innovation engineering in UK

Innovation in UK engineering firms

Abstract

This article shall define the criteria for judging of the competition to find the most innovative engineering firm in the UK. An introduction to the subject of innovation, and a review of the current methods used to measure innovation, in both product and service based firms, shall be presented. For each measurement technique, the advantages and disadvantages shall be discussed, and finally recommendations will be made as to which measurement system and indicators shall be used to judge the competition. The report shall recommend that both subject and object based measurement techniques be used in judging the competition. The report shall also recommend that the innovativeness of the product or service and value-added, be used as the primary indicators in judging the competition.

Contents

1 Introduction 1

Innovation 1

Radical versus incremental innovation 1

Innovation and risk 2

Intellectual property (IP) and Knowledge 3

Measurements of innovation 4

Innovation surveys 4

Subject approach 5

Subjective judging criteria 7

Object approach 8

Objective and overall judging criteria 9

Conclusions 9

References 10

1 Introduction

Innovation

Innovation is the exploitation of new ideas in order to increase either customer or organizational value. [1] It is distinguished from invention in that invention is the creation of a unique idea,whereas innovation is the use of that idea to create value. [2, 3] Innovation therefore generally requires production and distribution facilities as well as skills, market knowledge and financial resource. Invention however, can take place without, or with very small amounts of these resources. Invention and innovation can therefore take place in very different environments. As well as this, a lag can take place between invention and innovation if the required resources, orcomplimentary inventions such as materials with improved properties, are not available to

implement the invention. [3]

Radical versus incremental innovation

Innovation can take place in an incremental or radical manner. Radical innovation is the introduction of a completely new product to the market, while incremental innovation is the improvement or adaptation of an existing product, or imitating a competitor’s product. [4] However in reality this distinction is blurred, with five different sub-classifications being found by Garcia and Calantone, in-between radical and incremental. [5] Radical was redefined as being a product or service which is new to the market, which creates a demand not previously recognised by the customer. (e.g. the World Wide Web) The lowest form of incrementalinnovation was imitative innovation which was defined as a product not being new to the market,but was new to the firm. Innovation is particularly important to UK based companies, especially with the threat from

emerging economies such as China and India, which can offer goods and services at a lower cost

due to their very low running and labour costs. [1] It is therefore necessary that UK based

companies, create radically new products or add significant value to their product through

innovation, in order to compete more on a quality basis, rather than a cost basis. The importance

of radical innovation is highlighted by the PDMA (product development and management

association) study on new product development, which showed that 49.2% of sales in best

practise firms came from radical innovation (new to the world) products, commercialized in the

last five years. The high profitability of these radically new products is highlighted in the fact

that these products only accounted for 10% of the total product portfolio. [6, 7, 8]

Innovation and risk

Both incremental and radical innovation can be profitable, but the right type of product must be

developed, and commercialised at the right time for success. As can be seen from the PDMA

data, radical change is much more profitable than incremental, but it also has a much greater risk

involved. The PDMA study found that less than 60% [6] of launched new products were a

success. This number seems to be inherent risk, as the number remains the same regardless of

the NPD improvements that have taken place since the previous PDMA study. This risk is due

to a completely new product being launched into the market with very little previous experience.

This is unlike incremental innovation where the experience of launching similar products

previously, can be used to minimize risks. [8] Experience must also be gained in the new technology, and resources must be geared towards producing it, while these changes are not needed with incremental innovation. [8] It is also important that the time to market, from invention to innovation, is kept to a minimum. If this

time period is excessive imitative innovators may be able to release similar products before the

inventing company, and as a result sales could be lost. These factors increase the cost and risks

involved, greatly. However despite the high risks involved, a company will need to develop the right radical innovations before their competitors, or in an adequate time after their competitors, in order to maintain a competitive edge over their rivals. If this does not happen, the radically new product may dominate the market and make the product produced through incremental change obsolete. (e.g. cameras and Kodak) Given these findings, it is clear that a balance between incremental and radical innovation must be found in order for a company to be a success. If a company is too greatly concerned with radical innovations, much time and money could be wasted in developing products which

ultimately fail. While if it is not at all concerned with radical change, it would not be fulfilling

its potential in terms of profitability and a step change in products in the market may make the

product it is currently producing obsolete. It is also important to note that despite the very high

profitability of successful radically new products, non-radical products which have been on the

market for a number of years, still account for more than half of the total sales in the PDMA

study. Therefore their significance should not be ignored.

