Innovation

3.1.2.1 DEFINING INNOVATION

Innovation and learning are in many ways linked. Learning in a corporate setting is concerned with acquiring, creating and using knowledge to create a competitive advantage, but it is also considered an antecedent of innovation, and so the two differ and must be distinguished (Calantone et al., 2002).

Corporate learning is intraorganizational and requires communication as learning can only occur through individual people (Calantone et al., 2002). Thus, an organization can only learn through its members or by acquiring members with new knowledge, where the members learn through the interaction with and observation of the corporate environment (Calantone et al., 2002; Grant, 1996). Many of the environmental factors that influence and instigate corporate learning, such as market uncertainty, turbulent industries and high competition, also have the same effect on innovation, which furthers their relation (Calantone et al., 2002).

Innovation, on the other hand, concerns creating something new (Duus, 2020). In this regard, Schumpeter (1934), who is considered one of the most influential economists regarding innovation, defines innovation as

“the new combination of existing productive factors” (p. 136). This definition considers innovation in relation to production but can be applied to areas that in general concerns processes that lead to new outcomes or improve current outcomes. Schumpeter (1934) further contributed to the understanding of innovation, by proposing a distinction between different types of innovation, stating that it can take shape in five different ways in a corporate setting: through products, production processes, markets, organizations, or raw materials.

Drucker (2002), on the other hand, considers innovation in relation to entrepreneurship, stating that innovation is the core of any entrepreneurial firm, as the term “entrepreneurial” in higher regards describes new or improved inventions rather than the age of a firm. Considering Drucker’s (2002) idea of innovation, entrepreneurial innovation can occur in two distinct ways: through both an individual entrepreneur who builds a new company based on an innovative idea, and through a company that expands business opportunities through its members (Duus, 2020).

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The link between entrepreneurship and innovation is mirrored in Kirzner’s (1997) definition of innovation as the result of entrepreneurial activities in the pursuit of profit, however, Kirzner (1997) differs from Drucker (2002) by placing more emphasis on the profit seeking aspect of innovation (Duus, 2020). Like Kirzner (1997), Duus (2020) considers profit to be a key aspect of innovation, and by this definition, the

effectiveness of an innovation is thereby determined through its contribution to profit. Innovation is thus determined by two characteristics: new and profitable. Considering this in relation to the resource-based view, innovative capabilities can therefore be argued to be the core of sustained competitive advantages. This thereby makes innovation both healthy for the market dynamics by fulfilling unmet needs, as well as

disruptive by creating a competitive imbalance (Christensen & Overdorf, 2000; Duus, 2020; Lewin et al., 2009).

Drucker (2002) considers the most innovative ideas to be the result of analyzing specific business areas, thereby constituting that for innovation to be “good”, managers need to monitor areas of opportunity, whereas Duus (2020) considers innovation to be both a conscious and unconscious process throughout all levels of corporate hierarchy. This paper defines innovation through the definition proposed by Duus (2020) as: “something new and different that results in profit greater than what could have been achieved through traditional means” (p. 316). The definition presented by Duus (2020) applies to innovation in the private sector, whereas innovation in the public sector is often politically or efficiency-driven.

3.1.2.2 THE MANAGEMENT OF INNOVATION

Having established the importance of innovation in competitive advantages, firms need to find the right balance between honing current skills and resources, and developing new ones (Nagji & Tuff, 2012).

Managing innovation thus in part concerns finding the right balance between three innovational activities:

optimizing core value-creating skills and products, expanding into peripheral business, thereby innovating through adding new products or entering new markets, and developing transformational innovations that create new markets (Nagji & Tuff, 2012).

Determination of the right balance between these three innovational activities, varies greatly depending on the industry in which the firm operates, the risk aversion, and the developmental stage of the firm (Nagji &

Tuff, 2012). Nagji and Tuff (2012) suggest a rule of thumb called the “golden ratio”, where investments are allocated with a 70-20-10 ratio. The golden ratio states that 70% of a company’s innovation budget should be allocated to developing the core value-creating skills and products, whereas 20% is allocated for adjacent innovation and 10% to transformational innovation. Managers are prompted to use this ratio as an idea of how to prioritize activities but should adjust according to firm circumstances (Nagji & Tuff, 2012). The more high-speed the industry is, the less risk averse the firm is, and the earlier the developmental stage of the firm, the more focus should be placed on transformational innovation and vice versa (Nagji & Tuff, 2012).

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Finding the right balance, however, does not entail success, as innovation needs to be properly incorporated and managed, by determining how closely to connect innovational activities to daily operations (Nagji &

Tuff, 2012). This can be done through three measures, which consist of creating clear innovational

ambitions, finding and maintaining the right balance for innovational activities, and properly organizing all three innovational levels (Nagji & Tuff, 2012). It was found that firms that are able to operate at all three innovational levels, presented better performance results, which determines that all three levels are necessary for firms, but require entirely different skillsets. It is therefore rare to possess all three innovational levels, and still if the skillsets are acquired, proper management remains a prerequisite for the efforts to flourish (Nagji & Tuff, 2012).

The theory of how to manage innovation proposed by Nagji and Tuff (2012), is to some degree backed by the views on learning proposed by Calantone et al. (2002), where it is stated that a firm’s innovation and learning environment are highly correlated, which is why a firm committed to learning will possess higher innovative capabilities. This means that for a firm to be innovative, the organization has to create the right climate for learning to occur, which can be done through clear ambitions, the right balance, and proper organization, thus, influencing firm performance through the right management (Calantone et al., 2002;

Nagji & Tuff, 2012). Calantone et al. (2002) also identified four components of corporate learning, which included a “shared vision”, which is in line with having clear innovational ambitions, thereby enforcing Nagji and Tuff’s (2012) theory.

