Innovation Management
Lecture 1. Innovation and innovators
Established firms versus start-ups
• Start-up entrepreneurs address customer needs in entirely new ways.
• Differences in size, (age), resources, affect the way a firm operate along several dimensions.
Business cases analysis
• Opportunity to recognize patterns and apply theoretical concepts to real life situations
Why do firms exist?
• Neoclassical economic: Is a broad theory that focuses on supply and demand as the driving
forces behind the production, pricing and consumption of goods and services. firms as
production functions that efficiently transform land, labour & capital inputs into goods &
services. Competitive markets coordinate buyer seller exchanges via price signals.
o The main reason why it is profitable to establish a firm would seem to be that there
is a cost of using the price mechanism. (Focus on price!)
Transaction: occurs whenever a good or service is transferred across a technologically separable
interface Transaction cost theory. (overdragen van goed of dienst via transactiekosten theorie)
• Alternative governance structure should be assessed based on their capacity to economize
on transaction costs (trade-off) (less friction)
• Economic efficiency and organization’s internal structure are related
• Optimize transaction costs
• Boundaries of the firm as a decision variable
o Firms exist to reduce transaction costs (loss of efficiency) Transactions costs relate to
the searching/allocation itself. Indeed, incurring such ‘undesirable’ costs might still
lead a firm to better/cheaper workers
• Costs are simply a loss of value when transferring one type of capital to another. When we
analyze different ways of engaging in economic activities, we should minimize costs.
Behavioral assumptions: Transaction agreements never cover all possible future contingencies
(“incomplete contracting”). Transactors act under:
• Bounded rationality: Transactors are constrained by cognitive limits on their capacities to
process information efficiently (incomplete contracting).
• Opportunism: “Self-interest with guile” could induce strategic behavior by transactors to lie
to, cheat, confuse, mislead their exchange partners.
Forms of governance
• Hierarchy (Make) = transactions among parties occur under a unified owner who settles
disputes (firm governance) -> 1 eigenaar
• Market (Buy) = Autonomous parties’ exchanges are governed by prices in supply demand
equilibrium (market governance) -> kopen van andere partij
• Hybrid (Ally) = “Long-term contractual relations that preserve (parties) autonomy but
provide added transaction-specific safeguards as compared with the market”.
,Boundaries of firms and governance structures: The more internalization, the less a company
cooperate with others. Then everything is internal.
Make or buy decisions
Consider backward/forward/lateral integration
options: Forward and backward integrations are
two integration strategies which are adopted by
organizations to gain competitive advantages in
the market and to gain control over the value
chain of the industry under which they are
operating. These strategies are one of the major
considerations when developing future plans
for an organization. Together these two
strategies are known as vertical integration.
Critical dimensions for transactions
1. Uncertaintly
2. Frequency with which transactions recur (terugkomende transacties)
3. Extend to which investments are transaction-specific (investeringen)
Asset specificity can stem from three causes: (specificity relates to costs)
• site specificity (locatiegbondenheid)
• physical asset specificity (fysieke activa)
• human asset specificity (e.g. learning by doing) (menslijke activa)
Firms vs. markets
Advantages of 'common ownership' (firm control)
1. Reducing incentives to suboptimize
2. Resolve differences
3. More complete access to relevant information
,Overview of the elements
Criticism to TCE (transaction costs economics)
• Opportunism: too much emphasis (teveel nadruk)
• Trust: among individuals between organizations is an alternative basis for lowering
transaction costs
• Learning curves: transactors become better over time
• Path dependence: the governance of a particular transaction may depend on how previous
transactions were governed (laten afhangen van eerdere transacties)
• Heterogeneity: TCE neglects of differential capabilities and dynamics
What is innovation?
• Innovations are new combinations of existing resources
• While invention is the first occurrence of an idea for a new product or process, innovation is
the first attempt to carry it out into practice.
What is the role of innovation in economic and social change?
• Schumpeter’s notion of creative destruction: Growth is brought about by the introduction
of new technologies and creation of new firms, replacing existing firms and technologies.
• Innovation introduces variety into the economic sphere. Should the stream of novelty dry
up, the economy will settle into a “stationary state” with little or no growth (Metcalfe 1998).
• Innovation is the engine of growth
Technological innovation
The act of introducing a new device, method, or material for application to commercial or practical
objectives (Schilling, 2009)
• In many industries technological innovation is now the most important driver of competitive
success
• Increasing market segmentation and shorter ProductLife-cycles
• Diversification as part of competitive advantage
• From new things to new value
, Business innovation
The creation of substantial new value for customers and the firm by creatively changing one or more
dimensions of the business system
• Starbucks: not the best company in coffee but came up with third place. That's their main
innovation. Create a community feeling > that's why people pay a premium price.
Innovation radar
Who innovates?
• Entrepreneurship: an activity which involves the process of discovery and exploitation of a
new opportunity.
• Entrepreneur: is a person who undertakes the creation of an enterprise or business, a person
who identifies and exploits opportunities.
• Social Entrepreneur: while typical entrepreneurs improve commercial markets, social
entrepreneurs improve social conditions
Venture
Start-up entity developed with the intent of profiting financially. A business venture may also be
considered a small business. Many ventures will be invested in by one or more individuals or groups
with the expectation of the business bringing in a financial gain for all backers. Most business
ventures are created based on demand of the market or a lack of supply in the market. Needs of
consumers are identified for a product or a service and the entrepreneur and investors will proceed
to develop the idea, market the idea, and sell the product or service developed.
