De Novo & De Alio Innovating Firms In A VUCA World
There is a potential consensus that innovation emanates within the individual, i.e. from his or her own ideas. It relates to the generation, acceptance and implementation of newer ideas, processes, products or services, whether incremental or radical. Typically, there are two types of firms entering an industry and redefining it, termed as de novo, like Google, Apple, Microsoft, Tesla, etc, while the de alio are firms like Nokia, Motorola etc. entering or diversifying from other industry. Both embrace innovation required for firm performance. This study dissects relevant literature, spread from 1950-2016, examining the quest for innovation and at the same time analysing on how top innovating firms have sailed though the volatile, uncertain, complex and ambiguous (VUCA) times.
Innovation has been a complex process, both in time and space confronted by the VUCA challenge. Creativity triggers innovation leading to newer findings. Firms like Lenovo have mastered replication in computing and mobile handset domains while Samsung etc have redefined the consumer goods space. Dell computers, Zara etc. have moved into forward integration. Bajaj and Eicher motors provide a redirection in the automotive industry, while Ikea, Algramo, Baco Galicia etc have reconstructed their business. The likes of Amazon have transited into re-initiation. Welcome to the world of innovation, as incumbents and their likes have sailed in VUCA times to redefine their existence and future. Isn't it interesting to have a dialogue on who and what types of innovating firms are these?
Replication is considered to be a lower order in comparison to reinitiation. This re-initiaton is also termed to be a destructive innovation, changing rules in its business space. Innovation can be witnessed in two main areas identified as in product and process. This can be further differentiated into incremental (This is considered to bring minor or major perfections to the existing products, quiet often witnessed in consumer goods firms) and radical (This is considered as introducing new product type as witnessed in pharmaceutical and technology intensive firms). In order to measure innovation and firm performance one may evaluate the business, in terms of one that is contemporary at the time-to-market demand on new ideas like Apple from USA does for iPhones & currently for Apple TV. This measurement can also be in terms of a firm to be the first to market with creative products like Shanghai Raas from China in the albumin space, which is a promising and leading firm redefining the blood bank related products. Firms like Salesforce have exploited opportunities using cloud platform in redefining sales & marketing in the service innovation domain and are perceived by its customers to be more innovative with a diversified portfolio. The journey on innovations in a VUCA world is endless!
What innovation implies?
Innovation occurs at different stages in firm life cycle like what Unilever and Asian paints as top innovating firms have witnessed with a long history of existence. They have considered an extension towards creating and securing newer ideas including its successful introduction into the market. Monster beverage is yet another one. Genmob, in the biotechnology space clinches organizational innovation that provides enablers in terms of environment leading to newer dimensions in processes, resulting in innovative products. The magnitude of outcome creates newer products, services completely new to a business unit". Many of these innovating firms have defied volatility in terms of changing needs of customer demands, business environment, purchase power etc. and scaled forward. It would be interesting to discover how they did it?
Thus, innovation is an outcome of uninterrupted progress in creating and acquiring newer dimensions of knowledge, which acts as an enabler. There are two distinct categories. Firstly, it is the product innovation, which can be incremental as in modification and discontinuous as in development of a noteworthy set of newer technologies. Adobe systems, Autodesk, Coloplast are few examples of innovating firms engaged continuously in doing so. Secondly, the process innovation can also be of incremental nature resulting in lowering cost and enhancing quality. The discontinuous one leads to creation of new methods for producing products or creating newer services like Expedia in the travel vertical. These innovating firms have untiringly deliberated upon uncertainties associated with the market, its application and with the end customer, yet with a focussed attention have leaped beyond horizon.
Firms must build innovation strategies while developing dynamic capabilities in obtaining refined knowledge and newer organizational methods. At the same time, it must align newer technologies for the purpose of acquiring newer products and processes. Constellation software is one that has accomplished this task and mitigated complexities like consumer orientation, market demand, networked competition, price warfare etc. in a VUCA world.
Incremental innovations, as by Hindustan lever, Vertex Pharmaceuticals etc. intends to exploit endogenous competencies possessed by the firm. This process engages newer methods of working by the company that helps in modifying the manufacturing procedures used for its products. On the other hand, radical innovations, by companies like Netflix, Incyte etc. involves incorporating the desired alterations, may be with a completely new architecture as in product innovation. There is little empirical evidence on the causality between organizational innovation and firm performance, yet it must be explored. Unlike other firms that are breathing heavily to survive these leading innovating firms have mastered over ambiguity, such as customer preference, buying behaviour, product and service portfolio etc. and have steered their prominence, with VUCA as a challenge.
Based on our research and proposition, we consider that the "innovation adoption rate" has a positive relationship with organisational performance in a VUCA world, anticipating unexpected-unknowns. Greater is the firm's commitment to innovation, the better are the returns.
An Insight- incremental and radical innovation firm
Innovative and entrepreneurial firms generate ideas targeted at superior products (iwatch), manufacturing processes (Toyota) and services (Keyence), requiring entrepreneurial leaders. These entrepreneurial leaders and their firms contest and are successful in managing their innovation processes. Their discovery rates are higher. They are inclined towards creating followed by exploiting opportunities.
