Discussion of innovation measurements

To understand the impact of innovation policy, the true nature of innovation itself must be clearly identified. The study of innovation has been evaluated within a variety of contexts, including technology, social systems, economic development, commerce, and policy construction. This broad variety of contexts provides a wide range of approaches for defining innovation (Fagerberg et al. 2004).

Throughout these broad perspectives on innovation, a consistent theme is evident. Innovation is predominantly understood as the effective introduction of new techniques, new methods or practices, or new products and services. Examples of these innovations include new techniques in value investing, new methods of

construction using interchangeable parts, new business practices such as the assembly line, new products such as the personal computer, and new services such as the internet. These innovations were novel ideas which changed the order of operation in their respective contexts.

The introduction of a new good is, by definition, the development of a good which is unfamiliar to customers. While many of these innovations are dependent on new scientific discoveries, innovation can at times be the original application of an existing entity. This is often found in the pharmaceutical world where existing drugs are found to have new uses.

The introduction of a new method of production can exist in a new commercial treatment of a commodity. The search for new supply sources of raw materials or half-manufactured goods can also be innovative, irrespective of whether

this source previously existed. Innovation can also be found in the reorganization of an industry. Schumpeter‘s focus on innovation is evident in Neo-Schumpeterian economics, developed by such scholars as Christopher Freeman (1982) and Giovanni Dosi (1982). Innovation is also studied by economists in other contexts, including Paul Romer‘s New Growth Theory and the theories of entrepreneurship.

The sources of innovation or the catalysts that drive innovative thought are difficult to reproduce but they can be classified according to several categories. In the linear model of innovation, the source of innovation is often considered to be the manufacturer. Individuals or businesses develop new ideas to improve the sale of their products. More recently recognized as a valid source of innovation is end-user

innovation. Individuals or businesses develop an innovation for their own personal needs to be used in-house because of a lack of existing products to meet their needs. A prime example of end-user innovation was the development of assembly line

production by Henry Ford. In Sources of Innovation, Eric von Hippel (1988) identifies end-user innovation as the most significant and critical source.

Regarding user innovation, a considerable level of innovation occurs through the direct use of related technologies by individuals implementing natural process improvement methods throughout the course of their routine activities. This can be seen in the development of interchangeable parts. Eli Terry, a clock maker in the 1700s, began using standard parts that were interchangeable to facilitate his operation.

User-innovators like Terry sometimes become entrepreneurs, when they recognizer the value of their innovation. A recent trend in the market has been the free exchange of innovations using methods such as open source technology. This trend is born out of networks of like-minded individuals who are able to use the free exchange of innovative developments to further develop technologies (Tuomi, 2002)

In the business environment, considerable attention is focused on formal research in the pursuit of breakthrough innovations or disruptive technologies. These innovations are by far the most publicized and recognized accomplishments, but innovations may also be developed through more indirect routes, including the exchange and integration of professional experience as well as on-the-job

modifications of practice. The more radical and revolutionary innovations emerge predominantly from traditional direct research and development. Incremental innovations more often emerge from practice, but there are numerous exceptions to each of these trends.

Within an organization, innovation programs are greatly affected by organizational goals and objectives, company business plans, and corporate positioning relative to market competitiveness. Google is an excellent example of innovation through this means. The corporate environment at Google embraces innovative ideas, methods and processes. Google offers creative outlets to its

employees in the form of activities and services, and through this creative process, has introduced numerous innovations in online business, including the development of a global digital compilation from satellite photos of the earth. This dedication to innovation is often capital intensive, requiring significant percentages of corporate turnover.

The pursuit of a successful innovation requires considerable dedication, consuming tremendous resources. The large cost of experimentation associated with innovative development can be financially draining, creating a barrier of entry for many cash-poor organizations. The tremendous need for funding experimentation in the pursuit of innovation is underlined in Stefan Thomke‘s book, Experimentation Matters. He charges that the ability to innovate is dependent on experimentation

(Thomke, 2003), creating intense funding requirements. Investment in innovative improvements to established products, processes and services will typically average four percent within a company, but may vary throughout industries and can range from as low as one half percent of turnover to well over twenty percent, depending on the rate of change within the individual corporate markets.

While many organizations endeavor to be innovative, the intangible aspect of creativity creates an imbalanced return on investment with respect to innovative efforts. Financial resources alone are no guarantor of success, and the possibility of failure is great. The wide range in percentage of corporate turnover dedicated to innovative efforts illustrates the varied level of importance placed on innovation with respect to financial resources, but fails to address the diverse cultures impacting the organization.

As a result, the success rate of innovative investment varies greatly. A great majority of innovation projects result in failure, contributing nothing to the

organizational goals. Many organizations fund a great number of innovation projects while expecting only a small percentage of them to materialize into commercial assets.

And there is always the possibility that none of the innovation projects will ever be successful. As a result, the ability to recognize the commercial potential in every innovation is critical to a corporation‘s success. A particular example of this failure is Xerox Corporation, which invented the computer mouse and the graphical user interface, but failed to recognize the commercial potential or capitalize off of their innovation.

The debate between supply and demand origins of innovation has also been explored extensively. Supply-pushed innovations are based on the development of new technological possibilities, while demand-led innovations are based on social

needs and market requirements. The co-dependent nature of both supply and demand creates a difficulty in isolating the originating source of the innovation itself.

Although this debate continues to remain unresolved, recent studies have focused on the underlying nature of both supply and demand in relation to innovation. Empirical research indicates that innovation occurs in a broader context than within the confines of industrial supply or user demand, but rather in a complex interrelated network of activities linking a wide range of stakeholders, including (but not limited to) users, developers, government and consultancies. Social networks such as Facebook⁸, LinkedIn⁹ and Twitter¹⁰ serve as examples of the interrelated nature of innovation, suggesting that effective innovation occurs for the most part at the boundaries of industry where technological developments are linked together with the needs of users through an original method, engaging and requiring the involvement of all parties.

The impact of innovation can be felt throughout societies on a variety of levels.

From an individual corporate standpoint, an innovation is passed from the innovator to other individuals within a network. This process has a significant impact on the life cycle of innovations. The life cycle can be characterized by an S-shaped diffusion curve, commonly referred to as an ―s-curve.‖ The s-curve follows the growth of productivity against time and is derived from a portion of a traditional distribution curve.

The life cycle or product life of an innovation relates to the stages of development beginning with a start-up phase to a rapid increase in revenue and eventually resulting in a decline as new innovations displace the relevancy of the product. The life cycle of computer game consoles has been consistent over the past two decades as new products in this field emerge every four years. The market success of these innovations is somewhat predictable, but in reality, a large majority

of innovations never materialize into commercial products and are not represented on the curve. Innovations that are successfully introduced into the market begin with relatively slow growth. As the product develops an established foundation within the market, demand increases, driving a rapid increase in the product growth. Related incremental innovations including minor improvements drive product growth further.

As the product matures, the growth rate declines and eventually begins to plateau. At this point, new innovations will typically replace the old technology, driving the now-outdated product into decline.

Many corporations develop innovation programs to take advantage of the product life-cycle curve. A key driver for these innovation programs in corporations is to achieve growth objectives. Davila et al. (2006) notes, ―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‖ (p.6). As a product matures, these innovative companies will often develop products to replace them, introducing the new technology at successive intervals with the intent that the rapid growth phase of the more recent innovation will coincide with the peak of the aging product‘s s-curve. By timing intervals and accurately predicting a product life cycle, individual companies are able to maintain the highest consistent growth rate.

These intervals vary greatly within markets and depend on many external and internal factors.