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

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.

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

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.

Figure 3.2   Knowledge–capital interaction

Source: Adapted from the web content of the Technical University of Munich, www.tum.de/

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.

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).

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.

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.

Intangibility

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.

Inseparability

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

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

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.

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.

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).

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.

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.

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

Difference	Incremental innovation	Radical innovation
Goal	Maintain and consolidate the existing market position	Change the rule of game and realize transcendence
Focus	Improve on the cost and performance of the original product	Development of a new industry, product or process
Technology	Develop and exploit the existing technology	Research and exploration of new technology
Uncertainty	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
Procedure	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.

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.

Figure 3.7   Continuous innovation and discontinuous innovation

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.

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).

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.

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

Source: Chen, Yin, and Mei (2018)