Innovation product management Question

chApter 1

Why innoVation management and Why is it important

for engineers?

Technology and innovation have played a central role in social-economic development of societies for a long time, at the level of nations, commer- cial organizations, and individuals. A few examples are the development of agricultural methods and steam-powered engines during the 19th century; these are often associated with what is called the First Industrial Revolu- tion. The use of electric power and more advanced production techniques, such as the production line, among other inventions characterized the Second Industrial Revolution. The Third Industrial Revolution manifested itself through the expansion of mobile (technology) for communication and information systems at the end of the 20th century and beginning of the 21st century; all three revolutions have shaped the society, as we know it now. These changes came along with new methods, products, and services, during later eras propagated by companies1. Nowadays, compa- nies and governments have put technology and innovation high on their social-economic agenda. Bringing about technological developments and innovations is not restricted to governmental agencies, institutions (such as universities and research institutes), and companies, but also includes individual inventors. Think about Leonardo da Vinci (official name: Leon- ardo di ser Piero da Vinci, 1452–1519), who was an inventor and artist at the same time (his creations still have a resounding influence today). This brief introduction can only touch on the importance of inventions, new processes, new products, and new services and how their inventors

1 Companies as legal entities appeared only during the 19th century; see Bakan (2004) for a description of the emergence of companies as legal construct.

C o p y r i g h t 2 0 1 8 . M o m e n t u m P r e s s .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

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and companies have contributed to the socio-economic development of society over the course of centuries.

In this (historical) context, engineers have played an important role for inventions and technological advances that resulted in innovations (Section 1.1 will provide more detail on the difference between inventions and innovation). Among those engineers who are famed for their innova- tions is Jan Leeghwater (1575–1650), a hydraulic engineer, mill builder, and architect in the Netherlands. He was involved in the reclamation of the first polder in the world from a lake by using windmills; the name of this lake is now Beemster Polder, and the extraction of water took from 1609 to 1612. Another well-known British engineer is Isambard Kingdom Brunel (1806–1859), builder of dockyards, the Great Western Railway, the first propeller-driven transatlantic steamship, and numerous important bridges and tunnels in the United Kingdom; each of these often contained inno- vative solutions to long-standing engineering problems. Nicolas Grollier de Servière (1596–1689) was a French inventor and ornamental turner who became well known for creating a series of fantastic machines. As an engineer, he specialized in deploying movable bridges in the field for the military. After he retired to his home in Lyon, he worked on ornamental lathe work and built a series of fantastic models. He displayed his work in a cabinet that he opened to the public once a week and which became famous enough to attract politicians, scholars, artisans, and other inven- tors. This cabinet featured model water pumps and Archimedes’ screws, siege engines, designs of floating bridges, and clocks regulated by balls traveling down inclined planes or along spiral tracks, machines to trace landscapes, and to convert plan images into perspective, odometers with reducing gears, wheelchairs, many intricate pieces of lathe work in ivory and wood, and an improved version of Agostino Ramelli’s reading wheel that allowed many books to be read by means of a rotating wheel. Nikola Tesla (1856–1943) was a Serbian–American inventor, electrical engineer, mechanical engineer, physicist, and futurist best known for his contribu- tions to the design of the modern alternating current electricity supply system. This non-exhaustive list of engineers and inventors demonstrates the contribution that engineers have made to society by creating solutions to its infrastructure, equipment for processing materials, machines for pro- duction, novel products, and artifacts.

Building on this contribution to society and the role of engineers, this introductory chapter starts by looking at what innovations are and how they differ from technology in Section 1.1. Then, it moves on to look at the innovation funnel in Section 1.2 before it discusses the role of so-called business models in Section 1.3; these business models play an important

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Why innovAtion MAnAgeMent   •  3

role in the commercialization of new products and services, and some- times depend on innovation for their processes. After presenting the basic concepts for innovation, the role of engineers in the context of innovation management is discussed in Section 1.4. This is followed by Section 1.5, which presents the content and outline of the book, and Section 1.6, which describes how to use this text.

1.1  WhAt Are innovAtions?

Returning to the importance of innovation and technology management, it is almost impossible that a day goes by without talking about innova- tion or without being confronted with announcements by companies about new products and services. These announcements by firms might be about breakthroughs for new products and services, improvements of exist- ing products and services, and new ways of their delivery, among other changes. This makes one wonder whether these are really new products and services, just simply revamps or just rebranding. Sometimes these announcements by companies mention technology that is being used for those products and services. This makes it necessary to first look at what technology and innovation are all about.

1.1.1 Defining Technology

The first key concept—technology—can be seen as the know-why and know-how in the form of techniques, methods, or processes used in the creation and production of goods or services. For example, the technology for information and communication systems constitutes all the equipment, infrastructure, software, interfaces, and auxiliary devices to exchange data and information between computers, storage devices, and humans (note that this is not a formal definition, but merely a description for the purpose of this book). The methods and processes for information and communication technologies extend from design to use in operations and to maintenance, which might even include the transition to new informa- tion systems. This instance also shows that an important characteristic of technology is that it can be embedded in machines, computers, devices, factories, and infrastructure; these objects can be operated by individuals who might not necessarily have detailed knowledge of the working of such artifacts and contraptions. In this particular case, it also means that quite a number of (scientific) disciplines are working together to realize

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those information systems. The processing power of microchips depends on advances in physics and electronics, among others, and the integration of the relevant knowledge in these disciplines to create these electronic circuits. However, a software architect, working on software tools and platforms, will be limitedly aware of all the knowledge from physics and electronics, but still make a major contribution to the proper functioning of information systems. Hence, technology is not confined to a narrow domain of knowledge, but in general, covers a wide range of techniques, methods, and processes from several disciplines to make product, services, artifacts, and other contraptions work.

