The New Business Management of Innovation and Human Capital: European vs. American Model

Abstract

This work aims to shed light on the new principles and techniques of business management of innovation and human capital within a widely connected world. The two most extended innovative paradigms (startups and transfer innovation) are used in all world innovation systems. Their common point is the transformative potential of innovation based on good human capital skills in new management methods to promote an adequate combination of economic progress and social welfare. The human capital skills must be focused on the new agile business models used by these innovative paradigms on the frontier of technological knowledge. The entrepreneurs, startups, and innovative companies need to attract innovative talent that help to implement industrial initiatives (Industry 4.0 in Europe and Advanced Manufacturing in the USA) and dynamize the traditional productive sectors in a market with uncertainty. The technology knowledge is relatively stronger and reliable than business knowledge. Therefore, ICT skills and new innovation management are keys to supporting traditional sectors. The startup boom will produce changes in business models, organizations, and human capital skills.

1. Introduction

The objective of this chapter is to present orderly the new management principles and human capital skills to reduce the uncertainties and costs of the innovation processes at the market. The main innovation stereotypes (USA vs. European) are compared, and their implications for current innovation policy are discussed.

The content is structured as follows. In the first place, technological and market uncertainties that affect innovation are introduced. The second section highlights the necessary skills of human capital to cope the new challenges into a changing world and new business models focused on digitalization and blank spaces markets with fuzzy goals. The third part delimits the different styles of innovation, the startup model (American paradigm), and the innovation model by transfer to productive processes and sectors in industrial sectors to develop their productivity (European and especially German paradigm). Finally, in the fourth part, by way of conclusion, current views on the possibility of a fourth industrial revolution (Industry 4.0 or EU model vs. advanced production initiative or US model) are discussed. The threats of the disruption innovation they can pose in a connected world on the brink of an information revolution are presented. The problems are exposed, and the support for both styles of innovation is justified as a more sensible line of policy, together with a growing diffusion of new techniques and principles of innovation management in the training of young professionals and managers, as well as their dissemination between professionals and managers of consolidated companies, opinion formers and policy-makers [1].

2. New ideas, inventions, and innovation: the market uncertainties

Currently, most innovations are linked to the inventions and advances of science and technology, but innovating is more than that. To innovate is to bring to the market new products and services that meet the needs of your potential customers and that they are willing to acquire. Therefore, the business management of innovation is different from invention. It is the art of designing, developing, and marketing new products and procedures with good expectations of success in the market.

Business innovation combines creativity, research, and product development to create offerings for different customer and consumer segments. It unfolds in a context of uncertainty (technological, productive, and market), the greater the degree of novelty (breakthrough) of the ideas and inventions on which it is based.

Usually, inventors do not pay much attention to the market phase (commercialization road map), but the evidence shows that it is essential in terms of benefits or net profits. Inventors do not usually pay much attention to the market phase (commercialization road map), but the evidence shows that it is essential in terms of benefits or net profits.

Once the innovation phase has been launched, there is a head-on collision between forecasts and reality, since entering an unknown territory (blue ocean) with multiple dimensions and unpredictable details. This context of uncertainty is characterized by an action and discovery spiral: new step (action), new information (feedback), and new context (continuous reassessment) of possibilities, needs, and objectives of the innovation development and implementation process.

3. Human capital skills to the innovation challenges

The main advantage of the innovation process is the creation of new economic business spaces outside the competition of traditional sectors.

Business managers have been transforming the vision of the human capital necessary to face the challenges of the market. In manufacturing societies, they were considered only as labor. Over time, human capital has been gaining importance as their skills and knowledge in business management have increased. So, Maslow [2] introduced his theory of hierarchical needs and provided management with new insights on how to use human capital. With the development of the service sector at the end of the twentieth century, a close relationship is generated between business human capital and business success for the sale of this intangible service.

When global business competition is generated at the beginning of the twenty-first century, the qualifications and capabilities of human capital become extremely necessary to redesign or modify products and services and adapt them to customer demands. Good human capital facilitates the creation of value in companies. The scientific-technological revolution has fostered the process of change and appreciation of human capital in order to differentiate itself from the competition at a global level.

One of the key inputs for the success into innovation process is human capital training, defined as skills, knowledge, and experience of employees. A formed human capital strengthens the capacity of a firm to retain and develop a new knowledge frontier. Thus, a well-trained human capital is more likely to spur innovation at companies. Even, some companies come to pay a postgraduate innovation training to employees to improve the possibilities of success in the process of new products launch.

Technological change facilitated the spread of knowledge and prompted the birth of new models of innovation. This is what was called “the innovator’s dilemma” [3] of which there are such well-known examples as Kodak, IBM, or Xerox, which lost their leadership by “disregarding” an unknown segment of their business. New opportunities and capacities were opened to absorb external knowledge and take advantage of it in the company, which gave a key impetus to business innovation processes (concept of absorptive capacity [4]).

Open innovation [5] describes the radical change in the ways of managing R&D in large companies and small projects. The traditional internal models were opened to external sources to acquire new knowledge, exploit technologies, and improve results. The cooperation and openness of R&D to find new solutions for customers increased efficiency and generated new business models, increasing development possibilities [5, 6], on the evidence in the consumer electronics sector [7].

