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Japanese innovation processes

Masaharu Ota
Graduate School of Business, Osaka City University,Osaka City, Japan

Japanese innovation processes 275

Received 11 April 2011 Revised 8 October 2011 23 December 2011 Accepted 17 April 2012

Yohsuke Hazama
Fujitsu Limited, Tokyo, Japan, and

Danny Samson
Department of Management and Marketing, University of Melbourne, Melbourne, Australia
Abstract
Purpose The aim of this study is to propose and test a model of innovation process management and to clarify the managerial strategies required to achieve it in Japanese enterprises. Design/methodology/approach The authors conducted empirical tests of the model using the data from the questionnaire surveys of Japanese companies, and an illustrative case study. Findings It was found that there was a high likelihood that the IP of Japanese companies thought to have had success with innovation matched the proposed model. The support for the model from the Japanese data is sufciently strong so as to suggest that certain managerial factors should generally be implemented in order to succeed with innovation. The authors then conducted a case study on a notably prominent Japanese company, Toyota, interviewing senior executives both in Japan and Australia. This was done in order to further verify and enrich the ndings of the model development and the empirical survey study. The authors found specic practices and capabilities that were statistically signicant in Japans manufacturing companies in general, which were also deeply engrained within Toyota in particular. The importance of structured process in Toyota in particular and generally in the Japanese manufacturing sector was conrmed, comprising scanning, idea occurrence, strategy formulation, resource procurement, implementation and value creation. Originality/value This study is one of few that shows the particular approach used in Japanese manufacturing companies. That systematic approach led Japanese manufacturing companies to be at the forefront of innovation for three decades from 1975, and able to successfully expand internationally. Keywords Innovation, Innovation process, Creative process, Japan Paper type Research paper

Introduction The market environment in recent years has seen dramatic globalization, fast cycles of new technologies, and diversication. Companies and other organizations hoping to adapt to these challenges, and to survive and develop have been faced with the need for improved management, enabling them to gain a sustained competitive advantage. One way to win a sustained competitive advantage and create value for stakeholders is to pursue innovation. In order to further realize such innovation, the systematic and continuous creation of innovation must be considered. In other words, strategies and
The authors thank Dr Prakash Singh, University of Melbourne, whose comments were an enormous help to them. Finally, this research was supported by Grant-in-Aid for Scientic Research of the Japanese Ministry of Education, Culture, Sports, Science and Technology under the Contract No. (B)19330086 (2007-2009) and the Grants for Priority Research of Osaka City University.
International Journal of Operations & Production Management Vol. 33 No. 3, 2013 pp. 275-295 q Emerald Group Publishing Limited 0144-3577 DOI 10.1108/01443571311300773

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operations management that induces innovation is necessary. Existing studies have fallen short of fully modeling this, and in particular studies of innovation processes (hereafter abbreviated as IPs) that lead to the success of innovation are still mostly incomplete and hence insufcient. Certainly, many researchers have claried IPs in a broad scope, and there have been studies discussing IPs at the operations management level. However, these studies are mostly limited to abstract discussions and are still insufcient when considering the realization of innovation. Examples of studies of the comprehensive innovation concept include those of Utterback and Abernathy (1975) and Utterback (1994), Christensen (1997) and Tidd et al. (2001). This study reconsiders IPs and conducts empirical reviews of them. First, we derive an IP model that relies on existing IP studies and considers dynamic capability (DC) (hereafter abbreviated as DC). In addition, we conduct an empirical review of that model using data from a questionnaire survey of Japanese companies. The unique contribution of this study is a relatively rare examination of innovation processes in Japanese rms, including one illustrative case study of arguably Japans leading manufacturing company, and a survey of successfully innovative rms there. The model as proposed was based in the literatures of innovation and dynamic capabilities and was validated inside Japanese companies, showing the sequential steps of the Japanese innovation process. Literature review: previous relevant studies of innovation Many previous studies about innovation have been performed, perhaps beginning with that of Schumpeter (1934). Meanwhile, in the area of IP research there are studies by Rogers (1962, 2003), Mitsufuji (2007), Rothwell (1992) and Dodgson et al. (2005). Roberts (1998) pointed out that: [. . .] relative to American rms, Japanese industry has more heavily invested in applied rather than basic research, adopting and improving on pre-existing products and technologies, in already well-developed market areas. This study builds on earlier studies of innovation in Japan and elsewhere in which the interactive steps of a holistic innovation process were considered, although it was not always in a dynamic capabilities frame (Nonaka, 1990; Nonaka and Takeuchi, 1995). These earlier studies of Western (von Hippel, 1988) and Japanese innovation demonstrated interactivity and the importance of information management, but not the full dynamism that the present study examined. Bowonder and Miyake (1992) provided some conceptual advances at both the national and rm level in referring to idea processing aspects of innovation, but fell generally short of connecting these fully to value creation and did not empirically validate their models. We have responded in this study to Bernstein and Singh (2006), who proposed a conceptual model of innovation that is essentially linear, commented on the paucity of integrative approaches and studies in this area, and called for further testing and validation. Trott (2008) showed the content requirements of innovation and demonstrated the richness that case studies can bring to illustrate the how of innovation process, which we have built on in this study. Previous studies as discussed above in the literature have called for more work on integration and dynamic aspects of innovation process. This study has as its core feature, the explanation of dynamic capabilities approach to innovation (in Japan) with validation of these elements in an integrated model based on a large data set, which is then further enriched using a case study of one of Japans most successful organisations: Toyota.

