INNOVATION: SOME INSIGHTS

1. INNOVATION: SOME INSIGHTS Prof. Gündüz Ulusoy Director, TÜSİAD-Sabancı University Competitiveness Forum and Faculty of Engineering and Natural Sciences Sabancı University, Istanbul International Cultural and Academic Meeting of Engineering Students - ICAMES Boğaziçi University, Istanbul May 18, 2007

2. WHAT IS INNOVATION AND HOW DOES IT DIFFER FROM INVENTION ? • An invention is an idea, a sketch, or a model for a new or improved device, product, process, or system. It has not yet become a part of the economic system. (E.g., several designs of Leonardo da Vinci.) • An innovation is only accomplished with the first commercial transaction involving the new device, product, process, or system. It is part of the economic system. Commercialization is the final link of the innovation process. Commercial success, on the other hand, is not a requirement for an innovation. (E.g., Concorde, which made supersonic air travel possible, was an innovation but not a successful one since instead of the forecasted 300 airplanes only 16 were built and those had only limited use.)

3. TYPES OF INNOVATION* • Product innovation. Includes totally new product or service or those improved to a large extent. • Process innovation. Includes major improvements in production or delivery processes. • Marketing innovation. Development and implementation of new marketing techniques such as changes in design, packaging, promotion, pricing, and positioning. • Organizational innovation. Development and implementation of new organizational methods in commercial applications, workplace design, organizational structure, external relations of the firm. *The Measurement of Scientific and Technological Activities. Frascati Manual, OECD, Paris, 2002.

4. EXAMPLES OF TYPES OF INNOVATION • Product innovation: antibiotics; digital camera. • Process innovation: Kanban; floating glass manufacturing process; a new reservation system. • Marketing innovation: franchising; B2C; a new bottle for a parfume marketed in a new marketing segment. • Organizational innovation: business restructuring; subcontracting a function for the first time.

5. OTHER CLASSIFICATIONS OF INNOVATION • New for the firm. • New for the market. • New for the world. • Destructive innovations. • Incremental innovations. • Radical innovations.

6. CREATIVE DESTRUCTION • We observe a long period of relative stability with incremental changes around an innovation – continuous improvement. • The stable environment is destroyed by a discontinuity, which changes dramatically one or more of the technology, market, social, regulatory and other conditions. A new game starts opening a new opportunity space for further innovation.

7. CREATIVE DESTRUCTION* • During periods of dramatic change, incumbent firms which have not been successful in building the capabilities needed to secure a position in the new competitive landscape have vanished. • For example, manufacturers of horse carriages, sailing ships, vacuum tubes, steam locomotives, propeller engines. • In a rather prophetic way, Schumpeter** has shown the way out for large incumbent firms: “... It may happen that new combinations should be carried out by the same people who control the productive or commercial process, which is to be displayed by the new.” *Hart, S.L. And Milstein, M.B., Global sustainability and the creative destruction of industries”, Sloan Management Review, pp.23-33, Fall 1999. **Schumpeter, J., The Theory of Economic Development, Harvard University Press, 1934.

8. WHAT ARE THE RESOURCES FOR ECONOMIC GROWTH? JUST LABOR AND CAPITAL? There are two ways of increasing the output of the economy: 1. increase the number of inputs. 2. develop ways of getting more output from the same amount of inputs. What are the inputs? Inputs are labor and capital. Abromowitz measured the growth of the American economy between 1870 and 1950. He made some reasonable assumptions about how much a growth of one unit of labor adds to the growth. He did the same with capital. All that could explain only 15% of growth of the American economy in that period. Robert Solow (later a Nobel laureate) and other economists in the 1950s and 60s came up approximately with the same result. Hence it convinced economists that innovation must have been a major force of growth in industrialized economies. Indeed this has led to the concept of Total Factor Productivity (TFP).

9. WHAT DO THEY SAY ON INNOVATION’S ROLE IN ECONOMIC GROWTH • Printing, gunpowder and the compass have changed the whole face and state of things throughout the world... (Francis Bacon, 1620). • Improvements in machinery go hand in hand with the division of labor, and very pretty machines ... facilitate and quicken production... (Adam Smith, 1776). • The bourgeoisie cannot exist without constantly revolutionizing the means of production! (Karl Marx, 1848). • Knowledge is the chief engine of progress in the economy (Alfred Marshall, 1897). • The entrepreneur and his search for new combinations is the driving force in all economic development... (Joseph Schumpeter, 1911). • Science and basic research are incredibly powerful sources of future economic and societal development... (Vannevar Bush, 1945).

10. OUTPUT GROWTHBETWEEN 1300-1800* The factors that statistically are valid to explain the historical data for growth in this period are: 1. Earlier urbanization (growth and urbanization are linked but the direction of causality is open to question). 2. Amount of trade (permitting specialization and the benefits of comparative advantage). 3. Innovation and productivity in manufacturing (new technologies make it possible to produce more from the same inputs of labor, capital, and land). Differences between countries in the other variables do not match differences in their patterns of growth. * Coyle, D., The Soulful Science, Princeton University Press, Princeton, 2007.

