60 TECHNOLOGICAL INNOVATION

r Investing in new areas of technology somewhat distant from current practice.

r Building networks and alliances from outside the base industry.
r Being aware of new patterns of customer behaviour.
r Jettisoning old habits or ‘ways of doing things’ when required.

Although these practices and strategies may help firms avoid the fate of Polaroid, there
is no recipe for survival in the face of great technological or market ferment. Some firms
may succeed in changing their nature and culture to respond to these situations. Many
firms will try to change, then fail and eventually decline. A few firms will not even try
and choose death over struggle.

The changing nature of the innovation process

The innovation process is the way firms marshall their resources to take advantage of
scientific, technological, and market opportunities. Over the last twenty-five years or so
analysts have developed a number of approaches that consider the innovation process,
and these can be categorized into five generations of thinking (Rothwell 1992).
The first, prevalent during the 1950s and 1960s, was the research-push or first-
generation approach (see Fig. 3.1). This approach assumes that innovation is a linear
process, beginning with scientific discovery, passing through invention, engineering, and
manufacturing activities, and ending with the marketing of a new product or process.
Associated with the US government’s chief science policy advisor, Vannevar Bush, in his
influential book The Endless Frontier, the approach was a legacy of the Second World
War, where the power of science was demonstrated in the form of the nuclear bomb, and
it was assumed that massive scientific investments would produce dramatic improve-
ments in the energy sector, defence industries, and medicine. Until the 1970s, many

First-generation innovation process…

(Research push)

Science and
technology Market

Research Development Manufacture Marketing Sales

Figure 3.1. First-generation innovation process

 TECHNOLOGICAL INNOVATION 61

Second-generation innovation process…

(Demand pull)

Science and Market

technology

Market Research &

Manufacture Sales
demand development

Figure 3.2. Second-generation innovation process

government policy-makers and managers of major industrial companies had accepted

the view that a new product or process is the result of discoveries in basic science,
brought to the attention of the parent organization by its research staff for possible
commercial application. The management challenge in this process is simple: invest
more resources in R & D. In this model there are no forms of feedback. The model
was rapidly shown to apply only to science-based industries.
From the early to mid-1960s a second linear model of innovation was adopted by pub-
lic policy-makers and industrial managers in advanced capitalist economies. This was
the demand-pull or second-generation model (see Fig. 3.2). In this model, innovations
derive from a perceived demand, which influences the direction and rate of technology
development. Kamien and Schwartz (1975: 35) argue that in this model innovations are
induced by the departments that deal directly with customers, who indicate problems
with a design or suggest possible new areas for investigation. The solutions to any
problems raised are provided by research staff. To some extent this approach reflected the
corporate practices of the time, which emphasized planning and saw the creation of large
centralized planning departments, believed to be able to predict future requirements.
The rise of social science subjects, such as human and economic geography and the
sociology of consumption, generated new ideas about markets and demand, informing
and advising governments, which developed ‘predict and provide’ policies. It was also a
time of growing consumer awareness and movements, such as those demanding greater
automobile safety. The management challenge of this process is relatively simple: invest
in marketing.
Both linear models of innovations are oversimplified. Rothwell (1992), for example,
showed that at an industry-wide level the importance of research-push and demand-
pull may vary during different phases in the innovation process, and also vary across
sectors.
62 TECHNOLOGICAL INNOVATION

Third-generation innovation process…

(Coupling)

Research
Development
Design
Prototyping
Science and Testing
Operations Market
technology Marketing
Sales
Service

