- Meaning and Importance of Innovation in Economics
- Classification of Innovation
- Innovation Functions
- The Meaning and Structure of Innovation Management
- The Functions of Innovation Management
- The Importance of Innovation for Companies
- The General Principles of Innovation Implementation
- Innovation Management Techniques
- Innovation Risk Management
- Related Economics essays
The basis of the qualitative changes taking place in today’s economy is the innovative strategies and tactics of production. Innovation activity of the economy has become a central social and economic process in the industrialised countries. Changes in production factors are expressed in the growth of information, intellectual and innovative components. These trends are closely related to the transformation of forms and methods of economic agents and management. In fact, the main components of innovations are the technological, scientific, social, managerial and cognitive elements that are embodied in scientific knowledge, inventions, and different physical media resources. Arising at every stage of the reproductive cycle of innovation, these elements vary in typology and purpose. Moreover, innovation is not an isolated act of introducing novelty or random gambling activity, but it rather presupposes a focused process of management and main stages of its implementation.
Meaning and Importance of Innovation in Economics
Innovation includes materialised goods derived from capital investments and resulting in new equipment and technology, progressive forms of work organisation, maintenance, and management. The process of creation, development and dissemination of innovations is called innovative activity or innovation process, and the result of innovation can be called an innovative product (Rafinejad, 2007). In fact, the role of innovation in the modern economy has grown significantly (Bray, 2002). Without the use of innovation, it would be almost impossible for a firm to create competitive products that would be associated with a high degree of research intensity and novelty (Bray, 2002). Thus, in the market economy, innovation is an effective means of competition, leading to lower production costs and greater investment, increasing the manufacturer's rating of new products, and helping to enter new markets (Swann, 2014). However, any change in processes or products manufactured by the enterprise cannot be considered an innovation (Berkun, 2007). An essential feature of this process is the scientific and technological novelty, so it is necessary to distinguish innovation from insignificant modifications in products and processes. These include changes in colour, shape, minor technical or external differences in the product and its components (Berkun, 2007). Concerning the evaluation of innovations, it is determined by technological parameters and the market position (Constable & Somerville, 2003). Today, the description of technological innovation is based on international standards added with recommendations that have been adopted in 1992 (Constable & Somerville, 2003). These standards cover new products and new processes, as well as their significant technological changes.
Classification of Innovation
In fact, economists divide innovation into specific groups according to certain criteria, which help to shape the classification of innovation. The innovation management practice uses different classifiers; thus, depending on technological innovation parameters, they are divided into products and processes (Corsi & Akhunov, 2000). Product innovations include the use of new materials, new semi-finished products, components, as a result of which fundamentally new products are obtained. Process innovations represent new methods of organising production (new technologies) (Corsi & Akhunov, 2000). Because of the novelty of this type of innovation for the market, it forms a new industry for different countries, companies or groups of firms around the world (Gawer, 2011). By the appearance of the stimulus, economists have distinguished innovation caused by the development of science and technology, production needs, and market demands (Dundon, 2002). As part of the system (company) economists have distinguished innovation in the enterprise input (raw materials, equipment, information), enterprise output (goods, services, technology, information), and innovation system structure of the company (management, production) (Gawer, 2011). Depending on the nature of changes, there are basic innovations that presuppose the implementation of major inventions and shaping of new trends in the development of technology, as well as innovation improvement that realises minor products and is dominated in the phases of stable development of scientific and technological cycle (Dundon, 2002). Modification (private) innovation is aimed at partial improvement of outdated equipment and technology generations.
Importantly, the innovation fulfils some general functions. Among them are reproductive, investment, and stimulating function. Reproduction function means that innovation is an important source of funding for the expanded reproduction (Edquist, 1997). The meaning of the reproductive function lies in making profit from the innovation and using it as a source of financial resources. Profits are derived from implementing innovations used in various fields, including capital. The capital is used to finance new types of innovation (Edquist, 1997). Thus, the use of profits from innovation for investment is the content of the investment function of innovation (Swann, 2014). Getting an entrepreneur profit by implementing innovations corresponds to the main objective of any commercial organisation. In fact, profit is an incentive for entrepreneurs to introduce innovations and prompt them to explore demand, improve the organisation of marketing activities, and apply modern financial managerial techniques (Swann, 2014). On the whole, this is the content of stimulating function of innovation.
