Fundamentals of Innovations

In this section, we address the fundamentals of innovation, comprising the innovation value chain, the innovation development process, and the keys to high-impact innovations.

Innovation Value Chain

The innovation value chain (Hanson et al. 2007) consists of three sequential processes: idea generation, idea development, and the diffusion of the developed concepts. Some companies may be strong in one and weak in another. The ultimate success of a company's innovation pursuits depends not on its strengths in any of these processes, but on the weaknesses in any of them. Like in a mechanical chain, the overall strength is determined by the weakest link in the chain. Companies must understand their own strengths and weaknesses in all these processes and take action to strengthen their weak processes, in order to achieve an acceptable outcome in their innovation value chain. Idea Generation

Innovative ideas may come from creative people of different sources. Table 10.1 shows a list of known sources of "big ideas," based on a survey conducted by IBM Business Consulting Services (Violino 2006).

The concepts of open innovation and open-market innovation are well known in the business literature (Chesbrough et al. 2015; Chesbrough 2005; Griffin et al. 2014). The benefits of treating customers and suppliers as strategic partners are obvious. For example, physicians may know about opportunities for new capabilities to make their care delivery more effective. Debruyne (2014) and Leonard (2002) suggest that companies ask customers for the outcomes they want, not for a particular product/service feature that they think they need. Christensen (2013) explains the rationale of not asking existing customers solely for ideas, thus likely missing some simpler needs of lower-end customers in rapidly growing segments.

Idea generation may be improved by building an external solution network. As practiced by Proctor and Gamble (P&G; Huston and Sakkab 2006), customer needs are first translated into technology briefs, which include the problems to be solved. These briefs are then sent through the company's solution network, which includes technology scouts, suppliers, research laboratories, and retailers to solicit possible solutions.

Idea generation may also be enhanced by creating a solution-seeking website (e.g., Eli Lilly's InnoCentive— Over 80,000 research participants (called

TABLE 10.1

Sources of Big Ideas


Respondents (%)



Business partners








Associations, trade groups


Sales or service units


Internal R&D




Source: IBM Business Consulting Services. Note: Multiple choices allowed.

solvers) in over 170 countries are currently registered at the site to help its clients (called seekers) to find solutions to difficult R&D challenges. The clients include Dow Chemical, P&G, Eli Lilly, and 20 plus others. When seekers confront a particularly difficult research challenge, they post their requirements to InnoCentive's solver network and offer a bounty to anyone who finds a solution. The ultimate price for the solution winner is $20,000. The success rate of InnoCentive was said to be about 50%.

Alternatively, companies may set up a discovery network. Siemens is known to have set up a 15-person scouting unit in Berkeley, California, to cultivate personal relationships with scientists, engineering doctoral students, venture capitalists, and entrepreneurs as well as government laboratories and corporate research centers. They keep track of emerging technologies and business ideas and constantly feedback their learning to allow Siemens to selectively take advantage of such insights in order to achieve time-to-market and technological leadership advantages. Similarly, Intuit sent out a 10-member team to learn and observe how small business owners do their financial books. The result is the Simple Start edition, which became a best seller for Intuit.

Certainly, companies may also build internal cross-unit networks in order to tap into the special talents from within. P&G created 30 "communities of practices (CoPs)" each focused on an area of expertise, to encourage interactions between workers of diversified backgrounds. These communities solve specific problems that are brought to them. Members of these communities participate in monthly technology summits with business representatives.

How could innovations be promoted by networking? Personal networks are extremely important for innovative pursuits. Companies should foster innovation by creating networks that facilitate interactions between employees and others with specific know-how and diversified backgrounds.

A successful network delivers three advantages: (1) private information, which is not readily available from public sources; (2) diverse skills sets, which greatly compliment one's own knowledge and experience; and (3) information brokers, who are linked to useful networks to access information if needed (Uzzi and Dunlop 2005). For a network to offer these advantages, its members should preferably have diversified knowledge and experience, be able to serve as linkages to other networks of diversified people, and can offer private information when trust has been established.

