Investment in innovation has always been thought of as an organizational process that aims at utilizing resources that are productive enough in order to create economic growth of an enterprise. According to Lazonick, investment in these productive resources usually establish a suitable foundation for economic growth (Lazonick, 2). Schumpeter, in his theory of Economic Development, noted that there is a purpose and need for every enterprise to invest in ‘superior’ productive resources that can create new set of goods using different processes of production (Schumpeter, 7). These, as he noted, must be investments geared towards innovation.
Enterprise innovation is indeed not a process that is entirely influenced by the markets. It does not rely on price signals, whatsoever. This is because the markets are not in a position to demand goods or services that are not yet in circulation. Markets that have developed in labor, capital and products are just but outcomes, and not sources, of innovative organizations (Lazonick, 5). Lazonick further notes that for those organizations that solely invest in actual per capita resource growth, there arises a need for regulating these markets. He states that in the absence of such regulation, these developed markets tend to upset and weaken those processes that lead to innovations in an organization. Lazonick has adeptly distinguished between an innovative enterprise and a theory of innovative enterprise. In his explanation, he describes an innovative enterprise as that social unit or organization that takes significant investment in developing productive resources that generate high quality goods and/or services than what was available prior to the development of these resources. Such an investment often ensures that there is a higher utilization of these productive resources so that the unit costs are driven down. This forms the major theme of innovation enterprises. On the other hand, a theory of enterprise innovation is a theory of the social conditions that do maintain those production processes that lead to high quality products at the lowest unit costs (Lazonick, 3).
The relationship between organizations and their positions in the market is always mirrored in the kind of approach these organizations take in establishing an innovative enterprise. Since innovation is strongly linked to macroeconomic patterns in the market as well as market fluctuations, innovations in enterprises tend to group in both time and space. This is due to the presence of strong interdependency among the innovation economic patterns (Drejer, 4). According to Drejer, economists have since described such patterns as waves which are thought to represent diffusion phases of innovation. These diffusion phases often lead to the creation of completely new industrial units.
Supporting this notion is the Freeman and associates study of 1982 that sought to study the innovation patterns of enterprises. In this complete longitudinal study, innovation patterns were found to be short-wave in nature and of an average length of approximately seven years. Each successive innovation wave pattern was found to represent a linear extrapolation of a previous pattern as well as a major source of cumulative disorder. The study further noted the existence of both incremental, also known as linear, and radical (rupture) innovation patterns in each wave (Freeman, 10). The study extended its scope of the Kondratiev long pattern theory to identify two additional factors present in innovation flux. These factors are institutional variables and technological variables. As the study noted, there tends to be deviation from product creativity to process innovation, especially when there is an upswing in the economy. This happens when larger volumes and lower unit costs are being sought. During such an upswing, there are also industries on the other side that are in a state of stagnation. These are often the optimizing organizations. Usually, they have little or no research and innovation activities at all. In such firms, much of the technical innovation that does take place, though insignificant, is outsourced.
The Freeman study is in further support of Schumpeter who had earlier described the innovation diffusion procedure as one that is inherently uneven. The theories of international trade and product life cycles are an additional attestation to this. First, only a few organizations are interested in such innovation cycles. However, many other organizations follow their pioneers after success has been observed. Therefore, there is a hesitation at the first stage followed by quick and fast growth. This is usually the uptake stage of innovation also referred to as the exponential phase of innovation. Lastly, a gradual saturation of innovation leads to decline in investment in innovative enterprises.
Lazonick proposes three major activities that any enterprise engages in so as to invest in innovation. These activities are strategy, finance, and organization. Through strategy, the organization selects the kind of products or goods to produce and the processes through which the goods are produced. Through organization, the enterprise channels all its inputs into processes of production that result to the production of goods and/or services. Through finance, the organization maintains itself from the channeling of inputs to the ultimate production and sale of goods. Lazonick seemingly supports his colleagues by proposing that the innovation process can be described as one that is tentative, cumulative and collective. He describes the social conditions as those pertaining to strategic control, financial assignment, and organizational incorporation. One important point in Lazonick’s argument perfectly resonates with Schumpeter’s conclusion. As he states, there exist a problem with the perfect competition theory. Generally, consumers and workers are interested in those firms that can transform technologies to generate products that are high in quality and lower in costs. In doing this, they eliminate the possibility of these firms maximizing their profits as a result of certain technological functions.
However, whenever there is an innovative theory in an organization, then it is possible for the organization to achieve the given technological transformations and still gain a large market power. This then drives a community’s economic growth. The crucial nature of strategy, organizational integration, and financial assignments to operation and efficiency in an innovative enterprise supersedes the neoclassical optimization theory. In the optimization theory, the firm concerned usually selects a strategy for investment based on external forces exerted on it by the markets and arising technologies. This makes it impossible to differentiate between firms in an industry. This is contrary to the innovative enterprise where the strategic investment of productive resources usually favors in trying to deviate from the U- cost curve if and when it occurs. Consequently, the unit costs in a successful innovative enterprise are driven down. In the end, a successful innovative enterprise outperforms its optimizing competitor, allowing more production of goods and/or services at lower unit costs.
As Chandler notes in his argument (Chandler, 32), managerial revolution was a complete idea in America by then. He further adds that it is indeed the innovative strategies of the big organizations that had created the durability boom of consumers observed in the 1920s. Chandler accepts the importance of such innovative enterprises over that portrayed by the optimizing firm. In all however, there is general acceptance of existing challenges to the innovative enterprise. One such factor or challenge is competition. Competition tends to bring an uncertainty - the possibility that although the firm has successfully transformed its technology and gained a large market share of high quality products with lower costs, its rivals in the market will outperform it both in both quality and cost. In such a scenario, the innovative enterprise may take one of two existing options. The firm may decide either to respond by coming up with an alternative innovation response or seek to adjust based on the strategies it has already made. This latter case may result in employee wage cuts, obtaining debt relief from the organization’s creditors and/or tax subsidies from the government. In so doing, the innovative enterprise drops its innovative tag and acquires an optimizing mindset.
In conclusion, it is imperative that there be an in-depth empirical research on organizations in order to ascertain the actual integration of an innovative enterprise. Though this paper focuses mainly on the works of Lazonick, there are many works that tend to touch on the same subject matter in trying to analyze innovative enterprises from capabilities perspectives. In many organizations, it is the top executives that are mainly mandated with the roles of allocating finances and other resources to innovation. Some of these executives understand that in recognizing such investment strategies, they are also recognizing making investments in the knowledge and skills of employees who may at one time be absent from the organization as well as opposing technological, competition and market forces that pose serious uncertainty. Yet, they go ahead to make such choices of investment in innovation because they believe that their organizations have great potential to generate the high quality and low cost products needed in the market.
In order to counter such uncertainties, the executives have to develop an extreme interest in the centrality of integration in an organization as well as its financial commitment to the innovation process (Baldwin & Clark,18). During the formulation of innovative strategies, such company executives must be well-versed with organizational capabilities and be in a position to mobilize resources that can sustain the innovation process. This is in case of technological upsets or adverse market fluctuations that might bring about destruction of value creation through shut down of the innovation cycle (Christensen et. al., 12). Organization executives who succeed in confronting such uncertainties are those with the abilities of investing innovation strategies. Such abilities are obtained from deep knowledge of market, technological, and competitive forces in the industry in which the organization operates. They are also derived from understanding the production capacities of the firms they manage. In the end, these executives develop incentives that ensure value creation as a result of innovation as opposed to value extraction which is a by-product of optimizing firms.
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