Connotation and types of innovation

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The Routledge Companion to Innovation Management
Jin Chen, Alexander Brem, Eric Viardot, Poh Kam Wong
Connotation and types of
innovation
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Jin Chen, Ximing Yin
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Basic definition and nature of innovation
Innovation has been widely regarded as the central process driving economic growth and the
sustainable competitive advantages of both companies and nations, as well as global sustainable
growth, while the key precondition to conducting innovation management effectively is to have
a big picture and deep insight of the concept: the nature of innovation (Schumpeter, 1934). This
chapter will introduce the connotation and types of innovation, as well as the latest trend and
emerging paradigm of innovation (Chen, Yin, and Mei, 2018; Martin, 2016).
Basic definition of innovation
Innovation is a very ancient English word which stemmed from the Latin word “innovare”,
meaning renewal, making of new stuff or change.
Joseph Schumpeter, a professor from Harvard University and an Austrian American, was
the first scientist to introduce the innovation theory (Fagerberg, 2003). In the German edition
of The Theory of Economic Development, published in 1912, he systematically defined the word
“innovation” as the introduction of an unprecedented “new combination of production factors”
into the production system. Innovation is made in order to obtain potential profit (Chen, 2017).
In putting forward the innovation theory, Schumpeter was motivated primarily to provide
an all-new interpretation of the internal mechanism of economic growth and economic cycles.
Based on the internal mechanism of innovation, he explained why a capitalist economy assumed
a “boom-recession-depression-recovery” cycle, adding that innovation at different levels con-
tributed to three economic cycles of varying lengths (Schumpeter, 1934).
Schumpeter summarized the following five forms of innovation:
• Introducing new products or improving product quality;
• Adopting new production methods and processes;
• Developing new markets;
• Exploiting new sources of supply of new material or partly finished products;
• Implementing new organizational forms.
3
CONNOTATION AND TYPES OF
INNOVATION
Jin Chen and Ximing Yin

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Connotation and types of innovation
27
However, his original thoughts on innovation were difficult for most people and mainstream
economists to accept for a very long time, until the 1950s, when science and technology began
to play an increasingly independent and outstanding role, drawing a lot of attention to innova-
tion theory research. From the 1980s onwards, researchers went deeper into and applied theories
of technological innovation to many realistic phenomena in economic development. The sig-
nificant place and systematic theory of innovation gradually began to be established.
Initially, innovation was used primarily to define technological innovation, namely, the crea-
tion and introduction of new technology into a product, process or business system. The inven-
tion of an all-new product or process is an important technological improvement on the existing
ones, or the launch of a new product into the market (product innovation), or the application of
a new production process (process innovation).
The Organisation for Economic Co-operation and Development (OECD) issued the first
edition of the Oslo Manual: Proposed Guidelines for Collecting and Interpreting Technological Innova-
tion Data in 1992, updated in 1997 and 2005, in which it broadly defines technological inno-
vation as: “An innovation is the implementation of a new or significantly improved product
(good or service), or process, a new marketing method, or a new organizational method in
business practices, workplace organization or external relations” (OECD/Eurostat, 2005, p. 46).
The narrower definition of innovation could be “the implementation of one or more types of
innovations, for instance, product and process innovations”. An innovation is deemed to have
been realized if a product was launched into the market or a process was applied to production.
Therefore, innovation spans a range of activities, whether scientific, technological, organiza-
tional, financial or commercial.
In addition, the scholars defined innovation differently:
• American scholar Mansfield held that an invention could be termed a technological inno-
vation the first time it was applied (Mansfield, 1968).
• British technology policy expert Prof. Christophe Freeman regarded innovation as the
many steps (e.g. technology, design, manufacturing, finance, management and marketing)
that took place the first time a new product or process was initiated (Freeman, 1987).
• American scholar Chesbrough defined innovation as the creation and commercialization of
an invention (Chesbrough, 2003).
• American scholar Drucker considered innovation a special tool an entrepreneur applies in
order to turn changes into different business and service opportunities. Innovation can be
a discipline, an academic field or a practice (Drucker, 2009).
• The China’s Central Committee and State Council defined technological innovation more
systematically in The Resolution on the Further Development of Technological Innovation, High
Technology and Industrialization,1 issued in 1999:
• Technological innovation is the application of innovative knowledge, new technolo-
gies and processes by an enterprise. It also encompasses the adoption of new pro-
duction methods and management models to improve product quality, develop new
products, provide new services, occupy new market share and realize market value.
In this book, the author defines innovation as an entire procedure encompassing the genesis,
design, R&D, trial production, production and commercialization of new thoughts and ideas. It
symbolizes the ability to transform foresight, knowledge and enterprise into wealth, especially
the ability to combine technical knowledge efficiently with commercial knowledge to derive

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Jin Chen and Ximing Yin
28
value. In a broader sense, all the undertakings aimed at creating new economic or social value
can be termed innovation.
At the outset of an innovation initiative, problem orientation and strategic foresight are
equally important to clarifying the strategic direction. One should apply a holistic thinking
mind-set to manage the tension and paradox between short-term problem-driven and long-
term future-prospect thinking processes. While innovation is under way, it is very necessary
to keep in close touch with the team members and stakeholders (e.g. the user, joint venture,
university and investor). When it comes to state of mind, freewill, great courage to take a risk
and a positive attitude to setbacks are requisites. When it comes to performance, a lot of atten-
tion should be paid to the contribution of innovation to social development and environmental
protection, as well as to the materialization of commercial value. See Figure 3.1.
Innovation does not necessarily involve technological changes
Innovation does not necessarily have a technological or physical nature. It may be an invisible
asset or approach (Rogers, 2010). It’s not technology, but the online business model of Google,
Amazon and Alibaba that contributes most to the prevalent success of the World Wide Web.
Since China marketized the electrical power industry with a competitive feed-in tariff mecha-
nism, the policy has led to a prolonged wave of corporate innovation in strategy, organizational
structure, management and operation. It’s very clear that innovation is a prevalent trend in
many forms and fields. Compared with technological innovation, institutional innovation is
more important, although more difficult to achieve. One example is Shenzhen, a fast-growing
city, which rose over two decades ago in economic reform and derives its success from the
establishment of the Shenzhen economic and technological development zone (ETDZ) in
the 1980s. According to the report released by the World Economic Forum in 2018, Shenzhen
ranks number one among emerging cities with its global networks of innovation. Shenzhen
has built on its reputation for hardware manufacturing to develop its own internationally
Shareholder & Stakeholder
Collaboration
Future-Prospect
(Predictive and
Forward-Thinking)
Holistic
Thinking
Problem-Driven
(Creative and
Critical Thinking)
Diversied
and Novel
Knowledge
Risk-taking Spirit and
Failure Tolerance
Social Value
Economic Value
Figure 3.1 Connotation meaning of innovation

