Innovation and Change in Business
Introduction
Many current Chief Executive Officers of different organizations hold to the fact that developing new ideas and innovations are their priorities. This means that innovation remains an important factor in the success of any business enterprise. Innovation entails establishing of new products or services in business operations. For many years, organizations have depended on the need to spend resources on the innovative ideas that are likely to help establish their market shares. According to an article by The Economist (2007), innovation and change within business settings became relevant after the end of the Second World War. Major economies like the United States saw the need to develop new products that would solve people’s problems. Research and Development (R & D) has been the main approach adopted by many business enterprises as well as governments in an attempt to come up with products in the market. It is no secret that Research and Development is seen as the main factor into adapting to the needs of the market. For this reason, many businesses allocate millions of pounds and Euros in order to come up with products that meet new requirements and market needs (Klette and Kortum, 2004).
Organizations that adopt Research and Development are known to be innovative in nature. These organizations allocate much of their resources into research with a view of coming up with new products that meet certain market needs. To many people, these organizations are known to be innovative. There is the belief that the more an organization spends on R & D, the more innovations it is likely to come to have. However, it is important to critically look at this claim because it tries to show that organizations with no Research and Development plans can never come up with new products that meet unarticulated needs within the market (Odagiri, 1985). As much as many organizations have used R & D to come up with innovative products and services, others have also achieved great success without having to rely on R & D. for this reason; this paper does a critical analysis of the claim with a view to presenting the correct standpoint of the issue.
A critical look at the different aspects of R & D helps in finding out whether data support the claim that the adoption and expenditure on R & D makes an organization innovative. A look at the R & D figures from different organizations is important in finding the correct impact on innovation (Cohen and Klepper, 1996). On the same note, many organizations do not have R & D budget and making an analysis helps in finding out whether this affects innovation within such organizations. This study critically examines different cases in order to find out whether R & D is the key to having an innovative organization and whether more expenditure equals to more innovation.
Is R & D the Key to having an Innovative Organization?
Research and development (R & D) entail specific activities within an organization that is modeled to achieve progress through the establishment of new products and services. These activities do differ from one company to another; however, the functions of R & D can be classified together. The first function that research and development seek to achieve is the development of new products into the market. Another function may entail the need to discover new knowledge about a certain scientific method that can be used to come up with new products or processes (OECD, 2009). Within the OECD, the UK, or even the EU, expenditure by different organizations shows that R & D budgetary allocation continues to be valued as a stepping stone towards coming up with products and services that satisfy consumers. To get the correct picture, it is important to make statistical analysis on the R & D expenditure within the European Union and other economic blocks under OECD (Chakrabarti, 1990).
According to the United Nations (2012), research and development is helpful since it leads to the acquisition of necessary knowledge within the society. Information that arises from research and development can be used by organisations to establish products that enhance competitive advantage within the market. In the current times, the best way towards establishing products and services that meet specific needs in the society requires that a system be put in place to gather the knowledge available. A system that enables for sharing knowledge is important towards allocating resources that eventually bear fruits in terms of the profits. Any production process requires that the producer is able to identify the needs of consumers; otherwise, innovation may fail to serve its purpose. All these explain the need for research and development as the main method towards becoming innovative.
Different organisations may adopt various approaches towards innovation as dictated by the strategic plans. This means that R & D is valued as an important drive towards innovation. Most of organisations either use R & D in order to make incremental innovation while others prefer radical innovation. In incremental innovation, changes are made on the existing product or service in order to make improvements and capture the attention of the consumers while radical innovation entails adopting sweeping changes on the existing products and services.
According to Leifer (2000), most organizations adopt incremental innovation because of the advantages it provides over the radical innovation. He notes that so long as a give product or service is in the market, it develops human capacity and expertise, making it easy to come up with improvements that meets identified needs of the consumers. This means that incremental innovation reduces the risk that may arise from major changes. Organisations also tend to spend less when they adopt incremental innovation since expenditure towards research and development only works towards making improvements depending on market need. Radical innovation means that more investment must be done in order to come up with very new products or services in the market.