In a more formal sense, there are many definitions about what tech- nology constitutes, see Box 1.1; however, hardly any of these brings about a better understanding of the processes for generating technologi- cal knowledge and applying technologies in products and services. In this sense, Ramanathan (1994, pp. 224–28) recognizes four perspectives on technology embedded in definitions:

• Technology from a transforming and enabling perspective. This means that technology is seen as the application of scientific knowl- edge, sometimes in terms of fitness of purpose and suitability for economic transactions. The definition of Galbraith (1967, p. 12), see Box 1.1, fits with this perspective.

• Technology from a tool perspective. In this point of view, technol- ogy is seen in a more limited view as being an apparatus, machine, piece of equipment, or anything similar. Schön’s (1967, p. 1) definition in Box 1.1 fits in this category.

• Technology from a perspective on knowledge, which places the emphasis on know-how (the capability to use knowledge in action).

• Technology is the systematic application of scientific or other organized knowledge to practical tasks (Galbraith 1967, p. 12).

• Technology is any tool or technique, any product or process, any physical equipment or method of doing or making by which human capability is extended (Schön 1967, p. 1).

• “... a system that uses knowledge and organization to produce objects and techniques for the attainment of specific goals” (Volti 2006, p. 6).

• Technology is scientific, engineering, and managerial knowledge, which makes possible the conception, design, development, pro- duction, and distribution of goods and services (Gibson 1976).

Box 1.1. Definitions of technology

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Why innovAtion MAnAgeMent   •  5

The definition of Volti (2006, p. 6) is an example of this perspective on technology (see Box 1.1).

• Technology as embodiment, which could be considered a synthe- sis of the three previous perspectives. That blending together also implies that each of the three preceding definitions has limitations. How Gibson (1976) describes technology is a case in point for this encompassing point of view; see Box 1.1.

These distinctive perspectives also mean that, when reading literature on technology management and technology cycles, it is imperative to pay attention to how authors view technology, even if they do so implic- itly. In this book, the fourth perspective, the broadest interpretation will be followed.

1.1.2 Defining innovaTion

This latter, broad definition of technology is very close to what one could call innovation: the successful commercialization of technological advances and inventions. Looking at the definitions in Box 1.2, innovation adds to technology that a product or service is new. These definitions are just a few of many; for example, Baregheh, Rowley, and Sambrook (2009)

• Innovation is conceived as a means of changing an organization, either as a response to changes in the external environment or as a pre-emptive action to influence the environment. Hence, innovation is here broadly defined to encompass a range of types, including new product or service, new process technology, new organizational structure or administrative systems, or new plans or program pertaining to organization members (Damanpour 1996, p. 694).

• Industrial innovation includes technical, design, manufacturing, management, and commercial activities in the marketing of a new (or improved) product or the first commercial use of new (or improved) process or equipment (Freeman 1982, p. 7).

• Innovation is not a single action, but a total process of inter- related sub-processes. It is not just the conception of a new idea, nor the invention of a new device, nor the development of a market. The process is all these things in an integrated fashion (Myers and Marquis 1969, p. 1).

Box 1.2. Definitions of innovation

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have examined 60 definitions that all differ substantially. However, what comes to the fore is that innovation is about something new, either to an organization or industrial sector. It can be new because of the product or service, the technology with which they are produced, the application (and market) or even the organizational system; this broad definition is often associated with management guru Peter Drucker (1985), though his role has been limited to advocating the discipline of innovation rather than advancing its practice. For an example of an organizational system, you can think of the Toyota Production System, that is now called lean pro- duction (see Holweg 2007); this way of producing consists of (i) tools, for example, statistical process control; (ii) methods, such as single-minute exchange dies; (iii) production planning and control, just-in-time deliv- eries are a case in point; and (iv) management approaches, for instance, total quality management. Whereas it was developed under the leader- ship of Taiichi Ohno during several decades, its exposure in the 1970s and 1980s explained how Japanese companies could produce cars more efficiently and of more consistent quality. Western companies saw this way of producing as an innovation for manufacturing systems, which was adopted quickly to compete with Japanese companies. Ironically, much of the practices of the Toyota Production System originated in the West; an example is the so-called plan–do–check–act (PDCA) cycle used for statistical process control, which was championed by W. Edwards Deming (an American statistician)2. This cycle was invented by Walter A. Shewart in the 1930s and was based on the scientific method described by Francis Bacon. This long history has led to the so-called PDCA cycle being a cor- nerstone of lean production, as a contemporary approach. This extensive description of this cycle was done to show that innovations often build on previous work, and, therefore, it takes long before they come to fruition. This case of lean production shows that innovation could also concern

2 See Moen and Norman (2006) for tracing back the history of the PDCA cycle.

• “… the process whereby new and improved products, processes, materials, and services are developed and transferred to a plant and/or market where they are appropriate” (Rubenstein 1989).

• “… the processes by which firms master and get to practice product designs and manufacturing processes that are new to them, if not to the universe or even to the nation” (Nelson and Rosenberg 1993, p. 4).

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Why innovAtion MAnAgeMent   •  7

organizational innovation besides product and process innovation; thus, this emphasizes that innovation should be viewed from a broad interpre- tation (even though that this book focuses mainly on product, service, and process innovation).

