Management Engineering - Leadership & Innovation

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Complete course

1 Leadership and Innovation Teachers: Mariano Corso Luca Gastaldi 2 3 1. Leadership and Innovation Relationship We must study leadership and innovation together, since they are two faces of the same coin. Why innovation? Because if we don’t innovate, we cannot be forever in the market. Running operations is a routinary process, but then there are innovation projects, which are very different because they start with the objective of dying since they have a beginning and an end. The real difficulty is not the process itself, but the point is to make the outcome of the project the new operation, so the overlapping is the tricky point. Change management process is very challenging and difficult to standardize: for years managers had to choose between running operations and developing innovative processes. Today the pace of innovation process is increasing drastically everyday: innovation and change are seen as an everybody and everyday challenge. Therefore, companies must behave in an ambidextrous way. Today, we are living in the Fourth Industrial Revolution, characterized by these new characteristics: • Pace: time available before the full impact of innovation is shorter and shorter. • Pervasiveness: innovation is not something episodic or sporadic but rather it is an everyday and everybody business. • Openness: sources of innovation are more and more outside the company boundaries with actors that in many cases are non-contractible by the company. Why leadership? Because to promote and realize innovation nowadays being a good manager is not enough, because innovation is not something that can be done in R&D anymore, but it is an act of inspiring people, designing new services and new communication and, to do it, we need to be a leader. Indeed: A manager is someone who gets things done through other people in organisations. A leader is someone who is able to influence a group of followers toward the achievement of a vision or goals. Engaging followers is very important because followers are the ones who recognize leadership in the leader. 4 To go more in dept with the differences between managers and leaders, there is this metaphor: Then Covid-19 arrived, with the following effects on innovation investments by some Italian companies: In the future we will have less managers with a different kind of skills from the ones they used to have for many years. Particularly, there are four metaphors for a manager valuable for the tomorrow organization: • Being an Architect to develop bridges of meanings in the organization and between the organization and the environment in which the company is. • Being a Personal Trainer to be able to have a personal relationship with each employee, to help him to develop his strengths and performances. • Being a Broker in terms of sharing flexibility, because we don’t have only to give flexibility to people letting them to be autonomous, but because we want also to have this flexibility back. • Being an Orchestrator to deal with diversity. In the more traditional kind of organizational model (mechanic organization), we think that a leader is someone in the centre or top of the organization; however a real leadership model should be based on a more organic organizational model. Therefore, leaders need to know how to get the most out of people, and teamwork, cross-cultural, communication, conflict handling and negotiation skills are needed early and often in today’s organizations. According to Peter Drucker: “Management is doing things right; leadership is doing the right things” . 5 2. Innovation Strategies A company has two choices: innovate or perish. Considering the most important 250 firms in the Down Jones Index in 1900, only one firm survived till 2000 and it was General Electrics: Indeed, according to Miko Kosonen (Former CIO of Nokia): “Most companies die not because they do the wrong things, but because they keep doing what used to be the right things for too long” . So, basically, most companies die because they do not innovate. Innovation needs the right attitude to change. For example, the beginning of the end for Nokia was not considering Apple because at the time it was a niche in the computer industry. However, it is not the hardware to make the difference, but how Apple developed a perfect ecosystem. Then, also Microsoft did it. Like it happens in most of the cases, Nokia did not understand this innovation because it was a successful company with a successful product, so this signed the beginning of Nokia’s failure in mobile industry. Innovation is about bringing something new. It could either be about creating something new or improving something already existing. An innovative company is a company that plays with technologies and develops new products or services. According to Oslo Manual: “An Innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations” . So, it doesn’t mean that something has to be new, because it can also be an improvement of something already existing. Then, innovation must be implemented in the real world, creating value and progress. Coca Cola has always been an innovative company along the years. The innovations made by Coca Cola were about the production system and the package (a more resistant and lighter package), the shape of the Coca Cola bottle as a powerful way of communication, and the distribution system, distributing the product to the army during the war and during the Olympic Games, since it was one of the main sponsors. Therefore, now Coca Cola has one of the highest brand awareness in the world, because it is extremely good in communication. The most valuable asset is still nowadays the brand and not the formula. Historical definitions of innovation are: • According to Schumpeter: “Innovation is the implementation of new combinations. Innovation is a source of competitive advantage and the main source of progress through a process of creative destruction” . • According to Freeman: “Innovation is different from Invention! Invention is an idea, a sketch or a model for a new or improved device, product, process or system. Innovation (in the economic sense) is accomplished only with the first commercial transaction involving the new product, process” . So, there is not innovation if it is not sold into the market; in this case we have the invention, which is something valuable, but it is not an innovation. 6 • According to managerial viewpoint: “Innovation is to shift the trade-off among performance to better fulfil existing needs or to generate new performance dimensions for new needs” . Inventors vs Innovators Meucci invented the first prototype of phone; the telephone itself was not invented by Bell, but he was the innovator, while Meucci was the inventor. Bell took the idea from Meucci and brought it into the market, so Bell was the innovator. The inventor of vacuum cleaner was not Hoover, but his brother-in-law that invented and patented it as a suction cleaner, while Hoover was the innovator changing the name in vacuum cleaner and commercializing it. Hatcher developed RC cola (inventor), so the first cola sold in cans instead of bottles; it was not RC Cola taking advantage of this invention but mainly Pepsi and Coca Cola, the innovators. So, it is not compulsory being an inventor for being an innovator. For instance, Apple has other companies creating components and Apple knows how to put them together, so these companies are the inventors, while Apples that combines these already existing components together is the innovator. Many times, the innovators are nothing more than very smart technology/solution brokers: • Technology Brokers. In 1866 Mr Sholes (a mechanical engineer form Milwaukee) created the first typewriter