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Chapter 3: What is innovation? in:

Joachim H. Becker, Sven Pastoors, Ulrich Scholz, Rob van Dun

Towards Sustainable Innovation, page 63 - 78

A five step approach to sustainable change

1. Edition 2017, ISBN print: 978-3-8288-3903-8, ISBN online: 978-3-8288-6655-3, https://doi.org/10.5771/9783828866553-63

Tectum, Baden-Baden
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59 chapter 3: What Is InnovatIon? Sven Pastoors/Ulrich Scholz Summary Achieving growth is one driver for innovation in corporations: “Companies cannot grow through cost reduction and reengineering alone... Innovation is the key element in providing aggressive top-line growth, and for increasing bottom-line results” (Davila et al., 2006). By fostering innovation, companies particularly strive for the following goals: • Competitive advantages over the competition. • Increase of turnover and earnings and thereby financial independence. • Increase of market share and long-term customer commitment. • Improvement of the company image. • Long-term growth, securing jobs and creation of new ones. 60 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation A company can only overcome the changes in the internal and external environment by means of innovation. Therefore, many companies perceive the innovation process as the starting point for futureoriented development. Innovative ideas can only take hold, however, if the market accepts them. Thus, the innovation process must not only be organised under purely technical aspects, but in particular, must be designed as an interdisciplinary process in the case of technical innovations, and the employees must be involved in all the important company departments. The tasks of research and development departments (R&D) are an implementation process upstream of the innovation process. The innovation process ends with the introduction of the new solution (the new product) into the market, or internally in case of process innovations. 3.1 The term innovation Innovation14 can mean a real world-first, or a subjective novelty from the point of view of an individual company. Thus, there are a large number of definitions. The scientists Vahs and Burmeister define an innovation as a targeted implementation of new technical, economical, organisational or social solutions, which are aimed at reaching the company objectives in a new manner (Vahs/Burmeister 2005, p. 15.). The statement by Hauschild supplements this definition. He defines innovations as qualitative new products or procedures that differ perceptibly from the previous situation (Hauschild 2004, p. 56). At the same time, according to Schumpeter, a differentiation is made between product, process, social and organisation, and business innovations. 14 The word “innovation” comes from the Latin words ‚novus’ meaning ‚new’ and ‚innovare’ meaning ‚to change something’. 61 Chapter 3: What is innovation? A further definition of the term innovation can be found at the Organisation for Economic Co-operation and Development (OECD): “146. An innovation is the implementation of a new or significantly improved product (goods or service), or process, a new marketing method, or a new organizational method in business practices, workplace organisation or external relations. 147. This broad definition of an innovation encompasses a wide range of possible innovations. An innovation can be more narrowly categorised as the implementation of one or more types of innovations, for instance product and process innovations. This narrower definition of product and process innovations can be related to the definition of technological product and process innovation used in the second edition of the Oslo Manual. 148. The minimum requirement for an innovation is that the product, process, marketing method or organisational method must be new (or significantly improved) to the firm. This includes products, processes and methods that firms are the first to develop and those that have been adopted from other firms or organisations”. (OECD 2005, p. 46) A factor that currently influences innovation is the increasing trend towards internationalisation. This trend expresses itself through increased competition, to which companies in turn will have to adjust to redefine markets and the global position. Additionally, there is a clearer individualisation of customer needs, an increased customer focus on the topic of sustainability and a reduction in product life-cycles. Through this increasing innovation speed, companies are placed under increasing pressure to succeed. 