As well as the different ...

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ultimately fail. While if it is not at all concerned with radical change, it would not be fulfilling

its potential in terms of profitability and a step change in products in the market may make the

product it is currently producing obsolete. It is also important to note that despite the very high

profitability of successful radically new products, non-radical products which have been on the

market for a number of years, still account for more than half of the total sales in the PDMA

study. Therefore their significance should not be ignored.

As well as the different types of innovation, innovation can also be broadly defined into two

categories, product and process innovation. [9] Process innovations include aspects such as

improving the production process, changing the materials used to make a product or identifying

new sources for the existing materials. Organisational innovation and different methods of

distribution can also be categorised as process innovation. These different types of innovation

are sometimes measured in different ways, with different indicators. The different ways of

measuring innovation is covered in the section 2 of this report.

Intellectual property (IP) and Knowledge

As mentioned above, there is a threat from imitative innovation on an invention that has been

created by another firm. It is therefore vital that secrecy or patenting is used to protect these

ideas or inventions. If a firm has not protected an invention adequately a rival firm can release

the product while it is being developed by the inventing company and steal sales away from the

company. In countries that have a first to file patenting process, such as the UK, the imitating

company may also be able to file a patent on the invention. This would be worse still for the

inventing company.

IP is also of importance in process innovation where protection can provide capital from licences

taken out by other firms to use the process. It can also prevent rival companies from imitating

the invention, so the inventing company has an advantage over its competitors from using it.

Knowledge of the market is also of importance. Companies need to know what products to

release and when to release them. Innovation is generally a disruptive and costly process, so it is

vital that companies recuperate their losses through either sales of product or cost saving.

Generally, for success of a product there should be little competition in the target market, the

number of potential buyers must also be adequate. Roure and Keeley (1990) [10] showed that an

inverted U-shaped relationship exists between concentration of buyers and viability. A high

concentration of buyers exists where many customers exist in the target market, but have limited

ability to buy the product, whereas a high concentration is the opposite. The optimum of

viability was shown to exist with a medium buyer concentration. As well as this, the relative

price must reflect the quality and value the customer gains from using the product. [11]

It is also important that firms have experience of innovating, and innovate in products and

services where their core competencies lie. This can reduce the risks involved in innovation, as

the firm as a whole and its employees can learn by their mistakes on previous innovative

products. A venture into something completely new to the company can have great risks

involved due to the lack of experience in the field. [11]

Measurements of innovation

Measurements of innovation are of importance to industry and government, as well as for

judging competitions. Industry needs this information in order to determine the correct level of

investment into innovation and to determine the areas in which innovation would be

economically profitable. Whereas for government they are important in assigning resources to

organizations or assessing the performance of publicly funded organisations and projects. In

both these cases, the monitoring of innovation may also be used to identify any barriers to

innovation and increase the efficiency of innovation. [6]

The basic method of measuring the capacity of a company for innovation is through innovation

surveys. These take into account expenditure on R&D, patent applications and any

organisational help or hindrances to innovation, amongst other factors. The measurement system

is limited to companies with a significant amount of transparency. If the company is very

secretive, for example due to national security reasons, they will be very reluctant to fill in any

innovation surveys and release statistics on their spending. They will also rely on internal

confidentiality to protect their ideas and intellectual property. This cannot be easily overcome

and will therefore, limit surveys and the competition to companies with an adequate level of

transparency.

