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Managing innovation dilemmas: The cubesolution

Christiane Prange a,*, Bodo B. Schlegelmilch b,c

a School of Economics & Management, Tongji University, 1500 Siping Road, 200092 Shanghai, P.R. Chinab Institute for International Marketing Management, WU Vienna University of Economics & Business,Welthandelsplatz 1, 1020 Vienna, Austria

c Lingnan College, Sun Yat-Sen University

Business Horizons (2017) xxx, xxx—xxx

Available online at www.sciencedirect.com

ScienceDirectwww.elsevier.com/locate/bushor

KEYWORDSInnovationclassification;Innovation types;Innovation cube;Innovator’s dilemmas;Innovationmanagement

Abstract Innovation has become a universal feature of corporate life. Almost nocompany can survive without innovation. However, when it comes to developinginnovation strategies, managers often are left alone to decide which innovation typesto pursue, how to balance them in an overall portfolio, how to allocate resources, andhow to implement them. In short, managers face a variety of innovation dilemmas.One of the most pertinent problems is how to distinguish innovation types in ameaningful way. In this article, we introduce the innovation cube, a tool that helpsposition innovation types in a managerially meaningful way. Once managers knowhow to relate and compare their innovation types to those of other companies, thecube helps them to better formulate their innovation strategy.# 2017 Kelley School of Business, Indiana University. Published by Elsevier Inc. Allrights reserved.

1. The innovation jungle

The widespread agreement that innovation isimportant does not prevent the recognition thathardly anybody agrees on what innovation actuallyis. There is no unambiguous definition of innovation,and research provides inconclusive terms and over-lapping classification systems (Crossan & Apaydin,2010). One of the most common distinctions is that

* Corresponding authorE-mail addresses: cprange@tongji.edu.cn (C. Prange),

bodo.schlegelmilch@wu.ac.at (B.B. Schlegelmilch)

0007-6813/$ — see front matter # 2017 Kelley School of Business, Ihttps://doi.org/10.1016/j.bushor.2017.11.014

between product and process innovation. Othersdistinguish between business model innovation(e.g., hub-and-spoke airline routes), operationalinnovation (e.g., business process reengineering),and services innovation (e.g., commercial petsitting). If there are only small changes, we referto incremental innovation (e.g., changed size ofcanned soft drinks) whereas huge modifications(e.g., the ballpoint pen) are named radical. Ifinnovations create a new market segment by de-stroying an old one, we classify them as disruptive(e.g., the personal computer basically eliminatedconventional typewriters). However, sometimes thedistinctions are blurred. Take, for example, Apple’s

ndiana University. Published by Elsevier Inc. All rights reserved.

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2 C. Prange, B.B. Schlegelmilch

iTunes music store: It represents a radical change inthe organization’s business model (i.e., onlinemusic distribution). But MP3 players alreadyexisted and had been successfully introduced bycompetitors, so the introduction of the iPod wasonly an incremental innovation for the market. Thisterminological jungle in innovation literature couldeasily be extended with many other examples.

As a result, it is very difficult for managers tocompare innovation types. Most research on inno-vation strategy is not particularly helpful because itclassifies innovation types after the company hassuccessfully or unsuccessfully implemented them.That is, looking for advice on how to launch aninnovation project may not be successful becausecompanies started out from a different vantagepoint than what is reported in research results.All this leads to problems in language, understand-ing, and operationalization which, in turn, impedeother important decisions, such as how many andwhat kind of resources to allocate to different typesof innovation or what risk profiles to accept.

In response, we aim to provide conceptualclarification and practical advice. Using insightsfrom extant literature and several case vignettes,we develop an innovation cube, which positions themultitude of innovation types in a way that ismeaningful for managers.

2. Classifications and typologies

Many disciplines have focused on innovation,ranging from economics, technology management,strategy, to organizational behavior (Daft & Becker,1978; Rothwell, 1978; Teece et al., 1997; Utterback &Abernathy, 1975). It is not surprising that an equallylarge number of classification systems exist (e.g.,Adams, Tranfield,&Denyer, 2011; Crossan& Apaydin,2010; Rowley, Baregheh, & Sambrook, 2011). But todate, it has remained unclear what innovation reallyis and research provides little value to practitioners.A short excursion into attributes may help to locatethe origin of the problem. Typically, a phenomenoncan be described according to its primary orsecondary attributes (Downs & Mohr, 1976). Primaryattributes describe an organization independent ofits context–—it always remains the same. Forexample, innovations that are classified as new tothe world will always be so–—for every company thatinvents them–—because the defining characteristic istheir very first appearance on the market. However,most studies focus on secondary attributes: Theyfocus on the context in which an innovation maydiffer. For example, internet service is a sustaining

innovation to catalog retailers, because it extendstheir existing markets by offering better value, butthe same innovation is disruptive for departmentstores, challenging their very existence (Danneels,2004).

