Connotation and types of innovation

Authored by: Jin Chen , Ximing Yin

The Routledge Companion to Innovation Management

Print publication date:  February  2019
Online publication date:  February  2019

Print ISBN: 9781138244719
eBook ISBN: 9781315276670
Adobe ISBN:




Innovation has been widely regarded as the central process driving economic growth and the sustainable competitive advantages of both companies and nations, as well as global sustainable growth, while the key precondition to conducting innovation management effectively is to have a big picture and deep insight of the concept: the nature of innovation (Schumpeter, 1934). This chapter will introduce the connotation and types of innovation, as well as the latest trend and emerging paradigm of innovation (Chen, Yin, and Mei, 2018; Martin, 2016).

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Connotation and types of innovation

Basic definition and nature of innovation

Innovation has been widely regarded as the central process driving economic growth and the sustainable competitive advantages of both companies and nations, as well as global sustainable growth, while the key precondition to conducting innovation management effectively is to have a big picture and deep insight of the concept: the nature of innovation (Schumpeter, 1934). This chapter will introduce the connotation and types of innovation, as well as the latest trend and emerging paradigm of innovation (Chen, Yin, and Mei, 2018; Martin, 2016).

Basic definition of innovation

Innovation is a very ancient English word which stemmed from the Latin word “innovare”, meaning renewal, making of new stuff or change.

Joseph Schumpeter, a professor from Harvard University and an Austrian American, was the first scientist to introduce the innovation theory (Fagerberg, 2003). In the German edition of The Theory of Economic Development, published in 1912, he systematically defined the word “innovation” as the introduction of an unprecedented “new combination of production factors” into the production system. Innovation is made in order to obtain potential profit (Chen, 2017).

In putting forward the innovation theory, Schumpeter was motivated primarily to provide an all-new interpretation of the internal mechanism of economic growth and economic cycles. Based on the internal mechanism of innovation, he explained why a capitalist economy assumed a “boom-recession-depression-recovery” cycle, adding that innovation at different levels contributed to three economic cycles of varying lengths (Schumpeter, 1934).

Schumpeter summarized the following five forms of innovation:

  • Introducing new products or improving product quality;
  • Adopting new production methods and processes;
  • Developing new markets;
  • Exploiting new sources of supply of new material or partly finished products;
  • Implementing new organizational forms.

However, his original thoughts on innovation were difficult for most people and mainstream economists to accept for a very long time, until the 1950s, when science and technology began to play an increasingly independent and outstanding role, drawing a lot of attention to innovation theory research. From the 1980s onwards, researchers went deeper into and applied theories of technological innovation to many realistic phenomena in economic development. The significant place and systematic theory of innovation gradually began to be established.

Initially, innovation was used primarily to define technological innovation, namely, the creation and introduction of new technology into a product, process or business system. The invention of an all-new product or process is an important technological improvement on the existing ones, or the launch of a new product into the market (product innovation), or the application of a new production process (process innovation).

The Organisation for Economic Co-operation and Development (OECD) issued the first edition of the Oslo Manual: Proposed Guidelines for Collecting and Interpreting Technological Innovation Data in 1992, updated in 1997 and 2005, in which it broadly defines technological innovation as: “An innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations” (OECD/Eurostat, 2005, p. 46). The narrower definition of innovation could be “the implementation of one or more types of innovations, for instance, product and process innovations”. An innovation is deemed to have been realized if a product was launched into the market or a process was applied to production. Therefore, innovation spans a range of activities, whether scientific, technological, organizational, financial or commercial.

In addition, the scholars defined innovation differently:

  • American scholar Mansfield held that an invention could be termed a technological innovation the first time it was applied (Mansfield, 1968).
  • British technology policy expert Prof. Christophe Freeman regarded innovation as the many steps (e.g. technology, design, manufacturing, finance, management and marketing) that took place the first time a new product or process was initiated (Freeman, 1987).
  • American scholar Chesbrough defined innovation as the creation and commercialization of an invention (Chesbrough, 2003).
  • American scholar Drucker considered innovation a special tool an entrepreneur applies in order to turn changes into different business and service opportunities. Innovation can be a discipline, an academic field or a practice (Drucker, 2009).
  • The China’s Central Committee and State Council defined technological innovation more systematically in The Resolution on the Further Development of Technological Innovation, High Technology and Industrialization, 1 issued in 1999:
    • Technological innovation is the application of innovative knowledge, new technologies and processes by an enterprise. It also encompasses the adoption of new production methods and management models to improve product quality, develop new products, provide new services, occupy new market share and realize market value.

In this book, the author defines innovation as an entire procedure encompassing the genesis, design, R&D, trial production, production and commercialization of new thoughts and ideas. It symbolizes the ability to transform foresight, knowledge and enterprise into wealth, especially the ability to combine technical knowledge efficiently with commercial knowledge to derive value. In a broader sense, all the undertakings aimed at creating new economic or social value can be termed innovation.

At the outset of an innovation initiative, problem orientation and strategic foresight are equally important to clarifying the strategic direction. One should apply a holistic thinking mind-set to manage the tension and paradox between short-term problem-driven and long-term future-prospect thinking processes. While innovation is under way, it is very necessary to keep in close touch with the team members and stakeholders (e.g. the user, joint venture, university and investor). When it comes to state of mind, freewill, great courage to take a risk and a positive attitude to setbacks are requisites. When it comes to performance, a lot of attention should be paid to the contribution of innovation to social development and environmental protection, as well as to the materialization of commercial value. See Figure 3.1.

Innovation does not necessarily involve technological changes

Innovation does not necessarily have a technological or physical nature. It may be an invisible asset or approach (Rogers, 2010). It’s not technology, but the online business model of Google, Amazon and Alibaba that contributes most to the prevalent success of the World Wide Web. Since China marketized the electrical power industry with a competitive feed-in tariff mechanism, the policy has led to a prolonged wave of corporate innovation in strategy, organizational structure, management and operation. It’s very clear that innovation is a prevalent trend in many forms and fields. Compared with technological innovation, institutional innovation is more important, although more difficult to achieve. One example is Shenzhen, a fast-growing city, which rose over two decades ago in economic reform and derives its success from the establishment of the Shenzhen economic and technological development zone (ETDZ) in the 1980s. According to the report released by the World Economic Forum in 2018, Shenzhen ranks number one among emerging cities with its global networks of innovation. Shenzhen has built on its reputation for hardware manufacturing to develop its own internationally competitive innovation ecosystem. Internet giant Tencent is based in the city, as are the global hardware firms of Huawei and ZTE. As a result, the city sees the third-highest number of patent applications of any city in the world. As China’s capabilities grow, Shenzhen is likely to be at the center of this. 2

Connotation meaning of innovation

Figure 3.1   Connotation meaning of innovation

Technology leadership does not equal successful innovation

Technology leadership does not necessarily mean successful innovation. See Table 3.1.

These technology leaders failed in their products and programs primarily because of poor coordination of nontechnological factors with technological factors, marketing and manufacturing capacity. Take Wanyan, for example, the company that unveiled the world’s first VCD in 1994. However, it dropped behind in the ensuing campaigns on market expansion, marketing and manufacturing capacity and ended up falling out in a VCD war. On the contrary, Intel and Haier succeeded in transforming technological advantages into market advantages through effective coordination of technological and nontechnological factors.