Lecture 1. Innovation and innovators
Established firms versus start-ups
• Start-up entrepreneurs address customer needs in entirely new ways.
• Differences in size, (age), resources, affect the way a firm operate along several dimensions.
Business cases analysis
• Opportunity to recognize patterns and apply theoretical concepts to real life situations
Why do firms exist?
• Neoclassical economic: Is a broad theory that focuses on supply and demand as the driving
forces behind the production, pricing and consumption of goods and services. firms as
production functions that efficiently transform land, labour & capital inputs into goods &
services. Competitive markets coordinate buyer seller exchanges via price signals.
o The main reason why it is profitable to establish a firm would seem to be that there
is a cost of using the price mechanism. (Focus on price!)
Transaction: occurs whenever a good or service is transferred across a technologically separable
interface Transaction cost theory. (overdragen van goed of dienst via transactiekosten theorie)
• Alternative governance structure should be assessed based on their capacity to economize
on transaction costs (trade-off) (less friction)
• Economic efficiency and organization’s internal structure are related
• Optimize transaction costs
• Boundaries of the firm as a decision variable
o Firms exist to reduce transaction costs (loss of efficiency) Transactions costs relate to
the searching/allocation itself. Indeed, incurring such ‘undesirable’ costs might still
lead a firm to better/cheaper workers
• Costs are simply a loss of value when transferring one type of capital to another. When we
analyze different ways of engaging in economic activities, we should minimize costs.
Behavioral assumptions: Transaction agreements never cover all possible future contingencies
(“incomplete contracting”). Transactors act under:
• Bounded rationality: Transactors are constrained by cognitive limits on their capacities to
process information efficiently (incomplete contracting).
• Opportunism: “Self-interest with guile” could induce strategic behavior by transactors to lie
to, cheat, confuse, mislead their exchange partners.
Forms of governance
• Hierarchy (Make) = transactions among parties occur under a unified owner who settles
disputes (firm governance) -> 1 eigenaar
• Market (Buy) = Autonomous parties’ exchanges are governed by prices in supply demand
equilibrium (market governance) -> kopen van andere partij
• Hybrid (Ally) = “Long-term contractual relations that preserve (parties) autonomy but
provide added transaction-specific safeguards as compared with the market”.
,Boundaries of firms and governance structures: The more internalization, the less a company
cooperate with others. Then everything is internal.
Make or buy decisions
Consider backward/forward/lateral integration
options: Forward and backward integrations are
two integration strategies which are adopted by
organizations to gain competitive advantages in
the market and to gain control over the value
chain of the industry under which they are
operating. These strategies are one of the major
considerations when developing future plans
for an organization. Together these two
strategies are known as vertical integration.
Critical dimensions for transactions
1. Uncertaintly
2. Frequency with which transactions recur (terugkomende transacties)
3. Extend to which investments are transaction-specific (investeringen)
Asset specificity can stem from three causes: (specificity relates to costs)
• site specificity (locatiegbondenheid)
• physical asset specificity (fysieke activa)
• human asset specificity (e.g. learning by doing) (menslijke activa)
Firms vs. markets
Advantages of 'common ownership' (firm control)
1. Reducing incentives to suboptimize
2. Resolve differences
3. More complete access to relevant information
,Overview of the elements
Criticism to TCE (transaction costs economics)
• Opportunism: too much emphasis (teveel nadruk)
• Trust: among individuals between organizations is an alternative basis for lowering
transaction costs
• Learning curves: transactors become better over time
• Path dependence: the governance of a particular transaction may depend on how previous
transactions were governed (laten afhangen van eerdere transacties)
• Heterogeneity: TCE neglects of differential capabilities and dynamics
What is innovation?
• Innovations are new combinations of existing resources
• While invention is the first occurrence of an idea for a new product or process, innovation is
the first attempt to carry it out into practice.
What is the role of innovation in economic and social change?
• Schumpeter’s notion of creative destruction: Growth is brought about by the introduction
of new technologies and creation of new firms, replacing existing firms and technologies.
• Innovation introduces variety into the economic sphere. Should the stream of novelty dry
up, the economy will settle into a “stationary state” with little or no growth (Metcalfe 1998).
• Innovation is the engine of growth
Technological innovation
The act of introducing a new device, method, or material for application to commercial or practical
objectives (Schilling, 2009)
• In many industries technological innovation is now the most important driver of competitive
success
• Increasing market segmentation and shorter ProductLife-cycles
• Diversification as part of competitive advantage
• From new things to new value
, Business innovation
The creation of substantial new value for customers and the firm by creatively changing one or more
dimensions of the business system
• Starbucks: not the best company in coffee but came up with third place. That's their main
innovation. Create a community feeling > that's why people pay a premium price.
Innovation radar
Who innovates?
• Entrepreneurship: an activity which involves the process of discovery and exploitation of a
new opportunity.
• Entrepreneur: is a person who undertakes the creation of an enterprise or business, a person
who identifies and exploits opportunities.
• Social Entrepreneur: while typical entrepreneurs improve commercial markets, social
entrepreneurs improve social conditions
Venture
Start-up entity developed with the intent of profiting financially. A business venture may also be
considered a small business. Many ventures will be invested in by one or more individuals or groups
with the expectation of the business bringing in a financial gain for all backers. Most business
ventures are created based on demand of the market or a lack of supply in the market. Needs of
consumers are identified for a product or a service and the entrepreneur and investors will proceed
to develop the idea, market the idea, and sell the product or service developed.