These examples are reflected in existingclassification systems and show some of theproblems related to classifying innovations. Someclassifications focus on the degree of requiredchange in a corporation, the impact on the industryat large, or on organizational sources of innovation.However, the potential linkages across the differentsystems of classification are usually ignored. Inaddition, a classification that focuses on innovationintensity rarely includes the distinction betweendifferent areas of focus (e.g., product vs. process,product vs. technology, product vs. administration)(Adams et al., 2011). In a similar vein, a classifica-tion based on the impact of the innovation onthe industry, such as sustaining vs. disruptive(Christensen, 1997), does not necessarily accountfor the strategic anchor of the innovation in which aparticular business function drives innovation(e.g., marketing or logistics) as opposed to acorporate-level, system-wide innovation (e.g.,value chain configuration). Without such linksthough, companies cannot identify the relevantcapabilities and requirements for change orprepare fully to implement successful innovations.To address this problem, we propose an integrativeframework that connects different innovationtypes and lends itself to the development ofinnovation strategies.

3. The innovation cube

Although innovation can refer to products,processes, systems, administrative procedures, ortechnologies, managers need to think holistically(Sawhney & Wocott, 2006). To adopt such a holisticperspective, we use three dimensions: changeimpact, strategic impact, and market impact.

All three dimensions are well established inacademic literature and, in isolation, have servedto classify innovations. Some other dimensionscould permit comparisons too (there are 53 innova-tion attribute classifications) (Adams et al., 2011)but we selected these three because they haveattained consistently high acceptance in interac-tions with managers during executive teaching andconsulting projects worldwide (Salaman & Storey,2002). Furthermore, these three dimensions sup-port comparisons of existing classification systemsthat identify their similarities and differences. That

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Managing innovation dilemmas: The cube solution 3

is, we position each innovation type in relation tothese three dimensions and thereby unearthconnections among the different approaches toclassifying innovations.

To substantiate the three dimensions, we alsodraw on insights from literature on decisionmaking and dynamic capabilities within strategicmanagement (Grant, 2013); research into thelevels, directions, and impetus for organizationalchange processes (Levy & Merry, 1986); andstudies of innovation and market creation (Kim &Mauborgne, 2005). We complement these findingsfrom prior literature with managerial insights andpractitioner perceptions. We first distinguishedbetween incremental and non-incremental innova-tion, which is the easiest distinction for managers tocomprehend. Non-incremental innovations can takedifferent forms, including disruptive innovationsthat have an impact on the market and industry,radical innovations that dramatically change userbehavior, or strategic innovations that influencedecision-making processes (Garcia & Calantone,2002).

3.1. Change impact

To develop innovations that depart from the statusquo, a company often needs to reconfigure itsinternal procedures, resources, and capabilities.Thus, innovation types can be categorized interms of their impact on the firm’s establishedcapabilities. When new capabilities are required,they may arise through what organizational changeliterature calls transitional or transformationalchange (Levy & Merry, 1986). These two variantsfacilitate different types of innovation. Transitionalchanges tend to involve minor modifications in thefocus area of a firm’s innovation (Adams et al.,2011), such as when a company changes focusfrom a product to a service or moves towardtechnological or administrative innovations. Thesesmaller changes in turn can induce more substantialtransformations in the firm. Transformationalchanges must overcome cognitive limitationsand stir up deeply embedded customer ormarket-related competencies, which often limitscompanies from moving into new markets(Henderson, 2006). This constraint is salient whenthe firm must destroy existing competencies tocreate new ones or when the company’s cognitiveresource base needs to be shaken up to initiatepath-breaking innovations. To identify innovationtypes along our first dimension, change impact astransformational or transitional change, we askseveral questions (see Table 1).

3.2. Strategic impact

The nature of change provides information aboutthe company’s internal adaptation processes, but itdoes not reveal much about the complexity orunderlying values of strategic decision making.Strategy research commonly differentiatesbetween functional levels (Andrews, 1971). Inno-vations typically emerge from these various levels,including product development, human resources,or finance, because they deal with singularelements of strategic decision making. The successof the energy drink Red Bull can be ascribed to thecompany’s ingenious marketing approach, for ex-ample. Questions on the business unit level pertainto the implementation of innovations, perhapsusing a determined cost focus, as Easy Jet does,or according to the relevant scope in the markets inwhich the firm competes with its innovations, asexemplified by Unilever’s bottom-of-the-pyramidapproach to emerging markets (Prahalad, 2004).Decisions at the corporate level are typicallysystemic and involve the actual (and sometimeseven future) positioning of the firm and they aregenerally of more fundamental strategic concern.National Geographic Ventures, a wholly ownedsubsidiary of National Geographic Society, createda new games division to publish and develop gamesfor major gaming consoles and handhelds, online,and mobile platforms. This innovation wasdesigned to extend its core mission and reachnew generations of customers–—that is, a strategicinnovation with high impact (Markides, 1997). Whenidentifying innovation types along our seconddimension of strategic impact, the functional orcorporate strategy level, we ask several questions(see Table 1).

3.3. Market impact

Market impact refers to the market sustainingvs. market disrupting impact of innovations.Traditional strategic management has longadopted a competitive orientation as companiesattempt to become more effective in a given mar-ket (Grant, 2013). Christensen (1997) introduced anapproach that complements this competitiveorientation in a discussion on disruptive innova-tions. Initially, the author said that it is disruptivetechnology that drives the creation of new marketsegments; he later replaced it with disruptiveinnovation due to his recognition that fewtechnologies are intrinsically disruptive orsustaining in character. Rather, it is the businessmodel enabled by the technology that creates thedisruptive impact.

