Vol. 29, No. 1, pp. 33-45, 1997 0 1997 Elsevier Science Ltd All rights reserved. Printed in Great Britain 001&3287/97 $17.00 + 0.00 Futures,
Pergamon
PII: SO016-3287(96)00064-X
INTANGIBLES The soft side of innovation Pim den Hertog, Rob Bilderbeek and Sven Maltha
The ‘soft side’ of the innovation process is easily ignored. Nonetheless it is crucial in understanding the complexity of innovation processes and competitiveness in a knowledge-based, de-materialized economy. This article focuses on intangible investments as a component of this soft side of innovation practice. First, we will introduce and discuss the concept and meaning of intangible investments. Next, we will illustrate the growing significance of intangibles by considering examples from five industries (producing clothes and fashion, flowers, beer, publishing and financial services). Synthesizing the results from these five cases, we will link the role of intangible investments with service functions in innovation practice. Finally, we will discuss some emerging implications for both future business strategy and policy-making. 0 1997 Elsevier Science Ltd
Knowledge, de-materialization
and service activities
Knowledge-based economies are entangled in an ongoing process of ‘de-materialization’: the cost structure of goods is increasingly dominated by intangible elements.’ Common ‘intangible’ components of production are, for instance, quality (assurance and control), research and development, (product and/or process) design, marketing, logistical planning, distribution, licensing, training and servicing. Many of these components predominantly have a service character.* Moreover, most of them are geared towards understand-
The authors may be contacted at TN0 Centre for Technology and Policy Studies, P.O. Box 501, 7300 AM Apeldoorn, The Netherlands (Tel: +31.55.5493500; fax: +31.55.5421458; e-mail:
[email protected],
[email protected],
[email protected]). This article is primarily based on a study performed for the European Commission (DC 1II.A; cfr. Bilderbeek, Rob, Dany Jacobs, Sven Maltha and Pim den Hertog (1995), immaterial lnvesfmenrs as an innovative Factor. Research for EC DC III A.3. Apeldoorn (NL): TN0 STB Centre for Technology and Policy Studies).
33
Intangibles:
P den Herfog et al.
ing client needs better and interacting more closely with users. As a consequence, the production of material products often constitutes only a limited and decreasing part of the total process of generating added value. The American service sector guru Quinn estimated that ‘within manufacturing, 75 to 85% of all value added, and a similar percentage of costs, are due to service activities. The major value added to a product is typically due less to its basic commodity value than to styling features, perceived quality, etc added by ‘services’ activities inside or outside the producing company’.3 Both within and between firms, this de-materialization process reflects three parallel phenomena: l l
l
Increasing
interdependence and intertwining
The continuous process of specialization firms and economic sectors. Emerging
economic
tracting, outsourcing On a macro-level
networks
of highly
of industrial
and service activities.
and differentiation, interdependent
firms
both within
individual
in a mutual
subcon-
and cooperation relationship.
(the economic system
as a whole),
de-materialization
is reflected in
an increasing dominance of the service sector. At present, the majority of the working population in most advanced economies have a job in the service sector. Many modern economies show a dominant contribution of the service sector to GDP. Competitiveness depends increasingly on investing into intangibles adequately, given their innovative role in modern production processes. Or, as Quinn put it provocatively: ‘Value added is increasingly
likely
to come from technological
improvements,
styling
features, product image, and other attributes that only services can create.’ . . . ‘Products themselves are only physical embodiments of the services they deliver.‘4 Therefore, decision making within company strategies and public policies requires an adequate consideration of investment into intangibles. Therefore, it is essential to have a clear vision on intangible
Defining
investments
intangible
In general definitions
as a concept.
investment of investment traditionally
refer to the acquisition
of durable physi-
cal goods, such as machines, means of transport and buildings which can be used in production processes more than once. Accordingly, statistical data as well as economic analyses of investment usually focus on investment in material fixed assets. Thus far, investments in immaterial assets still constitute an underexposed aspect of innovation theory. Apart from investments in research and development (R&D), patents and licenses, as well as education, the statistical identification of intangible investments is still in an experimental stage. This complicates an adequate assessment of the innovative potential of intangibles to a great extent. Research and statistics on intangible investments show a tendency to focus particularly on R&D expenditures. This is mainly caused by a limited availability of internationally comparative statistics on other components of intangible investments. This myopic view is likely to be a reflection of the prevailing interpretation of innovation as a process primarily driven by investments into ‘hard’ technology-oriented R&D. However, R&D-based indicators are not capable of sufficiently reflecting economic creativity and innovation. Adequate measurement of successful market introduction of innovative products or processes requires much more than only R&D.5
34
Intangibles: P den Hertog et al.