Success factors in innovation

Over the past decades, scholars have summarized some important success factors for innovation, including:

  • Integration of departmental responsibilities: The various departments converge functionally in an effective manner so that all the departments are involved as an integrated body in the innovation program from the outset to make highly manufacturable designs.
  • Strong market orientation: Potential users are allowed to participate or get involved in as many R&D programs as possible to play a pioneering role.
  • Good external communication: The innovator keeps in effective touch with external scientific and technological sources and remains receptive to new thoughts from without.
  • Ingenious plans and more program control procedures: Resources are deployed so as to select new program procedures. Program assessments are made in order to manage and control programs effectively.
  • Key persons: Such persons include influential program advocates and technological gate keepers. There must be energetic managers. Talented managers and researchers must be retained.

Table 3.1   Technology leadership does not mean successful innovation




Pilkington (float glass process)

Mitsubishi (VHS video recorder)

Intel (CPU)


Founder (laser typesetting)

Lenovo (PC)

Haier (water heater safety device)

Eastcom (cellphone)


EMI (scanner)

Nokia (smart phone)

Xerox (PC, mouse, etc.)

Letv (Internet + TV)

Wanyan (VCD)

GREE (mobile phone)

XH Electronics (color TV)

Baidu (take-out platform)

Motorola (iridium)

Solyndra (solar power)

Apart from these, certain strategic factors are also a precondition to successful innovation:

  • The senior management team gives a pledge of commitment to support an innovation program.
  • A long-term corporate strategy must be positioned to play a key role.
  • For significant projects, long-term resource planning must not be based solely on a short-term payback period but on future market penetration and growth.
  • The firm must be flexible and responsive to changes. There must be a sensible internal innovation mechanism.
  • The senior management is risk tolerant.
  • There must be an innovation-receptive corporate culture fit for innovator development.
  • The entrepreneurial, institutional and financial environment must be supportive. Effective external incentives are important as well.
  • There must be close ties between R&D and other corporate divisions, as well as a sensible R&D structure.

Innovation and relevant concepts

Innovation and creation

Putting it simply, innovation is the proposal and commercialization of a creative idea. There will be no innovation without creative ideas. Creativity differs from innovation, in that the former involves only putting forward creative ideas, while the latter materializes and commercializes the ideas.

Innovation and invention

Innovation and invention often interweave with each other, so many confound them. But the two concepts are fundamentally distinct. Some innovations include no invention at all. A certain innovation that concerns an invention may encompass more than the latter. A measure of invention is the number of patents, or the wave of cheers from secluded laboratories. Innovation, however, means the translation of an invention into application; as Einstein cautioned his assistants: “We must achieve concrete results. We’re not those German professors wasting their life on bee hairs”.

Schumpeter, who first differentiated invention from innovation, held that one of an entrepreneur’s responsibilities is to introduce new inventions into the production system and that innovation is the first-time commercialization of an invention (Fagerberg, 2003; Schumpeter, 1934).

It’s natural that a time lag exists between the invention of a technology and its commercialization as an innovation. By and large, a period of technology diffusion or adjustment typically comes before an innovation produces a remarkable economic impact (Andergassen, Nardini, and Ricottilli, 2017). For example, the fax machine took 145 years to really commercialize.

The chance that an invention successfully turns into a commercial innovation is small. In the United States, a meager average of 12 to 20 percent of all R&D projects stand a chance of turning out successful commercial goods or processes.

Innovation and entrepreneurship

The concept of entrepreneur was first put forth in the 1730s by French economist Richard Cantillon, who believed that an entrepreneur worked to improve the efficiency of economic resources. Entrepreneurship is a set of special skills of a spiritual and technical nature. In other words, entrepreneurship is used to describe the versatile talent an entrepreneur exhibits in the creation, management and operation of an enterprise (Drucker, 2009). It is an invisible, singularly critical production factor, and innovation lies at its core. Besides, entrepreneurship normally encompasses such traits as risk taking, courage to explore, learning ability, persistence, devotion, cooperation and integrity.

Innovation and R&D

Since Thomas Edison made innovative invention a branch of science in the 19th century, R&D has served as an important measure of the innovation capability of a country or enterprise (Belderbos, Carree, and Lokshin, 2004).

There are many definitions of the word. The OECD defines R&D as systemic creative work aimed at enriching the knowledge repository regarding humans, culture and society, as well as the utilization of such knowledge for new inventions and applications.

The OECD classifies R&D activities into three types: basic research, applied research and experimental development. Basic research refers to experiments or theoretical research, which, based on phenomena and facts, aims primarily to acquire new knowledge and has no concrete application purposes. Basic research is conducted to generate new knowledge and discover truths and has no directionality. Although much of the basic research in the United States is funded by the federal government, a large number of top-of-the-line firms are also very successful in this area. Take Johnson & Johnson, for instance. The conglomerate spent $US10.554 billion on R&D in 2017, taking about 12.7 percent of its total revenue. At the same time, Merck, an emerging leader of innovative medicines, vaccines and animal health products, spent $US7.5 billion on R&D in 2017, taking about 17.2 percent of its total revenue. 3 Researchers have reached one consensus: basic R&D on the existing platform of technological knowledge is the one way potential invention opportunities can be quickly discovered and utilized. The viewpoint hypothesizes that technology drives innovation.

Applied research refers to investigation on raw data and deals primarily with the acquisition of new knowledge on a specific applied or pragmatic field. The objective of applied research is clearly defined, and the resulting inventions, if any, may be commercialized, since it is oriented to solving practical problems a firm faces. Applied research proponents don’t think basic research is necessary because they have a sufficiently large stock of knowledge for their businesses.

Experimental development refers to systematic trials that convert knowledge derived from scientific research and experience on new material/product/equipment manufacturing to the development of new processes, products, systems and services, or to the improvement of existing processes, products and services.

R&D starts from creative ideas, extending all the way through research, development and success of trial production. The center of R&D lies in process and output.

An increasing number of companies are paying more attention to R&D capabilities. Major corporations across the world run their own research bodies, like IBM, Microsoft, Siemens, Huawei and Haier. A firm may encounter huge problems buying advanced technology from the market, especially in an era full of cutthroat competition when the owners of cutting-edge technology will not choose to part easily with the huge profits before strong competitors appear. Even if traditional technology can be bought, it is usually expensive. With the development of technology and the escalation of market competition, firms will need more advanced technology, which requires much more expenditure. Furthermore, some technologies may not be applicable upon introduction. They have to be assimilated and adapted to the production and management system of the firm before achieving business profit.

Overall, technological knowledge constitutes an integral part of a company’s core capabilities. A company cannot maintain long-lasting competitive advantages unless it carries out R&D activities to accumulate unique technological knowledge (and especially its own R&D talent resources) in order to avoid being emulated by competitors.

Table 3.2 outlines the difference between technological innovation and some similar concepts.