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Table 1. Evaluating the impact of the three dimensions

Cube Dimensions Questions for Evaluation

Change Impact � Is there an incremental step-by-step movement, which is intended to do more of the same better or arenew ways of perceiving, thinking, and behaving required?� Is it a multi-level, qualitative, cultural, and radical change involving a paradigm shift or does change onlyaffect a few dimensions?� Which types of capabilities are affected by the change process? Does change involve a reconfiguration ofdynamic capabilities or does it focus on replicating capabilities in different markets?� Are capabilities internally developed and procedures gradually changed or are capabilities externallyacquired and involve a radical change of absorptive capacity?� How often is change initiated? Is this routine business or is change the exception?

Strategy Impact � Is it a strategic or a routine decision? Strategic decisions affect the corporate level of mission and scope;routine decisions affect daily activities.� Is it a multidimensional or a unidimensional decision? Multidimensional decisions have an impact on thefuture of the company; unidimensional decisions have an implementation focus.� Is it an internal or an external decision? Internal decisions are often operational or functional decisions;external decisions focus on what business the firm is in as well as defining long-term goals (i.e., moresystemic decisions).� Does strategic decision-making aim at decisions including diversification, vertical integration,acquisitions, new ventures, the allocation of resources between different businesses of the firm ordivestments (corporate strategy level) or is it concerned with the improvement of functional operations,products, or the product portfolio?

Market Impact � Are innovations completely new to the world, or modifications and second moves into the market?� Has the value proposition for one or more customer segments changed?� Have customers used the product before and has experience learning taken place? Has customerperception of products or of the company changed?� Do innovations affect competitors in the given market or do they lead to new market creation?� Is the innovation largely built on a technology or on a business model?

4 C. Prange, B.B. Schlegelmilch

Many disruptive innovations are not based onsophisticated technologies. They emerge insteadas novel combinations of existing, off-the-shelfcomponents applied cleverly to a small, fledglingmarket niche before being scaled up to attract themass market. A good example of a disruptiveinnovation is the launch of PCs and their abilityto overtake mechanical typewriters in the market.Other products start at a rather low technologicallevel, such as the first walkie-talkies. Often worsethan existing products and services and also moreexpensive, these disruptive innovations appeal tonew or less demanding customers. Such low-enddisruptive innovations (Christensen, 1997) eventu-ally turn into new market disruptions and targetcustomers whose needs were previously not met byincumbents. Sometimes this strategy leads to theemergence of a new industry or industry segments,such as the netbook market. When identifyinginnovation types along our third dimension ofmarket impact, that is, disruptive or sustainingmarket level, we ask several questions (Table 1).

Figure 1 takes a look at all three dimensionstogether. Step 1.1 illustrates the departurefrom incremental innovations along the three

dimensions. In Step 1.2, we contrast the dimensionsof change and strategy impact, which helps identifythree innovation types that differ from incrementalinnovation: operational innovation, standard-setting innovation, and industry innovation. In Step1.3, the change dimension matches up with themarket impact dimension, which facilitates aperspective on disruptive innovations such asstandard-setting and low-end innovation. Step1.4 uses all three dimensions to identify eight typesof innovations: incremental, operational, design,strategic, low-end, paradigm, industry, andstandard-setting. These innovation types can spandifferent areas of focus; we could potentially con-struct different cubes with eight innovation typesfor technological, process, product, management,administrative, and other innovation foci.

The intersection of change, strategy, andmarket impact reveals a critical implication:Companies may be forced to develop competingresources and capabilities to succeed with differenttypes of innovation. A further complication arises assome innovation types remain financially unattrac-tive for a notable period because they need time todevelop or open new market space, whereas others

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Figure 1. The evolution of the innovation cube

Managing innovation dilemmas: The cube solution 5

provide quick returns. So how should a managerdecide which innovation types to develop?

4. The eight innovation types: Casevignettes

To illustrate the cube, we first searched for existingcompany examples, then applied the questions tosynthesize existing information and clarify thecompanies’ innovations along our three dimensions.We collected data from the press (e.g., TheEconomist, Financial Times, The Wall StreetJournal), corporate websites, consulting reports,and various executive teaching audiences toidentify companies. When we reached anagreement regarding the fit of a company, it wasused to create a small illustrative case vignette.Our interpretation of the respective dimensions isincluded in the text (in brackets).

4.1. Incremental innovation: Beiersdorf’sNivea skincare brand

The Nivea skincare brand is an innovationcharacterized by intersections of low changeimpact, low strategy impact, and low marketimpact–—that is, a typical incremental innovation.After the company’s founding in March 28, 1882,the firm’s owner Oskar Troplowitz developed awater-in-oil emulsion as a skin cream with Eucerit,the first stable emulsion of its kind. It provided thebasis for Eucerin and later Nivea. Over the years,the company has only marginally changed Nivea’sunique properties [do more of the same better],including its blue packing with a white logo. Today,the brand competes in 14 product categories and isavailable in more than 150 countries; the parentNivea cream brand remains its core offering. Thecompany gradually extended Nivea as an umbrellabrand over other product categories [sustaining

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innovation that builds on existing products]. In thecontext of our three dimensions, the Nivea examplereveals:

1. The company did not have to change its internalprocedures dramatically to bring the productto the market [transitional changes] becauseimproving its existing product was the goal[replication of capabilities];

2. Major decision-making processes about productand design variants, extensions, and marketingcampaigns made the company’s overall businessmodel very profitable [unidimensional, func-tional focus]; and

3. The market impact was clearly determinedby sustaining and enlarging the market space[continuous reasearch and development but noradical, disruptive technology].

