Business Innovation

Business Innovation

In the current economic and social context, innovation is one of the main drivers of territorial development and a determining factor for the success of small, medium and large enterprises, essential for gaining market leadership or recovering a competitive disadvantage. It is one of the words most used in the speeches and agendas of politicians and entrepreneurs, but also one of the most abused. Yes, because innovation is talked about a lot, but too often without knowing its true meaning. This means that many companies, driven by the desire to innovate, throw themselves headlong into the creation of new products and services without defining a clear strategy at the base.

Definition of Innovation

In the business environment, “innovating” means introducing new products, services, processes, business models into the economic system for the first time or improving existing ones. The specificity of the company is related to a concept of risk management.

What Is Innovation? Schumpeter’s Definition

The first to treat the issue of innovation in the strategic perspective of development and competitive advantage was the Austrian economist Joseph Schumpeter who, in 1934, in “Theory of economic development” has defined the concept as “the first introduction into the economic and social system of a new product, service, process, market, production factor or organizational model”. According to the author, therefore, innovation can take different forms and occur during different phases of the life cycle of a company: from the production of goods and services to the search for new sources of supply.

To arrive at this definition, Schumpeter starts from the assumption that economic systems are not static, as the neoclassical economists argued, but dynamic and evolved. In static systems, firms produce the same goods with the same technologies for the same end markets and competition takes place essentially on the price front. In dynamic systems, on the other hand, firms introduce new products, improve existing ones and seek out new markets and this is how they create their competitive advantage. In these latter systems, the figure of the entrepreneur no longer corresponds only to those who carry out economic transactions to make a profit, but to those who take the risk to carry out what Schumpeter himself defines innovative acts.

The author identifies innovation, therefore, as a critical dimension of economic change, with the name of creative destruction. In fact, in dynamic systems, sometimes the innovative process can impact so intensely on some economic sectors that it forces companies to evolve in order not to risk failure. Let’s think, for example, of companies such as Xerox, Polaroid or Blockbuster that have seen their dominant position collapse due to not being able to adapt to new business models or new technologies introduced by competitors.

Types of Innovations

business idea

When you think of the word innovation, the first association that comes to mind is certainly linked to the great inventions of the past, from the light bulb to the first typewriters, to the most recent technologies such as smartphones, tablets and voice assistants. If it is true that product innovation is the most visible and deeply rooted form of innovation in the collective imagination, it is also true that new products and services are not the only existing forms of innovation. There are many authors who for this purpose have tried to create classifications to frame the innovative phenomena.

Among the many, the most famous classification is the one proposed by Schumpeter himself, which identifies four different categories: product, process, organizational and marketing innovations.

The process innovations – intended as improvements of production processes – while not being visible as those of the product may be among the most important sources of competitive advantage for an enterprise. Just think of how the introduction of the assembly line revolutionized the industrial sector in the 19th century or how, in more recent times, social media have fundamentally changed the way businesses communicate and sell their products and services. Organizational innovations, on the other hand, embrace all those changes in the organizational structure of the company with the aim of improving its management, while those of marketing concern the entry into new markets or opening up to new product sectors.

The Process Of Generating Innovation

Although innovation is often described as a spontaneous process, the fruit of the creativity of the individual, the majority of studies show that successful innovators use well-defined management strategies and processes. Schumpeter himself identifies two phases in the innovation generation process – inventive and innovative – to which a third phase of diffusion on the market was subsequently added.

  • Invention: in this phase the company must develop the greatest number of innovative ideas by drawing on internal and external sources of knowledge, whether it is the brilliant mind of the individual entrepreneur (think of the cases of Elon Musk and Steve Jobs ), but also of employees, of individual customers and, why not, also of competitors. Emblematic is the case of Ikea which – as we also read in “Fundamentals of strategic business management” – owes its success to an employee who, unable to bring home a bookcase with his car, dismantled it into several pieces. Once the ideas have been generated, the company’s task is to select the most promising ones and choose which ones to enter the development phase.
  • Innovation: requires the investment of human and financial resources to be able to support all stages of development, from the construction of the prototype to experimentation, up to distribution to the end customer.
  • Diffusion: represents the process by which innovative ideas and products spread among the members of a given social system. This process can be influenced by various factors such as relative advantage, compatibility, observability of results, as well as by the presence of costs to be incurred.

The Evolution of Innovative Processes: From the “Solitary Inventor” to Networks

If in the past innovation was the exclusive prerogative of the R&D departments of individual companies, today it is the networks of innovators who, drawing on knowledge and resources from multiple external and internal players, become the main driver of economic development and technological progress. Rothwell (in ” Towards the Fifth Generation” , 1994), for example, identifies five phases that show how the innovation generation process has evolved over time from a linear approach to one systemic .

If in the past the innovative process was enclosed within the company walls and the inventions jealously guarded by protection mechanisms such as patents and industrial secrets, today there is no more space for the solitary inventor and the marketing trend is to open up towards the external. In fact, the most recent models of innovation start from the premise that the knowledge and resources necessary for the implementation of successful innovations cannot – and must not – reside only within the individual company. Therefore, the collaborative aspects that allow the creation of relationships with external and internal subjects of the company, in an approach defined as open innovation, are emphasized .

Think, for example, of the success of Android which, thanks to its open source software characteristics, has contributed to the development of an entire ecosystem, allowing hundreds of manufacturers to use the operating system for free, test it and even make it better.

Who was Joseph Schumpeter?