There have been a wide range of discussions within the aforementioned studies as well as other studies (Tornatzky et al., 1990) with regards to the denition of innovation, but there is no one denition that is used in all of these studies. However, because IP is the subject of this paper, it is necessary to clarify the denition of innovation as well as the denitions of process and IP. This paper denes innovation as the reform of products, production processes, and operations, etc. to bring about economic and convenience benets for companies and customers. In other words, we say that innovation is not simply inventions or discoveries, but is achieved by obtaining economic benets from those inventions and discoveries. Moreover, process in this study has the meaning understanding the stages of each individual innovation activity as a sequence. In other words, IP is dened as the sequence of stages of organizational activities in innovation activities. The European Commission has dened innovation as: Innovation consists of the successful production, assimilation and exploitation of novelty in the economic and social spheres (European Commission, 2003). This denition clearly accords with our view that a key part of innovation is the actual outcomes beyond ideas or invention only. What are especially important in promoting these studies are the discussions regarding the IPs of companies. There are processes for each of the innovation activities of companies. These are studies that clarify the theories and success factors in innovation activities regarding processes that have been especially successful or processes likely to succeed, as well as studies that attempt to utilize these theories and success factors for the future innovation activities of companies. Tidd et al. (2001) acknowledge the importance of innovation while stating in response to the question of whether or not it is possible to promote innovation while managing IPs that:
[. . .] there are no simple recipes, etc. to make innovations successful, but even if innovation processes are uncertain and random, it is possible to nd the pattern of success at the foundation.

Japanese innovation processes 277

We concur with this theme, that certain underlying practices are generally likely to be associated with systematic success in innovation. Numerous IP studies have focused on the internal innovation processes of companies such as research and development, etc. (product innovation) and improvements of production processes, etc. (process innovation), as well as on the process of innovations appearing in social systems being diffused and established in society. This paper denes the IP executed within companies as the IP of (the stage of) creation and the IP outside of companies as the IP of (the stage of) diffusion. There have been few previous studies specically researching either of these types of IP, however the studies of Rogers (1962, 2003), Mitsufuji (2007), and others based on communication theory contain discussions that focus on the IP of diffusion in particular. Benner (2009) contributed specically to process understanding in the area of capabilities, through a study of technological change, showing the potentially large benets of a process management approach. Whereas IP has been studied extensively in other countries, (Oke et al., 2007; Huang et al., 2010), other studies have shown that cultural differences (Pagell et al., 2005; Cagliano et al., 2011) make signicant differences to innovation and operations management practices. There has been a relative dearth of survey-based studies of Japanese manufacturers which show from such a sample as ours, the nature of Japanese innovation management practices.

