As a recently released federal task force report emphasized, Canadian companies need to become more competitive. But “competitive” these days is practically synonymous with “innovative.” The issue is a “But” because there is a dearth of knowledge, especially in Canada, on how companies around the world innovate. These authors researched companies around the world, and their findings, described in this article, will help Canadian companies jump start their efforts to become more innovative.
Innovation is a major engine of economic growth. While competition forces businesses to innovate, managers have no easy recipes at hand. From a public policy perspective, the challenge is even more obscure. Despite very aggressive innovation policies, Canada is a laggard when it comes to innovation, resulting in significantly lower productivity growth— and in the creation of an issue that has become a major national concern.
This paper attempts to shed light on this dilemma by presenting a global survey of over 1000 large and small firms—the MINE (Managing Innovation in the New Economy) survey—which documented innovation strategies and performance in all sectors of an economy. The survey led to the identification of six patterns of innovation, which we refer to as “innovation games.”
1. Current notions of innovation
Innovation can be broadly defined as new, value-creating applications of know-how in the economy.ii Joseph Schumpeter, the great economist of the first half of the twentieth century, was still very attached to the notion of innovation as science-based discoveries that trigger competitive races for market domination between innovators and imitators. Entrepreneurs, supported by venture capitalists, were deemed to play a central role in this innovation, as agents of rejuvenation, triggering what Schumpeter called a “creative destruction process.”
However, Schumpeteriii also argued that large-scale firms with well-organized R&D operations could also be significant innovation agents. From that perspective, his followers advocated that governments should strongly support R&D through publicly financed research and tax measures. In the 1990s, Clayton Christensen,iv a professor of management at the Harvard Business School, enriched Schumpeter’s creative destruction model by introducing and describing the importance of disruptive innovation, , a concept that became very influential among managers. More recently, four other research-based insights have also emerged in the academic literature on innovation.
Modularity: An increasing proportion of innovations are associated with modular systems in which platforms coordinate assembled components.v
Interactions with customers: Markets are often created jointly, by innovators and clients. Reacting to prototypes, expert or pioneering customers provide strategic information to developers early in the process of market definition.
Ecosystem: Innovative firms often rely on the contributions of complementary firms. Ecosystems include contractors, independent innovators, venture capital or innovation-support agencies.
Openness: The open source movement in software was the first to challenge closed proprietary platforms in order to democratize innovation. With the rise of the Internet, content created by users has greatly stimulated independent innovations.
These new concepts enrich our understanding of innovation and have given rise to a rich “how-to” literature directed at managers. However, as of yet, no magic bullet has been found and views on how to stimulate innovation still differ greatly.
2. The MINE study
The MINE survey was directed (by co-author Roger Miller) to understand how businesses actually innovate and to assess the results of their innovation efforts. Detailed questionnaires were completed by senior managers of over 1000 firms all over the world concerning all aspects of the innovation process. Moreover, 200 case studies were conducted to enrich our understanding of the different dynamics of innovation. (www.minesurvey.polymtl.ca)
Statistical analyses enabled us to identify six clear patterns of innovation, which we call “games of innovation.” A further examination of the patterns suggests that innovation results from different and mutually exclusive scenarios of value creation, with each one reflecting a particular set of competitive conditions, and involving both collaboration and rivalry.
What works in one sector may not work in another. This view goes against the widely held belief that there are universal best practices for stimulating innovation. Indeed, the pursuance of one particular set of “best practices” can trap entire sectors of the economy in negative-sum competition, resulting in minimal innovation, slow growth, and low profits. Fortunately, it takes only one “player” to challenge established rules in a given sector.
Other economists have also argued that innovation is subject to a type of division of labour. For instance, Keith Pavitt,vi an English economist, identified four, sector-based trajectories of innovation: supplier-dominated, scale-intensive, specialized suppliers, and science-based.vii However, the large database provided by the MINE survey provided new insights and identified empirically clear patterns based on the competitive dynamics in a particular marketplace.
A further finding suggests that innovation is very much a result of the strategic intent of senior management. This applies to mature industries as much as emerging industries. MINE participants indicated that, on average, 38 percent of their profits were attributable to their own investments in innovation. Innovation is an integral part of business strategy, even if managers still have difficulty understanding how to encourage it.
3. Capturing the realities of innovation
The statistical analysis suggested that the six games were defined by a combination of two factors, the first one related to the market and the second to the architecture of products and services.