Innovation surveys

Innovation surveys are designed to probe the innovative activities carried out by firms. They can

take place using two strategies, the subject approach and the object approach. The subject

approach takes into account the attitude of a particular firm to innovation. It also identifies the

inputs and outputs of innovation, which is particularly useful. However it take too broad a view

to give much information about the degree of innovation in the products produced, or the degree

of communication between the different players in the innovative process. It also does not give

much information about the help and hindrances experienced by the players in these firms. [9,

12, 13] This type of information is more readily achieved from the object approached.

The second strategy is the object approach in which data is collected about a particular

innovation or innovative project. The survey approach is more time consuming than the subject

approach, for both the company and surveyor, but gives good complementary data on the

innovativeness of the company’s products. It can also be used to asses expenditure on the

particular innovative product, which is hard to do with the subject approach, which tends to give

expenditure as a whole. [9. 12, 13]

Subject approach

The European commission used the subject approach to determine the innovative performance of

countries in the European Union. [14] This approach can be applied at the firm level in order to

determine innovativeness. The European commission analysed data on 17 indicators, split into

four different categories, in order to analyse the innovative performance of different countries.

The indicators which are of importance in judging this competition, were categorised into three

categories, and are:

• Knowledge creation:

Public R&D expenditure.

Business R&D expenditure: expenditure includes that on fixed assets (plant, equipment

etc) for R&D purposes, and payments to others firms or divisions of the company for

R&D purposes. Expenditure can be measured by innovator-based reporting on the

amount and source of funds for R&D purposes, as recommended in the Frascati manual

[15].

Patenting activity: Although patenting activity is a measure of invention rather than

innovation, it is seen that the vast majority of European firms use commercially, or

licence much more than half of their patents. A European patent office (EPO) survey

showed that 47% of European firms licensed or commercially used more than 90% of

their patents, while a further 16% used between 50 and 90%. [13]

A further gauge of the commercial importance and innovative quality of these patents is

to asses the amount of times they are renewed, or the number of years the firm has paid

renewal fees for. The number of countries the patent application is extended to can also

be used to determine the innovation involved and what the firm expects the invention to

achieve. [16, 13]

• Transmission and application of knowledge:

The number of in house innovative activities

Number of cooperative (with other firms) innovative activities

Innovation expenditure.

This assessment will give an indication of non-R&D related, process innovations, undertaken by

the company.

• Innovation finance output and markets:

amount of new or slightly improved products (to both existing and new markets)

released in last five years and sales figures for these products

access to venture capital (capital to explore new ideas, and develop, market, manufacture

and sell the new product)

Information and communication technology (ICT) expenditure

Amount of value added from innovations

The information described above shall be obtained through a combination of investigations in to

the accounts of the companies involved, and innovator-based reporting in the form of

questionnaires. This approach is a relatively cheap and easy way to narrow down the contenders,

before a more intensive object approach is taken. It is also, mostly focused on figures which

have very clear definitions. This means the results cannot be easily skewed to give a better

image of the firms involved.

Subjective judging criteria

The value-added is the most important indicator of innovation, of those described above. This is

in keeping with the original definition of innovation adding value to the organisation or

customer. The value-added can be easily obtained for cost cutting process innovations, but may

be harder to obtain for product innovations. A question in the questionnaire, related to what the

company’s perception of the value added to some of their products, or in case of services, what

the client’s perception of the value is, would be useful.

The second tier of importance, are those indicators dealing with expenditure on innovation and

sales of new or slightly improved products. Innovation is the successful delivery of value, and

therefore sales through product innovation, or reduction in cost through process innovation is of

vital importance in manufacturing firms. The efficiency of delivery, the expenditure to sales or

savings ratio, is also of importance. This figure is more balanced when smaller firms are

considered, as they may not have the resources that larger firms do. In cases where there are no

sales figures, such as with services, the value-added shall be used instead.