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According to Rogers (1962, 2003) the four major elements in studies of IP of diffusion are innovation, the social system, communication channels, and the passing of time (dynamics), and he presents a linear model for the diffusion of innovation into social systems. Furthermore, Rogers denes innovation as an idea, practice, or object that is perceived as new by an individual or other unit of adoption. In addition, Rogers calls innovation the series of processes that lead from (i) discovery of a need or problem, to (ii) basic and applied research, (iii) development, (iv) commercialization, (v) diffusion and adoption, and (vi) the consequences of the innovation. Rogers referred to this as the innovation decision process. The studies of Rogers and Mitsufuji focused on the diffusion processes of innovations outside of companies as well as innovations as creation within companies, and they present comprehensive discussions and models. Furthermore, in these models the IP of diffusion and IP of creation are acknowledged as having complementary, interactive, and interdependent relationships, and it has been pointed out that this interdependence is essential to the further development of innovation studies (Mitsufuji, 2007). Dobni (2010), found a relationship between the innovation orientation of Canadian rms and their innovation strategies and outcomes, with rms having stronger innovation orientation being more externally and market focused than other rms. Holger et al. (2010) recently pointed out the need for both better practice and further research on integration and holistic management of innovation processes in a new product development context. While innovation is a broader concept than just considerations of new products, it is certainly true that new offerings are a clear and important aspect of broader innovation efforts and processes. Similarly Burroughs et al. (2011) point out the importance of an integrated approach in the creativity stages of new product development as part of comprehensive innovation processes. Porters (2008) Fit Strategy is an example of a discussion regarding IP that comprehensively considers innovations at the stage of creation and the stage of diffusion. Porter distinguishes between operational efciency and strategy, and stated that both were essential factors for companies to gain a competitive advantage. Furthermore, given this, Porter considers innovation strategy to be the construction of ts among these activities within companies. Previous studies regarding the IPs of creation do exist although they do not discuss the topic in sufcient detail. For example, Tidd et al. (2001) discussed innovation activities from the perspective of process management, and divided the IPs within companies into ve stages. Namely, they divided them into (i) the processing of signals, (ii) formulation of strategies, (iii) procurement of resources, (iv) implementation, and (v) learning and re-innovation, and said that the progression of these ve stages was the routine that existed in the process foundation of innovation management. As such, Tidd et al. divided IP into the stages of scanning, strategy formulation, procurement of resources, implementation, and learning and re-innovation because they believe this is the routine that exists in the foundation of IP, and Tidd et al. reviewed the behavioral patterns that make the management of innovation successful. On the other hand, Davila et al. (2006) discussed IP with the belief that even though innovation is not and cannot be perfect, it can be understood as a process of many ideas becoming few ideas, and that this process can be compared to a funnel. Davila et al. assert that in IP, many ideas rst appear, but these are sorted and selected, and nally only a very few excellent ideas remain, which go through the process of

being developed and marketed. According to Davila, the entrance of the funnel and process is congested with a limitless number of ideas (the creation phase), and only several of these ideas are actually used. Then, as these ideas are passed through the funnel of ideas, they gradually decline in number as they are assessed and selected in stages. Then the ideas chosen in the end get resources and proceed to the implementation stage. Subsequently, the ideas that have become intellectual assets proceed to the value creation stage. In other words, it is the IP model of Davila et al. that suggests that ideas occur in the rst stage of innovation, are sorted and selected in the stage of the promotion of IP, and the ideas that are nally selected proceed to the implementation stage, with those that become intellectual assets proceeding to the value creation stage. IP studies focusing on the stage of creation have been conducted in the aforementioned manner. However, if we attempt to consider effective IP models, the factors underpinning the promotion of the IP are necessary. This study introduces and tests dynamic capabilities as those factors. Overview of DC DC is a concept proposed from the resource based view (RBV) analytical perspective in management and strategy theory. The rst study to have suggested the DC concept is said to be that of Teece et al. (1997). Teece et al. dene DCs as the ability to integrate, build, and recongure internal and external competences to address rapidly changing environments. They also said that the DC of companies are determined by the three Ps that include management and organizational processes, positions that are dened by relationships with technologies and customers, etc. and the paths representing the inertia of organizational behavior. Teece did not consider organizational processes themselves to be DCs or organizational capabilities, but instead considered that capabilities were the product of the overlapping processes and positions of companies. Moreover, in the more recent studies conducted by Teece, DC was divided into the following components: . the capacity to sense and shape opportunities and threats; . the capacity to seize opportunities; and . the capacity to maintain competitiveness. Teece (2007) suggests that micro-foundations exist in each of these components. There have been many more studies done since these studies by Teece. For example, the study by Eisenhardt and Martin (2000) complements the studies of Teece. Eisenhardt et al. dene DCs as The rms processes that use resources [. . .] to match and even create market change. As is clear from this denition, Eisenhardt et al. consider the processes of organizations to be DCs. Furthermore, the study of Zollo and Winter (2002) focuses on DCs from the perspective of organizational learning as the source of DCs. Zollo et al. accept changes in the competitive environment as being inevitable, and describe operational capability as the capability to adjust and control resources efciently for specic objectives of activities in such specic environments. Paladino (2008) reported on the efcacy of the RBV on innovation capabilities and outcomes, which we take further in the Japanese context. There have been studies on DCs by many researchers in addition to these. Although the term DC has been commonly used, its denition has continued to be subject to a wide

