The Art of Innovation Validating the innovative proclamation of Company X

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The Art of Innovation

Validating the innovative proclamation of Company X

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The Art of Innovation

Validating the innovative proclamation of Company X

PUBLIC VERSION

Author G.W. de Graaf

Student Number s1660802

E-Mail g.w.de.graaf.1@student.rug.nl

gerarddegraaf@gmail.com Educational Institute University of Groningen

Study MSc Business Administration Business & ICT

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DISCLAIMER

This report has been produced in the framework of an educational program at the University of Gron-ingen, Netherlands, Faculty of Business Administration. No rights may be claimed based on this re-port, other than described in the formal internship contract. Citations are only possible with explicit reference to the status of the report as a student internship product.

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PREFACE

This paper will mark the end of my educational study at the University of Groningen and the Business & ICT master in particular. The skills learned and the knowledge acquired during the educational period is put into practice and have resulted in this master thesis. Company X gave me the opportunity to do my graduation thesis at their business unit in Groningen. The assignment conducted for Company X Groningen consisted of both a theoretical and an empirical part. This perfectly fit into the requirements of the University but also of Company X.

I am particularly thankful to those who supported me during the period of writing this the-sis. First of all, from the University of Groningen, I want to thank both dr. T.W. de Boer and dr. D. Seo who supervised and helped me during this graduation period. Secondly, I thank those who participated in the interviews. Without their input, it would have been impossible to finish this paper and therefore, I am grateful they dedicated the spare time they have got and helped me collecting the information needed. Special thanks are owed to […] for pro-viding me with feedback and supported me during the graduation period. Last of all, I espe-cially express my gratitude towards […] who gave me the chance to do my graduation the-sis at Company X and supplied me with advice and feedback during the graduation period.

Gerard de Graaf

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ABSTRACT

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LIST OF TABLES AND FIGURES

Figure I: Science or Technological Push1 ...17

Figure II: Demand or Market Pull ...17

Figure III: The Interactive Innovation Model ...18

Figure IV: The Open Innovation Model by Chesbrough (2003) ...19

Figure V: Classification of Technological Innovation ...23

Figure VI: Four-dimensional Model of Service Innovation by Den Hartog. ...31

Figure VII: Creativity Model by Amabile (1998). ...37

Figure IX: Proposal Creating by Company X………56

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CHAPTER 1 INTRODUCTION

1.1 Introduction

In this chapter, the subject of this paper will be introduced. First, the problem description is given. With this problem description in mind, research questions are stated in section 1.3. In section 1.4, the research approach is explained. This chapter concludes with an outline for the rest of the paper.

1.2 Problem Description

It is hard to imagine the world we are living in without the introduction of new products or processes. Every day, new things are invented or existing products are improved. This re-search will focus on innovation among organizations and in particular Company X. Although all organization have the possibility to innovate, and in turn try to enhance efficiency, produc-tivity, quality, or extent their market share, successful innovation is often not that easy. Nev-ertheless, for firms, innovation is an important factor considering staying competitive in a fast changing environment. Neglecting innovative opportunities for an organization can harm the competitive position in which it is operating.

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For the producers of cassette desks, the introduction of the CD meant they had to change their product portfolio; otherwise they eventually would become obsolete. They same is now happening to CD manufacturing companies who see the legal downloading of music from the internet as a huge threat for their business continuation.

Thus, it is argued that there must be a focus on innovation to sustain a good position in the market. For Company X it is therefore important to know how to serve their customers with solutions that really add business value. These products or services must have a higher value than competitors’ IT products. This offers Company X an excellent opportunity to satisfy their customers with IT solutions that really have added value compared to products from com-petitors. Without innovation, such new products would not emerge and Company X’s market share would eventually drop. Thus, innovation is a necessity. Company X alleges to be an innovative organization. The mission statement of Company X supports this vision. However, the question is to what extent the statement is applied within Company X. Saying you are innovative does not directly results in innovations that matter. Signals from within the organi-zation indicate that Company X is less innovative than stated.

The problem statement that follows from the above description can be declared as: Is Com-pany X indeed the innovative firm they claim to be?

1.3 Research Questions

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How is innovation defined in the literature? Innovation is a very broad term. Therefore, a theoretical research is conducted to explore the field of innovation. The focus of this chap-ter is from a broad perspective but will give insights in innovation that provide a first under-standing of innovation.

How can innovation within service firms be characterized? In the first research ques-tion, innovation is described. This second question will provide a meaning towards service firms. For this research, the focus is on innovation in service firms from a management per-spective. This choice has been made in relation with the case firm.

How does innovation fit into the strategy of Company X? Corporate strategy on inno-vation must ensure that innoinno-vation actually does occur. However, often strategies are con-flicting with operational effectiveness goals. Putting innovation into practice requires align-ment between operational level and strategy level. The question is how this is aligned at Company X at strategic level.

How is innovation positioned in the organization? This sub question will give the reader some insights in Company X’s innovation values. Stating on strategic level your or-ganization is innovative is one thing, putting it into practice is another. This question will look at the innovative character of Company X Groningen from an operational perspective. The outcome of this sub question is the result of the conducted interviews and the analysis of the responses.

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1.4 Research Approach

The research conducted mainly consists of two parts. The first part of the paper contains the results of the literature study. The second part describes the empirical research and conclu-sions. It must be noted here that there is no strict boundary between these two parts. Literature

The literature research is an important part of the thesis. Before looking into the practical part of the assignment, a literature study has been conducted. Literature is basically available on two mediums. The first one are printed sources, the second one are online sources. Books, papers, articles, journals and magazines are all examples of literature sources. A care-ful consideration is made in choosing the right sources.

Empirical

Empirical research is the opposite of a literature research. It is based on experimentation or observation, i.e. evidence. Such research is often conducted to give answers to certain ques-tions or hypothesis. An empirical study is, according to the Mississippi State University: “Re-search which is based on observed and measured phenomena and it is re“Re-search that derives knowledge from actual experience rather than from theory or belief”. (Ashmore, 2008)

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There are different methods of data collection and all have advantages and disadvantages. Questionnaires, interviews, observations and unobtrusive measurements are all methods for data collecting.

The method used for the thesis will be the interview method. The foremost advantages of this method are:

It is adaptive, it allows data collection on a range of possible subjects; Source of “rich” data;

Emphatic;

There are also some drawbacks that have to be considered. Three of these are: Bias in interviewer and respondent;

Coding and interpretation difficulties; Self-report bias.