The Meaning and Structure of Innovation Management
In fact, a system that allows a firm to control the process of innovation is called the innovation management. Innovation is a subject of the impact from the side of the economic mechanism. Economic mechanism affects both the processes of creating, implementing and promoting innovation and economic relations that are formed between producers, buyers and sellers of innovation (Betz, 2011). The impact of the economic mechanism for innovation presupposes the use of certain techniques and special managerial strategies (Swann, 2014). Together, these techniques and strategies form certain kind of the innovation management mechanism. In fact, innovation management is a relatively new concept in the scientific, industrial, technological and administrative sphere of the professional management activity (Foxon, Kohler, & Oughton, 2008). Moreover, innovation management is based on some general key points (Betz, 2011). Firstly, it is the search for ideas, serving s a foundation for the innovation (Dauda, 2009). Secondly, it is an organisation of the innovation process for this novelty. Lastly, it is the process of promoting and implementing innovation in the market. For effective implementation, innovation management should involve strategy and control tactics (Dauda, 2009). The strategy defines the overall direction and method of using funds to achieve goals. After reaching general goals, the strategy and means to achieve them cease to exist (Foxon et al., 2008). Tactics are specific methods that help to achieve goals in the particular conditions (Morris, Kuratko, & Covin, 2010). The aim of the tactics of innovation management is the art of choosing the optimal solutions and techniques to achieve the most appropriate outcomes in a given economic situation.
The Functions of Innovation Management
In fact, innovation management performs certain functions that determine the formation of the system management framework. There are two types of management innovation functions, namely the subject of management and the object of management that control functions.
There are several types of the subject of management functions with specific features (Morris et al., 2010). Thus, prediction function covers the development of long-term changes in the technical, technological and economic conditions of the control object as a whole and of its various parts. The planning function covers the whole range of measures to develop planned targets in the innovation process and put them into practice. The organisation function is reduced to making people aware that the implementation of an investment program should be based on rules and procedures (Rafinejad, 2007). The control function is the impact on the object of management that helps achieve the state of technological and economic systems when they deviate from the set parameters. The coordination function is the consistency of the work of all parts of the control system and individual specialists. The stimulating function is expressed in the motivation of employees to receive interest as a result of their work on the creation and implementation of innovations (Rafinejad, 2007). The monitoring function includes testing the organisation of the innovation process and planning the creation and implementation of innovations. There are also several types of the functions of the object control with specific features such as a risky investment, organisation of the innovation process, and the organisation of promoting innovation in the market (Rogers, 2003). The function of venture capital is manifested in the organisation of venture funding investment in the innovations market. Investing in a new product or a new operation is always associated with uncertainty and risk (Rogers, 2003). Therefore, it is usually carried out through the creation of innovative venture funds, and the content of the functions of the organisation in the innovation process is the rational organisation of creation, implementation and diffusion of innovation.
The Importance of Innovation for Companies
Firstly, the incentive mechanism for the development of innovation is the market competition. Under market conditions, product manufacturers or service providers are constantly forced to look for the ways to reduce production costs and output into the new markets (Swann, 2014). Therefore, entrepreneurial firms have pioneered effective innovations and thus get a significant advantage over competitors. In fact, innovation is the result realised on the market derived from investing in a new product or operation (technology, process) (Swann, 2014). In this regard, with all the diversity of market innovations, the important condition for their implementation in the business is to attract innovative investments in a sufficient amount (Shavinina, 2003). Implementation of innovation management in the context of the enterprise is a transition to a new and better way of organising activities and providing growth opportunities for the firm (Shavinina, 2003). The fact of the introduction of innovation in the company indicates the transition to a higher level of production capacity, which is an indicator of the company's development.
The General Principles of Innovation Implementation
The organisation of innovation into a single system connects the elements of innovation management process. The process of organisation of innovation management in the company is composed of several interrelated stages (Van der Veen, 2011) The first management stage defines the purpose of managing innovation and the choice of the innovation management strategy (Terziovski, 2007). The second management stage is a definition of innovation management practices, development of an innovation management program, and organisation of work for the implementation of the program entry (Adair, 2007). The last stage of this process is the monitoring of the planned program, analysis and evaluation of innovation management techniques, and revision of the methods of innovation management. Concerning the construction of the process of innovation, the organisation of innovation management lies in the creation and implementation of innovations that are a part of the innovation process (Clegg, 1999). However, innovation process is the foundation of company’s strength, which will depend on the effectiveness of the use of innovative management techniques. First, the firm must determine target control of the operation or new product (Clegg, 1999). The goal of innovation management can be profit, expanding market segment, or entering a new market. The next important step in the organisation of innovation management is the choice of strategies to manage innovation. The right strategy depends on the management efficiency and effectiveness of innovation (Adair, 2007). The approaches to the methods of managing innovation depend on the management objectives and specific management tasks, which may vary. An important organisation step is to develop an innovative management program of innovation management and organise work for the implementation of the planned procedures (Terziovski, 2007). Program management innovation represents a consensus on the timing, results and financial support of a set of actions to achieve goals (Adair, 2007). Program development is usually a laborious process, for which the company must define objectives, work out various options for their achievement and choose one of the options. In addition, the firm must develop a comprehensive implementation plan of the program, and assign specific people as well as determine their rights, responsibilities and identify their areas of work (Dodgson, Gann, & Salter, 2008). An integral part of innovation management iis the organisation of the implementation of the planned program of action that is the definition of certain types of activities, volumes and sources of funding for works of specific people, deadlines, etc. (Van der Veen, 2011). The other significant step is the organisation of innovation that would monitor the implementation of the planned program of action (Dodgson et al., 2008). Equally important are the analysis and evaluation of innovation management techniques (Freeman & Soete, 1997). The analysis primarily detects whether the methods used have helped to achieve the goals, with which efforts and expenses the goal has been achieved, and whether a firm can use the methods of management of innovation more effectively (Freeman & Soete, 1997). The final stage of the organisation of innovation is the possible adjustment of innovation management techniques.