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range of discussions. There is still no convergence of scholarly or practitioner opinions regarding the nature of the capabilities of companies that lead to the competitive advantage of the companies in markets undergoing dramatic environmental changes. However, when discussing the innovation activities and IPs of companies, it can be said that DCs are important to the innovation activities of companies, just as Helfat (2007) assert that DCs serve as the driving force for the innovation activities of companies. The dynamism of rms even in their inter-rm relationships was evidenced by Lee and Veloso (2008), showing the complex interactions of suppliers and customers in industrial marketing and innovation processes. On the other hand, there has been signicant discussion of innovation capability as the capability companies need to promote innovation. One example in this eld is the study by Lawson and Samson (2001). In this study the authors asserted that while the mainstream and newstream operational activities of companies were discussed separately in the past, they should be combined when being discussed and managed. In other words, companies that conduct operational activities in dynamic environments should carry out management which combines the mainstream, i.e. the existing activities, and the newstream produced by new innovations. They used the concept of innovation capability as a bridge between multiple sets of knowledge which enables the combination of the two streams to be achieved. MacCormack and Iansiti (2009), in a recent article demonstrated the importance of dynamic capabilities in Microsofts success, and their study leads to the need for further more general cross sectional studies such as ours which demonstrate these impacts much more generally than in a single case study. In this study, when considering the IPs of companies we understand DCs to be one of the elements that increase the effectiveness of IPs. In other words, in this study, DCs are introduced as the meta-models of IPs, included in the identical model, and made the foundation for the review of managerial strategies for the promotion of IPs in particular. Dynamic capabilities is concluded to be a highly suitable basis to use as an approach to Japanese innovation processes because of the close t of dynamism to the essence of innovation. Reconstruction of the innovation process model of creation Based on the previous studies regarding IPs and DCs introduced in the preceding section, this study proposes an IP model of creation as shown in Figure 1 which includes management of both DCs and IPs. This model revisits and combines the model by Tidd et al. of routines existing in the process foundation of innovation management and the model by Davila et al. There are several reasons why a new IP model combining both of the previous models is proposed. The rst reason is that both models have stages with insufcient parts. They are incomplete. The model of Tidd et al. has a strong tendency to seek innovation sources from outside of companies, and the model of Davila et al. has a strong tendency to seek idea sources from within companies. In addition, the model of Tidd et al. does not consider the stage of the creation of value following the stage of implementation. The stage of sorting and selecting is incorporated in the model of Davila et al., but it is established in too narrow a sense as only the stage preceding implementation. In other words, sorting and selecting is too restrictive to be used as an IP stage preceding the stage of implementation. In the model of Tidd et al., the stage of sorting and selecting

Learning and Re-innovation

Japanese innovation processes

Implementation Management For Implementation Value Creation

Scanning

Idea Occurrence

Strategy Formulation

Resource Procurements Management for Resource Procurement

281

Management for Scanning

Management for Idea Occurrence

Management for Strategy Formulation

Management For Value Creation

Dynamic Capability (Innovation Capability)

