Introduction by market needs and ultimately external customers.

Introduction

Industrial
innovation is considered fundamental to productivity growth and thereby to
long-term socio-economic development in industrialized countries. According to
growth accounting that emerged from the 1950s, the main source of growth of labor
productivity are the ‘residual,’ which mainly consists of new products and
processes based on the advancement of knowledge and technology.

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Increasing
physical and human capital (through education) is seen as less important for
increasing productivity. On the one hand, empirical research has revealed that
innovation en-hances the growth and survival of firms (Brouwer and Kleinknecht
1994; Archibugi and Pianta 1996; Audretsch 1995; Lawless and Anderson 1996; Metcalfe
1995). On the other hand, innovation is a very complex and risky process, with
low success rates, and sometimes lethal effects. Innovations potentially
disrupt and reform the organizational fabric, often in a fairly unpredictable
and situation-specific way (Zammuto and O’Connor 1992; Dean and Snell 1991;
Lundvall 1992; Leonard-Barton 1988; Dougherty and Hardy 1996).

Product
innovation is defined as development driven by a desire to improve the
properties and performance of finished products. Objectives of product
innovation may be to develop new products, improve product properties, improve
product quality, etc. (Lager, 2002b).    

Process
innovation is defined as development driven by internal production objectives.
Such objectives may be reduction of production costs, higher production yields,
improvement of production volumes and product recoveries, environment?friendly production,
etc. (Lager, 2002b).

Product
innovation work is mainly driven by market needs and ultimately external
customers. Thus, the product innovation work is primarily effectiveness?driven.
Respectively, process innovation work is mainly driven by the needs of
production (i.e. internal customers) and can be said to be primarily
efficiency?driven. Important to note, these strict definitions and separation
of product and process innovation activities do not, however, imply that there
cannot be a combination of the two activities and objectives in an innovation
project. However, they highlight the importance of distinguishing the two types
of innovation activities and objectives.

 

 

Product
Innovation

When
people think of innovation, often, they’re thinking of product innovation.
Product innovation can come in three different forms.

 1) The development of a new product, such as
the Fitbit or Amazon’s Kindle.

2)
An improvement on the performance of the existing product, such as an increase
in      the digital camera resolution of
the iPhone7.

3)
A new feature of an existing product, such as power windows to a car.

Drivers
of product innovation might be technological advancements, changes from
customer requirements, or outdated product design. Product innovation is
generally visible to the customer and should result in a greater demand for a
product.

 

Process
Innovation

Process
innovation is probably the least sexy form of innovation. Process is the
combination of facilities, skills, and technologies used to produce, deliver,
and support a product or provide a service. Within these broad categories,
there are countless ways process can improve.

Process
innovation can include changes in the equipment and technology used in
manufacturing (including the software used in product design and development),
improvement in the tools, techniques, and software solutions used to help in
supply chain and delivery system, changes in the tools used to sell and
maintain your good, as well as methods used for accounting and customer
service.

While
product innovation is often visible to your customers, a change from the process
is typically only seen and valued internally. Speaking generally, changes in the
process reduces costs of production more often than they drive an increase in
revenue. Of the three types of innovation, process is typically the
lowest-risk.

Examples:

One of the most famous and ground breaking
examples of process innovation is Henry Ford’s invention of the
world’s first moving assembly line. This process change not only
simplified vehicle assembly but shortened the time necessary to produce a
single vehicle from 12 hours to 90 minutes1.
Recently, Differential built a
mobile sales dashboard for Grupo Bimbo. The baking company has 65
manufacturing plants and 2.5 million sales centers located in 22
countries, across 3 continents. As a result, the executive team members
travel a lot, meeting with their direct reports around the world. Having a
mobile sales dashboard gives the team quick access to the sales
information and other KPI’s for each country, channel, and brand, cutting
out guesswork in sales decisions, and reducing meeting time. 

 

Implication of
product/process innovation model

a.       New
developing industries favour product innovation.

b.      Maturing
industries favour process innovation.

c.       Small
new entrants have greatest opportunities in early stages of an industry.

d.      Large
incumbent firms have advantage in later stages.

 

 

How
extensive is the provision of product and process innovations?

Evidence
of firm innovation surveys suggests that the share of firms with a product or
process innovation varies significantly across country (Figure 1) and depends
on firm size (Figure 2) and economic sector. Data on to innovations developed
mainly within a firm (so-called “in-house innovators”) confirm that small and
medium-sized enterprises (SMEs) tend to be “adopters” of technologies more
frequently than large firms.

 

Figure 1:  Proportion of innovative enterprises by type
of innovation, 2008–10 (% of all innovative enterprises)

 

 

 

 

 

 

 

Figure 2: Types of innovation by
firm size, 2006–08 (% all SMEs and large firms)

 

Firm-level
innovation data also reveal that the majority of innovative firms (both large
firms and SMEs) introduce product or process innovations, as well as
marketing/organisational innovations (Figure 1). This is true to firms in
manufacturing and services (Figures 3 and 4).

 

 

Figure
3: Types of innovation in the manufacturing sector, 2006–08 (% of all
manufacturing firms)

Figure
4: Types of innovation in the services sector, 2006–08 (% of all services
firms)

OECD
(2011). “Mixed modes of innovation”, in OECD Science, Technology and Industry
Scoreboard 2011, OECD Publishing. Source: OECD, based on
Eurostat (CIS-2008) and national data sources, June 2011.

 

 

 

 

 

 

SUMMARY

Taking
into consideration the different effects of the various types of innovation is
important when designing innovation policy. Product and process innovation
maybe difference from their impacts on performance (e.g. turnover, cost
reduction, and productivity), as well on socioeconomic performance (e.g.
contribution to growth and job creation). Recognizing this is important to
innovation policy agendas, which are often overly focused on product innovation
at the expense of process innovation.

Identifying
the factors that drive and those that hinder the different types of innovation
helps in understanding the innovation process and formulating innovation
policy. Indeed, objectives and barriers vary by type of innovation. For
example, the objectives of product innovations often relate more to demand
(e.g. improving product quality, increasing market share, entering new markets)
than do those of process innovations. For example, cost factors can be relevant
for all types to innovations, while market factors, such as uncertain demand
for innovative goods or services or a potential market dominated by established
enterprises, and knowledge factors related to a lack of information on markets
and institutional factors, such as the weakness of property rights, can affect
product innovation but not process innovation.

 

 

 

 

 

 

 

 

 

REFERENCES

Cohen, W.M. and Klepper, S. (1996),
“Firm size and the nature of innovation within
industries: the case of process and product R&D”, Review
of Economics and Statistics, Vol. 78 No. 2, p. 232. 

Markus E. Bergfors, Andreas Larsson,
(2009) “Product and process
innovation in process industry: a new perspective on development”, Journal of Strategy and Management, Vol. 2 Issue: 3, pp.261-276.

Lager, T. (2002b),
“A structural analysis of process development
in process industry – a new classification system for strategic project
selection and portfolio balancing”, R&D
Management, Vol. 32 No. 1, pp. 87?95.

Salem
Baer (Jan 16, 2017) “The 3 types of
innovation: product, process, & business model” retrieved on Dicember
10, 2017. https://differential.com/insights/the3typesofinnovation/

 

OECD
(2011), “Mixed modes of innovation”, in
OECD Science, Technology and Industry Scoreboard 2011, OECD
Publishing. http://dx.doi.org/10.1787/sti_scoreboard-2011-44-en