Nature of innovation

Innovation spans the whole process from basic research through to applied research, with a “Death Valley” in between. To be effective, an innovation should have some kind of a bridge to connect basic research to applied research, or else ultimate commercialization efforts will end up in failure and the innovation will not realize its value. Therefore, how to establish ties between basic research and commercial applied research is very critical to innovation.

Innovation can also be depicted in terms of the knowledge–capital interaction process. As an essential part of innovation, research relies on capital input to deliver knowledge output, which lays the foundation for innovation. Innovation as a new capital eventually contributes to a greater capital spillover. See Figure 3.2.

Table 3.2   Technological innovation vs. similar concepts


Simple definition

Distinction from technological innovation


Propound a new concept, thought or doctrine for the first time.

No mass production and commercialization.

Basic research

Explore the world and technological advances. No specific commercial goals.

No intensive trial production, mass production and commercialization.

Applied research

Systematic creation activities aimed at acquiring more technical knowledge by working towards specific goals.

Inadequate links with the production and market sectors.

Experimental development

Employ the knowledge derived from basic/applied research to develop new materials, products and equipment.

No consideration for commercialization.

Technology introduction

Introduce new equipment and talent to improve production capacity and marketability.

No guarantee for market entry.

Technological renewal

Involve primarily systematic or partial renewal of production equipment.

Can improve production capacity, but commercialization possibility remains unknown.

Technological revolution

Strictly speaking, technological revolution encompasses the whole span from invention, to innovation, to diffusion.

Takes a longer time than innovation. An economic concept. Less operable in reality.

Technological progress

The process wherein innovations mass and consolidate over years.

Post-innovation summation of innovation history.

Figure 3.2   Knowledge–capital interaction

Source: Adapted from the web content of the Technical University of Munich,
What’s critical to innovation success – linking strategy and
                                 creativity, R&D, production and marketing

Figure 3.3   What’s critical to innovation success – linking strategy and creativity, R&D, production and marketing

From the perspective of organizational management, innovation pays attention to the effective coordination of strategy and creativity, R&D, production and marketing. Typically, effective synergism and coordination among the four divisions are very important to a firm and require great emphasis. Generally speaking, the vast majority of the innovation failures are not attributed to technological factors, but to defective strategy, market survey, sales management and organizational management. See Figure 3.3.

Basic types of innovation

Innovation can be classified in different terms. In terms of content it can be classified into product innovation, process innovation, service innovation and business model innovation.

Product innovation

A product in the traditional sense is any tangible physical good or raw material, ranging extensively from everyday products (e.g. toothpaste) to industrial goods (e.g. steel pipes) (Gao et al., 2017). At the early stage of the product lifecycle, there is no prevalent design in the market and products are subject to major changes. Therefore, a firm must constantly improve on an innovation to meet customer demand, expand the customer base and build up greater market advantages.

There is a recent trend among service companies (e.g. insurers, financial firms, telecommunications carriers and other professional service firms) to promote their services as “products”. One case in point is the successful launch of Alipay, an online financing product, by Ant Financial Company in 2004, which is trying to bring inclusive financial services to the world. As described by Fortune’s Annual Change the World List 2017, Ant Financial’s Ant Forest app has encouraged 450 million users in China to do just that in fulfillment of parent Alibaba Group’s pledge to use financial technology to tackle climate change. Users earn points toward planting virtual trees by adopting earth-friendly habits. The company plants a real tree for every 17.9 kg of carbon saved: over 8 million were planted in 2017. And the engagement keeps customers loyal to Ant’s widely used payment app. 4

In order to break the traditional bounds of industry, a growing number of producers are beginning to provide customers with services centering on their products. For example, automakers offer roadside assistance to drivers. GM sells cars, but customers buy service as well, which is sold as part of the deal. One such service is OnStar, a vehicle-mounted GPS satellite communications system that enables GM customers to locate themselves at any time and call for help in case of emergency.

Although the service firms tend to describe what they offer as a product, it’s different from what we generally perceive as a product. Most importantly, whereas generic products are visible, service is, in many cases, invisible. Insurance is intangible, but a snowboard is physical and visible. A service product (e.g. medical and health care) is produced and consumed simultaneously, and its delivery requires very active participation of the consumer. Besides, it is extremely difficult, if not virtually impossible, to prohibit imitation by the establishment of a patent law. In the model of product innovation, service takes the predominant form of tie-ins designed to increase the value-added of a product and improve its market competitiveness.

In simple terms, product innovation means the release of a new product designed to meet customer demand or solve customers’ problems. Examples of product innovation include the Apple iPhone, Haier’s environmentally friendly twin tub washing machine (no need for washing powder) and the Huawei Mate 8 fingerprint recognition smart phone. Product innovation can be subdivided into component innovation, architectural innovation and complex products and systems (CoPS) innovation (Chen, Tong, and Ngai, 2007; Hobday, 2000).

Component innovation

The vast majority of products and processes are hierarchically nested systems; that is to say, the product or process as an entity is a system made up of components, each of which is in turn made up of a lower hierarchy of components until the hierarchical structure ends at an indivisible level. One example is the bike, which is a system comprising the frame, wheels, tires, seat, brake discs and other components. Each of these components is an independent system. For example, the seat can be considered a system comprising the metal and plastic frame, stuffing and nylon cover.

Innovation may lead to changes to an individual component, or the entire structure where a component works, or both. If an innovation leads to changes to one or more components without severely compromising the entire system structure, it’s termed a component innovation. One case in point is an innovative bike seat that introduces gel stuffing as an enhanced dampening material while involving no further structural change to the bike.

Architectural innovation

In contrast to component innovation, architectural innovation drives changes to the entire system structure or to the action mechanism governing two or more components (Wilden, Devinney, and Dowling, 2016). While a stringent architectural innovation may change how the components interact as a system, no substantial change occurs to the components themselves. Moreover, most architectural innovations not only change the interaction but also change the components themselves, leading to a fundamental system change. Architectural innovation may have a far-reaching complex impact on the market competitors and technology users. One example is the transition from a functional cellphone to a smart cellphone. This architectural innovation requires not just applicable changes to many components but also changes to how the cellphone is operated.

Whereas a single-component innovation requires a firm to master the expertise about the component, initiating or introducing an architectural innovation requires the mastery of how to assemble and integrate the components structurally into the system. The firm must learn about the features of the various components, how they work together and how some system feature changes trigger substantial system changes or structural feature changes to individual components.

CoPS innovation

The CoPS evolved from the LTS (Large Technical System), a concept which originated from the US military’s technology development system. The CoPS remained a relatively new concept even to Western countries until the late 1990s when clearer definitions were suggested (Hobday, 2000). A CoPS refers to a huge product, system or piece of infrastructure that involves enormous R&D spending and high technology and is job-produced or custom-made in small batches (Chen, Tong, and Ngai, 2007; Hobday, 2000). The concept encompasses large telecommunications systems, mainframe computers, aeronautical and space systems, smart buildings, power grid control systems, large vessels, high-speed trains, semiconductor production lines, information systems and other systems inseparable from modern industrial uses (see Table 3.3). In spite of its small production, the CoPS industry accounts for a significant share of gross domestic product (GDP) and played a very critical role in the modern economy due to the bulky size and high unit cost of the products.