62 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation 3.2 types of Innovation A distinction is made between innovations in literature using three different criteria: • The field of the innovation • The degree of newness of an innovation • The type of formation Assignment according to the area of the innovation According to Schumpeter (Schumpeter 1939, p.  256), innovations can be assigned corresponding to the areas in which they can be implemented. Schumpeter differentiated between the following innovation categories: • Technical innovation: The term “technical innovations” describes all forms of practical implementation of technical knowledge in new or improved products and production procedures. • Service innovation: The services are the focal point of service innovations. Burr defines service innovations “as primary implementation of a new kind of service idea in the market.” (Burr 2007, p. 75) • Business model innovation: A business model innovation is a conscious alteration of an existing business model or the creation of a new business model, which better satisfies the needs of the customer than the existing business model (such as IKEA, Dell and Zalando). • Design innovation: Design innovations are innovations which are primarily oriented for the customer benefit like, for example, the usability and life expectancy of a product. • Social innovation: The term “social innovation” refers to the process of formation, implementation and dissemination of new social practices. Social innovations are directly related to the search for solutions for social problems and challenges. At 63 Chapter 3: What is innovation? the same time, it is often about new types of communication and cooperation (Howaldt /Jacobsen 2010). Assignment according to the degree of newness of an innovation The typecasting of the individual types of innovation can be oriented regarding its market novelty value. In this sense, new can mean a real world-first, or a subjective novelty from the viewpoint of an individual company, employee, etc. The novelty is not the only part of an innovation; rather it must cover a requirement; it must appear beneficial in the eyes of the user. Here a differentiation is made between: • Real innovation: a new solution to an existing problem creating new customer benefits. • Quasi new products: expansion or modification of existing products • Me-too products: differentiation in the image of the product and the price Assignment according to the formation of an innovation Furthermore, innovations are differentiated according to their type of formation: • Within the closed innovation process, the innovators are only within the company • Within the open innovation process, the company not only depends on its own innovative power, but it also uses external information and expertise (above all with the aid of the internet). 64 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation 3.3 The (closed) innovation process A company can only overcome the challenges that arise from changes in the framework conditions (i.e. the changes in the internal and external environments) by means of innovations. Therefore, many companies perceive the innovation process as the starting point for future-oriented development. Innovative ideas can only take hold, however, if the market accepts them. Thus, the innovation process must not only be organised under purely technical aspects, but in particular, must be designed as an interdisciplinary process in the case of technical innovations, and the employees must be involved in all the important company departments. The tasks of research and development departments (R&D) are an implementation process upstream of the innovation process. The innovation process ends with the introduction of the new solution (the new product) into the market or internally in case of process innovations. In doing so, the bottleneck is not the lack of good ideas or non-existing technology, but primarily the willingness and courage to implement this quickly into the market. Besides, the new products and services have to be seen in a social context. Therefore, a visionary management is needed that recognises the need of a social change process and creates a culture of innovation, creativity and readiness to take risks within the company. In practice, innovation models are used as a management tool, for example, in order to standardise real running processes. The designs of the process models, which are dependent on the respective goals of the company, are just as diverse as the possible applications of the models. Thus, there is no single correct process model. 3-phase funnel model of innovation There are numerous process models in innovation management given in literature. One innovation process model is the 3-phase funnel model (Figure 3.1). This model also takes into consideration both 65 Chapter 3: What is innovation? the innovation search fields and the influence of the product/market strategy of a company and its technology strategy on the development of innovations. Figure 3.1: The “3-phase funnel” of innovation Source: Hermann/Möller2006, p. 101. Innovation process according to Thom Thom already developed a practical model for innovation which is split in different phases, as shown in Figure 3.2 (Thom 1992, p. 9). The special feature in the process model by Thom is that he has further specialised the main phases and has thus provided handling instructions for the implementation of the innovation process. Consequently, with the