Communications &
feedback loops

Figure 3.3. Third-generation innovation process

The third model, the coupling or third-generation model, (see Fig. 3.3) integrating
both research-push and demand-pull, was centred on an interactive process where
innovation was regarded as a ‘logically sequential, though not necessarily continuous
process’ (Rothwell and Zegveld 1985: 50). The emphasis in this model is on the feedback
effects between the downstream and upstream phases of the earlier linear models. The
stages in the process are seen as separate but interactive. The management challenge
of this process involves significant investments in cross-organizational communications
and integration.
New models (the ‘fourth- and fifth-generation’ innovation models, as Rothwell called
them) incorporate the feedback processes operating within and between firms. The high
level of integration between various elements of the firm in innovation is captured in
the fourth-generation, collaborative, or ‘chain-linked model’ of Kline and Rosenberg
(1986), which shows the complex iterations, feedback loops, and interrelationships
among marketing, R & D, manufacturing, and distribution in the innovation process
(see Fig. 3.4). This process reflected growing understanding about the way innovation
involved more than broad-based input from the science base and the market, but close
relationships with key customers and suppliers. There was increased appreciation of the
internal organizational practices that encouraged innovation, especially the move away
from sequential departmental involvement towards a more fluid, inclusive, and process-
based approach. The importance of technology in assisting the innovation process, by
having common CAD/CAM (computer-aided manufacturing) platforms for example
(see Chapter 8), was identified. Based on experiences with government policies and
programmes encouraging collaborative R & D, such as Sematech in the USA, ESPRIT
in Europe, and the Fifth Generation Computer Systems (FGCS) programme in Japan,
the process recognizes the role that can be played by alliances with other firms and
competitors. The management challenges and required resource commitments become
significantly more widespread.
The fifth-generation innovation process includes the growing strategic and techno-
logical integration between different organizations inside and outside the firm, the way
 TECHNOLOGICAL INNOVATION 63

Fourth-generation innovation process…

(Collaborative)

Suppliers

Horizontal
Research
Research
CAD/CAM,
Development Intranets Alliances
Design
Prototyping
Testing
Cross Manufacturing
Science and functional Marketing
teams, Sales Market
technology Service
Process-based
organization

Customers

Figure 3.4. Fourth-generation innovation process

these are being enhanced by the ‘automation’ of the innovation process and the use of
new organizational techniques, such as concurrent rather than sequential development
(see Fig. 3.5). It moves away from the ‘silos’ of functional divisions towards organization
according with business processes. This model represents an idealized approach to best
practice and will be considered in some depth.

The fifth-generation innovation process

While the analytical origins of the fifth-generation innovation process differs from
the macro-perspective of the fifth wave of technological development (discussed in

Fifth-generation innovation process…

(Strategic and integrated)

Process driven by:

Innovation strategy
Science and
Market
technology High-level organizational
and technological integration

Strategic and technological integration

with customers, suppliers, innovation
communities and networks

Figure 3.5. Fifth-generation innovation process

64 TECHNOLOGICAL INNOVATION

Chapter 2), the challenges for management are similar, particularly with respect to
dealing with high levels of risk and uncertainty. The major aspects of the fifth-generation
innovation process are outlined in Fig. 3.5. Within the firm we see increasing concern
with the organizational forms and practices and skill balances that enable the maxi-
mum flexibility and responsiveness to deal with unpredictable and turbulent markets.
Research, development, design, and engineering take place in concurrent iterations, sup-
ported by ‘innovation technology’ in a fluid model called ‘Think, Play, Do’ (Dodgson,
Gann, and Salter 2005; see Box 3.3). Some of these issues have already been discussed
in relation to the new management paradigm, and others, like lean thinking, will be
discussed in Chapter 8. The value-creating activities of the firm are linked with suppliers
and customers, and all the technological activities in the firm are directed by increasingly
coherent and effective innovation strategies (see Chapter 4). Two important features
of the fifth-generation innovation process are the increasing extent of strategy and
technology integration.
Strategic integration between firms is increasingly global and occurs across techno-
logical, market, and financial areas. When Boeing designed its 777 aircraft, it involved
its customers and suppliers closely. Boeing created what came to be known as the
‘Gang of Eight’, comprising eight international airline customers who met over a twelve-
month period to help specify the requirements for the new aircraft. United Airlines,
which decided to purchase thirty-four of the new aeroplanes before they had even been
designed, was intimately involved in its configuration (Sabbagh 1996). Boeing also had
close involvement from suppliers. Important components, such as major parts of the
fuselage and the rudder, were subcontracted to Australian and Japanese firms. Engine
manufacturers, such as Pratt and Whitney, designed their engines in close conjunction
with Boeing.
Since 1995, Ford has operated a Technology/Product Review Center in Dearborn,
Michigan. This is a forum for suppliers to demonstrate their technological expertise
to Ford engineers. These ‘supplier showcases’ typically last two days and have been
replicated in the UK and Germany. A major problem for Ford has been integrating its
suppliers’ technology, and these centres are designed to overcome these problems by
giving early feedback on suppliers’ technology developments.
Technological integration occurs in various forms. An example would be the hybrid
car, running on both electricity and petrol, and involving the merger of electrical and
mechanical technologies. Kodama (1995) discusses the prevalence of ‘technological
fusion’. Thus, mechatronics involved the fusion of mechanical technology with electrical
and material technologies, optoelectronics involves the fusion of glass and photonic
technology with cable and electronic device technologies, and biotechnology involves
the fusion of, amongst other fields, biology, chemistry, and engineering. Kodama argues
that fusion is more than a combination of different technologies. It is the creation
of a new technology where the whole is greater than the sum of the parts. Each
fusion ‘creates new markets and new growth opportunities in the innovation’ (Kodama
 TECHNOLOGICAL INNOVATION 65