The influence of investment in non-material goods on economic welfare clearly has increased substantially over the last decades.6 In itself, th’IS justifies an open eye towards the role of intangibles in the economic process, more particularly in innovation. As opposed to fixed assets, intangible assets are said to have the potential of giving a permanent impulse to economic growth. A common definition of intangible investments refers to expenditures on education and production or acquisition of disembodied know-how. In contrast with material investment, immaterial assets have the potential to give a permanent impulse to economic growth. Knowledge is considered non-rival and only exclusive to a limited degree. Ideas are looked upon as mostly non-rival because different people may use them for free at the same time. Moreover, resource or exclude others from using it. This
using
combination
ideas does not exhaust the (non-rivalry
and difficult
to
exclude) gives knowledge positive externalities. Accordingly, the OECD’ use a broader definition of intangible investments, covering all long-term outlays by firms aimed at increasing future performance other than by the purchase of fixed assets. A further subcategorization refers to intangible investments in technology, enabling intangible investments and market exploitation and organization. However, up till now no consensus has been reached on a full list, system or categorization of intangible investments (Table 7). A recent attempt to assess the development of intangible investments in 10 countries includes several of the components mentioned above. Unfortunately it focuses exclusively on those categories on which international comparable data are available. This comparative study shows a variation of intangible investments in these countries between 8 and 11% of GDP in 1992. Tangible investments for the same year accounted for 14 to 24% of GDP (Table 2). There are however serious data flaws which prevent a more complete assessment of the magnitude of intangible investments. Not only are some categories of intangible investments excluded, also some of the categories included are not fully covered (eg software and marketing). Therefore, the available figures are believed to be an underestimation. Nonetheless, the figures at least show other categories than R&D to be taken into account.
Illustrations
from five industries
The OECD-list presented above clearly adopts an economic perspective. It is likely to underexpose the significance of intangible factors such as reputation, image and the TABLE 1. COMPONENTS
. . . . . . . . . . . .
OF INTANGIBLE
INVESTMENTS
ACCORDING
TO THE OECD (1992)
R&D expenditure Know-how Industrial patterns and design Patents and licenses Artistic creations, copyright Rights to receive royalty payments Training and other investments in human resources Market share Product certification Customer lists, subscriber lists and lists of potential customers Product brands and service brands Software and similar products
35
Intangibles:
TABLE2
P den Hertog
SOME
Austria Belgium Denmark France Germany Netherlands Norway Sweden UK USA
et a/.
COMPONENTS
OF INTANGIBLE INVESTMENTS PERCENTAGE OF GDP (1992)
FOR
10 COUNTRIES,
AS
Education*
R&D
Technology payment9
Software’
Advertisingd
Sum
5.4 5.2 5.9 5.2 3.4 5.5 7.3 6.4 4.6 5.2
1.5 -
0.23 1.2
2.4 2.5 1.9 1.9 3.0 2.2 2.8
0.21 0.51 0.44 0.16 0.23 0.08
0.39 0.61 0.54 0.59 0.44 0.78 0.53 0.62 0.61 0.8
0.76 0.6 0.81 0.7 0.9 0.89 0.75 0.7 1 1.1 1.23
8.3 7.7 7.3 9.1 7.7 9.4 10.6 10.8 8.7 10.1
A
Source: CBS and CPB, lmmateridle lnvesteringen in Nederland: Een lnternationale Positiebepaling (Immaterial investments in the Netherlands: determining the international position). Voorburg (NL): Netherlands Statistics/Central Planning Office, 1995, p. 1 1.8 “Only public investments (by the government) are included here. Investments of private firms into education and training are not included. “Based on (international) technology balance of payment data. Apart from excluding investments made in a national context, copyrights are not included either. ‘Since software development costs for own purposes are not included, these figures are believed to be an underestimation. “Based on investments into advertising, not covering all marketing related costs. CBS/CPB estimate that for the Netherlands marketing costs twice as high as reported here.