aid of specification rules, the workflow for structuring innovations was established for the first time. 66 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation Figure 3.2: The innovation process according to Thom Source: Thom, N., 1992, p. 9. Thus, it becomes clear that there is no standard model that is suitable for every application. Rather, due to the different targets, emphases and questions, the different models have found their validation and recognition in literature. It is common to all the models that the starting point of innovations is change in the company’s environment. The company must not see this as a threat, but instead as an opportunity. Then, opportunity is sought in the presented search fields. Furthermore, idea generation, idea evaluation and idea realisation are derived from this. 67 Chapter 3: What is innovation? 3.4 The open innovation process Contrary to the conventional closed form, with open innovation the innovation process opens up beyond the company’s boundaries. In doing so, internal and external ideas flow equally into the development of new products, services and business models. The information exchange and networking of expertise are typical for the open innovation process. They support companies furthermore by optimising the process procedures both according to new technical aspects as well as the customer wishes. The opening of organisation innovation processes and the active use of ideas from the external world thereby lead to expansion of the own innovation potential (Reichwald/Piller 2009, p. 150 seq.; Gassmann/Enkel 2004, p. 14 f.). Open innovation can be divided into three areas: • Outside-in: The outside-in process is the integration of external knowledge in the innovation process. The ideas come from outside and are used for innovations within the company. The expertise of suppliers, customers and external partners (e.g. universities) is used to increase the quality and speed of the innovation process. Already in 1986, Eric von Hippel described the lead-user method – the integration of particularly advanced consumers in the development of new products. The outside-in process illustrates that the place in which new knowledge is created need not correspond with the place where the innovation is made (Gassmann/Enkel 2004, p. 6). • Inside-out: The inside-out process is the externalisation of internal knowledge. New processes are already created in the company, and these are tested with the aid of customers and for example outsourced through the foundation of a start-up. Companies use this process, for example, to earn licence fees for patents and innovations, which are not used for the operative business activities. The inside-out process illustrates that the place in which knowledge or innovation is created need not 68 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation correspond to the place where the innovation is used and implemented into new products (Gassmann/Enkel 2004, p. 7 seq.). • Cooperative Process: The cooperative process is a combination of the outside-in and inside-out processes: the internalisation of external knowledge in connection with the externalisation of internal knowledge. During this, mutual ideas are developed. For example, processes between manufacturers and suppliers are optimised through collaboration. The creation of standards and the setting up of markets are the focal points of the cooperative process. The environment is actively integrated during the development of the innovations. A market is generated around the innovation through the simultaneous externalisation of this innovation (Gassmann/Enkel 2004, p. 10 seq.). Prerequisites for implementation and use of open innovation are the willingness to be open to the ideas of others and to share knowledge with others. The company actively connects customers, suppliers, business partners, external creative individuals, students, lateral thinkers and experts from other sectors with different backgrounds in idea development. At the same time, knowledge, new ideas and innovative concepts are mutually generated through the external source of ideas. The Internet is the driver of current development in the area open innovation and the open innovation process. Consumers and users communicate in Web 2.0 and in social media networks independent of time and place. New on-line applications, like user design tools, internet-based test and analysis tools, and ideation platforms support mutual idea development. (Die Ideeologen, 2014). In today’s business environment, where changes occur very rapidly and technological development is very fast, open innovation rapidly gains popularity. This is accelerated by ever increasing research and development costs, that are simply too high to be paid for by 69 Chapter 3: What is innovation? just one company or institute. Moreover, companies have started to realise that cooperation might be more profitable than focusing too much on competition. As a result, innovation is very often carried out in a cooperation of numerous parties, sometimes