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Connotation and types of innovation
29
competitive innovation ecosystem. Internet giant Tencent is based in the city, as are the global
hardware firms of Huawei and ZTE. As a result, the city sees the third-highest number of pat-
ent applications of any city in the world. As China’s capabilities grow, Shenzhen is likely to be
at the center of this.2
Technology leadership does not equal successful innovation
Technology leadership does not necessarily mean successful innovation. See Table 3.1.
These technology leaders failed in their products and programs primarily because of poor
coordination of nontechnological factors with technological factors, marketing and manufac-
turing capacity. Take Wanyan, for example, the company that unveiled the world’s first VCD in
1994. However, it dropped behind in the ensuing campaigns on market expansion, marketing
and manufacturing capacity and ended up falling out in a VCD war. On the contrary, Intel
and Haier succeeded in transforming technological advantages into market advantages through
effective coordination of technological and nontechnological factors.
Success factors in innovation
Over the past decades, scholars have summarized some important success factors for innovation,
including:
• Integration of departmental responsibilities: The various departments converge func-
tionally in an effective manner so that all the departments are involved as an integrated
body in the innovation program from the outset to make highly manufacturable designs.
• Strong market orientation: Potential users are allowed to participate or get involved in
as many R&D programs as possible to play a pioneering role.
• Good external communication: The innovator keeps in effective touch with external
scientific and technological sources and remains receptive to new thoughts from without.
• Ingenious plans and more program control procedures: Resources are deployed so
as to select new program procedures. Program assessments are made in order to manage and
control programs effectively.
• Key persons: Such persons include influential program advocates and technological gate
keepers. There must be energetic managers. Talented managers and researchers must be
retained.
Table 3.1 Technology leadership does not mean successful innovation
Leader Follower
Winner Pilkington (float glass process) Mitsubishi (VHS video recorder)
Intel (CPU) IBM (PC)
Founder (laser typesetting) Lenovo (PC)
Haier (water heater safety device) Eastcom (cellphone)
Loser EMI (scanner) Nokia (smart phone)
Xerox (PC, mouse, etc.) Letv (Internet + TV)
Wanyan (VCD) GREE (mobile phone)
XH Electronics (color TV) Baidu (take-out platform)
Motorola (iridium) Solyndra (solar power)

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Jin Chen and Ximing Yin
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Apart from these, certain strategic factors are also a precondition to successful innovation:
• The senior management team gives a pledge of commitment to support an innovation
program.
• A long-term corporate strategy must be positioned to play a key role.
• For significant projects, long-term resource planning must not be based solely on a short-
term payback period but on future market penetration and growth.
• The firm must be flexible and responsive to changes. There must be a sensible internal
innovation mechanism.
• The senior management is risk tolerant.
• There must be an innovation-receptive corporate culture fit for innovator development.
• The entrepreneurial, institutional and financial environment must be supportive. Effective
external incentives are important as well.
• There must be close ties between R&D and other corporate divisions, as well as a sensible
R&D structure.
Innovation and relevant concepts
Innovation and creation
Putting it simply, innovation is the proposal and commercialization of a creative idea. There will be
no innovation without creative ideas. Creativity differs from innovation, in that the former involves
only putting forward creative ideas, while the latter materializes and commercializes the ideas.
Innovation and invention
Innovation and invention often interweave with each other, so many confound them. But the
two concepts are fundamentally distinct. Some innovations include no invention at all. A cer-
tain innovation that concerns an invention may encompass more than the latter. A measure of
invention is the number of patents, or the wave of cheers from secluded laboratories. Innova-
tion, however, means the translation of an invention into application; as Einstein cautioned his
assistants: “We must achieve concrete results. We’re not those German professors wasting their
life on bee hairs”.
Schumpeter, who first differentiated invention from innovation, held that one of an entrepre-
neur’s responsibilities is to introduce new inventions into the production system and that inno-
vation is the first-time commercialization of an invention (Fagerberg, 2003; Schumpeter, 1934).
It’s natural that a time lag exists between the invention of a technology and its commerciali-
zation as an innovation. By and large, a period of technology diffusion or adjustment typically
comes before an innovation produces a remarkable economic impact (Andergassen, Nardini,
and Ricottilli, 2017). For example, the fax machine took 145 years to really commercialize.
The chance that an invention successfully turns into a commercial innovation is small. In
the United States, a meager average of 12 to 20 percent of all R&D projects stand a chance of
turning out successful commercial goods or processes.
Innovation and entrepreneurship
The concept of entrepreneur was first put forth in the 1730s by French economist Richard
Cantillon, who believed that an entrepreneur worked to improve the efficiency of economic

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Connotation and types of innovation
31
resources. Entrepreneurship is a set of special skills of a spiritual and technical nature. In other
words, entrepreneurship is used to describe the versatile talent an entrepreneur exhibits in the
creation, management and operation of an enterprise (Drucker, 2009). It is an invisible, singu-
larly critical production factor, and innovation lies at its core. Besides, entrepreneurship normally
encompasses such traits as risk taking, courage to explore, learning ability, persistence, devotion,
cooperation and integrity.
Innovation and R&D
Since Thomas Edison made innovative invention a branch of science in the 19th century, R&D
has served as an important measure of the innovation capability of a country or enterprise
(Belderbos, Carree, and Lokshin, 2004).
There are many definitions of the word. The OECD defines R&D as systemic creative work
aimed at enriching the knowledge repository regarding humans, culture and society, as well as
the utilization of such knowledge for new inventions and applications.
The OECD classifies R&D activities into three types: basic research, applied research and
experimental development. Basic research refers to experiments or theoretical research, which,
based on phenomena and facts, aims primarily to acquire new knowledge and has no concrete
application purposes. Basic research is conducted to generate new knowledge and discover
truths and has no directionality. Although much of the basic research in the United States is
funded by the federal government, a large number of top-of-the-line firms are also very success-
ful in this area. Take Johnson & Johnson, for instance. The conglomerate spent $US10.554 bil-
lion on R&D in 2017, taking about 12.7 percent of its total revenue. At the same time, Merck, an
emerging leader of innovative medicines, vaccines and animal health products, spent $US7.5 bil-
lion on R&D in 2017, taking about 17.2 percent of its total revenue.3 Researchers have reached
one consensus: basic R&D on the existing platform of technological knowledge is the one
way potential invention opportunities can be quickly discovered and utilized. The viewpoint
hypothesizes that technology drives innovation.
Applied research refers to investigation on raw data and deals primarily with the acquisi-
tion of new knowledge on a specific applied or pragmatic field. The objective of applied
research is clearly defined, and the resulting inventions, if any, may be commercialized, since it
is oriented to solving practical problems a firm faces. Applied research proponents don’t think
basic research is necessary because they have a sufficiently large stock of knowledge for their
businesses.
Experimental development refers to systematic trials that convert knowledge derived from
scientific research and experience on new material/product/equipment manufacturing to the
development of new processes, products, systems and services, or to the improvement of existing
processes, products and services.
R&D starts from creative ideas, extending all the way through research, development and
success of trial production. The center of R&D lies in process and output.
An increasing number of companies are paying more attention to R&D capabilities. Major
corporations across the world run their own research bodies, like IBM, Microsoft, Siemens,
Huawei and Haier. A firm may encounter huge problems buying advanced technology from
the market, especially in an era full of cutthroat competition when the owners of cutting-edge
technology will not choose to part easily with the huge profits before strong competitors appear.
Even if traditional technology can be bought, it is usually expensive. With the development of
technology and the escalation of market competition, firms will need more advanced tech-
nology, which requires much more expenditure. Furthermore, some technologies may not be

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Jin Chen and Ximing Yin
32
applicable upon introduction. They have to be assimilated and adapted to the production and
management system of the firm before achieving business profit.
Overall, technological knowledge constitutes an integral part of a company’s core capabili-
ties. A company cannot maintain long-lasting competitive advantages unless it carries out R&D
activities to accumulate unique technological knowledge (and especially its own R&D talent
resources) in order to avoid being emulated by competitors.
Table 3.2 outlines the difference between technological innovation and some similar concepts.
Nature of innovation
Innovation spans the whole process from basic research through to applied research, with a
“Death Valley” in between. To be effective, an innovation should have some kind of a bridge to
connect basic research to applied research, or else ultimate commercialization efforts will end up
in failure and the innovation will not realize its value. Therefore, how to establish ties between
basic research and commercial applied research is very critical to innovation.
Innovation can also be depicted in terms of the knowledge–capital interaction process. As
an essential part of innovation, research relies on capital input to deliver knowledge output,
which lays the foundation for innovation. Innovation as a new capital eventually contributes to
a greater capital spillover. See Figure 3.2.
Table 3.2 Technological innovation vs. similar concepts
Concept Simple definition Distinction from technological
innovation
Invention Propound a new concept, thought or
doctrine for the first time.
No mass production and
commercialization.
Basic research Explore the world and technological
advances. No specific commercial
goals.
No intensive trial production,
mass production and
commercialization.
Applied research Systematic creation activities aimed at
acquiring more technical knowledge
by working towards specific goals.
Inadequate links with the
production and market sectors.
Experimental
development
Employ the knowledge derived from
basic/applied research to develop
new materials, products and
equipment.
No consideration for
commercialization.
Technology introduction Introduce new equipment and talent
to improve production capacity and
marketability.
No guarantee for market entry.
Technological renewal Involve primarily systematic or partial
renewal of production equipment.
Can improve production
capacity, but commercialization
possibility remains unknown.
Technological revolution Strictly speaking, technological
revolution encompasses the whole
span from invention, to innovation,
to diffusion.
Takes a longer time than
innovation. An economic
concept. Less operable in
reality.
Technological progress The process wherein innovations mass
and consolidate over years.
Post-innovation summation of
innovation history.

