State of the Art of Innovation

Oleh:

Bambang Purwanggono
 State of the Art of Innovation
By: Bambang Purwanggono

What is an Innovation and Why Does One Happen?

A review of the literature on innovation and diffusion reveals several distinct schools of
thought as to just what an innovation is and why one might happen. The "school" which has
been most influential in North-American and North-American influenced development
projects is led by Everett Rogers. He defines innovation as "an idea, practice, or object that is
perceived as new by an individual or other unit of adoption" (Rogers 1983:11).

This school views innovation and diffusion as distinct processes, takes the need for the
innovation as given, treats technology as a free-standing object independent and devoid of
cultural meaning, and views problems of diffusion as ones of communication and persuasion.
To E. Rogers, innovations are singular inventions that are adopted via a process of
protagonistic "marketing". At issue is the potential adopters behavior ("i.e."
attitudes and personality) -- rather than their ability to adopt, and the ability of the agent
promoting the innovation to persuade the potential adopter.

In contrast to the Rogers school, H. Barnett (1953), B. Agarwal and others have argued that
innovation and diffusion are not separate processes -- that innovation is essentially the first
step in the diffusion process -- and that potential adopters decisions concerning adoption is
based on rationality rather than persuasion (Agarwal 1983). In this school, innovations are
ideas or technologies which are continually adapted as they are adopted, and represent
sequential socio-cultural change. H. Barnett, an early proponent of this school, stated that
"When an innovation takes place, there is an intimate linkage or fusion of
two or more elements that not have been previously joined in just this fashion, so that the
result is a qualitatively distinct whole" (Barnett 1953:181). J. Schumpeter's simple definition,
that innovations are "the carrying out of new combinations" (1971:47) also fits this
contrasting school of thought.

Economists have focused on the economic factors "inducing" innovation, and have taken a
market rather than personal perspective. Ruttan and Hayami (1984), utilize a functionalist,
neo-classical argument that innovation results from the endogenous scarcity of some
component of production. Thus, using this argument for example, the tractor was adopted in
the United States in response to increasing labor costs. This is essentially the "scarcity is the
mother of all invention" school.

The neo-classical school has been criticized by another group of economists that emphasize
the importance of exogenous, structural factors (history, international markets, politics and
institutions) in "inducing" innovation ("e.g." A. de Janvry 1985).

The discipline of anthropology is also divided on the subject. Again, in general terms, the
division is largely between those who consider humans to be pragmatists with innovations a
function of their rational objectives and characterized by the materials at hand, and those who
consider humans meaning- and symbol-making beings with innovations a function of their
subjectively defined beliefs. From the latter perspective, innovation is culturally defined and
stimulated, and thus innovation is essentially an overt act of cultural creation. Regardless of
which of the two arguments one supports, anthropology informs us that for reasons
related to either material or belief systems, each and every culture is necessarily and
fundamentally different. Anthropology thus offers at least one clear contribution to the
debate on innovation: an innovation which can be considered "rational" in one socio-cultural
environment would not necessarily be considered "rational" in another.

Two anthropologists, H. Barnett and S. Gudeman, offer arguments that bridge this gap
between the "induced" argument of the economists and the "culturalist" arguments of some
anthropologists. Barnett maintained that the incentives to innovate can be described as: self-
wants (including credit wants and subliminal wants); dependent wants (including convergent,
and compensatory wants); or a voluntary desire for change (Barnett 1953). At the personal
level, the "induced" innovation model of Ruttan and Hayami would fit within Barnett's
model.

Accepting the Barnett's and Schumpeter's definition of innovation-- as that of making new
combinations of familiar things -- Gudeman proposes that people create new things for use,
and simultaneously create culture (Gudeman, 1991). A discarded food bowl used for a
chimney cap is thus both an innovation with practical use value and a cultural creation. This
proposal is both a refinement and extension of the Barnett model.