The main reason for choosing interviews instead of questionnaires is that the target group is small. Only a small number of Company X employees have to be asked for relevant informa-tion for answering the main and sub quesinforma-tions. Acquiring the right data with quesinforma-tionnaires will most likely not deliver the desired information. Furthermore, a major drawback of ques-tionnaires is that it takes more time before the questionnaire is ready but also before all re-spondents have filled in the questionnaire. A wrong interpretation of the question by respon-dents can cause wrong conclusions that are based on the questionnaire. When too few em-ployees are willing to cooperate and do not apply the questionnaire, it is impossible to draw conclusions from the data. Thus, interviews are the best way for gathering information. (Cooper, 2006)

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The interview

It is important to target the right people in the organization. Since the research focuses on innovations at Company X at management level, the focus was not on interviewing consult-ants or technicians. Instead, the key focus was on higher management.

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1.5 Structure of the Thesis

This paragraph will give a broad overview of how the structure of this thesis is composed.

Chapter 2 – A Theoretical View on Innovation This chapter will introduce the subject innovation. How can innovation be defined and how do others look at innovation.

Chapter 3 – Service Firms Where the previous chapter focused on innovation in general, this chapter will focus on innovation in relation with firms where knowledge plays a foremost role.

Chapter 4 – The Case Company In this chapter, the case company (Company X) is intro-duced. This chapter includes a view on managing innovation from a strategic point of view. Furthermore, the Company X Innovation Values Model will be discussed.

Chapter 5 – The Interview Analysis This chapter will elaborate on results derived from the interviews. The main purpose is to see how innovation is arranged at operational level at Company X.

Chapter 6 –Improving Company X’s Innovation Position In this chapter, the results from the interviews are related to the theory and a discussion will be started about improving Company X’s innovation position.

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CHAPTER 2 A THEORETICAL VIEW ON INNOVATION

2.1 Introduction

In this chapter, innovation from a theoretical point of view is discussed. To start with, in sec-tion 2.2, different literature is reviewed and examined to understand innovasec-tion and find a suitable definition to the meaning of the word innovation. Then, in section 2.3, the difference between product- and service innovation is discussed. In section 2.4, it is examined where innovation comes from. Lastly, in section 2.5, the various types of innovation in organizations are discussed. The chapter finally concludes with a summary of the contents which have been discussed in this chapter.

2.2 Defining Innovation

So far, throughout this paper, the phrase ‘innovation’ has been mentioned without further explanation. In this section, a more in-depth research after innovation is conducted. This section will look into the innovation world as described in the literature. The main purpose of this chapter is to find a suitable definition of innovation that can be applied for this research.

2.2.1 First thoughts about innovation

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In the following section, the focus is on innovation from an organizational perspective when a definition for innovation is searched for.

2.2.2 How is innovation defined by literature

The first economist who wrote about the importance of innovation and who focussed on the need for innovation for organizational success was Schumpeter (1942). Schumpeter argued that companies were involved in a continues innovation cycle. New firms are embracing new technologies and are developing new products; these products are replacing older products. With such new products, market share and revenues are gained at the cost of legacy firms. This cycle is never ending, old firms vanish and new firms are born. Schumpeter concurred that technological innovation is the main source of economic growth. According to Schum-peter, innovation can be defined as:

”The introduction of new goods or a qualitative change in an existing product, process inno-vation new to an industry, the opening of new markets, the conquest of new sources of supply for raw materials or other inputs, and the carrying out of a new organization of any industry.”

Schumpeter uses the newness of products to define something as an innovation. The ques-tion is what ‘new’ means. McKeown (2008) states that when someone perceives something as being new, it can be classified as an innovation. It does not necessarily have to be a brand new idea; two mixed up ideas already known by others may form an innovation as well. This is in line with White et al. (1988) who argue that innovation can be defined as:

“The development of new products, changes in design of established products, or use of new materials or components in the manufacture of established products.” (White et al., 1988)

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The Organization for Economic Cooperation and Development (OECD) and Eurostat did a research after Schumpeter’s vision on innovation. The OECD states that new or improved products and services are valid for organizations to classify themselves as innovative even though the particular services or products are not new in the market but only to the firm. (Rogers, 1998) Dibrell et al. (2004) agrees with this statement. He states that innovations can involve changes in departments, working routines or equipment, or a combination of the three. When this change is new to the firm, the firm is innovative. (Orfila-Saintes et al., 2007)

Innovation is often related to technological advancement. However, innovation is not neces-sarily referring to technological or technologic inventions. As Nelson and Winter (1982) ar-gue, non-technological innovations are just as important. (Nelson and Winter, 1982) New cars or airplanes are pure technological in Nelson and Winter’s view. But, new manufacturing processes or introduction of Just-In-Time inventory management systems are still innovations and are equally important. Jacobs (2000) argues that new clothing fashion and agricultural products (like seeds) can be arranged in the latter group as well. They are not technological described but are still innovations in their field. The argument of Nelson and Winter (1982) that car and airplane innovation is pure technological is debateable. There are numerous ac-tivities, like process design, marketing, and financing, involved in the innovation process. It is supposable that a production line process has to be adjusted when new types of automobiles are produced. The underlying manufacturing process change can be seen as an innovation as well.

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The service of providing a song in front of an audience is no longer a necessity. The service has become a good. Therefore, these two definitions are not sufficient to serve as a defini-tion for service innovadefini-tion.