3.1 Market-creating innovations and in-market innovations
The competitive dynamics in a new market are quite different from those of an established one, thus leading to very different innovation patterns. Market-creating innovations (MCI) generally emerge from the confluence of technologies at the cutting edge of development and are spurred by insights, serendipity, curiosity and big dreams, as well as positive reactions from pioneering customers. Such innovations trigger competitive races during which the product is defined and refined with early adopters – a mutual learning exercise.
Market-creation races are now taking place in the personal digital assistant (PDA) domain, where Research in Motion’s Blackberry triumphed as the defining product, trouncing the start-up Treo, the creators of the Palm Pilot. Apple has joined the race with its iPhone, and mobile phone manufacturers such as Nokia, Erickson, Samsung, and Motorola are vying to offer the most innovative products. Some of these companies may end up having to drop out and join the ranks of former phone manufacturers.
Market creation often tends to be the territory of new entrants, catching incumbents by surprise. Incumbents typically disparage new and innovative products as unproven and unreliable. If and when incumbents finally do decide to jump in, their belated “me-too” products make them appear as laggards and compromise their market image.
In-market innovations (IMI) are found in established markets, fuelling competitive races to reduce costs or differentiate products through superior features or better targeted distribution. In established markets, customer needs are better known and technological leaps are seldom defining events. The resulting higher “predictability” allows innovation to be a key element of a firm’s competitive strategy,
In the MINE survey, about 75 percent of the participants were in in-market innovative games and 25 percent in market-creating ones. In-market innovations are more prevalent for the simple reason that the greater part of the economy is composed of structured, established markets, where innovating is the essence of competition. Indeed, over a ten-year period, the management of in-market innovations can make one corporation soar and another one plunge.
3.2 The architectural state of an innovation
The second factor that defines innovation games is the architecture of the product being innovated. Three states are possible:
Stand-alone products: Innovative “stand alone” products are selected by buyers on the basis of their relative merits. For example, a better mouse trap, a new blockbuster drug, or a new type of batteries would fit into this category.
Closed-system: This innovation is the integration of components into a closed system, such as a new jet engine, or a breakthrough software application. The innovator is typically a technical expert firm that works closely with a demanding client seeking higher performance.
Platform: This innovation takes place in an open modular system. It may concern either a module that sits on the platform or the platform itself. The iPhone and the Blackberry, operating on wireless platforms, are such modules.
The combination of the above-mentioned factors yields six games, as illustrated in the table below. Since games are defined by the competitive dynamics, one game will tend to dominate in any particular industry or sector at a particular time. However, game shifts can occur. For instance, telephony and media broadcasting, once two different industries, are now in the midst of Battles of Architecture, as new delivery channels are being established. Conversely, as dominant architectures emerge in an industry, the games shift from market-creating innovations to in-market innovations.
|Autonomous innovations||Closed-system innovations||Platform innovations|
– 1 –
– 2 –
– 3 –
Innovations within existing markets
– 4 –
– 5 –
– 6 –
If we assume that market-creating innovations generate twice as much added value as innovations in mature markets, we could infer that market-creating innovations account for about one-third of the economic growth attributable to technological progress, with innovations in established markets accounting for the rest. Although there are no acceptable metrics for measuring innovation, such a distribution appears reasonable.viii ix
4. The dynamics of the games of innovation
Games of innovation are coherent sets of strategies and rules for making decisions about innovations in different contexts and apply a specific logic to a particular situation. Each game is also characterized by an ecosystem of interdependent firms and institutions that are complementary to the innovators. The following is a brief description of each game.
4.1 Eureka! – Commercializing a new discovery
Closest to the science-based model of innovation, Eureka! games typically start with an inventor’s quest to match new knowledge-based solutions with unmet needs or underserved markets. When safety is critical, such as in pharmaceuticals, significant investments to meet regulations are required, thus favouring deep-pocket innovators.
Because they are easy to imitate once public, discoveries need to be protected by patents, creating valuable temporary monopolies and rewarding the high-risk, up-front investments Pressures to innovate are relentless as winning products eventually lose their edge or their legal protection. Firms must continuously invest in R&D to stay in the race or else migrate toward less innovative (and less profitable) products.