Incremental innovation can arrive without any ma-jor impact on the three dimensions.

4.2. Operational innovation: ToyotaProduction System

The Toyota Production System (TPS) is character-ized by the intersections among high change im-pact, low strategy impact, and low market impact,making it a typical operational innovation. WithTPS, Toyota has repeatedly outperformed its com-petitors in terms of quality, reliability, productivity,and cost reduction. Implemented in the 1950s and1960s by Taiichi Ohno, TPS has become the bench-mark for manufacturing and product developmentin the automobile industry. Processes are constantlybeing challenged and pushed to higher levels, whichenables the company to innovate and improve con-tinually [innovation takes place in a given marketwithout challenging existing value propositions ofthe market]. Interpreting the TPS example accord-ing to our three dimensions, we found:

1. The company started with transformationalchanges to initiate its exceptional productionsystem, which then became deeply embeddedin the culture. This made it impossible for othersto copy the system on a one-to-one basis [trans-formational change which involves an internalparadigm shift], even after Toyota encouragedother companies to study its manufacturingprocess and allowed them access to its plants;

2. The procedures affect the operational orfunctional level of strategy; its competitive

advantages result from more focused activities[continuous improvement of process elements];and

3. The market impact is sustaining, because thebusiness domain has not changed [internalprocess efficiency has not led to the creationof a new market].

Operational innovation can have an importantinfluence on the well-being of a firm, without anymajor strategic or market impacts.

4.3. Design innovation: Deutsche PostWorld Net

Deutsch Post World Net (DPWN) sits at theintersection of low change impact, high strategyimpact, and low market impact, for a typical designinnovation. The conglomerate that became DPWNhas survived several upheavals, starting with thefirst postal reform in Germany in 1989 thatseparated telecommunications and postal bankingfrom mail services. In 2002, DPWN obtained amajority stake in DHL, a pioneer and worldwideleader in global express shipping, then subsequentlybundled all related activities under the single DHLbrand. Although the appearance of the companychanged due to its acquisition of DHL, thatacquisition primarily allowed DPWN to increaseits international network by improving the servicesthat have long been at the core of the company’sbusiness [no change in business model]. Interpret-ing the DPWN example within our three dimensions,we assert:

1. DPWN has gone through innumerable changeswhile the essence of the business has remainedfairly consistent [transitional changes], in thatthe company still delivers mail and operates afreight carrier system by gradually moving intonew markets;

2. Decision making clearly affects the corporatelevel and thus the systemic core of the company.Through geographical expansion, definitions ofthe logistics business have been extended andthe company has adopted a global playerpositioning [new perception of the wholecompany]; and

3. The company started with elementary logisticsand has continued with them ever since[sustaining business]. There have been no recentefforts to disrupt existing markets through morefundamental strategic moves.

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Managing innovation dilemmas: The cube solution 7

Design innovation can exist without any majorchange or market impacts.

4.4. Strategic innovation: Dell ComputerCorporation’s internet sales

As a typical strategic innovation, Dell’s businessmodel is characterized by the intersection of highchange impact, high strategy impact, and lowmarket impact. In its established industry, thecompany started to challenge its competitors byplaying the game in a totally different way. Itintroduced new value propositions and newmethods for purchasing, delivery, and service.The company was the first in the industry toembrace the internet and its role in the serverand storage markets. From its inception, Dell hasoperated as a pioneer in the configure-to-orderprocess, delivering individual PCs configured tocustomer specifications. This approach revolution-ized the value chain, because Dell challengedconventional delivery times and demand supplyimbalances. The company also had a clear focuson customer satisfaction and augmented its coreproduct with a range of free services. Looking atthe Dell example through our three dimensionsreveals:

1. Compared with its competitors, Dell introduceda radically changed business model thatdepended on different internal procedures[transformational change], such that itbypassed traditional retail channels, builtproducts to order, and sold directly throughthe internet; this led to huge cost savingsand close customer integration into theproduct-building process;

2. Strategic decision making affected the wholecompany when it focused on internet salesand aligned its corporate decision-making withthe resulting requirements [strategic decisionsaffect mission and scope of the company];and

3. The business model was sustained [complement-ing the offer of traditional computersellers]. Strategic innovation can exist with amajor change and a strong strategy impact but alow market impact.