Google Company provides a good case that proves that research and development is an important tool towards innovation. Some time back, the company developed Gmail in order to help in sending emails. For long, Gmail was a simple interphase that did not have many features. Most importantly, the company kept Gmail simple by avoiding flash ads that affect users but efficiently delivering mails. With time, the company has continued to make improvements on Gmail by making it better and faster to use. These improvements continue to the present as seen in the services that the company comes up with. Google has adopted incremental innovation in most of its products, something that has led to the introduction of products like google maps and chrome browser. Their strategy has always been to stay relevant to consumers at all times, continual improvement of their products and services to them more competitive in the market. Another important strategy has been cost reduction, meaning that consumers should access services with less cost of bandwidth.
Google case does not mean that radical innovation does not work. Virgin firm remains a firm that continues to undertake radical innovation towards diversification. They spend most of their resources in order to come up with products and services that are different from each other. So far, this company has more than two hundred different business under operating under a single umbrella. These lines of business cover areas like planes, music, and gaming, mobile among others something that makes it different from Google Company that only makes improvement of its internet services. It comes that their corporate strategy entails adopting research and development in order to achieve diversification of products and services in the market. This is an advantage since collapsing of the company would mean that different businesses would continue to operate without much interference (The Economist, 2012, January 14).
However, it is important to note that Virgin Company adopts hybrid of innovation strategies through their continued improvement on their products and services after they are launched to the market. They seriously use research and development in order to produce new products and service that stand out from others and later continue making improvements on the same. According to Kim and Mauborgne (2005,) a purely radical innovation entails adopting ‘blue ocean strategy’ in order to create new products. This means that such organisations do not use their resources towards fighting competition in the market but work towards circumventing it through by innovating new products and services, effectively creating a new market.
Mobile phones remain important in the lives of human life. In the beginning, mobile phones were simple with limited applications for consumers. However, mobile manufacturers have continued to come up with innovations, leading to addition of many features in order to target specific clients in the market. Presently, smart phones have added usefulness in these gadgets since they can perform functions like personal computers. Further incremental innovation has also made working with phones convenient since users can easily access the internet without having to visit cyber cafés. It stands out that innovation helps in increasing demand for the products, and at the same time helps to reduce production cost.
Other than the adoption of research and development as a way towards innovation, many other methods can be used to arrive to the same end. Not all expenditure on R & D leads to the innovative products that meet specific goals in the market. Despite the heavy investments on research and development, some organizations fail to come with adequate innovations that solve problems in the market. This means that research and development is important; however, there is need to look at other factors that may affect innovation. According to The Economist (2012, January 14), Fujifilm never made major investments on research and development; however, they were keen to study the changes that quickly approached by each passing time. Because of this, they were able to prepare adequately by making necessary changes into the future. Research and development should be directed towards meeting future needs within the society. An organization that fails to capture such future needs during research and development may come up with products and services that fail to attract attention of the consumers.
It is important to have in mind that innovation does not just require R & D but needs to entail an understanding of the market needs. Any innovation that does not capture a deeper understanding of the market trends, needs of customers and market competition, there can never be the proper direction. Leadership is another leading factor that determines innovative culture within an organization. In most cases, an organization culture that promotes diversity, with much support and reward those activities that promote diversity (Griliches, 2000). In such organizations, failure is seen as an opportunity to bring improvement on the innovation. This requires a committed executive team of leaders that fully support innovation (Geroski, Machin and Van Reenen, 1993).
More Expenditure equals more Innovation
Innovation has been associated with how much is allocated towards the same in an organization. This can also be seen in the amount that is spent towards research and development within the UK or EU. In most cases, organizations that thrive in different industries have attributed their successes to the much expenditure on R & D. The European Union (EU) has always endeavored to allocate more resources towards R & D with a view of coming up with better products and services. Science and technology is an area that account for much of the money allocated towards research and development. One of the objectives has been to increase the level of investment in order to increase competitiveness on the global market. In order to achieve this, the trading block had an objective of committing 3% of its Gross Domestic Product (GDP) in order to boost R & D (Eurostat, 2012). However, the block still struggles to reach this target. According to the Eurostat (2012), European Union expenditure was almost EUR 250,000 million in 2010. This result showed an increase of 3.4% while compared to the previous year, and almost 50% increase when compared to 2000, a decade earlier. The ratio of R & D expenditure in relation to GDP is an important indicator towards showing the progress towards Europe 2020 strategy. According to Figure 1, R & D expenditure increased steadily to 1.88% before experiencing a decline in 2005 and another increase to 2.0% in 2009. In 2010, the expenditure fell slightly below 2.0%, something that was attributed to the slow recovery from the financial system crisis at the time.
