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Navigating imposed innovation: A decision-making framework
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Navigating imposed innovation: A decision-making framework Amir Bahman Radnejad a,*, Oleksiy Osiyevskyy b a
School of Business & Management, State University of New York, Brockport, 109B Hartwell Hall, 350 New Campus Drive, Brockport, NY 14420, U.S.A. b Haskayne School of Business, University of Calgary, SH426 Scurfield Hall, 2500 University Drive N.W., Calgary, Alberta T2N 1N4, Canada
KEYWORDS Imposed innovation; Nonmarket stakeholders; Stakeholder pressure; Competitor collaboration; Resistance to innovation
Abstract Modern economies are characterized by the rising role of nonmarket actors (e.g., regulatory agencies, social activists, labor unions, media) that are gaining influence over the behavior of for-profit firms. These nonmarket stakeholders use their clout over industry players to impose innovations that require costly changes in business practices or technological trajectories while lacking firmlevel economic justification. How should a company respond when it is pressured to adopt a new practice or change its products, while the economic calculations suggest that this is going to be a pure cost? Our study suggests alternative strategic responses to imposed innovation pressures and explores the factors determining the choice of an optimal strategy. Grounding the argument on the outside-in approach to pursuing imposed innovations, we propose a framework of organizational responses to external pressures to innovate, with varying degrees of firm engagement and different levels of cooperation with other industry actors. We also present a decision tree approach, allowing organizational decision makers to analyze the contextual determinants and ultimately arrive at the most appropriate, contextdetermined strategy. ª 2019 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.
1. Imposed innovations phenomenon Why do firms innovate? Although the list of motivating factors is quite broad, they all ultimately * Corresponding author E-mail addresses: [email protected] Radnejad), [email protected] (O. Osiyevskyy)
(A.B.
fall into one of two categories: economic incentives and nonmarket stakeholder pressures (Verbeke, Osiyevskyy, & Backman, 2017). Economic incentives imply that a firm pursuing a particular innovation projectdbe it a new product launch, process improvement, or business model innovationdcan reap the rewards in terms of generating additional revenue and/or reducing
https://doi.org/10.1016/j.bushor.2019.09.010 0007-6813/ª 2019 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.
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costs immediately or in the observable future, resulting in rising profit and market valuation. However, in today’s environment, we observe the rising influence of powerful nonmarket actors, or shapeholders (Kennedy, 2017; Osiyevskyy & Biloshapka, 2017): regulators, NGOs, pressure groups, and the media. Shapeholders impose pressures on companies to implement innovations that lack true economic justification. These innovations might destroy the firm’s shareholder wealthdat least in the short termdyet serve the goals of these nonmarket stakeholders. Examples of imposed innovation projects include implementation of product safety features or sustainable supply chain management practices that are not required by mainstream customers who refuse to pay a premium for them. These initiatives result in additional costs for the company. Sometimes particular technologies get preselected and mandated by the government (e.g., deliberately weakened encryption standards in telecommunication systems), which might result in lost revenues if some customers switch to alternative suppliers. So, how should a company respond when it is pressured to adopt a new practice or change its products and the economic calculations suggest that this is going to be a pure cost? We provide evidence-based advice for managers on how to address the challenges of such imposed innovation projects successfully. The term imposed innovation refers to an innovation undertaken by a forprofit firm in response to pressure from powerful stakeholders acting through nonmarket means and lacking microeconomic justification in the observable future. The pioneering study by Verbeke et al. (2017), which coined the term, suggested a set of theoretical propositions on this issue from a strategic management perspective. Setting the first stepping stone in the imposed innovations research agenda, this initial academic Figure 1.
article left unanswered the practical question regarding optimal decision making in the corporate sector. Addressing this gap between theoretical reasoning and practice, we offer a decisionmaking framework grounded in insights from the innovation and stakeholder management literature streams. We believe the primary benefactors of the proposed decision-making framework to be senior managers and officers responsible for R&D and innovation portfolios in established companies. The advice of the current study is based on innovation management thinking, allowing the imposed innovation challenges to be properly addressed without narrowly considering them as purely corporate social responsibility (CSR) projects.
2. Diverging innovation motivations To properly explain the domain of imposed innovations, it should be compared to other types of innovation. For this, we juxtapose the two groups of innovation motivating factorsdeconomic incentives and nonmarket stakeholder pressuresdin a matrix (see Figure 1), revealing the typology of innovations based on firm-level motivations. The typology presented in Figure 1 is based on the diverging motivations for engagement in a particular innovation project (weak/strong economic incentives and weak/strong stakeholder pressure). As such, this classification does not contradict existing established classifications such as sustaining-versus-disruptive or radical-versusincremental distinctions; all of these innovation types can be situated in any quadrant of the motivation-based matrix. With respect to motivations for innovation, the projects that have been the prime focus of most past innovation studies and popular business literature are positioned in Quadrant 4. These
Diverging motivations: A typology of innovation projects
Navigating imposed innovation: A decision-making framework projects achieve microlevel economic value creation and value capture. Embracing them allows a firm to create a competitive advantage, resulting in superior profitability. Of course, not all innovation projects will be a success but a common feature of the projects in Quadrant 4 is that they are chosen and implemented by for-profit firms because of their potential for ensuring relatively quick market success. In other words, firms in Quadrant 4 innovate because it makes immediate business sense, such as when Apple introduces the next version of an iPhone, a business school starts an online version of its popular introductory course, or a manufacturing company substitutes manual labor with industrial robots. In all of these cases, the focal firms are expecting to reap the benefits of these projects in the observable future, and this economic motive is not related to the existence or lack of external pressure from powerful nonmarket stakeholders. In contrast, innovation projects in Quadrant 2 are unlikely to serve the firm’s economic value creation and value capture objectives. At the same time, nonmarket stakeholders play little or no role in trying to impose these projects. Spontaneous innovation projects may arise from responses to business opportunities identified at the frontline of the firm, but they do not fit with the firm’s main product and market portfolios and are unlikely to be resourced and implemented. Such innovation projects can also result from failed decision-making processes (e.g., processes guided by internal politics, pet projects of powerful managers): Amazon, for example, failed in its attempt to launch its own smartphone, FirePhone, which was allegedly motivated by the CEO’s wishes without sufficient customer demand (Carr, 2015). Spontaneous innovation initiatives rarely reach the full implementation stage and, in well-functioning firms, they should be eliminated by a variety of organizational selection and retention mechanisms. However, if the development of a spontaneous innovation proves its economic potential to benefit the firm, then it would move to other quadrants (1 or 3). Quadrant 3 includes win-win innovation projects, which are simultaneously market-motivated (i.e., having an obvious business case) and required by powerful nonmarket stakeholders. For example, various car safety features in developed economies mandated by governmental regulators have allowed automobile firms to create and capture new value (e.g., when introducing shockabsorbing bumpers, seat belts, airbags, and other safety equipment). Toyota’s blockbuster commercial success with the hybrid Prius car was coupled
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with major pressure from the U.S. Environmental Protection Agency (EPA) and California Air Resources Board (CARB) to reduce the carbon emission of vehicles. Another example of win-win innovations is the development of food safety regulations, which are required by customers and also imposed by governmental agencies. In all of these cases, the implementation of the imposed innovations allows powerful stakeholders to achieve their objectives while also providing a profit motive for industry players. This win-win situation could also be achieved when the powerful stakeholders try to encourage an innovation using market means such as government subsidies or tax credits, provided that these additional incentives are strong enough to make the innovation economically feasible for the firms. In this article, we focus on imposed innovation projects (Verbeke et al., 2017)dlargely neglected in prior literature yet gaining substantial practical importancedpositioned in Quadrant 1 of Figure 1. These innovation projects do not improve economic value creation and capture for the firm, at least in the conceivable short- and medium-term, yet firms are experiencing significant pressure from influential nonmarket stakeholders to implement them anyway. Examples of imposed innovations today are numerous, including eco-innovation projects, affirmative action practices, and corporate governance norms. The rising power of nonmarket stakeholders with diverse demands (Osiyevskyy & Biloshapka, 2017) is making this phenomenon more and more important. However, one should not make an error equating imposed innovations only with CSR initiatives. If such CSR initiatives require innovating in products or processes, they obviously fall within the realm of imposed innovations; yet, there are numerous other instances of innovations imposed by powerful nonmarket stakeholders that are not CSR-related. For example, certain technologies are mandated by the government for industry participants, including installing back-door access for law enforcement officials in encrypted telecommunications systems and devices or carbon capture and storage in oil production. If such innovations made economic sense for industry participants, having a positive impact on profit and firm value immediately or in the observable future, they would eagerly implement them without additional pressure (i.e., win-win or market-motivated innovations). In some cases, the pressure to innovate is imposed through nonmarket means without considering the impact on the firm’s microeconomic performance, as with aggressive pressure groups (e.g., Greenpeace) that
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demand changes in business practices regardless of the consequences for firms. As we explain in Section 3, when facing an imposing pressure to innovate, a company has a spectrum of possible response strategies and the best approach is dependent on the particular context and strategic position of the company.
