The Impact of Innovation on Companies

Firms and businesses exist and battle to survive just as living beings within the countries or regions they operate, and just as living beings experience the need to change or create change due to their continuously altering environment, so to do business organizations. In order to stand the test of time and obtain a higher competitive advantage, a business must continue to remain relevant to its customers, it must continuously find ways to provide the relevant product or service for the ever changing consumer base and at the same time maintain an optimum profit margin. This form of artificial or better yet commercial evolution, can be said to be the core reason behind the use of technology in the business world, this is the drive for industrial innovation. In 1950 Joseph Alois Schumpeter, stated that; "The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates."(p83) As businesses grow and expand beyond their place of origin, they tend to acquire more competitors in any industry they operate and in turn have to find ways to effectively stretch their core competencies in order to compete with their new rivals or develop new competencies, most of the time with the use of technology. The process of innovation is a highly complex series of steps which is somewhat disorderly, difficult to measure and requires a high level of technical knowledge (Kline and Rosenberg, 1986) and this clearly depicts there numerous dangers involved in the innovation process. Also one may ask, how will changing a product or service or the method of its production give a company a higher competitive advantage (Utterback and Suarez, 1991) when compared to its counterparts who have chosen to maintain the status-quo, besides why would any company want to change a formula that has worked for them over a long period of time. The concept of innovation has long been studied by numerous scholars with a of lot journals and articles written on it, but this paper will attempt to understand what innovation means to a business operating on a global front by offering case studies on three of the most innovative companies in the world and in that light find out how their innovation has impacted their operations and activities, and whether it has increased their competitive advantage in comparison with their less innovative competitors.

What is Innovation?

Since the dawn of time large companies or firms have existed for two major reasons, survival in the long run (Utterback and Suarez, 1991) and profit maximization in the short run through obtaining a high market share of their consumers. With the increasing effects of globalisation partnered with the continuously shrinking economic distance and the rapid technological changes occurring (Lall, 2001), companies now find themselves competing on a global scale. The increased scale of competition has created the need for companies to evolve in their activities and progressively grow beyond the status-quo and this is where the need for technology arises. In lay man terms, innovation in business can said to be a positive change in the methods of production or the creation of a whole new product. Mulgan and Albury (2003) define innovation as the successful creation and implementation of new processes, products, services and methods of delivery which result in significant improvements in outcomes efficiency, effectiveness or quality (p3). The OECD define innovation as: Consisting of all those scientific, technical, commercial and financial steps necessary for the successful development and marketing of new or improved manufactured products, the commercial use of new or improved processes or equipment or the introduction of a new approach to a social service (1981, 15-16). Nord and Tucker define an innovation as a practice or technology which is being utilized for the first time by a firm or organisation, irrespective of whether it has been implemented by other firms (1987, cited in Klein and Sorra, 1996). In the words of Kline and Rosenberg, who coined the term "commercial innovation" in order to clearly acknowledge that the concept is been seen from a business angle (1986); "The process of innovation must be viewed as a series of changes in a complete system not only of hardware, but of the complete market environment, production facilities and knowledge, and the social contexts of the innovation organization" (p275). Large firms have always found themselves at the forefront of technological breakthroughs and the diffusion of a newly acquired knowledge (Patel and Pavitt, 1992; Cantwell 1994; Nonaka and Takeuchi, 1995; Roberts 1995 a and b cited in Gerybadze and Reger, 1997). Most businesses create and run a research and development departments, which are charged with the task of exploring the possibilities of creating and utilizing new technology in their operations in order to either create a new product or a new method of production. Innovation is not only the creation of a new product or a change in the production process, put in the words of Kline and Rosenberg (1986); "There is no single, simple dimensionality of innovation. There are, rather, many sorts of dimensions covering a variety of activities. We might think of innovation as a new product but it may also be; an improvement in instruments or methods of doing innovation, the substitution of a cheaper material, the re-organization of production, internal functions or distribution arrangements leading to increased efficiency, better support for a given product or lower cost" (p279). Innovation may also be development of skill by a particular firm, through continuous learning and routine problem solving activities (Loasby, 1998) which will eventually become a benefit to that business. None the less, the most recognised forms of technological change in the business world are product innovation and process innovation (Dicken, 2007). Product innovation occurs as soon as company starts creating new commodities, for many organizations creating a new product is a central path by which they adapt or sometimes transform themselves in their changing environment (Woomack, Jones and Roos, 1990; Doherty, 1992; Brown and Eisenhardt, 1995; cited in Eisenhardt and Tabrizi, 1995), Dicken (2007), believes that once a business environment becomes highly competitive, the steady creation of new products will aid in maintaining a firm's profit margin and in the long run maybe its survival (p93). Process innovation on the other hand involves developing new, efficient and cheaper means of production while still maintaining the required level of quality. The need for businesses to undergo a continuous process of innovation cannot be stressed enough and due to intense competition, along with fast changing markets and technologies, firms now tend to be more aware of this fact (Harvard Business Review, 1998). As businesses grow within certain regions, gather together and form clusters, there will tend to be an exchange of information among firms operating in different fields of the same industry or the similar fields, these businesses invest in research and development now, not only to create new ideas but to become efficient in the use of the free flowing information in their environment (Cohen & Levinthal, 1989). Investment in innovative activities will rise as a result of the complex and varying processes involved for successful innovation (Kline & Rosenberg, 1986), the process of studying an industry's environment while researching on new technology and efficient ways of its utilization can turn out to be a very tedious process. There has always been some sort uncertainty in innovation due to the risk involved of either creating a new product or utilizing a new form of technology in the production process, but following the countless amount of detailed research performed on different companies operating in different parts of the world by Michael Porter and Class van der LInde, it was revealed that the companies which were internationally competitive were not those with cheaper input or large scale, but those which were capable of continuous improvement and innovation (1995).