1.1.2.1 Radical and incremental innovation

As one archetype of innovation, radical innovation is the exploration of new technologies and inventions that are substantially different from the existing knowledge, product, and services. An example of radical innovation is digital imaging. Not so long ago, during the beginning of the 1990s, almost all pictures were taken by using traditional film. At the end of the 1980s and the beginning of 1990s, digital cameras appeared, which did not rely on the traditional films anymore, and paved the way for different ways of storing and sharing pictures. After this transition, the so-called smartphones integrated miniaturized cameras, which moved the taking of images away from the traditional camera (film and digital). Nowadays, these shifts have been followed by all kinds of applications that allow sharing of images by users of websites and the cloud (as sharing of services and storage across multiple locations on the Internet). Currently, cameras, traditional or digital, are sold less and confined to a specialist market. This example shows that digital imaging has changed the way of taking pictures and the ways of sharing them. However, not all radical innovations are successful. An instance of the latter is Zap Mail, which was offered by Federal Express in 1984, using fax transmission. Soon after its launch, another standard for faxes was introduced, incompatible with Zap Mail, and smaller devices became available to small enterprises and homes. Hence, all initial lower costs and advantages for fast delivery were overtaken by a different use of fax technology. Other examples of failed radical innovations are Apple’s Newton, quadrophonic audio equipment, and videodisc players (with gramophone-size discs). Thus, such revolutionary steps by new technol- ogy are called radical innovation, but some of the examples show that they are not necessarily always successful.

On the opposite side of this dichotomous scale is incremental inno- vation. This is the case when an existing technology for products and ser- vices is improved, and these improvements result only in relatively small steps forward. Google’s development and commercialization of Gmail is an example of such dedication to incremental innovation. When Gmail was launched in 2004, it had a limited set of features in addition to its

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core function, delivering e-mails. Unlike its competitors, it was easy to use with no distracting flash advertisements and an adequate user inter- face. Over the course of time, Google released more features and made the service better, faster, and easier to use. Five years later, Gmail was taken out of its beta status, and finally listed as being complete, though, to this day, improvements continue to happen. The company has used the same approach for the development of other applications, such as the Maps ser- vice and the browser Chrome. Incremental innovation often is less risky than radical innovation; however, the first generation of a product might have to be stemming from a radical innovation.

1.1.2.2 Role of PRoDucT configuRaTion

When designing and engineering products and services, the integration of technologies and inventions in such a product or service plays a key role. Such changes in technologies and ideas have to be integrated in a so-called product architecture or service architecture; some called this the product structure or the product configuration (see Dekkers 2006, p. 4012). In terms of logistics and production planning, this is known as the bill of materials (BOM). Figure 1.1 shows the example of a ballpoint pen, with, on the left, a picture of such a pen, and on the right, the related product configuration (or BOM, for that matter). For more complex products, a product configuration can consist out of many more levels, as each high- er-level component might consists of other lower-level components and parts. An example of a complex product is an engine (for a car or a ship). The top of the engine, the cylinder head, contains a cylinder head block

Figure 1.1b. Bill of materials for a ballpoint pen.Figure 1.1a. Parts of a ballpoint pen.

Twist mechanism

Pusher button

Spring

Cartridge

Centre band

Sheath

Barrel

Clip

Ballpoint pen

(a) (b)

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Why innovAtion MAnAgeMent   •  9

(often casted), cylinder head cover, camshafts, valves, rubber seals, and many other parts to fit this together; and this is only one subassembly of an engine. This complexity can also be found in information systems. However, a product configuration does not give information about how these components and parts of a system work together. To this purpose, the product configuration needs to be complemented with functional sche- mata and other similar documentation to understand how it works. Thus, a product or service configuration informs about the basic (geometrical) relationships between assemblies, components, and parts of a system.

Based on how technologies and inventions affect the product configu- ration, a distinction is made between architectural innovation and modular innovation in addition to the concepts of radical and incremental innova- tion; see Figure 1.2 (based on Henderson and Clark 1990, p. 12). Incre- mental innovation means mostly that small advances in technologies do not affect the product or service configuration. Modular innovation means again small advances that might lead to the complete substitution of an entire assembly or component without any effects on the product configu- ration. This is more or less the case when one engine type is replaced with a new one, for example, the diesel engine being offered in cars that had only petrol engines before; almost all other assemblies and components can remain the same. Very differently, architectural innovation affects the product configuration. Look at the introduction of the transistor as replace- ment of the thermionic triode (or more popular, the vacuum tube) in the 1940s and 1950s; ultimately, this innovation made it possible to create so-called integrated circuits, the predecessor of the current micro-chips. Besides making products and electronics components smaller, these inte- grated circuits have led to very different structures in electronic devices,

Figure 1.2. Typification of innovation.

Core technologies and concepts

Incremental innovation

Modular innovation

Architectural innovation

Radical innovation

Reinforced Overturned

U nc

ha ng

ed C

ha ng

ed

Pr od

uc t a

rc hi

te ct

ur e

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including how software is embedded in these products. The challenge of architectural innovation is to identify when changes in product configura- tion are beneficial to products, a capability that firms often master poorly. Because for radical innovation, principally no architecture exists and no preceding technology or concepts are available, it implies that radical innovation always yields a new product architecture. These four types of innovation related to the product configuration are a returning theme in managing innovation.

1.2  innovAtion funneL

Although it is recognized that these types of innovations have played a large role in the social-economic development of the world as it is today, the thinking about innovations as a continuous process came to the fore by the thoughts of Joseph Alois Schumpeter (see Box 1.3). The thoughts of Schumpeter about innovation were embedded in the so-called German Historical School of Economics, a school of thought in economics that studied reality, rather than devising mathematical models during the 19th and 20th century. Within this context, his texts did describe the so-called business cycles that lead to creative destruction. Note that, according to more modern views, the concept of creative destruction in an economic sense should be attributed to Werner Sombart (Reinert and Reinert 2006, p. 77); see Box 1.4. After Schumpeter’s publications, innovation got more

Joseph Alois Schumpeter (1883–1950) has become mostly known through the popularization of the term creative destruction in the con- text of destructive business cycles; this is now called innovation. His career included academia, banking, and minister of finance (albeit the latter briefly). He started writing about the dynamics of econo- mies before the First World War. Over the course of time, his thoughts changed, and, hence, these are divided into Early Schumpeter and Late Schumpeter.

