BA220

1. Strategy Theory and
Practice
© Stewart R. Clegg, Christos Pitelis,
Jochen Schweitzer & Andrea
Whittle

2. Chapter 4
Strategy and
innovation

3. Learning objectives
• Understand the role of innovation for strategic management
• Appreciate the differences between product innovation,
process innovation, service innovation, business model
innovation and design-led innovation
• Understand the barriers and enablers of innovation in small
and large companies, including the concept of ambidextrous
organizations
3

4. Learning objectives
• Explain the concepts of co-
creation, open innovation and
open strategy
• Identify and explain the
importance of innovation
environments, including national
and regional innovation systems
4

5. Defining innovation
• Innovation refers to the
development and introduction
of new products, services,
processes or business
models. In business this
means successful
commercialization but
innovation can also occur in
a non-commercial context,
when new practices are
developed and adopted
5

6. New product development (NPD)
• NPD encompasses the process of bringing a new product to
market by transforming a market opportunity into a product
(or service)
• Three main phases have been identified in NPD:
– The first stage involves developing ‘fuzzy ideas’, where
there is an insight into a potential new market that is
evaluated and, if it passes approval processes, becomes
a more detailed product development plan.
6

7. New product development (NPD)
– The second stage is the
actual process of designing
the product or service
delivery so that prototypes
are created and tested.
– The third stage is that of
implementation, where the
detailed design and creation
of the launch product or
service are finalized.
7

8. Radical innovation as creative
destruction
• Joseph Schumpeter coined the term ‘creative destruction’ in
his 1942 book
• Creative destruction involves the replacement of older, less
efficient processes, products, services or organizational
practices with newer, more efficient ones
– It is ‘destructive’ because it annihilates the old and
inefficient, but it is also ‘creative’ because it replaces it
with the new and more efficient
8

9. Creative destruction and disruptive
technologies
• The key role in creative
destruction is reserved for
technological innovations that
can outflank existing products,
designs and processes
• Incremental improvements are
made redundant through
creative destruction (e.g.
personal computers vs
typewriters)
9

10. Radical vs incremental innovation
10

11. Radical vs incremental innovation
• Phillips et al. (2006: 181) argue that to avoid ‘lock-in’ (when
organizations become too locked in to past routines and
their refinement), organizations should:
– have high tolerance for ambiguity because certainty and
rules only become clear after the fact
– strategies need to be emergent and the organization
needs to adapt and learn quickly
– the culture should support and encourage curiosity-driven
behaviour
– risk taking and tolerance of (fast) failures have to be high
– developing weak ties and peripheral vision are important
to seeing innovation opportunities
11

12. Radical vs incremental innovation
12

13. Innovation platforms
• Cusumano and Gawer (2002) argue that successful firms
do not simply develop new products and services and
compete with others in open markets. Rather, leading firms
establish a platform on which new products emerge
• A platform is a base upon which other applications,
processes or technologies can be developed. It is an
evolving ecosystem that is created from many inter-
connected pieces
• Platforms create ‘lock-in’ paths that make it hard for
customers to change their minds and for competitors to
enter the game
13

14. Innovators’ dilemma
• The innovator’s dilemma describes companies whose
successes and capabilities can become obstacles in the
face of changing markets and technologies
• Christensen (1997) analysed why successful organizations
(such as Apple, IBM and Xerox) sometimes fail when they
face change and innovation
14

15. Sustaining and disrupting
technologies
• Most technologies are sustaining technologies, meaning
that they improve the performance of existing products
rather than replace them. Sustaining technologies do not
produce innovation
• The problem for large companies is that they generally do
not invest in disruptive technologies because they are
simpler and thus promise less profit, or they develop in
fringe markets that are not important to big players
15

16. Business model innovation
• A business model is the
complete system that firms use
to create, deliver and capture
value
• Osterwalder and Pigneur (2010)
define a business model as: ‘the
rationale of how an organization
creates, delivers and captures
value’
16

17. Business model canvas
17

18. Business model canvas
• Value proposition is the central component of the model and
describes the bundle of products or services that create
value for the customer either through price, performance,
satisfaction, user friendliness or design, etc.
• Channels describe the various means used to reach the
customer with a value proposition and encompass how an
organization interacts with the customer for distribution,
sales, marketing and other forms of communication.
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19. Business model canvas
• Customer relationships are the
types of relationships a
company wants to build with its
customers.
• Key resources are the most
important assets needed in
order to support the business
model; these can be human,
intellectual, financial or physical
assets.
19

20. Business model canvas
• Key activities describe the most
important activities the firm has
to perform in order to fulfil the
business model.
• Strategic partners are the key
partners in the value network.
Partnerships are founded in
order to create alliances, to
optimize the business model or
to reduce risks.
20

