The Economics and Governance of Innovation and Institutions - Example

Business   Topic: The Economics and Governance of Innovation and s Lecturer: Presentation: Introduction Innovation originates from the application of creative ideas to develop new products. It is a process that begins with invention whereby the new ideas are generated in relation to the performance targets of business. Products usually have a life cycle that decreases over time and requires enhancement through constant innovations to maintain competitiveness in the market. Different industries exhibit different strengths and weaknesses, opportunities and threats. These have a significant influence on the type of innovation that they are engaged in focusing on product leverage. Innovations are associated with basic and radical transformations in an organization’s operations, and can be triggered by factors such as technological advancement, increased competition and quality standards among other aspects of the external environment. Through innovation, firms are able to capitalize on strengths and to take opportunity over competitors’ weaknesses. This paper discusses the reasons why innovation processes may exhibit different features in different industries. Definitions of Key Terms Innovation- a process of transforming an idea in to a product or service. This is forms the foundation of this paper Consumer decision making process- a process through which consumers make decisions on whether to buy a product or service. It affects acceptance of innovative products Product differentiation- production of distinct products allowing consumers a wide variety of products to choose from. It results from product innovation Features of Innovation in Different Industries Pavit (1984) established that innovation originates from the application of creative ideas to develop marketable products from the existing ones. This process begins through invention whereby the new ideas are generated in relation to the performance targets of business. Products usually have a life cycle that decreases over time and requires enhancement through constant innovations to maintain competitiveness in the market. Richard & Nelson (1991) noted that innovations can be accomplished through development of fresh knowledge or new products in the market that increases a firm’s leverage through increased profits and consumer satisfaction. Customer preferences change with time and therefore continuous assessment of the market is needed. Innovations targeted at consumer satisfaction depend on research that helps managers to determine market dynamics in terms of consumer preferences. Malerba & Orsenigo (1997) present a perspective of constant brand extension to maintain a firm’s performance. Brand extension is a significant strategy used by firms in marketing whereby the name of a popular brand in the market is used to market an innovative brand from the same company. The spin-off, which is the new product, is unlikely to be known by consumers on its own. The brand name under which it is sold may encourage consumers since they associate it with the quality of the original product. Brand extension raises a firm’s profitability since it deals with various products. The attitude of consumers towards a particular brand determines the success of the firm in extending it (Pavit, 1984). The higher the value attached to the brand, the more a firm is likely to succeed in its extension. Moreover, the satisfaction derived from both products matters since the more related the products are in terms of utility, the more consumers are likely to accept the extended brand. Brand extension also revitalizes the diminishing image of the original brand (Nelson, 1991). Consumers in most situations are attracted to an innovative firm whereby they are presented with creative products that they believe are an advancement of the old brand. The new products make the old brand to reappear or become more frequent than before in the market. With the understanding that the new product has an added value, they are likely to purchase more and in the process, the brand maintains its position in the market (Richard & Nelson, 1991). Supplier dominated innovations are mainly focused on establishing unique characteristics that make a product to stand out among other competitors’ products in the market. Such characteristics arouse the interests of consumers, motivating them to have a closer observation. Products are developed with a different structure from that of the dominant products in the market. Competing firms offering the same products ensure that their innovations yield distinct products in terms of size, shape, quantities as well as color such that consumers can recognize at the first glance (Dosi, 1988). Industries that adopt this kind of innovation base their theme on people’s reactions to the product. It is assumed that innovation is successful when consumers like the product at a glance. Such innovations shorten the consumer decision making process, enhancing the desire to acquire the particular product, which on the other hand influences the price. Supplier dominated innovations require adjustment of the physical appearance of the end product without affecting its function to consumers while making it unique from competitors. It is innovation aimed at accomplishment of product differentiation through new production processes where consumers are inspired by the outward show of the product (Malerba & Orsenigo, 1997). For example, Abercrombie and Fitch, Gap Inc. and Tommy Hilfiger Corporation are among the organizations whose innovations are dominated by the suppliers of materials for development of clothes. They are mainly involved in developing unique designs from the acquired materials. The companies compete in the lifestyle industry, offering outfits, garnishes, and personal care products, which are highly recognized by their physical appearances. It is therefore common for such industries to exhibit innovation characteristics that are different from other industries that are focused on functional innovation (Pavitt, 1984). Production intensive innovations are mainly found in the electronic and motor vehicle industries whereby the customers are presented with highly differentiated product resulting from the application of new knowledge acquired through research and development. In other words, it is innovation that is focused on improving the utility of products from a rudimentary form (Nelson, 1991). The consumer is expected to develop a perception that the product will offer greater utility than the products that existed before. Firms therefore innovate to develop new product functions that augment functionality to customers. Most customers seek better quality goods and services than the ones they are used to and hence firms aim at constant improvement of the quality of products to outdo those of competitors, which is achieved through destructive innovation (Dosi, 1988). New products are developed and overshadow the earlier products that eventually become obsolete, which is similar to the Schumpeter Mark 1 illustrated by Maleba & Onsenigo (1997). The characteristics exhibited by firms engaging in innovations have social and cultural implications due to the perception of how to use the products among consumers. For example, the non-programmable computers are deemed obsolete in the modern