Impact of Innovation on Companies Operating Globally: A Study of Apple Computer Inc. and Wal-Mart Stores Inc.

The increasing use of technology by businesses can be clearly observed in today's with companies who aren't even technology based developing ways to utilize new ideas in their activities or production process. Before the economic downturn, American companies dominated most industries with the most innovative firms but with the economy's slow and gradual return, we can find that American companies are no longer the "be all and end all in innovation" (Businessweek, 2010).

2010 Ranking

Company

HQ Country

Stock Returns 2006-2009 (in %)

Revenue Growth 2006-2009 (in %)

Margin Growth 2006-2009 (in %)

1

Apple U.S. 35 30 29

2

Google U.S. 10 31 2

3

Microsoft U.S. 3 10 -4

4

IBM U.S. 12 2 11

5

Toyota Japan -20 -11 NA

6

Amazon.com U.S. 51 29 6

7

LG Electronics South Korea 31 16 707

8

BYD China 99 42 -1

9

General Electric U.S. -22 -1 -25

10

Sony Japan -19 -5 NA

*21

Wal-Mart Stores U.S. 7 6 -1 *Wal-Mart was does not fall under the 10 companies but is included for the sake of this paper

Table 1: Data from Businessweek; 50 Most Innovative Companies, 2010.

The table above shows the 10 most innovative firms for the year 2010 along with a 4year analysis of their revenue, stock and their operating margin, but the sake of this paper I am going to focus on Apple, Wal-Mart and Sony, then attempt to find out the impact of their innovation on the industry they operate in as well as themselves over time.

Case Study on Apple Computer Inc.

"Innovation distinguishes between a leader and a follower" Steve Jobs, Apple Computer Inc. CEO. Apple Computer Inc. is located in Silicon Valley and is a quintessential venture-capital-financed high-technology firm (Nonaka & Kenney, 1991). As at 1977, the time of Apple's conception, the PC industry was dominated by the IBM PC and Microsoft's Windows Operating system. Apple was characterised by its idiosyncratic and go-alone strategy and was famous for not allowing its technology to be utilized by other PC makers (West, 2002). Apple placed itself firmly in the PC industry and showed its capacity for innovation by the 1984 release of the Macintosh Apple, which was the first ever mass-market PC with a graphic user interface (GUI) (West, 2005), at this time, what differentiated Apple from all other competition was the fact that they created their own software along with the hardware that ran it as well. Apple creators Steve Jobs and Stephen Wozniak did not believe the PC should only be a work tool, but should be fun as well and it was this thinking that led to the first successful use of the mouse to interact with the PC (Markides, 1997). In 1994 Apple was forced into licensing its products out to other companies due to high drops in revenue and this in turn led to a loss in their market share as these companies produced similar products at cheaper prices (West, 2002). Although being a highly innovative company, Apple faced numerous issues in the PC industry where it suffered a high level of losses and eventually had to relieve its then CEO John Sculley of his position and re-empoy Steve Jobs as CEO in July 1997 (West, 2005). Apple Inc. went through a massive makeover with the return of one of its founding fathers who came in with a series of highly innovative and profitable products, and eventually diversifying into other markets and altering Apple's major product in the process. "With the release of the iMac on August 15, 1998 Apple was able to put to rest some its past failures. These failures included the first Apple Portable, which was bulky and awkward and the Newton, Apple's first attempt to enter the PDA market. In 2001, after several years of development, Apple released Mac OS X, an operating system that targeted both consumers and professionals. Mac OS X was a complete redesign from Mac OS 9 and was able to harness the power of UNIX while offering a streamlined user experience with a simplified GUI (Graphical User Interface). The iMac line of personal computers paired with Mac OS X returned Apple to profitability and the release of the iPod portable digital audio player later that year was the icing on the cake. The phenomenal success of the iPod set the stage for future products, including the best-selling mobile device in history, the Apple iPhone, the MacBook line of portable computers, and the Apple iPad which was released on January 27th 2010." (Dougherty, 2010) Apple has experienced success in most recent product releases coupled with massive growth in sales and revenue as shown in 2007 when the sales of their Mac range shot up by 37% (Piero, 2010), while controlling only 7.4% of the American market share as at the fourth quarter of 2009 (Foreman, 2010). With the continuous release of new and exciting products along with their entry and unusual dominance of the mobile phone industry and their literal creation of the tablet PC market with the release of their iPad device, it is evident that Apple is a company that has achieved superiority through rapid and constant innovation and will continue to garner a reputation that is far out of proportion to its size or market share (West and Mace, 2007).