Beyond economic and cultural rationales, there are of course "personal" motivations for
innovation. By using the term "wants" rather than "needs", Barnett clearly asserts the
uniquely personal nature of innovation incentives. Schumpeter notes that these motivations
vary from "spiritual ambition...mere snobbery...will to conquer...to prove oneself...to succeed
for success itself...[and] finally there is the joy of creating, of getting things done or of simply
exercising one's energy and ingenuity." (Schumpeter 1971:69). Gudeman (1991) reminds us
that the innovator can be motivated more by pride and excitement than by potential economic
gain.

How Does an Innovation Happen?

We have previously discussed various theories concerning what an innovation is and why it
might occur. How does it actually take place? Conventional American literature and the
popular American belief hold that innovations are largely the product of supra individual
inventors who have great intellects, insight, and an eagerness to take risks. These
independent innovators are also the entrepreneurs whose gall, brilliance and drive for
profit make the market economy function.

Barnett (1953), Kash (1989) and others have proposed that the "American, independent
innovator" is largely the stuff of myth -- or was only partially true in an earlier period -- and
though often responsible for formulating new ideas, they are not, unto themselves,
responsible for innovations. H. Barnett also emphasized that innovations initially and
primarily take place on a mental plane where divergent ideas converge.

Barnett proposed that the breadth and depth of ideas increase the frequency of innovations
and that social, cultural or natural barriers to the exchange of ideas necessarily limit their
mixing and remodeling. Similarly, Barnett found that the collaboration of effort positively
influenced innovation. Group interaction increases the possibility that a new idea will
develop, not only because of the simultaneous and cooperative exploration, but because the
interactions are mutually stimulating (Barnett 1953:42-43).

According to Kash, innovations are actually the product of organizations which integrate
different knowledge and skills held by different individuals. This is not to dismiss the
importance of the original idea, or of brilliant individuals. It is to state that brilliant ideas are
initially just recombinations of old ideas, and that they are actually reformulated, adapted and
processed by "normal" men who in the process create the innovation. Kash's theory that
organizations sequentially create innovations is similar to that held by the innovation school
represented by Agarwal: that innovation, adaptation and diffusion is a single process
involving multiple individuals.

The term "brainstorming" illustrates Barnett's and Kash's proposition. From this perspective,
groups or societies which are successful innovators are those in which individuals are
organized in ways which stimulate the generation, interchange, testing and adoption of ideas.
In essence, "the collective capacity to innovate becomes something more than the simple sum
of its parts." (Reich in Kash 1989:53). Thus in modern western society at least, the secret to
innovative capacity is propitious social organization.

During the last decade we have observed an explosive attention, both in the popular press
(e.g. Young, 1994) and among academics (e.g. Drazin and Schoonhoven, 1996; Kanter,
1985), on innovation as a means to create and maintain sustainable competitive advantages.
Innovation is considered a fundamental component of entrepreneurship (e.g. Covin and
Miles, in press) and a key element of business success (e.g. Nonaka and Takeuchi, 1995).
This is becoming even more evident as we move into a post-capitalist, knowledge-based
society (Drucker, 1993). Jacobson (1992) argues that continuous changes in the state of
knowledge produce new disequilibrium situations and, therefore, new profit opportunities or
"gaps". The rate of change is also increasing due in part to exponential advancements in
technology, frequent shifts in the nature of customer demand, and increased global
competition. D'Aveni (1994) categorizes the situation in its extreme form as "hyper-
competition" and, as we move into a more knowledge-based society, an increasing number of
industries and firms are likely to face such hyper-competitive conditions. Hence, the
unending and increasing stream of knowledge that keeps marketplaces in perpetual motion
will require companies to focus even harder on being innovative in order to create and sustain
competitive advantages.
The growing importance of innovation to entrepreneurship is reflected in a dramatic increase
in literature that addresses the role and nature of innovation (Drazin and Schoonhoven, 1996;
Drucker, 1985). In spite of this increase and the resulting vibrancy within the field, prior
research has not yielded a widely-held consensus regarding how to define innovation.
Additionally, without a good working definition, we still lack good measures of innovation.
Kotabe and Swan (1995) argue that one of the greatest obstacles to understanding innovation
has been the lack of a meaningful measure. Without adequate measures, theory development
is impeded and it becomes difficult to suggest appropriate interventions for firms seeking to
pursue innovations. To address these issues, the overarching research question considered in
the present study is, what is innovation and how should it be operationalized?
As a starting point, we note that nearly every definition of innovation focuses on the concept
of newness. Slappendel (1996) argues that the perception of newness is essential to the
concept of innovation as it serves to differentiate innovation from change. The newness
theme is especially important to understanding the link between innovation and
entrepreneurship as suggested by prior studies that emphasize its pivotal role in new venture
creation and management: "new business startup" (Vesper, 1988), "new entry" (Lumpkin and
Dess, 1996), "new organizations" (Gartner, 1988) and "organizational renewal" (Stevenson
and Jarillo, 1990). Thus, we suggest that, in order to isolate a useful definition and measure of
innovation, we need to address three newness-related questions: what is new, how new, and
new to whom?
With these innovation concepts in mind, we developed a study that investigated six different
types of innovative activity:
(1) new products;
(2) new services;
(3) new methods of production;
(4) opening new markets;
(5) new sources of supply; and
(6) new ways of organizing.