3. Decision tree The management literature on effectively dealing with institutional pressures (Clemens & Douglas, 2005; Oliver, 1991) or demands of powerful shapeholders (Kennedy, 2017; Osiyevskyy & Biloshapka, 2017) clearly suggests that there is no single best solution and that firms must choose an effective strategic response depending on contextual factors. Following this logic, our analysis of imposed innovation phenomenon suggests that there is no one-size-fits-all method of dealing with imposed innovation pressure. In order to select the appropriate strategy, the firm management needs to adopt a systematic approach. Creating such an approach must begin with the consideration of two basic factors (Verbeke et al., 2017): (1) Imposed innovation projects do not create a major economic incentive for the focal firm in the conceivable short- and medium-term and (2) are being considered only because of the external pressure by a third party (i.e., government, NGOs, labor unions, media, and societies). Therefore, the first priority for firm management facing an imposed innovation project should be to find a way to share the cost and risk of such projects with other industry participants. Based on this priority, we argue that the firm needs to adopt the outside-in approach (Figure 2) in responding to an imposed innovation pressure. Figure 2.
Outside-in approach to imposed innovation
The outside-in approach suggests that the first step for firm management is to identify whether they can create an industry-wide response. If not, then they need to assess the possibility of a collaborative response, including some of the competitors. Finally, as a last resort, the management should conceive of and design a standalone response. To guide the decision-making process in the outside-in approach, we created a set of questions, summarized in the decision tree (see Figure 3), to help firm management systematically find a suitable strategy in response to an imposed innovation pressure. To simplify the decision tree, we divided it into two boxes (i.e., Box A and Box B). The first question that leads us to either Box A or Box B is whether the imposed innovation project can be considered as an industry-wide threat (Q1) with pressure being felt in a similar manner by all participants. Section 3.1. explains the scenario resulting from an affirmative answer to this question, while Section 3.2. focuses on scenarios for which the imposing pressure is distributed differently across participants (i.e., Box B).
3.1. Box A: Industry-wide threat Regulations imposed by governments, coupled with the pressure from third parties such as NGOs, can sometimes create an industry-wide threat for all players, requiring each to engage in the imposed innovation activity. An important feature of this context is that a violation of any firm within that industry may create industry-wide consequences and stakeholder backlash. Under these circumstances, the possibility of making an industry-wide alliance to either resist or comply with the imposing pressure is higher than in any
Figure 3.
The decision tree
Navigating imposed innovation: A decision-making framework
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6 other case. However, the question remains: How should these firms collaborate and what should the collaboration goals? To substantiate the proposed decision-making framework under the industry-wide threat conditions (Box A in Figure 3), we use the illustrative case study of the Canadian oil and gas industry. Since the industry’s inception, its players faced major and accelerating pressure from environmental parties, governments, NGOs, and local communities to address the environmental and social issues regarding extraction practices (e.g., fracking, steam-assisted gravity drainage oil production) and transportation threats (e.g., pipeline leakage). These pressures have materialized in strict formal federal and provincial regulations and informal yet powerful social demands (e.g., requirements for the social license to operate), creating an existential threat to the Canadian oil and gas industry (Radnejad & Vredenburg, 2015; Radnejad, Vredenburg, & Woiceshyn, 2017). A major part of the requirements involves implementing different green innovations, implying costly changes in production processes aimed to eliminate or reduce the firm’s environmental footprint (OECD, 2009), including activities such as managing waste, improving eco-efficiency, and reducing emissions (De Marchi, 2012). The literature focused on such innovations (e.g., Berrone, Fosfuri, Gelabert, & Gomez-Mejia, 2013; Kesidou & Demirel, 2012; Popp, Hafner, & Johnstone, 2011) acknowledges the role of environmental regulation, as well as customer and societal requirements, in stimulating decision making in favor of such projects. In most cases, implementing such innovations has no economic rationale for the firms under pressure, putting these projects into the imposed innovations category (Verbeke et al., 2017). To select the optimal response to an industrywide imposed innovation pressure, the firm’s management must first evaluate whether the imposed innovation project may create any longterm competitive advantage for the firm (Q2). Even though imposed innovations have negative firm-level economic implications in the short- and medium-term, the emergence of the underlying external pressure functions as a major change in the industry’s environment. In this case, the proactive engagement and embrace of an imposed innovation might allow a firm to build unique organizational capabilities in this area and later benefit from the first-mover advantage (Porter & van der Linde, 1995a, 1995b). Hence, being proactive might allow a firm to gain a competitive advantage, leading to superior performance in the
A.B. Radnejad, O. Osiyevskyy longer term (Verbeke et al., 2017). Proactive engagement in an imposed innovation project becomes a viable strategic choice if the unique technology developed/adopted becomes the industry standard (Gerard & Lave, 2005) or if unique capabilities can be developed related to the innovation’s implementation in the firm (Sharma & Vredenburg, 1998). 3.1.1. Proactive-selective collaboration
If, after careful analysis, management provides an affirmative answer to Q2 (i.e., the imposed innovation creates a long-term competitive advantage for the firm), the firm should proactively collaborate with a select number of firms to develop basic knowledge and know-how addressing the imposed innovation project. The selective collaboration helps create several advantages for the focal firm: First, the firm shares costs and risks associated with developing of the imposed innovation with other firms. Second, the firm can select the partners based on their capabilities to develop the imposed innovation. Third, by sharing the project with the limited number of partners, the firm can protect its potential long-term competitive advantage created as the result of the imposed innovation. In the focal case of the Canadian oil and gas industry, such proactive-selective collaboration is manifested in the successful operation of the Canadian Oil Sands Innovation Alliance (COSIA). Created by 10 of the major oil sands producers in the worlddBP, Canadian Natural, Cenovus, ConocoPhillips, Devon, Suncor, Imperial, Nexen, Syncrude, and TeckdCOSIA was founded in 2012 to focus on accelerating improvement in the environmental performance of oil sands producers through collaborative innovation and action. The alliance aimed to develop game-changing innovations in four environmental priority areas, including greenhouse gas emissions, land preservation, water contamination, and tailings ponds. These happen to be the areas governments and third parties are most sensitive about, creating the highest pressure on oil sands producers to address them. Notably, the founding oil sand producers considered these areas to be noncompetitive (Radnejad et al., 2017; Radnejad & Vredenburg, 2015) since not addressing these issues would create industry-wide consequences and all players within this industry have to follow the regulations. Thus, there is no competitive advantage in the short-term or mid-term for any firm. However, in the long-term, having advanced environmentallyfriendly technologies can give a firm an advantage in leasing new reservoirs. On the other hand,
Navigating imposed innovation: A decision-making framework the cost, risk, and resources needed to develop such imposed innovations are noticeable barriers for any individual firm. Thus, the wealthiest and most resourceful major players got together to develop targeted imposed innovations through COSIA. There are similar industry consortiums in other industries, including Transcelerate in the biopharmaceutical arena and the Canadian urban transit research and innovation consortium in the urban transit arena. 3.1.2. Collaborative resistance
In some cases, the imposed innovation does not create a long-term advantage for the firm. Under this circumstance, the firm may question whether there is any way to resist the imposed situation (Q3). If it is possible to resist, considering that the imposed project is an industry-wide threat, firms can create an industry-wide collaboration to fight back through various means (e.g., lobbying). In our focal case, the Canadian Association of Petroleum Producers (CAPP) is an exemplar of the lobby groups that have been working on behalf of the industry to protect the interest of oil, oil sands, and natural gas producers in Canadadwith members accounting for 80% of the country’s total oil and gas productiondin front of external pressures, including those imposing innovations on the industry. CAPP’s recent efforts, for example, lie in actively resisting the controversial Bill C-69 proposed by the Canadian government. If passed, the bill is likely to create major obstacles in the review and approval of infrastructure projectsdwhich, most notably for the industry, includes pipelinesd in the country. 3.1.3. Collaborative compliance