ability to create appealing formulas and concepts like those of Benetton, McDonald’s, Ikea, CNN and Swatch. Insights from modern strategic management theory in particular show that investments in new concepts and commercial solutions are more decisive for competitive strength than the availability of new technologies.’ These soft factors, which have a fairly high service component, are often hard to measure by definition. However, intangibles develop increasingly into decisive driving forces behind innovation processes in both manufacturing and service sectors. This point will be illustrated in the next sections, showing, in a qualitative way, how intangibles promote innovation in five industries: clothing and fashion, flowers,
Clothing
and fashion
beer, publishing
and financial
services.‘o
industry
Since the 1950s the clothing industry has undergone many changes worldwide. Local family companies, such as Benetton, have evolved into multinational companies serving international markets. Many Western European production facilities have moved to low wage countries in Asia and Eastern Europe. Outsourcing of labor to third world countries mark the fall of national textile industries in several European countries. Some parts of the upmarket segment of the clothing and fashion industry have survived this shakeout by anticipating on changing consumer preferences and producing high value-added products. Through acquisition of foreign fashion stores and multiplexing retail formulas, huge worldwide distribution chains emerged.” Over the years companies such as Levi Strauss (US), Boss (Germany), Benetton (Italy), Hennes & Mauritz (Sweden) and Swatch (Switzerland) have developed into dominant players in European and world clothing and fashion markets. The driving forces behind market success and innovation in the clothing and fashion
36
Intangibles:
industry
are highly
very capital-intensive
intangible.
Whereas,
(substitution
into a know/edge-intensive
for example,
of labor), the clothing
the textile industry
and high value-added industry.‘*
P den Hertog et al.
industry
has become
has rapidly developed
intangible
factors such as
image, lifestyle and satisfaction play a dominant role in product design, the distribution and the overall company concept. The significance of investment in intangible assets such as advertising, staff and store formulas intangible factors are dominant:
is therefore unambiguous
in this sector. Three
(1) Design, advertising and distribution. Upmarket clothing and fashion industry segments developed successfully on the basis of intangible assets like design, new business concepts, aggressive advertising and efficient distribution systems. investing in strong store formulas proved to be a success factor.
In particular,
(2) Knowledge-intensive and high value-added production. Cheap labor is no longer the key to successful international market penetration. High investments in human capital, design and an effective infrastructure have become important strategic tools. In addition to that, close cooperation via sub-contracting relationships in the clothing industry enables firms to optimize production and distribution strategies. (3) Responsiveness to consumer preferences. In the clothing industry the sensitivity
for
changing consumer behavior, the quality of the department stores, as well as its atmosphere, are crucial success variables. Successful retail chains use explicit retail formulas for store design. In this context, the combination of collection and presentation plays a key role in attracting customers and in emotionalizing a product. The formulas aim at creating awareness among potential customers strong individual consumer identities.
Flower ‘Flowers
and going along with
industry from Holland’
is a well-known
marketing
phrase for Dutch flowers
on foreign
markets. For a long time the Netherlands have dominated the international market for cut flowers. Cut flowers still are the number one export product.13 A large regionally concentrated community of breeders and related industries and services produce high quality flowers. The production covers numerous varieties in (mainly) sophisticated greenhouses that use modern process equipment. High productivity levels compensate for less favorable conditions (ie climate). Growing flowers is by definition a highly capital-intensive industry. Nonetheless, the above-mentioned factors and major context changes I4 indicate the increasingly decisive role of intangible investments in this industry. Apart from material factors influencing its competitive position, there are three categories of intangible factors that determine the sector’s innovative potential: Knowledge and education. The flower industry flourishes through a network of welleducated, innovative breeders, supported by a strong and open knowledge infrastructure. In this structure universities, public and private research institutions cooperate and disseminate knowledge efficiently. The breeders themselves are open to innovation. They share information on new developments, varieties, etc as much as possible. (2) Distribution and logistics. The flower industry benefits from a well-organized logistic
(I)
37
Intangibles:
P den Hertog
system.
et al.