Figure 1: R & D expenditure in relation to GDP
Source: Eurostat, OECD (2012)
It is widely accepted that the more an organization allocates towards research and development, the more innovation it is likely to come up with. However, whether more expenditure leads to more innovation is debatable. The information above indicates that the R & D expenditure by many business enterprises remain steadily high in many countries. According to the EU strategy, more expenditure on R & D is encouraged in order to come up with innovations that make the trading block competitive (Parisi, Schiantarelli and Sembenelli, 2006). Many business enterprises within UK spent billions of Euro every year in order to come up with products that meet consumer needs (Conte, 2006). The recent financial crisis in the past has been blamed for less resource allocation towards research and development. This is shown in Figure 1 by the slight decrease within the European Union, especially towards 2010.
The best way to find out what increased expenditure towards innovation can achieve is by S-curve. This comes from the fact that innovation of a given product or service undergoes different stages and there reaches a time when allocating more money on the same line of product may not yield the required outcome. Any kind of technology undergoes a lifecycle, something that may limit allocation of more money on the same line of product or service. In most cases, the beginning of innovation is met by slow commercialization because a number of constraints arise in the process. The continued effort towards solving such challenges leads to more progress in terms of the rate of progress. However, performance of a given technology innovation is limited with age as other fundamental constraints come into play.
Figure 2 below gives a typical S-Curve of a technology where horizontal axis represents cumulative amount of research and development over time. Note that time is an important variable that gives the outcome of an effort. The vertical axis measures performance in terms of the commercial performance. With time, newer technologies emerge into market thus overtaking the older innovations in terms of the commercial performance. This means that the continued expenditure on the same line of products may not lead to the same high commercial acceptance in the market as before.
Figure 2: Technology Innovation S-curve
Performance T1 T2
R & D effort or Time
Note: T1 represents the old technology while T2 represent the new technology.
As shown above, a given technology becomes older with time while newer technologies bring alternative solution to consumers. It is apparent that the continued effort put in place in order to come up with more innovation does not yield much in terms of performance. Emergence of newer technologies mostly works to replace the older ones. In figure 2 above, performance improvement in T1 slows down with time as the T2; a newer technology improves its performance in spite of its inferiority. According to the S-curve, T2 overtakes T1 in terms of the performance. S-curve helps in determining how technological changes that affect innovation.
According to Foster (1986), innovation undergoes different phases that influence effect of the expenditure on the same. At time 0, an innovation finds its way into the market through a given product. After the introduction, an organization finds out how to bring effectiveness in to the product by embarking on intense program of innovation. The initial period of innovation registers less growth because the new product tries to establish itself within the market. The following period, marked by the intense innovation in a bid to find the correct design is known as fluid stage. Expenditure allocated towards research and development is meant to come up with a dominant design that meets a given market need. At this period, the product becomes established in the market with an increased demand from the consumers. This is shown by the increased performance in figure 2 above. Innovations through R & D help in acquiring knowledge that leads to product improvements. After this dominant design, product innovation begins to slow. The last part of the product cycle is marked by the slow growth rate and any further investment in R & D does not yield the required revenue (Foster, 1986).
S-curve proves that the continued expenditure towards research and development leads to increased innovation. At the beginning of an innovation, R & D plays an important role towards developing ideas and methods of producing products that meets certain needs within a market. However, positive growth or performance is registered after an appropriate design has been developed and the demand increases in the market. As shown in the S-curve, times comes when more research and development does not lead to the positive result because new products have emerged in the market. At this stage, no amount of expenditure on the same product in an attempt of coming up with more innovation can help improve its image in the market. Beyond this point, more expenditure does not equal to more innovation (Rogers, 1962). In most cases, new technologies have already emerged in the market and consumers have set their eyes on them.
In order to ensure that expenditure on R & D leads to more innovation, innovative organizations should work towards ensuring that they work towards new technologies that would replace old ones. In figure 2, T2 represents the new and emerging innovation that has come up and is rapidly overtaking the older one (T1). This means that an organization is able to continue experiencing growth of a product through newer technologies meant to solve particular problems within the market. Maintaining an old line of technology through continued expenditure on research and development does not lead to the increased growth and performance.