eaRly SchumPeTeR

In his early writings, Schumpeter (1911; 1934) saw entrepreneurs at the heart of the business cycles caused by creative destruction. In this view, entrepreneurs avoid competition with similar products and

Box 1.3. Joseph Alois Schumpeter

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Why innovAtion MAnAgeMent   •   11

services, including pricing. Therefore, these entrepreneurs seek to dif- ferentiate their offering of product and services by the creation of new products and services, the creation of new methods for operations, the entry into new markets, the introduction of new materials and sources, and the development of new forms of organization. These advantages hold until other entrepreneurs and firms catch up by copying these creations or alternately offering products and services that differ; the latter triggers further dynamic interactions between competing firms in market segments.

laTe SchumPeTeR

In his later thoughts, though published in 1954 (Schumpeter) beyond his death in 1950, he distinguishes between innovators and managers. According to this view, larger firms have the resources at their dis- posal to fund and to exploit research and development; therefore, R&D departments and managers replace the entrepreneur, though the burden for funding R&D and internal bureaucracy reduce the effectiveness of innovative efforts. Also, firm size and market powers are the drivers rather than the entrepreneurs tipping the equilibrium out of balance.

noTe

It should be noted that now many (e.g., Reinert and Reinert 2006, p. 73) view Schumpeter’s thoughts as a rewrite of a debate in Germany decades before; in this discourse he did not attribute some of his thoughts to those of Werner Sombart (see Box 1.4).

Sources: Dekkers et al. (2014); Reinert and Reinert (2006).

Although Joseph Alois Schumpeter (see Box 1.3) has become associated with the concept of innovation, it was Werner Sombart (1863–1941) who laid the foundation by introducing the term creative destruction for the domain of economics in his work of 1913 (see Reinert and Reinert 2006, p. 77). Sombart was an economist and sociologist, and he did preside the Youngest Historical School in Germany.

Box 1.4. Werner Sombart

Sources: Reinert and Reinert (2006).

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attention and has now become part of the strategies of companies and the policies of governments. The (continuous) destructive business cycles induced by companies to gain advantages over other companies compet- ing in the same markets by introducing new products and services, and entry into new markets relates to the so-called innovation funnel; both will be discussed in the next subsections.

1.2.1 DeSTRucTive BuSineSS cycleS

First, a description follows about the thoughts of Schumpeter put forward for creative destruction and related business cycles. Creative destruction and the related business cycles are evoked by entrepreneurs seeking dif- ferentiation of their offering of product and services by the creation of new products and services, the creation of new methods for operations, the entry into new markets, the introduction of new materials and sources, and the development of new forms of organization. While initially these advantages hold, it is later that other entrepreneurs and firms catch up by copying these creations, or alternatively, by creating new offerings them- selves. Thus, the initial advantage is marginalized until again an inno- vation reaches the market place and starts a new cycle. This means that markets (and new markets) are continuously in motion, driven by compet- itive forces with the purpose of gaining advantages through innovation. In addition, Schumpeter’s later thoughts—see Box 1.3—put the emphasis on larger firms, which have more resources at their disposal and also possess structures that facilitate the generation of innovation. At the same time, these larger firms reduce the effectiveness of innovation by the difficulties of getting R&D funded and the related bureaucracy for managing proj- ects. Even though the debate about the contributions of entrepreneurs and larger firms to innovation has not been fully settled, yet, the continuous dynamics by business cycles compel companies to look continuously for new technology and possible innovations.

A case in point for the troubles with funding and administrative bur- den in larger firms is the Philips Physics Laboratory (in Dutch: Philips Natuurkundig Laboratorium), first located in Eindhoven, then moved to Waalre, and later back to Eindhoven, all in the Netherlands. The labo- ratory was founded in 1914 by the two brothers who build the founda- tions for the once electronics giant Philips (Koninklijke Philips, aka Royal Philips). At its heydays in the 1960s and 1970s, the laboratory employed about 2,000 people, including ca. 600 researchers with masters and doc- toral degrees. In this period, it generated many inventions, the compact disc being an example, and patents. During the second half end of the

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Why innovAtion MAnAgeMent   •   13

1980s, top management of Philips became concerned with the costs of funding R&D and started the implementation of a policy that research projects should be linked to applications in strategic business units3 of the corporation. Ultimately, this policy of requesting greater returns to business units, and, thus, a greater orientation toward applications away from basic research resulted in the disbandment of the laboratory in 2001. What remains now at the High Tech Campus Eindhoven is but a frac- tion of what it was. Consequently, Philips has lost its leading position as developer of new technologies and one of the largest generator of patents; this shows that, even for larger firms, there are challenges with regard to creating innovations.

Another approach for dominating innovation by larger firms is acqui-hiring, according to Coyle and Polsky (2013). In this practice, larger companies, such as Google, acquire smaller innovative, entrepreneurial firms and hire their leaders. However, some have argued that this practice smothers innovation, as the new knowledge is suppressed in favor of the larger firm’s knowledge base. This must be seen as more of a defensive move to reduce competition than as a mechanism to create larger variety of innovative products and serves the interest of larger firms. It should be noted that buying up promising small startups already existed in the pharmaceutical industry in the 1980s. What acqui-hiring adds is that the inventors of such companies, which are often their CEOs, are successively employed by the larger firm, refraining them from further innovative activ- ities. Such trends, such as acqui-hiring, reinforce the dominance of larger corporations, while not necessarily improving the effectiveness of innova- tion processes in the context of Schumpeter’s destructive business cycles.

1.2.2 STageS foR innovaTion

The search for new products and services, and how they are offered to customers, leads to many attempts by firms to create differences in their offerings; this raises the questions how effective these offerings are. But before looking into business models, it might be helpful to look at the generic process of creating new products and services. A well-known model to this purpose was generated by Herbig (1994, p. 4); see Figure 1.3.

