Chapter 2: Innovation
INTRODUCTION Innovation has been recognized as a powerful means by which ﬁrms can create and sustain competitive advantage. However, where does innovation come from? Are innovations distributed randomly as a function of external chance events, completely exogenous to the ﬁrms trying to achieve them? Or can ﬁrms strategically and deliberately innovate so as to create a competitive advantage? This chapter explores the innovation process and examines the internal and external inputs that inﬂuence ﬁrms’ innovative performance. Although I will review a vast innovation literature in this chapter, there are several main points to take away. First, agents external to the focal ﬁrm (that is, suppliers, customers, competitors and the like) are excellent sources of the knowledge that drives innovation. Second, ﬁrm capabilities are a key input to the innovation process and thereby inﬂuence innovative output. Finally, innovation, while a function of certain individual inputs, is also dependent upon interactions of those inputs. While I will describe the innovation process in some detail below, it is important to note that the discovery and realization of an innovation principally revolves around the use of resources and capabilities available to the ﬁrm. As such, I deﬁne innovation as new combinations of existing resources and capabilities (Schumpeter, 1934; Penrose, 1959). Innovations may include new or improved products or services, new or improved organizational processes, new or improved organizational designs, or the opening of new markets previously inaccessible to the ﬁrm (Schumpeter, 1942; Afuah, 1998). They may be realized in forms that...
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