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Connotation and types of innovation
33
From the perspective of organizational management, innovation pays attention to the effec-
tive coordination of strategy and creativity, R&D, production and marketing. Typically, effective
synergism and coordination among the four divisions are very important to a firm and require
great emphasis. Generally speaking, the vast majority of the innovation failures are not attributed
to technological factors, but to defective strategy, market survey, sales management and organi-
zational management. See Figure 3.3.
Basic types of innovation
Innovation can be classified in different terms. In terms of content it can be classified into prod-
uct innovation, process innovation, service innovation and business model innovation.
Research
Capital Knowledge
Innovation
CKI
(Center for Knowledge
Interaction)
Figure 3.2 Knowledge–capital interaction
Source: Adapted from the web content of the Technical University of Munich, www.tum.de/
R&D
Strategy &
Creativity
Production Marketing
Figure 3.3 What’s critical to innovation success – linking strategy and creativity, R&D, production and
marketing

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Jin Chen and Ximing Yin
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Product innovation
A product in the traditional sense is any tangible physical good or raw material, ranging exten-
sively from everyday products (e.g. toothpaste) to industrial goods (e.g. steel pipes) (Gao et al.,
2017). At the early stage of the product lifecycle, there is no prevalent design in the market
and products are subject to major changes. Therefore, a firm must constantly improve on an
innovation to meet customer demand, expand the customer base and build up greater market
advantages.
There is a recent trend among service companies (e.g. insurers, financial firms, telecommu-
nications carriers and other professional service firms) to promote their services as “products”.
One case in point is the successful launch of Alipay, an online financing product, by Ant Finan-
cial Company in 2004, which is trying to bring inclusive financial services to the world. As
described by Fortune’s Annual Change the World List 2017, Ant Financial’s Ant Forest app has
encouraged 450 million users in China to do just that in fulfillment of parent Alibaba Group’s
pledge to use financial technology to tackle climate change. Users earn points toward planting
virtual trees by adopting earth-friendly habits. The company plants a real tree for every 17.9 kg
of carbon saved: over 8 million were planted in 2017. And the engagement keeps customers loyal
to Ant’s widely used payment app.4
In order to break the traditional bounds of industry, a growing number of producers are
beginning to provide customers with services centering on their products. For example,
automakers offer roadside assistance to drivers. GM sells cars, but customers buy service as well,
which is sold as part of the deal. One such service is OnStar, a vehicle-mounted GPS satellite
communications system that enables GM customers to locate themselves at any time and call
for help in case of emergency.
Although the service firms tend to describe what they offer as a product, it’s different from
what we generally perceive as a product. Most importantly, whereas generic products are visible,
service is, in many cases, invisible. Insurance is intangible, but a snowboard is physical and visible.
A service product (e.g. medical and health care) is produced and consumed simultaneously, and
its delivery requires very active participation of the consumer. Besides, it is extremely difficult, if
not virtually impossible, to prohibit imitation by the establishment of a patent law. In the model
of product innovation, service takes the predominant form of tie-ins designed to increase the
value-added of a product and improve its market competitiveness.
In simple terms, product innovation means the release of a new product designed to meet
customer demand or solve customers’ problems. Examples of product innovation include the
Apple iPhone, Haier’s environmentally friendly twin tub washing machine (no need for washing
powder) and the Huawei Mate 8 fingerprint recognition smart phone. Product innovation can
be subdivided into component innovation, architectural innovation and complex products and
systems (CoPS) innovation (Chen, Tong, and Ngai, 2007; Hobday, 2000).
Component innovation
The vast majority of products and processes are hierarchically nested systems; that is to say, the
product or process as an entity is a system made up of components, each of which is in turn
made up of a lower hierarchy of components until the hierarchical structure ends at an indivis-
ible level. One example is the bike, which is a system comprising the frame, wheels, tires, seat,
brake discs and other components. Each of these components is an independent system. For
example, the seat can be considered a system comprising the metal and plastic frame, stuffing
and nylon cover.

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Connotation and types of innovation
35
Innovation may lead to changes to an individual component, or the entire structure where
a component works, or both. If an innovation leads to changes to one or more components
without severely compromising the entire system structure, it’s termed a component innovation.
One case in point is an innovative bike seat that introduces gel stuffing as an enhanced dampen-
ing material while involving no further structural change to the bike.
Architectural innovation
In contrast to component innovation, architectural innovation drives changes to the entire
system structure or to the action mechanism governing two or more components (Wilden,
Devinney, and Dowling, 2016). While a stringent architectural innovation may change how the
components interact as a system, no substantial change occurs to the components themselves.
Moreover, most architectural innovations not only change the interaction but also change the
components themselves, leading to a fundamental system change. Architectural innovation may
have a far-reaching complex impact on the market competitors and technology users. One
example is the transition from a functional cellphone to a smart cellphone. This architectural
innovation requires not just applicable changes to many components but also changes to how
the cellphone is operated.
Whereas a single-component innovation requires a firm to master the expertise about the
component, initiating or introducing an architectural innovation requires the mastery of how
to assemble and integrate the components structurally into the system. The firm must learn
about the features of the various components, how they work together and how some system
feature changes trigger substantial system changes or structural feature changes to individual
components.
CoPS innovation
The CoPS evolved from the LTS (Large Technical System), a concept which originated from
the US military’s technology development system. The CoPS remained a relatively new concept
even to Western countries until the late 1990s when clearer definitions were suggested (Hobday,
2000). A CoPS refers to a huge product, system or piece of infrastructure that involves enormous
R&D spending and high technology and is job-produced or custom-made in small batches
(Chen, Tong, and Ngai, 2007; Hobday, 2000). The concept encompasses large telecommunica-
tions systems, mainframe computers, aeronautical and space systems, smart buildings, power grid
control systems, large vessels, high-speed trains, semiconductor production lines, information
systems and other systems inseparable from modern industrial uses (see Table 3.3). In spite of its
small production, the CoPS industry accounts for a significant share of gross domestic product
(GDP) and played a very critical role in the modern economy due to the bulky size and high
unit cost of the products.
In an investigation into diverse product data in the UK, Miller and Hobday, researchers in
the Science Policy Research Unit (SPRU) of the University of Sussex, found CoPSs to have
contributed to at least 11 percent of GDP, creating at least 1.4 million to 4.3 million jobs. Their
further research pointed out that the role of the CoPS industry was not to be overlooked in
maintaining the UK’s leadership in the world economy. As a very sophisticated system consisting
of numerous subsystems and components, a CoPS, if successfully developed, can give an impe-
tus to the other industries and common mass production industries. For example, it drives the
development and application of more advanced mass production lines.

