Abstract
If we pause for a second to look at our daily lives, and try to compare them with the lives our parents and grandparents led, the differences are striking. Just about any activity we tackle, be it in our family life, at work, or when relaxing, is quite different from previous generations and benefits from completely new technological means.
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Notes
- 1.
For instance, think of the role of complex booking systems based on revenue management* techniques in the airline industry, which have enabled significant business model innovation.
- 2.
As an example, the strategies followed by personal computer makers in order to make their proprietary solutions standard might be of some teaching to electric car makers. Similarly, methods used to manage software development projects can be applied to the design of industrial products.
- 3.
Isaac Newton famously used the metaphor of scientists as “dwarves standing on the shoulders of giants” to express this idea.
- 4.
Many examples can be mentioned. One of the probably most striking ones is the incandescent light bulb, whose invention most people would credit to Thomas Alva Edison. However, Edison did not really do so, but was the one who improved prior artifacts invented by many predecessors, and made the light bulb commercially viable. Edison blended technological and business acumen. First of all, he managed to identify beachhead markets to which he could direct his earlier and still underperforming products, such as ships, industrial facilities and wealthy individuals (Jonnes 2004). Then, he followed with street lighting and, finally, offices and households. Even more, he deeply understood the systemic nature of his invention and the need to develop complementary goods, such as generators, enabling the market to adopt his technology as a complete solution. Similarly, neither Henry Ford nor Bill Gates invented respectively the motor car or the personal computer. However, it is thanks to them if these artifacts have effectively become widely diffused innovations.
- 5.
For instance, Stirling engines* (a special type of steam engine) were invented in the eighteenth century and have hardly ever been used in practice. However, they are now being considered as interesting solutions for generating electricity from the heat obtained in solar concentration panels.
- 6.
The exogenous or endogenous nature of phenomena leads economists to interesting choices in their fields of study. For instance, it is obvious that climate and the weather impact the economy, but economists have only recently started studying these phenomena, i.e. since it has been recognized that climate change is likely to be determined by human activity or, in other words, that it is endogenous to society and the economy.
- 7.
Apple Computer is, as of 2015, one of the world’s largest firms by market capitalization. However, it is a relatively small firm in terms of employment. Its success is mostly due to its capability of directing the innovative effort of a complex ecosystem of suppliers (e.g., component manufacturers who develop new products specifically for Apple) and complementors (e.g., application developers). Similarly, many Internet companies like Facebook innovate by providing a platform on which other companies (e.g., games developers) can deliver innovative products and services. Finally, many large companies, such as P&G and pharmaceutical companies have recently decided to reduce their internal R&D expenditure, and to look for greater cooperation with other entities that may already have developed solutions to relevant problems, or have the competencies to do so quickly.
- 8.
Open Innovation is sometimes and mistakenly equated to Open Source*. The latter can be considered to be a special type of the former, since Open Source solutions are typically developed in an extremely distributed and non-hierarchical way. However, the way with which intellectual property is dealt with in Open Source is very specific to its philosophy, and does not apply to all forms of Open Innovation.
- 9.
A well-known example is California’s Silicon Valley, an area that since decades has been home to thousands of large and small firms, together with complementary actors who have specialized in serving the needs of the cluster (e.g., patent attorneys, venture capitalists, etc.).
- 10.
For instance, a paint maker can provide customers with primary pigments and a colorimeter, and leave them the task of blending the colors to achieve the desired shades. Similarly, the diffusion of technologies such as 3D printing and open source electronics is likely to greatly boost the innovative role of customers in the fields of small-scale manufacturing and automation.
- 11.
For instance, we can say that a company like Google owes its success to the business model innovation introduced in the Internet industry (in pills, making companies pay for the search results given to users, who instead use the service for free), and not only to the process innovation they have introduced in the search process thanks to sophisticated algorithms. Similarly, Facebook is built on a business model innovation in which users freely access a platform, occasionally pay for additional services provided by complementors (e.g., games developers), while Facebook profits by sharing revenue with them, as well as by advertising.
- 12.
