From Software Business Community

Innovation

Innovation process

There are different models to describe the innovation process.

Three stages model

"The three stages in the process of innovation: invention, translation and commercialization. ^[4]

This model was introduced by Schilling, M. 2007 ^[5]. In his opinion, the innovation process can be divided in invention, translation and commercialization. Invention describes the creative action of generating a new idea. Translation describes the appliance of this idea to create products, services, new forms of organizations or business models. Commercialization describes all activities which are necessary to generate profit from the appliance of the idea.

Five stages model

This model with five stages can be found in Modesto A. Maidique, 1980 ^[6]. The author suggests to separate the innovation process into the following stages:

1. Recognition
2. Invention
3. Development
4. Implementation
5. Diffusion

This model goes a bit further as the three stages model and includes the whole lifetime of the innovation. Recognition means the identification of an insufficiency in the current situation. The invention describes the process of generating an idea to solve the problem. Development is the action to apply the invention to create plans for products, services or new forms of organizations or business models. In the implementation phase the results of the development is used to produce real instances of the innovative products. Diffusion describes the adaption of the innovation of the society.

Types of Innovation

According to Schilling, M. 2007 ^[5] , innovation can be classified with the help of four dimensions.

Architectural vs component innovation

Component innovations entail changes to one or more components of the system, but do not affect the overall configuration of the system. Architectural innovations entail changes in the overall configuration of the system or the way in which the components interact, and most likely require also changes in the components.

Radical vs incremental innovation

Incremental innovation adjusts or changes existing solutions to generate novelty. Radical innovation is very new and different from prior solutions. Disruptive technologies which threaten dominating firms are usually radical innovations, while incremental innovations are usually only improvements to existing products.

Product vs process innovation

Product innovations are innovations related directly to the outputs of an organization. Process innovations on the other hand are innovations related to the way the outputs are generated within the organization. Process innovations most likely increase the efficiency of the organization, without changing the outputs.

Competence enhancing vs competence destroying innovation

Innovation is seen as competence enhancing if it builds up on a companies existing competence. It can be seen as a leverage and thus an enhancement of the existing competencies. Competence destroying innovations are innovations which make a companies competence obsolete.

Market niche innovation

According to William J. Abernathy et. Al, 1983 ^[7], an innovation is called a market niche innovation if it opens a new market. In the beginning the innovator has got a temporary monopoly situation, until other competitiors enter the market.

Sources of Innovation

According to Schilling, M. 2007^[5] , there are several sources of innovation which have to be taken into account. These sources can investigate in basic research, applied research and development. Basic research means to increase scientific knowledge for its own sake. This knowledge may or may not result in innovation. One speak of applied research if understanding of a topic is built up for a specific need or application. Development is the process of apllying knowledge to produce useful devices, materials or processes.

Innovation by users

Often innovations originate from individuals which create solutions for their own needs. For further information see End-user innovation.

Research and development by organizations

Organizations provide a more powerful source of innovation. In most cases, larger companies have their own research and development facilitates, which often cooperate with other institutions.

Government

In most industrial countries the government invest in research through own laboratories, the formation of science parks or technology areas as well as grants for other public or private research entities. The amount of governmental funding on research and development varies from country to country, but in most countries it can be seen as an important driver of innovation. The importance of governmental funding in comparison to industrial funding is lower in industrialized countries than in developing countries.

Universities

Many university facilities engage in research that leads to useful innovations. The university's intellectual property policies retain discretion over the rights to commercialize the innovation within the university. In order to transfer technology into environments where they can be commercialized, many universities have established technology transfer offices. These offices help other organizations to commercialize the research and thus increase the degree to which the universities research results in commercialized innovations.

Private nonprofit organizations

Professional or technical societies, academic and industrial consortia, private research institutes and private foundations can be seen as another source of innovation. While some of them directly provide innovation through their own research, others are indirect sources of innovation as they fund research and development efforts of other innovation drivers.

Collaboration and network linkage

The collaboration between these different innovation drivers can also be seen as a source of innovation. The results of the research and development are leveraged by the different participators in the collaboration.

Innovation theories (to be considered)

• Thomke (Importance of Experimentation)
• Chesbrough (Open Innovation)
• Fine (Innovation processes need to match Industry "Clockspeed")
• Von Hippel (User Driven Innovation)
• Amabile (Creating an environment for Innovation)
• Nonaka (Importance of Tacit Knowledge in Knowledge Creation)
• Cooper (Funnels and Stage Gates leading to Systematic Innovation)
• Keeley (Innovation as a combination of technical AND design issues)
• Christensen (Disruptive Innovation: risk of overdesign)
• Basadur (Team Innovation Model)
• Bronfenbrenner (Innovation as a self-organizing eco-system)

Relevance to software business

Innovations are present everywhere in software business. Some authors Utterback, J. M., 1994 ^[8] and others hold the view that "...commercial software is a form of general industrial innovation"^[8]. Like in every business innovation is essential for a company to sustain or improve their market share. Schilling (2007) ^[5] says that innovation is in many industries most important driver of competitive success and firms in wide range of industries rely on products developed within the past five years for more than one-third of their sales and profits.

Innovation strategies

There are two main strategies to handle innovation in software business.