by combining (brokering) existing technologies: the forward movement (one step for each pressed key) was taken from watches, the back movement leverage was taken from sewing machines, the keyboard was taken from telegraphs, and the hammer mechanical movements for printing each letter was taken from pianoforte. So, he did not create anything, but he found out the way to put parts together. Innovators are very good in spotting things around, putting them together in different ways to fulfil the needs. They recombine them in a very smart answer to the existing needs, so they are technology brokers. • Solution Brokers. United Colours of Benetton became famous when it changed the way of designing sweaters, enabling personalization. They started to sell a huge quantity of different colours, more than 30 for each sweater. The problem was related to the safety stocks. To overcome this problem, they changed the production process, creating the sweater and only after deciding the colours based on the market requests. So, there is a postponement of the moment in which the product is characterized and, thanks to this, it is possible to have more freedom to reduce the number of sweaters into the safety stocks. More than 20 years later, Dell did the same thing. On Apple website, it is possible to choose among a fixed number of options, while on Dell website, it is possible to customize the computer because in the 7 warehouses they have the components and not the final products. Dell delays the transformation in the final product by postponing. Therefore, to work on innovation, it is necessary to look around recognizing that even if the industry is different (computer and clothes), the problem may be the same and the solution transferred. It is necessary to decompose the problem, understanding the key problem. By abstracting the problem, it is possible to find solutions coming from other industries, broking the solution. The innovator is able to learn and replicate the innovation process, so he is able to learn from failure and develop something new. Apple has not always been successful, for instance it had an important invention Apple II, even if Apple III was much better in terms of innovation with better technologies, but it was a commercial disaster. It was a disaster because of a wrong process to create it: it was paid by customers but delivered only a year after. Due to this, Apple went near bankruptcy. However, learning from this mistake, then Jobs created Macintosh, one of the greatest success of Apple which became the second more sold computer in the history of computers. Product Service System Product Service System is a system composed by products, services and communication, all designed together. Nowadays companies hardly sell products or services, but normally a customer buys a bundle of them. The coffee machine is a device but there is also a shopping online. The product innovation of Nespresso is almost nothing; what the company did was to create a new kind of experience sponsored by communication. Particularly, Nespresso made a mass product a luxury one; it is mainly a communication kind of innovation, because coffee used to be a commodity and Nespresso redesigned the experience. The iPod was something that had to stay in the pocket. Apple had to find a way to make the product communicating itself. The wires of the headphones were the only things visible: they made them white so that it was possible to notice them. In this way, a product not seen is communicated only through the wires. Nespresso did something similar using the capsules. Another example is iPhone (product) with the possibility to personalize it downloading apps (services), sponsored by a lot of advertising on how its photo camera is good for example (communication). Therefore, product, service and communication cannot be innovated separately, but they need to be innovated together. Types of innovations A general framework to classify innovation is people (who), meaning (why) and solution (how). People are of paramount importance as innovation is done to improve people’s lives. Meaning means to change the why. The thermostat is used to manage the temperature in an interior. It ranges from 20€ to 300€. There is a strong correlation between the price and the time spent to use and 8 program it. So, there are now many new options for the thermostat. The company Nest created the thermostat Nest, that uses artificial intelligence and reduces visual information. The system learns the desired temperature and every time it detects that someone is in the house, it raises the temperature. Just by using it, after one week the system can reduce the cost for the heating system of 20% in one year. Nest did not create something new but told the opposite thing: the traditional thermostat (first picture) is bought to have the power to control, while Nest (second picture) is bought to have not a relationship with the thermostat. So, it is clear that Nest innovated the meaning, changing the reasons why to buy a thermostat. Moreover, Nest started to create an ecosystem, because innovations can be combined. Jawbone, for instance, is a wearable to study the sleeping. During the night, it can detect the sleep pattern understanding the right temperature. Jawbone and Nest communicate to create the perfect environment. Nest also did a partnership with Mercedes-Benz: the connection with the car identifies if someone is coming home, starting to increase the temperature. So, the product is not bought because it does something better than others, but the reason why it is bought is the opposite and for this reason Google decided to buy Nest for 3.2 billion dollars. Artemide is one of the most popular Italian companies related to lights. Artemide used to produce icons lamps. It introduced in the market the most famous lamps starting from the 60s. Around the year 2000, it had a problem: they were good in leveraging design, but it recognized that currently design was no more source of competitive advantage, so Artemide needed to change its value proposition. To be recognizable and to maintain the competitive advantage, Artemide decided to stop selling lamps and start selling lights. So, the company created a set of lamps that can create an environment, creating the right chromatography environment matching the mood of the person. To do this, Artemide started scientific researches on how human brain reacts according to the light environment. In the office, it creates always the perfect system of lights to make the brain work better for example. So, the company did not change the product, but radically changed the company itself, becoming a lighting company. This is a change of why: the lamp in the past was bought for the design, while today the shape of a lamp is not important anymore, but only the light is important. Talking about meaning changing, it is generally about changing the reason why a product is bought or the meaning of the company itself. 