It is apparent that research is an important factor towards coming up with innovative products and services that satisfy consumers. As noted in the above tables, countries within OECD spend more of their resources in order to increase competitiveness within the trading block. Another fact that stands is that business enterprises make the bigger percentage of the resources committed towards R & D. The goal of such decisions is to come up products and services that satisfy the intended consumers (Johansson and Loof, 2008). With this respect, it is important to note that not all investments committed towards R & D lead to the intended innovation. For instance, some technological companies have committed much money towards coming with robots that are able to serve humans. Much of these efforts have not yielded the right fruits in terms of innovation (Pisano and Shih, 2009).
In conclusion, research and development remains an important factor that helps organizations come up with innovations that meet consumer needs. Currently, it is difficult to come up as a market leader without having a deliberate plan towards modifying or coming up with new products and services. World leaders in business sector continue to commit resources towards research and development in order to produce products and services that meet expectation of consumers. The positive point comes from the fact that consumers are always ready to try new and modified products that are introduced into the market. On the same note, expenditure has been associated with innovation. The more resources allocated towards research and development, the better the chances of coming up with great innovations. However, S-curve shows that results from research and development on a given product have phases. Moreover, other than R & D, others factors like leadership determine the outcome of innovation.
References
Chakrabarti, A. (1990). Innovation and Productivity: An Analysis of the Chemical, Textiles and
Machine Tool Industries in the U.S. Research Policy, 19(3), pp. 257269.
Cohen, W. and S. Klepper (1996). Firm Size and the Nature of Innovation within Industries: The
Case of Process and Product R&D. Review of Economics and Statistics 78(2):232-243
Cohen, M. & Klepper, S. (1996). A Reprise of Size and R&D. Economic Journal, Vol. 106(437),
- 925.951.
Conte, A. (2006). The Evolution of the Literature on Technological Change over time: A Survey.
Max Planck Institute of Economics, Discussion Paper No. 107.
Eurostat (2012). R & amp; D expenditure. European Commission. Retrieved April 12, 2014 from
http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/R_%26_D_expenditure
Foster, R. (1986). The S- Curve: A new forecasting tool. Chapter 4 in Innovation, The Attacker’s
Advantage. New York: Summit Books, pp. 88-111.
Geroski, P., Machin, S. & Van Reenen, J. (1993). The profitability of innovating firms. RAND
Journal of Economics 24(2):198-211.
Griliches, Z. (2000). R & D, Education and Productivity: A Retrospective. Cambridge, MA:
Harvard University Press.
Johansson, B. & Loof, H. (2008). The impact of firms’ R&D strategy on profit and productivity.
The Royal Institute of technology
Kim and Mauborgne. (2005). Blue Ocean Strategy. Boston: Harvard Press.
Klette, T. & Kortum, S. (2004). Innovating Firms and Aggregate Innovation. Journal of Political
Economy 112: 896-1018.
Leifer. (2000). Radical Innovation. Library of Congress.
Odagiri, H. (1985). Research Activity, Output Growth and Productivity Increase in Japanese
Manufacturing Industries, Research Policy, Vol. 14(3), pp. 117130.
OECD. (2009). Innovation in Firms. A Microeconomic Perspective.
Parisi, L., Schiantarelli, F. & Sembenelli, A. (2006). Productivity, Innovation and R&D: Micro
Evidence for Italy. European Economic Review, No. 50, 2006, pp. 2037–2061
Pisano, G. & Shih, W. (2009). Restoring American Competitiveness. Harvard Business Review.
Rogers, E. M. (1962). Diffusion of Innovation. New York, NY: Free Press.
Sutton, J. (1998). Market Structure and Technology. Cambridge, Mass.: MIT Press.
The Economist (2012, January 14). The Last Kodak moment? Pages 61-62.
United Nations, (2012). Fostering Innovative Entrepreneurship. United Nations Economic Commission for Europe: Challenges and Policy Options. PP. 1-34. Retrieved from Http://www.unece.org/fileadmin/DAM/ceci/publications/fie.pdf