1. History of Innovation:

About innovation in the earlier time:

Novation is a term that first appeared in law in the thirteenth century. It meant
renewing an obligation by changing a contract for a new debtor

Innovation is discussed in the scientific and technical literature, in social sciences like
history, sociology, management and economics, and in the humanities and arts.

Innovation is also a central idea in the popular imaginary, in the media, in public
policy and is part of everybodys vocabulary

Briefly stated, innovation has become the emblem of the modern society, a panacea
for resolving many problems, and a phenomenon to be studied.

2. The Theory of Economic Development, Schumpeter (1934)

The study of innovation is a relatively young and fast growing branch of social
sciences. Mainly inspired by the work of Schumpeter and by other research traditions
outside the economics mainstream, it has developed as an interdisciplinary field
studying the relationships between economic, technological, organizational and
institutional changes. In his Theory of Economic Development, Schumpeter (1934)
had pointed out that the main function of entrepreneurs in private firms is to combine
existing resources to put forward new uses and new combinations, or innovations.
These he conceived in a broad sense, so to encompass new processes and new
products, as well as new sources of supply of raw materials, new markets, and
organizational changes.
 Schumpeter pointed out that entrepreneurs are prime movers of economic change. The
entrepreneurs described by Schumpeter were innovators. They opened new markets,
created new types of industrial organization, and introduced new goods, production
methods, and new sources of materials.

This innovative entrepreneur stands out like an economic hero whose creativity
invigorates the economy with new ideas that lead to economic growth. But less
imaginative entrepreneurs can also play an important role.

Joseph
Schumpeter
Austrian School ,
Birth 8 February
1883, Death 8
January 1950
(aged 66)

First of all he adds a

definition of innovation (or
development as he
initially phrased it) as new
combinations of existing
resources, equipment and
so on (Schumpeter 1934,
pp. 65).

This activity (innovation) needs to be distinguished (he argues) from invention (discovery):

As long as they are not carried out into practice, inventions are economically irrelevant.

And to carry any improvement into effect is a task entirely different from the inventing of it,
and a task, moreover, requiring entirely different kinds of aptitudes. Although entrepreneurs
may of course be inventors just as they may be capitalists, they are inventors not by nature of
their function but by coincidence and vice versa. (Schumpeter 1934, pp. 89)

3. Evolutionary Theory of Economic Change (1982)

By Richard Nelson and Sidney Winter, 1982, which introduce the Schumpeterian ideas on
economic evolution dynamics into a novel formal framework.

Nelson and Winter proposed an evolutionary model of economic change in which

businesses were endowed with certain techniques of operation. According to this theory, all
firms carry out procedures and use technologies that determine their success or failure.
They labelled these behaviors routines. They include standard operating procedures,
investment behavior and, the process of finding better ways of doing things.