In an investigation into diverse product data in the UK, Miller and Hobday, researchers in the Science Policy Research Unit (SPRU) of the University of Sussex, found CoPSs to have contributed to at least 11 percent of GDP, creating at least 1.4 million to 4.3 million jobs. Their further research pointed out that the role of the CoPS industry was not to be overlooked in maintaining the UK’s leadership in the world economy. As a very sophisticated system consisting of numerous subsystems and components, a CoPS, if successfully developed, can give an impetus to the other industries and common mass production industries. For example, it drives the development and application of more advanced mass production lines.

Table 3.3   CoPS examples

Aircraft flight control system

Aircraft engine



Navigation system

Large ship (vessel)

Baggage handling system for airports

Bank transaction processing system


Business information network

Large chemical plant

Mainframe computer

Power grid control system

Big bridge

SPC exchange

Flight simulator

Ship dock

Space station

High-speed train

Flexible manufacturing system


Smart building


Telecommunications transaction processing systems

Semiconductor workshop

Fighter jet

Water filtration system

Microchip workshop

Guidance system

Water supply system

Nuclear power plant

Nuclear fusion reactor

Wastewater treatment plant

Offshore drilling platform

Port cargo handling system

Microwave tower

Passenger aircraft

Semiconductor lithography system

In terms of technology diffusion (Andergassen, Nardini, and Ricottilli, 2017), a CoPS involves a wide variety of high technologies that directly cause its embedded technology modules to be applied in other fields. This technology diffusion is faster than normal product innovation, thus bringing about technological updates to the whole industry and improving the competitive power of a country.

Process innovation

Process innovation is a new mode of producing or delivering a new product or service, for example, innovation in production processes, technological roadmaps or production equipment (Pilav-Velić) and Marjanovic, 2016).

For a manufacturer, process innovation includes the adoption of new processes, techniques, manufacturing methods and technologies to achieve advantages in cost, quality, lead time, development cycle and delivery speed, or to improve the custom-making capacity of products and services. In the case of washing machine manufacturing, a process innovation may take the form of the adoption of a new sheet material or the replacement of a traditional machine tool with a computerized numerical control (CNC) machine tool, which contributes to 50 percent cost reduction or threefold productivity or more.

The purpose of product innovation is to optimize product design and performance singularity, whereas the purpose of process innovation is to improve product quality, reduce production cost, maximize productivity, minimize energy consumption and upgrade the working environment.

Process innovation delivers multiple benefits (e.g. larger margin, less cost, higher productivity and higher employee satisfaction), makes value delivery more stable and reliable and benefits the customer as well. Process innovation is unique in that it’s normally invisible to the customer; in other words, it occurs at the backstage of the firm. Only when a mishap of the corporate internal procedure causes a failed delivery of products or services will the customer take notice of the problematic procedure.

Product innovation and process innovation usually alternate. On the one hand, a new process makes the production of new products possible. For example, when a new metallurgical process makes bike chain production possible, the development of shaft-driven bikes with a gear train becomes possible in due course. On the other hand, a state-of-the-art workstation helps a firm realize computer-aided manufacturing (CAM), which is a boost to speed and efficiency. In addition, a product innovation developed by a firm may be a process innovation for another. For example, when an innovative CNC lathe developed by a manufacturer is used by a firm for machining, it is considered a process innovation for the latter since it improves speed, quality and efficiency.

A service firm employs process innovation to improve frontstage service and launch novel services or new “products” visible to the customer. In 1986, FedEx released a unique parcel tracking system to the market. What the customer saw was only a small barcode reader the operator used for parcel scanning, while the rest of the sophisticated system was invisible to the customer, who knew only the real-time state of the parcel on its way. The value-added service helped FedEx secure temporary advantages over its competitors.

Innovation matrix

Based on the basic types and characteristics of innovation, we can infer the category under which the innovation of an organization or firm falls. The categorization matrix pertinent to innovation management optimization is suggested as follows (see Figure 3.4).

Service innovation

One hallmark of modern economy is a fast-growing service sector which gains in increasing significance in the national economy. Lying at the core of the world economy, the service sector is the driving force behind economic globalization. A growing number of firms in the service sector are making service innovations to render high-quality services and products, cut costs and develop new service philosophies.

Innovation matrix

Figure 3.4   Innovation matrix

Service innovation is a dynamic process a firm takes to implement purposeful, organized changes to a service system with the aim of improving service quality, creating new market value and introducing changes to service factors. While the service innovation theory evolved from the technological innovation theory and the two are inseparably correlated, service innovation distinguishes itself from the latter (especially innovation in manufacturing technology) by its unique innovation strategy.

Basic characteristics of service innovation


In the first place, in contrast to a tangible consumer product or industrial product, service and its components are in many cases intangible, incorporeal and invisible to the naked eye. This hallmark makes service not easy to evaluate or validate.

In the second place, customer services are sold as a tie-in bundled with many consumer and industrial products. For the customer, the service or utility attached to these vehicles matters much more. From this standpoint, intangibility is not unique to service.


The production and consumption of a service are not to be clearly differentiated. They take place at the same time. In other words, the customer consumes a service at the moment he or she receives it from the service firm. There is no chronological order as to the production and consumption of a service. This characteristic indicates that the customer cannot eventually enjoy the service unless he or she participates in the production of the service. The characteristic makes the service industry more discrete, localized and distinct from manufacturing.


Heterogeneity means persistent incoherence in terms of service composition and quality that is hard to generalize. Because the service industry is centered around humans, the individuality of humans makes it very hard to adopt a uniform service quality standard. For one thing, the quality of a service provided by the same service provider may vary from time to time due to individual factors (e.g. state of mind); for another, the factors (e.g. knowledgeability, interest and hobby) of the customer, who participates directly in the production and consumption of the service, may have a direct impact on service quality and effect. Heterogeneity may cause the customer to confuse the image of the firm with its service.


Perishability requires a service firm to address how to address understock problems and the resulting undersupply problems, develop a distribution strategy, select distributors and distribution channels, design production processes and address passive service demand in a flexible and effective manner.

Absence of ownership

The absence of ownership means that in the production and consumption of a service, the ownership transfer that concerns no physical stuff. Since the service is intangible and perishable, it disappears upon the completion of the deal and the consumer has not physically owned it. The ownership of the service is not readily transferable.

The differences between service and manufacturing are presented in Table 3.4.

The success of the service industry is built on innovation and skilled management, which play an ongoing role in enhancing service quality and productivity. A firm gets the upper hand in competition through innovation activities that add to product value.

In the United States and European developed countries, the service sector takes the lead in economy, contributing to 60 to 80 percent of the GDP. Therefore, service innovation is no less important than technological innovation for manufacturing. Of course, a service innovation may be of a technological nature, but in most cases it is social or nontechnological. It is not to be understood in the narrow sense as a “supplement” to technological innovation.

