Innovation, Quality, and Lean Methods: A Business Analysis

Posted on Feb 15, 2025 in Business Administration and Management (BAM)

Schumpeter’s Definition of Innovation (1942)

The concept of innovation:

The introduction of a new good or a new quality of a good.
The introduction of a new method of production, that is one not yet tested by experience in the branch of manufacture concerned, which need by no means be founded upon a discovery scientifically new.
The opening of a new market, that is a market into which the particular branch of manufacture of the country in question has not previously entered, whether or not this market has existed before.
The conquest of a new source of supply of raw materials or half-manufactured goods, again irrespective whether this source already exists or whether it has first to be created.
The carrying out of the new organization of any industry, like the creation of a monopoly position (for example through trustification) or the breaking up of a monopoly position.

Categorizing Innovations

Types and Hierarchy of Innovation

Examples of innovation types:

Process Innovation: Focuses on improving operational efficiency by changing how products or services are manufactured or delivered. For example, Frederick Taylor and Henry Ford revolutionized industries with Scientific Management and mass production. Today, companies like Tesla combine production efficiency (mass production) with customer personalization (mass customization).
Business Model Innovation: Creates new ways to deliver value, reach customers, or structure an organization. For example, Amazon revolutionized e-commerce with logistics and subscription services.
Product and Service Innovation: Involves introducing new products or significant improvements to existing ones. For example, Xerox PARC developed the graphical user interface (GUI) and the computer mouse.
Strategic Innovation: The Blue Ocean Strategy opens up new markets without direct competition. For example, Cirque du Soleil combined circus and premium theatre experiences.
Management Innovation: Introduces new management practices. For example, Peter Drucker’s Management by Objectives (MBO) and Toyota’s Production System (TPS).

Sustainable Innovation and Competitive Advantage

Sustaining competitive advantage through innovation.

Yes, some types of innovation are more sustainable and valuable long-term:

Business Model Innovation: These often redefine industry standards and can be hard to replicate. For example, Amazon’s logistic and Prime subscription model.
Core Competence-Based Innovation: Core competences give firms access to various markets and are tough to imitate. For example, it requires that at least 30 percent of the annual sales of each business division must come from products introduced in the last four years.
Incremental Process Innovations: These ensure continuous improvement and cost reduction. For example, Toyota and its Lean Manufacturing approach.
Strategic Blue Ocean Innovations: These create untapped market spaces with significant growth potential. For example, Nintendo opened a blue ocean with the introduction of Nintendo Wii, redefining what playing videogames was and opening to accessibility and innovation as well as new target of customers.

Paths, Circumstances, and Patterns of Innovation

Paths, circumstances and patterns of innovation.

Strategic Investment in R&D: Companies that consistently invest in research and development tend to innovate more.
Supportive Organizational Culture: An environment where risk-taking and failure are accepted encourages experimentation.
Adaptability to Change: Companies like Intel highlight the need for rapid adaptation to remain relevant.
Bottom of the Pyramid Innovation (BoP): Innovating for underserved populations can be both profitable and socially impactful.
Cross-Disciplinary Collaboration: Companies like Google thrive on diverse teams collaborating for strategic decisions.

Corporate Policy and Managerial Approaches to Innovation

Corporate policy / managerial approaches to encourage innovation

Management by Objectives by Peter Drucker: Clear, measurable objectives that are set collaboratively between managers and employees.
Employee First (HCL): Empowers employees and provides the right tools for success.
Collaborative Culture (Google): Encourages teamwork and collective decision-making.
Recognition and Rewards (Nucor Corp): Profit-sharing and rewards for innovative contributions.

Personal Traits and Attributes Favoring Innovation

Personal traits and attributes that seem to correlate with innovation proclivity of firms.

Certain traits that support innovation are:

Creativity and Curiosity: Peter Drucker (The Discipline of Innovation) highlights that curiosity and the capacity of detecting opportunities where others can’t see them are essential characteristics to boost innovation.
Resilience and Risk Tolerance: Rosabeth Moss Kanter identifies these attributes as key for innovative behaviour in individuals and organizations. It is the willingness to experiment.
Inspirational Leadership: In the article “The Core Competence of the Corporation” the authors highlight strategic vision, and the capacity of a leadership focused on organizational strengths as pillars to boost innovation.
Critical and Analytical Thinking: Google CEO Eric Schmidt mentions that collective knowledge in diverse collective groups enhances an effective and innovative decision-making.

Best Practices in Managing Innovations

Best practice in terms of decision-making, organization, and administration of innovation.

Collaborative Decision-Making: Encouraging group input to reduce bias (e.g., Google).
Flexible Financing: Balanced funding for incremental and disruptive innovations. It is crucial to finance innovative projects adapted to different economic contexts.
Agile Organization: Empowering cross-functional teams with autonomy.
Strategic Administration: Adopting agile methodologies and fostering continuous improvement.

Quality is Free: The Concept Explained

The concept of quality in manufacturing and service industries.

Philip Crosby introduced “Quality is free” in his book “Quality is free: The Art of Making Quality Certain”. At first glance, this statement might seem counterintuitive because improving quality often requires investment in better materials, advanced technology, etc. However, the message is that the cost of poor quality is far higher than the cost of preventing errors and defects from the start.

Therefore, the statement background is:

Preventing mistakes costs less than fixing them.
Investing in quality upfront avoids costs from returns, repairs, and unhappy customers.
A culture of quality drives efficiency and builds customer loyalty.

In short, quality isn’t an added cost but rather it’s a smart investment. Doing it right the first time is a business strategy that pays off.

The Six-Sigma Approach to Quality Management

Six-Sigma is a quality management methodology which main goal is to reduce process variation and eliminate defects to improve overall product or service quality. “Six Sigma” refers to a statistical measure indicating a process that produces fewer than 3.4 defects per million opportunities (DPMO).

Six Sigma uses a strategy based on:

Defining: Identify the problem. For example, in a bakery a quality problem could be that out of the cookies produced, too many are broken.
Measure: Gather data. With the same example of a bakery, the 10% of the cookies broke in packaging.
Analyze: Find root causes. A possible cause could be that packaging machines are incorrectly calibrated.
Improve: Implement solutions. Adjust the machines in order to manage cookies more carefully.
Control: Maintain improvements and ensure that the problem does not happen again. For example, revising machine calibration weekly.

Six Sigma is represented in a graph with a lower and an upper limit:

Lower specification limit (LSL) for value L: 2.499 mm
Upper specification limit (USL) for value L: 2.501 mm

Items outside this range will be rejected by customer. Each curve represents a sigma level, that is, the level of quality and process control. As we go up, the distribution becomes narrower, which means less variability and fewer defects until we reach the narrowest curve, which is Six Sigma (almost perfect control, very few defects. ≈ 3.4 DPMO)

Lean Methods and Techniques Impacting Quality

Lean methods and techniques that affect product/service quality.

Strong Supply Chain Partners (Keiretsu).
Just-In-Time Pull System (JIT): Produce only when needed to reduce inventory waste.
Levelling Production Load (Volume and Product Mix) (Heijunka).
Intelligent and human automation (Jidoka).
Mistake Proofing (Poka-Yoke): Error-proofing mechanisms to prevent mistakes.
Continuous Improvement (Kaizen): Continuous improvement through small, incremental changes.
5S- (Sort, set in order, Shine, Standardize and Sustain): Maintaining a Clean Orderly Work Environment for efficiency.