Figure 1. IP model for the creation process

is included in the stage of strategy formulation, whereas these can and should be conceptualized as separate steps, one being conducted at the level of the testing of individual ideas and the other a much higher level set of activities. In the stage preceding implementation, strategies should be executed in the broad sense of carrying out a wide variety of activities, as suggested by the term strategy formulation. The model of Davila et al. is incomplete with regards to the stages of procurement of resources and learning and re-innovation when discussing the IPs of companies. When pursuing management policies for the success of innovation, the IP stages shown in each of the models are necessary to the innovation activities as is clearly shown in the studies of both Davila and Tidd. In other words, we can make the success of innovation more familiar by making the stages not considered by the IP models of Davila and Tidd complement each other. We think the creation of a practical IP model is possible by combining the two models each of which have insufcient parts. Each has signicant strengths to consider, and these are combined into an integrated process model (shown as Figure 1). In both studies, of Tidd et al. and Davila et al., there was no stage considered by either party to be unnecessary to the success of innovation: they were both just incomplete. It is necessary to indicate specic management policies in order to execute the aforementioned combined IP, and since it is the DCs that indicate these, the DCs are to be included in the IP model nally proposed by this study as shown in Figure 1. Because of this, the execution of IPs becomes more specic. This execution of IPs can be reviewed from the perspective of operations management. The appropriateness of combining the models of Davila and Tidd and creating a new IP model that includes DCs in the combined model will be tested using a positivistic analysis in the next section. In other words, we test whether or not the IP model proposed by this study is being employed by company groups thought to be achieving successful innovation, and in addition we test which specic management policies are being employed. Put simply, we conduct an analysis into whether or not the IP model proposed in this study is effective for the achievement of successful innovation.

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Methodology: empirical review of the innovation process model of creation In this section, we attempt to test the appropriateness of the proposed IP model of creation using the survey results of the innovation questionnaire we conducted. Questionnaire survey outline and analysis methods (1) Questionnaire survey outline. The questionnaire survey regarding innovation management used in the analyses in this paper is a nation-wide survey regarding innovation management that was implemented by the Center for Global Operations and Innovation Management of the Graduate School of Business at Osaka City University. To conduct the survey we mailed questionnaires to listed companies and unlisted companies that we extracted from the quarterly Japan Company Handbook. We excluded companies in the agriculture, forestry, and shing industries and companies in the nance industry. The distribution and collection period was from mid-January to mid-April 2006. The questionnaires were distributed to 6,992 companies, including 4,226 manufacturers and 2,766 non-manufacturers. Furthermore, 3,361 of these companies were listed and 3,631 were not listed. A total of 417 companies responded, giving us a response rate of 6 percent. Such small response rates have been problematic in recent years as executives become overloaded with work and over-surveyed (Jin, 2011). Our survey asked for reasonably sensitive information, which might also have impacted the response rate. To assess for possible response bias, we made many phone calls to non-respondent companies, nding that their non-response was mostly a function of policy or shortage of time. Our questionnaire was tested for validity during pilot tests and was also supported by previous iterations of many of the questions in a worldwide GMRG survey application, including tests for common method bias (Conway and Lance, 2010). In addition, validity and support came from the same questions being used in our case study interviews at Toyota. This survey was conducted as a joint study with the Global Manufacturing Research Group (GMRG) and the University of Melbourne, with which Osaka City University has made an academic exchange agreement. The GMRG is a group of scholars that study the operational management of companies in the manufacturing and service industries. It is based in the USA and has members all across the world. Surveys were sent to the central strategy and planning ofce of these Japanese companies where full and central knowledge is held about the companies practices. Respondents were asked about a wide variety of topics, with a total of 94 question items on management strategy; management resources; assessment of innovation; e-business; introduction of IT; collection, organization, and accumulation of organizational information; originality and idea management; organizations; compensation and incentive systems; operational goals; culture and climate; technological management; cost management; operations management; efforts for the sustainable development of mankind; business assessment; information regarding innovation, supply chain management, and product development. Scales were drawn from the various literatures described above, and were pilot tested. The pilot was with a small sample set of 20 rms drawn from the population of Japanese companies and led to some relatively minor reworking of the question items. In particular, many of the question items were derived from the individual elements of the innovation capability of Lawson et al., and question items regarding these were utilized. In other words, the question items utilized in the analyses can be understood as the question items that indicate DCs.

