3 Innovative performance

First step in developing our open system model is to relate to the discussion of innovative capabilities and identify which dimensions are target of innovative capability and how we operationally can understand innovative performance in the context of globalization and unstable market conditions. Fundamentally the concept of performance can be considered multidimensional, with the aim of directing the collective efforts of the employees and measure the results of their efforts for the firm. The dimensions constitute in other words the results of rational intention to strengthen the target orientation in the collective efforts of the firm. Operationally the dimensions can be either objective or subjective measurement indicators. Among common objective dimensions of measurement we find quantitative performance aims on turnover, results, value added and productivity. The subjective dimensions are related to appraisal of performance which is more situational or contingency and relational dependent and therefore difficult to measure valid with objective measures. In general objective measures are often preferred because of their precision and in situations where objective measurements are difficult to calibrate, subjective dimensions of measurement are preferable, improving measurement quality compared to objective measures. This is especially the case when performance is measured on combined but time lagged and situational specific dimensions (Meadow consortium 2010).

Performance measurement of dynamic or innovative capabilities is by definition dependent on situational and contingent relations which makes subjective measures on performance preferable, of course given that the measures are valid and reliable. Theoretically our concepts relate to dynamics and innovation and we shall delimit our target concept to innovative capabilities. The dimensions of innovation capabilities should cover the ability to plan, develop and implement ideas shaped as behavioral initiatives which are new for the firm. Innovations dimensions may take shape of new products or services, new markets developed, new technology, organization development or business process development (OECD 2005). An important point is that the dimension mentioned are expected to interact positively in a situational way which establishes the conditions for favorable combinations of innovation performance in the firm: new products or services should preferable result in development of a new market for the firm and implicate use of new technology as well as new organizational developments and business processes. We have asked the firms in 2006 and again in 2010 the degree of priority they have given to the mentioned innovation dimensions and the result is shown in the table below.

20042005*

20072009**

Very high priority/
Very low priority

Very high priority

Very low priority

Very high priority

Very low priority

Product-/service development

23,3

3,5

17,3

1,8

Market development

20,7

4,1

15,1

1,5

Technology development

15,6

5,5

11,5

2,8

Organization development

12,4

4,8

11,5

2,2

Business process development

13,9

7,4

10,5

2,8

Table 1 Priority given to innovation efforts in periods 20042005 and 20072009 (percent shares)
* How has the firm prioritized last year’s innovation efforts?
** How has the firm prioritized innovation effort in 20072009?
Source: Disko 4 and GOPA survey

If we compare the share of firms giving very high priority to the innovation dimensions in the first period with the share of firms giving very high priority in the last period it is obvious that the innovation priorities are at a lower level in the last period during the economic slump. Even though the reductions are not dramatic the priority level are approximately 25% lower for most of the dimensions in the last period. One exception is organizational development, which only descended by a bit more than 7% at the last observation. However, it is interesting to notice that the shares of firms giving very low priority to the innovation dimensions are correspondingly decreasing from the first period to the last. In general this indicates that fewer firms give the innovation dimensions very high priority in the period of economic slump. This does not mean that the firms drop innovation initiatives by giving them very low priority. Instead they moderate their priorities and give innovation dimensions high or moderate priorities in the economic tight period.

The observed trend in innovation priority observations probably are result of how the firms cope with the international business cycle. In the booming economy more firms give very high priority to innovation but also the share giving very low priority is higher, compared with the priorities of the firms in the period of economic slump. Innovation activities are expected to be economic favorable for the firms if successful but they are also risky and we may expect that the risk is higher in a depressed economy, which can explain that the firms are more moderate in their priorities. The latent structure of the innovation dimensions has been considered in a factor analysis and all the dimensions show very high loadings on a single factor, which we can name firm’s multidimensional innovation priority. In the perspective of innovation capabilities these patterns are particular interesting in relations to accomplished or realized innovations. The introduction of new products or services at the market is most interesting to observe, because it is the dimension that the other innovation activities ultimately are intended for. In the table on next page the firms have stated whether they have introduced new products or services during the two year periods within the fifteen years covered.

19931995*

19982000*

20032005

20072009

Yes, one

51,7

45,4

8,4

14,5

Yes, more than one

45,3

48,3

No

47,4

52,4

43,5

33,9

Don’t know

0,4

2,2

2,8

3,3

Table 2 Has the firm introduced new products/services during (period), when excluding minor improvements of existing products? (Percent vertical)
* Response possibilities: Yes, No, Don’t know
Source: Disko 1, Disko 2, Disko 4 and GOPA survey

The share of firms which do not innovate products or services increases with five per cent point from the first period to the next period in the nineties. From this level where more than half of the firms do not innovate, this share decreases markedly the following two periods down to one third of the firms. If we look at the share of firms which innovate the decrease between the first and second period is six percent point. In the following periods the firms have indicated one or more than one innovation in their responses. In the period of 20032005 the level of firms which innovated is two percent point higher than in 19931995. This growth in the propensity to innovate continues up to the following period, where almost 63 percent of the firms state that they have introduced new products or services on the market. This growth takes place both among the firms introducing one and more innovation as well as one innovation on the market in the period. However it is obviously strongest among firms launching only one innovation. This development is interesting compared to what we could observe in the development of strategic priority given to multidimensional innovation in the two periods. Even with the mentioned moderation of innovation priorities the propensity of product and service innovation seems to increase in the economic slump.