In this system
a key role is attributed to the auctions
integrating
growers,
strong wholesale traders, and critical and trendsetting customers via numerous sales outlets. Given the massive supply and demand volumes, prices at the auction are in fact world prices. Logistics are crucial since cut flowers are perishable: they need to be packaged, transported, as quickly as possible. (3) Image, design and quality.
re-packaged, traded, distributed Flowers
are by definition
and sold to the customer
an emotional
product subject to
fashion, image and customers’ feelings. The ability to assess long-term trends in fashion, interior decorating, gardens and especially colors adequately is crucial for product developers and breeders to anticipate the newest trends. This ability (to assess) is continuously put to the test by censorious and trendsetting users on the domestic market. The increasingly differentiating and unpredictable taste of consumers complicates this early assessment even more. Tighter environmental laws and environmental
groups put the industry
under further pressure. Consequently,
there is
a growing tendency to invest both in new process equipment, packaging and in the image of flowers, the flower industry and quality control systems.
Beer industry Developments in the beer industry are dominated by a proliferation of acquisitions by the big brewing companies with global ambitions and new partnerships with local breweries. Heineken and Guinness, the Dutch and UK brewers, moved into international markets after the second world war. Only recently, however, have other big brewers such as Anheuser-Busch of the US attempted to turn themselves into global powers. Whereas the market for soft drinks is thoroughly internationalized, the beer market is still rather fragmented: three brands (Coca-Cola, Pepsi-Cola and Seven-Up) control 70% of the soft drinks world market; the 20 biggest beer brands barely reach 26% in their market. Prime driving forces are the struggle for market share, economies of scale in the home market, and the search for entrances on new markets through local brands and their distribution networks. The following intangible factors play a decisive role in the sector’s development: (1) Premium
brands.
Brewers
consider premium
brands as the key to market share. This
applies both to catching bored consumers on the saturated North European and North American markets, and to hooking new drinkers in expanding markets of LatinAmerica, South-east Asia and parts of Eastern Europe. The world’s top major brewers are very active in expanding their market share by taking over local breweries. Brand familiarity and premium image are crucial. In the absence of completely new ways to make beer, innovative products such as ‘ice’ beers are an additional tool for reviving mature markets, since it has appeared to be virtually impossible to produce beer in a completely new way. (2) Market differentiation. As consumers migrate away from the bland megabrands to tastier prestige labels, the big breweries tend to discount their famous-name beers heavily in order to lure consumers. At the same time they develop or buy peculiar, high-priced new types of beer, in particular import beers and microbrews. As a result of this differentiation strategy, many brewers expand their product range. Not only do they offer the standard mass market beer, they also offer a broad range of special
38
Infangibles:P
den Heflog ef al.
and near beers, each aiming for a niche in the beer market that is differentiating 3
as well. Innovative
marketing.
Apart from
launching
innovative
products,
brewers
tend to
focus on more creative marketing strategies. Among these are efforts to develop, test, and deliver new products more quickly and efficiently. Faster cycle times and more locally oriented marketing attention may give brewers a competitive lead. Related changes in the sales organization and the production system reflect the development towards a more differentiated beer market.
Publishing
services industry
Most publishers
still
concentrate on folio-publishing
(books, journals,
magazines,
news-
papers, etc). In many cases, non-folio publishing and new media are challenges to which the majority of publishers still have to respond. Nevertheless the context in which publishers
have to operate is changing rapidly:
l
digitization
l
the emergence of multimedia and interactivity; technological innovation allowing for more personalized globalization, re-regulation and liberalization.