4.5. Low-end innovation: The Asus Eee PC

The Eee PC netbook by Asus is characterized by theintersection of high change impact, low strategyimpact, and high market impact. This typical

low-end innovation caused a low-end disruption,because the performance of existing products over-shot the demand of certain customer segments.These consumers did not want to pay a premiumfor greater product functionality so they soughtcheaper alternatives. In 2007, companies like Sony,Hewlett-Packard, and IBM were still focusing onincreasing technological sophistication. Asus intro-duced its netbook, which was less powerful butaddressed the requirements of a community ofusers searching for ‘good enough’ quality and lowprices. Almost all competing companies followedthis trend; by 2008, netbooks had begun to takemarket share away from notebooks. Interpretingthe Asus example within our three dimensions,we note the following results:

1. The company offered a dramatically differentvalue proposition to the market, including newsales and marketing strategies [transformation-al change];

2. Though Asus was a first mover, its initial objec-tive was to complement its core business byenlarging the product portfolio so its decisionmaking affected functional and business unitlevels rather than the corporate strategy [lowstrategy impact]; and

3. The introduction of the netbook revolutionalizedthe industry and created a new market segmentthat threatened the traditional PC industry[disrupting existing markets].

Microsoft and Intel even tried to cement netbooks inthe low end of the market to protect mainstreamnotebook PC sales, because they earned lowermargins on their own low-cost laptops. Low-endinnovation can exist with high change and marketimpacts but low strategy impacts.

4.6. Paradigm innovation: Olympus’s DNAcomputer for gene analysis

Olympus’s introduction of the world’s first DNAcomputer for gene analysis featured high changeimpact, high strategy impact, and high marketimpact–—a typical paradigm innovation. Unlike aconventional microprocessor, which uses electricalimpulses and processes information one step at atime, a DNA computer relies on chemical reactionsbetween fragments of DNA. Because multiplereactions can take place inside a test tube simulta-neously, the reaction is the equivalent of massiveparallel processing. Since its founding in 1919,Olympus has led the industry in developing medical

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8 C. Prange, B.B. Schlegelmilch

innovations across multiple business lines [innova-tion as strategy]. It also has a reputation forpioneering many of the world’s firsts, such as thefirst gastrocamera, the first DNA computer for geneanalysis, and the first endoscope system featuringhigh-definition and Narrow Band Imaging technolo-gies. When we interpreted this example within ourthree dimensions, we found the following:

1. To develop a completely new skill set in genomeinformatics, as is required to invent and com-mercialize the DNA computer, Olympus formed ajoint venture–—NovousGene–—that enabled it toacquire external knowledge to merge it with itsexisting capabilities [transformational change];

2. Olympus had always been an innovative leaderin the opto-digital solutions market and haddeeply engrained innovation in its businessmodel [corporate strategy level]; and

3. Olympus disrupted the existing sphere of digitalcomputers, which alone were insufficient tooffer quantitative gene expression profiling[new market creation].

Paradigm innovation can exist only when there is amajor impact on all dimensions: change, strategy,and market.

4.7. Industry innovation: Napster’speer-to-peer network

In an industry innovation, Napster’s peer-to-peernetwork idea involved the intersection of lowchange impact, high strategy impact, and high mar-ket impact. By facilitating direct file exchangesbetween peers, Napster threatened the establishedbig players in the media industry. Its impact becamemanifest on May 17, 2002, when it was acquired byGerman media firm Bertelsmann for $85 million.Originally founded as a pioneering peer-to-peer filesharing internet service, Napster also emphasizedsharing audio files (typically music) encoded in MP3formats. Although the original service was shutdown in response to a copyright infringement law-suit, it had a lasting impact on the traditional musicindustry. Rivals soon realized that Napster had fullyintegrated digital distribution into its sales concept,which made it easy for music enthusiasts to down-load copies of songs that were otherwise difficult toobtain. Interpreting the Napster example within ourthree dimensions, we suggest:

1. The required level of change to bring its productto market was transitional in that Napster used a

revolutionary technology but made few changesin operational procedures or market preparingactivities [transitional change];

2. The creation of Napster involved a strategicdecision to introduce a new business modelthat involved strategic company layers [systemslevel]; and

3. The company created an entirely new industrythat radically changed existing value proposi-tions [market disruption]. The threat associatedwith replacing existing industry rules explainsthe severe actions taken against Napster.

Industry innovations occur with high strategic andmarket impacts but imply only minor internalchanges.

4.8. Standard-setting innovation: Procter& Gamble’s wet-layering technology

Finally, Procter & Gamble’s (P&G) idea is charac-terized by the intersection of low change impact,low strategy impact, and high market impact,which makes it a typical standard-setting innova-tion. The new technology provided a way to placewet paper onto a three-dimensional belt with apatterned honeycomb structure and then dry itwith hot air. The resulting material featured athree-dimensional paper structure that wasretained. P&G patented this innovation so that itcould use it exclusively until 2018. It may evenhave a more far-reaching impact on the industry’splayers. The P&G example, according to our threedimensions, reveals the following:

1. The required level of change resulted fromtransitional moves to constantly improvemanufacturing technologies to deliver higherquality, cost-effective products that requirefewer raw materials [change involves only afew dimensions];

2. The innovation derived from improvementsin manufacturing and affected productionprocedures and product positioning strategies[ functional level]; and

3. The current paper manufacturing market hasnot yet been threatened by the innovation,but it should constitute a substantial threat todisrupt the whole industry after 2018, when itspatent protection runs out. Thus, standardinnovations may foreshadow future industry orparadigm innovations.

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Managing innovation dilemmas: The cube solution 9

Standard-setting innovations can exist with lowstrategic impact and change impact but high marketimpact.