In the consolidated companies, marketing experts were integrated into the product development teams and new marketing techniques were put into practice for the new products (idea filtering, concept testing, and product testing. All these techniques are an essential part of the new business management of innovation [8].

The new open innovation models are also widely used in the startups and small- and medium-sized business sector based on the qualification, skills, and knowledge of human capital to break down many barriers and obstacles of the innovation [9, 10, 11]. A startup is not a company per se, it is a provisional organization whose objective is precisely to design and search for a product and a viable business model that allows it to develop sales and become a company. To do this, it is necessary to have a human team with skills in the new management of innovation.

In summary, human capital with postgraduate education on innovation management, or employer-sponsored training or business experience on innovation management, are significantly associated with the success of the innovation launch process to the market.

4. Innovation models: disruptive startups (US paradigm) vs. transferring process (EU paradigm)

There are many different types and classes of innovation, which makes it difficult to classify them, but they can be grouped into some reference paradigms.

4.1 US innovation paradigm: Startups model

On the one hand, there is the trend called “Innovation at the frontier of knowledge.” It refers to the American creative style, whose paradigm is the “innovative milieus” (such as Silicon Valley at San Francisco or Route 128 at Boston). They are highly efficient innovation systems, endowed with expert knowledge and highly developed and sophisticated financing and marketing mechanisms, where inventions at the frontier of knowledge become highly relevant disruptive innovations (Google and Facebook, now called, Alphabet and Meta).

Currently, there is a boom in entrepreneurship and an explosion of technology startups in many parts of the world. According to many experts, the current boom in tech entrepreneurship has much stronger foundations than the internet bubble of the 1990s. The product development and market launch process are long, costly, and fraught with uncertainty about consumer response. For these reasons, the new startup management principles are oriented toward a process of customer discovery and customer validation hypotheses, where the product development goes hand by hand with the customer validation. The aim is to create an MVP (minimum viable product or prototype) with which the sales process can be started and captures the market information, unlike what traditional models of a complete development of the product have proposed.

This new methodology of the US paradigm (startups) is based on a gradual search process through experimentation and validation of the starting hypotheses (see Figure 1 below). This makes faults discoverable quickly and inexpensive. With this, it allows ratifying or reorienting (pivoting) the attributes and benefits of the minimum viable product and the value proposition until they fit into the “pain points” and the unsatisfied needs of customers.

Figure 1.

Development phases of a startup. Source: Own elaboration based on The lean Launchpad online blog.

The key aspect to develop a startup is the search and discovery of a product and a business model that works and adapts to the needs of potential clients. As can be seen in Figure 1, it is a two-phase process: the first phase is search, based on a process of interaction with consumers and clients for discovery, reformulation, and validation of initial hypotheses, and the second phase is execution, based on the generation of customers sales and the construction of the company [12].

During the customer discovery process, startups look for a business model that works, so if potential customers do not validate their initial business hypotheses, they revise or pivot to new hypotheses. It is an iterative process of trial and error, where failures will be quick to find the right solution as soon as possible. Once the product has been validated and the model has been tested on the market, startups increase their marketing and sales spending and begin to scale their business. From there, the startups will begin the process of company building.

For this reason, the biggest real challenge for startups is to develop and validate their value proposition, define their products, and seek a profitable business model that allows them to consolidate sales and scale business volume. For this, there are instruments to evaluate the key points of the project, as is the case of The Business Model Canvas [13].

Agile development methods are used to shorten the product development cycle. This methodology (Lean Startup) was disseminated by Eric Ries, one of Steve Blank’s most brilliant students, in the homonymous book [14]. It uses in-market validation tests to align the processes of product creation and customer discovery and development, tweaking and pivoting (bottom part at Figure 1). It uses incremental indicators to measure the result of actions on interested customers and sales and analyzes and controls the appropriate growth model based on the costs of acquisition, customer retention, and value of customers throughout their life cycle.

Steve Blank indicates several advantages of the agile management of innovation and entrepreneurship through the Lean Startup methodology [15]:

1. Sharp drop in the cost of developing new products.

2. Better ways to finance risk with new types of investors (business angels, accelerators, and micro-VCs).

3. Own development of innovation management that greatly reduces the cost of errors and failures.

4. New technology fast consumer adoption, opening opportunities for startups with low-cost products, and large companies with novel solutions.

4.2 EU innovation paradigm: transferring process model

On the other hand, there is the “innovation by transfer” style, which is the European Union paradigm. It focuses on supporting the diffusion of new technologies to improve processes and products to the real economy, both in “spearhead” technology sectors and in industry in general, or even in the more traditional sectors (agricultural and livestock sectors). The key idea of this approach is that innovation should be spread broadly to drive productivity gains throughout the economy, and not be concentrated in just a few high-tech sectors. This European style is usually supported by collaboration networks with public-private partnerships and broad incentives from public policies.