9 Similar design-driven innovations are the ones by Alessi following fiction (pictures on the left) and Kartel worm (picture on the right): Solution means to change the how. The fan is normally bought to have fresh air, but normally it is not a nice tool. However, one company created a radical new fan, completely changing the way to think at it. Once, a fan used to be on the ceiling. Creating the portable one is an incremental innovation. Normally, by doing an incremental innovation, there is not the innovation either of the architecture or of the components. There are the same mechanics, with the central axes and the blades connected to it, with the same physical effect. With the new solution, a radical innovation, there is a different technology that do not even leverage the same physical effect. They are two completely different concepts. Particularly, to classify radical and incremental innovation, it is necessary to take into account: • Functions: we have to ask ourselves if the product is enabling new functions. For instance, the first smartphone allows a new function, which is the possibility of talking in mobility, which was a radical innovation. • Performances: the new product can do the same things of the previous products, but in a better way. For instance, at the beginning, there was a modem connecting the PC with the telephone line, because there was not the ADSL. Every time the performances were doubled. Then, the optical fibre introduced higher speed, and this was a radical innovation. • Product architecture. Another classification of innovation, intrinsically linked to the incremental-radical innovation one, starts from the definition of product architecture. In most of the cases, the products sold are assembled, so in the production process, there is an assembly phase. So, there is a distinction between the product as a whole and the product in its parts. The product can be described as a list of components linked in a specific way. Putting them together in the correct way, the product is created. Product architecture is the list of components and the way in which they interact. For example, a room fan’s major components can include the blade, the motor, the blade guard, the control system and the mechanical housing. The overall architecture of the product lays out how the components work together. Perceiving a product in this way, innovation can be made either on the components or on the architecture. So, it is possible to make an innovation by changing a component, for instance if gasoline engine in the car is replaced with an electric one, there is a radical change in the component and it is a radical innovation, because there is a complete change of the technology and of the physical aspects. Furthermore, it is possible to keep the same components but changing how they are put together, so this is an architectural innovation. For instance, years ago cars had the engine connected with the tyres, while now they are connected with the front tyre. The physical aspect is different as the car is pulled. There is a radical change of the driving experience without changing the components, so it is possible to radically innovate the product by changing radically the architecture. 10 The fact that the joystick became the joypad is an architectural based innovation. Components have been modified (there is a change of shape of the stick, different buttons and so on), but the main change was in the architecture because in this way it was easier to change the game experience. In the old one, there was a small combination of possible actions during the game. With the joypad, there were many different possibilities: the aim was to change the architecture as it allows more easily to change the game experience. The basic technology was still sticks and buttons, but there were many more options. After some years, the motion control of the Wii was introduced: the radical innovation was in the interactions as, thanks to an accelerometer, the actions came from the movement in the real environment. The change was mainly a component-based innovation: there were still buttons and components, but the real innovation was in the interactions thanks to the accelerometer, which was the new component, that made possible to move in the real world seeing the effects on the screen. Particularly, Nintendo was just the innovator, because the inventor of accelerometer was STMicroelectronics and that technology was used for many years until Nintendo moved it in the world of consoles, changing the game experience. Many times, the Service Concept requires the additional definition of a group of components (products and services). The idea of architecture could be applied to services, calling it the service package. A person hardly buys just one service, but a bundle of services. For instance, a person normally buys not only a flight but also the services during the flight, the comfort and so on. Indeed, buying a ticket for an airplane, there is a bundle of different services linked together in different ways. This is the relationship between incremental and radical innovation: If the improvements are made through incremental innovations, every time the performances improve. However, normally there is a limitation to the possible improvements. After a while, it is more difficult to improve a product; indeed there is a decreasing marginality: the cost for small improvements becomes high. So, at a certain point, a radical innovation is needed. An incremental innovation is small, and this implies small investments, little time and the risk connected is low. The risk is the probability of investing in innovation without getting the results. Doing many incremental innovations, a great part will get to a result, because by doing many, there is risk sharing. On the other hand, radical innovation is big, therefore it requires a lot of investments, a lot of time and a higher risk: failing means that all money is lost. Companies, however, cannot just do incremental 11 innovations. For example, Apple launched more than 300 products in the last years, but with no more than 5 innovations: the majority are incremental. Finally, after a radical innovation, there is once again incremental innovation to sustain this radical innovation during the time. Finally, we can distinguish between competence enhancing and competence destroying innovations. Now, the focus is on the user perspective, but originally it was defined from the company perspective: • Competence-Destroying Discontinuities: they require new skills, abilities, and knowledge in either process or product design. The skills needed for the core technology shift, causing power and structure shifts in organizations. They are usually initiated by new firms. For example, asking someone who plays tennis to play squash is a competence-destroying innovation, since he has not just the necessity to learn how to play squash, but he also has the necessity to destroy/erase his default behaviour in playing tennis. • Competence-Enhancing Discontinuities: they are order-of-magnitude improvements in price-performance trade-off that build on existing know-how within a product class. These discontinuities tend to consolidate industry leadership. For example, changing the wood racket with a carbon-fibre racket to play always tennis is a competence-enhancing innovation, since tennis players can manage a faster ball without erasing their existing knowledge, but leveraging on it. Innovation strategies can be: These 3 (+1) strategies can be clustered on two dimensions: functionality of the solution provided, so exploiting technologies to carry out radical or incremental innovation, and meaning, which can be innovated leveraging on the language spoken by the product or service. Innovation of meaning is not an alternative to innovation in technology and functionalities; they could be combined, so in this case we talk about technological epiphanies, which are products or services with an improvement both in meaning and technology, such in Nintendo Wii, where there was a new radical technology (the motion control) and a new meaning in console games (no more something for geeks in a virtual environment, but something to create a positive social environment that could be exploited also by non- gamers, like families). 