The increasing propensity of product and service innovation can of course cover various degrees of innovation. We can find substantial new products or services, new on the world market, which we can categorize as ‘radical’ innovations. We can also find innovations, known on the world market, but new on the Danish market. We can categorize such innovations ‘national’. Finally, we can find innovations already known on the Danish as well as the world market, which means that they are ‘local’ innovations for the firms producing them.

Yes

19931995

19982000

20032005

20072009

On Danish market

76,9

77,9

76,7

78,5

On world market

78,1

87,8

81,3

75,3

Tabel 3 Are similar products/services found? (Percent share ’yes’)
Source: Disko 1, Disko 2, Disko 4 and GOPA survey

The table presents responses from the firms on the question whether their introduced product or service innovations already exists on the world market or the Danish market. By far the largest share of the innovations already exists on the world market. The maximum is here in the period 19982000 where almost 90 percent of the surveyed firms respond that their innovations already exists on the world market. From this maximum the share decreases towards 2007–2009, where almost one fourth of the innovations are new on the world market. This is evidence of a growing trend of global innovations in a period with tight economic activities, which indicates that part of the Danish firms have gained strong innovation capabilities. If we observe the share of firms responding that their innovations are new on the Danish market, this share is remarkable stable over time. 77% to 79% of the innovating firms respond that their innovations are known on the national Danish market. In general it can be emphasized that by far the largest share of the innovations are local in the sense that they ‘only’ are new to the firm. In a learning perspective, however, these innovations are results of mobilizing knowledge and learning resources in the firms, with the financial risks and potential gains imbedded in such activities. In the table below we can observe how the firms have evaluated their return on innovation activities in the period of economic boom and in the period of economic slump.

20032005

20072009

Large return

26,3

10,2

Some return

57,6

55,1

Poor return

10,2

22,0

No return

1,6

4,7

Don’t know

4,3

8,2

Table 4 How is the economic return on the firm’s innovation efforts during (period) evaluated? (Percent vertical)
Source: Disko 4 and GOPA survey

In spite of the increasing propensity to innovate in the period up to 2009 it is evident, that lower shares of firms evaluate their return on innovating activities to be large. We can observe a decrease of more than 60% in this share with large returns on innovation. Parallel to this the share of firms evaluating their return as poor increases from 10% in 20032005 to 22% in 20072009. From a majority on large or some return on innovation 20032005, the majority has skidded to some or poor return in 20072009. We presume that this trend is determined by the international business cycle and the severe financial crises after 2008, depressing demand on products and services on the international as well as the national markets. The trend is in line with the trend in priority given to innovation dimensions by the firms observed in table 1. The challenge is, however, that innovations as a rule have a long development period, relatively to their period as new on the market. Given this pattern it is a very problematic and a risky strategy to react short sighted in relation to the business cycle with innovation priorities. Looking at the innovation behavior, however, it is far from being the trend. On the contrary it was evident form table 3, that the firms increased their propensity to launch new products – mostly a single –on the market, even though the returns are decreasing in the same period.

With the aim of developing a meaningful and valid indicator of innovative firm performance it is interesting and relevant to combine the measure of management’s evaluation of return on the innovation activities with the measure of realized product or service innovation in the period. In this way the innovation behavior becomes the necessary requirement and economic return the sufficient requirement in the measure of innovation performance. The indicator on innovative performance is thus a composite index composed by counting the firm’s product or service innovation and management’s evaluation on large or some return on innovation activities. The table below shows the result of composing the summative indicator of innovative performance.

20032005

20072009

P/S innovation + return

52,2

50,5

No P/S innovation + return

47,8

49,5

Tabel 5 Innovative performance of firms in 20032005 and 20072009 (Percent vertical)
Source: Disko 4 and GOPA survey

From the perspective of the firm the indicator of innovative performance is plausible because it combines accomplished product or service innovation with large or some economic return. That the product or service innovation should be economic favorable to the firm is a logic and reasonable criteria because firms are dependent on economic surplus in order to stay in market. Thus the positive economic return on innovation becomes a sufficient requirement of innovation performance. The table shows that 52% of the firms fulfilled the criteria of innovative performance in the period 20032005 while 51% of the firms fulfilled the criteria in the period 2007–2009. The slightly lower level of firms with innovative performance in the last period is thus a result of a higher level of product or service innovations but a lover level of economic return on the innovations. In the following this indicator of innovation performance will be used as dependent variable when describing or testing the effect of modes and frames which are expected to encourage relational learning and innovation capabilities.