11. THE NEW SHAPE OF INNOVATION* • Innovation is diffusing at ever increasing rates . It took 55 years for the automobile to spread to a quarter of the country, 35 years for the telephone, 22 years for the radio, 16 years for the PC, 13 years for the cell phone, and only seven years for the Internet. • It is multidisciplinary and technologically complex. It arises from the intersections of different fields or spheres of activity. • It is collaborative – requiring active cooperation and communication among the scientists and engineers and between the creators and users. • Workers and consumers are embracing new ideas, technologies and content, and demanding more creativity from their creators. • It is becoming global in scope – with advances coming from centers of excellence around the world and the demands of billions of new consumers. *Innovate America, Council on Competitiveness,Washington, D.C., 2005.

12. THE SERIOUSNESS OF COMPETITION* • Foreign owned companies and foreign-born investors account for nearly half of all US patents with Japan, Korea and Taiwan accounting for more than one-fourth. • Sweden, Finland, Israel, Japan and South KOrea each spend more on R&D as a share of GDP as a share of GDP than the United States. • China overtook United States in 2003 as the top global recipient of foreign direct investment. • Only six of the world’s 25 most competitive information technology companies are based in the United States; 14 are based in Asia. • Asia now spends as much on nanotechnology as the United States *Innovate America, Council on Competitiveness,Washington, D.C., 2005.

13. THE GLOBAL INNOVATION STUDY 2006 IBM – TYPES OF INNOVATION* • Business model – Innovation in the structure and/or financial model of the business. • Operational – Innovation that improves the effectiveness and efficiency of core processes and functions. • Product/services/markets – Innovation applied to products or services or “go-to-market” activities. *Expanding the Innovation Horizon. The Global CEO Study, IBM Business Consulting Services, 2006.

14. THE GLOBAL INNOVATION STUDY 2006 IBM – TYPES OF INNOVATION • Most common business model innovations: - Organization structure changes. - Major strategic partnerships. - Shared services. - Alternative financing / investment vehicles. - Divestitures / spin offs. - Use of a third party operating utility.

15. THE GLOBAL INNOVATION STUDY 2006 IBM – TYPES OF INNOVATION • Most common operations innovations - Improved operations responsiveness to customers. - Applied new science or technology to core processes. - Applied new IT to automate processes. - Optimized core process. - Reduced cycle time / complexity. - Integrated functional business processes.

16. THE GLOBAL INNOVATION STUDY 2006 IBM – TYPES OF INNOVATION • Most common products / services / markets innovations - Greater penetration of current market. -Improvements to current products or services. - Electronic channels. - New geographic markets.

17. THE GLOBAL INNOVATION STUDY 2006 IBM – FINDINGS* • Business model innovation matters. • External collaboration is indispensable. • Innovation requires orchestration from the top. • Create and manage a broad mix of innovation that emphasized business model change. • Find ways to substantially change how you add value in your current industry or in another. • Use technology as an innovation catalyst by combining it with business and market insights. • Collaborate on a massive , geography defying scale to open a world of possibilities. • Push the organization to work with outsiders more, making it first systematic and, then, part of your culture. *Expanding the Innovation Horizon. The Global CEO Study, IBM Business Consulting Services, 2006.

18. INNOVATION MODELS IN THE MANUFACTURINGINDUSTRY 2006/07* Determinants of Innovation *Ulusoy, G., Günday, G., Kılıç, K., Alpkan, L., et.al., TUBITAK Project SOBAG-105K105, TUBITAK, Ankara; 2006-2007.

19. INNOVATION MODELS IN THE MANUFACTURINGINDUSTRY 2006/07 Firm Innovation Model

20. SOME RESULTS OF THE PERFORMANCE MODEL

21. BEATING THE COMPETITORS TO MARKET

22. FINANCIAL PERFORMANCE

23. IMPACT OF INNOVATION EXPENDITURES Median: Inovation exp / Return = %3.4 Mean: Inovation exp / Return= %2.8

24. SOME FINAL REMARKS • We engineers should not do innovation for the sake of innovation and strive for the best technical solution. The goal is to survive, to grow, and to make profit. • Innovation is not invention. It requires commercialization of whatever we suggest to introduce and hence, innovation goes hand in hand with entrepreneurship. • Collaboration and competition are the basic ingredients of the innovation process.

25. SOME FINAL REMARKS • Even the most stable looking innovation environment can be subject to creative destruction. Innovation is a never ending process with a renewable resource, namely, human intellect. • Particularly with all the current emphasis on sustainable environment, we can expect relatively more creative destruction to take place in near future. It is up to the new generation of engineers to come up with innovations, which help to increase the standart of life on a global scale and at the same time do not work against sustainability of the environment.

26. THANK YOU TUSIAD – SABANCI UNIVERSITY COMPETITIVENESS FORUM Sabancı University Orhanlı, Tuzla 34956 İstanbul Tel. 0216 483 97 10 Fax. 0216 483 97 15 www.ref.sabanciuniv.edu