21. Business model canvas
• Revenue streams describe how the firm can monetize its
product offering and pay for its costs. Innovative business
models find a new way to capture value from the value
system.
• Cost structure includes all the costs incurred by the
business model, whether the firm is using a cost-driven
business model (where all costs are minimized) or a value-
driven business model (where costs are less important than
increasing the value that is delivered to the customer).
21

22. Business model patterns
• Unbundling
• The long tail
• Multi-sided platforms
• Freemium
• Open
22

23. Service innovation
• Services are: ‘the application of specialized competencies
(knowledge and skills) through deeds, processes, and
performances for the benefit of another entity or the entity
itself’ (Vargo and Lusch, 2004: 2)
• In a service-centred view, the role of firms is ‘not to make
and sell units of output but to provide customized services’
(Vargo and Lusch, 2004: 13)
23

24. Service-dominant logic
• For Vargo and Lusch (2004), the shift to an increasing
component of service in the production and distribution of
activities offered for profit in the market means that the
Service-Dominant (S-D) logic is replacing the old Goods-
Dominant (G-D) logic
24

25. Ten fundamental premises of the
service-dominant logic
• Service is the fundamental basis of exchange.
• Indirect exchange masks the fundamental basis of
exchange.
• Goods are a distribution mechanism for service provision.
• Operant resources are the fundamental source of
competitive advantage.
• All economies are service economies.
• The customer is always a co-creator of value.
25

26. Ten fundamental premises of the
service-dominant logic
• The enterprise cannot deliver value, but only offer value
propositions.
• A service-centred view is inherently customer oriented and
relational.
• All social and economic actors are resource integrators.
• The beneficiary always determines value.
26

27. Innovation, creativity and design
• Nobel Laureate Herbert Simon suggested focusing on the
processes that we deploy to design the artificial world in
which we live:
– ‘Engineering, medicine, business, architecture and
painting are concerned not with the necessary but with
the contingent – not with how things are but with how they
might be – in short, with design’ (Simon, 1969: xii)
27

28. Innovation, creativity and design
• Based on these ideas, the management concept of design
thinking developed, now taught in business schools all over
the world
• Design-led innovation involves learning how to design
innovation from creative firms (e.g. Pixar)
28

29. Design-led innovation and design
thinking
• Tim Brown defines design thinking as innovation that is
‘powered by a thorough understanding, through direct
observation, of what people want and need in their lives and
what they like or dislike about the way particular products
are made, packaged, marketed, sold, and supported’
(Brown, 2008: 86)
29

30. The design mindset
• A focus on human values and need finding, where design
thinkers are requested to gain a deep understanding for
people through conversation, observation and experiencing,
first hand.
• Radical collaboration, where team composition is
intentionally diverse and radical in terms of the experience
that each team member brings to the table. Diversity also
means including many relevant parties and end-users to
represent real and valid stakeholders of the problem-space.
30

31. The design mindset
• Bias towards action. Design thinking teams are urged to
create a bias towards action and trying things out,
promoting early failure to gain important experience and
iterate in a safe environment
• Attitude of experimentation and prototyping, where low
fidelity but life-sized representations are encouraged as
early as possible in the process and real users are engaged
to provide feedback.
• A habit of ‘show don’t tell’ stands for a mindset of preferring
visual language and story-telling over analytical reports and
factual accounts.
31

32. The design mindset
• Producing a coherent vision
out of messy problems via
synthesis, interpretation and
simplicity.
• Mindfulness of the design
thinking process itself.
32

33. Improvisation, trial and error
• Kamoche and Cunha (2001: 96) define organizational
improvisation as ‘the conception of action as it unfolds, by
an organization and/or its members, drawing on available
material, cognitive, affective and social resources’
33

34. Large versus small firm innovation
• Large organizations are able to build vast R&D capacities
through the resources they command:
– One way that large well-resourced organizations can
innovate is by buying it in
• Small, new, knowledge-based technology firms will be better
able to take risks:
– Small firms are often closer to their customers as they
have to work harder to know them and provide what they
want
34

35. Ambidextrous organization
• The concept was developed by Tushman and O’Reilly
(1996) using the analogy of human ambidexterity (the ability
to use both the left and right hands in equal measure)
• Ambidextrous organizations engage in simultaneously
exploiting today’s existing markets while exploring potential
new markets
• The ambidextrous organization characterizes an entity that
is capable of simultaneous incremental and revolutionary
innovation
35