Venture capital is also of vital importance in innovation, as without these funds being made

available, innovation which is much more fund-dependent than invention, cannot take place.

This information on venture capital, can capture the more recent situation of innovation funding,

unlike the sales and expenditure data which could be a number of years old.

Other indicators mentioned above are of less importance still. The number of current

innovations is a measure of those in progress and so can’t be strictly defined as innovations,

which must have delivered value. However the figures may be of use in analysing newly formed

companies and any changes in the degree of innovative activity within companies.

Patents are a measure of invention and apart from in cases where there are licensed to other

firms, do not deliver any value. Therefore they are not of significant importance. ICT

expenditure may significantly aid innovation, but cannot be used as a direct measure for

innovation.

Object approach

The European commission scoreboard type subject approach can give a good understanding of

the companies involved in the competition. Once this is complete a more intensive object

approach can be applied to a select number of companies which have performed well in the

subject approach. This approach involves analysing the innovations that a company is involved

with, and therefore enables the degree of innovation that is present in the companies’ products to

be much more easily recognised. The reasons for releasing new products and undergoing other

innovative activities can also be determined more easily using this approach. This information

along with the data from the subject approach can be used to further narrow down the list of

contenders before an innovative project lifecycle approach is used on the remaining companies,

as described below.

A project lifecycle approach, as set out by Brusoni et al (1998) [17], can be used in order to

analyse a particular innovative activity. Information about the role of different parts of the firm

and external companies in the innovative process, as well as the relationships and knowledge

sharing between these internal and external players shall be gained through this approach. Short

questionnaires and interviews with the project leaders or persons heavily involved with the

innovative activity can be used to obtain this information. This shall be repeated over the

lifetime of the project or activity in order to gauge any changes which take place as the

development progresses.

This approach should enable good information to be collected on the degree of communication

between different divisions in firms and the level of collaboration with other firms. It should

also provide information on what hampers innovative activity and what the best approaches to

innovation are. The information can also be compared with that from other firms, in order to

determine best practices with regard to innovation. This would be of great benefit to firms

involved with innovation.

Despite all the benefits that can be obtained from a project lifecycle based analysis of a

company’s activities, the process is very time consuming for both the innovating company and

the surveyor. It can also be very costly for the surveyor and very laborious for the innovators, as

some projects can take place over a number of years with questionnaires and interviews taking

place at regular intervals in these years.

It is therefore recommended that enough incentive is given, in terms of prize money, publicity,

and a better understanding of the innovative process within their firms, in order for the

companies to be cooperative. Consideration must also be given to the financial budget and the

time scales involved in determining the winner of the competition. Although, a less costly and

burdensome survey of part of the lifecycle of the project may still provide useful information.

Objective and overall judging criteria

As the competition is regarding innovation, the innovativeness of the products shall be the most

important factor in judging the winner. The innovativeness together with the value-added, from

both product and process innovations, should be the main indicators used in judging the

competition. Sales figures for products are of slightly less importance as they depend on

awareness and incorporation of the technologies. This will be dependant on time, and will differ

for different technologies. Thought should be given to the incubation period of the product,

before a decision is taken on the credence given to sales figures.

Communication and funding is of vital importance in aiding innovation, but cannot be used as a

direct measure of innovation. If significant value-added innovation takes place with little

communication between departments and firms and little funding, it should still be given the

same the same credence as those with good communication between departments. However, the

companies involved should be told of any communication problems in order for the efficiency of

innovation to be improved and advised to reflect the innovative abilities of the firms in the

budgeting for innovative activities.

Conclusions

This report has set out the criteria for judging the competition for the most innovative firm in the

UK. The most important indicators for judging the competition are the degree of innovation and

the value added through innovation, with sales of product innovation and cost saving through

process innovation also being of importance. Factors aiding innovation such as funding and

communication are not directly related to the innovative capacity of a firm and so are of less

importance.

Word count: 3,966

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innovation engineering in UK

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