marketing method, or a new organizational method in
business practices, workplace organization or external relations.” - OECD
Innovation is not the same as invention or change
There are a lot of intermediate products, it’s hard to say when a product is new or just
an improvement on an old product
Being able to implement the idea is a key part of innovation
Schumpeter: Innovation is recombination. Innovation/value creation in bringing
existing products together
Not innovating means stagnating and will result in ‘diminishing results on capital’
Doing more of the same will not differentiate you
Innovation is hard
Businesses need to be organized for innovation
3
, Strategic Innovation Management – Chapter 2
Innovation strategy
Innovation strategy can give us a framework for discussion and alignment
Strategy is about making a clear vision for the future
Strategic analysis begins with an exploration of innovation space – where could we
innovate and why would it be worth doing so
o Build a sense of the environment and analyze threats and opportunities
o Reflect on what resources the organization can bring to bear
o Spot where and how new markets can be created and grown
o Serve established markets in new ways
o Innovation can be mapped along four dimensions
1. Product: changes in the things which an organization offers
2. Process: changes in the way in which these offerings are created and
delivered
3. Position: changes in the context into which the products/services are
introduced
4. Paradigm: changes in the underlying mental models which frame what
the organization does
Strategic selection is choosing out of all the things you could do, the ones you will do
o Play to your strengths
o Understand how you fit into wider systems and where we could create a
competitive advantage through innovation
o Determine your strategic posture
Strategic implementation
o Make a simple project plan
o Think through and challenge the underlying strategic concept
Make sure others see your strategic vision
Clearly communicate your innovation strategy
There is a core role for leadership to provide vision and direction
Strategy
Strategy is what an organization does to reach it goals
Innovation is not the end goal, but the means to get there
According to high-school economics, a company is a rational actor whose goal is
profit maximization, but this isn’t the case in the real world
Strategy is about making risky choices
Behavioral theory of the firm
A firm is a coalition of participants
Multiple actors influence what the firm can or cannot do
The firm has no unambiguous objective function
Each group of participants will have their own objective
Information is not free, it has a price
Decision makers are boundedly rational
Organizational goals
The goals of a firm are reached through a bargaining process
The bargaining power of different participants determines how much they can
influence goals
The bargaining power of different participants depends upon how unique their
contribution to the company is and on their legitimacy
Contributions and inducements
All participants have aspiration levels of how much change they want
A participant doesn’t optimize, it searches for satisfaction
4