including traditional competitors. This typically happens in so-called valleys, of which the most famous one is Silicon Valley. Companies that work in related industries and develop similar technologies prefer close to each other, as this enables close cooperation and the creation of important technology networks. A different way that external information can be internalised is through knowledge-spill overs, which are especially apparent when two or more companies cooperate for the development of new technologies. This, however, is not always intended by any of those companies, especially when they work together with competitors in their product markets, and hence is seen as a risk, where valuable information is spilled over. Joint ventures and strategic alliances typically struggle to protect his knowledge from their partners. Although the effects are similar to those in Cooperative Processes, as the companies do not intend this, this is not considered to be open innovation, but a negative side effect of close cooperation. Types of open innovation Crowdsourcing Companies design on-line idea competitions on open innovation platforms, in which creative people from every sector can take part and generate new ideas. With the aid of open innovation communities, Internet users develop solution suggestions for the targeted problem. At the same time, organisations use so-called swarm intelligence. (Die Ideeologen, 2014) 70 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation Co-Creation Co-creation is a further opportunity to support idea development through open innovation processes. The difference between co-creation and crowdsourcing is that the idea givers must work together on a solution. (Die Ideeologen, 2014) Lead-User Innovation The users are often hidden behind the development of successful products. This process is also known as customer innovation (user innovation). The innovations developed by the users are as diverse as the requirements of the customers are different. As a rule, these come about purely from the customer’s own need. (Vahs 2014, p. 269) Customers (both user companies and individual end consumers) therefore do not only further develop existing products according to their needs, but even generate totally new products. Inventions offer huge economic potential for companies, but also risks (Vahs 2014, p. 269). Creative customers take an active role in the innovation process and innovative companies invest a lot of money to seek them out as sources of innovation. Sustainable lead user process In the past, customers told the manufacturers their wishes and preferences, often primarily in the framework of market research questionnaires. But because questionnaires are aimed at the masses, they almost never register the needs of advanced customers, the so-called Lead Users. Lead users are advanced customers, whose needs are seen as representative of the market. They are generally well educated, highly qualified and race ahead of the masses. Furthermore, they recognise early the requirements for a product and are also generally able to name them. Lead users therefore know the needs before they appear in the market. (von Hippel 1986, p. 796 f.) 71 Chapter 3: What is innovation? By creating solutions for their own problems and requirements, lead users themselves also profit from their innovations. The motivation for the lead user to develop innovative products lies therefore in their own use of their new products and not in their commercial marketing, as it does for companies. Lead users often find no products on the market that suit their market leading requirements. Lead users are therefore always a step ahead of the market. Therefore, it is only a matter of consequence that they are used as the predictors of customer requirements. Companies from the widest range of sectors are already making widespread use of this and have been involving lead-users in their innovation projects for many years, like for example Johnson & Johnson, 3M, HILTI, Deutsche Telekom or Kellogg’s (Herstatt et al., 2001, p. 3 f.). They have successfully further developed their range of products in this way (ibid.). Vahs and Brem advantages and disadvantages of this method as follows: “In this respect, the sourcing and evaluation of customer information involves certain risks and is often connected with high financial costs and a great deal of time. But it also ensures the consistent alignment with the innovation process to the customer benefit and thereby reduces the risk of failure during the launch of the new product onto the market.” (Vahs/Brem 2013, p. 269) The lead user approach according to Herstatt, Lüthje and Lettl is made up of a multi-step process in which the companies use their customers in order to further develop their products. Companies organise workshops with their advanced customers, together with employees from marketing and technology they then design concepts that will be tested for their marketability with average customers in a later step. The individual steps in the sustainable