Finally, for cases in which (1) the external pressure is an industry-wide threat (i.e., the answer to Q1 is yes), and (2) there is no long-term competitive advantage in developing the imposed innovation project for the focal firm (i.e, the answer to Q2 is no), and (3) resistance is not possible (i.e., the answer to Q3 is no), the best strategy is creating an industry-wide collaboration to share the cost, risk, and resources to develop the imposed innovation projects. The Petroleum Technology Alliance of Canada (PTAC) is an example of such a strategy. In 1996, senior executives of 25 Canadian-based oil companies representing a cross-section of major, intermediate, and junior companies came together and funded a nonprofit, industry-wide organization (Radnejad & Vredenburg, 2015). Since then, PTAC has positioned itself as a neutral broker to facilitate innovation, collaborative research, and technology development as well as
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the demonstration and deployment of responsible hydrocarbon energy in Canada. The organization intends to leverage intellectual and financial resources and apply them to solve industry-imposed innovation projects, helping to improve the industry’s performance both environmentally and socially. Since its inception, PTAC has reported successful completion of over 500 industry-led projects, most related to responding to different imposed innovations. Its membership currently is comprised of 18 conventional and unconventional oil and gas producers (e.g., Husky Energy, Shell Canada, Suncor Energy, Chevron Canada, ConocoPhillips Canada), 21 research-providing institutions (e.g., universities, colleges, private and public research institutions), 10 industry associations, 9 governments (provincial and federal), and 137 service and supply companies. PTAC’s membership includes the majority of the industry and it is the closest we have found to an industry-wide collaboration set up to address imposed innovations.
3.2. Box B: Threat unique to a particular firm However, in some instances, imposed innovation projects do not create an industry-wide threat; instead, a particular firm or a group of firms may find itself under pressure while the rest of the industry is out of the mix. This situation happens mostly when the external party imposing the innovation project is a group of customers and/or third parties that do not have the power to directly create and impose industry-wide regulations. In this case, large industry players are usually targeted, while the smaller players can stay under the radar (Verbeke et al., 2017). An example of pressure on particular firms is a movement started by groups of customers and third parties to purchase cleaning products (e.g., detergent, soaps, shampoos, bleach) that have less environmentally harmful ingredients. Admittedly, these movements might end up becoming a dominant force in the market and/or lead to governmental regulations that would bring an existential threat to the entire targeted industry. However, in many cases or at least during the infancy of these movements, they are not considered as an industry-wide threat for the incumbent players. In this situation, according to the outside-in approach, the focal firm should investigate whether any competitors consider the imposed innovation project as a potential competitive advantage and value creation opportunity (Q2’). It
8 is important to remember that firms perceive innovation opportunities differently and, as such, an imposed innovation for one firm can be a winning innovation for another. Besides, new entrants and entrepreneurs are interested in new niche trends, too; thus, the focal firm that perceives the external pressure as an imposed innovation needs to investigate whether any of its competitors consider that as an opportunity. If the focal firm identifies such competitors, the firm should investigate whether those competitors are willing to collaborate (Q3’). If the answer is yes, proactive-limited collaboration is the preferred strategy. 3.2.1. Proactive-limited collaboration
Obviously, the collaboration model will be limited since the competitor(s)din this case, the collaboratordconsiders the imposed innovation as an opportunity and has an incentive to fully collaborate (i.e., full open innovation) with the focal firm. The competitor(s) might be potentially willing to get into limited collaboration with the focal firm because of lack of capital, know-how, or other resources. Even limited collaboration provides an opportunity for the focal firm to advance its knowledge and know-how about the imposed innovation. The collaboration of Tesla and Daimler AG during Tesla’s very early stages is an example of such a proactive-limited collaboration strategy. In 2003, Tesla identified the willingness of wealthy individuals to protect the environment by driving a fully-electric performance car. The company started to develop a battery required for such customers. At that time, the pressure from such customers and third parties had not yet encouraged governments to highly regulate car emissions. It was not yet an industry-wide threat to the internal combustion car manufacturing industry, and many car manufacturers would not see any potential economic value in such a market. At that time, the demand and other similar pressure from environmental parties were considered an imposed innovation to some internal combustion car manufacturers, but not an industry-wide threat. To respond to the imposed innovation, the Daimler created a partnership (i.e., proactivelimited collaboration strategy) with Tesla to develop Tesla’s battery technology. In return, Tesla agreed to give 10% of its shares and supply the first 1,000 units of Daimler’s electric smart car. This collaboration led to the success of Tesla but also provided a strategic opportunity for the Daimler group to develop know-how surrounding battery technology and development.
A.B. Radnejad, O. Osiyevskyy 3.2.2. Reactive compliance
Sometimes the opportunity-perceiving competitor(s) is not willing to collaborate with the focal firm (i.e., the answer to Q3’ is no). Under this circumstance, the preferred strategy for the focal firm is reactive compliance, which involves complying with the imposing pressure yet only at the bare minimum to meet the expectations and letting the proactive competitors take the initiative and bear the initial costs and risks. Reactive compliance includes three possible strategic options: (1) fast follower strategy (i.e., second mover advantage to let the proactive competitors resolve the imposed innovation’s initial uncertainty); (2) buy-out strategy (i.e., waiting for a proactive competitor to try out the new imposed approach and then buying it), and (3) copying and imitating strategy. This is a popular strategy among firms dealing with an imposed innovation. In the study of the Canadian oil and gas industry facing a pressure to adopt the costly carbon capture and storage technologies without foreseeable economic payoff, the reactive compliance strategy turned out to be preferred by almost half of the studied industry players, including all relatively small companies as well as some large firms (Verbeke et al., 2017). These reactive compliant companies were embracing the imposed technology only up to the externally required level, either waiting for the other players to invest and bear the initial risks or for the imposing pressure to disappear. 3.2.3. Proactively closed innovation
All of these scenarios are valid if any of the competitors find value in the imposed innovation. But what if the competitor(s) does not find value in the imposed innovation? In this scenario, we will get to the third stage of our outside-in approach, which is whether there is any long-term competitive advantage for the focal firm in developing the imposed innovation (Q4’). If there is a long-term competitive advantage for the focal firm, the preferred strategy is the proactively closed innovation strategy. Similar to a closed innovation model, “companies engage in all business activities related to innovation, such as idea generation, development, and financing, on their own” (Radnejad & Vredenburg, 2015, p. 79). This strategy is preferred since by developing the imposed innovation in a closed manner, the focal firm positions itself as a leader of the industry’s future and benefits from the first mover advantage in the long term. This advantage rests in the fact that the other industry players do not consider the imposed innovation as a threat and, as such, they might be
Navigating imposed innovation: A decision-making framework
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more reactive in embracing it. Moreover, the competitorsdincluding new entrantsddo not see any value in developing the imposed innovation. These two reasons, combined with the fact that the focal firm has already identified a long-term competitive advantage, indicate an opportunity for the focal firm in the long term that justifies the risk and cost of internally developing the imposed innovation. The case of Hewlett-Packard (HP) and its decision to replace lead in its products is an example of a proactively closed innovation strategy. In the early 1990s, the opposition to the usage of lead in different products started to grow. In 1992, as a result of a request from the U.S. Congress r, the EPA introduced TSCA Title IV on Lead Exposure Reduction, which “recognized that children’s exposure to lead in the paint caused serious health risks. It authorized the EPA, working with other agencies, to implement a comprehensive program for reducing lead exposures” (Auer, Kover, Aidala, & Greenwood, 2016, p. 4). Later, in 1993, the government of the Netherlands also banned the use of lead in some circumstances. These regulations, combined with third-party movements, created pressures on different industries to replace lead (i.e., imposed innovation). During that time, one of the companies who took this movement more seriously than others was HP. For years, the company invested in its own R&D to test different replacements for the lead in its solder (i.e., a fusible metal alloy used in production). Finally, the company could replace lead successfully in all of its products and became the first lead-free company in the electronics industry. HP’s proactive closed innovation strategy addressing the imposed innovation proved to be extremely valuable and created a competitive advantage when the European Union passed the Restriction of Hazardous Substances Directive in July 2006, which regulated the use of lead in electronic products (Nidumolu, Prahalad, & Rangaswami, 2009).