1995: 203). There are many contemporary examples of new technologies emerging
from the combination of different knowledge bases, such as bioinformatics and
nanomaterials.
Another form of technological integration involves technologies that themselves
enable the integration of various components of the innovation process. These have been
described as a particular category of technology: innovation technology (see Box 3.3).
This increased strategic and technological integration often aims to improve competi-
tiveness through the timely delivery of goods and services. Time-based strategies of rapid
speed, such as ‘first-to-market’, are growing in importance (see the discussion on ‘first-
mover advantage’ in Chapter 4). When Sony developed the camcorder, it believed that it
only had a six-month lead on its competitors. One of Toshiba’s laptop computer manu-
facturing plants introduces a new model to the manufacturing line every two weeks. For
two years, Nokia introduces a new mobile phone every month. Speed is also evident in
the pharmaceutical industry, where ‘first-to-patent’ is of crucial competitive importance,
and the speed of the development process can provide distinct advantages. In online
services, such as Amazon and YouTube, being first-to-market assists the development of
brand recognition. To reduce the time it takes to develop new products, digital product
data must be presented in such a way that they can be used effectively by all the different
departments of the firm. Software companies, such as SAP, offer enterprise resource
planning (ERP) systems that help integrate financial data with design, manufacturing,
and inventory data (see Chapter 8). Product data management (PDM) systems can be
part of ERP systems. PDM stores all the information and data about products in an
easily available format, allowing continual changes to be made in a controlled manner.
Although very complex, when fully operational ERP enables each department in a firm
to have access to the information it requires in a format that is understandable.
All our case-study companies are affected by aspects of the fifth-generation innovation
process. The biotechnology firm has to be particularly closely integrated with its major
partner, with whom its future strategy is entwined. The Taiwanese machine tool firm
and the Japanese R & D laboratory need close affiliations with overseas research labo-
ratories. The British pump firm requires close strategic integration with others involved
in the design and manufacture of its systems. The Indian software company aims to
act as a systems integrator, coordinating inputs from suppliers to meet customer needs.
The Mexican supplier needs to work hand-in-hand with its US customers. High levels
of technological integration are required of all the firms. The biotech firm is using
a number of automated systems for gene-sequencing and this enables the electronic
‘design’ of molecules. The pump firm has a CAD/CAM system linked to its suppliers and
customers. The machine tool company uses a range of computerized design databases,
enabling it to store all information on existing products and test results and electronic
prototyping of new parts. The Japanese laboratory uses its intranet and a wide range
of Internet-based communications to link with its internal customers and external sci-
entific partners. The Indian software company uses computerized project management
66 TECHNOLOGICAL INNOVATION

Box 3.3 Innovation technology

Technology is being used to improve the speed and efficiency of innovation in new ways, providing
considerable challenges and opportunities for managers. Companies such as Ricardo and Dassault are
using virtual-reality suites to help customers design next-generation products. GSK is using simulation
and modelling tools to substantially improve the speed of new drug design. E-science, or Grid com-
puting, is building new communities of scientists and researchers in Rolls Royce and other companies,
helping them to manage collaborative projects. Wal-Mart uses sophisticated data-mining technology to
help understand its customers and manage its supply chain. Firms in industries as diverse as Formula
1 racing, and fashion, are using virtual and rapid prototyping technology to improve the speed of
innovation. Together these technologies comprise a new category of technology, what Dodgson, Gann,
and Salter (2005) call ‘innovation technology’ (IvT). IvT is being used to make customers on the
one hand and scientific researchers on the other more central in decisions about new products and
services.
Many IvTs are becoming ubiquitous (Thomke 2002; Tuomi 2002; Schrage 2000). There is evidence of
extensive use of IvT in a wide range of sectors, from pharmaceuticals to the mining and construction
industries and across many different types of organizations. IvT functions alongside Information and
Communication Technologies (ICT) and technologies used in operations and manufacturing, such as
automated materials handing.
Pharmaceutical companies are increasingly using IvT in fields such as gene-sequencing and com-
binatorial chemistry. Pfizer has developed automated techniques for rapid screening and dispensing
of thousands of chemicals using robots. GM uses what it calls ‘math-based design and engineering’,
which provides digital representations of vehicles for design, engineering, and testing. This system is
used routinely in areas such as:
r 3-D simulations for modelling vehicle structures, crashworthiness, and safety restraint.
r Computational fluid dynamics codes for designing and analysing engine combustion systems,
transmissions, interior climate-control systems, and vehicle aerodynamics.
r High-level systems for automated design of integrated chips and electromechanical components.
r Virtual-reality prototypes for vehicle exteriors, interiors, components, and production tooling.