In the Eureka! game, the dominant innovation strategies call for recruiting the best possible technological talent, typically smart, intuitive, and fast-moving developers who maintain links with leading-edge science, and for building a balanced portfolio of research projects. Moreover, winners generally have superior marketing capabilities and, in the case of start-ups, organization-building capacities. Marketing is as important as discovery in this game. The pharmaceutical industry, a main player of this game, spends $1.80 on sales and promotion for every dollar spent on research.x
Eureka! is R&D-intensive. According to our survey, firms participating in this game spend 29.2 percent of sales on R&D. The ecosystem, also important in this game, is typically composed of a few large competitors, a cluster of ambitious well-supported start-ups, and many specialized but complementary firms.
4.2. Engineering Breakthroughs: Rethinking the way things are done
For several years, Dassault Systèmes worked closely with Toyota to rethink the design of new car models, resulting in a reduction of their model development costs and development time by 44 percent for major car projects.xi Dassault, thus engaged in the Engineering Breakthrough game, is now the world leader in product life-cycle management. This game usually consists of collaboration between an eager and demanding industrial client and an expert firm, with the client offering to serve as a testing ground for a breakthrough product that the firm hopes to develop. Together, they try to revolutionize the way “things are done” in a particular area. This game also involves taking huge technological risks.
The dominant strategies in Engineering Breakthrough innovations are (1) long-lasting interactions between technology suppliers and lead buyers to solve jointly defined tough problems; (2) early entry in the hope of building proprietary systems where knowledge and experience accumulate; and (3) building credibility and reputation by delivering enhanced performance with new versions.
Engineering Breakthrough games are also highly R&D-intensive. According to our survey, firms participating in this game invest, on average, 32 percent of their sales in R&D. On the other hand, patents do not play a major role, although proprietary solutions abound and are deeply embedded in the products. Moreover, reputation and reliability are critical given that customers are taking huge risks. Buyers are often locked in as they face high switching costs.
4.3 Battles of architectures: Establishing new platforms
When IBM contacted Microsoft to develop the operating system for its PCs in 1981, it did not realize that the operating system, and not IBM’s hardware architecture, would become the key platform for growing PC sales. Here, IBM was implicitly engaged in a typical Engineering Breakthrough game with Microsoft, a game that would morph into a Battle of Architecture where Microsoft O/S (and its successor, Windows) eventually came to own what would become the dominant PC platform for the next twenty-five years.
Today, telcos are engaged in similar battles, one whose outcome is still to be determined. Will Google, Skype, and other “info mediators” become the entry points for new communications? Or will incumbent telcos remain the central players?
Battles of Architectures can be seen as market-creating tournaments convened by the convergence of new technologies, and in which one or several sponsors promote open platforms that can accept modules, components, and services offered by external players. Its chief sponsor manages the platform and serves as the “orchestrator.”
The potential of emerging platforms is often hard to detect, which is why their funding relies on astute venture capitalists. The early competing platforms are often baffling, with users ill informed about the prospects. Only a few platforms survive in Battles of Architecture.xii We all know early users who ended up holding orphaned products, such as WordPerfect and Lotus 1-2-3.
The dominant strategies in this game are usually not based on scientific prowess or patents. Instead, winning strategies rest on: (1) a bold vision of the trajectory of new technologies; (2) the ability to build winning coalitions of complementary players around open standards; and (3) marketing and promotion capabilities, allowing the new platform to win the intense race and to attract a dominant client base.
The ecosystem is central to Battles of Architecture. Orchestrators need specialized complementors to enrich their platform. Being first attracts critical and pioneering users and third-party developers—a critical step in building a large community.
Winning platforms are not necessarily technologically superior. The lineage of successful platforms can be traced to a few key strategic moves: (1) promotion of an initial prototype to attract the attention; (2) stimulation of demand by subsidizing early adopters; (3) generous licenses to open the platform; and (4) moves to trigger threshold effects.
R&D is slightly less important in this game, representing 18 percent of sales. Still, 36 percent of staff time was spent on innovation, suggesting that innovating in this game revolves around much more than technology.
4.4 New and improved: Run-of-the-mill improvements
Procter & Gamble Co. continually ranks among the most admired companies in Fortune magazine surveys.xiii P&G plays the New and Improved game, continually maintaining an edge by differentiating products from the competition, and demanding higher prices. Process improvements also make it possible to lower costs and improve quality. Managerial innovations, leading to superior delivery, are also a key factor in this game as no competitors can afford to lag behind significantly on the value/cost equation.
The New and Improved value-based competition is found in numerous markets, from personal care products, power tools, raw materials, and hotels, to car rentals. The eco-system is made up mostly of large competitors who have significant market shares and relies extensively on supplier networks to complement in-house innovation capabilities.