Another possible view on innovation, and which is often cited by other authors, is provoked by Pavitt (1984). In his view, innovation in organizations is strongly influenced by technologi-cal innovation and therefore rather influential in the technologitechnologi-cal literature. Pavitt’s idea of service innovation can be seen as a strong supplier-dominated view. Service contributions to operations are in this view related to improved outputs. As an example, the growth of air transportation can be used. The air transportation grew quickly in the last decades. According to Pavitt’s definition, this is mostly achieved by innovations in the area of products like air-planes and expansion of airfields. However, improvements in the air transport service indus-try, like better ticketing systems or luggage handling with advanced IT systems and bar codes, are not recognized. Regardless of the fact that it contributed enormously to the growth of air transportation. Three major problems are surrounding Pavitt’s idea of service innovations contributing to organizational growth. Firstly, it assumes that services as such cannot contribute to productivity growth. Secondly, not all efficiency of companies can be related to capital equipment. Both low-cost and full-service airlines have capital intensive products such as the airplanes itself, yet, both have completely different organizational struc-tures and business models considering offered services. Lastly, defining services as drivers for technological progress may not be helpful since the growth in labour in service firms (like banking) compared to traditional firms, due to IT and business (re)organization, is unmistak-able. (Crespi, 2006)

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2.3 Importance of Service Innovation

Until recently, the focus of researchers and authors has mainly been on technological innova-tions. Traditionally, the manufacturing sector received more attention in comparison to the service sector, both within organizations as in literature. In fact, the academic study of ser-vice innovations was an area of neglect as Pryce (2007) argued. Serser-vices, from the innova-tion perspective, were regarded as secondary for many years, and also, they were mainly regarded as consumers of innovations. Occasionally, services were seen as facilitators for innovations for non-service firms. This view is, because of the “servicisation” of societies, no longer viable. Servicisation means that societies are more and more dependant of services for their daily tasks. Whether this is at work or at home, services are becoming increasingly im-portant. Just as technological innovation, also service innovation can be defined broadly as ‘the successful exploitation of new ideas’. Albeit product (good) innovations are more easily identified as important, most likely because goods are tangible, service innovations as well proofed to be important in the last years. Looking at the financial services, one can without arguing state that financial institutions have increased the number of new services offered in the last years. (Pryce, 2007)

2.3.1 What are goods?

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2.3.2 What is a service

The importance of services cannot be underestimated in today’s developed societies. Albeit the term service is used often, it is still hard to tell what the word service really means. Many discussions have been on what services really are and how one can perceive a service. The term service can be defined in more than one way. Just ask a person how he would de-scribe a service and often, the answer will be related to services in the form of support (e.g., after-sales services). In this case, services are ‘functions’ that transform human beings, data, or state of a product as argued by Miles (2000). This can be achieved by service products, derived from goods (e.g., capital service), or created by consumers (self-service).

Services rarely consist of raw materials, buildings and goods. Furthermore, services are most of the times intangible. Online money transfer via the bank is an example of a service. An-other service is the possibility to offer products online and pay via credit card. The problem with defining a service as a service is that is not always clear to what extend a service could also be seen as a product. In the next section, this is explored further.

A service can be defined as: “A service is non-visible and non-tangible. A service is mostly used in the form of interactions with or between humans, data, and/or other functions.”

2.3.3 Combining goods and services

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1) Combination of products and services in one end solution

Today, services are used often in combination with pure goods. The emergence of IT played a major role in this respect. One example of goods and service combination is online banking which is characterized by an enormous growth. The introduction of the bar-code and RFID technology is an example of a good combined with a service innovation in the retail sector. Although the RFID chip and bar-code itself are non-services, the underlying functions (e.g. more efficient inventory management, direct sales numbers, trend spotting) required innova-tion in services to maximize the potential of the bar-code and RFID chips. (Sheffi, 2004)

2) Visibility of services vs. goods

Another difference between services and goods can be related to the matter of visibility of services and goods. In the initial phase, both good and service innovation efforts start in the same way. Someone in the firm has an idea and shares this with others. The whole idea awareness and generation cycle can be applied to both services and goods. When the ideas are discussed and need to be translated to a prototype, the divergence starts. Goods are relative easily translated to a physical prototype; services on the other hand are by nature different to translate into a physical prototype due to the intangibility of a service. It is not only the visibility of a service in the initial phase that causes problems. But also in other stages, services are hard to understand because they are not visible for the user of that ser-vice. The user might regard the tool he uses as a good solely. Despite the fact that the un-derlying service is accountable for the importance of the service that the customer is using at that point, he regards the good (a touch screen for example) as the primary good.

3) Identifying newness of services innovation

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Based on these three arguments, it is argued that services and goods are hardly ever sold as single products. Goods are accompanied by services and services by goods. This combination is called a product. A product can be a pure service, a pure good or a combination of both. For the remainder of this paper, the term product and the term service will be used inter-changeably.

2.4 Where Innovations Come From

Where innovation is originated from, has always been an important question in the innova-tion field. Tradiinnova-tionally, innovainnova-tion is regarded as a product of scientific research and insights. This view does not include innovations emerging from concrete problems or requests. Jacobs (2000) describes that innovations can be originated from market demands but also from in-side the organization. In the former case, such innovations are the result of desires by cus-tomers. In the latter case, such innovations do not necessarily involve requests from the market. Indeed, a firm can innovate even though there is no particular demand for innova-tions in the market.

2.4.1 Innovation from a closed push and pull perspective

In this section, innovation from a closed innovation perspective is discussed. In a closed novation environment, influences from outside the firm are absent or hardly present. All in-novations are firm-based executed. Furthermore, the closed innovation model states that all the knowledge and skills are present in the firm. If the firm can discover an innovation by itself, and then market the innovation, it will gain revenues and will win. In Figure I on page 17, innovation from a push perspective is depicted. The push-method is often used by tradi-tional R&D departments situated in larger organizations. Such R&D departments are given a pre-determined budget and with this budget, they can finance innovations. There is very lim-ited market research done and customer’s desires are not very well known.

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Figure I: Science or Technological Push1

This type of innovation is a typical example of closed innovation since there are relative few or none influences from outside. Another type of closed innovation is the demand - or market pull method. This pull method works the other way around compared to the push method. When new product concepts are known in the organization, product development starts and it ends with a new scientific concept. A schematic overview of this push method is displayed below.

Figure II: Demand or Market Pull1

2.4.2 Combination of push and pull perspective

Nowadays, these relative simple models do not always prove to be useful. The legendary Concorde airplane as developed by an Anglo-French government treaty did never achieve a status of full glory. It proofs that launching new products does not automatically denotes success. The Concorde for example faced environmentalists groups, complaints by residents about the loud noise it produced, and problems with airfields which were not prepared for the Concorde. Besides that, airlines where not interested in buying the Concorde due to sev-eral economical reasons. Finally, political issues played a major role in the process. There-fore, in the case of the development of the A380 airplane by Airbus, a more sophisticated model was applied. Before just start building a plane, Airbus had a decent market research study conducted to find out whether there would be interested airliners for the aircrafts.