Firms need to both examine and assess the skillsets of the individual people with specialized knowledge and how the organization operates as a whole (Christensen & Overdorf, 2000). The latter is often a crucial aspect of navigating through turbulent environments, and often manifests itself in the firm’s resources, processes, and values (Christensen & Overdorf, 2000). However, when examining innovation in a corporate setting, two aspects need to be taken into consideration: the ability to create and implement innovational efforts, and the firm’s willingness to change (Calantone et al., 2002). It is therefore necessary to consider what

innovations the company is able to implement and its capacity to change, as new processes require new capabilities (Christensen & Overdorf, 2000).

The ability for an organization to adjust and change is difficult to master and becomes harder the larger the firm is with its growing complexities from bureaucracy, small firms are thus more capable of adjusting to changes (Christensen & Overdorf, 2000). What is therefore considered a competitive advantage in the resource-based view regarding internal complexities creating imitable resources, can also become a hurdle for the company’s ability to adapt to its environment. This consideration is also mirrored by Christensen and Overdoff (2000), who argue that a resource-based view alone cannot handle disruptive change.

Page 32 of 94 3.1.2.3 RADICAL INNOVATION

Whether an innovation is considered minor or great is determined by its impact. Smaller innovations are incremental and change how daily operations in firms are carried out, whereas greater innovations bring radical change and impact entire markets and industries, what Drucker terms “disruptive innovation”

(Drucker, 2002; Duus, 2020). When first introduced to the market, disruptive innovations do not meet mainstream consumer expectations, as it underperforms at dimensions currently valued by the common consumer, but excels in areas that mainstream consumers have not yet created a demand for, making it valued by only a niche market (Danneels, 2004; Drucker, 2002). This is also the reason why incumbents may initially overlook the innovation. It is through R&D that the innovation is developed so the mass market is satisfied with its performance (Danneels, 2004; Drucker, 2002).

Anderson and Tushman (1991) proposed a theory describing the evolution of technology which in many ways follows Drucker’s (2002) ideas of disruptive innovation, stating that technology evolves through cycles. The cycle is initiated with an innovational breakthrough, termed technological discontinuity, that elevates current technology of the industry (Anderson & Tushman, 1991). Following the technological discontinuity is an era of ferment, where the new technology replaces the old, and firms compete to develop the best design (Anderson & Tushman, 1991). The final stage of the cycle is characterized by the emergence of a dominant design, which brings an era of incremental change until the cycle repeats itself (Anderson &

Tushman, 1991). The era of ferment occurs due to the inability of the new technology to meet consumer expectations, as Drucker (2002) proposed, which is why the initial design is not used as the standard and makes it necessary for firms to refine the design (Anderson & Tushman, 1991). The technological cycle thus follows Drucker’s (2002) theories on disruptive innovation.

Some innovations can make previous know-how completely obsolete which is why incumbents may not necessarily dominate the market with the recent innovation. However, innovations can also enhance current competencies by building on the current skills and knowledge (Anderson & Tushman, 1991). Drucker (2002) and Anderson and Tushman (1991) agree that the key determinant for an innovation to be disruptive, is that it is competence-destroying, nevertheless, the two disagree on who grows to become leaders in the disruptive innovation. Drucker (2002) states that incumbents that focus too much on R&D for existing technology, what Nagji and Tuff (2012) considered to be focusing on core activities, will struggle with catching up when disruptive innovations are introduced. Drucker (2002) further states that incumbents are replaced by new entrants, arguing that they only cope well with competence-enhancing innovations. Anderson and Tushman (1991), on the other hand, state that entrants introduce the technology, but that it is the incumbents that develop the dominating design. However, the two agree that incumbents will inevitably fail if reluctant to adopt new innovations that require changes to fundamental functions, which circles back to the argument that firms need to be willing to change in order to compete in a turbulent market.

Page 33 of 94 3.1.2.4 INNOVATION AND FIRM PERFORMANCE

The relationship between innovation and firm performance has briefly been touched upon and most findings from previous research unanimously indicate that innovation has a clear influence on the firm’s performance, meaning that it can both improve and, with the lack of proper management, deteriorate the firm performance (Morbey, 1988; Morbey & Reithner, 1990; Tubbs, 2007; Vithessonthi & Racela, 2016). Innovation is therefore an important resource in order to compete, but research has also been able to identify a connection between firm performance, innovation and economic cycles (Duus, 2020; Tubbs, 2007). Some consider innovation to be the cause behind economic cycles as they often occur during economic down-turns, and cause the following upturn (Duus, 2020). This is explained by Tubbs (2007), as instigated by the possibility of gaining competitive advantages from increasing R&D efforts at the start of a downturn, where most firm’s might decrease R&D investments, which gives a relatively better competitive performance leading to

increased sales.

Innovation can therefore ensure sustained growth regardless of firm size, and it is also shown that firms and industries with relatively higher R&D investment showcase better performance results given the greater competitive abilities, but what research lacks to examine is whether this applies across all industries, or if it mostly concerns technology driven industries (Morbey & Reithner, 1990; Tubbs, 2007).

Morbey and Reithner (1990) also found that although innovation leads to growth, no strong relationship was found between R&D and profit, which was explained by the increase in cost. What leads to increased profit, is the level of R&D productivity (Morbey & Reithner, 1990). This means that firm performance through innovation is determined by the productivity level. The increased cost from R&D and innovation is also cause to the initial decrease in firm performance, and R&D investments only improve firm performance in the long run, creating a relationship with an inverted U shape (Vithessonthi & Racela, 2016). This was determined after finding that firms with excessive R&D investments, showed poorer performance (Vithessonthi & Racela, 2016).