l l
and medium-neutral
information
storage; media;”
and
As a result of these changes publishing has become part of a much larger and complex industry with a variety of enabling technologies, players and delivery systems: the infoindustry. New (combinations of) media, distribution channels and facilitating technologies are developing; contributing industries increasingly integrate and new players enter the field of publishing. The worlds of telecommunications, media and publishing, consumer electronics, computing, distribution and office equipment tend to overlap more and more. This convergence causes electronic media to develop rapidly; there is an increasing need for content. Consequently, the production and recycling of content is in the hands of a broad and growing range of firms. What they have in common is the capability to develop, produce and deliver new interactive information services: telecom operators, music and film producers, entertainment companies, computer manufacturers and software firms. As a result, they have the potential to enter what was traditionally thought of as the exclusive domain of publishing. Content providers are no longer necessarily publishers; and, publishers increasingly merge into integrated communication companies.16 The highly intangible core function of a publisher or info-industry company addresses the ability to (help and create to) communicate the intellectual product of an author (broadly defined) to the end-user by the best means possible. A publisher’s main considerations are how to find, process and manipulate information, how to store it, how to update databases, how to format information for a user and how to transport it. Intangible factors, creativity and rather knowledge-intensive activities play a pivotal role in the process of value adding in the info-industry. Two factors are highlighted here: (7) The ability to produce, re-package and market content. The reputation of being able to create original content on the basis of text, sound, images, graphics and related copyrights, is evolving into a most valuable asset for the info-industry. As the number of players increases and the capacity to reach the user is no longer a scarce item (eg
39
Intangibles: P
den Hertog et
multi-channel
(2)
a/.
broadcasting), the need for content is growing rapidly. Simultaneously,
the ability to use and repackage content various times gains importance (both in the same form through different channels and recycled through transformation into different types of media products.” The ability to focus on and deliver content to specific user groups requires an intimate knowledge of potential customers or target user groups. In addition to that, knowledge of the best way to reach these potential customers is a necessity. Increasingly, infoproducts are customized to the specific needs and wants of certain user groups and distributed in innovative ways.
Financial
services industry
An ongoing process of mergers and acquisitions in the financial services sector has led to an increasingly bipolar development of the sector’s structure worldwide. On the one hand there is a decreasing number of huge financial conglomerates, each offering a broad range of financial services. lfl Many of these ‘financial supermarkets’ aim at full financial service delivery, ranging, for example, from simple cash management services to highly specialized asset management. As far as nationa/ financial markets still exist, these ‘A//Finanz’ providers tend to dominate national market conditions. On the other hand there is a wide range of ‘not-so-large’ financial service companies. Often these SME (small and medium-sized enterprises) financial service providers operate in a (few) market niche(s) on the basis of specialization and focus on specific client target groups. For this category, customer
vicinity
is a substantial
comparative advantage, in particular
in high-quality
(and often high value-added) market niches. Furthermore, the blurring of financial market boundaries has led financial services to be increasingly interwoven with other economic sectors. In particular the larger financial service companies more and more often tend to offer a combination of banking and insurance services: banks and insurers merge into bancassurance providers, aiming at integrated financial provision of services. This integration process goes hand in hand with redesigning the organization of financial service companies. Moreover, as a result of deregulation and liberalization an increasing number of financial service providers operate on global markets. Whereas some parts of the financial market (eg the capital and stock market) have been genuinely international for a long time, ‘foreign’ competitors now increasingly penetrate on traditionally closed, national financial markets. This leads to intensified competition. The wave of (international) mergers and acquisitions has strengthened this process. Rationalization and cutting the operational costs of the financial service delivery process, largely facilitated by substantial investment into information and communication technologies, have developed into a competitive factor. Against this background financial service providers are fairly active in investing in the following intangibles which serve as a basis for further innovations: (1) Organizational transformation, aiming at a better client orientation, not least because of tightened competition. Information and communication technologies facilitate flexible, multi-channel, tailor-made financial service delivery. As a result, new financial products and service formulas ery.
40
emerge, also beyond pure financial
service deliv-
Intangibles:
P den Hertog et al.