The greatest exponent of the EU innovation paradigm is the German case. It has taken the lead in adapting innovations to industry and spreading them across business sectors. A large part of the innovations consisted of introducing new ideas and capabilities into businesses with traditional products and processes to give them dynamism and future prospects. In large part, “Germany’s style of innovation explains its prowess in the field of manufacturing: most of the Chinese products we buy every day are produced with machinery made in Germany, and the companies that make them are prospering” [16]. One of its most emblematic successes is the Fraunhofer Foundation innovation collaboration network.

The main characteristic of the EU transfer innovation paradigm is that generates vast possibilities for new styles of entrepreneurship. The possibilities and future trends are not yet well known, but it is observed that this type of transfer innovators requires broader professional skills, training, and knowledge to build bridges between different industries and businesses.

4.3 Startups mistakes of both paradigms

But even though startups use these agile methodologies at both paradigms, they also make mistakes and fail in their product launches to market (see Figure 2).

Figure 2.

Top 10 startup mistakes (relative frequency %). Source: Own elaboration from 100FirstHits data [15].

More than 60% of startups frequent mistakes are concentrated in areas related to the development (or discovery) of clients, reaching up to 66% if we also consider the mistake of devoting more effort to attracting investors than clients (5.4%). The biggest mistake is still building something that no one wants to buy (35.8%). Following in importance is the dispersion of efforts in search of all perceived opportunities without concentrating resources (very limited in a startup) in the appropriate market segment (13.4%). The next biggest mistake is overfocusing on internal product development without starting early sales and marketing studies as soon as possible (11.7%). Waiting to have the product completely ready is a major mistake that forces you to invest time and money without having solid evidence from customers through demos and minimum viable products (MVPs).

Disruptive technology startups have a lower probability of success (>25%) than the creation of SME companies in other traditional sectors, but their capacity for growth, scalability, and success (hockey stick growth trajectory) is in a very short time they reach prominent positions among the most influential and largest companies.

5. Conclusions

The two innovative paradigms (startups and transfer innovation) are used, to a greater or lesser extent, in all world innovation systems. Innovation processes are made up of very different combinations of both paradigms. Their common point is the transformative potential of innovation based on good human capital skills in new management methods to promote an adequate combination of economic progress and social welfare.

These skills must be focused on the new agile business models used by startups on the frontier of technological knowledge. These new projects challenge established norms and created new business spaces with disruptive capacity (Apple, Spotify, Amazon, Uber, Airbnb…) [17].

But also, human capital skills can be able to help industrial initiatives of the two paradigms (Industry 4.0 in Europe and Advanced Manufacturing in the USA). They can be able to increase the dynamism of the traditional productive sectors as central elements for employment, prosperity, and the countries’ own innovative capacity [15].

Currently, process innovation in manufacturing and other sectors, supported by widely used new technology projects (ICTs, Robotics, New Materials, Algorithms, etc.) is causing profound changes in production methods and industrial organization (Industry 4.0) [18]. These changes are the beginning of the “fourth industrial revolution” because of a digital transformation of manufacturing and production. In this new paradigm of industrial change, Germany has a world leadership position. It has focused on the innovation of state-of-the-art industrial equipment and processes.

Currently, the possibilities of integrating the different general-purpose technologies (GPTs), such as IoT, in the different automation processes of production, logistics, and distribution offer fantastic prospects for the development of the industry [19]. And, in the future, the changes in industrial production processes (general interest services included) will generate new personalized business opportunities for clients and consumers.

But, at this moment, only a few developed countries have maintained the value of generating industrial value added. Only Germany and Austria (see Figure 3) maintain an industry with a significant relative weight and a more favorable evolution than at the world level [20].

Figure 3.

Industrial added value in Europe (2017). Source: Interreg Europe data [17].

The objective of Industry 4.0 is to increase the competitiveness and sustainability of industrial sectors and maintain the weight of these sectors in the economy. For this, it is necessary that the promotion of automation, robotization, and information on industrial and manufacturing processes generates new jobs that have skills of the new principles of innovation management adapted to customers.

It is vitally important to preserve jobs and activities in the industrial core of developed countries, but it cannot be done at any price. ICTs and their use in advanced manufacturing open a window of opportunity. It is based on technological developments and R&D, whose evolution and trend have less uncertainty than innovation processes linked to the market [21].

As a summary, knowledge related to technology is relatively strong and reliable, while knowledge regarding business developments is weaker and less reliable [22]. Therefore, ICT skills and new innovation management are keys to supporting traditional sectors.

Disruptive changes combined with new agile business models will help increase the productivity of traditional sectors. The startup boom will produce changes in business models, organizations, and human capital skills. These changes will reach multiple private sectors (leisure, tourism, retail distribution, transport, energy, and finance) and public sectors (health, education, and public administrations).

The main contribution of this chapter is the evidence, both theoretical and practical, that a greater training of its human capital focused on new agile business models and new innovation management generates better marketing results for new products.

Acknowledgments

The author wishes to acknowledge the funding received from the research group to which he belongs: Jean Monnet Group on Competition and Development (C + D Group, https://www.gcd.udc.es/paulino/) at University of A Coruña at Galicia, Spain (https://www.udc.es/).