Innovation What is it?

Innovation The process of taking a creative idea and turning it into a product or process that can be sold.

Types of Innovation Product Innovation - producing a new good or new service

Types of Innovation Process Innovation new means of producing, selling and supporting goods and services Examples: Direct Sales Model Hospital Room Registration Processes (computer-based patient records)

Types of Innovation Administrative innovation - new ways of organizing and/or handling the organizational tasks firms use to complete their work Examples: Changes in organizational structure, the use of technology to support business processes (Enterprise Resource Planning Systems)

Three Ways to Innovate Internal Innovation – Using a firm’s own resources and capabilities to innovate (e.g., Novartis allocates at least 15% of its sales to R&D) Cooperation – When two or more firms form and agreement to join some of their resources and capabilities to innovate (Merck partnered with more than 100 universities and clinical centers to develop the human papillomavirus (HPV) vaccine) Acquisition – Buying ownership of another firm’s innovations or innovation capabilities (Disney’s acquisition of Pixar)

Research and Development Basic Research – Research designed to gain a comprehensive knowledge or understanding of the subject without specific applications in mind. Applied Research – Research designed to gain knowledge or understanding to meet a specific, recognized need. Development – The systematic use of knowledge or understanding gained from research directed toward the production of useful materials, devices systems or methods

Top Global R&D Spenders (2004) Microsoft Pfizer Ford DaimlerChrysler Toyota General Motors Siemens Matsushita Electric IBM Johnson and Johnson

Spend More and Profit Will Come?

Study Findings (Booz and Hamilton, 2005) Study of 1,000 publicly held companies around the world revealed: Money doesn’t buy results (There is no relationship between R&D spending and the primary measures of firm performance (e.g., growth, profitability and shareholder return)) Size Matters: Scale can lead to an advantage Spending more does not necessarily help, but spending too little will hurt Appropriate Innovation Processes are more important than innovation spending Inter-functional/organizational collaboration is key to success

Firm Performance Product Innovation Process Innovation Administrative Not necessarily

Example of an Innovation Process IHOP’s R&D Director (or one of the staff members) thinks of a product idea and approaches the company with the proposal IHOP personnel finds at least 100 screeners (actual customers) to evaluate the idea (i.e., Would they like to see it on the menu? Will it blend in with other items on the menu?) R&D personnel do a cost benefit analysis on the proposed item. A different group of screeners are asked to sample the product and react to how the item is presented on the menu Those items that survive are test-marketing within a limited Number of restaurants and more data is gathered from actual Guests.