implies either collaborative resistance or collaborative compliance depending on whether resistance is possible (Q5’). This is because no firms within the industry consider the imposed innovation valuable, yet some firmsdincluding the focal onedfeel the threat of no action being taken. Since the innovation is imposed on the focal firm, it needs to carry out some actions (e.g., reactively comply or resist). When no long-term value can be captured from the innovation, it is better to share its costs and risks as broadly as possible, ideally through an industrywide collective response. However, the difference between the focal collaborative resistance or compliance strategies in Box B of Figure 3 and similar strategies in Box A is that, in the former case, the threat is not felt by all industry players and hence the optimal, industry-wide response might not be achievable. In this case, the firm must find a narrower circle of collaborating firms that are experiencing the same threat because of their size or other factors that prevent them from staying below the radar of stakeholders imposing the pressure. Within the Canadian oil and gas industry, an example of an industry network for collaborative compliance was Oil Sands Leadership Initiative (OSLI), which was active from 2010e2012 and comprised only six major playersdConocoPhillips, Nexen, Shell, Statoil, Suncor, and Totaldthat felt the strongest pressure to improve the environmental and social performance. In line with our decision-making framework, the OSLI’s foundational idea was that the imposed innovation is a collective problem that requires collaboration rather than competition and that no single firm can solve it alone or build a competitive advantage from it. Later, once the pressure to introduce social and environmental innovations expanded to the whole industry (i.e., context moving from Box B to Box A in Figure 3), the need for limited OSLI dissipated and it paved the way for the currently active, more broad COSIA alliance.
3.2.4. Collaborative resistance/compliance
4. Final thoughts
The final scenario of the decision tree applies to situations in which (1) no industry-wide threat is present (i.e., the answer to Q1’ is no), (2) there is no value for any competitors (i.e., the answer to Q2’ is no), and (3) there is no long-term value for the focal firm (i.e., the answer to Q4’ is no). The preferred strategies for this scenario are similar to the preferred strategies for the scenario in which (1) there is an industry-wide threat (i.e, the answer to Q1’ is yes) and (2) there is no long-term value for the focal firm (i.e., the answer to Q2’ is no), which
We live in a time of the strong, rising power of nonmarket actors such as government regulatory agencies, activist nongovernmental organizations, labor unions, and media. Some studies correctly refer to these actors as shapeholders (Kennedy, 2017; Osiyevskyy & Biloshapka, 2017) as opposed to stakeholders, which stresses their ability to shape corporate actions and performance while having no stake in the company’s future. Governed by their own agendas, these influential
10 constituents sometimes push for-profit businesses to alter their technological trajectory or business practices so as to serve societal goals with supposedly environmental and social benefits. Sometimes, this push takes the form of additional market incentives (e.g., subsidies or tax credits), thus changing the economic justification for the firms’ engagement in a particular innovation. Similar are the cases of government pressures for implementing projects associated with large, state procurement projects (this puts the innovation project into the win-win category in Figure 1). Yet, quite often, the imposing pressure takes nonmarket forms, including threats of prosecution, taking away or not granting further licenses, or general public backlash. This gives rise to the phenomenon of imposed innovations, which are becoming more and more prevalent worldwide. These projects lack firm-level economic justificationdat least in the immediate futuredand are implemented with the sole purpose of safeguarding the firm’s social license to operate. This occurs if no minimum thresholds can be established for economic performance in terms of expected contributions to value creation and capture by the firm within a foreseeable timeframe, and the nonmarket actors exerting pressure mainly want to see improvements in the firm’s environmental or social performance. From a long-term perspective, complying with the pressure of the nonmarket stakeholders to safeguard access to markets and resources or to maintain reputational capital can be considered economically rational yet, in the shorter term, these projects often impose net costs on firms. Imposed innovation projects are implemented mainly to avoid disruptions of the firm’s operations by the nonmarket forces. When comparing such projects with innovations driven by market actors and motivated by the microeconomic considerations of creating and capturing value through better serving the needs of customers or value chain partners, imposed innovation projects have particular characteristics and require idiosyncratic strategies once the firm has decided to pursue them. Basing our argument on the outside-in approach to pursuing imposed innovations, we reveal a broad set of strategic responses to innovation pressures with different levels of cooperation with other economic actors in the industry and varying levels of firm engagement. The primary insight of our framework is that there is no single, optimal strategic response to imposed innovation pressures suitable for all circumstances. Instead, the appropriate response is contingent on a set of
A.B. Radnejad, O. Osiyevskyy contextual determinants, such as the existence of a common industry threat, ability to build longterm competitive advantage, ability to collaborate with competitors, and the possibility of resistance. The proposed decision tree (Figure 3) summarizes the impact of these determinants on the proper strategic response, serving as the guide for organizational decision makers. In addition, as shown in Figure 3, most of the recommended strategies are based on shaping collaboration among the industry players to resist, comply, or proactively respond to imposed innovation. Therefore, to be able to respond effectively to the shapeholders, firms need to internally build on their absorptive capacitydtheir ability to acquire the external knowledge and incorporate it into the firm’s knowledge basedand collaboration culture. Externally, firms need to create an efficient network within the industry by creating industry associations that bridge originations and innovation intermediaries. These associations will create two advantages. First, their function increases the collaboration experience of the industry, which ultimately increases the absorptive capacity of the firms and, second, they provide infrastructure to respond effectively to emerging imposed innovation.
References Auer, C. M., Kover, F. D., Aidala, J. V., & Greenwood, M. (2016). Toxic substances: A half century of progress. Washington, DC: EPA Alumni Association. Berrone, P., Fosfuri, A., Gelabert, L., & Gomez-Mejia, L. R. (2013). Necessity as the mother of ‘green’ inventions: Institutional pressures and environmental innovations. Strategic Management Journal, 34(8), 891e909. Carr, A. (2015, January 6). The inside story of Jeff Bezos’s fire phone debacle. Fast Company. Available at: https://www. fastcompany.com/3039887/under-fire Clemens, B. W., & Douglas, T. J. (2005). Understanding strategic responses to institutional pressures. Journal of Business Research, 58(9), 1205e1213. De Marchi, V. (2012). Environmental innovation and R&D cooperation: Empirical evidence from Spanish manufacturing firms. Research Policy, 41(3), 614e623. Gerard, D., & Lave, L. B. (2005). Implementing technologyforcing policies: The 1970 Clean Air Act amendments and the introduction of advanced automotive emissions controls in the United States. Technological Forecasting and Social Change, 72(7), 761e778. Kennedy, M. R. (2017). Shapeholders: Business success in the age of activism. New York, NY: Columbia University Press. Kesidou, E., & Demirel, P. (2012). On the drivers of ecoinnovations: Empirical evidence from the UK. Research Policy, 41(5), 862e870. Nidumolu, R., Prahalad, C. K., & Rangaswami, M. R. (2009). Why sustainability is now the key driver of innovation. Harvard Business Review, 87(9), 56e64.
