Design Management Group

Innovation

Key Innovation concepts & definitions

A number of concepts are used to describe patterns of innovation. Some of these are summarised below.

Innovation Definition

Innovation can be defined as "The successful exploitation of new ideas". Breaking this down a bit further:

• New ideas - these might be for a new (or improved) product, process or service, or even a whole new business or business model.
• Exploitation - this indicates that the idea must be implementable and potentially value generating (i.e. innovation = invention + exploitation).
• Successful - finally, this implies that the innovation is actually adopted by the target audience (or indeed anyone else)

A strict definition of innovation might restrict it's use to first-of-a-kind breakthroughs, like the jet engine, or the internet, but the term is also commonly used in connection with more modest incremental improvements to existing innovations.

Innovation can refer to the creation of new technologies, products or services, but equally to manufacturing or business processes - think of Pilkington (float glass), Toyota (lean production), Dell (direct sale, build-to-order), Amazon (on-line shopping), Rolls-Royce ('power by the hour'), Nokia (switch from paper & rubber to cellphones).

Note also that 'new' is a relative term - so it can mean 'new to the world', 'new to the market' or 'new to the firm'.

Technology S-curves

The S-curve concept was introduced in Richard Foster's 1986 book Innovation, the Attacker's Advantage, to describe how the performance of a technology varies over time (more strictly how it varies with increased R&D effort or investment).

The basic idea is that technology performance increases with increased effort but eventually hits an upper limit or plateau where further improvement would either be impossible or prohibitively expensive. To achieve a higher performance requires a discontinuous switch to a different technology, which in turn follows its own S-curve. The new S-curve may well start at a performance level below that of the old one, but it has the potential to overtake its predecessor.

The common example is the replacement of sailing ships by steam ships.

Moore's Law

Gordon Moore, co-founder of Intel, observed in a 1965 paper that "the complexity for minimum component cost has increased at a rate of roughly a factor of two per year". He went on to speculate that this trend would continue for at least ten years.

This subsequently became known as Moore's Law, which is usually stated in terms of the number of transistors (or transistor density) doubling every couple of years. Remarkably, this 'law' has held for 25 years, although there is now some evidence of a slight roll-off.

Dominant design

The concept of dominant design was introduced by Abernathy and Utterback in 1978 to describe the emergence of a broadly accepted core design principle from a number of competing incompatible alternatives. Common examples are the QWERTY keyboard, the VHS video standard and the IBM PC. Once a dominant design emerges, innovative activity is generally directed towards improving the process by which the dominant design is delivered - or searching for a new breakthrough or disruptive design.

A dominant design may persist for a considerable period of time, even though it might not represent the best technical solution (e.g. VHS v Betamax).

Disruption

Disruption occurs when an innovation emerges which offers superior performance on along a new dimension, even if performance on conventional measures is initially poor. Incumbents will tend to dismiss the new innovation as of no importance, but it may well create a new market which eventually supersedes the existing market.

The concept of disruptive innovation is examined in Clayton Christensen's 1997 book The Innovator's Dilemma, based on his study of the disk drive and other industries. In the follow-up Innovator's Solution, he distinguishes between low-end disruptions (targeting the least profitable customers who are 'overserved' by existing products) and new-market disruptions (where new attributes, typically simplicity/convenience appeal to non-consumers, despite poor product performance on traditional criteria).

Disruption is however relative: what may be disruptive to one company might be sustaining to another. The internet may have enabled Amazon to be disruptive relative to bricks-and-mortar bookshops, but it has been sustaining to Dell for whom it was merely another channel for its direct-sales PC business.

Diffusion of innovation

Everett Rogers in his 1962 book, The Diffusion of Innovations, examined the way in which innovations spread through social systems. Noting that previous authors had used a variety of labels for describing types of adopter, he proposed a five-way classification: Innovators, Early Adopters, Early Majority, Late Majority and Laggards.

The categories are based on the normal distribution (bell-curve) and each category is one standard deviation wide (except for 'laggards' which is 2 standard deviations wide. Rogers didn't consider it worthwhile to distinguish between two different types of laggard).

Thus Innovators represent the first 2.5% of the population, Early Adopters the next 13.5%, Early Majority the next 34%, Late Majority the next 34% and Laggards, the remaining 16%.

Note that if the bell-curve is plotted cumulatively, it looks like an S-curve.

The 'chasm'

Geoffrey Moore built on these concepts in his 1991 book Crossing the Chasm. The basic idea is that although the first customers for a new product or service - the innovators and early adopters - may provide promising sales and enthusiastic feedback, they nonetheless only represent 16% of the total population. For real commercial success, it is necessary to reach the early/late majority, who represent 68% of the population.

Unfortunately, this group may well have a very different perception of the new product and follow-on sales are by no means guaranteed. This potential gap between the two groups is labelled 'the chasm'.

A good example of products which fell into the chasm would be the early hand-held devices such as the Apple Newton and the Zoomer, which gained early success amongst the early adopters, but completely failed to reach mass-market. The product which crossed the chasm was the simpler and more robust Palm Pilot.

Value capture

Successful exploitation of a new idea implies that at least some of the value is captured by the innovator, yet this is often not the case. If the idea is easily copied, or others are in a better position to exploit the idea, the innovator may in fact capture little of the resulting value. These notions are explored in the work of David Teece.

The concept of appropriability refers to the ease with which the idea can be protected. One approach involves the use of patents, copyrights or trade secrets. Another is licensing, where grant of license may pre-empt a potential competitor. Strong branding may also prove effective (e.g. NutraSweet). An alternative strategy is to simply rely on innovation speed, to outrun potential imitators.

The exploitation of a new idea may require ownership of or access to complementary assets. Examples of these include manufacturing capacity, distribution and sales channels or after-sales support infrastructure. Competition may come from a potential imitator with better control of such assets.

The EMI CAT scanner is often cited as an example of a brilliant innovation which nonetheless failed to capture long-term value through an inability both to protect the basic idea and to establish an infrastructure to support the key US market.

Further Reading

• Arora, A., Fosfuri, A. and Gambardella, A. (2004) Markets for Technology: The Economics of Innovation and Corporate Strategy, MIT Press
• Chesbrough, H. (2003) Open Innovation, Harvard Business School Press
• Christensen, C.M. (1997) The Innovator's Dilemma, Boston:Harvard Business School Press
• Christensen, C.M. and Raynor, M. (2003) The Innovator's Solution, Boston:Harvard Business School Books
• Foster, Richard N. (1986) Innovation: the attacker's advantage. London : Macmillan
• Henderson R. (1995) Of life-cycles real and imaginary - The unexpectedly long old-age of optical lithography, Research Policy 24 (4): 631-643
• Moore, G. A. (1991) Crossing the Chasm: Marketing and selling high-tech goods to mainstream customers (New York: HarperBusiness).
• Rogers, E. (1983) Diffusion of innovations. 3rd ed. New York : Free Press ; London : Collier Macmillan
• Teece, D. (1986) Profiting from technological innovation: implications for integration, collaboration, licensing and public policy, Research Policy 15(6): 285-305
• Teece, D. (2000) Managing intellectual capital, Oxford University Press (click here for an excerpt)
• Tidd, J., Bessant, J. and Pavitt, K (2005) Managing Innovation: Integrating technological, market and organisational change, 3rd Ed. Chichester:Wiley
• Utterback, J (1994), Mastering the dynamics of innovation, MIT Press:New York