  • Service innovation is more incremental than radical. Service innovation is in more cases incremental because it normally involves very tiny process changes and almost no breakthrough innovation. Service innovation is introduced to curtail cost, enhance product differentiation, improve the flexibility of reaction to customer questions, develop new markets and maximize customer loyalty.
  • In the service sector product innovation and process innovation are usually integrated. Service innovation may take the form of the launch of a new service product, the production or delivery of a new service or the generalization of a new technology. The service is nonstorable, so it cannot be entirely dissociated from the product, and innovation in the service product is indissociable from innovation in the service process. That explains why the service innovation often comes with the changes to many factors, like the service production process and the service product.

    Table 3.4   Service industry vs. manufacturing

    Manufacturing Service
    A product is tangible A service is intangible
    Ownership transfer takes place when the deal is made The ownership of a service is normally not transferred
    A product is verifiable A service is not easily verifiable
    A product can be traded for many times The trading of a service is unrepeatable
    Both the buyer and seller can store a product A service cannot be stored
    A product is produced before consumption A service is normally produced and consumed at the same time
    A product is produced, sold and consumed separately A service is produced, sold and consumed at the same time
    A product is transportable A service is not transportable
    The supplier sells a product, while the customer generally does not participate in production The customer participates in the delivery of a service
    A product may become an indirect link between the producer and the user A service is often a direct link between the provider and the user
    The core value is produced in a factory The core value is produced when the buyer communicates with the seller
  • Service innovation is customer-oriented. While it’s based primarily on customer demand, service innovation may also originate in the evolution of corporate philosophy. The less standardized the service, the higher the customization requirements and the more important the customer’s decision in service innovation.
  • Service innovation may form new knowledge or information. For example, the service staff, when delivering services, devise new methods or build up new knowledge and information. As the gathering of and investigation on scientific knowledge is not necessary, service innovation requires a relatively short time.
  • Innovation teams are usually more flexible. By and large, no or very few service firms have R&D units. Their innovation team, responsible for conception and blueprints, is normally an improvised project team of employees temporarily drafted from the various departments. Once the innovation plan has come into operation or been harmonized with the routine business procedure, the team dissolves.

Servitization of manufacturing

Service innovation is not unique to the service industry. Servitization has become a predominant trend across the global manufacturing sector since the 1980s, a phenomenon proven by a growing share contributed by sheer manufacturing to the value-added of industrial goods and a shrinking share by service (e.g. R&D, industrial design, logistics, marketing, brand management, intellectual property management and product maintenance). Take the automotive industry, for instance. The return on investment (ROI) stands at only 3 to 5 percent for manufacturing, while the figure stands at up to 7 to 15 percent for vehicle service. Excellent manufacturers are turning from production-centered to service-centered.

Servitization of manufacturing is a business model wherein the manufacturer reorients the core of its value chain from manufacturing to service. The service industry contributes to about 70 percent of the GDP of developed countries, with producer services accounting for about 60 percent. However, in China, producer services are still a backward industry, accounting for an insignificant share of the economy. Still, the emphasis on producer services has emerged as the consensus across the society at large.

Producer services include primarily R&D, design, third-party logistics, lease financing, IT service, energy conservation and environmental service, testing and certification, e-commerce, consulting, service outsourcing, after-sales service, HR service and brand building.

GE is the largest manufacturer of electrical equipment and electronics in the world. It is not only a producer of consumer and industrial electrical equipment but also a giant military contractor of space exploration and aeronautical instruments, jet navigation systems, multiwarhead ballistic missile systems, radars and spaceflight systems. However, it reaps the majority of its revenue from various services, which accounted for 59.1 percent of its total revenue in 2006 alone. The present-day GE is a conglomerate branching extensively into commercial finance, consumer finance, medical care, industry, infrastructure and NBA Universal.

Classification of service innovation

There are five types of service innovation.

Service product innovation

Service product innovation refers to innovation in the content or product of a service. This type of innovation is centered around product design and production capacity. Examples include People’s Uber launched by Uber China and MI Roam launched by MI.

Service process innovation

Service process innovation refers to innovation in the production and delivery process of a service product. It is subdivided into production process innovation, or backstage innovation, and delivery process innovation, or frontstage innovation. Sometimes it is very difficult to discriminate between service process innovation and service product innovation. Where the supplier (firm) and the customer liaise very closely, the customer will participate in the rendering of the service, a situation that requires both sides to contribute to providing the product. In this case, the product is virtually indistinguishable from the process. For such firms, it’s very difficult to distinguish product innovation from process innovation.

Service management innovation

Service management innovation refers to innovation models of service organization or management. A service firm adopting total quality management (TQM) practices well deserves the title of a service management innovator. One example is Hai Di Lao, a hot pot brand renowned for ingenious staff management.

Service technology innovation

Service technology innovation refers to innovation in service-supporting technologies, such as Alipay Facial Scan, Huawei Mate 8 fingerprint recognition and the online seat reservation service of movie theaters.

Service model innovation

Service model innovation refers to innovation in the model of the services provided by a service firm. One example is the O2O home wash service introduced by traditional car detailing stores.

Business model innovation

Peter Drucker, a master of management, once said: “The current competition among companies is not the competition between products but the competition between business models”. Business model innovation refers to challenges in the ways to create value for customers that are common in the industry today. It strives to meet the changing needs of customers, provide more value for customers, open up new markets for enterprises and attract new customers. A simple example is that compared with traditional bookstores, Amazon and are business model innovations.

There are many definitions of the business model, but the management academic community primarily accepts the “clarification of business model” published in 2005: the definition in the article “The origin, current status, and future” is as follows:

[T]he business model is a conceptual tool that contains a series of elements and their relationships that shed light on the business logic of a particular entity. It describes the value companies can provide to their customers, as well as the company’s internal structure, partner networks, and relationship capital to achieve (create, market, and deliver) this value and generate sustainable, profitable revenue.

(Osterwalder, Pigneur, and Clark, 2010)

This defines the characteristics of the business model. The business model shows the relationships and elements that a company depends on to create and sell value. It can be subdivided into nine areas:

  • Value proposition. The value that the company can provide to consumers through its products and services. The value proposition confirms the practical significance of the company to consumers.
  • Target customer segments. The company’s targeted consumer groups. These groups have certain commonalities that allow companies to create value (for these commonalities). The process of defining consumer groups is also referred to as market segmentation.
  • Distribution channels. Various ways companies use to reach consumers. Here is how the company develops its market. It involves the company’s marketing and distribution strategy.
  • Customer relationships. The links established between the company and its consumer groups. What we call customer relationship management is related to this.
  • Value configurations. The configuration of resources and activities.
  • Core capabilities. The ability and qualifications companies need to implement their business model.
  • Partner network. A network of partnerships between the company and other companies to effectively provide value and realize its commercialization. This also describes the company’s business alliances.
  • Cost structure. The currency description of the tools and methods used.
  • Revenue streams. The company creates wealth through a variety of revenue flows.

We can use these nine factors to measure whether a business model is qualified and take further action to improve the business model.

Every innovation of the business model can bring the company a competitive advantage for a certain period. But over time, companies must continually rethink their commercial designs.

Levels of innovation

Since Schumpeter put forward the innovation theory, scholars worldwide have been attaching extensive importance to research on content-centered innovation (e.g. product and process innovation). In order to carry out in-depth research and increase the pertinence of innovation policy, scholars classify innovation based on different standards and dimensions.