12 Considering the Nest thermostat presented before: • It is a radical innovation in its first version, which is called MVP (Minimum Viable Product) and is very simple and then is improved over time with incremental innovation. • It is a component-based innovation because new components were introduced. • It is a competence-enhancing innovation, because we don’t need the manual to use it since it is very intuitive, and so we don’t need to read anything; the Nest system is self-learning and so is preventing the need for us to learn how to program the thermostat. • It is a design-driven innovation since there is an innovation of meaning concerning why to buy a thermostat. Why innovating is a tough challenge? 2 projects out of 3 are failures. We are in a phase where we have to survive because we have exponential change. When we work on daily activities, we focus on immediate tasks and we don’t see what is happening outside of our daily activities. Therefore, we need ambidexterity because continuous innovation requires something that is against our nature, so being able to stay at the same time on two dynamics that are different. We should be able to exploit the present situation (exploitation), but at the same time explore, looking to the big picture, to the changes in the environment, to the opportunities and the threats, searching for an innovation to help our company to survive also in the future (exploration). 13 3. Technology Push Innovation A technology push innovation is a process driven by scientific or technological competences, that bring to a product/process innovation that typically revolve around the physical attributes of the product. Products, the way of working and all the society are changing due to technologies. According to Dosi: “Technology is a set of practical and theoretical knowledge, know-how, methods, procedures, success and failure experiences and, obviously, of physical assets and machineries” . So, a technology is how we do things and not the tool that we use. According to Zeleny: “Technology is a set of hardware, software, brain-ware and their sustain network” . The typical dynamic of technology innovation is represented by S-shape curves model, which consider the time-based evolution of a single parameter of a technology. The idea is that over time technology evolves and we can identify 3 phases: • Initiation: the daily progress of the technology is quite slow, because the technology still needs to be understood and improved. • Development: people start to increasingly adopt the technology, which evolves in terms of performances, based on users’ needs. • Maturity: the technology reaches the limit on a specific performance. The assumptions to build these curves are: limited growth (L), 3 phases and constant innovation effort (b). Basing on these assumptions, we can develop the following analytic formula: Assuming that innovation effort is constant; its marginal productivity depends on the level of the current performances (y), but when we are near to the limit, the effectiveness of the effort starts slowing down. If we are able to understand where we are, we can decide whether to invest or not in a technology or we can understand the time to invest in another technology than the one we are currently using. So, as said, there are four possible uses of S-shape curves model: • To understand the development stage for a technology (investment policy). • To foresee L. • To foresee when a given technology will reach a specific level. • To drive the technology switch. 14 The curve also helps in the long period. Envelope curve explains how different technologies are working together to see an increase on a single performance. In the example, there are different technologies that helped the development of the speed performance. However, the model has some limits. The first strong hypothesis is that there is constant effort in the development of the curve, but we can decide to stop in investing in a technology (first picture), because someone or the market decides that this technology is not interesting anymore. If we don’t invest anymore, the performances will not improve anymore, and so the level of performances of that technology will become a flat line, like it happened for Apollo I. However, we can also decide to increase the level of investments (second picture), increasing b, the parameter that drives the shape of the curve, reaching a higher level of performance sooner in time. Therefore, the shape of the curve is modified, because, even if the limit in terms of performances is always the same, it is reached sooner. Other two limits are that the model considers just one performance at a time and that it is not possible to foresee directly the limit, even if it is possible to understand how close it is looking to the growth rate of the performance (therefore it is a theoretical model). To better understand, we can consider the electric vs petrol engine in automotive example: Electric engines are today more competitive than petrol engine technologies. The electric engine was already evaluated into the market years ago, so the two curves (the petrol and the electric engine) started at the same time. Indeed, the idea of a car being powered by a battery is nothing new, since the first model of this type was invented way back in the 1830s, and the first one to be made commercially available, complete with rechargeable batteries and all, hit the market in 1881. This example tells that the two technologies were there, but the market decided to invest in just one. Following the end of World War I, it was believed that petrol cars were more reliable, especially with the 15 improvements being made to the internal combustion engine at the time. Couple that with the fact that petrol was more available at the time and highway infrastructures were rapidly expanding, the electric vehicle quickly fell out of favour with the consumer. Therefore, according to some of the performances considered, there can be a mistake in terms of betting on a technology. It is necessary to know that this model has a limit in terms of the fact that only one performance is considered at the time and therefore there may be some mistakes. For example, acceleration, speed and the way of reacting of an electric engine is very great; moreover it is less costly and more ecological, so now each company has to decide when to jump on the new curve. Innovative market dynamics We can have immediately an idea about innovative market dynamics thanks to the typewriter case: With the first model, it was not possible to see what the user was writing. There was an improvement, but it was still a not great technology as it was still difficult to use it. However, in those years, it was a fair result. With the second model, they introduced the possibility of using upper and lower case. It was a greater success because market was already used to it since in past years, people became able to understand how to use it, which are the benefits of using it instead of stenography. It is possible to analyse this by the Roger diffusion/lifecycle of innovation: Roger’s model about lifecycle of innovation shows that there is an increasing difference in segmentation of the users when dealing with innovation. At the beginning there are techno-enthusiastic people (innovators) that want to buy the new technology just to have and try it, even if it is risky. The second group is the early adopters that want to have the technology once they know that it really works, so they don’t buy like innovators only for the taste of 16 having and test the technology, but because they want to use it, so they are basically opinion leaders, while innovators are technical people. Then, we have the early majority and late majority (they buy the technology late), who adopt the technology when it is more diffused, and finally there are the laggards, so the people that have aversion to the change, by adopting the new technology. We have to understand the characteristics of each segment because, every time we deal with a technology, we have to convince different groups with different decisional parameters. Remington typewriter improved over