Navigating imposed innovation: A decision-making framework OECD. (2009). Sustainable manufacturing and eco-innovation: Framework, practices, and measurement. Available at: http://www.oecd.org/dataoecd/15/58/43423689.pdf Oliver, C. (1991). Strategic responses to institutional processes. Academy of Management Review, 16(1), 145e179. Osiyevskyy, O., & Biloshapka, V. (2017). Shapeholders: Managing them as allies, partners, and significant constituents. Strategy & Leadership, 45(5), 41e48. Popp, D., Hafner, T., & Johnstone, N. (2011). Environmental policy vs. public pressure: Innovation and diffusion of alternative bleaching technologies in the pulp industry. Research Policy, 40(9), 1253e1268. Porter, M. E., & van der Linde, C. (1995a). Toward a new conception of the environment-competitiveness relationship. The Journal of Economic Perspectives, 9(4), 97e118. Porter, M. E., & van der Linde, C. (1995b). Green and competitive: Ending the stalemate. Harvard Business Review, 73(5), 120e134.
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Radnejad, A. B., & Vredenburg, H. (2015). Collaborative competitors in a fast-changing technology environment: Open innovation in environmental technology development in the oil and gas industry. International Journal of Entrepreneurship and Innovation Management, 19(1/2), 77e98. Radnejad, A. B., Vredenburg, H., & Woiceshyn, J. (2017). Metaorganizing for open innovation under environmental and social pressures in the oil industry. Technovation, 66, 14e27. Sharma, S., & Vredenburg, H. (1998). Proactive corporate environmental strategy and the development of competitively valuable organizational capabilities. Strategic Management Journal, 19(8), 729e753. Verbeke, A., Osiyevskyy, O., & Backman, C. A. (2017). Strategic responses to imposed innovation projects: The case of carbon capture and storage in the Alberta oil sands industry. Long Range Planning, 50(5), 684e698.
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Navigating imposed innovation: A decision-making framework Amir Bahman Radnejad a,*, Oleksiy Osiyevskyy b a
School of Business & Management, State University of New York, Brockport, 109B Hartwell Hall, 350 New Campus Drive, Brockport, NY 14420, U.S.A. b Haskayne School of Business, University of Calgary, SH426 Scurfield Hall, 2500 University Drive N.W., Calgary, Alberta T2N 1N4, Canada
KEYWORDS Imposed innovation; Nonmarket stakeholders; Stakeholder pressure; Competitor collaboration; Resistance to innovation
Abstract Modern economies are characterized by the rising role of nonmarket actors (e.g., regulatory agencies, social activists, labor unions, media) that are gaining influence over the behavior of for-profit firms. These nonmarket stakeholders use their clout over industry players to impose innovations that require costly changes in business practices or technological trajectories while lacking firmlevel economic justification. How should a company respond when it is pressured to adopt a new practice or change its products, while the economic calculations suggest that this is going to be a pure cost? Our study suggests alternative strategic responses to imposed innovation pressures and explores the factors determining the choice of an optimal strategy. Grounding the argument on the outside-in approach to pursuing imposed innovations, we propose a framework of organizational responses to external pressures to innovate, with varying degrees of firm engagement and different levels of cooperation with other industry actors. We also present a decision tree approach, allowing organizational decision makers to analyze the contextual determinants and ultimately arrive at the most appropriate, contextdetermined strategy. ª 2019 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.
1. Imposed innovations phenomenon Why do firms innovate? Although the list of motivating factors is quite broad, they all ultimately * Corresponding author E-mail addresses: [email protected] Radnejad), [email protected] (O. Osiyevskyy)
(A.B.
fall into one of two categories: economic incentives and nonmarket stakeholder pressures (Verbeke, Osiyevskyy, & Backman, 2017). Economic incentives imply that a firm pursuing a particular innovation projectdbe it a new product launch, process improvement, or business model innovationdcan reap the rewards in terms of generating additional revenue and/or reducing
https://doi.org/10.1016/j.bushor.2019.09.010 0007-6813/ª 2019 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.
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costs immediately or in the observable future, resulting in rising profit and market valuation. However, in today’s environment, we observe the rising influence of powerful nonmarket actors, or shapeholders (Kennedy, 2017; Osiyevskyy & Biloshapka, 2017): regulators, NGOs, pressure groups, and the media. Shapeholders impose pressures on companies to implement innovations that lack true economic justification. These innovations might destroy the firm’s shareholder wealthdat least in the short termdyet serve the goals of these nonmarket stakeholders. Examples of imposed innovation projects include implementation of product safety features or sustainable supply chain management practices that are not required by mainstream customers who refuse to pay a premium for them. These initiatives result in additional costs for the company. Sometimes particular technologies get preselected and mandated by the government (e.g., deliberately weakened encryption standards in telecommunication systems), which might result in lost revenues if some customers switch to alternative suppliers. So, how should a company respond when it is pressured to adopt a new practice or change its products and the economic calculations suggest that this is going to be a pure cost? We provide evidence-based advice for managers on how to address the challenges of such imposed innovation projects successfully. The term imposed innovation refers to an innovation undertaken by a forprofit firm in response to pressure from powerful stakeholders acting through nonmarket means and lacking microeconomic justification in the observable future. The pioneering study by Verbeke et al. (2017), which coined the term, suggested a set of theoretical propositions on this issue from a strategic management perspective. Setting the first stepping stone in the imposed innovations research agenda, this initial academic Figure 1.
article left unanswered the practical question regarding optimal decision making in the corporate sector. Addressing this gap between theoretical reasoning and practice, we offer a decisionmaking framework grounded in insights from the innovation and stakeholder management literature streams. We believe the primary benefactors of the proposed decision-making framework to be senior managers and officers responsible for R&D and innovation portfolios in established companies. The advice of the current study is based on innovation management thinking, allowing the imposed innovation challenges to be properly addressed without narrowly considering them as purely corporate social responsibility (CSR) projects.