4. Complementary assets (David J. Teece, 1986)

are described as:

first, complementary knowledge (that is

kept proprietary) can be combined with
external knowledge to form an innovation that is still essentially unique to the focal firm

second, other complementary assets such as brand names, distribution or service networks, or
manufacturing capabilities can be used to leverage external knowledge in a way that
would not be possible for other firms .

5. Network externalities

a firm may join in with others on a new technology in order to promote a specific technology
to become a standard, which then benefits all firms that joined early on, and thus creates
rarity with respect to those firms betting on other standards (e.g., Arthur, 1989).

Such cooperative arrangements have been set up, for instance, within the multimedia and the
wireless telecommunications industries in order to make an impact on standards development
(Chiesa & Toletti, 2003; Leiponen, 2006).

6. Absorptive capacity

the degree to which these firms posses extant absorptive capacity that allows them to
recognize, assimilate and use external knowledge (Cohen & Levinthal, 1990).

7. Diffusion of Innovations (Rogers 1962)

He defines diffusion as "the process

by which an innovation is
communicated through certain
channels over time among the
members of a social system."
Rogers proposes that adopters of any new innovation or idea can be categorized as innovators
(2.5%), early adopters (13.5%), early majority (34%), late majority (34%) and laggards
(16%), based on the mathematically-based Bell curve.

Studying how
innovation occurs,
E.M. Rogers
(Diffusions of
Innovation, 1995)
argued that it
consists of four
stages: invention,
diffusion (or
communication)
through the social system, time and consequences.
 8.
8.
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8.
8.
8.
8.
8.
8.
8.
8.
8.
8.
8.
User innovation (Eric von Hippel, Democratizing Innovation, 2005)
 Figure: Bounds of viability for all three innovation models

9. Edquist 1997

Product innovations may be goods or services. It is a matter of what is being produced.

Process innovations may be technological or organizational. It concerns how goods and

services are produced.

10. Clayton Christensen 1997 (The Innovators Dilemma)

The central theory of Christensens work is the dichotomy of sustaining and disruptive
innovation. A sustaining innovation hardly results in the downfall of established companies
because it improves the performance of existing products along the dimensions that
mainstream customers value.

Disruptive innovation, on the other hand, will often have characteristics that traditional
customer segments may not want, at least initially. Such innovations will appear as cheaper,
simpler and even with inferior quality if compared to existing products, but some marginal or
new segment will value it.

Disruptive innovation, a term of art coined by Clayton Christensen, describes a process by

which a product or service takes root initially in simple applications at the bottom of a market
and then relentlessly moves up market, eventually displacing established competitors.

An innovation that is disruptive allows a whole new population of consumers access to a

product or service that was historically only accessible to consumers with a lot of money or a
lot of skill. Characteristics of disruptive businesses, at least in their initial stages, can
include: lower gross margins, smaller target markets, and simpler products and services that
may not appear as attractive as existing solutions when compared against traditional
performance metrics.

11. Henry Chesbrough (Father of Open Innovation, 2003)

As a point of departure, Chesbrough

(2003) argues that internal R&D no
longer is the invaluable strategic
asset that it used to be due to a fundamental shift in how companies generate new ideas and
brings them to the market (Chesbrough, 2003a; Chesbrough, 2003b).

In the old model of closed innovation, firms relied on the assumption that innovation
processes need to be controlled by the companyit was based on self-reliance. Changes in
society and industry has led to an increased mobility of knowledge workers and the
development of new financial structures such as venture capital forces that have caused the
boundaries of innovation processes to start breaking up (Chesbrough 2003a). Chesbrough
defines open innovation as:

the use of purposive inflows and outflows of knowledge to accelerate internal innovation,
and expand the markets for external use of innovation, respectively. Open Innovation is a
paradigm that assumes that firms can and should use external ideas as well as internal
ideas, and internal and external paths to market, as the firms look to advance their
technology. (Chesbrough, 2006b, p.1)

Open innovation has emerged as a model where firms commercialize both external and
internal ideas/technologies and use both external and internal resources. In an open
innovation process, projects can be launched from internal or external sources and new
technology can enter at various stages. Projects can also go to market in many ways, such as
out-licensing or a spin-off venture in addition to traditional sales channels (Chesbrough,
2003b).