Classification by the level of innovation

Scholars divide innovation levels into incremental innovation and breakthrough innovation (or radical innovation) (Prahalad, 2012; Ritala and Hurmelinna-Laukkanen, 2013; Van Lancker, Mondelaers, Wauters, and Van Huylenbroeck, 2016).

Incremental innovation

Incremental innovation refers to minor improvements and updates on a product or process along the initial technology trajectory. The general opinion is that incremental innovation can maximize the potential of an existing technology while adding to the advantages (especially organizational capabilities) of the existing mature firm. Incremental innovation has a lesser requirement on the size and technological capability of a company.

Research on the rocket engine, computer and synthetic fiber suggests that incremental innovation has a remarkable impact on product cost, reliability and other performance parameters. Despite the fact that single innovations mean only very small changes, the cumulative effect normally surpasses that of the initial innovation. That is the trend typical of the price cuts and reliability improvements of the early Ford Model T, which plummeted from $1,200 to $290 during 1908–1926 amid remarkable rises in labor productivity and capital productivity. Ford’s successful cost reduction resulted from numerous improvements of processes (e.g. welding, casting, assembly and material substitution). One more feat of the Model T is the better performance and reliability attributed to improved product design, which made the car more captivating.

Although incremental innovation typically has insignificant effects on the firm’s profitability, it works to improve customer satisfaction, add to product or service utility and generate a positive impact. Similarly, incremental innovation lends itself to improving productivity and cutting costs.

From the theoretical perspective, incremental innovation does not seem to have applied new scientific knowledge on a significant scale, but over time it will build up a tremendous cumulative economic effect. Many companies and their managers prefer the cumulative model to the radical model when it comes to innovation, considering that the latter may imperil the company and land it in dire straits.

Nevertheless, a lot of empirical researches have shown that incremental innovation maintains the competitive advantage of a firm’s products only for the time being. When a rival rises with a disruptive innovation, an established large corporation will likely lose ground and market leadership. The invention of the transistor almost crushed all the vacuum tube manufacturers who had been working devotedly on incremental innovation. Another example is Japan’s quartz clock technology, which dealt a lethal blow to the Swiss horological industry. Ironically, the quartz clock had its origin in Switzerland, and excellent Swiss scientists and horologists had been refining their incremental innovations time and again for higher performance. These lessons prove that while incremental innovation helps a company maintain a temporary advantage, it may be easily beaten by radical innovation.

Incremental service innovations include simplified hotel check-in and check-out procedures, refit of a bank hall, installation of conspicuous signs in a rest home to aid elderly people with poor eyesight and USB charging ports fitted on aircraft seats by international airlines.

Constant innovation is very essential to the success of firms committed to developing new products and markets. Their awareness of the essentiality of each increment of progress to an innovation as a whole explains why incremental innovation well deserves its endorsement as an indispensable and valuable tool. However, there is one limitation to sole attention to incremental innovation. The firm may be impeded from making further progress in products, services or market.

Radical/breakthrough innovation

Radical or breakthrough innovation is a type of innovation that leads to an enormous progress in the primary performance indicators of a product, a decisive impact on market rules, competition environment and industry structure, or even a thorough reshuffle of the industry pattern. As they typically involve all-new concepts, significant technological breakthroughs, foremost scientists or engineers and great spending, radical innovations may take eight to ten years or longer to materialize. A radical innovation usually comes with a series of product, process and business organizational innovations, or even revolutions in industry structure. It’s very hard to define the expression in terms of revenue increases since that depends on the size and spending of a firm. As such, a radical innovation could be understood only as a so-called “breakthrough”. Any attempt at a definition, if applicable, could only be based on the term itself. If a process improvement reduces cost or increases production significantly, it can also be termed a breakthrough. See Figure 3.5.

Sometimes a radical invention also secures a radical innovation for an enterprise. Radical innovation is a great stride forward by humans. While it may not secure first-comer advantage for a firm, in many cases it gives birth to an all-new industry. The automobile, electricity, penicillin and the Internet are all radical inventions and discoveries.

All the successful technological firms need continuous or incremental innovation to fulfill the varying demands of existing customers and therefore realize continuous business growth. However, incremental innovation needs to be complemented periodically by discontinuous innovation, including radical innovation, one of the major types of discontinuous innovation. To qualify as a “breakthrough”, an innovation must have the potential of achieving at least one of the three following goals:

  • Brand-new set of performance features;
  • At least five-fold improvement or more on the existing performance indicators; or
  • Cost reduction by a large margin (>30%).

Long-established multinational corporations, like IBM, GE, Motorola, HP, Siemens, Philips, 3M, GM and DuPont, regularly interrupt incremental innovations in a process with radical innovations.

Nevertheless, failures predominate over successes when it comes to attempts on significant radical innovation. Although many small startup firms (especially Silicon Valley firms) seem to have experimented with and commercialized radical innovation, most fail in the end. According to recent research, only a small portion of the venture capital (VC)–funded innovations in the United States belong to the first type (true breakthrough) and the second type (fundamental technological improvement), because VC funds have a short lifecycle (normally eight years) and do not opt for long-term, high-risk investments despite the high potential for profitability.

Incremental innovation vs. radical innovation

Figure 3.5   Incremental innovation vs. radical innovation

Obviously, radical innovation, which involves a lot of time, investment and concern from top management, is a very thorny undertaking even in the United States, Europe, Japan and other developed countries. That explains why it is very important for developing countries to grasp the essence of breakthroughs and implement innovation methods from an open-minded perspective. Disruptive innovation, another model of discontinuous innovation put forward by Harvard professor Clayton M. Christensen, might be a more sensible, realistic practice to introduce and popularize for developing countries.

The main distinction between radical innovation and incremental innovation can be understood from the perspective of the technology trajectory. As shown in Figure 3.6, when Technology I enters the incremental innovation stage, a new idea (Technology II) different from Technology I is introduced and attempts on a radical innovation must be made, even though the initial outcome may be less satisfactory than the preceding product. An example is the earliest train, which did not run as fast as a horse-drawn carriage. However, after more stable principal technical performance parameters were achieved through significant innovation, there was a period when technology and product performance experienced a sharp increase until the principal technical performance parameters stabilized, which we may call the radical innovation stage. During the radical innovation stage, Technology II experienced a turning point where the marginal increase rate of performance decreases but the overall performance still increases. Then the firm entered another significant innovation period, which we can call the radical-incremental innovation transition stage. Finally, the firm entered a stage of incremental innovation until a new technological trajectory appeared (Technology III). When the product of Technology III overtook that of Technology II, the incremental innovation ended in decline. If a firm does experiment with incremental innovation (Technology II) and radical innovation (Technology III) at the same time, the chance is greater that it can maintain a consistent competitive advantage. If a firm has a leading advantage in Technology II but gives no consideration to Technology III, it has to face the challenge from a latecomer, which may result in the reshuffle of the market in the middle of the trajectory of Technology III.

Incremental innovation and radical innovation: technology

Figure 3.6   Incremental innovation and radical innovation: technology trajectory

source: Authors’ design, based on Christensen (1997).