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Asking airliners gave Airbus insights as well in the preferences of the customer so the firm could anticipate in advance on the desires in the development stage. Tidd et al. (2005) de-fines innovation success as “The successful exploitation of new ideas.”

Although this might be true to some extent, even a successfully introduced product does not automatically means success on commercial grounds since there are dozens of others fac-tors, like economic feasibility or changing customer desires, that have impacts on economic successfulness. Nonetheless, combining pull and push methods into a more sophisticated method is a first step towards open innovation (see section 2.4.3).

Figure III: The Interactive Innovation Model2

Above, the interactive innovation model is depicted. This model implies that during the inno-vation process, interactions are taking place everywhere in the model. (Jacobs, 2006)

2.4.3 Open innovation

Open innovation, or network innovation, is a term introduced by Chesbrough in 2003. He saw that organizations, like IBM, Lucent, and Intel, more and more began to jointly work together on innovations. Chesbrough (2003) mentioned five main reasons for the rise of open innova-tion at the expense of closed innovainnova-tion:

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Researchers are less connected to their employer. Just like ‘regular’ employees, job hopping increases. Knowledge residing in (R&D) firms can quickly move to competi-tors.

Researchers have become more and more entrepreneurs starting businesses for themselves. This is inspired by large amount of capital made available by investors. Outsourcing of non-core businesses works negatively on classic R&D that demands a

strong integrated business.

Research costs have ascended dramatically fast. The risks are higher and organiza-tions cannot take chances. Working together can reduce costs and consequently risks. Success depends seldom on new technologies. Instead, a complete renewal of the

business model determines success. Technologies are just parts of business models.

According to Chesbrough (2003), cooperation is the key for successful innovation. Share your knowledge and expertise with others and jointly work on innovations. Potential ideas that are likely not to be useful for firm A can be used by firm B instead. Or, ideas developed by firm C can be used by firm A and together with firm B, firm A can join a new market. This is sum-marized in Figure IV below.

Figure IV: The Open Innovation Model by Chesbrough (2003)3

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The importance of the open innovation model is that it looks beyond the normal boundaries of the firm. In Figure IV, the boundaries of the firm are represented by the dotted line. This line symbolizes the transparency of he firm. Inside the firm, research projects are developed. Some ideas follow the dotted funnel and become end products on a current market. These ideas and products are all firm based and have strong associations with the closed innovation model. On the other hand, the firm can also use research projects originated outside the boundaries of the firm. These ideas can, due to the transparent nature of the firm, be used by the firm in current development processes. The opposite effect can be seen when internal research proposals are rejected by the firm. These ideas can be used by other firms for their research or product development. Not only research projects can flow easily from one firm to another, this is also true for developed products. The key to success in the open innovation model is making optimal use of ideas and knowledge of others. (Chesbrough, 2003)

2.5 Various Types of Innovation in Organizations

Innovation in organizations is characterized by different types of innovation. In this section, these differences will be made clear. In addition, the types that suit the case company the most will be chosen. First, innovation in organizations is explored.

2.5.1 Innovation in organizations

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The invention of the laser by Gordon Gloud did not take place at just one day by a brilliant idea. Instead, it took Gloud more than twenty years before he came to the end solution. (Berkun, 2007) In the example of the innovation of the laser, innovations can thus be seen as the efforts of years of working. But, not all innovations take such long times. It largely depends on the type of innovation, as discussed in the next section.

2.5.2 Various types of innovation in organizations

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Table I: Radical vs. Incremental Innovations Based on Van Stamm4

Table I above shows six major differences between radical and incremental innovation. This table does not clarify the rate of occurrence of incremental – or radical innovation. As Ettlie (2006) suggest, only six to ten percent of innovations are radical. The majority of innovations can be classified as incremental. This view is encouraged by Tidd et al. (2005) He also argues that innovations rarely are radical. Products are most of the time just improvements of previ-ous products, process innovation is most of the time related to optimization of existing sys-tems. Pieces for innovations for solutions to problems used one day can be reused another day for a different problem. Not only pure technological innovations are incremental, this is also true for pure service innovation as Jones and Samalionis (2008) argue. O’Connor and Ayers (2005) studied radical innovation in service firms and how an organization can build a radical innovation competency. They define radical innovation as:

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See Von Stamm (2003) Managing Innovation Design and Creativity

Radical Incremental

Degree of Uncertainly High Low

Main Focus Products, processes, services with unprecedented

performance features

Cost or feature improvements in existing processes products or services

Technology Exploring new technologies Exploiting existing technologies Purpose Creating a dramatic change that

transforms existing markets or industries, or creates new ones

Improving competitiveness within current markets or industries

Business Case Creating a business case is difficult. The business case will developed overtime,

Business cases are easy to create. Possible reactions of customers are relative easy to predict.

Skills and Knowledge Skills and knowledge have to be created. The members of the organization are not familiar with radical changes

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“The commercialization of products and technologies that have strong impact on 1) the mar-ket, in terms of offering wholly new benefits, and 2) the firm, in terms of its ability to create new businesses.”

A more sophisticated way to look at innovation types is done by Sherif and Seo (2008). Their innovation model is displayed below.

Figure V: Classification of Technological Innovation5

Sherif and Seo (2008) have developed a framework that is divided in four quadrants: plat-form innovation, incremental innovation, architecture innovation, and radical innovation. Importantly, there is made a distinction between technological discontinuities and value chain discontinuity. The importance of technological discontinuity largely determines the way in which radical and platform innovations occur. Value chain discontinuities determine the mat-ter of occurrence of architectural and radical innovations. This situation helps understanding that for radical innovations, there must be an emergence of new technology and a new value chain. A radical innovation in this respect can be seen as an innovation that provides the or-ganization with a new set of capabilities that consists of new technologies and inflicts the value chain. Not surprisingly, these kinds of innovation are the hardest ones to achieve.

5_{Source: Figure derived from}_{Government Role in Information and Communications Technology}

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More easily realized are incremental innovations since the technology is already available and value chains are established as well. More important are platform and architectural innova-tions. Starting with the former, this type of innovation is mostly likely done by larger organi-zations. The reason for this lies in the emergence of new technologies in existing value chains. New techniques for existing customers requires capital in terms of human and

money. For smaller companies, this very hard to realize. Architecture innovation uses existing technologies but for new value chains. The techniques necessary for innovation can either be retrieved from all sorts of sources, the importance here is the fact the technologies are known and familiar with the organization. The ultimate goal of architectural innovation is cre-ating new products or services to suit the needs for clients that would not have been able to be served without a new appliance of existing technologies.