For instance, Dell Computer has been an important innovator in the computer hardware business by selling directly to customers and assembling computers to order. We can safely say this is a business model, and not simply a process, innovation, because of the change of upstream and downstream relationships. Similarly, low-cost airlines such as Southwest and Ryanair have introduced what we can define as business model innovations, because of the way they overturned traditional revenue flows and cost structures. For instance, meals and baggage handling have become a source of revenue instead of a cost. Sometimes, and with significant controversy, the same has happened for airport fees, thanks to the choice of flying to under-used airports owned by public authorities, who have been persuaded to subsidize flights to stimulate local tourism.
- 13.
In fact, many innovations of common use, from the Internet to GPS, to the popular robotic vacuum cleaners made by iRobot, were originally developed as military technology.
- 14.
The reference to Darwin has not been made by chance, since the innovation process is based on a very similar mechanism of experimentation, recombination, and selection. In fact, economics of innovation is tightly connected, from an epistemological perspective, to the heterodox school of evolutionary economics. As a side note, innovation economists are well aware that technological progress is somewhat brutal and irresistible, but this does not automatically create a connection with strict economic liberalism and laissez-faire policies. For example, an economist of innovation may recognize that e-books and music streaming services are supplanting the traditional media distribution industry. It is likely that she will dismiss suggestions to use public funds to support the industry in crisis as completely useless, but may recommend actions aimed at reconverting its assets to other markets.
- 15.
Well-known technology clusters such as the Silicon Valley are characterized by a very high “churn rate” of companies and jobs, which leads to the collective growth of the entire system.
- 16.
Think of nuclear waste or (though the debate is still ongoing) of the potential impact of GMO crops on biodiversity.
- 17.
The phenomenon can be observed when modern technology is introduced in a primitive society, or when technological progress is very fast. As an example for the former case, when refrigerators have been introduced to primitive societies accustomed to hunting, this has often led to obesity and drunkenness, since people do not know how to properly manage a constant supply of food. Concerning the latter case, consider genetic screening of embryos. Aside from the controversies associated to the nature of embryos (“is it a human being we are discarding?”), the problem is related to the objectives. The technique was originally intended to avoid giving birth to babies with genetic diseases. However, when technology will allow it, and given the choice, what parents will not try to use it to have better looking and more intelligent babies too? And how is society going to make sure that this will not develop into fully fledged eugenics, as in Huxley’s “Brave New World”?
- 18.
A caveman with a club is not simply a stronger man than his peers. According to his tendencies, he might become a man of order who protects the village from enemies, the village chief, or a mugger. In more modern times, smartphones profoundly change the habits of their users and their attitude with respect to their equals. Companies know this phenomenon quite well, and marketing effort often amplifies the effect.
- 19.
Coming back to the example of GMO crops and food, European markets have long resisted adoption. Even if, in the end, they might end up accepting this technology, what is the financial impact of this delayed adoption?
- 20.
There are cases in which product liability can raise complex issues even for technology that is not particularly innovative. For instance, a pharmaceutical company might decide to withdraw a socially desirable product, such as a drug, if its profitability is not high enough to offset the potential liability that might emerge, because of rare but highly damaging side effects on particular customers.
- 21.
Dramatic and well-known examples of such phenomena are tobacco smoke and asbestos, which have led to countless casualties and decades of debate between the first detection of the problem, and legislative action restricting their usage.
- 22.
In order to cope with this trade-off, the EU has introduced a rule termed “Development Risk Clause”. The Clause states that “The producer shall not be liable […] if he proves that the state of scientific and technical knowledge at the time when he put the product into circulation was not such as to enable the existence of the defect to be discovered” (Directive 85/374/EEC). However, this solution is not without problems. Besides leaving consumers with residual risk, firms are effectively taken away incentives to work on product safety, since ignorance on side effects shields them from liability. This leaves the advancement of the state of the art on potential dangers of new technology to public authorities alone, who might not be able to develop or access enough knowledge on the subject.
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Cantamessa, M., Montagna, F. (2016). Innovation in Business and Society. In: Management of Innovation and Product Development. Springer, London. https://doi.org/10.1007/978-1-4471-6723-5_1
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