3 A strategic business unit focuses on a specific product offering and market seg- ment. Such a unit typically has a discrete marketing plan and competes with differ- ent firms than those in other product–market combinations, even though they may be part of the same, larger corporation.

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This model, called the path of innovation, describes the steps from the generation of scientific knowledge to the commercialization and diffusion of products and services. According the path of innovation, fundamental science forms the input for the discovery or development of new theory. The next stage is the observation of potential applications based on the developed discoveries and theories, followed by a stage of feasibility; this can be an invention or a proof of concept (based on teleological experi- mentation). Once the feasibility has been proven, the invention of concept can be developed into a product or service. During development a decision will be taken to commercialize the new product or service; once commer- cialized, the diffusion into the market(s) follows. What is characteristic for this model is that the starting point for innovation is defined as funda- mental science, and the creation of products and services as technological development. Moreover, in this model, the feasibility of this knowledge constitutes an invention; hence, inventions are a consequence of scientific and technological knowledge. Only after a new product or service has been created and commercialized, it becomes an innovation that can be placed on the typification in Subsection 1.1.2; note that whether this com- mercialization is successful or not is not part of the conceptualization of the path of innovation. This model of Herbig also implies that innovations are a result of a staged process, in which decisions are taken at the end of each phase.

This stage-wise thinking and the related decision-making indicate that not all possible applications and inventions make it to the market. Stevens and Burley (1997) have looked at how many ideas are successfully com- mercialized; see Figure 1.4. Their study shows that it takes 3,000 ideas to have one successful product launch in the market for the pharmaceutical industry. Industry experts even indicate that this ratio might be increasing

Figure 1.3. Generic path of innovation.

Fundamental science

Discovery or development of new theory

Observation of possible application(s)

Feasibility (Invention)

Development of product/service

Decision to implement

Innovation (Commercialization)

Diffusion

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Why innovAtion MAnAgeMent   •   15

in any type of industry4. This means that companies and inventors need to generate many ideas and need to make sure that the selection of projects that go the next stage is done properly; if not, they might be betting on the wrong horse, so to say. For this reason, some companies, such as Siemens (Schepers et al. 1999), stimulate the generation of ideas by employees. Not generating potential innovations might be a safer bet from a more conservative perspective, but this means that a company taking this stance might be outmaneuvered by competitors that are more successful in gener- ating innovations; akin Schumpeter’s thoughts about creative destruction and business cycles. Anyhow, the figure also indicates that what is called innovation management is extremely important for companies, particu- larly because they need to generate money from inventions, patents, and new (technological) solutions by generating more ideas and inventions than are successfully commercialized.

1.2.3 innovaTion funnel

This process from generating ideas and inventing to commercialization is often denoted with the term innovation funnel; see Figure 1.5. In most of the representations of the innovation funnel, there is a phase of ideation, development, and commercialization. Sometimes these three phases are substituted by more phases. For example, four phases are distinguished: idea generation, conceptualization, development, and commercialization.

4 Based on a discussion between academics and industry experts during the 4th European Conference on Management of Technology (Glasgow, September 06 to 08, 2009).

Figure 1.4. Survival rates for industrial innovation ideas.

3,000 Raw ideas (Unwritten)

300 Submitted ideas (Inventions)

125 Small projects for feasibility

4 Major developments

2 Launches of products and services

1 Successful new product or service

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16   •   innovAtion MAnAgeMent And npd for engineers

Or even seven: idea generation, idea screening, concept development and testing, market strategy and business analysis, feasibility study, product design and engineering, test marketing, and market entry. No matter how many phases, the innovation funnel suggests that the processes are linear. In reality, for design and engineering, these processes are not all sequen- tial, as this book will show throughout, and rather are constituted of many interrelated activities. In practice, this depiction of the innovation funnel can be used by firms to map ongoing projects for new products and ser- vices to the phases they are in; thus, this would create an overview of the portfolio of projects, the idea being that a continuous flux of new products and services is created.

1.3  business ModeLs

The monetization of new products and services is also expressed in the link between innovation and business models as part of the phase of commercialization. The concept of business models emerged during the 1990s and is partly related to advances in information and communication technologies and partly to companies wanting to generate revenues from inventions, patents, and so on. The first reason is probably associated with software companies starting to sell through different channels, initially sending software by e-mail and later from websites. The selling through different channels of inventions, patents, and so on, the second reason, is best expressed with the example of 3M, known for its innovations. Back in 1996, the Regional R&D Manager Europe gave a presentation during the

Figure 1.5. Symbolic representation of innovation funnel.

Market(s)

Ideas and inventions

Ideation Development Commercialization

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Why innovAtion MAnAgeMent   •   17

6th International Forum on Technology Management (Amsterdam, Octo- ber 15–18, 1996) about how they conducted research and development. He stated that the R&D output had risen to such a volume that the manu- facturing and sales of 3M were unable to absorb those new products and bring them to the market. Hence, they had started to contract other firms for manufacturing, sales, and distribution of newly developed products. In this category fall also product and services that cannot be sold effectively and efficiently through the distribution and sales channels of the parent company. Hence, considering, selecting, and setting up business models for the commercialization of inventions, scientific knowledge, and tech- nological developments is paramount to the success of new products and services.

1.3.1 aSPecTS of BuSineSS moDelS

This raises the question of what aspects should be found in a business model. According to one of the first papers (Forge 1993) on this facet of conducting business combined with a more recent popular one (Johnson et al. 2008), a business model consists of:

• A customer value proposition. This means that a product or service should offer a solution to a problem of the customer; the thought is that the more a product or service differs positively from offerings by competitors, the higher the customer satisfaction. Keep in mind that such a competitive advantage of a firm is a result of creative destruction by the firm itself and also subject to creative destruction by competitors, in terms of business cycles (see Subsection 1.2.1). In terms of marketing, this means also defining market segments for products and services, that is, specific consumer groups with specific needs.