society. Laptops are becoming the fashionable among contemporary users and computer firms have to maintain innovativeness in terms of product form and usability to attract customers (King et al. 1994). Such firms exhibit different characteristics in innovations compared to those that engage in meaning innovation. Other firms engage in creative accumulation whereby they invest substantially in research development to improve quality of products and services already in the market. They emerge from understanding the need to change the prevailing product quality to match market demand (King et al. 1994). Fundamental changes are applied to enhance product quality and to strengthen firm’s competitiveness in the market. Firms engage in research to identify the gaps that hamper profitability. Research and development also assist in the identification of the strategic responses to competition. In many situations, a firm capitalizes on its strengths and takes opportunity of the competitor’s weaknesses. With this regard, innovation is necessary to keep an organization abreast with the prevailing market circumstances hence a greater capacity to cope with competition. Such innovations have enhanced developments in science based products such as genetic engineering and telecommunications are similar to Schumpeter Mark technology as indicated by Maleba & Onsenigo (1997). Most of the innovations in these industries are based on discovery of existing information that has not been known for a long time. According to Nelson (1991), in a situation where company strategies differ between two firms, innovation differs as well. This is evident when one firm comes up with an innovative product. Competitors must try to imitate the innovation but the result might be unique due to the application of a different strategy. Computer companies such as IBM, Apple, HP, Dell and Acer among others have maintained competitiveness in the Information technology sector and each ensures that innovative processes are different from those of competitors even though some innovations have been imitations of the early innovators. The companies engage in design driven innovations that enhance product usability that are exhibit characteristics that are different from textile industries. The industries compete on the basis of utility and efficiency for consumers, which are the major drivers for innovation (David, 2001). Product designers evaluate whether the new product gives leverage to an organization with regards to competitiveness and whether it can easily be imitated by competitors (King et al. 1994). Firms tend to engage in innovations that evoke self-actualization and dazzling characteristics that draw attention to the user. Apart from product design, innovative marketing strategies may also generate the desired meaning for the product, which creates the desire for consumers to own a particular product. Product innovation is influenced by socio-economic and cultural aspects of the target market. Attractiveness, quality, symbolism and uniqueness are significant in this kind of innovation (Malerba & Orsenigo, 1997). Firms engage in socio-economic and cultural innovations due to socialization practices and the desire for consumers to demonstrate self identity, whereby the tangible characteristics of the products that are well known among consumers are overlooked in favor of the intangible characteristics such as social class, youthfulness, masculinity and ego. The products could have been in existence over a long period of time but construction of innovative meaning make them fit among particular groups in the society (Kogut & Zander, 1992). For example, Milan International Jewelry, Frank Global Jewelry and Absolute Alliance International are among the global leaders in jewelry that engage in innovation to satisfy customers in the various social classes globally. This is innovation where firms differentiate products by changing the original appearance and developing new archetypes. Firms engage in typological innovations to gain competitive advantage by developing unique features of products. According to Hanusch & Pyka (2007), characteristics involved in typological innovation include; trademark, design and comfort. It also entails external environment conditions such as timing and location. Innovation is accomplished through market segmentation and targeting. A segment is identified based on preference and purchasing power. Once a segment is established, a niche is created and firm protects it against competitors (Arthur, 1990). Innovative trademarks are among the product differentiation strategies that enhance customers’ acquaintance with the products and develop brand loyalty. This enables firms to gain competitive advantage over competitors. Brand management is essential as it makes customers to perceive the product as better than that of competitor despite the similarity of the products (Hanusch & Pyka, 2007). This is especially so in the motor vehicle industry whereby firms ensure constant typological innovations resulting in new brands that are functionally similar to the original products but different with regards to design, colour and enhanced comfort (Malerba & Orsenigo, 1997). Typological innovations have been significant in the evolution of the motor vehicle industry. Conclusions Different firms exhibit different characteristics with regards to the features of innovation based on their product lines. The source of innovation can generate a difference in terms of the type of innovations an organization will engage in. Firms in the textile industry may engage in innovations that are different in the motor vehicle industry since the focus is different on the basis of consumer preferences. Consumers in the textile industry mainly prefer beauty characteristics while consumers in the motor vehicle industry prefer differentiated products in terms of design, comfort and trademark. Similarly, firms in the ICT industry engage in innovation that is different from those in the jewelry industry. Generally, firms in all the industry categories exhibit different innovation characteristics on the basis of the type of innovation they engage in. References Arthur, B. W. (1990), “Positive Feedbacks in the Economy” Scientific American, Vol. pp. 80-85 David, P.A. (2001), “Clio and the Economics of QWERTY”, Journal of Economic History, Vol. 75(2), pp. 332-337 Dosi, G. (1988), “Sources, Procedures, and Microeconomic Effects of Innovation”, Journal of Economic Literature, Vol. 26 pp. 1120-71 Hanusch, H. & Pyka, A. (2007), Technological Paradigms and Trajectories, Cheltenham: Edward Elgar Publishing King, J. L., Gurbaxani, V., Kraemer, K.L. McFarlan, F. W., Raman, K. S. & Yap, C. S. (1994), “Institutional Factors in Information Technology Innovation”, Information Systems Research, Vol. 5(2), pp.139-163 Kogut, B. & Zander, U. (1992), Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology”, Organization Science, Vol. 3(3), pp. 383-397 Malerba, F. and Orsenigo, L. (1997), “Technological regimes and sectoral patterns of innovative activities”, Industrial and Corporate Change, 6(1), pp. 83-100) Pavit, K. (1984), “Sectoral Patterns of Technical Change: Towards a Taxonomy and a Theory”, Research Policy Vol. 13 pp. 343-373 Richard, R. & Nelson, R. R (1991), “how do Firms Differ and how does it Matter?” Strategic Management Journal, , Vol. 12 pp. 61-74 Read More