(2) (Reltraining. The above-mentioned transformation processes force banking and insurance companies to invest quite substantially in training and retraining. Enabling employees to work with new technology-based applications, (reltraining and organizational restructuring are vital conditions to client-oriented service delivery. Therefore human resources management is developing into a core management field. (3) Distribution channels. The organizational redesign processes often specifically aim at broadening the channels for distributing financial services. In fact, distribution of financial services has turned into a key management area. The rise of call centers reflects the segmentation in financial services delivery: on the one hand standardized distribution channels for delivering standard, low added-value financial services in a highly competitive market. On the other hand, tailor-made client-focused delivery of high value-added financial services to specific target groups, and further differentiation towards more specific market segments. (4) New communication patterns with less predictable clients. Technology-based innovations in the financial sector create new and often more differentiated communication and distribution channels to customers. The potential of these channels leads to a broadening range of feasible communication patterns. As competition gets more intense, banks and insurers have to look upon client wishes as a determining factor more and more. Like the chipcard, on-line banking is a promising distribution channel for banks, but the consumers’ whims and unpredictability are making it difficult for them to handle these developments convincingly. (5) Active advertising and marketing strategies. Traditionally, the financial sector has a rather moderate attitude towards advertising and marketing. As competitive pressures increase, banks and insurers tend to spend more time on creating an image as a means to attract new clients. No longer are advertising and marketing exclusively based on concepts like reliability and solidness (though still essential to financial service providers). The emphasis is slowly shifting towards more challenging concepts like entrepreneurial attitude and cosmopolitanism.
Intangibles
as driving factors towards
innovation
The intangible factors playing a predominant role in innovation mentioned industries are summarized in Table 3.1q
in each of the above-
What lessons can be drawn from the above-mentioned sector cases? Clearly, it shows the soft side of innovation: innovative products and services are not exclusively the result of ‘hard’ R&D functions as a mere reflection of the technological innovation process. On the contrary, apart from technology-based innovations an often substantial contribution to innovation comes from intangible service functions. These include design, marketing, human resources, the organization and management of knowledge, the ability to organize the interface with users, and modern distribution concepts. Considering the predominant intangible factors underlying innovation in the above-mentioned industries, there seem to be several commonalities (see Table 4). All these intangible driving forces behind innovation are directly related to service functions. This, in turn, illustrates the facilitating role of services in innovation processes, be it in manufacturing or non-industrial economic activities. An important impact on innovativeness appears to derive from two major factors in particular:
41
Intangibles:
P den Hertog et al.
TABLE 3. PREDOMINANT Industry
INTANGIBLE Intangibles
FACTORS
IN INNOVATION
IN 5 INDUSTRIES
in innovation
Flower
Knowledge and education Distribution and logistics Image, design and quality (R&D, advertising,
Beer
Premium brands (advertising/marketing) Market differentiation (marketing) Innovative marketing
Publishing
Ability to produce, re-package and market content (marketing) Ability to focus on and deliver content to specific user groups marketing)
Financial services
Organizational transformation (Reltraining Distribution channels New communication patterns with less predictable Active advertising and marketing strategies
Clothing and fashion
Design, advertising and distribution Knowledge-intensive and high value-added Consumer behavior
TABLE 4. MAIN CATEGORIES
OF IMMATERIAL
INVESTMENT Intangible
IN THE SECTOR CASE STUDIES*”
investment
in:
Transformation structure
Knowledge:
Knowledge-intensive
Product:
Brand names, images and design
Market:
Innovative advertising and marketing user/consumer groups
Distribution:
Channels for tailor-made delivery of services/products, and communication with less and less predictable consumers
l
l
production,
clients
production
Organization:
Source: Bilderbeek
towards flexible,
marketing)
adaptive client-oriented education,
organizational
trejtraining
strategies,
oriented towards
specific
et al (1995), op cit. P. 83.
the ability to make optimal use of available human resources (‘organization’ and ‘knowledge’), the ability to communicate with (potential) clients and users (‘market’, ‘distribution’, ‘product’).
Consequently,
understanding
of the nature of innovation
processes requires an adequate
focus including the contribution of intangible investments. Accordingly reformulated innovative business and policy strategies will better reflect the growing role of service functions, and in particular knowledge-intensive services, in innovation processes.
Future implications Considering the growing significance of intangibles in innovation processes, the obvious question is whether there are serious implications for both future policy and business strategy development, and if so, how could these be geared better towards making the most of the soft side of innovation.