• A revenue model. This model tells how customers are acquiring the goods or services and completing the (financial) transaction. Customers might go to retail locations to buy goods, such as shops, or might visit websites. Such revenue models also include how the customers and buyers are going to pay for the goods and ser- vices (cash, credit cards, lease, loans, and so on); sometimes, these payments require the involvement of another party, such as credit card companies.

• The key processes and related resources. These key processes are needed for the interaction with the customers so that they are will- ing to purchase goods and services. In addition, processes need to

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18   •   innovAtion MAnAgeMent And npd for engineers

be in place for the delivery after the purchase, particularly in those cases where customers do not carry goods from a point-of-sale to where they intend to use them. Processes for after-sales services should not be forgotten.

Although others have published about business models, too, for example, Chesbrough and Rosenbloom (2002) and Margretta (2002), these have been defined in terms of strategic management and less in terms of operationalization.

1.3.2 oveRview of BuSineSS moDelS

Traditionally, business models for consumer products were mostly based on retail outlets, including franchises, and in a few cases, post order companies. These traditional business models are called: bricks and mortar, direct sales franchise, and subscription; see Table 1.1. With the advent of the information and communication technologies, partic- ularly the Internet, the interaction with consumers has changed drasti- cally since the 1990s; it results in more possible ways for companies to interact with customers and attract them to purchase goods and ser- vices. Newer business models include: freemium, online brokerage, and (professional) open source; see also Table 1.1. The overview shows the wide variety of business models, but it also pinpoints that these methods have implications for the commercialization of new products and ser- vices, and sometimes require adaptations in the products and services to enable successful marketing and sales. The business model should be complemented with how the financial transactions take place, for exam- ple, paying by cash, by credit card, or in installments. This overview indicates that innovations should be directed at market channels through appropriate business models, which may cover differing approaches for specific segments of markets (think about the sales of luxury items ver- sus fast moving goods).

1.3.3 PoSiTioning SeRviTizaTion in innovaTion

Particularly for products, so-called servitization has become a way to enhance the value proposition by manufacturing firms for the customer. This concept was brought to light by Vandermerwe and Jada (1988) as a reaction to decreasing profits on regular sales of goods. They men- tion the example of photocopiers with built-in artificial intelligence that allows firms to repair photocopiers even before users have become aware

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Why innovAtion MAnAgeMent   •   19

Business model Characteristics Bricks and clicks • Both offline (bricks) and online (clicks)

presence. • Examples: warehouses (John Lewis) [United

Kingdom] and Sears [United States] and supermarkets (Tesco) [United Kingdom] and Wal-Mart [United States].

Bricks and mortar • Direct sales to customers or business-to- business (B2B*) with presence through only retail locations.

• Often local or regional. • Note: This business model seems to disap-

pear, because most companies have some online presence nowadays.

• Example: IKEA (mostly, though changing slowly), Staples (B2B*, office supplies; changing, too).

(Online) brokerage • Brokers connecting buyers and sellers, and facilitating transactions.

• Sales might involve competitive bidding (conducted online).

• Might expand to B2B*. • Example: eBay, ICAP Patent Brokerage.

Collective business • Business organization or association typically composed of relatively large number of companies, traders, or professionals in same or related fields of endeavor.

• Pooling of resources, sharing of information, or other benefits to members.

• Example: Virtuelle Fabrik (Switzerland). Cutting out the middlemen

• Removal of intermediaries in supply chains. Instead of traditional distribution channels (such as distributors, wholesalers, brokers, and agents), companies deal with every customer directly, for example, through the Internet.

• Example: LEGO (online, shops) Direct sales • Marketing and selling products direct to

consumers away from fixed retail location: typically made through party plan, one-to-one demonstrations, and other personal contact arrangements.

Table 1.1. Overview of business models

(Continued )

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20   •   innovAtion MAnAgeMent And npd for engineers

Business model Characteristics • Example: Avon (cosmetics and personal care,

United States), Tupperware (home products, United States)

Distribution • Organization or set of organizations (go- betweens) involved in the process of making a product or service available for use or con- sumption by consumer or business user. Other three parts of the marketing mix are product, pricing and promotion.

• Example: Intelsius (pharmaceuticals, United Kingdom)

Fee in, free out • Charging first client fee for service, while offering that service free of charge to subsequent clients.

• Example: digitization services. Franchise • Alternative to building chain stores to distrib-

ute goods and avoid investment and liability over chain. Franchisor’s success is success of franchisees. Greater incentive than direct employee because of direct stake.

• Example: Curves (women’s fitness, United Kingdom)

Freemium • Offering basic Web services, or basic down- loadable digital product, for free, while charging premium for advanced or special features.

• Example: Dropbox (United States), Skype (United States).

Industrialization of services

• Service provision as industrial process. • Mostly abandoned because of negative

effects. • Example: McDonalds (fast food, United

States), Starbucks (coffee shops, United States).

Premium • Offering high-end products and services appealing to discriminating consumers.

• Brand image important factor as quality is subjective.

• Example: luxury and fashion goods.

Table 1.1. (Continued)

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Why innovAtion MAnAgeMent   •   21

of (potential) failings. Even software has undergone servitization; many upgrades are for revisions that resulted from errors that most users have not been aware of. This shows that servitization allows companies to pro- vide a better product or a better service, without necessarily the customer being aware of all processes operating in the background.