Case Study on Wal-Mart Stores Inc.*

Wal-Mart Stores Inc. is the brain child of Sam Walton which was made a reality in 1962 when the discount retailer was opened. Sam Walton operated only in small towns which allowed them run their operations on a small scale, in relation to their bigger and better resourced competitors. The expansion of Wal-Mart was a slow and gradual yet efficient process, the company grew at a pace which Sam Walton could easily manage and be actively present in most activities. Wal-Mart operated as low cost strategy which was hard to maintain due to the lack of a suitable working relationships with suppliers and distribution chain, suppliers saw Wal-Mart as a minor player in the retail industry and treated them as such. In order to minimize costs Wal-Mart utilized vertical integration by building their own warehouses and obtaining their own trucks for transportation, with this and the use of their Everyday Low Price Strategy (EDLP) which saved them a large amount of funds that would have been spent on advertising, Wal-Mart was on its way to obtaining market leadership. The 70's saw a change in Wal-Mart's corporate nature as the company went public, in order to expand beyond its 30 stores and raised about $5million in the process. In less than 25 years, Wal-Mart had risen to become the largest American corporation in terms of sales. With over $374 billion in revenue, Wal-Mart had overshadowed all competition in its home market and is proposed to hit half a trillion dollars in revenue within the next decade (Upbin, 2004 cited in Hesterly, n.d). Wal-Marts success can be attributed to its low cost strategy and its intense use of technology in its operations. Technology investments in sophisticated inventory, management systems, state of the art distribution centres, and other aspects of logistics weren't seen as very important areas of the retail industry. Wal-Mart had pioneered the use of technology in the retail industry and still possesses significant advantage over its competitors. The use Electronic Data Interchange (EDI) to shorten distribution cycle, by providing a direct transfer of sales information directly from the discounters register to the suppliers' computers. Wal-Mart was the leader in forging EDI links with suppliers with its Retail Link System which provided inventory information for over 3000 stores to about 3000 vendors (Standard and Poor, 1998 cited in Hesterly, n.d). In 2003, Wal-Mart once again showed its penance for technological initiative with its push for the use Radio Frequency Identification (RFID) by all suppliers, in order to track inventory more precisely than the traditional methods, although the use of the RFID was not widely accepted it was shown to save Wal-Mart up to $8 billion in costs. At the heart of Wal-Marts success remains its distribution and logistics system which had been born out of the need to service so many stores in small towns while maintaining low costs, as a result of this, Wal-Mart created and utilized their own distribution centres which used a cross-docking technique. In cross-docking, goods were delivered to distribution centres and often simply loaded from one dock to another or even from one truck to another without sitting in inventory, the cross-docking technique reduced Wal-Mart's cost of sales by 3% in comparison to competitors who no matter how much they attempted could not perfectly replicate the technique. Wal-Mart, though operating in a service oriented industry laid their emphasis on innovation and continuous improvement, and this can be traced back to the old days when there were either no computers or they were not affordable, then Sam Walton would keep a ledger of measures on several variables for each store, the emergence and efficient utilization of information technology enabled Wal-Mart to extend its emphasis on information and measurement and transform this into success and immense global growth.

*Case created by Dr. William Hesterley for the purpose of a class discussion

Case Study on Sony Electronics Inc.