36. Designing for ambidexterity
• Specialist subunits are created with unique processes,
structures and cultures that are specifically intended to
support early stage innovation, comprised of one or more
innovation teams within the larger parent organization
• Different organizational structures and systems are required
when launching a new business or product, which is why a
separate sub-unit is often required to enable people to think
and act differently
36

37. Co-creation and open innovation
• Increasingly, innovation occurs through the co-creation of
value with consumers.
– Consumers are more connected than before; interest
groups, communities and other social groupings connect
users with each other globally. Social networking sites
such as Facebook are a good example of this shift.
37

38. Co-creation and open innovation
– Consumers are more informed; higher connectivity means
that information travels faster, with more information being
accessible to more people. If you want to find out about
anything you go online and find literally hundreds of
communities where you can read honest discussions
about the pros and cons of your objects of desire or
concern.
– Consumers feel more empowered and are more active,
creating communities of practice in which expertise is
freely shared online. When core competencies cannot be
owned within the firm but are distributed it is difficult to
profit from them.
38

39. The co-creation of value
• In the words of Tapscott and
Williams (2008: 31), the ‘[o]ld
plan and push economy’ is
giving way to the new ‘engage
and co-create economy’
39

40. The co-creation of value
• Prahalad and Ramaswamy (2004) define co-creation as
follows:
– Consumers are less isolated and more connected.
Interest groups, communities and other social groupings
connect users with each other globally, e.g. through social
networking sites such as Facebook
40

41. The co-creation of value
– Consumers are less unaware and more informed. Higher
connectivity means that information travels faster and
more information is accessible to more people, e.g. via
review sites like TripAdvisor
– Consumers are less passive and more active. Think of
communities such as Linux where people produce, share
and discuss how to solve problems
41

42. Open innovation
• The concept of open innovation was pioneered by Erich von
Hippel, Henry Chesbrough and others from the 1980s
onwards
• Open innovation is premised on allowing companies and
multiple stakeholders to interact and co-create. Networks,
ecosystems and innovation communities become important
strategic resources because they allow co-creation
42

43. Open innovation strategy
• Chesbrough and Appleyard (2007: 65–66) differentiate
between four ‘open strategies’ organizations can employ to
benefit from open innovation:
– Deployment: innovation increases the user experience
and they are willing to pay for the enhanced service. IBM,
for instance, makes money from training and consulting
on open-source software applications.
– Hybridization: firms invest in add-ons to products
developed in the open and remain in control of the
intellectual property of the add-on.
43

44. Open innovation strategy
– Complements: a firm sells a product or service that is
related to the use of the open-source content. The
example in case would be a mobile phone seller who
benefits from free software for the mobile.
– Self-service: in this model, the community develops a
service for its own needs; no one monetizes its value.
44

45. Start-up environments
• Innovation needs capital – investment is necessary to get
an idea commercialized as a start-up company
• Banks are notoriously conservative in funding start-ups
• Networks provide one key source of finance
– Innovation Bay is an example of a network organization
that brings together entrepreneurs, investors and
businesspeople
45

46. Open innovation and open strategy
• Chesbrough and Appleyard (2007: 65–66) differentiate
between four ‘open strategies’ that organizations can
employ to benefit from open innovation:
– Deployment: innovation increases the user experience
and they are willing to pay for the enhanced service. IBM,
for instance, makes money from training and consulting
on open source software applications.
– Hybridization: firms invest in add-ons to products
developed in the open and remain in control of the IP of
the add-on.
46

47. Open innovation and open strategy
– Complements: a firm sells a product or service that is
related to the use of the open source content. The
example in case would be a mobile phone seller who
benefits from free software for the mobile.
– Self-service: in this model, the community develops a
service for its own needs; no one monetizes its value.
47

48. Social innovation
• Social innovation entails ‘new
ideas (products, services and
models) that simultaneously
meet social needs and create
new social relationships or
collaborations. (Murray et al.,
2010: 3)
48

49. Social innovation
• Murray and his colleagues have devised a six-step process:
– Prompts, inspirations and diagnoses
– Proposals and ideas generation
– Prototyping and pilots
– Sustaining
– Scaling and diffusion
– Systemic change
49

50. Social innovation
• Social innovation is defined as:
– ‘new ideas (products, services and models) that
simultaneously meet social needs and create new social
relationships or collaborations. In other words, they are
innovations that are both good for society and enhance
society’s capacity to act’ (Murray et al., 2010: 3)
• Micro-finance is an example
50

51. Social innovation
• Murray et al. (2010) devised a 6-step process for
undertaking social innovation:
– Prompts, inspirations and diagnoses: every new idea
starts with the perception of a problem or a crisis. In the
first stage of social innovation, the problem is
experienced, framed and turned into a question that
tackles the root of the problem.
51