The higher order innovations lead in creating newer industries (Tesla on Electric driven automobiles - game changing), products (cars) or markets (long life heavy duty fuel cells) as an outcome. The low order innovations introduces modified product (frequented in mobiles, TV's, Refrigerators, AC's, Washing Machines etc.), which may engage slightly enhanced technology. It's subset is the process innovation, which creates new ways in producing the existing product or the services being offered as in paint, automobile, hotel industry etc. Thus, incremental innovations are a low order category, while radical innovations are classified as the high order ones.
The more complex and dynamic environment as in VUCA, the more will be the chances of firms engaging in innovation and inclining towards incremental or radical reforms. Firms must capitalise upon the resources that are necessary to innovate on a continuous basis, should they desire to exist? Isn't agility and resilience the need by these innovating firms and the entrepreneurs?
An entrepreneur must constantly experiment and have the insights for future course of actions. There must be a foresight to look forward to new opportunities in the offering and capitalise upon at the earliest. The younger the CEO, (Musk of Tesla, Zuckerberg of Facebook) the inclination to risky strategies is more, as the question of status symbol is less as compared to the more seasoned and elderly ones (Bill Gates of Microsoft, Tim Cook of Apple). The degree of contribution by the younger generation is more, in terms of its content and the value to the firm anticipating the VUCA challenge.
Let us strengthen our understanding on innovating firms. These are de novo and de alio type innovating firms, which are two different categories of a "firm entry" in a market.
The de novo and de alio innovating firms
The starters are termed as de novo (start-up) (Paytm, Oyo rooms, Flipkart, Regeneron Pharmaceuticals, Amore Pacific etc.) and the firm's diversification away from another industry are termed as de alio (Red Hat, Fast retailing, Hermes international etc.). According to a study de novo firms are able to create traction for technological consequences in product innovation as compared to de alio firms. These firms vary in their abilities on being innovative. Whether entrants are more capable than incumbents in developing competence towards innovation is still a question in discussion.
Market leadership (Apple, Audi), market share (Samsung, Suzuki), adoption of technology (Lenovo, Motorola), technical performance (Sony, Siemens) and entry into a new technological niche (LG, Carl Zeiss) are some judgemental parameters to assess the level of innovation. It is difficult to classify as to which firm category should engage in which type of innovation, incremental or radical or may be both.
One needs to explore, the firm type, its propensity to be innovative, the organisational patterns and the structural flexibility followed by its autonomy! The organisational competence refers to the capability by the organisation to execute problems, while coordinating the daily routines, structures, production and relationship with external actors. Organisations must stay anti-fragile tending to develop and refine their competence level according to their exposure and acquired age in business (Honda, Mastercard). Some firms have a higher degree of organisational competence that can lead to dependable performance (Fanuc, Baidu). It is a question, whether the actual organisational competence initiates a degree of innovation to a firm and that if it could be related to the existing technological environment with the firm's structural flexibility (Proctor & Gamble, Bharti Airtel).
The organisation experiences in its journey or so-called business life cycle, few stages that have enduring significance in its development like Dassault Systemes from France. The critical event is at the time when the firm is found. It has been rightly pointed out that in the bargain of raising funds the firm has the possibilities of its structure being exposed and at times can be unfavourable (Daewoo Motors). This structural inertia varies in each firm and at times is complex. Younger and smaller organizations (Pepperfry, Grofers, Quikr) are more likely to undertake significant organisational change than the larger and older ones with a limited foresight to disruptive effects. De novo firms are more flexible. Is it the autonomy and flexibility translating into advantages?
De novo firms (Shimano) have a critical advantage over de alio firms (Unilever Indonesia) as a result of flexibility in structure, as their organisational competence is not completely exploited. There is a greater level of freedom. It is also understood that these de novo innovating firms are industry focussed with little structural reforms to suit the purpose. On the contrary the de alio innovating firms encounter resistance to change. Therefore, de novo firms as compared to de alio firms have an upper edge at the time of entry, which is a better combination of structural forms and organisational capabilities. The firms with improved capabilities and with superior resources have a greater tendency in adapting innovation in continuity. De alio firms are the ones with matured and established capabilities along with requisite resources. Is it that they build up a routine in their innovation schedule?
Hence, we can see for de alio firms the organisational competence may aid to the innovation process, but the scarcity in their structural status may hamper their end results. However, for de novo firms, the positional deficiencies in acquiring well-developed capabilities, resources and the advantage of position, restrain them from getting into the innovation imbroglio in a larger scale. De novo firms hence should proactively pay more attention to the opportunities that make them innovative and towards taking risky changes than de alio firms in a VUCA world.
Discussions
Firms must support innovation leading to venture development. The firm engages in innovation each time it enters in a market with an enhanced product. This is termed as the firm's supreme innovation capability. At the industry level, an entrepreneurial firm innovates when it initiates entry into a new market with a superior product. The latter dimension illustrates on the firm's innovation capability with respect to its competitors.
As a result, the de novo firms have a greater tendency towards being bold in structural flexibility with propensity towards change in organizational abilities as compared to de alio firms. There is strong proclivity on de novo firms undertaking product innovation by enhancing and absorbing superior technical dimensions in their products more frequently than do de alio firms.
Firms that envisaged the VUCA challenge and with their first mover advantage in the industry (Starbucks) or during the emergence of path breaking technologies (Netflix) have meaningfully advanced product enhancement rates as compared to firms that entered later. They were agile and precise to learn the art of mitigating 'chaos' and 'visible' challenge thrust upon exogenously.
Thus we conclude that innovation is the centre point of discussion and is responsible for firms' performance, whether de novo or de alio type in a VUCA world.