5. Managers’ interpretations of thecube

Having established the dimensions and cells of ourinnovation cube, we used this information tointerview 16 senior managers in organizations thatmust innovate (see Appendix). Our objective was toestablish whether the three dimensions of ourinnovation cube (change, strategy, and market)and the resulting cells fit the thought worlds ofpracticing managers. The key issue is whethermanagers use the dimensions of the cube in practiceand can meaningfully place their innovations in aparticular cell.

We first asked managers to define innovation.Without giving them any further prompts, we

Table 2. Managerial interpretations of innovation

Innovation Examples

Internal process � Innovation is when you push the limits . .parameters, you will never experience innowill get killed, and if you don’t, you get a � Innovation also means changing the proces� Innovation is essentially creativity, so advercatch attention.

Extent � Innovation is to create something complete� Innovations are ideas about new things peo� Innovation is when you create something newvery small. The way you use something can� Innovation means to develop an idea how

technologies.� Innovation is doing new things, doing the s� Innovation is always bringing something nsomething that is different from the previo

Output � Innovation is when the customer believesrelationship.� Innovation is developing something new thexisting . . . could be design or thoughts (e.a benefit. It can be major or minor.� Innovation is creating a value that did not � Innovation is when the customer sees the s� Innovation is the idea and the implementatigive money for it . . . if there is somethinginnovation.� Innovation is if a company introduces sometto the market that have not been there befoit as new, it is an innovation.

Action � We were not thinking much about innovati� Innovation spans the whole organization . .do not get lost . . . where every idea is ap

wanted to find out what they understood by theword. The results largely reflect the vast heteroge-neity of academic research; respondents notedinternal innovation (e.g., process of engaging ininnovation, pushing limits, creativity), the extentof innovation (small, big, improvement, big idea),external client-focused innovation (value genera-tion, benefit, relationship), innovation outputs(value, market demand, perception), and innova-tion actions (catch market share) (see Table 2).

After clarifying the managers’ understanding ofinnovation, we asked these respondents whetherthe three dimensions of the cube made any sense.To establish the extent of their understanding, weasked for examples from their own companies thatreflected the different dimensions of the cube. Withregard to the change dimension, managers said:

“Any kind of innovation leads to internalchange that could be organizational change,change of policies, compensation schemes,motivators, titles, change of power . . . I

. innovation is at the frontiers . . . if you stay within yourvation. Innovation is about trying to step outside. Either youstep further.ses to match the current reality.tising IS innovation. If you are not different or new, you don’t

ly new from scratch.ple do, create new things . . .

or different which can be applied on a big scale or . . . maybe be a small improvement.a demand can be better fulfilled through existing services or

ame things in different combinations . . .ew to existing products or services, doing something better,us way of doing it.

in me, when he respects my competence and respects the

at is not there or the improvement of somethingg., philosophers’ ideas about democracy), but it needs to bring

exist before; it is not a play toy.ervice, the value.on of what the market wants or accepts, if people are willing to

positive that is valuable, that can be used . . . then it is an

hing new for the market. If services or products are introducedre . . . difficult to specify objectively, if the market perceives

on, we were just trying to catch the market. . it is when people have a platform to bring in ideas and thesepreciated and people want to contribute . . .

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Figure 2. Innovation types and dynamics in the cube

10 C. Prange, B.B. Schlegelmilch

experienced this with technology when peoplewere doing web stuff . . . and over time thatbecomes a complete change of the company.”

“If you look at change in terms of impact, wewould have different business units with theirown processes . . . the influence could be con-tained within the business unit, it would thenhave a focused influence. But if this change isgoing to have an influence across business units(e.g., automated billing, which involves thefinance department), by extension this is moreprofile change.”

With regard to strategic impact, managers said:

“The functional influence you mean, influenceof change on the business strategy . . . if it ismore profound, it has a corporate effect, thenthe company would be willing to invest. Forinstance, we had a project, temperaturecontrol containers . . . I think it was a greatimprovement to the process with strategicinterests . . . honestly, but also politicalinterests.”

Finally, when asked about the dimension of marketimpact, managers said that:

“We were on the move toward disruptive mar-kets. Image technology potentially destroys orenhances the radiologists’ competence. Whendisruptive technology is coming into play now,people do not immediately recognize it asdisruptive; I don’t think we are really appreci-ating how disruptive it could be.”

“That is really creating something new. Ifyou talk about paper-based to paperlesssystems . . . The electronic medical recordchanged not only a lot for patients, serviceproviders, and health care provision ingeneral–—in terms of costs and benefits–—butalso affected other industries . . . especiallywhen it came to compatibility . . . and thereyou had many firms like Siemens or Johnson &Johnson jumping on the new standards.”

In the next step, we focused on the cube’s ability tocapture dynamic changes in innovation strategy. Tothis end, we used the questions developed earlier(see Table 1) to trace changes between innovationtypes over time (see Figure 2). The full circlesrepresent a clear identification of one innovationtype. When these full circles connect to emptycircles, it indicates that the interviewees cited achange of innovation types over time. For example,

circle 1 signifies an incremental innovation that,over time, became 10–—that is, an operational inno-vation accompanied by transformational change. Bydepicting these movements, the innovation cubereveals dynamic changes as perceived by managers.We report selected examples for each innovationtype mentioned in the interviews.

