Analyse the importance of innovation in an organisation
Innovation: Some background information 2
Definitions 3
Examples of innovative practice 4
Using innovation in organisations 5
Using innovation in practice 8
Techniques for facilitating and managing innovation 9
Practical consequences of innovation 11
Innovation, creativity and invention 15
Creativity in organisations 16
Innovation, entrepreneurship and intrapreneurship 19
Strategic advantages and disadvantages of innovation 20
Techniques for applying innovation 20
Innovation and the entrepreneurial organisation 21
Innovation and the learning organisation 22
Summary 25
Innovation: Some background information
Innovation is an essential process in every organisation. No idea or competitive advantage lasts indefinitely. There are very few products or services capable of dominating the market place from one generation to the next. The reason for this is that we live in a competitive society which is becoming ever more competitive for a number of reasons. For example:
• Monopolies such as those covering postal, telecommunication and transport services are being dismantled by governments. This offers new opportunities for competition.
• Many governments are removing tariffs. These were barriers designed to protect domestic businesses from international competition. The usual method is to impose a tariff on imports so that their price in the domestic market is increased to at least the price of the home-produced product. Lower tariffs mean that local producers will only survive if they are able to be competitive with imports. This may require these businesses to reduce price, improve quality, or both. Innovation and better management practices are usually the means of achieving such ends. A TAFE college might offer tutorials for commuters on trains from outlying suburbs. A number of universities are offering lectures on Saturday for students unable to get off work early enough to attend evening lectures.
• Public pressure can force innovative developments. The pressure of environmental organisations such as Greenpeace has forced many businesses to find better ways of recycling waste products and finding packaging materials that are biodegradable.
Definitions
This topic deals with innovation and the ways in which it can be used by both entrepreneurs and intrapreneurs. You may not be familiar with all these terms. In fact, at least one may not even be in the dictionary which we hope you always keep on your study desk. Let’s start with what we think are good definitions.
Innovation The creation, adaptation or adoption of something that is new or improved, with the potential to create value for an organisation.
Entrepreneurship The process of creating value through the recognition of business opportunities, the management of risk taking and the use of communication and management skills to bring together the human, financial and material resources needed to achieve desired ends.
Intrapreneurship The application of entrepreneurship by employees, as opposed to business owners, within an existing organisation structure.
There will be other terms introduced later in this topic.
We should at this point highlight the essential difference between an entrepreneur and an intrapreneur.
An entrepreneur is usually self-employed or the controller of an organisation in which he or she has a financial stake. The size is not really an issue. Rather, it is to do with behaviour. Bill Gates would be seen as an entrepreneur whereas a person who runs a coffee shop would, with rare exceptions, be seen as anything other than a small business operator. Most coffee shop owners operate in an environment in which they do little to create a marked difference between themselves and other coffee shop owners, whereas Bill Gates attempts to make Microsoft different to any other computer software company.
Intrapreneurs work within businesses which they do not
own. They may be, among other things, managers, sales representatives or scientists. They are distinguished from most of their peers by behaviour. That is, they act in an entrepreneurial rather than a bureaucratic way in looking for new opportunities. When these are identified, they set out to find ways to exploit them for the benefit of their employer.
Intrapreneurs are sometimes referred to as product champions. They are the people who will pick up an idea and effectively work to get it accepted by the top management of their organisation. Intrapreneurs are usually energetic and capable people who are enthusiastic about what they are doing and willing to apply themselves to the task of overcoming bureaucratic and similar hurdles.
Examples of innovative practice
Innovation takes many forms. In some cases it may not be immediately evident to the customer.
Take the actions of the Japanese car manufacturers in the 1980s following the rise of the yen relative to the currencies of the countries in which most of their customers live. They saw that the rise in the value of the yen posed a threat to them as it would push up the price of their cars relative to locally produced vehicles. Japanese car makers had to be innovative in order to deal with this situation. It is very difficult to innovate by producing a better product as most modern cars are very similar. Buyers have a choice of many very similar cars in every price range. Reliability, a good quality finish, reasonable styling, a generous warranty and reasonable fuel economy
is what most buyers want and get. The threat in the 1980s to
the Japanese was that manufacturers around the world were matching the quality of their products but were gaining a price advantage because of the rise in the value of the yen described above.
So, the Japanese manufacturers had to look elsewhere for the innovations that they needed to remain competitive. Most found it not in the final product but in the production process. For example, they made design changes to their cars to reduce the cost of the components used and assembly costs. They changed production processes to reduce the cost of manufacture. This was usually done by further automation and the use of robotics. Also, they examined the costs of all the components going into the final product, often replacing Japanese-sourced parts with components made in cheap labour countries such as the Philippines, Indonesia and China.
The end result was the implementation of many innovative ideas which limited the price increases on the final product.
The interesting point to note is that almost none of these innovations are likely to be noticed by the customer. However, without them these manufacturers may have suffered enormous losses and even financial collapse. One lesson we can learn from this is that innovations can be effective and significant without being so interesting that they come to our attention in books and articles.
Using innovation in organisations
Listed below are some of the areas in which innovation can be used within organisations.
• In products: to have better designed products, more functional or attractive packaging, higher quality, greater durability, enhanced appeal to customers, more effective pricing strategies. Products can be divided between those that are ‘new-to-the-earth’ and product modifications.
• In services: to have more focus on the needs of customers, be more timely from customer’s perspective and to deliver services more efficiently, in order to optimise customer satisfaction.