The dominant strategies for innovation in this game are: (1) relentless pursuit of process efficiency; (2) continuous incremental improvement of products (e.g., by adding features), which discourages substitutes and allows for higher prices; (3) avoidance of commoditization by developing specialized market niches, often through clever branding.
Patent protection is seldom critical as relevant technologies are widely known and available. R&D is also less critical (4.4 percent of sales according to the MINE survey).
4.5 Pushing the Envelope (PTE): Progressing the state of the art
The Canadian printer, Transcontinental, recently signed a 30-year contract with Hearst to print the San Francisco Chronicle. The contract was secured in particular thanks to a new dedicated plant to be built in close cooperation with a German printing machinery developer. The latest technology will enable the plant to operate with one-third fewer employees and greater flexibility. Such investments are typical of the PTE game. Using know-how available in the market place, engineers, architects, and designers push the envelope a little bit further with each new capital investment project, be it a machine, a plant, a power facility, or an IT network.
The dominant levers of innovation in PTE games are: (1) the selection of the experts, who will push the state of the art; (2) good governance structure and processes that will address any problem arising between the client, the experts, and the suppliers; and (3) good project management competencies.
4.6 Mass customization: Optimizing the benefits of a platform
During the period 1995-2000, the retail sector was the largest contributor to productivity growth in the U.S. economy. Innovations such as big boxes, Asian procurement, efficient logistics, floor employees, management practices, and collaborative inventory management gave Wal-Mart a huge productivity advantage. This forced competitors to adapt and subsequently changed the retailing sector dramatically.
Toyota did the same in automobile manufacturing, engaging not only its employees but thousands of suppliers. Mass Customization games are battles of brands to cater to heterogeneous market needs. Competition is on better, more targeted product and lower costs, and can enlist thousands of partners and suppliers. The more that information technology penetrates the economy, the more that Mass Customization gains in importance, allowing leading firms that control brands and platforms to reach their customers more efficiently, and with a continuously improved offering. A large automobile manufacturer can offer tens of thousands of different combinations of features—a long way from Henry Ford’s one-size, one-color Model-T.
5. Implications for business strategy
Innovating is costly and quite often unrewarding. However, simply following in the footsteps of an innovator is not necessarily a more efficient strategy. Besides being denied first-mover advantages, followers are obliged to adapt their strategy to compete with new entrants or innovators, and are thereby often relegated to a lower position.
Thus, understanding how innovation is structured is important for the design of any competitive innovation strategy. Knowing which games one’s business is involved in is critical for identifying the key success factors. It greatly helps when focusing on the right priorities, particularly for the medium term.
For instance, if you are a supplier in a Mass Customization game, the rules are pretty clear. On the one hand, you have to not only meet but also exceed the platform orchestrator’s standards. At the same time, you have to continually innovate in order to lower costs and differentiate products. Moreover, your marketing has to be aligned with the platform orchestrators you are doing business with.
Innovation is not an obscure, unexplored undertaking. Each game has its particular rules and challenges. By concentrating on these and leaving aside non-critical factors, a business can develop an edge. In-market innovations bring proper state-of-the art improvements to existing processes and products. The key is to choose the right improvements and to pace advances in such a way as to manage the risks involved.
Innovating in new markets typically involved initial technological discoveries. However, technology is ultimately a minor element in the competitive race that characterizes emerging markets. Of import, rather, is properly managing product development, striking the right alliances, investing sufficiently in marketing, as well as spending on patents when required and forgoing them when not. Nurturing the right ecosystems takes years of effort before it can become an advantage.
Things get more complex when an industry goes through a game change. For example, Bell Canada is in a tough situation, as its innovation game is changing from the search for efficiency to multiple battles of Architecture. Different skills are needed, such as pacing product evolution, managing a coalition of partners, and being a good partner. Picking the right platform also becomes crucial.
It is beyond the scope of this paper to explore generic business innovation strategies. However, typical games revolve much more around picking the right investments, the right partners, and the right technology paths than in investing in R&D.
6. Public policy implications
Most governments pursue innovation policies, and most of these tend to allocate public funding to special interests in science and technology. Thus, innovation, when viewed from the perspective of the six games, can expect to draw public support. However, the six-game perspective can also cast a pall over some trendy policies. Here are three examples.
Intellectual property rights are determinants in only one game, namely Eureka, where they are essential for justifying huge investments in development and in marketing, and where free-loading by copycats is easy. In all other games, intellectual property rights are often rent-seeking nuisances.