the years. Particularly, there were different companies proposing their own version of typewriter in the market, trying to make it better. The idea was to try to understand where there was more room for improvement. Normally, a product is recognized with a clear shape, so there is a concept of dominant design, a certain shape emerging into the market that represents the product. The Underwood N°5 was a dominant design. Analysing the competition in the typewriter market, at the beginning other two companies decided to enter the race. A few years after, other companies entered the market. At the end of the century, the dynamic was different with someone entering and other exiting. After a peak of diffusion, competition started decreasing; this happened because of the presentation of Underwood N°5 of the company named Underwood. It was the best-selling typewriter of those years and after its presentation, all companies used its shape, since the dominant design product has features to which competitors and innovators must adhere, if they hope to command significant market share following. For example, even if the Dvorak keyboard proved to be better, due to dominant design, companies had to adhere to Qwerty keyboard, which is worse, since designed in order not to click very fast all the buttons. Particularly, dominant design is the architecture winning on the market: • Winning architecture able to summarize innovations introduced by previous products. Usually, it is not introduced by the first company that proposed the innovation to the market, but by the one that is able to summarize the best things that are present into the market, being able to summarize the innovations. • Archetype of the product in both the designer and the user imagination. • It gives an answer to the need of a large number of people. Particularly, best things do not mean the best performances ever, but the best for the average customer. Indeed, it may happen that in the transaction some functionalities introduced by other companies are lost in order to make the product simpler for the vast majority of the people using it. • It reduces the number of requirements to be satisfied. • It may imply constraints. • It normally freezes the socio-economic context. The drivers that bring to the emergence of the dominant design are: • Complementary assets, so all those assets which are not directly related to the supply chain the focus is on, but they might enhance the value. An example is the distribution channel: it can enhance the 17 value of a product but not directly; indeed it is easier to launch a new product into the market having a privilege asset, such as distribution channel. Other examples are brands, additional services or capacity. • Ability to understand customers’ needs, in order to have a better understanding of them compared to competitors. The company that is able to bet on the functionalities more valuable for users, has higher probabilities to introduce a dominant design. • Leverage or have an influence on the regulation bodies such as rules and laws. • Strategic manoeuvring (externalities). According to the Abernathy-Utterback model, there is a relation between product and process innovation. We can see that it is possible to have a high innovation rate on the product dimension until a certain point, where the innovation rate starts decreasing. Indeed, once reached the dominant design, the product innovation rate decreases. It does not mean that companies do not foster it, but it only decreases, and probably, there will be incremental innovations and no changes in the architecture. Once reached the dominant design at the product level, it starts the one at the process level, in order to make the production process faster, introducing a more standard process. Regarding product, there are different architectures in the fluid phase that then in the transition phase become a dominant design. When it is impossible to find differences between the product of two companies, there is the entrance in the specific phase, where the products become standard. Smartphones are not in the specific phase because, having two different smartphones, it is still possible to understand where they are coming from and their features, even if there is a dominant design in the smartphones. Examples of products that reached the level of specific phase are insurances, tennis balls, salt, fuel (there are standards related to the brand, so it is not possible to differentiate a product of a brand from the same of another brand). Therefore, the model tells that generally innovation starts with a high innovation rate of the product until it reaches a dominant standard. Starting from it, innovation rate starts decreasing and there is a higher focus on process as the competition is completely on price. Then, the innovation rate reduces too also considering process. There is also a cyclic dimension of this model. Once a dominant design is set, it is not over yet as the struggle will start again. Tushman said that cycle innovation has two levels: • There is technology discontinuity that brings to a fluid phase, where companies compete with different technologies and architecture. • There is a selection of a dominant design and after that there is an era of incremental innovations: innovation is not over but it becomes incremental, trying to get closer to the vast majority of the market. The cycle starts once again once a technology discontinuity enters the market. Both a dominant design or a standard can be disruptive, such as the VHS that has been disrupted by the DVD, then disrupted by Blu-ray. 18 Why are radical innovations (technological discontinuities) so difficult for the incumbents? Due to the incumbent curse: by being an innovative leader into the market, there is an underestimation of the impact that other innovations may have. Particularly, incumbents generally prefer to underestimate what is coming from outside. Moreover, it may happen also in the other dimension by overestimating the room for improvements. Probably a company wants a technology continuing growing, overestimating the room for improvements in that certain area and underestimating what is coming from the outside. There is also inertia (the company wants to go on doing what it usually does) and the fear of cannibalization. Generally speaking, radical innovations are so difficult for the incumbents because of: • Marginal costs (path dependency). • Uncertainty about feasibility and profits, since starting everything from the beginning, there will always be a huge uncertainty. • Overestimation of the technology potential (technology myopia, so there is a lack of ability of seeing). • Innovation implies change management. An incumbent reaction may be analysed taking into consideration Olivetti vs Wang. In 1974, Koplow’s interface program was developed into the Wang 1200 Word Processor (first picture), an IBM Selectric-based text storage device. The operator of this machine typed text on a conventional IBM Selectric: when the return key was presses, the line of text was stored on a cassette tape. One cassette held roughly 20 pages of text and could be played back (the text retrieved) by printing the contents on continuous-form paper in the 1200 typewriter’s print mode. The stored text could also be edited, using keys on a simple, six-key array. Basic editing functions included insert, delete, skip and so on. Olivetti was one of the first manufacturers to introduce electronic daisywheel printer-based word processing machines called TES401 and TES501. Later the ET series typewriters without or with LCD and different levels of text editing capabilities were popular in offices. In 1988 Olivetti released the last and most advanced electronic typewriting machine ET2500 (second picture), in order to beat Wang. There