Radical innovation is significantly different from incremental innovation with regard to goals, organizational structure, processes and uncertainties (see Table 3.5). Further statistical research has proven the two differ also in target firms. In more cases, radical innovation takes place in small and medium enterprises(SMEs) while large firms prefer incremental innovation. Academic research based on a technology history perspective has also found out that large mature companies frequently lose to smaller ones due to radical innovation. This is due primarily to the fact that the institutions – rules of business conduct, corporate culture, incentive mechanism, operational strategy and organizational capability – were based on the preceding generation’s technology trajectory and were suited to the incremental innovation processes at the later part of the preceding generation’s technology. Therefore, the successful experience, core capability and competitive advantage work to impede a new round of competition (Christensen, 1997).

Table 3.5   Incremental innovation vs. radical innovation


Incremental innovation

Radical innovation


Maintain and consolidate the existing market position

Change the rule of game and realize transcendence


Improve on the cost and performance of the original product

Development of a new industry, product or process


Develop and exploit the existing technology

Research and exploration of new technology


Low level

High level

Technology trajectory

Linear and continuous

Divergent and discontinuous

Business plan

The plan is made immediately the innovation begins

The plan evolves as exploratory learning occurs

Generation of new thoughts and opportunity recognition

New thoughts are generated at the end of the previous innovation

New thoughts are generated spontaneously in the lifecycle

Main participant

Cross-functional teams (CFT)

Versatile, knowledgeable individuals and informal networks


Formal phase model

Informal flexible model at the early phase and formal model at the late phase

Organizational structure

CFTs inside the business unity

From thinker to incubator and then to target-driven project team

Resources and capability

Standard resource allocation

Acquisition of resources and capability in a creative way

Operator involvement

Formal involvement from the very beginning

From informal involvement at the early phase to formal involvement at the late phase

Richard Leifer and his fellow researchers investigated the inherent laws of radical innovation from the lifecycle perspective, discovering some generic characteristics that distinguished radical innovation from incremental innovation(Leifer et al., 2000):

  • Radical innovation often takes a long time (10 years or longer).
  • Radical innovation is highly uncertain and unpredictable.
  • Radical innovation is sporadic. Stops and starts alternate. So do discontinuation and recommencement.
  • Radical innovation assumes a nonlinear trend. It involves the recurrence of some activities and feedback as a response to discontinuation, as well as the constant employment of all the crucial radical innovation management capabilities.
  • Radical innovation is random. There is not a fixed team of main participants, and the focus of research varies. Radical innovation is susceptible to external environmental changes.
  • Radical innovation is background-dependent. Many factors, for example, history, experience, corporate culture, individuality and informal relations, interrelate and produce various positive or negative effects.

Classification by continuity and the target market

Continuous innovation

For a particular firm, if an innovation based on one technology trajectory and knowledge bank involves the constant improvement of existing products and launch of new products, it is termed a continuous innovation or sustaining innovation (Corso and Pellegrini, 2007). One example is Haier’s Prodigy washing machine. Now in its 18th generation, Prodigy has undergone years of technological upgrades, incorporating many outstanding features (e.g. summer-adapted barrel volume, sterilization, no use for detergent and better performance). See Figure 3.7.

Discontinuous innovation

Also termed intermittent innovation, discontinuous innovation encompasses innovation models that diverge from the initially continuous technology trajectory, such as radical innovation and disruptive innovation (Lynn, Morone, and Paulson, 1996). A disruptive innovation targets new market segments, assumes a new technology trajectory and is founded on a new knowledge base. One example is the UTStarcom Personal Handy Phone, a mobile version of a fixed-line phone, which came as a disruptive innovation compared with the original fixed-line technology trajectory.

Figure 3.8 summarizes the types of innovation based on this analysis and tries to classify innovation in three dimensions (i.e. content, level and market positioning). By using content as a dimension, innovation can be classified into product innovation, process innovation, service innovation and business model innovation. By using level of innovation as a dimension, innovation can be classified into incremental innovation and radical innovation, based on the degree of improvement. By using market positioning as another dimension, innovation can be classified into high-end innovation, which targets the high-end market, and low-end innovation, which targets the general public.

Continuous innovation and discontinuous innovation

Figure 3.7   Continuous innovation and discontinuous innovation

Summary of innovation classifications

Figure 3.8   Summary of innovation classifications

A firm may have a bias for a particular content, level and market positioning of innovation at a particular growth stage. Traditional manufacturing more often than not pays more regard to product innovation and process innovation and tries to reduce risks by incremental improvements. In addition, it is oriented to the general public in the low-end market in an effort to achieve economies of scale. Apple and other high-tech giants, intent on business model innovation, prefer a development strategy that combines incremental innovation with radical innovation in different product families while targeting such high-end markets as smart phones and tablets to achieve high innovation efficacy. A firm needs to balance among content, level of innovation and market positioning resource and select an appropriate path for sustained competitive advantage.

Holistic innovation

Innovation paradigm shift

With the recent advancement of the global and regional economies have come environmental problems, climate change and poverty that leave a big challenge for science, technology and innovation (Hekkert et al., 2007). Though researchers in the field of innovation made many advances (Martin, 2016), issues such as the Sustainable Development Goals (SDGs) induced more reflection on the paradigm of innovation and development. The traditional paradigms of innovation typically introduced by Western scholars are rooted in the Industrial Revolution and information technology. These traditional paradigms focus mostly on science, technology and the economy, and have limited responses to the process of global economic and institutional change. The recent paradigm of technological innovation shifted towards a broader dialogue between scientific research, technological innovation and social development (Stilgoe, Owen, and Macnaghten, 2013). Additionally, beyond achieving scientific and technological progress and economic growth, the goals aim for ethical and social fulfillment (Pandza and Ellwood, 2013), therefore achieving a sustainable transformation.

Thomas Kuhn’s (1970) book, The Structure of Scientific Revolutions, brought about a paradigm shift in how philosophers thought about science. Drawing from Kuhn’s classical perspective of a paradigm shift, we can observe paradigm shifts related to innovation by country or region (see Table 3.6).

Table 3.6   Paradigm shift of innovation by country or region


Main innovation paradigm


North America

User innovation

von Hippel (1986)

Disruptive innovation

Christensen (1997)

Open innovation

Chesbrough (2003)


Design-driven innovation

Verganti (2009)

Social innovation

Nicholls and Murdock (2012)

Common innovation

Swann (2014)

Responsible innovation

Owen, Behun, Manning, and Reid (2012)

Stilgoe, Owen, and Macnaghten (2013)


Lean production

Womack, Jones, and Roos (1990)

Knowledge-creating company

Nonak and Takeuchi (1995)

Jugaad innovation

Radjou, Prabhu, and Ahuja (2012)


Linsu Kim (2000)

Convergence innovation

Kong-rae Lee (2015)

Indigenous innovation

Jin Chen (1994)

Total innovation

Qingrui Xu (2007)

Secondary innovation

Xiaobo Wu (2009)

Embracing innovation

Richard Li-Hua (2014)