2. Diverging innovation motivations To properly explain the domain of imposed innovations, it should be compared to other types of innovation. For this, we juxtapose the two groups of innovation motivating factorsdeconomic incentives and nonmarket stakeholder pressuresdin a matrix (see Figure 1), revealing the typology of innovations based on firm-level motivations. The typology presented in Figure 1 is based on the diverging motivations for engagement in a particular innovation project (weak/strong economic incentives and weak/strong stakeholder pressure). As such, this classification does not contradict existing established classifications such as sustaining-versus-disruptive or radical-versusincremental distinctions; all of these innovation types can be situated in any quadrant of the motivation-based matrix. With respect to motivations for innovation, the projects that have been the prime focus of most past innovation studies and popular business literature are positioned in Quadrant 4. These
Diverging motivations: A typology of innovation projects
Navigating imposed innovation: A decision-making framework projects achieve microlevel economic value creation and value capture. Embracing them allows a firm to create a competitive advantage, resulting in superior profitability. Of course, not all innovation projects will be a success but a common feature of the projects in Quadrant 4 is that they are chosen and implemented by for-profit firms because of their potential for ensuring relatively quick market success. In other words, firms in Quadrant 4 innovate because it makes immediate business sense, such as when Apple introduces the next version of an iPhone, a business school starts an online version of its popular introductory course, or a manufacturing company substitutes manual labor with industrial robots. In all of these cases, the focal firms are expecting to reap the benefits of these projects in the observable future, and this economic motive is not related to the existence or lack of external pressure from powerful nonmarket stakeholders. In contrast, innovation projects in Quadrant 2 are unlikely to serve the firm’s economic value creation and value capture objectives. At the same time, nonmarket stakeholders play little or no role in trying to impose these projects. Spontaneous innovation projects may arise from responses to business opportunities identified at the frontline of the firm, but they do not fit with the firm’s main product and market portfolios and are unlikely to be resourced and implemented. Such innovation projects can also result from failed decision-making processes (e.g., processes guided by internal politics, pet projects of powerful managers): Amazon, for example, failed in its attempt to launch its own smartphone, FirePhone, which was allegedly motivated by the CEO’s wishes without sufficient customer demand (Carr, 2015). Spontaneous innovation initiatives rarely reach the full implementation stage and, in well-functioning firms, they should be eliminated by a variety of organizational selection and retention mechanisms. However, if the development of a spontaneous innovation proves its economic potential to benefit the firm, then it would move to other quadrants (1 or 3). Quadrant 3 includes win-win innovation projects, which are simultaneously market-motivated (i.e., having an obvious business case) and required by powerful nonmarket stakeholders. For example, various car safety features in developed economies mandated by governmental regulators have allowed automobile firms to create and capture new value (e.g., when introducing shockabsorbing bumpers, seat belts, airbags, and other safety equipment). Toyota’s blockbuster commercial success with the hybrid Prius car was coupled
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with major pressure from the U.S. Environmental Protection Agency (EPA) and California Air Resources Board (CARB) to reduce the carbon emission of vehicles. Another example of win-win innovations is the development of food safety regulations, which are required by customers and also imposed by governmental agencies. In all of these cases, the implementation of the imposed innovations allows powerful stakeholders to achieve their objectives while also providing a profit motive for industry players. This win-win situation could also be achieved when the powerful stakeholders try to encourage an innovation using market means such as government subsidies or tax credits, provided that these additional incentives are strong enough to make the innovation economically feasible for the firms. In this article, we focus on imposed innovation projects (Verbeke et al., 2017)dlargely neglected in prior literature yet gaining substantial practical importancedpositioned in Quadrant 1 of Figure 1. These innovation projects do not improve economic value creation and capture for the firm, at least in the conceivable short- and medium-term, yet firms are experiencing significant pressure from influential nonmarket stakeholders to implement them anyway. Examples of imposed innovations today are numerous, including eco-innovation projects, affirmative action practices, and corporate governance norms. The rising power of nonmarket stakeholders with diverse demands (Osiyevskyy & Biloshapka, 2017) is making this phenomenon more and more important. However, one should not make an error equating imposed innovations only with CSR initiatives. If such CSR initiatives require innovating in products or processes, they obviously fall within the realm of imposed innovations; yet, there are numerous other instances of innovations imposed by powerful nonmarket stakeholders that are not CSR-related. For example, certain technologies are mandated by the government for industry participants, including installing back-door access for law enforcement officials in encrypted telecommunications systems and devices or carbon capture and storage in oil production. If such innovations made economic sense for industry participants, having a positive impact on profit and firm value immediately or in the observable future, they would eagerly implement them without additional pressure (i.e., win-win or market-motivated innovations). In some cases, the pressure to innovate is imposed through nonmarket means without considering the impact on the firm’s microeconomic performance, as with aggressive pressure groups (e.g., Greenpeace) that
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demand changes in business practices regardless of the consequences for firms. As we explain in Section 3, when facing an imposing pressure to innovate, a company has a spectrum of possible response strategies and the best approach is dependent on the particular context and strategic position of the company.
3. Decision tree The management literature on effectively dealing with institutional pressures (Clemens & Douglas, 2005; Oliver, 1991) or demands of powerful shapeholders (Kennedy, 2017; Osiyevskyy & Biloshapka, 2017) clearly suggests that there is no single best solution and that firms must choose an effective strategic response depending on contextual factors. Following this logic, our analysis of imposed innovation phenomenon suggests that there is no one-size-fits-all method of dealing with imposed innovation pressure. In order to select the appropriate strategy, the firm management needs to adopt a systematic approach. Creating such an approach must begin with the consideration of two basic factors (Verbeke et al., 2017): (1) Imposed innovation projects do not create a major economic incentive for the focal firm in the conceivable short- and medium-term and (2) are being considered only because of the external pressure by a third party (i.e., government, NGOs, labor unions, media, and societies). Therefore, the first priority for firm management facing an imposed innovation project should be to find a way to share the cost and risk of such projects with other industry participants. Based on this priority, we argue that the firm needs to adopt the outside-in approach (Figure 2) in responding to an imposed innovation pressure. Figure 2.
Outside-in approach to imposed innovation
The outside-in approach suggests that the first step for firm management is to identify whether they can create an industry-wide response. If not, then they need to assess the possibility of a collaborative response, including some of the competitors. Finally, as a last resort, the management should conceive of and design a standalone response. To guide the decision-making process in the outside-in approach, we created a set of questions, summarized in the decision tree (see Figure 3), to help firm management systematically find a suitable strategy in response to an imposed innovation pressure. To simplify the decision tree, we divided it into two boxes (i.e., Box A and Box B). The first question that leads us to either Box A or Box B is whether the imposed innovation project can be considered as an industry-wide threat (Q1) with pressure being felt in a similar manner by all participants. Section 3.1. explains the scenario resulting from an affirmative answer to this question, while Section 3.2. focuses on scenarios for which the imposing pressure is distributed differently across participants (i.e., Box B).
3.1. Box A: Industry-wide threat Regulations imposed by governments, coupled with the pressure from third parties such as NGOs, can sometimes create an industry-wide threat for all players, requiring each to engage in the imposed innovation activity. An important feature of this context is that a violation of any firm within that industry may create industry-wide consequences and stakeholder backlash. Under these circumstances, the possibility of making an industry-wide alliance to either resist or comply with the imposing pressure is higher than in any
Figure 3.
The decision tree
Navigating imposed innovation: A decision-making framework
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6 other case. However, the question remains: How should these firms collaborate and what should the collaboration goals? To substantiate the proposed decision-making framework under the industry-wide threat conditions (Box A in Figure 3), we use the illustrative case study of the Canadian oil and gas industry. Since the industry’s inception, its players faced major and accelerating pressure from environmental parties, governments, NGOs, and local communities to address the environmental and social issues regarding extraction practices (e.g., fracking, steam-assisted gravity drainage oil production) and transportation threats (e.g., pipeline leakage). These pressures have materialized in strict formal federal and provincial regulations and informal yet powerful social demands (e.g., requirements for the social license to operate), creating an existential threat to the Canadian oil and gas industry (Radnejad & Vredenburg, 2015; Radnejad, Vredenburg, & Woiceshyn, 2017). A major part of the requirements involves implementing different green innovations, implying costly changes in production processes aimed to eliminate or reduce the firm’s environmental footprint (OECD, 2009), including activities such as managing waste, improving eco-efficiency, and reducing emissions (De Marchi, 2012). The literature focused on such innovations (e.g., Berrone, Fosfuri, Gelabert, & Gomez-Mejia, 2013; Kesidou & Demirel, 2012; Popp, Hafner, & Johnstone, 2011) acknowledges the role of environmental regulation, as well as customer and societal requirements, in stimulating decision making in favor of such projects. In most cases, implementing such innovations has no economic rationale for the firms under pressure, putting these projects into the imposed innovations category (Verbeke et al., 2017). To select the optimal response to an industrywide imposed innovation pressure, the firm’s management must first evaluate whether the imposed innovation project may create any longterm competitive advantage for the firm (Q2). Even though imposed innovations have negative firm-level economic implications in the short- and medium-term, the emergence of the underlying external pressure functions as a major change in the industry’s environment. In this case, the proactive engagement and embrace of an imposed innovation might allow a firm to build unique organizational capabilities in this area and later benefit from the first-mover advantage (Porter & van der Linde, 1995a, 1995b). Hence, being proactive might allow a firm to gain a competitive advantage, leading to superior performance in the