is another face: the incumbent may be cursed, but there are also first mover disadvantages. Being first mover, there are not also advantages, but also disadvantages: • Research and development expenses. • Undeveloped supply and distribution channels. • Immature enabling technologies and complements. • Uncertainty of customer requirements. Generally, there are different ways to do innovation: to go on improving something already existing or to create something new. Being an incumbent, it is easier to find alibis that convince not to go through radical innovation. Disruptive innovation The entire theory of disruptive technologies by Christensen and Rosembloom has been based on the example of the 14’’ disk drives that dominated the market with a large storage for mainframe computers 19 and that could hold a lot of data. However, it was disrupted by the 8’’ disk drives, based on similar technology, similar architecture and similar organizational capabilities, which then was disrupted by the 5.25’’ disk drives. The disruptive innovation model says that there are technologies underestimated because they are not able to satisfy the demand of the high end of the market. There might be technologies not considered because not able to satisfy even the need of the low end of the market, but by investing in them, their performances may increase so much that they can go beyond the performance demanded of the high end of the market, overcoming them with an innovation rate extremely high. According to Christensen and Rosembloom, disruptive innovation is not a kind of innovation but a process, a way about how a technology evolves in the market. Companies do not look at them, but they have huge potentials because putting a huge innovation effort on them, the development path is so huge that can overcome other paths. Disruptive innovation is a process and an entry condition is necessary: performance level at the beginning is low. For example, when Netflix entered the market, it did not challenge TV shows but Blockbusters. At the beginning it did not even allow to choose the movies. However, even if it came from the low performance side, then it disrupted the market. The disruptive innovation model says that it is necessary to be aware of what is happening in the market even if today is not so powerful. Few key points on disruptive innovation made by Christensen and Rosembloom are: • Disruption is a process. • Disrupters often build business models that are very different from those of incumbents. • Some disruptive innovations succeed; some don’t. • Disruptive innovations start from the low end of the market that demands different performances from the one currently valued in the mainstream market (high end market), compared to which the disruptive technology has lower performances. • The mantra disrupt or be disrupted can misguide us. 20 4. Blockchain and DLT Blockchain and DLT are technologies used nowadays at the basis of some technology push innovations. When we think about blockchain, usually we think about cryptocurrencies; they are part of blockchain, but it is not only about them. When there was the Cryptowinter, a lot of people thought at the blockchain as a bubble and that was its end. But, even if for cryptocurrencies was a bad time, the technology behind (the blockchain) is still there and nowadays a lot of banks are trying to create digital money out of it. The idea is to move from an ecosystem in which each actor has its own version of the truth to one in which everyone shares a single source of truth. Particularly, there are two different methods to obtain a single source of truth: TTP (Trusted Third Party, such as a consortium authority) and leader. Potential challenges for a single source of truth are: • No trustworthy entity capable of managing data. • No entity willing to manage the data. • Multiple participants with different ERP and DB. In the light of this, it seems very difficult to obtain a single source of truth. Therefore, we need Blockchain and DLT (Distributed Ledger Technology) to enable a single source of truth. Nowadays who was focusing on application specific platforms is moving to general-purpose ones, because a lot of time and effort is necessary to create a platform, so using it only for one application is not worth it. 21 The pillars of these general-purpose platforms are: Therefore, we can classify platforms in: Some platforms born as application specific intend to develop more applications, approaching general- purpose platforms. Moreover, there is still a clear distinction between projects that rely on permissioned or permissionless platforms. However, an effort to bring the two worlds together is increasingly evident. 22 Blockchain and DLT are based on: Timestamp works like this: Smart contract is a set of instructions expressed in computer language and visible to all, which are automatically executed by a Blockchain network upon the occurrence of predetermined events. Once the smart contract is activated, its execution is guaranteed and not stoppable. Decentralized applications (DApp) have the following features: • They are not censurable. • The code is intrinsically open source. • The code upgrade rules are clear and unavoidable: anyone can see them. • They work independently from centralized marketplace. • Very low risk of interruption of the network. Tokens can be classified in: 23 Cryptocurrencies value is increasing, as we can see from the following graphs: Here there are some applications of Blockchain and DLT for coming up with technology push innovations: 24 25 5. Open and Collaborative Innovation Traditional innovation funnel is one of the most traditional and famous models on innovation. When companies start an innovation process, they start to scout as many new ideas as possible, then they evaluate inside the company these ideas, and finally they select and implement the more coherent ideas with the needs of the company. So, there is a certain number of selection gates, and then there are only few ideas that arrive in the market; depending on their success they will create the value to be reinvested in other innovation processes. We must be very good in selecting the best ideas as soon as possible in order not to waste time, money and resources in ideas that are not promising enough. The larger is the beginning part, the more are the ideas, the better is the situation. The rest of the funnel should be closed enough because we have to protect our intellectual property. Managing innovation was historically focused on internal organizational issues by creating an innovative climate, selecting the right projects and executing projects, creating R&D departments to protect innovation projects from the on-going activities. These things are all still important, but we observe a crisis in the traditional approaches to innovation, since: • Not always more R&D is better: increased R&D expenditure without the corresponding link to new products leads to serious questions from shareholders. Therefore, not always the optimum is to have many and many R&D projects inside, because often the company does not have the complementary resources needed to succeed in a project, so on one hand it is worthy to divest from it and on the other hand it is not worthy to leave these ideas. • The ability to capture ideas from R&D and convert these into products and services that people want to buy is more significant than idea-generation. Particularly, idea generation might be simple, but the ability to capture ideas from R&D is difficult if it is isolated from the operations and from the market, because companies lack in awareness about how the requirements of the market are changing over time. • Investing in new Ideas for the existing businesses may not be enough: the European Industrial Management Association (EIRMA, 