Public funding of basic research, in particular, to universities, is justifiable as a contribution to the expansion of human knowledge—a worthy cause. However, an innovation agenda should not rely on the contributions of universities. The most important mission of universities in the field of innovation should be to nurture innovative graduates.
Venture capital is particularly useful in market-creating games. But from an innovation standpoint, the critical venture capitalists are those who are good at picking new technological trajectories. Few of them operate with government support.
There are other areas where public support can have a strong influence. Here are three of them.
Fiscal policies that encourage investments in product differentiation, continuous cost reductions, and the use of outside expertise to stimulate in-market innovations, which represent the majority of innovative activities in an economy.
Government leadership in standard-setting. There are lessons to be learned from the battle of the European-led GSM coalition against its two U.S.-based CDMA and TDMA coalitions, which helped European hand-set manufacturers. The willingness of businesses to rally behind a global standard can thus be critical.
Encouraging the development of rich ecosystems through proper cluster strategies, and encouraging cooperation and partnerships, particularly in new markets where ecosystems play critical roles.
Public policy efforts tend to focus on highly visible market-creating innovations. However, not only does our framework suggest a limited role for government in such games, it also suggests a more mundane role for government in in-market innovations, which contribute more to economic growth. There are areas where government could contribute to new market innovations, such as facilitating the adoption of global standards, encouraging global coalitions (as opposed to “Team Canada’s”), and making universities magnets that attract really smart students.
7. These games are serious!
The games framework demystifies innovation, arguing that innovation relies more on proper managerial decisions than on discoveries. In new market races, ideas abound; the challenge is to translate those ideas into structured products and services with enough of a market share to be competitive. However, that journey is not an easy one. A competitive race requires listening to pioneering customers, cajoling potential partners, continually upgrading the products, and, as profits seldom come early, maintaining the support of investors. These are, in essence, what constitute entrepreneurs’ games.
In in-market games, the ideas are more modest, as the innovations comprise improvements at the margin. The challenge is to establish a management system that generates continuous improvements. Once this is secured, the goal is to tap the proper expertise to improve process and costs, and to steer the innovating energies in the proper direction at the proper pace so as to keep up with competitors who are also seeking an edge.
- Brown, M., Wurth, A., et al, (2007). Innovation: Putting Ideas into Action. Houston: APQC.
- Schumpeter, J., (1942). Capitalism, Socialism and Democracy. New York: Harper.
- Christensen, C., (1995) The Innovator’s Dilemma. Boston: Harvard Business School Press.
- The seminal work is by Langlois, Richard N., and Paul L. Robertson. (1992). Networks and Innovation in a Modular System: Lessons from the Microcomputer and Stereo Component Industries, Research Policy 21(4): 297-313. See also Cusumano, M., and Gawer, A. (2003) The Elements of Platform Leadership. MIT Sloan Management Review, 31(1) pp. 51-58.
- Pavitt, K. (1984). Sectoral Patterns of Technical Change: Towards a Taxonomy and a Theory. Research Policy, 13: 343-73.
- Among other attempts, Michael Storper and Robert Salais identified four worlds of innovation activities: information and management of intellectual capital, high-technology-based industries, variety-based manufacturing, and mass-production. (Storper, M. and Salais, R., (1997). Worlds of Production: The Action Frameworks of the Economy. Boston: Harvard University Press.) Michael Best outlined five technology systems: interchangeability, mass-production Fordism, Toyotism, and flexibility. (Best, M., (2001). The New Competition: Institutions of Industrial Restructuring. Boston: Harvard University Press.)
- The estimates are derived from an analysis of the industrial composition of the clusters of firms which we identified in the MINE project. The estimates should be taken as rough indicators only.
- In theoretical terms, the contribution of innovation to economic growth can be defined as the sum of “Total Factor Productivity Growth,” a residual variable whose measurement is quite unsatisfactory, and the new knowledge component embedded in “Capital and Labour Productivity Growth,” which is also difficult to measure.
- Gagnon, M.A. and Lexclin, J., (2008). The Cost of Pushing Pills: A New Estimate of Promotion Expenditures in the US Journal of Public Library of Science Medicine. January.
- Auto Channel, (2007). http://www.theautochannel.com.
- See Gower and Cusumano, op.cit., for an early description of Battles of Architectures.
- Fortune website, ranking the most admired corporations on innovation. P&G was ranked #7 in 2007 and #4 in 2006.