This implies that it must be hard for organizations to find radical innovation occasions, the question is what makes radical innovation that hard. The main reason for this can be related to several factors. First of all, the risks accompanying innovation that have to be taken are much smaller with incremental than radical or disruptive innovations. Furthermore, the risks that the organization innovated products or services the customer does not desires is lower. The company has, at least that what they should have, a clear view on customers’ require-ments. This allows the organization to make small changes to existing products, services, or processes but still be able to serve the customer the way they need to be. Incremental inno-vations are characterized by small improvements. For this reason, incremental innoinno-vations rarely results in fast growth in market shares or revenues. On the other hand, this can also be seen as something positive since it also means that slower growth can be achieved with lesser risks. (Laine, 2006) Incremental innovation might be the right source for value creation although there are several reasons to encourage radical innovations in firms. When success-ful radical innovations are put on the market, it can give the firm an advantage over competi-tors and the innovation can gain larger revenues. Building a radical innovation competency can give an organization a competitive advantage. (O’Connor and Ayers, 2005)

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The emergence of the Blu-ray disks as a replacement of the legacy DVD’s meant a platform innovation for the firms who developed Blu-ray like Sony, Pioneer or Samsung. The value chains already existed, only the technology was discontinues. On the other hand, for the American film industry, the Blu-ray possibilities asked for new value chains. However, the technology for delivering movies on Bly-ray disks already existed. Thus, for the film industry firms like Warner Bros, Dreamworks, or Universal, Blu-ray was an architectural innovation. (Sherif and Seo, 2008)

2.5.3 Innovation types that apply for this research

Since it is impossible to look at all innovation types that exist in the literature, this research will focus on two types in particular. First of all, incremental innovation and secondly, archi-tectural innovation. For service firms, these two types of innovation are most present and most important. The presence of a case company is an additional reason to choose for archi-tectural- and incremental innovation. See Chapter 4 for a more detailed introduction of the case company.

2.6 Conclusions

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CHAPTER 3 SERVICE FIRMS

3.1 Introduction

In this chapter, service firms will be discussed. First of all, it is made clear what service firms are. Then, a particular kind of a service firm will be more deeply examined.

3.2 Service Firms

Many types of firms are operating in today’s market. Some firms are producing goods like televisions, cars, or computers. Other firms treat people with medical care like hospitals. Or, firms help other firms with their businesses. The latter two examples are examples of service firms. In the following sections, the ‘service firm’ will be more elaborated.

3.2.1 Characteristics of a service firm

A study in the UK showed that 75 percent of the total market in the UK are service-based sectors that heavily rely on knowledge. Energy, agriculture, and construction account for the remaining 25 percent non-service based market share. The UK research shows the participa-tion of service firms in the UK market. (Howells and Tether, 2004) But what is a service firm? Andersen et al. (2000) argue that three distinctive characteristics of service organizations can be noticed:

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The role of organizational factors is crucial for firms’ performances. As argued by An-dersen et al. (2000), short term gains are won by improving the relationship between the service deliverer and the client. Most likely, the service provider will change or update the provided service in line with the short term desire of the client. Such im-provements to a service will indeed provide the organization with revenues in the near future. Consequently, to maintain this profitability, long-term investments are just as important. These back-office service production activities must ensure long-term efficiency and effectiveness.

Human resources play a vital role in the provision of services. Especially when it comes down to translate customer desires into a service for a customer, people are important. With the knowledge, experiences, and skills of people, service firms can create an advantage over their competitors. Therefore, the total business process in service firms is heavily depending on human capital in terms of knowledge and skills of people who are involved in the process. Gallouj and Weinstein (1997) argue that service activities are more reliant on knowledge and skills embodied in people than on capital in terms of plants and equipment.

Based on these arguments, a service firm can be defined as:

“A service firm is an organization which offers a service to a client. The client can be a person but also another firm. Since knowledge, experiences, and skills are vital, human resources are the main asset of a service firm.”

3.2.2 The importance of innovation support

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Support for innovations is depending on more than one factor. Management has to support innovation, culture within the organization must support innovation, business plan must sup-port innovation, and there must be supsup-port for innovation from outside the organization. (Phillips, 2006) For this research, the support of management for innovation is described.

Getting the support of management for doing innovations is important. Several studies con-ducted in the past proofed that innovative R&D departments do not always get the rewards they should get. When looking at innovations, many innovations fail due to a shortage of management support. A good example of this is RCA, a company that produced transistors, radio circuits and tuning devices. In the mid-50’s, the R&D department of RCA created some kind of transistor radio receiver. The engineers used components which were produced by RCA. Although the engineers felt they came up with an application that could have a bright future, the management of RCA had another opinion. RCA management believed the radio market would not be an emerging market and decided not to pursue this, in their eyes, ‘infe-rior’ technology. The lack of management support for further developing the transistor radio gave others the opportunity to fill in the gap. Sony for example was at that time a small and relative new company in the radio market. They did adopt the transistor radio technology and gained market share all over the U.S. Although RCA tried to match Sony in the following years, it never could outperform Sony. RCA had, even though Sony used RCA-licensed tech-nology, great difficulty in keeping up with Sony. (Henderson and Clark, 1990)

This example shows that management support has to be available when trying to create new markets or extend current markets. Especially when it comes to radical innovations, support is important. Most of the time, it takes a long time to come up with a radical innovation. Support from management often decreases in time. As Colarelli and Ayers (2005) argue, new venture groups and radical innovation hubs last mostly for five years. These innovations groups have to come up with a new product before the patience of senior management runs out. Just at the moment innovation groups start to speed up on the appropriate tools and mechanism to use, such groups are discontinued by the management. Sometimes, old ideas are brought back to life a couple of years later but by then, all knowledge has been vanished and has to be acquired again. (Colarelli and Ayers, 2005)

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How to align management throughout the organization? A study conducted in France about innovation in service firms like banking, electronic information services, insurance, and man-agement consulting concluded that innovation was happening everywhere in organizations. Interestingly, the research also showed that the innovation process was generally unsystem-atic throughout the organization on every level. Service firms seldom have an R&D depart-ment that purely focuses on innovation. In the odd occasions there are R&D departdepart-ments, these departments are collecting ideas from members in the organization. These ideas are then evaluated and sorted based on the firm’s strategy. In general, it can be argued that such R&D is based on a search-and-learning process. Main point is that it is unsystematic. (Sundbo, 1997)

3.2.3 Four-dimensional model of service innovation

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Figure VI: Four-dimensional Model of Service Innovation by Den Hartog.6

Dimension 1 is the new service concept a firm has developed. Edvardsson’s terminologies this as “new value propositions”. (Edvardsson, 1997) The source for these concepts can either be from personnel or customers. Knowledge about the characteristics of the current services is extremely important. A new online banking concept might be an example of a new concept.