52. Social innovation
– Proposals and ideas generation: initial ideas are
developed and the proposal discussed. Importantly, wide-
ranging ideas are taken into account.
– Prototyping and pilots: talk is cheap – so ideas need to be
tested in practice. Trial and error, prototyping and testing
are means of refining ideas that cannot be substituted by
armchair research. The motto should be ‘fail often, learn
quickly!’
52

53. Social innovation
– Sustaining: this step includes the development of
structures and sustainable income streams to ensure that
the best ideas have a useful vehicle to travel. Resources,
networks and practices need to be organized so that
innovation can be carried forward.
– Scaling and diffusion: good ideas have to spread – hence
the scaling up of solutions is key; this can happen
formally through franchising or licensing; or more
informally, through inspiration and imitation.
53

54. Social innovation
– Systemic change: this is the
ultimate goal of social
innovation. This involves
change on a big scale driven
by social movements, fuelled
by new business models,
structured by new
organizational forms and
regulated by new public
institutions and laws.
54

55. High velocity environments
• New start-ups based on a radically discontinuous idea are
more likely to emerge in a high velocity environment (HVE)
that is characterized by:
– ‘rapid, discontinuous and simultaneous change in
demand, competitors, technology and regulation’ (Wirtz et
al., 2007: 297)
55

56. Strategy in HVEs
• In a high velocity environment, innovative strategy is not an
event or a plan but a continuous process of being alert
• Mintzberg (1989: 210) observed that:
– ‘because the innovative organization must respond
continuously to a complex, unpredictable environment, it
cannot rely on deliberate strategy. In other words, it
cannot predetermine precise patterns in its activities and
then impose them on its work through some kind of formal
planning process’
56

57. Institutional entrepreneurs
• Institutional entrepreneurs help establish new (and
sometimes challenge old) institutions by leveraging
resources to create new institutions or to transform existing
ones (Maguire et al., 2004: 657).
57

58. Institutional entrepreneurs
• Institutional entrepreneurs not
only play the role of traditional
entrepreneurs but also help
establish new (and sometimes
challenge old) institutions in
the process of their activities
58

59. Institutional entrepreneurs
• They do so by leveraging resources to create new
institutions or to transform existing ones (see Maguire,
Hardy and Lawrence, 2004):
– Electric car manufacturers have not only to innovate by
inventing the technology itself, they also have to innovate
the institutional environment comprising things like
infrastructure (e.g. car charging points installed by local
councils), government policy (e.g. tax breaks for low-
emission cars) and social values (e.g. raising consumer
desire for environmentally friendly cars)
59

60. Innovation environments
• Organizations operate in:
– ‘institutional environments [that] are characterized by the
elaboration of rules and requirements to which individual
organizations must conform if they are to receive support
and legitimacy’ (Scott, 1995: 132)
60

61. Clusters
• According to Michael Porter (1990), firms flourish best in
clusters because networks and density create a complexity
of interrelationships that also spark innovation:
– Clusters are geographical agglomerations of firms in
particular, related, and/or complementary, activities,
sharing a common vision, and exhibiting horizontal,
vertical intra- and/or inter-sectoral linkages, embedded in
a supportive socio-institutional setting, and cooperating
and competing in national and international markets
(Pitelis, 2012: 1361)
61

62. National innovation systems
• The likelihood of innovation emerging increases when there
is an appropriate national innovation system in place:
• National innovation systems are composed of different
patterns of institutions and organizational relationships
(Coriat and Weinstein, 2002)
62

63. Learning networks
• Clusters and ‘learning networks’ are both important in
building national innovation systems
• Bessant and Tsekouras (2001: 87) identify the following
advantages from shared learning in learning networks:
– potential for learning and reflection from different
perspectives
– shared experimentation can reduce cost risks
– shared experiences offer space for discussion and inquiry
63

64. Learning networks
– shared learning helps to
see the big picture issues
(the wood, not the trees)
– shared learning exposes
intra-organizational
cognitive maps and
challenges business-as-
usual through confrontation
with other models and ways
of doing things
64

65. Businesses are more likely to
innovate in national systems which
have
• Stable, coherent and effective administrative arrangements,
a long-term time horizon and investment in innovation
• Innovation system leadership and coordination through an
industry association for science, technology and innovation
policy, developing policy foresights, setting investment
priorities and developing early responses to challenges and
opportunities.
• Strategic approaches to building innovation capability
through improved agility and participation in global value
chains, a commitment to management capability building
and greater collaboration with the research sector.
65