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Jin Chen and Ximing Yin
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In terms of technology diffusion (Andergassen, Nardini, and Ricottilli, 2017), a CoPS involves
a wide variety of high technologies that directly cause its embedded technology modules to be
applied in other fields. This technology diffusion is faster than normal product innovation, thus
bringing about technological updates to the whole industry and improving the competitive
power of a country.
Process innovation
Process innovation is a new mode of producing or delivering a new product or service, for
example, innovation in production processes, technological roadmaps or production equipment
(Pilav-Velić) and Marjanovic, 2016).
For a manufacturer, process innovation includes the adoption of new processes, techniques,
manufacturing methods and technologies to achieve advantages in cost, quality, lead time, devel-
opment cycle and delivery speed, or to improve the custom-making capacity of products and
services. In the case of washing machine manufacturing, a process innovation may take the form
of the adoption of a new sheet material or the replacement of a traditional machine tool with
a computerized numerical control (CNC) machine tool, which contributes to 50 percent cost
reduction or threefold productivity or more.
The purpose of product innovation is to optimize product design and performance singu-
larity, whereas the purpose of process innovation is to improve product quality, reduce pro-
duction cost, maximize productivity, minimize energy consumption and upgrade the working
environment.
Process innovation delivers multiple benefits (e.g. larger margin, less cost, higher productivity
and higher employee satisfaction), makes value delivery more stable and reliable and benefits the
customer as well. Process innovation is unique in that it’s normally invisible to the customer;
in other words, it occurs at the backstage of the firm. Only when a mishap of the corporate
internal procedure causes a failed delivery of products or services will the customer take notice
of the problematic procedure.
Table 3.3 CoPS examples
Aircraft flight control system Aircraft engine Runway
Airport Navigation system Large ship (vessel)
Baggage handling system for
airports
Bank transaction processing
system
Observatory
Business information network Large chemical plant Mainframe computer
Power grid control system Big bridge SPC exchange
Flight simulator Ship dock Space station
High-speed train Flexible manufacturing system Synchrotron
Smart building Helicopter Telecommunications transaction
processing systems
Semiconductor workshop Fighter jet Water filtration system
Microchip workshop Guidance system Water supply system
Nuclear power plant Nuclear fusion reactor Wastewater treatment plant
Offshore drilling platform Port cargo handling system Microwave tower
Passenger aircraft Semiconductor lithography
system
Source: Authors’ design, based on Hobday (1998)

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Connotation and types of innovation
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Product innovation and process innovation usually alternate. On the one hand, a new pro-
cess makes the production of new products possible. For example, when a new metallurgical
process makes bike chain production possible, the development of shaft-driven bikes with a gear
train becomes possible in due course. On the other hand, a state-of-the-art workstation helps
a firm realize computer-aided manufacturing (CAM), which is a boost to speed and efficiency.
In addition, a product innovation developed by a firm may be a process innovation for another.
For example, when an innovative CNC lathe developed by a manufacturer is used by a firm for
machining, it is considered a process innovation for the latter since it improves speed, quality
and efficiency.
A service firm employs process innovation to improve frontstage service and launch novel
services or new “products” visible to the customer. In 1986, FedEx released a unique parcel
tracking system to the market. What the customer saw was only a small barcode reader the
operator used for parcel scanning, while the rest of the sophisticated system was invisible to the
customer, who knew only the real-time state of the parcel on its way. The value-added service
helped FedEx secure temporary advantages over its competitors.
Innovation matrix
Based on the basic types and characteristics of innovation, we can infer the category under
which the innovation of an organization or firm falls. The categorization matrix pertinent to
innovation management optimization is suggested as follows (see Figure 3.4).
Service innovation
One hallmark of modern economy is a fast-growing service sector which gains in increasing
significance in the national economy. Lying at the core of the world economy, the service sector
is the driving force behind economic globalization. A growing number of firms in the service
Level of Innovation
Nature of Innovation
Radical
Innovation
Product
Innovation
Process
Innovation
Service
Innovation
Business
Model
Innovation
Non-Technological
Innovation
Technological Innovation
Signicant
Innovation
Incremental
Innovation
Figure 3.4 Innovation matrix

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Jin Chen and Ximing Yin
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sector are making service innovations to render high-quality services and products, cut costs and
develop new service philosophies.
Service innovation is a dynamic process a firm takes to implement purposeful, organized
changes to a service system with the aim of improving service quality, creating new market value
and introducing changes to service factors. While the service innovation theory evolved from
the technological innovation theory and the two are inseparably correlated, service innovation
distinguishes itself from the latter (especially innovation in manufacturing technology) by its
unique innovation strategy.
Basic characteristics of service innovation
Intangibility
In the first place, in contrast to a tangible consumer product or industrial product, service and
its components are in many cases intangible, incorporeal and invisible to the naked eye. This
hallmark makes service not easy to evaluate or validate.
In the second place, customer services are sold as a tie-in bundled with many consumer and
industrial products. For the customer, the service or utility attached to these vehicles matters
much more. From this standpoint, intangibility is not unique to service.
Inseparability
The production and consumption of a service are not to be clearly differentiated. They take
place at the same time. In other words, the customer consumes a service at the moment he
or she receives it from the service firm. There is no chronological order as to the produc-
tion and consumption of a service. This characteristic indicates that the customer cannot
eventually enjoy the service unless he or she participates in the production of the service.
The characteristic makes the service industry more discrete, localized and distinct from
manufacturing.
Heterogeneity
Heterogeneity means persistent incoherence in terms of service composition and quality that
is hard to generalize. Because the service industry is centered around humans, the individuality
of humans makes it very hard to adopt a uniform service quality standard. For one thing, the
quality of a service provided by the same service provider may vary from time to time due to
individual factors (e.g. state of mind); for another, the factors (e.g. knowledgeability, interest and
hobby) of the customer, who participates directly in the production and consumption of the
service, may have a direct impact on service quality and effect. Heterogeneity may cause the
customer to confuse the image of the firm with its service.
Perishability
Perishability requires a service firm to address how to address understock problems and the
resulting undersupply problems, develop a distribution strategy, select distributors and distribu-
tion channels, design production processes and address passive service demand in a flexible and
effective manner.

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Connotation and types of innovation
39
Absence of ownership
The absence of ownership means that in the production and consumption of a service, the own-
ership transfer that concerns no physical stuff. Since the service is intangible and perishable, it
disappears upon the completion of the deal and the consumer has not physically owned it. The
ownership of the service is not readily transferable.
The differences between service and manufacturing are presented in Table 3.4.
The success of the service industry is built on innovation and skilled management, which
play an ongoing role in enhancing service quality and productivity. A firm gets the upper hand
in competition through innovation activities that add to product value.
In the United States and European developed countries, the service sector takes the lead
in economy, contributing to 60 to 80 percent of the GDP. Therefore, service innovation
is no less important than technological innovation for manufacturing. Of course, a service
innovation may be of a technological nature, but in most cases it is social or nontechno-
logical. It is not to be understood in the narrow sense as a “supplement” to technological
innovation.
• Service innovation is more incremental than radical. Service innovation is in more cases
incremental because it normally involves very tiny process changes and almost no break-
through innovation. Service innovation is introduced to curtail cost, enhance product dif-
ferentiation, improve the flexibility of reaction to customer questions, develop new markets
and maximize customer loyalty.
• In the service sector product innovation and process innovation are usually integrated.
Service innovation may take the form of the launch of a new service product, the produc-
tion or delivery of a new service or the generalization of a new technology. The service is
Table 3.4 Service industry vs. manufacturing
Manufacturing Service
A product is tangible A service is intangible
Ownership transfer takes place when the deal
is made
The ownership of a service is normally not
transferred
A product is verifiable A service is not easily verifiable
A product can be traded for many times The trading of a service is unrepeatable
Both the buyer and seller can store a product A service cannot be stored
A product is produced before consumption A service is normally produced and consumed at
the same time
A product is produced, sold and consumed
separately
A service is produced, sold and consumed at the
same time
A product is transportable A service is not transportable
The supplier sells a product, while the
customer generally does not participate in
production
The customer participates in the delivery of a
service
A product may become an indirect link
between the producer and the user
A service is often a direct link between the provider
and the user
The core value is produced in a factory The core value is produced when the buyer
communicates with the seller