The deficiencies of existing innovation paradigms

Reviewing the evolution of the innovation paradigms, we can divide the existing innovation paradigms into three main categories. The first is based on partial elements such as user innovation (von Hippel, 1986) and disruptive innovation (Christensen, 1997) proposed by American scholars, design-driven innovation (Verganti, 2009) and public innovation (Swann, 2014) advanced by European scholars, knowledge innovation proposed by Japanese scholars (Nonaka and Takeuchi, 1995), imitation-based innovation introduced by Korean scholars (Kim and Nelson, 2000) and secondary innovation introduced by Wu Xiaobo (Wu, Ma, Shi, and Rong, 2009). The second category includes paradigms focusing on the horizontal interaction and integration of factors such as knowledge, resources and so on. This category, such as open innovation by American scholars (Chesbrough, 2003) and total innovation by Chinese scholars (Xu et al., 2007), as well as convergence innovation by Korean scholars (Lee, 2015), does not consider vertical integration and may therefore risk being too open and lacking a core competence. The third category includes responsible innovation and public innovation by European scholars (Nicholls and Murdock, 2012; Owens, Behun, Manning, and Reid, 2012; Stilgoe, Owen, and Macnaghten, 2013) and Jugaad innovation by Indian scholars (Radjou, Prabhu, and Ahuja, 2012), embracing innovation by Chinese scholars (Li-Hua, 2014) and focusing merely on the conceptual, cultural or societal aspect of innovation, thus ignoring the importance of technological factors.

Existing innovation paradigms focus on understanding the innovation process from the perspectives of specific innovation behaviors, methods or aspects of innovation, but they cannot escape the atomistic innovative thinking mind-set. Reviewing the road to innovation of world-class enterprises, new products, new elements, new methods, new processes and even new ways of organizing do not depend on individual improvements or enhancements, nor are they spontaneous – rather, they result from organized innovation (Currall, Frauenheim, Perry, and Hunter, 2014). These three types of traditional innovation paradigms ignore the leading and essential role of strategic design and strategic implementation in promoting the implementation of ideas, obtaining innovation and transforming innovative values. Gary Hamel, the guru of modern management, introduced an innovative four-level model in his book, Big Future of Management (Hamel, 2008), including technological innovation, operational innovation, strategic and business model innovation and management innovations, which call for more emphasis on strategic design for innovation in terms of important leadership and driving value. Phillip also points out that holistic thinking is very important to leverage correctly both sides of the brain for knowledge workers from a consulting perspective (Andrews and Wall, 2017), which predicts the importance of strategic integration for enterprises. In addition, these three traditional innovation paradigms lack the long-standing global view of Eastern philosophy (Chinese traditional culture, Buddhist wisdom, etc.), such as overall thinking, unity of opposites, organic integration and dynamic development. They fail to embody the dynamic integration of yin-yang evolution, the harmony between man and nature advocated by Taoism, the “middle course (Zhong Dao)” philosophy advocated by Confucianism, the concept of “harmonious but different (He Er Bu Tong)” and the overall strategic concept introduced by the ancient Chinese book Art of War (Tzu, 2005).

Holistic innovation: new innovation paradigm based on Eastern wisdom

In light of the deficiency of existing innovation paradigms in the Chinese context, drawing from the advantages of Eastern philosophy and traditional Chinese culture, Chen, Yin, and Mei (2018) proposed a new paradigm of innovation, holistic innovation (HI), which is total and collaborative innovation driven by a strategic vision in an era of strategic innovation, which aims for a sustainable and competitive advantage. An innovative management paradigm based on HI is called holistic innovation management (HIM).

The four core elements of HI are strategic, total, open and collaborative; that is, total innovation, open innovation and collaborative innovation driven by the strategic vision. The four elements are interrelated and indispensable pillars within the helix of holistic innovation.

Framework of holistic innovation

In the innovation-driven era, HI is a new paradigm rooted in overall management change. It is a trinity based on the integration of the natural sciences and social sciences under the guidance of Eastern and Western philosophies. The helix concept of HI embodies a global outlook, an overall outlook and a peaceful outlook, which is in line with the common core values across Eastern and Western philosophies. It is conducive to achieving an organic co-evolution among engineering, technology, science and humanities, arts and markets in a cross-cultural competitive environment. Additionally, HI goes beyond the traditional boundaries of organizations, pushing companies to interact with the external partners, including the demand side, the supply side and even the domestic and foreign policy side and other relevant subjects and interests. By doing this, companies can build a vertical and horizontal innovation ecosystem. This system aims to exploit and create market opportunities and technology potential in a dynamic collaborative model to enhance product and technology novelty through cross-border innovation and competition and cooperation. Finally, HI could contribute to the goal of “Innovation for Peace” (Miklian and Hoelscher, 2018), an innovation to achieve global sustainable development and fulfill the value of humanity (Pandza and Ellwood, 2013) (see Figure 3.9).

Companies should think big, aim high and try to lead their own internal evolution in their ecosystems through forward-looking strategic design. Moreover, companies should also act boldly in their strategic implementation. Through horizontal resource integration, longitudinal vertical integration of capabilities and relying on collaborative innovation thinking, companies can achieve overall technology integration and product innovation and a competition-cooperation win-win situation (Ming-Jer Chen, 2014).

At the regional and national level, governments should realize that in the strategic fields of major scientific and technological innovation such as aerospace systems, high-speed railway technology, quantum communication, artificial intelligence and the Industrial Internet, they need more than simple technological innovation, they also need a long-term development strategy that is embedded with innovation strategy for the nation. Only through such a holistic thinking process can we achieve the organic integration of science and technology strategy, education strategy, industrial strategy, financial strategy and talent and diplomatic strategy. At the same time, a strategic vision can drive the horizontal integration and vertical promotion of all elements to provide an inexhaustible source of power to build the most innovative nation in the world. This will serve as a powerful engine for a global campaign of anti-poverty and peace. Finally, it will make a significant leading contribution to global sustainable development (Miklian and Hoelscher, 2018).

The holistic innovation theory calls for more attention from academics and public policy areas. Because holistic innovation provides enterprises with a systematic and holistic view of combining strategic management, organizational design, cultural construction and industrial trends, it can help realize the divergent thinking of engineering and social sciences in the natural sciences. It will help enterprises seize the “window of opportunity” during the process of industrial transformation and technological innovation. It is a new paradigm for enterprises to reshape their sustainable innovation capability and core competence. It is worthwhile for enterprise managers to engage in practical exploration and for scholars to follow up. As for the policy aspect, holistic innovation theory provides an innovative policy design perspective based on global and integrated views. Innovation policy should not be limited to science and technology. Science and technology, education, economy, culture, people’s livelihood and ecology should be combined to create a synergy to promote total and collaborative innovation driven by strategic design. Only in this way can China realize the national, industrial and enterprise innovation strategies. We can then systematically upgrade the national and regional innovation system and technology transfer system to provide the nation with assistance in major technological fields and strategic industries, and empower enterprises in emerging markets to win the advantages of global innovation and leadership.

Theoretical framework of HI: an emerging innovation paradigm in
                                 open environments

Figure 3.9   Theoretical framework of HI: an emerging innovation paradigm in open environments

Source: Chen, Yin, and Mei (2018)


For more details, please see the European Innovation Scoreboard 2017.


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