Innovation Management Techniques
A method of exposure control subsystem (control subject) on the controlled subsystem (management object) is called an innovation management technique. In fact, innovation movement is always associated with the movement of investment in the given innovation (Jolly, 2003). Therefore, all methods of innovation management are based on financial relations that have been formed in the process of movement of innovations on the market. The impact of innovation management techniques is directed to the area of the production or sale of innovations (Sloane, 2011). This direction is determined by the structure of the innovation process. Thus, the economists have divided innovative management techniques into certain groups (Jolly, 2003). There are methods that affect only the production innovation and pursue the sole purpose of creating a new product or a new operation with high-quality parameters (Martin, 1994). These techniques include benchmarking, methods of market research and planning of marketing innovation. The second group of innovative management techniques includes such methods as engineering innovation, reengineering innovation and brand strategy that includes the establishment, implementation, and organisation of innovation process (Martin, 1994). The structure of the third group includes admission price control and market fronting. The general objective of all methods of this group is acceleration of the sale of innovations with the greatest benefit and efficiency at the given time period, and with a more perceptible impact in the future (Sloane, 2011).
Innovation Risk Management
It is important that the industrial undertaking is not a closed system, and thus interacts with the environment, the effects of which must adequately reflect the objectives, targets, and management. Moreover, it is advisable to form a system of forecasting innovation and minimising risks that are unavoidable in the process of implementing innovation in the enterprise (Stam & Nooteboom, 2008). An innovation risk is a type of economic risk, which has the objective-subjective dialectic structure and describes the probability of deviation of actual results from the planned innovation because of variability and uncertainty of the economic environment (Stam & Nooteboom, 2008). On the other hand, it acts as an innovative deterrent development of industrial enterprises, as there is a likelihood of a negative result of innovation. Besides, it is a powerful incentive for advancing competitors and gaining benefits in the market (Tucker, 2010). The greatest risk is at the early stages of the innovation life cycle, or at the first stage of product development. An effective innovation policy must involve a risk management mechanism, which includes a series of sequential steps (Tucker, 2010). In particular, this is an identification of risks of innovation, sources of their origin and main influence factors. Moreover, it includes qualitative and quantitative analysis of the risks of innovation, interpretation of the results of the analysis of pre-integrated risk assessment, risk analysis of the values that are outside of the maximum allowable, assessment of possible damage and preliminary decision making on actions to minimise identified risks (Von Hippel, 2005). The final administrative decision is made only after creating a comprehensive system of risk responding. Thus, economists might argue that risk management is a separate subsystem of industrial enterprise innovation policy, but not just one of its stages (Von Hippel, 2005). After considering business opportunities, a firm must identify all objects and methods to control exposure and choose the best option to create a plan of implementing the chosen direction of innovation policy (Grossman & Helpman, 1993). At the final stages of the innovation development, it is important to timely control the result of administrative actions and feedback that would ensure the implementation of the principle of adaptability of the innovative development of industrial enterprises (Grossman & Helpman, 1993). Continuous comparison of actual results will give an opportunity to timely adjust appropriate management actions and opportune the achievements.
The formation of innovative development in a firm is a manageable process, and a company can achieve effective results with the help of competent creation and implementation of innovative policies. In fact, without the use of innovation it is almost impossible to create competitive products that would be characterised by a high degree of research intensity and novelty. It is important to note that innovation has a deep classification depending on the appearance of the stimulus, its place in the system, and nature of changes. However, every innovation process fulfils one of the general functions. Among them are reproductive, investment, and stimulating functions. In fact, implementation of innovation management in the context of the enterprise is a transition to a new and better way of organising activities and providing growth opportunities for the firm. However, the process of organising innovation management in the company is composed of several interrelated stages. Thus, the company must determine target control of the operation; choose the right strategy to manage innovation, and organise the program of development. In fact, the firm must use general innovation implementation techniques for the implementation of production innovation; accelerate the sale of innovations, and organise the establishment of an innovative process. Besides, an effective innovation policy must include an innovative risk management mechanism that will help a firm to adhere to a high level at different stages of the innovation life cycle. Therefore, innovation is a manageable activity that should follow general principles for its efficient implementation.