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Jin Chen and Ximing Yin
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nonstorable, so it cannot be entirely dissociated from the product, and innovation in the
service product is indissociable from innovation in the service process. That explains why
the service innovation often comes with the changes to many factors, like the service pro-
duction process and the service product.
• Service innovation is customer-oriented. While it’s based primarily on customer demand,
service innovation may also originate in the evolution of corporate philosophy. The less
standardized the service, the higher the customization requirements and the more impor-
tant the customer’s decision in service innovation.
• Service innovation may form new knowledge or information. For example, the service
staff, when delivering services, devise new methods or build up new knowledge and infor-
mation. As the gathering of and investigation on scientific knowledge is not necessary,
service innovation requires a relatively short time.
• Innovation teams are usually more flexible. By and large, no or very few service firms have
R&D units. Their innovation team, responsible for conception and blueprints, is normally
an improvised project team of employees temporarily drafted from the various departments.
Once the innovation plan has come into operation or been harmonized with the routine
business procedure, the team dissolves.
Servitization of manufacturing
Service innovation is not unique to the service industry. Servitization has become a predomi-
nant trend across the global manufacturing sector since the 1980s, a phenomenon proven by a
growing share contributed by sheer manufacturing to the value-added of industrial goods and a
shrinking share by service (e.g. R&D, industrial design, logistics, marketing, brand management,
intellectual property management and product maintenance). Take the automotive industry, for
instance. The return on investment (ROI) stands at only 3 to 5 percent for manufacturing, while
the figure stands at up to 7 to 15 percent for vehicle service. Excellent manufacturers are turning
from production-centered to service-centered.
Servitization of manufacturing is a business model wherein the manufacturer reorients the
core of its value chain from manufacturing to service. The service industry contributes to about
70 percent of the GDP of developed countries, with producer services accounting for about
60 percent. However, in China, producer services are still a backward industry, accounting for an
insignificant share of the economy. Still, the emphasis on producer services has emerged as the
consensus across the society at large.
Producer services include primarily R&D, design, third-party logistics, lease financing, IT
service, energy conservation and environmental service, testing and certification, e-commerce,
consulting, service outsourcing, after-sales service, HR service and brand building.
GE is the largest manufacturer of electrical equipment and electronics in the world. It is
not only a producer of consumer and industrial electrical equipment but also a giant military
contractor of space exploration and aeronautical instruments, jet navigation systems, multiwar-
head ballistic missile systems, radars and spaceflight systems. However, it reaps the majority of
its revenue from various services, which accounted for 59.1 percent of its total revenue in 2006
alone. The present-day GE is a conglomerate branching extensively into commercial finance,
consumer finance, medical care, industry, infrastructure and NBA Universal.
Classification of service innovation
There are five types of service innovation.

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Connotation and types of innovation
41
Service product innovation
Service product innovation refers to innovation in the content or product of a service. This type
of innovation is centered around product design and production capacity. Examples include
People’s Uber launched by Uber China and MI Roam launched by MI.
Service process innovation
Service process innovation refers to innovation in the production and delivery process of a ser-
vice product. It is subdivided into production process innovation, or backstage innovation, and
delivery process innovation, or frontstage innovation. Sometimes it is very difficult to discrimi-
nate between service process innovation and service product innovation. Where the supplier
(firm) and the customer liaise very closely, the customer will participate in the rendering of the
service, a situation that requires both sides to contribute to providing the product. In this case,
the product is virtually indistinguishable from the process. For such firms, it’s very difficult to
distinguish product innovation from process innovation.
Service management innovation
Service management innovation refers to innovation models of service organization or manage-
ment. A service firm adopting total quality management (TQM) practices well deserves the title
of a service management innovator. One example is Hai Di Lao, a hot pot brand renowned for
ingenious staff management.
Service technology innovation
Service technology innovation refers to innovation in service-supporting technologies, such
as Alipay Facial Scan, Huawei Mate 8 fingerprint recognition and the online seat reservation
service of movie theaters.
Service model innovation
Service model innovation refers to innovation in the model of the services provided by a service
firm. One example is the O2O home wash service introduced by traditional car detailing stores.
Business model innovation
Peter Drucker, a master of management, once said: “The current competition among companies
is not the competition between products but the competition between business models”. Busi-
ness model innovation refers to challenges in the ways to create value for customers that are
common in the industry today. It strives to meet the changing needs of customers, provide more
value for customers, open up new markets for enterprises and attract new customers. A simple
example is that compared with traditional bookstores, Amazon and Dangdang.com are business
model innovations.
There are many definitions of the business model, but the management academic commu-
nity primarily accepts the “clarification of business model” published in 2005: the definition in
the article “The origin, current status, and future” is as follows:
[T]he business model is a conceptual tool that contains a series of elements and their
relationships that shed light on the business logic of a particular entity. It describes

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Jin Chen and Ximing Yin
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the value companies can provide to their customers, as well as the company’s internal
structure, partner networks, and relationship capital to achieve (create, market, and
deliver) this value and generate sustainable, profitable revenue.
(Osterwalder, Pigneur, and Clark, 2010)
This defines the characteristics of the business model. The business model shows the rela-
tionships and elements that a company depends on to create and sell value. It can be subdivided
into nine areas:
• Value proposition. The value that the company can provide to consumers through its prod-
ucts and services. The value proposition confirms the practical significance of the company
to consumers.
• Target customer segments. The company’s targeted consumer groups. These groups have
certain commonalities that allow companies to create value (for these commonalities). The
process of defining consumer groups is also referred to as market segmentation.
• Distribution channels. Various ways companies use to reach consumers. Here is how
the company develops its market. It involves the company’s marketing and distribution
strategy.
• Customer relationships. The links established between the company and its consumer
groups. What we call customer relationship management is related to this.
• Value configurations. The configuration of resources and activities.
• Core capabilities. The ability and qualifications companies need to implement their busi-
ness model.
• Partner network. A network of partnerships between the company and other companies
to effectively provide value and realize its commercialization. This also describes the com-
pany’s business alliances.
• Cost structure. The currency description of the tools and methods used.
• Revenue streams. The company creates wealth through a variety of revenue flows.
We can use these nine factors to measure whether a business model is qualified and take
further action to improve the business model.
Every innovation of the business model can bring the company a competitive advantage
for a certain period. But over time, companies must continually rethink their commercial
designs.
Levels of innovation
Since Schumpeter put forward the innovation theory, scholars worldwide have been attaching
extensive importance to research on content-centered innovation (e.g. product and process
innovation). In order to carry out in-depth research and increase the pertinence of innovation
policy, scholars classify innovation based on different standards and dimensions.
Classification by the level of innovation
Scholars divide innovation levels into incremental innovation and breakthrough innovation
(or radical innovation) (Prahalad, 2012; Ritala and Hurmelinna-Laukkanen, 2013; Van Lancker,
Mondelaers, Wauters, and Van Huylenbroeck, 2016).