42
Intangibles:
As far as the development
of future business
P den Hertog et al.
strategies is concerned, the picture is
rather mixed. On the one hand many firms still innovate along traditional
lines, emphasiz-
ing technological innovation and R&D as prime drivers. On the other hand there is a growing number of firms that use a broader innovation concept, including the ‘soft side’ of innovation. Service companies, traditionally considered as ‘followers’ in (technological) innovation, are relatively well represented in this latter category. The cases mentioned above clearly illustrate the de-materialization of production processes; intangible components of investment like reputation, image and service formula play an increasingly decisive role as competitive success factors. Broadening the innovation concept towards the intangible, ‘soft’ side of innovation will offer good opportunities for firms to transform into learning organizations, as a step towards the knowledge-based economy. However, strengthening overall competitiveness requires a much more proactive approach, also from industrial and technology policy-making point of view. Present-day innovation and technology policy development still shows a manufacturing orientation rather overwhelmingly. The often substantial contribution of service functions to innovation is still being largely ignored. At present a focus on ‘hard’, mainly technological components and innovation indicators such as R&D investments dominate the ongoing debate on innovation practices and innovation policies. As a result, incomplete and partial approaches to innovation practices dominate, as well as in prevailing industrial and innovation policies. In spite of an awakening awareness that future policy development should be more adequately directed towards the specificities of service innovation, the actual ‘tertiarization’ of innovation and technology policy development itself is still about to start. Such a tertiarized innovation and technology policy approach should arise from the often rather fuzzy and intangible character of service innovations, related to factors like:
l
The interaction within and between networks of producers, suppliers and users in codevelopment and externalization processes. The complexity of many innovations: often a combination of innovations in the service delivery process, in products, markets and processes. The opportunities to appropriate the benefits of service innovations.
l
The relatively
l
l
fuzzy
and broad concept of R&D
in service innovation.
Intangibles include a wide variety of factors, ranging from human resources, tional concepts, software, marketing and advertising, distribution and logistics,
organizato image,
design and brand names, and reputation. Given this broad range, the question arises of which components of intangibles may be attributed to a large impact on innovativeness and competitiveness, and which not. At this point it is not quite clear what it is that each of the components of intangible investments contributes to innovation. Future policy development requires a better insight into the potential contribution of each of these intangibles to strengthening innovation-based competitiveness. A broad and knowledge-oriented vision of intangible investments, including these soft but essential components, therefore, is to be favored. More needs to be done in the field of defining intangible investment adequately as an innovation factor. Specific attention should be paid to the following aspects: l
The linkage between innovation processes on the basis of intangibles the public knowledge infrastructure.
and the use of
43
Intangibles:
l
l
P den Hertog et al.
The availability (or the lack of it) of an innovation tool kit, geared towards the specific characteristics of innovation processes on the basis of intangibles. Knowledge management, both within innovating firms and institutions of the knowledge
infrastructure,
as an instrument
for boosting
intangibles
as an innovation
factor.
Conclusion Given the substantial contribution of service functions to innovation and the prevailing manufacturing orientation of present-day industrial and innovation policy approaches, there is an apparent urgent need to ‘tertiarize’ these policies. Intangibles have proved to be an often essential input into innovativeness and therefore deserve more explicit attention in future industrial and technology policy-making processes. Thus far, intangible investments are still a widely underestimated area of the knowledge-based economy. A better integration of the service function focus into existing policy approaches promises to offer a good perspective for strengthening innovation-based competitiveness.
Notes and references 1.
2. 3.
4. 5.
6.
7.
a. 9. 10.
11. 12. 13.