Dimension 2 is the new client interface. It refers to changes a client experiences when using a service. An online ticketing system requires a service interface for the customer. A new online banking system requires new client interfaces as well. Besides this, 'interfaces' also refers to how customers perceive services.

Dimension 3 is the new service delivery system. This dimension covers the capabilities, skills and knowledge of employees working in the service organization.

6_{Picture derived from}_{Knowledge-Intensive Business Services as Co-producers of Innovation by}_Den

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Lastly, Den Hartog (2000) mentioned also a fourth dimension: technological options. As ar-gued by Den Hartog, emerging technologies are important for service firms but they are not the most vital part for innovation. The other three dimensions are more important for service firms. Service firms have relative modest influence on this technological dimension as tech-nology innovations originate from third tier suppliers. Nevertheless, once in a while, new technologies will emerge. In these occasions, service firms can react to the new technology by creating new services.

As Miles (2008) argues, many service innovations are a combination of each dimension. For example, when a customer acquires a new data communication system, it not only has a technological component but also new client interfaces. A logistics operator implementing a new track and trace system for packages uses a new delivery model but also new technology and new service concepts. These examples also show that technology can play a vital role as well and that technology advancement may not be underestimated by service firms.

3.3 Types of Service Firms

Service firms are everywhere around us. There are numerous types of service firms operating in many different markets. In public transportation organizations, medical health care organi-zations, tourist travel organiorgani-zations, educational organiorgani-zations, and business service organiza-tions. There is one particular aspect that plays a significant role in service firms: human cli-ents. The transportation sector performs a vital role in offering a service (i.e. transportation) for passengers. This can be either by bus, airplane, or subway. The medical health care or-ganizations consist of skilled doctors, nurses, and surgeons. They offer services to the clients who have medical issues. In the tourist sector, travel agencies will find the best holiday des-tinations for travellers. Teachers and schools can offer all kinds of services to students to improve their educational levels.

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3.3.1 Business service firms

Like most service firms, business service firms rely on knowledge. Therefore, business service firms are also referred to as Knowledge Intensive Business Service (KIBS) firms. Beije (2000) gives the following definition of a KIBS firm:

”Knowledge Intensive Business Service firms are independent organizations that render ser-vices to private firms, which have a high information content and that are to a considerable extent customized to the specific situation.”

Bettencourt et al. (2005) stresses in her definition of KIBS firms the importance of know-ledge:

“Knowledge Intensive Business Service (KIBS) firms are enterprises whose primary value-added activities consist of the accumulation, creation, or dissemination of knowledge for the purpose of developing a customized service or product solution to satisfy the client's needs (e.g., information technology consulting, technical engineering, software design).”

What both definitions have in common is the fact that both definitions stress the importance of tailored solutions for clients. This means that there is not one single solution to clients’ problems. To deal with such uncertainties, knowledge is vital in the production and delivery of a service. Gadrey et al. (1995) provided a meaning towards services in KIBS firms and what it means to produce a service:

“To produce a service, therefore, is to organize a solution to a problem (a treatment, an op-eration) which does not principally involve supplying a good. It is to place a bundle of capa-bilities and competences (human, technological, organizational) at the disposal of a client and to organize a solution, which may be given to varying degrees of precision.”

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Service providing firms and client firms working together to find solutions for problems (as done in many consulting and advisory firms) is a typical example of KIBS firms. Furthermore, the definition of Gadrey et al. (1995) argues that not only technological capabilities are im-portant, but human capabilities and organizational capabilities are just as significant aspects. (Den Hartog and Bilderbeek, 1999) Service innovation is about organizing the solution of new problems or conceiving formulas or even products that are to some extend new in the spe-cific market. Problems can be both originated from the KIBS firm or client. Furthermore, business issues can be indentified due to collaboration between the KIBS firm and client. (Gadrey et al., 1995)

It can, as done by Den Hartog (2000), be argued that KIBS firms can be seen as a facilitator, carrier, or source of innovation. Another important factor to stress is the fact that KIBS firms are closely related to external client firms. As a result, KIBS firms often have co-producers of innovation in the form of a client firm. The relationship between the supplier of the service and client can often be described as an interdependent or mutually beneficial relationship which results in KIBS as co-producers of innovation.

3.4 Conclusions

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CHAPTER 4 THE CASE COMPANY

4.1 The Case Company

This research assignment is conducted at Company X in Groningen, The Netherlands. Com-pany X is an IT and business services comCom-pany. Note: Some confidential information is re-moved from this chapter.

4.2 Company X and Innovation

For Company X, innovation is regarded as important. This is reflected in the mission state-ment. Company X tries to achieve innovation via the Company X Innovation Values Model. In this section, the Company X innovation values will be discussed in more detail.

4.2.1 Introducing the values

Three factors are important for Company X as being part of firm innovation. These three fac-tors are: technology, creativity, and organization. For Company X, innovation is the sum of technology, creativity, and organization.

4.2.2 Exploration of the Innovation Values Model

Technology

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Nevertheless, new product developments in service firms often rely on ‘old’ technology. To-day’s products are becoming more and more dependent on existing technology. This can be seen as architectural and incremental innovations.

The online paying system is a good example of this since it largely relies on older technology, namely, internet communication protocols and data transfer peripherals. Invented in the fif-ties, internet was for about four decades mainly useful and available for academics, re-searchers and government. Around 1990, internet became accessible for millions of new us-ers. Everybody had the possibility to make advantage of the internet. Recently, this old tech-nology was used again for a total different purpose: online paying. (Tannenbaum, 2003)

Although technology is a crucial factor in the Company X Innovation Values Model, it is ques-tionable what the importance of this component really is. The reason for this lies in the fact that Company X is not inventing new technologies by themselves. Rather, existing technology is used for new services. Technology is developed outside the organization by third party firms. Company X’s task is to make optimal use of existing technology, not to come up with new technology. Finding the best possibilities has to do with creativity and organization; the other two aspects of the Innovation Values Model.