One strategy is to create differentiation from other companies with the help of innovation. This way the companies achieve a competitive advantage. A special form of this behavior is market niche innovation, where the differentiation may lead to a temporary monopoly situation. ^[9] The other strategy is to drive an industry wide innovation in order to gain a market share from this new innovation. An example would be to provide a software platform and to capture innovations from partners who rely on the platform. ^[10]

A strategy which is unique to software business is the strong participation of end users. This can be achieved by open source projects or integration of users into the development process. As recognized by ^[11] "Users are a critical source of innovation" in software business. Some business models completely rely on End-user innovation

Development of innovation in software business

In the recent years, there has been a change in the types of innovation made by software business. The software business became more mature and has moved from product innovations to process ^[12] or business model innovations ^[2]. One example for business model innovation is Google's personal advertisements or Software as a service. Referring to Sääksjärvi et al.(2005)^[12] the product related innovations also become less radical and move towards incremental innovation.

Transfer of knowledge in software business

Software business in general is a very knowledge intensive industry sector. Some authors conclude that the firm’s transfer of knowledge and its ability to become a learning organization is critical to company innovation and competitiveness ^[13]. This requires efficient methods to transfer knowledge to software companies. As only few software companies are large-scaled and have their own research facilities, the collaboration between other sources of innovation and software business is essential.

As mentioned by Bagshaw, 1999^[14], "Innovation comes first from individuals, but must permeate throughout the organization". This means that it is important to build up an environment where the ideas of each individual in the company can become innovations.

Small software companies and innovation

As a huge amount of knowledge and resources does not necessarily result in innovation, small companies are very important for industry wide innovations ^[15] & ^[1]. "Although large firms may have an abundance of knowledge and technology they are not always the best vehicle to recognize and exploit the opportunities of the future. The role of new firms in the exploitation of new technology is well established."^[15].

This is especially true in software business, where less resources are required to enter the market than in traditional business. Thus, small and innovative software startups can become big competitors for existing companies within few years. There are a lot of examples for this phenomena like Microsoft, SAP and Google.

Small software startups often form around an innovation and try to push it forward. In small firms the communication is more direct and can affect the management in a more efficient way than in larger companies. Big companies try to adopt this capability by flattening hierachies and building "network organizations" ^[16]

Capturing value from innovation

According to Teece (1988) ^[17] the benefits from innovations are divided among several parties: the innovator, customers, suppliers, imitators and other followers. Patents or trade secrets provide often only a limited protection, especially if technology environment is complex. Therefore companies should consider carefully which role they want to play, should they do everything on their own or are joint ventures, co-production, cross distribution or licensing more valuable in the long run. Invests in R&D are often useless without invests in complementary products.

Research questions

• How to protect the value gained by your innovations from other competitors?
• Which sources of innovation are most essential in software business?
• Is there a conflict between R&D resources and maintenance resources in sw-companies?
• How does the number of innovations and time to implement them effects the capability of the organization to create value?
• How do firms choose, manage and protect their innovations most efficiently?

References

1. ↑ ^{1.0 1.1} Schumpeter, JA. (1934). The Theory of Economic Development:An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Harvard University Press: Cambridge, MA.
2. ↑ ^{2.0 2.1} Amit, R. Zott, C. (2001)Value Creation in E-business. Strategic Management Journal, vol.22, pp. 493–520
3. ↑ OECD 2005: The Measurement of Scientific and Technological Activities: Guidelines for Collecting and Interpreting Innovation Data: Oslo Manual, 3rd edition, Paris, 2005.
4. ↑ Bruce D. Merrifield. (1986) Forces of Change Affecting High Technology Industries. A speech by U.S. Assistant Secretary of Commerce.
5. ↑ ^{5.0 5.1 5.2 5.3} Schilling, M. (2007) Strategic Management of Technological Innovation, McGraw-Hill Education Singapore
6. ↑ Modesto A. Maidique. (1980) Entrepreneurs, Champions and Technological Innovation. Sloan Management Review (Winter)
7. ↑ William J. Abernathy, Kim B. Clark, and Alan M. Kantrow. (1983) Industrial Renaissance. New York, NY: Basic Books.
8. ↑ ^{8.0 8.1} Utterback, J. M. (1994) Mastering the Dynamics of Innovation. Harvard Business School Press, Boston, MA.
9. ↑ Messerschmitt, D.G. (2007) Rethinking Components: From Hardware and Software to Systems. IEEE Proceedings, July 2007.
10. ↑ Cusumano, M. and Gawer, A. (2002) The Elements of Platform Leadership, MIT Sloan Management Review, Spring 2002, pp. 51-58
11. ↑ Nambisan, S. (2001) Why Service Business are not Product Businesses. Management of Technology and Innovation, vol.42:4
12. ↑ ^{12.0 12.1} Sääksjärvi, M., Lassila, A. and Nordström, H. (2005) Evaluating the Software as a Service Business Model From CPU Time-Sharing to Online Innovation Sharing. IADIS International Conference e-Society.
13. ↑ Li, Xiaoqing and Ali R. Montezemi. (2003) Information sharing methodologies in support of knowledge management. McMaster eBusiness Research Center (MeRC) Working Paper #3
14. ↑ Bagshaw, M., Bagshaw, C. (1999) Leadership in the twenty-first century, Industrial and Commercial Training, vol.31:6
15. ↑ ^{15.0 15.1} Park, JS. (2005) Opportunity recognition and product innovation in entrepreneurial hi-tech start-ups: a new perspective and supporting case study, Technovation 25.
16. ↑ Ulrich J. Franke. (1999) The virtual web as a new entrepreneurial approach to network organizations. Entrepreneurship & regional development, vol.11, pp 203–229
17. ↑ David J. Teece. (1988) Capturing Value from Technological Innovation. Interfaces, vol.18, pp. 46-61

Origins of this article

This topic was initially started in Helsinki University of Technology on course Advanced course in software Business by Tim Schöneberg & Holger Heise