innovation process were summarised by Herstatt, Lüthje and Lettl as shown in Figure 3.3. The starting point is the formation of an interdisciplinary team and the selection of search fields with sustainability potential. In the 2nd phase, the needs and requirements of the customer are investigated, the customer insights. In the 3rd phase, the user profile is created, and the research starts in the target and neighbouring mar- 72 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation kets. In the 4th phase, solution concepts are developed together with potential users. Those affected become those involved; the customer plays an active role in the innovation process. Fig. 3.3: The four steps in the sustainable lead user process according to Herstatt, Lüthje and Lettl Source: Herstatt, Lüthje, Lettl, 2003, p. 62. An example of lead-user innovation in practise is often seen in computer game development. Blizzard Entertainment, the developer of popular games such as World of Warcraft, StarCraft, Hearthstone and Heroes of the Storm, ask a small group of interested and motivated players to play their games and share feedback with them. This so-called beta testing allows the developer to make changes to the utility of the game, using the knowledge and preferences of passionate gamers that can be considered as a proxy of other gamers as well. Through months of beta testing, the developer is able to make 73 Chapter 3: What is innovation? valuable changes to its products/services that provide more value to its customers. Training questions: 1. Name the targets the companies are striving for through innovations. 2. Define which innovation categories are to be decided between. 3. Name and define the typification of the innovations and support your statements with respective examples. 4. Name and define the four steps in the sustainable innovation process according to Herstatt, Lüthje and Lettl. Recommended literature: Burmester, Ralf/Vahs, Dietmar (2005): Innovationsmanagement: Von der Produktidee zur erfolgreichen Vermarktung, Stuttgart Burr, Wolfgang (2007): Erscheinungsformen, Bedeutung und betriebswirtschaftliche Potenziale von Dienstleistungsinnovationen, in: Schmidt, K./Gleich, R./Richter, A.: Innovationsmanagement in der Serviceindustrie, Freiburg, S. 73-92. Davila, T./Epstein, M.J./Shelton, R., 2006, Making innovation work Gassmann, Oliver/Enkel, Ellen (2004): Towards a Theory of Open Innovation: Three Core Process Archetypes, St. Gallen. Hauschildt, J. (2004): Innovationsmanagement, 3rd Edition, Munich. Hermann, Ch./Möller, G. (2006): Innovation – Marke Design, Grundlagen einer neuen Corporate Governance, Dusseldorf. Hippel, Eric (1986): Lead Users: A Source of Novel Product Concepts, in: Management Science, Vol. 32, No. 7 (1986). 74 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation Howaldt, Jürgen/Jacobsen, Heike (ed.) (2010): Soziale Innovation. Auf dem Weg zu einem postindustriellen Innovationsparadigma. Wiesbaden. OECD 2005 Reichwald, Ralf/Piller, Frank T. (2009): Interaktive Wertschöpfung. Open Innovation, Individualisierung und neue Formen der Arbeitsteilung, Wiesbaden. Schumpeter, Joseph A. (1939): BUSINESS CYCLES. A Theoretical, Historical and Statistical Analysis of the Capitalist Process, New York/Toronto. Thom, Norbert (1992): Innovationsmanagement, in: Schweizerische Volksbank (Ed.): Orientierung, No. 100, Bern. Vahs, D. (2014): Empirische Studie: Erfolgsfaktoren des Managements von Innovationsprozessen. In: OrganisationsEntwicklung Nr. 2/2014, S. 98-99  Vahs, D./Brem, A. (2013): Innovationsmanagement: Von der Idee zur erfolgreichen Vermarktung, 4th Edition, Stuttgart. Internet resources: Die Ideeologen (2014): Open Innovation, online: http://innovationsmanagement.ideeologen.de/open-innovation/openinnovation Herstatt, C./Lüthje, C./Lettl, C. (2001), Fortschrittliche Kunden zu radikalen Innovationen stimulieren, Working paper No. 9, p.  3f., online: https://www.tuhh.de/tim/downloads/arbeitspapiere/Arbeitspapier_9.pdf, last access on 22.12.2014.

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Zusammenfassung

With sustainability having gained a lot of momentum over the last years and companies implementing strategies to create corporate sustainability, there are lots of opportunities for innovation. Thus, the two concepts of sustainability and innovation should not be considered separately – they are closely interlinked with one another. The main goal of sustainable innovation is to develop new products and technologies that have a positive impact on the company’s triple-bottom-line. To meet this aim, they have to be ecologically and economically beneficial as well as socially balanced.

In order to help companies to improve their sustainable innovation process practically, this book is structured into five possible phases of a sustainable innovation process:

Awareness of a sustainability problem

Identification & Definition of the problem

Ideation & Evaluation of the solutions

Testing & Enrichment of the solutions

Implementation of the solutions & Green Marketing