In general, people tend to form their network by predominantly applying the "selfsimilarity" principle. The self-similarity principle states that people tend to make friends with those who have a similar background, work experience, and outlook. They also should not form networks by applying the "proximity" principles, thereby becoming closely connected with people who work in nearby offices or neighborhoods. The drawbacks of such self-similarity or proximity networks lie in their lack of diversity in opinions, values, judgments, and worldviews. Too much similarity restricts one's access to discrepant information.

Instead, people should pursue the "shared activities" principle to form networks, by making friends through group activities that pursue high-stakes activities of common interest. Examples of such group activities include community service ventures, interdepartmental initiatives, voluntary associations, cross-functional teams, charitable foundations, for-profit boards, and others. The mutual trusts developed among participants in such activities could form a very solid foundation for personal interactions and knowledge interchanges.

Important for innovation is the feedback secured from networks that are composed of trustworthy people with diversified perspectives.

MacCormack and Forbach (2008) point out that companies that are successful in pursuing innovation via collaboration pay attention to four P's: (1) People—select people on soft skills (communications) and train partners. (2) Processes—teams from different cultures have different strengths and working methods, which need to be matched with their assigned tasks. Frequent communications is a must to resolve problems. (3) Platform—apply the same infrastructure (tools and standards). (4) Program—a coherent program to continuously monitor and improve collaboration efforts (not as individual projects). For example, the Boeing 787 Dreamliner project involves 50 partners at 130 locations. The key to competitive advantage lies in the collaboration of so many partners, so that their individual expertise can be effectively merged to create innovative outputs.

Example 10.1

Transposing an old known idea to a new unrelated field is a well-known technique to innovate. How can company management foster this specific technique of creativity?

Answer 10.1

For such a technique to be effective, companies need to motivate people with diversified experience and knowledge to collaborate extensively and have a risk-tolerant organization in place to recognize and reward a superior performance in a timely manner.

Hargadon and Sutton (2009) suggest that an effective innovation system can be created by the right organization and attitude. Their research pointed out that the best innovators systematically use old otherwise disconnected ideas as the raw materials for new innovations. Robert Fulton applied the old steam engine idea that was used in mines for 75 years to power boats.

Successful innovators of companies systematically go through the knowledge-brokering cycle of identifying good ideas, keeping ideas alive, imagining new uses for old ideas, and testing promising ones. Thomas Edison said: "To invent, you need a good imagination and a pile of junk." Idea Conversion and Diffusion

There are two strategies that could improve the success of the idea generation process, namely, multichannel funding and safe haven.

Shell Oil created a 25-person unit, GameChanger, with an annual budget of $40 million. This unit evaluates and funds business ideas submitted by Shell employees, typically to the tune of $300,000-$500,000 per project. Successful projects are subsequently funded by Shell divisions.

Safe havens are business units designed to nurture new business ideas and projects and shield them from the short-term thinking and budget constraints that pervade in-line organizations. Line managers participate on the board that governs these safe havens. Safe havens are allowed to operate autonomously in separate geographical locations.

A champion is very much needed to preach and broadcast the value of new ideas, and to spearhead the diffusion process throughout a large organization (Vishwanath and Barnett 2011). Manage and Monitor the Value Chain

One way to constantly improve the innovation value chain is to set up performance indicators for each of its three component processes and then steadily monitor their progress. For idea generation, these indicators may simply include the number of high- quality ideas produced within and across units and from outside the firm. For idea conversion, the idea selection process may be evaluated by the percentage of all ideas generated that end up being selected and funded, whereas the development process could be gauged by the percentage of funded ideas that lead to revenues, and the number of months to first sale. To monitor idea diffusion, the percentage of penetration in desired markets, channels, customer groups, and numbers of months to full diffusion could be used (Hansen and Birkinshaw 2007).

There are a lot of "best practices" in innovations available in the literature. But one size does not fit all. The value chain concept and its management allow the proper choices to be made as to which best practices are to be introduced when and where in the organization, so that the overall innovation process is effectively advanced.

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