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Connotation and types of innovation
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Incremental innovation
Incremental innovation refers to minor improvements and updates on a product or process
along the initial technology trajectory. The general opinion is that incremental innovation can
maximize the potential of an existing technology while adding to the advantages (especially
organizational capabilities) of the existing mature firm. Incremental innovation has a lesser
requirement on the size and technological capability of a company.
Research on the rocket engine, computer and synthetic fiber suggests that incremental inno-
vation has a remarkable impact on product cost, reliability and other performance parameters.
Despite the fact that single innovations mean only very small changes, the cumulative effect nor-
mally surpasses that of the initial innovation. That is the trend typical of the price cuts and reli-
ability improvements of the early Ford Model T, which plummeted from $1,200 to $290 during
1908–1926 amid remarkable rises in labor productivity and capital productivity. Ford’s successful
cost reduction resulted from numerous improvements of processes (e.g. welding, casting, assem-
bly and material substitution). One more feat of the Model T is the better performance and
reliability attributed to improved product design, which made the car more captivating.
Although incremental innovation typically has insignificant effects on the firm’s profitability, it
works to improve customer satisfaction, add to product or service utility and generate a positive
impact. Similarly, incremental innovation lends itself to improving productivity and cutting costs.
From the theoretical perspective, incremental innovation does not seem to have applied new
scientific knowledge on a significant scale, but over time it will build up a tremendous cumula-
tive economic effect. Many companies and their managers prefer the cumulative model to the
radical model when it comes to innovation, considering that the latter may imperil the company
and land it in dire straits.
Nevertheless, a lot of empirical researches have shown that incremental innovation maintains
the competitive advantage of a firm’s products only for the time being. When a rival rises with
a disruptive innovation, an established large corporation will likely lose ground and market
leadership. The invention of the transistor almost crushed all the vacuum tube manufactur-
ers who had been working devotedly on incremental innovation. Another example is Japan’s
quartz clock technology, which dealt a lethal blow to the Swiss horological industry. Ironically,
the quartz clock had its origin in Switzerland, and excellent Swiss scientists and horologists had
been refining their incremental innovations time and again for higher performance. These les-
sons prove that while incremental innovation helps a company maintain a temporary advantage,
it may be easily beaten by radical innovation.
Incremental service innovations include simplified hotel check-in and check-out procedures,
refit of a bank hall, installation of conspicuous signs in a rest home to aid elderly people with
poor eyesight and USB charging ports fitted on aircraft seats by international airlines.
Constant innovation is very essential to the success of firms committed to developing new prod-
ucts and markets. Their awareness of the essentiality of each increment of progress to an innovation
as a whole explains why incremental innovation well deserves its endorsement as an indispensable
and valuable tool. However, there is one limitation to sole attention to incremental innovation. The
firm may be impeded from making further progress in products, services or market.
Radical/breakthrough innovation
Radical or breakthrough innovation is a type of innovation that leads to an enormous progress
in the primary performance indicators of a product, a decisive impact on market rules, competi-
tion environment and industry structure, or even a thorough reshuffle of the industry pattern.

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Jin Chen and Ximing Yin
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As they typically involve all-new concepts, significant technological breakthroughs, foremost
scientists or engineers and great spending, radical innovations may take eight to ten years or
longer to materialize. A radical innovation usually comes with a series of product, process and
business organizational innovations, or even revolutions in industry structure. It’s very hard to
define the expression in terms of revenue increases since that depends on the size and spending
of a firm. As such, a radical innovation could be understood only as a so-called “breakthrough”.
Any attempt at a definition, if applicable, could only be based on the term itself. If a process
improvement reduces cost or increases production significantly, it can also be termed a break-
through. See Figure 3.5.
Sometimes a radical invention also secures a radical innovation for an enterprise. Radical
innovation is a great stride forward by humans. While it may not secure first-comer advantage
for a firm, in many cases it gives birth to an all-new industry. The automobile, electricity, penicil-
lin and the Internet are all radical inventions and discoveries.
All the successful technological firms need continuous or incremental innovation to fulfill
the varying demands of existing customers and therefore realize continuous business growth.
However, incremental innovation needs to be complemented periodically by discontinuous
innovation, including radical innovation, one of the major types of discontinuous innovation. To
qualify as a “breakthrough”, an innovation must have the potential of achieving at least one of
the three following goals:
• Brand-new set of performance features;
• At least five-fold improvement or more on the existing performance indicators; or
• Cost reduction by a large margin (>30%).
Long-established multinational corporations, like IBM, GE, Motorola, HP, Siemens, Philips,
3M, GM and DuPont, regularly interrupt incremental innovations in a process with radical
innovations.
Nevertheless, failures predominate over successes when it comes to attempts on significant
radical innovation. Although many small startup firms (especially Silicon Valley firms) seem to
Level of Change
Benet of Innovation
Radical
Innovation
Signicant
Innovation
Incremental
Innovation
Figure 3.5 Incremental innovation vs. radical innovation

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Connotation and types of innovation
45
have experimented with and commercialized radical innovation, most fail in the end. According
to recent research, only a small portion of the venture capital (VC)–funded innovations in the
United States belong to the first type (true breakthrough) and the second type (fundamental
technological improvement), because VC funds have a short lifecycle (normally eight years) and
do not opt for long-term, high-risk investments despite the high potential for profitability.
Obviously, radical innovation, which involves a lot of time, investment and concern from
top management, is a very thorny undertaking even in the United States, Europe, Japan and
other developed countries. That explains why it is very important for developing countries to
grasp the essence of breakthroughs and implement innovation methods from an open-minded
perspective. Disruptive innovation, another model of discontinuous innovation put forward by
Harvard professor Clayton M. Christensen, might be a more sensible, realistic practice to intro-
duce and popularize for developing countries.
The main distinction between radical innovation and incremental innovation can be under-
stood from the perspective of the technology trajectory. As shown in Figure 3.6, when Tech-
nology I enters the incremental innovation stage, a new idea (Technology II) different from
Technology I is introduced and attempts on a radical innovation must be made, even though
the initial outcome may be less satisfactory than the preceding product. An example is the
earliest train, which did not run as fast as a horse-drawn carriage. However, after more stable
principal technical performance parameters were achieved through significant innovation, there
was a period when technology and product performance experienced a sharp increase until the
principal technical performance parameters stabilized, which we may call the radical innovation
Technology Progress
Timeline
Trajectory I
Trajectory II
Trajectory III
Tu rning
Point
Incr
emental
Innovation
Signicant
Innovation
Radical
Innovation
Signicant
Innovation
Incr
emental
Innovation
Figure 3.6 Incremental innovation and radical innovation: technology trajectory
source: Authors’ design, based on Christensen (1997).

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Jin Chen and Ximing Yin
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stage. During the radical innovation stage, Technology II experienced a turning point where the
marginal increase rate of performance decreases but the overall performance still increases. Then
the firm entered another significant innovation period, which we can call the radical-incremental
innovation transition stage. Finally, the firm entered a stage of incremental innovation until a
new technological trajectory appeared (Technology III). When the product of Technology III
overtook that of Technology II, the incremental innovation ended in decline. If a firm does
experiment with incremental innovation (Technology II) and radical innovation (Technology
III) at the same time, the chance is greater that it can maintain a consistent competitive advan-
tage. If a firm has a leading advantage in Technology II but gives no consideration to Technology
III, it has to face the challenge from a latecomer, which may result in the reshuffle of the market
in the middle of the trajectory of Technology III.
Radical innovation is significantly different from incremental innovation with regard to
goals, organizational structure, processes and uncertainties (see Table 3.5). Further statistical
research has proven the two differ also in target firms. In more cases, radical innovation takes
place in small and medium enterprises(SMEs) while large firms prefer incremental innova-
tion. Academic research based on a technology history perspective has also found out that
large mature companies frequently lose to smaller ones due to radical innovation. This is due
Table 3.5 Incremental innovation vs. radical innovation
Difference Incremental innovation Radical innovation
Goal Maintain and consolidate the existing
market position
Change the rule of game and
realize transcendence
Focus Improve on the cost and performance
of the original product
Development of a new industry,
product or process
Technology Develop and exploit the existing
technology
Research and exploration of new
technology
Uncertainty Low level High level
Technology trajectory Linear and continuous Divergent and discontinuous
Business plan The plan is made immediately the
innovation begins
The plan evolves as exploratory
learning occurs
Generation of new
thoughts and
opportunity recognition
New thoughts are generated at the
end of the previous innovation
New thoughts are generated
spontaneously in the lifecycle
Main participant Cross-functional teams (CFT) Versatile, knowledgeable
individuals and informal
networks
Procedure Formal phase model Informal flexible model at the
early phase and formal model at
the late phase
Organizational structure CFTs inside the business unity From thinker to incubator and
then to target-driven project
team
Resources and capability Standard resource allocation Acquisition of resources and
capability in a creative way
Operator involvement Formal involvement from the very
beginning
From informal involvement
at the early phase to formal
involvement at the late phase
Source: Authors’ design, based on Leifer (2000)