66. Businesses are more likely to
innovate in national systems which
have
• Long-term, predictable and secure funding to support
science, research and innovation in alignment with national
priorities, as well as research training, researcher mobility
and national and landmark research infrastructure.
• Local and regional innovation ecosystems, as a catalyst and
enabler for industry development and transformation
through entrepreneurial start-up activities, business and
research networks and supportive policies and
infrastructure.
• Tertiary education institutions that are positioned to educate
and train future entrepreneurs, employees and managers.
66

67. Conclusion
• You should now know about:
• Radical and incremental
innovation
• Innovation platforms
• Service innovation
• Design thinking and innovation
• National innovation systems
• Social innovation
67

68. References
• Bessant, J. and Tsekouras, G. (2001) ‘Developing learning
networks’, AI and Society, 15(2): 82–98.
• Brown, A. (2008) ‘A materialist development of some recent
contributions to the labour theory of value’, Cambridge
Journal of Economics, 32: 125–146.
• Chesbrough, H.W. and Appleyard, M.M. (2007) ‘Open
innovation and strategy’, California Management Review,
50(1): 57–76.
• Christensen, C. (1997) The Innovator’s Dilemma. Boston,
MA: Harvard Business School Press.
68

69. References
• Coriat, B. and Weinstein, O. (2002) ‘Organizations, firms,
and institutions in the generation of innovation’, Research
Policy, 32(2): 273–290.
• Cusumano, M.A. and Gawer, A. (2002) ‘The elements of
platform leadership’, Sloan Management Review, 43: 51–
58.
• Dorst, K. (2015) Frame Innovation. Boston: MIT Press.
• Dougherty, D. (2006) ‘Organizing for innovation in the 21st
century’, in S.R. Clegg, C. Hardy, T.B. Lawrence and W.R.
Nord (eds), Handbook of Organization Studies (2nd edn).
London: Sage. pp. 598–617.
69

70. References
• Kamoche, K. and Cunha, M.P.E (2001) ‘Minimal structure:
From jazz improvisation to product innovation’, Organization
Studies, 22(5): 733–764.
• Maguire, S., Hardy, C. and Lawrence, T. (2004) ‘Institutional
entrepreneurship and emerging fields: HIV/AIDS treatment
advocacy in Canada’, Academy of Management Journal,
47(5): 657–679.
• Mintzberg, H. (1989) Mintzberg on Management: Inside our
Strange World of Organizations. New York: Free Press.
• Murray, R., Caulier-Grice, J. and Mulgan, G. (2010) The
Open Book of Social Innovation. London: NESTA.
70

71. References
• Osterwalder, A. and Pigneur, Y. (2010) Business Model
Generation: A Handbook for Visionaries, Game Changers,
and Challengers, eBook, Kindle edn. John Wiley & Sons.
• Phillips, W., Lamming, R., Bessent, J. and Noke, H. (2006)
‘Discontinuous innovation and supply relationships –
Strategic dalliances’, R&D Management, 36(4): 451–461.
• Pitelis, C.N. (2012) ‘Clusters, entrepreneurial ecosystem co-
creation, and appropriability: A conceptual framework’,
Industrial and Corporate Change, 21(6): 1359–1388.
• Porter, M.E. (1990) The Competitive Advantage of Nations.
New York: Free Press.
71

72. References
• Prahalad, C.K. and Ramaswamy, V. (2004) ‘The new
frontier of experience innovation’, Sloan Management
Review, 44(2): 12–18.
• Schumpeter, J. (1942) Capitalism, Socialism and
Democracy (1987, 5th edn). London: Unwin Hyman.
• Scott, R.W. (1995) Institutions and Organizations. Thousand
Oaks, CA: Sage.
• Simon, H.A. (1969) The Sciences of the Artificial.
Cambridge, MA: MIT Press.
72

73. References
• Tapscott, D. and Williams, A.D. (2008) Wikinomics: How
Mass Collaboration Changes Everything. New York:
Portfolio Trade.
• Tushman, M.L. and O’Reilly, C. (1996) ‘Ambidextrous
organizations: Managing evolutions and revolutionary
change’, California Management Review, 38(4): 8–30.
• Vargo, S.L. and Lusch, R.F. (2004) ‘Evolving to a new
dominant logic for marketing’, Journal of Marketing, 68(1):
1–17.
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74. References
• Vargo, S.L. and Lusch, R.F. (2008) ‘Service dominant logic:
Continuing the evolution’, Journal of the Academy of
Marketing Science, 36(1): 1–10.
• Wirtz, B.W., Mathieu, A. and Schilke, O. (2007) ‘Strategy in
high velocity environments’, Long Range Planning, 40: 295–
313.
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