Creativity

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In most successful innovations, inspiration did not come from inside the organization but from the outside. (Company X, 2008)

To have some innovation skills as an organization, creative people in the organization are a necessity. (Von Hippel, 1988) Creativity is made up of three other components as depicted in Figure VII below. The model consists of three parts: expertise, creative thinking skills, and motivation.

Figure VII: Creativity Model by Amabile (1998).7

Organization

Organization in the Innovation Values Model refers to the firm that has to facilitate the op-portunity for innovation. One of the most important key success factors for successful inno-vation is commercialization of the innoinno-vation. The most dazzling innoinno-vations are worth noth-ing when the ideas are put aside and not commercialized. Or, innovations are done that do not fit within the business model. Thus the business model must support the innovation ef-forts and of course the forthcoming results. Barriers of innovation are the organizational cul-ture or bureaucratic procedures as argued by Phillips (2006)

7

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Organization is, however, of great importance in the process of innovation since innovation is not limited to an individual or team. Instead, innovation involves the entire firm from em-ployee to director and from sales to finance. The more effectively all parts of the firm work together, the more likely an organization will develop successful services and products. Bor-dia et al. (2005) are comparing organizational structures with DNA:

“Just as nature’s DNA spells out the exact instructions required to create a unique organism, organizational DNA determines how an organization will function.”

Three aspects are in particular important when looking at successful innovation at organiza-tional level. Bordia et al. (2005) have classified these three as: speed, transparency, and ac-countability.

Speed of introduction of innovations in almost every industry increased over the last years. Thus, companies have to innovate in order to stay competitive. Relying too long on older successful products can be dangerous for future profitability. To enable quick response to changing market desires, decision making at organizational level must be high. When new opportunities arise, organizations with effective, i.e. speedy, decision making, can quickly react in order to achieve early market positions. Also, when current market situations change due to changing customer desires or actions of competitors, speed in decision making is a major advantage for quickly responses.

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Accountability is the third aspect. As Bordia et al. (2005) state, it is the glue that holds an organization together. The importance of accountability is evident as poor accountability works negatively on the innovative power of an organization. For example, in over-managed organizations, it is often very hard to determine who is responsible for what. Too many man-agement layers decreasing accountability and negatively influence innovation. Also, unclear decision authorities blur accountability. When accountability is lacking in an organization, this results in missed market opportunities and disruptions in the organization. Besides this, poor accountability also has its implications at other levels in the organization. Many parties are involved when a service is launched. The eventual success of service implementation and gained market share does not depend solely on the service itself but even more on the coop-eration and accountability of functional commitments.

4.3 Conclusions

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CHAPTER 5 THE INTERVIEW ANALYSIS

5.1 Introduction

In this chapter, the results from the interviews are discussed. Innovation in general as per-ceived by the managers is discussed first. Then, Company X’s core assets in relation to inno-vation are treated. The first section concludes with the graduation department of Company X. In the second section, difficulties with innovation inside Company X are addressed. Four fac-tors in particular are important here. First, Company X’s market position. Secondly, innova-tion opportunities and how to respond to this. Thirdly, the lack of own assets and finally the disconnection between Company X and the graduation program.

5.2 Innovation at Company X

5.2.1 Innovation according to managers

The first question for the managers was how they would describe innovation and how they perceive innovation. The answers to this question were on the whole comparable. Firstly, the managers of Company X Groningen agree innovation is important. The managers all agree that a company must be innovative to survive in the market. They also acknowledge that innovative behaviour of Company X can give them an advantage over competitors.

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Noticeably, no one could give a clear definition of innovation. Furthermore, it can be said that the idea of innovation by managers is relative simple and straightforward. As one interviewee pointed out: “It is easy to shout ‘we want to do things different with a total new concept’ but really doing it is another step.”

5.2.2 Core assets of Company X

What resources are available to Company X to create an innovation base in the firm? This was a question that resulted in roughly two answers. The first core asset of Company X as mentioned by the management was personnel. For Company X, well educated personnel are an important asset. Personnel that work for Company X must be highly educated, at least at HBO or WO level. Personnel are attracted by offering good salary and secondary work condi-tions. Furthermore, potential employees are attracted by offering daring assignments and many opportunities for personal improvements or promotions.

To attain high levels of skilled personnel and keep them at high levels, persons need to be trained constantly. At Company X, the amount of courses offered to employees to strengthen their capabilities is in the opinion of this paper sufficient. Everyone is to a certain extend free to decide which courses he will attend. Besides personal interest courses, also obligatory courses are offered. In consultation with the manager, the best suitable courses will be se-lected. When a customer desires specific trained or certificated personnel, the managers can compel employees to follow required courses. Besides this, employees can suggest courses which are in their eyes useful. Depending on the situation, this can be approved or denied. Due to the economic crisis, all none-vital courses are postponed or skipped. This means that only those courses that can result in direct revenues (e.g. client request specific trained per-sonnel) will be approved. However, it must be argued that normally, employees have enough possibilities to follow courses that have their interest.

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Others can use of these sorts of knowledge relative easy. For Company X, there is a lot of tacit knowledge present throughout the organizations. The organization consists of high skilled personnel that possess large quantities of tacit knowledge. This knowledge is hard to store or extract from people. As a result, the present knowledge is not widely available.

The interviews showed that there is not much done about knowledge management. Some managers have tried but did not succeed. It must be noted though; there is strong recogni-tion of the importance of knowledge and management of knowledge. When a person con-tains much information, this can become a threat. In case this employee leaves the organiza-tion, the knowledge he posses will be gone as well. It is therefore important, to work on knowledge management.

5.2.3 The graduation program

The ambition of Company X to be innovative is partly reflected in the graduation program. Students participating in the graduation-program are truly motivated to work on graduation projects that really add something for the student but also for Company X. Students are en-couraged to work on innovative projects and more than often, the end products are some-thing completely new for Company X.

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5.3 Difficulties with Innovation inside Company X

The interviews showed that Company X is stressing the importance of innovation. But the interviews also showed that there are many difficulties with innovation inside Company X. In this section, the four most important bottlenecks are pointed out.

