The Management of Innovation
The basis for this essay on the management of innovation is illustrated in the following diagram from Bessant and Tidd:
Proactive linkages occur both within the company and externally with outside agencies that can contribute to the innovations in new products, markets and techniques. In the twenty first century business is a global activity that depends on networking to exploit the opportunities available. The key here is to communicate with andthe development of sensitivity to the widest possible array of sources. It is important to understand that innovation is an acquired skill set.
The ability to generate the proactive linkages demonstrated in the Bessant and Tidd diagram result from strategic leadership that provides both direction and resource deployment to the innovative organization. Once the links are established they will progressively generate innovations and the ability to select those that have the potential to benefit the organization. Finally those selected as appropriate will be implemented and become part of the company culture. (Bessant and Tidd, 2007)
Open innovation can be described as the antithesis of the traditional vertical integration of organisations with a pyramidal management structure. Rather than have internal research and development entirely responsible for the development of new products new ideas are also sought outside the organisation’s research and development department. Ideas can flow from other sources within the organisation or even from outside sources such as customers, suppliers and even competitors. The concept of open innovation can also result in alternatives to the companies’ traditional marketing models and market pathways.
Academic scholars of innovation and management are often sceptical of new frameworks or concepts based on the experience that such innovations are often little more than fads or fashions that distract the attention of managers or can actually cause harm to the organisations and people involved. The concept of open innovation is sometimes approached as an example of an unsupportable fad in academia because it is difficult if not impossible to neatly quantitatively measure. (Chesbrough, 2006 pp. 3-7)
The Bank of America case
An interesting example of management leading in the development of innovation in the historically conservative environment of the banking industry is the creation of a corporate unit entitled the Innovation & Development (I&D) team at Bank of America. One of the basis of the I&D team effort was the establishment of an innovation market to test new concepts and products. For a bank, a service industry, the testing and development of new products on an organised basis was, in itself, highly creative. The problem of new product development is service industries is the testing of new products. For physical products it is relatively easy. The new product is built and then subjected to laboratory testing to see if it is reliable and durable. If it is satisfactory and no further questions occur and it can be produced and marketed. If the product sells, then it is a success. The only way to test a service product is to offer it to the public. If the product is unattractive the public simply refuses to use it. If there are unexpected problems with the product a service company like a bank can have serious problems. It is therefor necessary to find a way of testing new products without involving the entire structure of the banks in all the markets it serves where the service is to be offered.
The use of Atlanta as a test market was also unique in the banking industry. It was a market large enough to support a wide variety of experimental initiatives that was also small enough to limit the business risk relative to the overall company. Even the way the tests were set up required innovation. Analyzing performance data, the bank first determined which experiments successfully enhanced customer satisfaction, revenue generation, and productivity, in itself a complex process. The next step was cost-benefit analyses to ascertain whether the performance gain outweighed the expense to introduce the new process nationally. Of 40 experiments, only 20 were recommended for implementation. (Thomke, 2003)
The effect of innovation on performance
Establishing the relationship between innovation and corporate performance is very difficult. One of the common approaches is the relationship available in public domains such as the relationship between research and development and the number of new patents issued to the company or the number of new product announcements. Less obvious, and invisible from the outside of the company are measures such as the proportion of total employment represented by technical, design and research personnel or the proportion of profitability related to products launched in a defined historic period. The Bank of America case above is a prime example of the impossibility of a universal approach. Obviously, such measures are not universally applicable, but must be tailored to the company in question. What is used here is a relationship between defined inputs and outputs, but measurement of innovation to overall firm performance is still more problematic.
A further part of the problem of measuring the impacts of innovation is that the internal and external environment of the organisation implementing the innovations has a profound effect on the effectiveness of the innovations. The elements of uncertainty and complexity of the organisation and its environment are important in terms of understanding the environment in which the innovations are introduced. The reality is that a single standard of measurement or an idealised “best practice model” is unrealistic. (Tidd, 2001)
The Bank of America case is an excellent example of the steps of the process. The proactive linkages originated with senior management that first created the I&D team and then provided the resources the team needed. The team provided the initial generation of the innovations using both internal and external sources. Using the Atlanta “test bed” it selected those innovations that seemed most likely to contribute to overall corporate performance and then turned implementation of the successful innovations over to the appropriate sources within the organisation. This almost model approach for a service company still did not find a solution for measuring the long term effects of the innovations or the success of the innovations in benefitting the Bank of America as a totality. In a different environment, for example a technology company the entire approach would have to be modified and the “testing” of the innovation would take an entirely different form.
Bessant and Tidd (2007) “Innovation and Entrepreneurship” Chichester, John Wiley & Sons.
Chesbrough, H.Ed. (2006) “Open Innovation: Researching a new Paradigm.” Oxford, Oxford University Press
Thomke, S. (2003) “R&D Comes to Services: Bank of America’s Pathbreaking Experiments” Harvard Business Review, Recovered 07/01/2011 from: http://hbr.org/2003/04/rd-comes-to-services/ar/1
Tidd, J. (2001) “ Innovation management in context: environment, organisation and performance” International Journal of Management, Vol. 3 No. 3 pp169-183