1985) recognised R&D as having three distinct areas, each requiring investment, which are R&D for existing businesses, R&D for new businesses and R&D for exploratory research. Therefore, investing for existing businesses in traditional innovation is not enough and we should be open to new business opportunities that can come from different areas, which are not currently part of our business, so it is important to have an idea about the exploration for the future. For all these reasons, the traditional process of innovation is becoming less effective; at the same time, we have two phenomena: • Shortening Lifecycles of Innovations: there is a short lifecycle of the product because technology evolves very quickly and therefore the advantage we have thanks to innovation cannot be so long as it was in the past; this means shortening the useful time in the market and so the economic returns thanks to the success we have in the market only for short time. 26 • Rising Costs of Innovation Development: the risks and costs of developing new ideas are becoming higher. So, we have lower market revenues and higher costs for innovation. Moreover, due to faster technological change, global competition and demanding customers, we have intensified competition. Moreover, we should also be aware of the Not In My Industry (NIMI) syndrome, which brings to enlarged competition, which is becoming the rule everywhere. So, today competition does not only come from direct competitors, but also from the part of our business that is not eroded by direct competition, but by different start-ups and companies from other markets that are trying to erode part of our business. For example, digital payment is one revenue area for a bank, but now we have so many start-ups such as Satispay that are trying to take part of the value; in the media sector we have entertainment companies that compete among themselves, but also with products and services developed in other industries that have resources to spend in order to try to enter the market. There are new challenges, but there are also new opportunities that where not there before, for example private financial companies that may help us to fund new ventures also outside the boundaries of the company, knowledge workers to work together to develop new ideas, and rapid diffusion of knowledge (knowledge must be disseminated). A simple and powerful idea is about opening the boundaries of the innovation process, involving not only the internal R&D, but also all company’s employees, customer and suppliers, start-ups or research centres, crowds or communities, in order to have more stimuli and inputs with lower costs and risks. This is the concept of open innovation. The growing number of innovations in Netflix is not developed by R&D, but by its employees. Lego looked to what customers were already doing and discovered a platform where customers were sharing ideas and working together to develop new things, so Lego saw the potential there and decided to 27 acquire the platform, since it was a powerful idea. For Lego, product innovation should be democratized opening the boundaries of the process to the customers, because not only in this way the company can gain ideas, but it can also create a market, so the users become marketers, with free promotion and advertising. We can add in the innovation process other companies, not only suppliers, but smaller companies such as start-ups with important ideas, commitment and capabilities, not hiring the engineer of them, but working with them and maybe then acquiring these companies. For example, in 2004 Google acquired Where 2 Technologies, an Australian start-up founded by Jens and Lars Rasmussen that were unable to get funding from Sequoia Capital for their Maps application, and then created Google Maps. Particularly, a lot of companies base their innovation strategies scouting new ideas and buying them in order to develop new products. Threadless is a platform that develops design ideas for t-shirts. The company has developed a new business model about involving people in developing new ideas and it was a success. It was Parc to create the mouse and the following computer program. Parc was a Xerox company. Xerox had a very effective innovation funnel, but also a close innovation funnel with a lot of confidentiality and effort to exploit internal intellectual property. The company had the idea that not all the products, ideas and technologies developed must be used by Xerox itself, but many others were exploited and licensed out and sold to different companies and somehow this Parc R&D laboratory in Xerox became a profit centre inside the group. It is unlikely that the best (or even very good) ideas are all located in one organization and, even with an idea in hand, should one organization really manage all of the technical and markets risks associated with commercializing technologies? In many cases spinning out the idea may be a good alternative, like Xerox did with its Parc lab. Now, we can finally give a definition of open innovation. Open innovation is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively. The boundaries of this innovation funnel should be made much fuzzier, so input and output are not only at the beginning and end of the funnel, but the funnel should be smart enough to include flows of knowledge in all the phases. 28 Chesbrough compared closed innovation with open innovation with the fuzzier boundaries. Today we live in a knowledge society, so we have a network of knowledge, where the distinctive capability in technological innovation shifts from know-how to know-where, so, even if we are very big, we should know how and where the best knowledge in our sector is. In order to do this, we have to create an open culture internally and a minimum amount of critical knowledge, in order to assure absorptive capacity, to have a propter access to external knowledge. There are four enabling factors of open innovation: • Vision and Strategy about how innovation will happen in our industry to see opportunities around us. • Agile and Open Organization and Processes in order to include new ideas when possible. • Culture and Competences. • Ecosystem of different actors around ourselves to create new things and exploit them outside. Open innovation actions are the following ones: We can classify these actions in three processes of open innovation: 29 • The Outside-In Process (or Inbound) enriches the company’s own knowledge base through the integration of suppliers, customers, and external knowledge sourcing. • The Inside-Out Process (or Outbound) refers to earning profits by bringing ideas to market, selling IP, and multiplying technology by transferring ideas to the outside environment. Companies, that establish the inside-out process as key, focus on externalizing their knowledge and innovation in order to bring ideas to market faster than they could through internal development. • The Coupled Process refers to co-creation with (mainly) complementary partners through alliances, cooperation, and joint ventures, during which give and take are crucial for success. Companies that establish the coupled process as key combine the outside-in process (to gain external knowledge) with the inside-out process (to bring ideas to market) and, in doing so, jointly develop and commercialize innovation. Here, we will focus on outside-in open innovation actions: More specifically: • Call4Ideas involves internal employees, actors or student. • Hackathons are ideas marathons in order to develop new ideas with actors that work together for a very limited time frame to accelerate idea generation. • Partner Scouting is about finding a partner for innovation. • Innovation Procurement is a process that may help companies to scout and buy innovation. • M&A is done to buy other