5.3.1 The market Company X is operating in

Not all initiatives can result in new services as many factors influence triumphs of innova-tions. In the case of Company X, it is argued that success of an innovation is for a large part dependent on the client. Company X is active in a market that is dominated by large firms. Company X’s customer base consists of companies that are among the fiftieth largest in The Netherlands. The smaller companies are not regarded as being important for Company X. When the interviews were conducted, the link between Company X and their customers was a bit vague. The interviews did not give the idea there is a real co-production of innovation. Although the interviews did proofs that communication between Company X and clients exist and is important, the interviews also revealed that innovations were hardly in cooperation with Company X’s customers or their suppliers. From a top down view, innovation at Com-pany X is dedicated to department development instead of co-development with clients. Fur-thermore, in the innovation cycle, departments are primarily focused on incremental ad-vancement. A good illustration of this is a service named […] which is sold as a complete new service for municipalities. In reality, the service is nothing more than old services, packed together and put on the market. Radical innovations rarely occur; most innovations are archi-tectural or incremental innovations. Even with archiarchi-tectural innovations, problems may occur. There is one main reason for this: Company X’s clients are less keen on buying and using new services.

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In the earlier days, clients were overwhelmed by possibilities of certain IT products. Very costly projects were started but halfway, the beautiful promises turned out to be unreach-able. Thus, projects where stopped or reshaped. Over time, client firms where anxious to adopt new services based on new technologies. They would not take the risks accompanying new services. The customer desires proven technology, not something that did not proofs to be reliable yet.

5.3.2 Responding to innovation opportunities

Innovation requires the right conditions that have been set. Success factors for innovation inside Company X which are mentioned are space to think of innovation, creativity of person-nel, skilled people, courage, and a bit of luck. Most initiatives that fail are because there is no interest for by customers. Another major problem is the strong short term focus of Company X’s management. Focus is on billable hours and earning money; not on innovation. According to Company X’s management board, innovation expenses should be earned back within a year. When this is not achievable, there will not be awarded budget for the innovation pro-ject. In general, firms are not looking for small scale solutions that are premature and have not shown any value. Consultants and technicians are not trained to work with it and, more importantly, it is not part of Company X’s core business. Currently, Company X’s consulting branch accounts for 80% of the total turnover. By the interviewees, consultancy work is not regarded as a source for innovation. By nature, consultancy focus on customer desires and less on interests of the consultancy firm itself. An in-house department that focuses on fixed price projects, is in that respect an outsider. The inhouse-center is an outsider within Com-pany X as being one the few competences not primarily focused on consulting activities. But, just like other competences, the inhouse-center’s core business is not on development of innovations either.

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This is the direct result of the strong consultancy focus of the firm. The sales department is ‘waiting’ for a customer that has some kind of problem or request that requires consultants. When the client needs a project manager, Company X can deliver a skilled project manager. If the customer has a skilled project manager themselves, Company X can take care of deliv-ering consultants doing the job. The problem with this attitude towards customer requests is that Company X is very dependent on the number of projects launched at customers by the latter’s request.

According to the respondents, there are also some problems with communication throughout the organization that work negatively on responding to market changes. Not only between the different locations of Company X, but even inside Company X Groningen. Albeit there were no department managers that experienced real difficulties with communication, there were occasions where communication failed. The interviews showed that competences felt they were out of touch with other competences, sales, and delivery. Good ideas were not familiar with sales. Thus, the sales manager was not aware of the existence of such ideas. Delivery managers spotting opportunities in the market and propose this to competences got no response because there was no follow up from the competences and sales. Or, ideas that never were further developed because there was no time and money allocated for it are just some examples.

It can be said that there is no awareness among the different parts of the organization in terms of knowledge about each other’s businesses. As one interviewee said: Company X is a strong pull organization. If something is not requested, it is also not given to others. It is logical that if everyone keeps things for themselves, others will not be aware of it. Although this does not occur often, there still is a strong belief that market opportunities are missed due to lacking communication and actions taken accordingly.

5.3.3 Lack of own assets

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The departments are basically supplying people in the form of consultants that have the knowledge of the named technologies. They are not involved in technical development or innovations. At most, they can contact the suppliers when they come across problems. How-ever, firms like Oracle or SAP are, compared to Company X tremendously large in size. Com-pany X just plays a small role in the total customer base of Oracle or SAP. To state ComCom-pany X is co-developing new features with the mentioned three parties is therefore off beam.

Company X is not an organization that develops own products or technologies. Company X makes use of innovations in technology by third parties, they do not innovate on technology themselves. There are various factors that have their influence on this decision. It must be stressed that this factors are the result of strategic decisions made by Company X manage-ment. There are different reasons that have influenced this decision. These reasons are stated below.

Development costs are extremely high For Company X, it is extremely costly to develop a software package or product. A team of people from all layers from the organization must be part of the development process. Employees working on internal projects cannot be work-ing on customer projects in the same time. This automatically means lower utilization of em-ployees and thus fewer revenues on short term. Besides this, due to the nature of the tomers of Company X, it is hardly impossible to sell one product more than one time. All cus-tomers desire custom fit software applications. Smaller cuscus-tomers are more suitable for pre-developed products, but the customer base of Company X does not consist of small custom-ers.

The Art of Innovation Validating the innovative proclamation of Company X

The Art of Innovation

Validating the innovative proclamation of Company X

The Art of Innovation

DISCLAIMER

PREFACE

ABSTRACT

TABLE OF CONTENTS

LIST OF TABLES AND FIGURES

CHAPTER 1

INTRODUCTION

1.1 Introduction

1.2 Problem Description

1.3 Research Questions

1.4 Research Approach

1.5 Structure of the Thesis

CHAPTER 2

A THEORETICAL VIEW ON INNOVATION

2.1 Introduction

2.2 Defining Innovation

2.3 Importance of Service Innovation

2.4 Where Innovations Come From

2.5 Various Types of Innovation in Organizations

2.6 Conclusions

CHAPTER 3

SERVICE FIRMS

3.1 Introduction

3.2 Service Firms

3.3 Types of Service Firms

3.4 Conclusions

CHAPTER 4

THE CASE COMPANY

4.1 The Case Company

4.2 Company X and Innovation

4.3 Conclusions

CHAPTER 5

THE INTERVIEW ANALYSIS

5.1 Introduction

5.2 Innovation at Company X

5.3 Difficulties with Innovation inside Company X