44
Here, the term ‘dematerialization’ is not being used as a reference to the absolute decrease in materials required for certain activities, like Bernardi and Calli do (see Bernardi, Oliviero and Riccardo Galli, Dematerialiration: long-term trends in the intensity of use of materials and energy, Futures, 1993, 4, 431-448). In this article, we associate dematerialization with the increased share of intangibles. For a discussion of the prospects for services in the new industrial economy, see Miles, Ian, Services in the new industrial economy, Futures, 1993, 6, 653-672. Quinn, j. B., Technology in services: past myths and future challenges, Technological Forecasting and Social Change, 1988, 34 (4), 340. And: Quinn, J B, T L Doorley and P C Paquette, Beyond products: services-based strategy, Harvard Business Review, March, 1990, p. 58. /bid, p, 330. Hertog, P. den, T. J. A. Roelandt, P. Boekholt and H. van der Caag (1995), Assessing the Distribution Power of National innovation Systems. Pilot Study: the Netherlands. Apeldoorn (NL): TN0 Centre for Technology and Policy Studies (STB 95/051). See also Jacobs, Dany (1996), Hot air. Added value in the knowledge economy. To be published in: ST/ Review. The ratio of immaterial/material investment in the Netherlands increased from less than 40% to more than 50% in the period 1970-l 991 (see Minne, Bert, 1995, Onderzoek, Ontwikkeling en Andere /mmateriN/e lnvesteringen in Nederland (Research, development and other immaterial investments in the Netherlands), Onderzoeksmemorandum, nr. 116, Den Haag: Central Planning Office, p. 5, 11). OECD (1992), Technology and the Economy: The Key Relationships, TEP, Paris: Organization of Economic Cooperation and Development. More recent OECD documents take more explicitly the knowledge-based economy as a starting point. See OECD, The OECD lobs Strategy: Technology, Productivity and job Creation. Vol. I: Highlights and Vol. 2: Analytical Report. Paris, 1996. See also Vosselman, W., Statistische Onderzoekingen. lnvesteringen in /mmateriNle vaste Activa Door Bedrijven (Statistical investigations. Investments in immaterial fixed assets by companies). M43. Netherlands Statistics, Den Haag, 1991. See Peters, Tom, Liberation Management, Fawcett Columbine, New York, 1992. These branches of industry, drawn from a study performed for the European Commission (cfr. Bilderbeek et al, 1995, see note 19) have been selected with the aim to get an overview of intangibles, role in a broad range of industries having a relatively strong end user orientation in common. Considering that other industries show comparable innovation patterns, we think that the branches selected here, reflect the general significance of intangibles in innovation practices. For a more thorough test, we consider a wider scope of industries including basic industries (eg steel, chemical industry) as recommendable. Benetton for example nowadays has over 5000 branches in 87 export countries. d’Ercole, Michele, innovation in a Mature Industry: Evidence From the Textile and Clothing Sector, MERIT, Maastricht, 1993. In 1994 Dutch firms exported a total of 6.8 billion flowers worth Dfl. 3.6 bln (ECU 1.7 bin); nearly 60% (70% in 1990!) of all flowers produced worldwide were traded in the Netherlands. The Dutch floricultural
Intangibles:
14.
15. 16.
17. 18.
19.
20.
P den Hertog
et al.
industry employed 71,000 workers in 1992. Apart from production (25,000), this figure includes auctions (4500), the supply industry (6000), wholesalers/exporters (13,000) and retailers (22,500). Below, we will concentrate here on the flower industry in itself, although it is an indissoluble part of the agri-business industry as a whole. Although the Dutch flower industry still dominates international production and trade in cut flowers, there are indications that the dominance is decreasing. Floriculture industry in general has been confronted with some major changes lately (like overproduction, increased imports from third world countries, signals about a declining image and lacking quality control). Data compression, digital broadcasting, interactive TV, home decoding, on-line publishing are relevant innovations here. A growing number of mergers and acquisitions, joint and unforeseen forms of collaboration and a relaxation of rules regarding cross media ownership lead to integrated communication concerns like Bertelsmann, Canal Plus, Pearson, Reed-Elsevier, Time Warner, Hachette. Stewart, C. and Laird, J., The European Media Industry. Fragmentation and Convergence in Broadcasting and Publishing. London: Financial Times Management Reports, 1994, p. 30. International differences in this respect are quite substantial. For instance, legislative barriers used to inhibit the formation of large banks across state boundaries in the United States, whereas the formation of large financial conglomerates is a distinguishing characteristic of the Japanese financial sector. For a more detailed insight into the role of intangible elements in the innovation process, see Bilderbeek, Rob, Dany Jacobs, Sven Maltha and Pim den Hertog, immaterial investments as an innovative Factor. Research for EC DG III A.3. Apeldoorn (NL): TN0 STB Centre for Technology and Policy Studies, 1995, Ch 4. This table regroups the intangibles mentioned in Table 4 under a limited number of main headings.
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