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Connotation and types of innovation
47
primarily to the fact that the institutions – rules of business conduct, corporate culture, incen-
tive mechanism, operational strategy and organizational capability – were based on the preced-
ing generation’s technology trajectory and were suited to the incremental innovation processes
at the later part of the preceding generation’s technology. Therefore, the successful experi-
ence, core capability and competitive advantage work to impede a new round of competition
(Christensen, 1997).
Richard Leifer and his fellow researchers investigated the inherent laws of radical innovation
from the lifecycle perspective, discovering some generic characteristics that distinguished radical
innovation from incremental innovation(Leifer et al., 2000):
• Radical innovation often takes a long time (10 years or longer).
• Radical innovation is highly uncertain and unpredictable.
• Radical innovation is sporadic. Stops and starts alternate. So do discontinuation and
recommencement.
• Radical innovation assumes a nonlinear trend. It involves the recurrence of some activities
and feedback as a response to discontinuation, as well as the constant employment of all the
crucial radical innovation management capabilities.
• Radical innovation is random. There is not a fixed team of main participants, and the focus
of research varies. Radical innovation is susceptible to external environmental changes.
• Radical innovation is background-dependent. Many factors, for example, history, experi-
ence, corporate culture, individuality and informal relations, interrelate and produce various
positive or negative effects.
Classification by continuity and the target market
Continuous innovation
For a particular firm, if an innovation based on one technology trajectory and knowledge bank
involves the constant improvement of existing products and launch of new products, it is termed
a continuous innovation or sustaining innovation (Corso and Pellegrini, 2007). One example is
Haier’s Prodigy washing machine. Now in its 18th generation, Prodigy has undergone years of
technological upgrades, incorporating many outstanding features (e.g. summer-adapted barrel
volume, sterilization, no use for detergent and better performance). See Figure 3.7.
Discontinuous innovation
Also termed intermittent innovation, discontinuous innovation encompasses innovation models
that diverge from the initially continuous technology trajectory, such as radical innovation and dis-
ruptive innovation (Lynn, Morone, and Paulson, 1996). A disruptive innovation targets new market
segments, assumes a new technology trajectory and is founded on a new knowledge base. One
example is the UTStarcom Personal Handy Phone, a mobile version of a fixed-line phone, which
came as a disruptive innovation compared with the original fixed-line technology trajectory.
Figure 3.8 summarizes the types of innovation based on this analysis and tries to classify
innovation in three dimensions (i.e. content, level and market positioning). By using content as
a dimension, innovation can be classified into product innovation, process innovation, service
innovation and business model innovation. By using level of innovation as a dimension, innova-
tion can be classified into incremental innovation and radical innovation, based on the degree
of improvement. By using market positioning as another dimension, innovation can be classified

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Jin Chen and Ximing Yin
48
Market positioning
Level of
innovation
Radical innovatio
n
Incremental
innovation
=Content/Nature
of Innovation
Business model
innovation
Service
innovation
Process
innovation
Product innovation
(component,
architecture or system
High-end
innovation
(Targeting the
high-end
market)
Low-end
innovation
(targeting the
general public)
Figure 3.8 Summary of innovation classifications
Innovation
Progress
Limit of Second
Generation Technology
Limit of First
Generation Technology
First
Generation
Technology
Progress Curve
Second Generation
Technology
Progress Curve
Continuous
Innovation
Time/Effo
rt
Discontinuous
Innovation
Continuous
Innovation
Figure 3.7 Continuous innovation and discontinuous innovation
into high-end innovation, which targets the high-end market, and low-end innovation, which
targets the general public.
A firm may have a bias for a particular content, level and market positioning of innovation at a
particular growth stage. Traditional manufacturing more often than not pays more regard to prod-
uct innovation and process innovation and tries to reduce risks by incremental improvements.

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Connotation and types of innovation
49
In addition, it is oriented to the general public in the low-end market in an effort to achieve
economies of scale. Apple and other high-tech giants, intent on business model innovation, prefer
a development strategy that combines incremental innovation with radical innovation in different
product families while targeting such high-end markets as smart phones and tablets to achieve
high innovation efficacy. A firm needs to balance among content, level of innovation and market
positioning resource and select an appropriate path for sustained competitive advantage.
Holistic innovation
Innovation paradigm shift
With the recent advancement of the global and regional economies have come environmental
problems, climate change and poverty that leave a big challenge for science, technology and
innovation (Hekkert et al., 2007). Though researchers in the field of innovation made many
advances (Martin, 2016), issues such as the Sustainable Development Goals (SDGs) induced
more reflection on the paradigm of innovation and development. The traditional paradigms of
innovation typically introduced by Western scholars are rooted in the Industrial Revolution and
information technology. These traditional paradigms focus mostly on science, technology and
the economy, and have limited responses to the process of global economic and institutional
change. The recent paradigm of technological innovation shifted towards a broader dialogue
between scientific research, technological innovation and social development (Stilgoe, Owen,
and Macnaghten, 2013). Additionally, beyond achieving scientific and technological progress
and economic growth, the goals aim for ethical and social fulfillment (Pandza and Ellwood,
2013), therefore achieving a sustainable transformation.
Thomas Kuhn’s (1970) book, The Structure of Scientific Revolutions, brought about a paradigm shift
in how philosophers thought about science. Drawing from Kuhn’s classical perspective of a para-
digm shift, we can observe paradigm shifts related to innovation by country or region (see Table 3.6).
Table 3.6 Paradigm shift of innovation by country or region
Country/region Main innovation paradigm Scholars
North America User innovation von Hippel (1986)
Disruptive innovation Christensen (1997)
Open innovation Chesbrough (2003)
Europe Design-driven innovation Verganti (2009)
Social innovation Nicholls and Murdock (2012)
Common innovation Swann (2014)
Responsible innovation Owen, Behun, Manning, and Reid (2012)
Stilgoe, Owen, and Macnaghten (2013)
Asia Lean production Womack, Jones, and Roos (1990)
Knowledge-creating company Nonak and Takeuchi (1995)
Jugaad innovation Radjou, Prabhu, and Ahuja (2012)
Imitation Linsu Kim (2000)
Convergence innovation Kong-rae Lee (2015)
Indigenous innovation Jin Chen (1994)
Total innovation Qingrui Xu (2007)
Secondary innovation Xiaobo Wu (2009)
Embracing innovation Richard Li-Hua (2014)