companies especially start-ups. • Idea Crowdsourcing is about finding ideas from a crowd of potential stakeholders. Particularly, in practice we have the following data from outside-in open innovation: 30 So, the possible sources of outside-in/inbound open innovation are: We have already seen some examples on customers involvement with Lego and Threadless. Start-ups are becoming the most important resource for innovation. In many industries a lot of innovation resources are not used in incumbent companies, but rather they are used in start-ups. When they are funded, they have to use money in a very limited amount of time, so there is a lot of innovation effort, especially in digital arena, by start-ups and this is why a lot of companies are working with start-ups exploiting this big innovation potential. Instead of contrasting or copying from Skype, Microsoft decided to buy it and bring all the potential and the competences and resources of Skype in the company, and now we have Microsoft teams, which was born based on the capabilities obtained with this acquisition. Other acquisitions of start-ups are WhatsApp and Instagram acquired by Facebook, YouTube acquired by Google, and Siri and Shazam acquired by Apple. Working with start-ups is a win-win approach for an enterprise for the following reasons: Most start-ups start with exactly the idea of trying to be bought by a larger company (exit strategy), so the purpose of what they develop is not to win in the market, but to be acquired by a more traditional and consolidated company. Not always the final solution is to buy them and integrate them; in many cases the best idea is work together in order to have innovation potential for the company and having access to the market and references for the start-up. 31 We can motivate employees to have the best from the innovation potential of our employees. In many cases there are good ideas and talents in our company, but they are hidden because sometimes people are frustrated while working in our environment. We should make employees more engaged in creative processes and innovation processes. An example is what we have seen for Netflix, which has every year an update that involves all the employees asked to develop innovations and ideas basing on some suggestions; the same happens for Facebook that relies a lot on new ideas developed everywhere in the company. In many cases suppliers are bounded by our market relation and they are not able to develop something that is outside their normal business; L’Oréal developed a program to push most innovative suppliers to develop together with its employees something that could be beneficial for all the network. Wikipedia exploits the power of crowds and this becomes extremely powerful when we can work with the web, because we can reach so many actors and coordinate their efforts in an efficient way; the business itself for Wikipedia is the involvement of the crowd. There are several possibilities: we can engaged crowds (many and different) or a confined community (users and customers, employees or other stakeholders). The drivers of it are the level of control and commitment, the level of heterogeneity and the size of the community. Nowadays crowdsourcing is a growing phenomenon. Crowdsourcing is defined as the process of obtaining needed services, ideas, or content by soliciting contributions from a large group of people, especially an online community, rather than from employees or suppliers. These people are not monetary awarded, but they have an intrinsic motivation to be in the crowd, like it happens for InnoCentive. 32 Engage crowds can be powerful not only for innovation, but also for marketing, such as for model 3 of Elon Musk for the brand Tesla, which is becoming a very engaging brand. Indeed, Tesla got 200,000 orders for Model 3 in its first day. The organizational forms for outside-in open innovation are: 33 The different forms can be analysed looking at their managerial and organizational characteristics, so looking to: level of integration, time horizon, risk, start-up time and costs, reversibility and level of contractual formalisation. Embracing open Innovation is a change management and collective leadership challenge. At this regard, we can have three different approaches: • T (Top Down): get executives onboard, personally committed to innovation. Without executive support, no change occurs. • B (Bottom Up): value creation begins with people, one by one, team by team. Nothing happens unless we get employees engaged. • X (Across): middle managers get the job done (for good and bad) by setting the right objectives and incentives. Finally, we can do the example of open innovation at Siemens. Siemens adopted open innovation to: • Develop new ideas. • Overcome the problem of business units as silos. • Resolve technological gaps and the lack of centralised information problem. • Change the cultural background with an open mindset. • Maximize the use of competences by exploiting competences that are not inside the company. • Scout and acquire talented people with some kind of competences that are not inside the company. The approaches to open innovation chosen by Siemens were: • Corporate Technology, a corporate-based innovative organization that worked across business units. • Innovation Jams focused online discussion on specific topics. • Techno-Web 2.0, a self-defined network that enabled the cross-sharing of tech-knowledge and the fast- response in solving urgent problems. • Internal Involvement, with specific contests of questionable success. • External Knowledge Brokers. This approach was the only one unsuccessful due to the difficulty to come up with the right RFP (Request For Proposals), due to the questionable validity and transparency of the involvement of the submitters (the ones who decide to embrace the challenge proposed by the company with the RFP), and due to the resistance from business units to review gimmicks rather than working on fundamental technology. Particularly, a lot of times companies think that launching an external contest will be successful, but to get all the benefits from it, we need to align vision and strategy and to do a lot of set-ups activities, because people outside the company do not have all the knowledge and competences for it, so we need to write a very clear brief and the topic of the contest (a very clear RFP). To conclude, we can note that the approach adopted by Siemens is mainly outside-in: companies try to introduce inside their boundaries ideas coming from outside, such as start-ups. Moreover, we must highlight the importance of marketing and communication, since a lot of external contests are done thanks to them, because we need to communicate these activities to the potential people interested in them and therefore we need to have a very good marketing and brand reputation. 34 6. Design Driven Innovation Design driven innovations are the innovations more relevant for the challenges that we have today. Few years ago, to be innovative, we needed ideas. Having ideas is very easy, the difficulty is to know where to go and to implement our ideas. Ideas now are commodities, so they are very easy to find. Therefore, we have a lot of possibilities to be creative, but we are blind because there are too many ideas; indeed most of the times organizations have the ideas in their hands, but they cannot see them. As we can see, the more are the ideas, the less is the value, which is the idea paradox. However, if people work in teams to develop ideas, the value increases; they should only find a direction. Indeed, we should cut ideas rather than having too many ideas, because there is no direction in having a lot of ideas; this was the challenge of Apple, where Steve Jobs cut 70% of them. At this regard, we can identify two types of innovation