Sony Electronics Inc. is a well-known electronic company formed in 1946 in the post-world war two era by Masaru Ibuka and Akio Morita under the then name Tokyo Telecommunications Engineering Corporation (Kenan, n.d). From the outset, Sony's original management policies revolved around product innovation and the company strived to make consumer electronics which were compact in size and highly portable (Vila and Mitchell, 2007). After their 1950 release of Japan's first tape recorder (Kenan, n.d) Masaru Ibuka travelled to the United States in order to market this invention, which was Sony's first major product (Chaudhuri, 2007) and relative success. Sony eventually became known for their innovative and consumer friendly products, in 1955 after they obtained the licence for the transistor for Western Electronics (Chaudhari, 2007) and went on to create Japan's first transistor radio the TR-55 and a slew of other highly innovative products including the world's first direct-view portable television set, the TV8-301 in 1960, along with the world's tiniest all transistor television set in 1962, the world's first blu-ray disc player in 2003, and in 2005 they were credited with building the world's smallest video camera which also shot in high definition (Kenan, n.d), but the product that made Sony a household name and reckonable force in their industry was the Walkman. The Walkman was produced in 1979 and was a massive hit with consumers, the product was not the first of its kind, with tape recorders already existing long before its arrival - but it was an advance in marketing, produced not for journalist professionals but for the average and common user as a the first portable music player (Hormby, 2006) paving the way for Apple's iPod and Microsoft's Zune. The Walkman created a cultural impact immediately becoming a highly sought after commodity by everyone irrespective of age or country (Du Gay, Hall, Janes, Mackay and Negus, 1997), in the words of Akio Morita; "This is the product that will satisfy those young people who want to listen to music all day. They would take it everywhere and won't have to care about record function. If we put a playback-only headphone stereo like this on the market it'll be a hit" February 1979, Sony Headquarters (Bellis, n.d). Beyond the culture defining era of the Walkman series, Sony continued to show its ability to bring dream into realities with the release of its Sony Discman or CD Walkman series, which utilized the already growing compact disc format. The Discman also included some series with radio and reception (Hassan, 2010). In recent years Sony has diversified into the mobile phone industry with its joint venture with Ericsson and also the gaming industry with its widely popular console the Playstation, which saw an increase in sales in 2010 (Mokey, 2010). From a company started with less than 1500 dollars (Kenan, n.d), Sony as at 2006 boasted of a worldwide sales figure of 63.9 billion dollars (Cahaudhuri, 2007) and has now been at the forefront of technological breakthroughs for the past 64years while still remaining a highly profitable and reliable brand name in the consumer electronics industry and with their background based on constant product innovation and a continuous search for new technology, Sony Electronics Inc. will remain a highly regarded company for more years to come.

Conclusion

There have been numerous journals that have attempted to draw out the relationship between innovation and the performance of a firm or business (eg. Feeny and Rogers, 2001; Loof and Heshmati, 2001) and it can also be seen from these journals that innovative firms are among the most efficient in their industries and can also enter into other with little to no issues. A direct linkage can be seen between a firm's performance and its level of utilized technology, Geroski (1994, p130) sums up that innovation can influence a firm's performance in two ways: The first is of the notion that the creation of new products or processes of production will strengthen a firm's competitive position in relation to its rivals. But the profits and growth will be short-lived and only last as long as the innovating firm can defend its position against rivals. The second view argues that the process of innovation alters a firm fundamentally by enhancing its internal capabilities, making it more flexible and adaptable to market pressures than non-innovating firms (cited in Neely and Hii, 1998). Innovation is the key to competitive advantage in a highly turbulent environment, and has direct consequences to a firm's ability to compete due to the value it creates by developing new products or new methods of production (Neely & Hii, 1998) and there is an obvious relationship between the intensity of competition and innovative activities (Bonanno and Haworth, 1998). Looking at Wal-Mart Stores Inc., Apple Computer Inc., and Sony Electronics Inc., all companies occupy or at one time occupied the market leader position in a specific industry or more and are also recognised as highly innovative firms, these similarities are far from coincidences, both Wal-Mart and Apple rank in at numbers 1 and 56 respectively in the Fortune 500 list and were two of the most profitable companies of the year (Fortune, 2010), also looking at the Table.1 it can clearly be seen that the companies listed are either the market leaders in their industries or extremely strong and rapidly growing competitors. Innovation from all this can be said to have a positive impact on the productivity and efficiency of businesses, be it a manufacturing or service providing firm. All firms should be involved in innovative activities despite the risks involved and the high costs of investing in technology I can say that the firms that will come out on top in the race to be global leader in their respective industries are those that embrace technology and its utilize it efficiently in their activities.

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