A.B. Radnejad, O. Osiyevskyy longer term (Verbeke et al., 2017). Proactive engagement in an imposed innovation project becomes a viable strategic choice if the unique technology developed/adopted becomes the industry standard (Gerard & Lave, 2005) or if unique capabilities can be developed related to the innovation’s implementation in the firm (Sharma & Vredenburg, 1998). 3.1.1. Proactive-selective collaboration
If, after careful analysis, management provides an affirmative answer to Q2 (i.e., the imposed innovation creates a long-term competitive advantage for the firm), the firm should proactively collaborate with a select number of firms to develop basic knowledge and know-how addressing the imposed innovation project. The selective collaboration helps create several advantages for the focal firm: First, the firm shares costs and risks associated with developing of the imposed innovation with other firms. Second, the firm can select the partners based on their capabilities to develop the imposed innovation. Third, by sharing the project with the limited number of partners, the firm can protect its potential long-term competitive advantage created as the result of the imposed innovation. In the focal case of the Canadian oil and gas industry, such proactive-selective collaboration is manifested in the successful operation of the Canadian Oil Sands Innovation Alliance (COSIA). Created by 10 of the major oil sands producers in the worlddBP, Canadian Natural, Cenovus, ConocoPhillips, Devon, Suncor, Imperial, Nexen, Syncrude, and TeckdCOSIA was founded in 2012 to focus on accelerating improvement in the environmental performance of oil sands producers through collaborative innovation and action. The alliance aimed to develop game-changing innovations in four environmental priority areas, including greenhouse gas emissions, land preservation, water contamination, and tailings ponds. These happen to be the areas governments and third parties are most sensitive about, creating the highest pressure on oil sands producers to address them. Notably, the founding oil sand producers considered these areas to be noncompetitive (Radnejad et al., 2017; Radnejad & Vredenburg, 2015) since not addressing these issues would create industry-wide consequences and all players within this industry have to follow the regulations. Thus, there is no competitive advantage in the short-term or mid-term for any firm. However, in the long-term, having advanced environmentallyfriendly technologies can give a firm an advantage in leasing new reservoirs. On the other hand,
Navigating imposed innovation: A decision-making framework the cost, risk, and resources needed to develop such imposed innovations are noticeable barriers for any individual firm. Thus, the wealthiest and most resourceful major players got together to develop targeted imposed innovations through COSIA. There are similar industry consortiums in other industries, including Transcelerate in the biopharmaceutical arena and the Canadian urban transit research and innovation consortium in the urban transit arena. 3.1.2. Collaborative resistance
In some cases, the imposed innovation does not create a long-term advantage for the firm. Under this circumstance, the firm may question whether there is any way to resist the imposed situation (Q3). If it is possible to resist, considering that the imposed project is an industry-wide threat, firms can create an industry-wide collaboration to fight back through various means (e.g., lobbying). In our focal case, the Canadian Association of Petroleum Producers (CAPP) is an exemplar of the lobby groups that have been working on behalf of the industry to protect the interest of oil, oil sands, and natural gas producers in Canadadwith members accounting for 80% of the country’s total oil and gas productiondin front of external pressures, including those imposing innovations on the industry. CAPP’s recent efforts, for example, lie in actively resisting the controversial Bill C-69 proposed by the Canadian government. If passed, the bill is likely to create major obstacles in the review and approval of infrastructure projectsdwhich, most notably for the industry, includes pipelinesd in the country. 3.1.3. Collaborative compliance
Finally, for cases in which (1) the external pressure is an industry-wide threat (i.e., the answer to Q1 is yes), and (2) there is no long-term competitive advantage in developing the imposed innovation project for the focal firm (i.e, the answer to Q2 is no), and (3) resistance is not possible (i.e., the answer to Q3 is no), the best strategy is creating an industry-wide collaboration to share the cost, risk, and resources to develop the imposed innovation projects. The Petroleum Technology Alliance of Canada (PTAC) is an example of such a strategy. In 1996, senior executives of 25 Canadian-based oil companies representing a cross-section of major, intermediate, and junior companies came together and funded a nonprofit, industry-wide organization (Radnejad & Vredenburg, 2015). Since then, PTAC has positioned itself as a neutral broker to facilitate innovation, collaborative research, and technology development as well as
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the demonstration and deployment of responsible hydrocarbon energy in Canada. The organization intends to leverage intellectual and financial resources and apply them to solve industry-imposed innovation projects, helping to improve the industry’s performance both environmentally and socially. Since its inception, PTAC has reported successful completion of over 500 industry-led projects, most related to responding to different imposed innovations. Its membership currently is comprised of 18 conventional and unconventional oil and gas producers (e.g., Husky Energy, Shell Canada, Suncor Energy, Chevron Canada, ConocoPhillips Canada), 21 research-providing institutions (e.g., universities, colleges, private and public research institutions), 10 industry associations, 9 governments (provincial and federal), and 137 service and supply companies. PTAC’s membership includes the majority of the industry and it is the closest we have found to an industry-wide collaboration set up to address imposed innovations.
3.2. Box B: Threat unique to a particular firm However, in some instances, imposed innovation projects do not create an industry-wide threat; instead, a particular firm or a group of firms may find itself under pressure while the rest of the industry is out of the mix. This situation happens mostly when the external party imposing the innovation project is a group of customers and/or third parties that do not have the power to directly create and impose industry-wide regulations. In this case, large industry players are usually targeted, while the smaller players can stay under the radar (Verbeke et al., 2017). An example of pressure on particular firms is a movement started by groups of customers and third parties to purchase cleaning products (e.g., detergent, soaps, shampoos, bleach) that have less environmentally harmful ingredients. Admittedly, these movements might end up becoming a dominant force in the market and/or lead to governmental regulations that would bring an existential threat to the entire targeted industry. However, in many cases or at least during the infancy of these movements, they are not considered as an industry-wide threat for the incumbent players. In this situation, according to the outside-in approach, the focal firm should investigate whether any competitors consider the imposed innovation project as a potential competitive advantage and value creation opportunity (Q2’). It
8 is important to remember that firms perceive innovation opportunities differently and, as such, an imposed innovation for one firm can be a winning innovation for another. Besides, new entrants and entrepreneurs are interested in new niche trends, too; thus, the focal firm that perceives the external pressure as an imposed innovation needs to investigate whether any of its competitors consider that as an opportunity. If the focal firm identifies such competitors, the firm should investigate whether those competitors are willing to collaborate (Q3’). If the answer is yes, proactive-limited collaboration is the preferred strategy. 3.2.1. Proactive-limited collaboration
Obviously, the collaboration model will be limited since the competitor(s)din this case, the collaboratordconsiders the imposed innovation as an opportunity and has an incentive to fully collaborate (i.e., full open innovation) with the focal firm. The competitor(s) might be potentially willing to get into limited collaboration with the focal firm because of lack of capital, know-how, or other resources. Even limited collaboration provides an opportunity for the focal firm to advance its knowledge and know-how about the imposed innovation. The collaboration of Tesla and Daimler AG during Tesla’s very early stages is an example of such a proactive-limited collaboration strategy. In 2003, Tesla identified the willingness of wealthy individuals to protect the environment by driving a fully-electric performance car. The company started to develop a battery required for such customers. At that time, the pressure from such customers and third parties had not yet encouraged governments to highly regulate car emissions. It was not yet an industry-wide threat to the internal combustion car manufacturing industry, and many car manufacturers would not see any potential economic value in such a market. At that time, the demand and other similar pressure from environmental parties were considered an imposed innovation to some internal combustion car manufacturers, but not an industry-wide threat. To respond to the imposed innovation, the Daimler created a partnership (i.e., proactivelimited collaboration strategy) with Tesla to develop Tesla’s battery technology. In return, Tesla agreed to give 10% of its shares and supply the first 1,000 units of Daimler’s electric smart car. This collaboration led to the success of Tesla but also provided a strategic opportunity for the Daimler group to develop know-how surrounding battery technology and development.