� Incremental innovation. Interviewee 1, whoworked for a healthcare company, emphasizedincremental innovations resulting from constantquality improvements that involve reevaluationsof existing procedures and products andbenchmarking. These had the potential to turninto an operational innovation if they inducedmajor changes to administrative procedures (seeFigure 2, move from 1 to 10). However, a basicdilemma arose when operational innovationswith overly specialized and complex processesconflicted with customers’ need for more flexiblesolutions.

� Operational innovation. Interviewee 2, who hadseveral years of experience in informationtechnology, remarked that operational innova-tion reflected changes in the sales processesand underlying data access and communication.Eventually, this operational innovation led to anew business model relying on customer relation-ship management software (2 to 20). A generalproblem identified with this operational innova-tion was the need for transformational changes,due to the loss of previous routines, while stillpreserving enough stability to act.

� Paradigm innovation. From Interviewee 3, aprocess expert and consultant working on

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Figure 3. Challenges in the innovation cube

Managing innovation dilemmas: The cube solution 11

digitization in a large hospital, we obtained inputabout a paradigm innovation. The companyintroduced electronic medical records to enablestorage, retrieval, and modification by differentpeople located in different parts of the world–—initself a revolutionary process. One of the bigchallenges for the company was career related,because flexible access to data conflicted withthe notion of expert status and confinedknowledge.

� Standard-setting innovation. Interviewee 4 illus-trated a standard-setting innovation involvingthe introduction of relational consulting andnew revenue standards. This new approach hadthe potential to become a new business model orstrategic innovation (4 to 40). One of the resultingdilemmas the company faced was the lack ofcontrol over interpersonal success factors, whichwere inherent to this new model, unlike the clearperformance parameters of the firm’s formerproduct sales consulting model.

� Low-end innovation. Interviewee 5, an interna-tional technology consultant, referred tolow-end innovation in an example of 3-Dprinting, which could greatly endangercompanies like FedEx as items that requirephysical transport today could be digitizedand transferred through the internet. Thus,traditional delivery options would becomeobsolete and totally new industries may emerge(5 to 50). Two major issues in the pursuit oflow-end innovation for the firm were that thespeed of industry change was difficult to gauge,and revenues were highly unpredictable. Thus,there was a need to decide between innovationswith highly uncertain returns but eventually highimpact or more predictable innovation outcomeswith lower impact. Accordingly, the resourceinvestments and return on investments differedwidely.

� Design innovation. Interviewee 6, from thebanking industry, provided an example of designinnovation and the associated challenges. Thecompany started to buy existing business modelsand players from the market. Under the umbrellaof a service integrator, different services wereincluded in its portfolio but, ultimately, thesesolutions did not pay off. The company talkedabout a pseudo-innovative strategy driven by theneed to create networks of suppliers, increasecomplexity, and achieve end-to-end consulting.One of the big issues for this financial servicescompany was how to balance attractive

innovation breadth through acquisitions with thefocused approach required by its customers.

� Strategic innovation. Finally, Interviewee 7, aconsultant, talked about strategic innovation indrastically changing a hospital’s business modelto embrace hotel services. This hotel hospital is astrategic innovation, but it also has the potentialto turn into an industry innovation–—an innova-tion type that we could not identify in isolation inour interviews (see Figure 2, B4 to B40). Thecompany did face a challenge in diversifying itsservices as its increased business scope forcedit to go beyond its core competences. Thus,innovation breadth, despite its potential, wasdifficult to implement.

The feedback and real-life examples extracted fromour interviews confirmed the relevance of our cubemodel with its three dimensions.

6. The cube in action

While many companies start out with one innova-tion type, once they grow they are more likely toorchestrate a portfolio of different innovations.Using our cube, we also identified what triggerschange between innovation types and highlightthe associated challenges and dilemmas managershave to solve (see Figure 3).

6.1. Complexity vs. simplicity

Within the cube, innovations vary in complexity,which may result from inside (higher specializationof employees) or outside of the organization(sophisticated consumer demand). Innovations be-come more complex if they cannot be understoodentirely by one person within a specific domain of

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expertise. For example, developing complexsoftware solutions for specific industries often re-quires the interaction of information technologists,medical doctors, and process specialists. Preparingfor these interaction processes can lead to astrategic innovation. Increasing complexity reflectsthe move to higher strategic impact (i.e., thevertical dimension of our cube). However, drivingcomplex innovations in the firm also might comeat the expense of developing simpler, morecustomer-oriented innovations. Managerial deci-sions to solve this dilemma should adopt thefollowing practices:

� Compare innovation complexity with customerrequirements (e.g., incremental vs. designinnovation).

� Ensure that the move to a more strategic level ofinnovation is consistent with the company’s strat-egy (e.g., operational vs. strategic innovation).

� Identify the potential of the innovation to exertan impact beyond the firm’s boundaries (e.g.,standard-setting vs. industry innovation).