• In processes: to produce at a lower cost, faster, to a higher quality standard through obtaining quality certification, the application of Total Quality Management (TQM) practices and safer work practices.
• In systems: prepare more timely output that is focused on critical issues and which is easier to maintain and update.
• In structures: more efficient in the use of labour, better able to respond to the external environment and able to improve internal communication and relationships.
Activity 11 Innovation can occur in big and small companies, social clubs and even in family situations. Give an example of an innovation which you have seen in action or with which you are familiar. Explain why you consider it to be an innovation.
2 Explain the benefits of the innovation described above.
Comments on Activity 1
Your answer to Question 1 could address any number of practices. What we hope you thought about was what represents an innovative idea rather than an improvement. Maybe not very much. For example, a restaurant in a social club may see innovation as being a move from having a long menu to offering customers buffet meals. The measure here will be the reaction of customers. The managers can probably claim to have been innovative if customers express satisfaction and business picks up significantly. Remember, innovation is more than copying what competitors are doing. It is not innovative to open the third coffee shop on the main street of a country town unless offering something very different to what the other two are offering.Moving on to Question 2, the answer is clearly that something has changed in a significant way – sales are up, profit margins are up,
waste is down etc.
Using innovation in practice
Innovation is the specific function of entrepreneurship, whether in
an existing business, a public service institution, or a new venture started by a lone individual in the family kitchen. It is the means
by which the entrepreneur either creates new wealth-producing resources or endows existing resources with enhanced potential
for creating wealth.
Peter Drucker, The Discipline of Innovation,
Harvard Business Review, May–June 1985, pp 67–72.
We have already listed some of the areas in the workplace where innovative ideas can be applied. Innovation is about change designed to give an organisation some benefit. Innovation is change introduced for the purpose of improving what already exists. The end result may not be as intended because not all innovations prove to be successful.
Innovation is often about responding to what we can call transformational forces. From the perspective of an Australian business this could include the following:
• the deregulation of industries and the opening up of financial markets to competition
• the economic growth of societies in South East Asia which has created a large new market for consumer goods
• the ‘globalisation’ of the economy which has increased export opportunities while creating more competition in the home market from imports which are coming down in price because of falling tariff levels
• changes in global communication and technology.
• changing attitudes on the part of a growing number of consumers towards the environment, the real utility of consumer goods, recycling and waste disposal.
The above points, possibly with minor variations, would be true for almost every country in the world.
The reality of doing business in a capitalist society is that innovation is essential for survival. As we have already noted, there are few products and services that remain unchanged from one generation to the next. A few fortunate companies have developed popular products that seem to appeal to the current generation as much as to earlier generations. A very large number of these products appear to be convenience goods such as Mars Bars and, for young Australians, Vegemite.
Furthermore, an attempt by governments to protect companies from competition eventually ruins these businesses. For example, the manufacturers of many poorly made consumer goods in Soviet bloc countries collapsed when their markets were opened to Western imports. The realities for almost every business is innovate or die. Some examples of areas in which businesses face the need to be innovative include the following.
• Banks. Offering customers credit cards and access to automatic telling machines that can be used extensively all around the world on terms and conditions better than offered by their main competitors.
• Traditional department stores. Undertake the near-impossible task of offering prices close to or equal to those charged by discount stores while offering the service and atmosphere customers associate with quality retailers.
• Airlines. Again, as with retailers, these companies face the problem of having customers who want ever higher levels of service to beat the boredom of air travel while paying discount fares.
• Most small businesses. Consumers face a wide variety of choices in how they spend their money, be it on clothing or restaurant meals. Innovative behaviour, together with other factors such as competitive prices, quality products and excellent service, should be directed to make a business stand out as offering something different.
Techniques for facilitating and managing innovation
Innovative ideas may spring up from many different sources, some quite unexpected. However, the process of implementing innovation cannot be allowed to be haphazard. Even the most apparently brilliant and unusual ideas must be subjected to rational scrutiny before being implemented. Some may eventually prove to be impractical or at least inappropriate
at the present time.
Analysis can help identify innovative ideas with the potential to succeed. This process can draw on expertise inside and outside of the organisation. Analysis may be directed to evaluating the potential of a new product and service. Market research can be used to determine the potential size of a market. Data can be drawn from various sources, including past experience,
to calculate production and other costs. Then profits are calculated by subtracting projected costs from projected revenue. A management decision must then be made to determine whether the revenue flow is acceptable.
Many managers have in recent years seen restructuring and ‘down-sizing’ as part of a process of innovative management. They would argue that the ultimate goal of management is to maximise profits and that cost cutting can play a role in this. Traditional financial analysis techniques can be used to calculate estimated future costs and benefits. However, there is a body of opinion today which challenges such analysis as it fails to fully take human factors into consideration. For example, to what extent will productivity be affected by low morale and the loss of corporate memory? Corporate memory can be defined as the collective knowledge of all those who work in an organisation, based on what they have learnt over many years. It is difficult to assess the cost to an organisation of the ‘memory’ lost through redundancies.
In ways similar to those described above, the costs and benefits attaching to any part of the process of production, information processing and the like, can be calculated. Such proposals can relate to better assembly techniques, packaging, pricing policy and advertising strategies. Again, analysts must consider the human factor. For example, how will competitors respond
to a price-cutting strategy or a heavy advertising campaign?