A.B. Radnejad, O. Osiyevskyy 3.2.2. Reactive compliance
Sometimes the opportunity-perceiving competitor(s) is not willing to collaborate with the focal firm (i.e., the answer to Q3’ is no). Under this circumstance, the preferred strategy for the focal firm is reactive compliance, which involves complying with the imposing pressure yet only at the bare minimum to meet the expectations and letting the proactive competitors take the initiative and bear the initial costs and risks. Reactive compliance includes three possible strategic options: (1) fast follower strategy (i.e., second mover advantage to let the proactive competitors resolve the imposed innovation’s initial uncertainty); (2) buy-out strategy (i.e., waiting for a proactive competitor to try out the new imposed approach and then buying it), and (3) copying and imitating strategy. This is a popular strategy among firms dealing with an imposed innovation. In the study of the Canadian oil and gas industry facing a pressure to adopt the costly carbon capture and storage technologies without foreseeable economic payoff, the reactive compliance strategy turned out to be preferred by almost half of the studied industry players, including all relatively small companies as well as some large firms (Verbeke et al., 2017). These reactive compliant companies were embracing the imposed technology only up to the externally required level, either waiting for the other players to invest and bear the initial risks or for the imposing pressure to disappear. 3.2.3. Proactively closed innovation
All of these scenarios are valid if any of the competitors find value in the imposed innovation. But what if the competitor(s) does not find value in the imposed innovation? In this scenario, we will get to the third stage of our outside-in approach, which is whether there is any long-term competitive advantage for the focal firm in developing the imposed innovation (Q4’). If there is a long-term competitive advantage for the focal firm, the preferred strategy is the proactively closed innovation strategy. Similar to a closed innovation model, “companies engage in all business activities related to innovation, such as idea generation, development, and financing, on their own” (Radnejad & Vredenburg, 2015, p. 79). This strategy is preferred since by developing the imposed innovation in a closed manner, the focal firm positions itself as a leader of the industry’s future and benefits from the first mover advantage in the long term. This advantage rests in the fact that the other industry players do not consider the imposed innovation as a threat and, as such, they might be
Navigating imposed innovation: A decision-making framework
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more reactive in embracing it. Moreover, the competitorsdincluding new entrantsddo not see any value in developing the imposed innovation. These two reasons, combined with the fact that the focal firm has already identified a long-term competitive advantage, indicate an opportunity for the focal firm in the long term that justifies the risk and cost of internally developing the imposed innovation. The case of Hewlett-Packard (HP) and its decision to replace lead in its products is an example of a proactively closed innovation strategy. In the early 1990s, the opposition to the usage of lead in different products started to grow. In 1992, as a result of a request from the U.S. Congress r, the EPA introduced TSCA Title IV on Lead Exposure Reduction, which “recognized that children’s exposure to lead in the paint caused serious health risks. It authorized the EPA, working with other agencies, to implement a comprehensive program for reducing lead exposures” (Auer, Kover, Aidala, & Greenwood, 2016, p. 4). Later, in 1993, the government of the Netherlands also banned the use of lead in some circumstances. These regulations, combined with third-party movements, created pressures on different industries to replace lead (i.e., imposed innovation). During that time, one of the companies who took this movement more seriously than others was HP. For years, the company invested in its own R&D to test different replacements for the lead in its solder (i.e., a fusible metal alloy used in production). Finally, the company could replace lead successfully in all of its products and became the first lead-free company in the electronics industry. HP’s proactive closed innovation strategy addressing the imposed innovation proved to be extremely valuable and created a competitive advantage when the European Union passed the Restriction of Hazardous Substances Directive in July 2006, which regulated the use of lead in electronic products (Nidumolu, Prahalad, & Rangaswami, 2009).
implies either collaborative resistance or collaborative compliance depending on whether resistance is possible (Q5’). This is because no firms within the industry consider the imposed innovation valuable, yet some firmsdincluding the focal onedfeel the threat of no action being taken. Since the innovation is imposed on the focal firm, it needs to carry out some actions (e.g., reactively comply or resist). When no long-term value can be captured from the innovation, it is better to share its costs and risks as broadly as possible, ideally through an industrywide collective response. However, the difference between the focal collaborative resistance or compliance strategies in Box B of Figure 3 and similar strategies in Box A is that, in the former case, the threat is not felt by all industry players and hence the optimal, industry-wide response might not be achievable. In this case, the firm must find a narrower circle of collaborating firms that are experiencing the same threat because of their size or other factors that prevent them from staying below the radar of stakeholders imposing the pressure. Within the Canadian oil and gas industry, an example of an industry network for collaborative compliance was Oil Sands Leadership Initiative (OSLI), which was active from 2010e2012 and comprised only six major playersdConocoPhillips, Nexen, Shell, Statoil, Suncor, and Totaldthat felt the strongest pressure to improve the environmental and social performance. In line with our decision-making framework, the OSLI’s foundational idea was that the imposed innovation is a collective problem that requires collaboration rather than competition and that no single firm can solve it alone or build a competitive advantage from it. Later, once the pressure to introduce social and environmental innovations expanded to the whole industry (i.e., context moving from Box B to Box A in Figure 3), the need for limited OSLI dissipated and it paved the way for the currently active, more broad COSIA alliance.
3.2.4. Collaborative resistance/compliance
4. Final thoughts
The final scenario of the decision tree applies to situations in which (1) no industry-wide threat is present (i.e., the answer to Q1’ is no), (2) there is no value for any competitors (i.e., the answer to Q2’ is no), and (3) there is no long-term value for the focal firm (i.e., the answer to Q4’ is no). The preferred strategies for this scenario are similar to the preferred strategies for the scenario in which (1) there is an industry-wide threat (i.e, the answer to Q1’ is yes) and (2) there is no long-term value for the focal firm (i.e., the answer to Q2’ is no), which
We live in a time of the strong, rising power of nonmarket actors such as government regulatory agencies, activist nongovernmental organizations, labor unions, and media. Some studies correctly refer to these actors as shapeholders (Kennedy, 2017; Osiyevskyy & Biloshapka, 2017) as opposed to stakeholders, which stresses their ability to shape corporate actions and performance while having no stake in the company’s future. Governed by their own agendas, these influential
10 constituents sometimes push for-profit businesses to alter their technological trajectory or business practices so as to serve societal goals with supposedly environmental and social benefits. Sometimes, this push takes the form of additional market incentives (e.g., subsidies or tax credits), thus changing the economic justification for the firms’ engagement in a particular innovation. Similar are the cases of government pressures for implementing projects associated with large, state procurement projects (this puts the innovation project into the win-win category in Figure 1). Yet, quite often, the imposing pressure takes nonmarket forms, including threats of prosecution, taking away or not granting further licenses, or general public backlash. This gives rise to the phenomenon of imposed innovations, which are becoming more and more prevalent worldwide. These projects lack firm-level economic justificationdat least in the immediate futuredand are implemented with the sole purpose of safeguarding the firm’s social license to operate. This occurs if no minimum thresholds can be established for economic performance in terms of expected contributions to value creation and capture by the firm within a foreseeable timeframe, and the nonmarket actors exerting pressure mainly want to see improvements in the firm’s environmental or social performance. From a long-term perspective, complying with the pressure of the nonmarket stakeholders to safeguard access to markets and resources or to maintain reputational capital can be considered economically rational yet, in the shorter term, these projects often impose net costs on firms. Imposed innovation projects are implemented mainly to avoid disruptions of the firm’s operations by the nonmarket forces. When comparing such projects with innovations driven by market actors and motivated by the microeconomic considerations of creating and capturing value through better serving the needs of customers or value chain partners, imposed innovation projects have particular characteristics and require idiosyncratic strategies once the firm has decided to pursue them. Basing our argument on the outside-in approach to pursuing imposed innovations, we reveal a broad set of strategic responses to innovation pressures with different levels of cooperation with other economic actors in the industry and varying levels of firm engagement. The primary insight of our framework is that there is no single, optimal strategic response to imposed innovation pressures suitable for all circumstances. Instead, the appropriate response is contingent on a set of
A.B. Radnejad, O. Osiyevskyy contextual determinants, such as the existence of a common industry threat, ability to build longterm competitive advantage, ability to collaborate with competitors, and the possibility of resistance. The proposed decision tree (Figure 3) summarizes the impact of these determinants on the proper strategic response, serving as the guide for organizational decision makers. In addition, as shown in Figure 3, most of the recommended strategies are based on shaping collaboration among the industry players to resist, comply, or proactively respond to imposed innovation. Therefore, to be able to respond effectively to the shapeholders, firms need to internally build on their absorptive capacitydtheir ability to acquire the external knowledge and incorporate it into the firm’s knowledge basedand collaboration culture. Externally, firms need to create an efficient network within the industry by creating industry associations that bridge originations and innovation intermediaries. These associations will create two advantages. First, their function increases the collaboration experience of the industry, which ultimately increases the absorptive capacity of the firms and, second, they provide infrastructure to respond effectively to emerging imposed innovation.
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