6.2. Stability vs. flexibility

Within the cube, innovations can imply morestability or more flexibility. Transitions betweeninnovation types are often driven by concrete needsfor higher efficiency (e.g., operational innovation)or new solutions (e.g., strategic or paradigminnovation). At the same time, every change pro-cess potentially dismantles existing organizationalpractices, control structures, and cultures. Thischange often conflicts with the basic humanneed for continuity and stability. For example,continuous process improvement in the healthcareexample implied greater reliability for all thoseinvolved while also moving toward operationalinnovation with more transformational changesand administrative juxtapositions, which createduncertainty. Along the horizontal dimension ofthe cube, we find that higher levels of changetend to increase flexibility but also increase psy-chological uncertainty–—both on the employee andthe consumer side. Managers should therefore relyon the following guidelines:

� Make sure the move toward more flexibility isbacked by a safe psychological environment(e.g., incremental vs. operational innovation).

� Reappraise whether visible stability should bepreserved rather than interrupted by business

model change (e.g., design innovation vs.strategic innovation).

� Validate the time span for industry shifts andsubsequent diffusion throughout a broader targetaudience (e.g., industry innovation vs. paradigminnovation).

6.3. Emergence vs. control

Within the cube, innovations can have an emergentor a controlled character (i.e., triggered by controland planning vs. experimentation and play). Some-times, innovations emerge as a pattern of actionthat develops in an organization in the absence of aspecific mission and goals, or even despite a missionand goals. This is not to say that innovations are theresult of pure luck but their output cannot alwaysbe fully controlled, which is typically the case formore disruptive innovations for which preciseplanning is difficult. The dominant but not exclusivepath in the cube that reflects transitions betweenemergence and control is along the diagonaldimension, where control decreases the higherthe transition to more disruptive innovations (e.g.paradigm, industry innovation but also, to a lesserextent, standard-setting or low-end innovation).Managers can follow these guidelines:

� Check the willingness to take the risks involved ina move toward the back of the cube (emergentdisruptive innovations; e.g., from operational toindustry innovation).

� Validate the backdrop of increased control thatcomes along with moves toward the front ofthe cube (sustaining innovations and morecontrol; e.g., move from standard-setting tostrategic innovation).

6.4. Focus vs. breadth

Finally, companies must decide whether to focus onsingle types of innovations or adopt a variety ofthem. No firm can adopt the full range of potentiallyviable innovations in its portfolio but the combina-tion of innovations, accumulated over time,suggests that the composition of a firm’s priorinnovation activity may influence later innovations.For instance, industry innovations are typicallypreceded by other innovations, whereas low-endinnovations are almost never the end state ofinnovation development. Knowing about potentialtrajectories, a firm may choose to focus on innova-tion types that are closely related, such as cellsalong one dimension in the cube, or else spread its

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Managing innovation dilemmas: The cube solution 13

(financial) efforts more evenly across all threedimensions. Managerial decisions to solve thisdilemma can follow these guidelines:

� Ensure that there is no danger of competenceerosion (when sticking to one innovation type).

� Verify ongoing processes of core dynamiccapability development (when broadening theinnovation scope).

� Identify the relatedness between innovationtypes and restrict deviation among all dimensions(when broadening the innovation scope).

Following these simple guidelines helps to discussthe feasibility of an organization to follow differentpatterns of innovation development. While theabove refers to general guidelines, certainindustries may favor particular trajectories, suchas high-reliability organizations (transportation,hospitals, construction) sitting at the forefront ofthe cube to sustain established practices while onlycarefully exploring market-disrupting innovations.On the other hand, research-driven organizations(smaller IT-companies, biotechnology) are morelikely to move along the vertical paths of the cube(for example starting from low-end innovation) todevelop both high strategic and high market impactinnovations (see again the Napster example). Whilemany companies strive for innovation types withhigher impact, the potential of incremental inno-vation should not be underestimated, especially insubscription-based business models in industrieswhere functionality improvement is key (e.g.,online learning, gaming, software).

7. Summary

The innovation cube presents an approach tomaster the major challenges associated withcategorizing and selecting innovation types. Thesechallenges are pervasive in literature on innovation.Managing innovation has always been a difficultbusiness, not least because of its fuzziness. We haveexplored how innovation types can better beclassified along three dimensions. The resultinginnovation cube offers a tool for diagnosis thatprovides managers with a simple, well-arrangedinstrument to identify, compare, optimize, andredesign innovation strategies. It also helps identifyvaluable combinations of innovation types bybalancing underlying dilemmas, which leads tointelligible, practical managerial implications.

The results, from both our illustrative casevignettes and our managerial interviews, showedthat the theoretically developed dimensions matchpractical business activities; the eight cells withideal types of innovation are of high practicalrelevance. If managers place their innovation typesin the cube, they will gain a tool that facilitatescompetitive benchmarks and improvements.

Appendix. About the research

The ideas put forward in this article weredeveloped from different sources. First, we drewon several years of conducting executive seminarsand MBA-programs on innovation and innovativeapproaches to strategy and marketing. Thus, inpartnership with several companies and managers,we identified pressing demands and problems. Wewere also fortunate to discuss ideas for this articlewith a large group of participants in workshopsand training seminars. Second, we interviewed16 managers spanning different industries (e.g.,financial services, solar energy, advertising,pharmaceuticals, television, automotive, IT,healthcare, consulting), countries (e.g., Germany,France, the U.S., Syria, India, the U.K., Turkey,Africa, China), and functions (e.g., functionalexperts in business development, marketing, ITconsulting; business unit leaders; CEOs).

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