Use of these systems has led to developments in stability control systems, electronically enhanced
steering, continuously variable suspensions and engine controls, with virtual-reality prototyping reduc-
ing the need for costly physical models. IvT allows firms to experiment cheaply and ‘fail often
and early’. IvT is also very important in the design of large, complex systems, such as utilities,
airport infrastructures, communications systems, where it is not usually feasible to test full-scale
prototypes.
One of the most important aspects of IvT is how it assists the representation and visualization of
knowledge and its communication across different domains, disciplines, professions, and ‘communities
of practice’. By way of illustration, the use of IvT in the design of a new building makes complex data,
information, perspectives, and preferences from diverse groups visible and comprehensible. Virtual
representation can assist architects in their visualization of the eventual design and help to clarify clients’
expectations by giving them a good understanding of what a building will look and feel like before work
begins; it informs contractors and builders of specifications and requirements, and enables regulators,
such as fire inspectors, to confidently assess whether buildings are likely to meet regulatory requirements.
IvT can allow various players in the innovation process, suppliers and users, contractors and subcontrac-
tors, systems integrators, and component producers, to collaborate more effectively in the delivery of
new products and services. The adoption of IvT is leading many organizations to reconsider the way
they conduct and manage innovative activities. They provide a useful aid to the digital integration of the
innovation process.
It is possible to think of IvTs as the new ‘capital goods’ of innovation. It could be argued that their
effective integration with other technologies will become one of the critical issues for technology-based
competitiveness in the future. (For a discussion on the way IvT are used in architectural design, see Box
7.16.)
 TECHNOLOGICAL INNOVATION 67

systems and software-writing tools. The Mexican automotive company relies on

Internet-based intermediaries for developing and commercializing its components.
The external orientation of the case-study companies, and the extensive innovation
communities and networks described in Chapter 5 are features of what is increasingly
known as ‘open innovation’. This model of innovation, and the question of how open
firms should be, are examined in Box 3.4.

Box 3.4 Open innovation

Researchers have suggested that firms need to adopt more plastic and porous models of innovation by
being open to external sources of ideas and routes to market and engage with a larger number and wider
range of collaborators. Chesbrough (2003) refers to this as the shift from ‘closed’ to ‘open’ innovation.
This perspective argues that the innovation process has become increasingly complex and to innovate
firms must involve a greater number of actors more closely and intensively to realize the commercial
potential of their ideas. This research is often highly prescriptive and is based on case studies of leading
practices in firms such as Lucent, Intel, 3Com, IBM, and P&G (Dahlander and Gann 2007; Dodgson,
Gann, and Salter 2006; Huston and Sakkab 2006).
The basic principles put forward by Chesbrough are derived from a critique of the dominant
twentieth-century model of corporate innovation where most activities associated with new product
and service development were deemed to be within the sphere of internal R & D. Chesbrough describes
this model as the traditional closed innovation approach, underpinned by six main principles:

1. An assumption that because the firm invests in its own R & D it has been able to recruit appropri-
ately qualified people to carry out innovation: ‘the smart people all work for us’.
2. To profit from R & D, firms must invent, develop, and sell the product or service by themselves.
3. If the firm’s R & D department is able to discover, or invent, a new idea, it will be in the best
position to get it to market first.
4. Bringing a product or service to market before competitors provides the best return on investment
in innovation.
5. Firms that come up with more and better ideas will beat their competitors.
6. Firms should control their IP themselves and prevent their competitors from profiting from it.