-Not all of
the smart
people
work for
us" so we
must find
and tap into
the
knowledge
and
expertise of
bright individuals outside our company.
-External R&D can create significant value; internal R&D is needed to claim some portion of
that value.
-We don't have to originate the research in order to profit from it.
-Building a better business model is better than getting to market first.
- If we make the best use of internal and external ideas, we will win.
-We should profit from others' use of our IP, and we should buy others IP whenever it
advances our own business model.

12. Godin (Innovation: The History of a Category , 2008)

Linear model of innovation (Godin, 2006): The theory suggests that technological
innovation starts with basic research, then goes through applied research, then development,
and then production and diffusion.

The first hypothesis starts with the idea that innovation is about novelty (arising from
human creativity), as etymology, dictionaries and history suggest >> innovation as
category has a very long history
The second hypothesis is that the history of innovation as creativity is that of three
concepts (and their derivatives): Imitation Invention Innovation
The third hypothesis is about innovation as a break with the past. Innovation and the
discourses on innovation serve to make sense of modern practices and values

13. Radical and Incremental Innovation (LEIFER et.al., 2000)

transforms the relationship between customers and suppliers, restructures marketplace

economics, displaces current products, and often creates entirely new product categories.
Radical innovation provides a platform for the long-term growth that corporate leaders
desperately seek. Unfortunately, recognizing the importance of radical innovations and
successfully developing and commercializing them are two different things.

Incremental innovation usually emphasizes cost or feature improvements in existing products

or services and is dependent on exploitation competencies.

14. Determinants of Open Innovation

Determinant Related earlier Key research results

of studies
open
innovation

Complement Blonigen & Large asset bases of firms offer high degrees of p
ary Taylor (2000); synergies for the integration of external knowledg
assets Berkovitch & acquired whole firms.
Narayanan The need for complementary assets
(1993) to secure commercial success is more common in
Knudsen (2005)

Scale and Chesbrough Economies of scale are an important incentive for

learning (2003); in open innovation.
effects Knudsen (2005) Firms can achieve significant cost savings
Sakakibara by leveraging economies of scale in R&D.
(2003)

Absorptive Laursen & Firms with high levels of absorptive capacity

capacity Salter (2005) (particularly skills and access to external network
Fontana et al. are likely to be more open.
(2006); Larger firms with heavy R&D activities are more li
Laursen & small ones to engage in
Salter (2004) collaboration with universities

Network Chesbrough Open innovation has helped particularly new

(2003)
externalities start-ups with relatively little own R&D to
Chiesa & Toletti
(2003); establish themselves as strong competitors.

Leiponen (2006) A firm may join in with others on a new

West (2006) technology in order to promote a specific

technology to become a standard.

Firms may voluntarily surrender appropriability

in order to, e.g., seek adoption in the presence

of demand-side economies of scale.

Reciprocal Huston & Sakkab Some of P&Gs most successful open innovation projects
sharing (2006)
have involved reciprocal knowledge sharing.
of Kogut (1989)
knowledge Reciprocal knowledge exchanges are often institutionaliz

in joint ventures and similar equity partnerships.

Learning Huston & Sakkab Following an exploitative search strategy, large

strategy (2006)
firms can address a large collection of outsiders
(exploitation Vanhaverbeke et
vs. al. to work on their specific problem.

exploration) (2007) Since there is a positive effect of redundancy in

a firms alliance network on exploitation but not

on exploration, firms need to seek variety by

working with new partners in order to explore

new types of knowledge.

M.T. Torkkeli; C.J. Kock; P.A.S. Salmi (2009)