The concept of servitization should not be confused with the comple- mentary products and services that are needed to make an artifact or con- traption work. Take the instance of a car. Fuel stations and garage facilities are needed to keep the car in a condition that it can transport passengers and goods. These are the complementary goods (fuel as example of sup- plies) and the services (maintenance and repair). In such a case, serviti- zation would mean that garages would receive advance warnings from a vehicle about its state and possible failures; such can also be established by

Business model Characteristics Professional open source

• Open-source software vendor generates reve- nue from paid professional services partnered with software.

• Example: Blender (3D creation suite, the Netherlands), Sakai (Virtual Learning Environment, United States).

Razor and blades • One item sold at low price (or free) in order to increase sales of complementary goods.

• Example: Gillette (razor blades, United States).

Service or servitiza- tion of products

• Sales of goods with complementary services. • Example: goods with extended warranty,

printers with ink cartridges. Subscription • Payment for access to product or service.

• Examples: newspapers, magazines, software.

User model • Based on offsetting measured use. Oppo- site of subscription business model to some extent.

• Examples: gas utilities, electricity utility. Yield management • Price of service varies and adapts to demand

and the available supply of temporary available good or service.

• Example: flight, hotels.

* B2B stands for business-to-business. The acronym B2C means business-to-customers.

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22 •   innovAtion MAnAgeMent And npd for engineers

performing an (electronic) diagnosis when the vehicle is brought into the garage for servicing. Hence, there is a thin line between complementary services and servitization, mostly defined by the capability to diagnose the state of the asset, equipment, software, and so on, without necessarily the intervention of the user.

1.4   Why is innovAtion MAnAgeMent  iMportAnt for engineers?

Knowing all the information so far about the paramount role of innova- tion in the development of companies and society, the business cycles and creative destruction, and appropriate business models for commer- cialization, the prominent role of designers and engineers comes to the fore. Designers and engineers by trade engage with new ideas and inven- tions for new product and service development and for process devel- opment. To this purpose, they generate ideas by teleological and staged approaches, matching requirements of (potential) customers with techno- logically feasible designs and manufacturing processes. Over the course of time in their career, they may get more involved with managerial tasks (see Lannes III 2001); they might even become managers that direct new product and service development, including roles as project manager. No matter the exact job description, the role of engineers includes aspects of innovation, unless an engineering graduate seeks a position outside the domain of design and engineering, but even then, innovation management could be part of the scope of a job.

This change in role, and even other jobs engineers take on, might include wider aspects of commercialization beyond matching require- ments of customers with feasible designs and operational processes (see Chapter 2 for these processes). Hence, engineers need to appreciate the role of marketing, manufacturing, service processes, and recycling; this extends to incorporating these aspects into design and engineering pro- cesses, so-called life-cycle management (see Chapter 3). The inclusion of all these aspects also leads to further innovations, for example, through servitization. Moreover, the consideration of all these aspects is not possi- ble without any engagement with other functions, even beyond the bound- ary of the firm (see Chapters 4 and 5). Adequate structures for project management (see Chapter 6) complement the inclusion of these aspects in new product and service development. Thus, the role of engineers, whether in earlier or later stages of their careers, covers a wide variety of aspects and also requires the interaction with many that are involved in innovation management.

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Why innovAtion MAnAgeMent   •  23

More recently, the monetization of inventions and technologies has captured more attention. This trend emerged during the 1990s. Companies and inventors are enticed to make money out of their inventions and tech- nologies through patents and other mechanisms (see Chapter 7). Some- times, these approaches lead to lawsuits about infringement. However, these efforts should also be placed in the context of national economies (see Chapter 8) and again stress the engagement with a variety of actors. This means that engineering students need to have some appreciation in which socio-economic context innovations are taking place.

1.5  outLine of the booK

Thus, this book is directed at engineering students and engineers, as designers and engineers in organizations, as inventors, as managers, and as so-called techno-entrepreneurs. In the first role, designers and engineers in organizations contribute to new products and services, new methods for operations, and possibly new organizational structures. As inventors, engineers might seek the application of scientific and technological to new products and services or to new applications. As manager they may lead engineering groups, departments, and R&D. As techno-entrepreneurs, engineers might see opportunities to commercialize these new or improved products and services. By combining engineering views with economic insight and managerial practices, this book aims at providing the necessary background to make innovations more successful for all these roles.

Some of the text and figures in this book make use of applied systems theory (Dekkers 2017), particularly the process models. Despite systems theories playing an essential role in design and engineering, the book will not go into detail about systems theories. Systems theories and systems engineering are seen as essential tools for engineering education. They allow engineers to work methodically on the design of products and ser- vices while keeping an overview at the same time. Therefore, this book builds on systems theories and systems engineering as much as appro- priate; however, readers might have to consult readings on this matter to complement the text.

This book also concentrates on processes, methods, and tools for design and engineering with long-standing application. It only addresses fashionable trends, such as lean product development (Salgado and Dekkers 2018), in Chapter 9. However, the rest of the book concentrates on principles and methods for product design and engineering. This means that, for some concepts, it falls back on those writings and terminology that was used by the originators of those conceptualizations.

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24 •   innovAtion MAnAgeMent And npd for engineers

Chapter 2 starts with introducing some further basic concepts for product design and engineering and innovation. Particularly, it introduces a generic model for product design and engineering, from technology and research to new product and service development to manufacturing and logistics. This chapter also expand further on the configuration of products and services. Furthermore, it presents a wide range of methods and tools that can be used during product design and engineering.

Chapter 3 builds on the design and configuration of products and ser- vices by looking at their lifecycle related to business models. This includes the commercialization of new product and services, which also covers the acceptance by customers and users of new technologies. This is linked to technology cycles and generations of innovation processes. Also, methods for strategic planning of technology are presented in this chapter.

Chapter 4 looks at how ideas and inventions can be sourced. These sources include inventors, customers and users, suppliers and commer- cial research organizations, universities, employees, and competitors. This chapter also expands in what phases and how to get these actors involved.