The open innovation approach challenges these principles. Open innovation is characterized by more
fluid interactions between internal and external innovation activities, in which ideas, people, and
resources flow in, around, and out of organizations. In this approach, the boundaries between internal
and external activities and the firm’s general operating environment are more porous, and it is therefore
important to extract as much knowledge from the external environment as possible (Chesbrough 2006;
Chesbrough, Vanhaverbeke, and West 2006). The following six points encapsulate the open innovation
approach:

1. It is not necessarily possible to employ all the best people in the firm’s R & D and innovation
centres, and there are many talented people with good ideas outside the firm, who could provide
useful inputs. The business needs to find a way of connecting with them.
2. The R & D carried out by other organizations can create value from which the firm can profit. It
needs to carry out R & D internally to create the absorptive capacity to capture some of the benefits
from ideas generated externally (Cohen and Levinthal 1990).
3. The firm does not need to originate ideas from its own research to profit from new ideas if it makes
the right connections to networks of innovators.
4. Building a better business model to exploit new ideas will provide a better return than focusing
purely on first-mover advantage (see Chapter 4).
5. The firm will succeed if it can improve the ways it uses ideas generated internally across the whole
organization, not just in R & D or design departments.
68 TECHNOLOGICAL INNOVATION

6. Firms that are successful open innovators are able to profit from the ways other firms use their IP,
and also to buy-in IP from external sources to advance their business objectives.
Since the publication of Chesbrough’s Open Innovation in 2003, these ideas have become influential
amongst innovation managers in many businesses (Christensen, Olesen and Kjær 2005). P&G has
changed its strategy from one focused on R & D to an approach known as ‘Connect and Develop’ (C&D)
(see Box 6.1). Philips has renamed its R & D department the ‘Open Innovation Unit’. Box 6.2 describes
how GSK has created a ‘Centre of Excellence in External Drug Discovery’, using an open innovation
model. The concept of open innovation has grown in importance across businesses in many sectors and
amongst policy-makers with responsibility for encouraging and supporting innovation in governments,
for example, by promoting an increase in the amount of collaboration between universities and industry
(Bessant and Venables 2007).
One of the problems with the open innovation concept is that whilst it has become a popular term, the
idea of systematically using external sources of innovation is not particularly new. Josiah Wedgewood,
the Staffordshire potter, organized collaborative technological networks and sought inputs from lead
customers in the 1700s. Hargadon (2003) shows how Edison recombined ideas, drawing on a network
of innovators, financiers, suppliers, and distributors in the development and commercialization of the
electric light bulb towards the end of the 1900s. This case study and many others show that there
has always been a degree of openness in innovation processes. The contemporary environment has
one important additional factor supporting the open innovation approach: innovation technologies
(Dodgson, Gann, and Salter 2005, see Box 3.3). These include a range of third-party brokering services
to enable exchange of IP (see Box 9.6), and e-Science, which enables firms and research organizations
to participate in collaborative R & D. The questions that innovation managers need to resolve are
how much should they engage in open innovation, in what ways, and how should these be managed
effectively. Dahlander and Gann (2007) argue that there are at least three types of openness that need to
be considered:
1. Openness in appropriability regimes and the different degrees of formal and informal protection
of IP (see Chapter 9).
2. Openness in the number and type of sources of external ideas for innovation.
3. The extent to which firms rely on informal and formal relationships with other actors in the
generation, development, and commercialization of new ideas.

Can firms be too open?

Innovation managers need to recognize the advantages and limitations of engaging in development
and commercialization of ideas across traditional boundaries. There is controversy in the innovation
literature over how open firms should be to external partners in their search for new innovations and
in developing new routes to market (Dahlander and Gann 2007; Helfat 2006; Chesbrough 2006). There
are times when openness may turn from virtue to vice. Laursen and Salter (2006) found there were
decreasing returns to openness. Firms that were too open had lower performance than those able to
balance openness with internal activities. There are several reasons why firms need to be careful in
opening themselves up to external partners. These include:
r The danger of theft: openness can lead to unplanned disclosures, and secrecy is often an effective
method to protect innovative ideas (see Chapter 9). Ensuring the firm has sufficient means to
protect its ideas is often a prerequisite to openness (Laursen and Salter 2005).
r Managerial time demands and transaction costs associated with managing a wide range of different
partners can be high and may distract firms from internal activities.
r Over-reliance on external parties may increase the risk and uncertainty of product development
processes.
r Negotiating and managing many external relationships can slow down the innovation process by
increasing coordination costs.
These factors, together with the need to develop new business models, may lead to misallocation of
managerial attention towards building external relationships, to the detriment of internal activities, and
lead to a reduction in innovative performance. Managers need to balance the requirement to be open to
external actors with the need to commercialize their ideas using their own resources.