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Jin Chen and Ximing Yin
50
The deficiencies of existing innovation paradigms
Reviewing the evolution of the innovation paradigms, we can divide the existing innovation
paradigms into three main categories. The first is based on partial elements such as user inno-
vation (von Hippel, 1986) and disruptive innovation (Christensen, 1997) proposed by Ameri-
can scholars, design-driven innovation (Verganti, 2009) and public innovation (Swann, 2014)
advanced by European scholars, knowledge innovation proposed by Japanese scholars (Nonaka
and Takeuchi, 1995), imitation-based innovation introduced by Korean scholars (Kim and Nel-
son, 2000) and secondary innovation introduced by Wu Xiaobo (Wu, Ma, Shi, and Rong, 2009).
The second category includes paradigms focusing on the horizontal interaction and integra-
tion of factors such as knowledge, resources and so on. This category, such as open innovation
by American scholars (Chesbrough, 2003) and total innovation by Chinese scholars (Xu et al.,
2007), as well as convergence innovation by Korean scholars (Lee, 2015), does not consider verti-
cal integration and may therefore risk being too open and lacking a core competence. The third
category includes responsible innovation and public innovation by European scholars (Nicholls
and Murdock, 2012; Owens, Behun, Manning, and Reid, 2012; Stilgoe, Owen, and Macnaghten,
2013) and Jugaad innovation by Indian scholars (Radjou, Prabhu, and Ahuja, 2012), embracing
innovation by Chinese scholars (Li-Hua, 2014) and focusing merely on the conceptual, cultural
or societal aspect of innovation, thus ignoring the importance of technological factors.
Existing innovation paradigms focus on understanding the innovation process from the
perspectives of specific innovation behaviors, methods or aspects of innovation, but they can-
not escape the atomistic innovative thinking mind-set. Reviewing the road to innovation of
world-class enterprises, new products, new elements, new methods, new processes and even
new ways of organizing do not depend on individual improvements or enhancements, nor are
they spontaneous – rather, they result from organized innovation (Currall, Frauenheim, Perry,
and Hunter, 2014). These three types of traditional innovation paradigms ignore the leading and
essential role of strategic design and strategic implementation in promoting the implementa-
tion of ideas, obtaining innovation and transforming innovative values. Gary Hamel, the guru
of modern management, introduced an innovative four-level model in his book, Big Future of
Management (Hamel, 2008), including technological innovation, operational innovation, strategic
and business model innovation and management innovations, which call for more emphasis on
strategic design for innovation in terms of important leadership and driving value. Phillip also
points out that holistic thinking is very important to leverage correctly both sides of the brain
for knowledge workers from a consulting perspective (Andrews and Wall, 2017), which predicts
the importance of strategic integration for enterprises. In addition, these three traditional inno-
vation paradigms lack the long-standing global view of Eastern philosophy (Chinese traditional
culture, Buddhist wisdom, etc.), such as overall thinking, unity of opposites, organic integration
and dynamic development. They fail to embody the dynamic integration of yin-yang evolu-
tion, the harmony between man and nature advocated by Taoism, the “middle course (Zhong
Dao)” philosophy advocated by Confucianism, the concept of “harmonious but different (He
Er Bu Tong)” and the overall strategic concept introduced by the ancient Chinese book Art of
War (Tzu, 2005).
Holistic innovation: new innovation paradigm
based on Eastern wisdom
In light of the deficiency of existing innovation paradigms in the Chinese context, drawing
from the advantages of Eastern philosophy and traditional Chinese culture, Chen, Yin, and Mei

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Connotation and types of innovation
51
(2018) proposed a new paradigm of innovation, holistic innovation (HI), which is total and col-
laborative innovation driven by a strategic vision in an era of strategic innovation, which aims
for a sustainable and competitive advantage. An innovative management paradigm based on HI
is called holistic innovation management (HIM).
The four core elements of HI are strategic, total, open and collaborative; that is, total innova-
tion, open innovation and collaborative innovation driven by the strategic vision. The four ele-
ments are interrelated and indispensable pillars within the helix of holistic innovation.
Framework of holistic innovation
In the innovation-driven era, HI is a new paradigm rooted in overall management change. It is
a trinity based on the integration of the natural sciences and social sciences under the guidance
of Eastern and Western philosophies. The helix concept of HI embodies a global outlook, an
overall outlook and a peaceful outlook, which is in line with the common core values across
Eastern and Western philosophies. It is conducive to achieving an organic co-evolution among
engineering, technology, science and humanities, arts and markets in a cross-cultural competitive
environment. Additionally, HI goes beyond the traditional boundaries of organizations, pushing
companies to interact with the external partners, including the demand side, the supply side and
even the domestic and foreign policy side and other relevant subjects and interests. By doing this,
companies can build a vertical and horizontal innovation ecosystem. This system aims to exploit
and create market opportunities and technology potential in a dynamic collaborative model to
enhance product and technology novelty through cross-border innovation and competition and
cooperation. Finally, HI could contribute to the goal of “Innovation for Peace” (Miklian and
Hoelscher, 2018), an innovation to achieve global sustainable development and fulfill the value
of humanity (Pandza and Ellwood, 2013) (see Figure 3.9).
Companies should think big, aim high and try to lead their own internal evolution in their
ecosystems through forward-looking strategic design. Moreover, companies should also act
boldly in their strategic implementation. Through horizontal resource integration, longitudinal
vertical integration of capabilities and relying on collaborative innovation thinking, compa-
nies can achieve overall technology integration and product innovation and a competition-
cooperation win-win situation (Ming-Jer Chen, 2014).
At the regional and national level, governments should realize that in the strategic fields of
major scientific and technological innovation such as aerospace systems, high-speed railway
technology, quantum communication, artificial intelligence and the Industrial Internet, they
need more than simple technological innovation, they also need a long-term development
strategy that is embedded with innovation strategy for the nation. Only through such a holistic
thinking process can we achieve the organic integration of science and technology strategy,
education strategy, industrial strategy, financial strategy and talent and diplomatic strategy. At
the same time, a strategic vision can drive the horizontal integration and vertical promotion of
all elements to provide an inexhaustible source of power to build the most innovative nation
in the world. This will serve as a powerful engine for a global campaign of anti-poverty and
peace. Finally, it will make a significant leading contribution to global sustainable development
(Miklian and Hoelscher, 2018).
The holistic innovation theory calls for more attention from academics and public policy
areas. Because holistic innovation provides enterprises with a systematic and holistic view of
combining strategic management, organizational design, cultural construction and industrial
trends, it can help realize the divergent thinking of engineering and social sciences in the natu-
ral sciences. It will help enterprises seize the “window of opportunity” during the process of

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Jin Chen and Ximing Yin
52
industrial transformation and technological innovation. It is a new paradigm for enterprises to
reshape their sustainable innovation capability and core competence. It is worthwhile for enter-
prise managers to engage in practical exploration and for scholars to follow up. As for the policy
aspect, holistic innovation theory provides an innovative policy design perspective based on
global and integrated views. Innovation policy should not be limited to science and technology.
Science and technology, education, economy, culture, people’s livelihood and ecology should be
combined to create a synergy to promote total and collaborative innovation driven by strategic
design. Only in this way can China realize the national, industrial and enterprise innovation
strategies. We can then systematically upgrade the national and regional innovation system and
technology transfer system to provide the nation with assistance in major technological fields
and strategic industries, and empower enterprises in emerging markets to win the advantages of
global innovation and leadership.
Notes
1 See also: http://cpc.people.com.cn/GB/64184/64186/66689/4494528.html
2 See also: www.weforum.org/agenda/2018/01/worlds-most-innovative-cities-jll/
3 For more details, please see the European Innovation Scoreboard 2017.
4 See also: http://fortune.com/change-the-world/alipayant-financial/
Strategic
Vision-
Driven
Eastern
Philosophy
Holistic Mindset
Coordinative Mindset
Peace Mindset
Western
Philosophy
Supply SideSupply Side
International
Organization
Engineering
Open
Compete
Collaborate
Art
Humanities
Market
Technology
Science
Natural Science
Social Science
Co-Creation
Info Sharing
Full Participation / All Time
Finance R&D IS HR
Organization Process Regulation Culture
Integration
International
Organization
Lead User
Customer
Competitor
Niche
Market User
Research
Institiute
University
Supplier
Agency
Figure 3.9 Theoretical framework of HI: an emerging innovation paradigm in open environments
Source: Chen, Yin, and Mei (2018)

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Connotation and types of innovation
53
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