Chapter 5 focuses on collaboration with the same actors. This work- ing together can be necessary for new product and service development to achieve successful commercialization, or it could be initiated after sourc- ing of ideas and inventions happened. The topics discussed also extend to the networks that result from external sourcing.

Chapter 6 introduces some basic principles for project management in the context of new product and service development. It also pays attention to stakeholders for projects and how to embed a project in an organization. However, leadership and management of projects are limitedly covered.

Chapter 7 presents intellectual property rights related to innovation, and new product and service development. Particularly, patents are dis- cussed, because this is the most common form of intellectual property rights for new products and services. The chapter also contains a section about entities that are seeking extra-ordinary returns from patents by suing companies or inventors that infringe their stock of patents.

Chapter 8 pays attention to national innovation systems. The wider social-economic context also determines how innovation and new product and service development takes place; particularly, this context concerns the collaboration between universities and firms, and the stimuli that gov- ernments may provide for innovation. Also, some points about clusters of companies can be found in this chapter.

Chapter 9 addresses a few contemporary approaches. These include lean product development, open innovation, living labs, crowdsourcing, and sustainability. For some of these concepts, such as lean product

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Why innovAtion MAnAgeMent   •  25

development and open innovation, the origins are traced back to con- cepts that appeared in the chapters before. For the other concepts, such as crowdsourcing and the relevance of sustainability, brief explanations are provided.

Chapter 10 creates an overview of all previous chapters by relating them to each other and by providing a link between strategy and innova- tion management. To this purpose, it introduces another model and also incorporates some recent insight. Thus, the further integration of mod- els, methods, and tools allows readers to form a more complete overview, rather than relying on fragmented concepts spread throughout a book.

1.6  hoW to use this booK

Thus, this book can be used as guide for teaching engineering students innovation management complementary to the methods and for design and engineering of products and services; it is particularly written for post- graduate students and undergraduate students during later years of their study. To this purpose, it pays attention to idea generation and invention, to commercialization of new product and new services, and patenting. In addition, it covers the processes for design and engineering from eliciting customers’ requirements and using technological knowledge to commer- cialization, including the use and recycling of products. Some of the tools and methods are mentioned, and examples are given, but the tools and methods are not explained in full detail; more detail should be found in specialized books that focus on these methods. At the end of the book, students should have an overview of all aspects of innovation relevant for engineers in a variety of roles.

This book can also be used by practicing engineers, in both engineering and managerial roles. Particularly for these, the text provides some guid- ance toward commercialization of ideas and inventions, and management of product and services design and engineering. The latter is expressed in the reference model for product and services design and engineering (Chapter 2), the role of product architectures (Chapter 3), the modes for sourcing and collaboration (Chapters 4 and 5), an unique approach to project management (Chapter 6), the protection of intellectual property rights (Chapter 7), the national context for innovation management and the integration of methods and tools in an overview (Chapter 10). Also, there is attention for connecting strategy formation to innovation manage- ment in Chapter 10. Moreover, Chapter 9 pays attention to newer concep- tualizations, such as open innovation and lean product development. This

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26 •   innovAtion MAnAgeMent And npd for engineers

means that practicing engineers can find approaches to enhance their roles in the context of innovation management, and new product and service development.

This book can also be used as a point of reference for management of product design and engineering. Some of the models that are used have not been used anywhere else, but there are also methods and tools pre- sented that have existed in engineering practice for a while. To facilitate this use as much as possible relevant references have been used; some of these references include the original sources. This enables those that use this textbook as point of departure also to find who introduced specific methods and tools (and when, of course).

1.7  Key points

• Essentially, the term innovation refers to an outcome of a process of invention, idea generation, and new product (and service) devel- opment. This means that innovation encompasses applying tech- nological knowledge with the purpose of bringing an invention or idea to the market.

• The concept of innovation includes the commercialization of inventions and technologies. It does not cover whether innovative products and services are considered successful in the markets they are introduced in.

• The archetypes of innovation are radical innovation, incremental innovation, modular innovation, and architectural innovation. Rad- ical innovation is the creation of new products and services that have little in common with existing products. Incremental innova- tion is the improvement of existing products and services through technological advances. When assemblies or components of exist- ing products and services are replaced with ones that are based on new technologies, this is called modular innovation. Might mod- ular and incremental innovations lead to redesign of the product configuration, then this is called architectural innovation.

• The product or service configuration shows out of which assem- blies, components and parts a product or service is consisting. Such a product or service may have levels of hierarchy; this is definitely the case for more complex products. In logistics this is commonly denoted with the bill of materials.

• The innovation funnel describes how inventions, ideas, and scien- tific and technological knowledge are converted into products and

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Why innovAtion MAnAgeMent   •  27

services. It consists of steps and decision-making which projects for the creation of new products and services, new methods for operations, entry on new markets, new materials and sources, and new forms of organization best to take forward.

• Business models describe how the interaction with the customer takes place. They consist of a value proposition, a revenue model, and the key processes with related resources for the delivery of goods and services to customers. Note that this applies to consumers as well as to firms buying from other firms (B2B).

• One particular business model to generate more revenue is servi- tization. In this concept, the diagnosis of the state of assets, equip- ment, software, and so on, without the intervention of the user offers the possibility to offer additional paid for services or to better manage the assets, equipment, software, and so on.

• The phenomenon of creative destruction in business cycles describes how the creation of new products and services, the cre- ation of new methods for operations, the entry into new markets, the introduction of new materials and sources, and the develop- ment of new forms of organization delivers a firm higher returns on its investments and triggers competitive pressures in search of a new equilibrium; this also put pressure on firms to be continuously innovative.

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EBSCOhost - printed on 10/26/2023 4:07 AM via TRINE UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

EBSCOhost - printed on 10/26/2023 4:07 AM via TRINE UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use