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There were four question formats used in the questionnaire: the Likert Scale format, the multiple answer format, the numerical answer format, and the free answer format. The question items used in the analyses in this paper were in formats asking about degree of agreement or existence of practices according to the seven-point Likert scale. (2) Outline of the sample companies. Looking at the 417 respondent companies by industry, 57 percent (237 companies) were in manufacturing and 43 percent (180 companies) were non-manufacturing companies. Looking at the non-manufacturing companies by industry, there were companies in the wholesale and retail industry (41 companies), the information technology and telecommunications industry (38 companies), the construction industry (35 companies), the service industry (26 companies), and the transportation industry (17 companies). We excluded nance and insurance industries and information industry because nance and insurance is controlled by Japanese Government and the operations of information industry is not classied to manufacturing or service. Looking at the companies on the basis of number of employees, 27 percent (115 companies) employed fewer than 300 persons, 40 percent (166 companies) employed between 300 and 999 persons, and 33 percent (136 companies) employed 1,000 persons or more. Looking at the companies on the basis of whether or not their stock was listed, listed companies made up 47 percent (196 companies) of all the companies and unlisted companies made up 53 percent (221 companies). The data used in this analysis is limited to that of the 168 companies in the manufacturing industry for which we were able to clearly ascertain the changes in sales between scal years 2004 and 2006. This is because we use the changes in sales as one of the indices for the success of product innovation. The reason is simply that successful product innovation aims to result in sales growth. Consider the very recent case of the Apple Ipad, which sold over 1 million units just in its rst month and only in the USA, as an example of sales growth through successful product innovation. (3) Analysis methods. In this study, of the total of 94 question items, we selected question items thought to be directly related to the management of IP by companies, and conducted an analyses of the data of the aforementioned 168 companies. Furthermore, we utilized SPSS version 11.0 and AMOS version 16.0 for the data analyses. (4) Selection of question items corresponding to each of the stages in the innovation process model. The question items used in the analyses in this section are the survey items related to innovation capabilities in particular. First, in empirically reviewing the IP model of creation shown in Figure 1, if we extract the questionnaire items related to the management policies that indicate the innovation capability of each IP stage, with the results being listed in Figure 2, for example scanning comprised the eight elements shown in Figure 2. We referred to the studies of Tidd et al. (2001), Davila et al. (2006) and Teece et al. (1997) when carrying out the questions and scale creation and then the extraction. Analysis procedures and principal component analysis One of the objectives of this study is to test the appropriateness of the proposed IP model and to nd out what major kinds of management policies Japanese companies are implementing when executing the IPs. In order to achieve this by utilizing the obtained data, it was necessary to conduct a covariance structure analysis using all the data regarding the question items chosen in previous item (4) and to nd the path

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IP Stage Order processing (Q2-13-01) Scanning Flexibility for needs (Q2-15) Arrang and accumulate the information (Q2-18) IT and innovation (Q2-12-01) Arrange and accumulate the knowledge (Q2-21)

Items of Questinnaire (indicates management policy) Customer information gathering (Q2-13-02) Encourage employees to catch the needs (Q2-16) Knowledge and information are shared with the partner organizations (Q2-36-03) Encourage the learning of knowledge and information (Q2-19) Originality management (Q2-23) Organizational hierarchy (Q2-26-02) Implement an incentive scheme (Q2-29) In-house communications activated (Q2-36-01) Strategy innovation (Q2-04) Technological information management (Q2-38) Technological development guides (Q2-39) Training programs for employees (Q2-20) Accumulate ideas (Q2-24) Project teams (Q2-26-03) Encouragement of employee activities (Q2-35-01) Cross hierarchical and functional communication (Q2-36-04) Information sharing (Q2-13-04) Bench marking (Q2-17)

284

Idea Occurrence

Decision making (Q2-26-01) Considering evaluation intended for the group and team (Q2-28) Enough authority to researchers (Q2-35-02)

Strategy Formulation Resource Procurement

Strategy directionality (Q2-03) Resource proccurement (Q2-06-01) Core technology (Q2-42) Innovation organization systems (Q2-25-02)

Linked with external specialists (Q2-25-03) Create organizational culture (Q2-34-02)

Individual or team's business target (Q2-32) Risk-taking (Q2-34-04)

Implementation

Organizational culture for innovation (Q2-34-01) Reflect effort of innovation activities (Q2-48-01)

Figure 2. Questionnaire items corresponding to each IP stage

Innovation expentancy of Sales department, Marketing department, and Service department (Q4-03) Value Creation Degree of efforts to acieve innovation by Sales department, Marketing department, and Service department (Q4-04)

Note: The number in parentheses of each item indicates the reference number of our questionnaire form

diagram with a high degree of t as well as the question items that indicate that path diagram, in other words, the management policies. However, in order to achieve this, it is necessary to repeat the process of sorting and selecting the question items a great number of times in order to reach a high degree of t. Therefore, in this study we narrowed down the question items by conducting principal component analyses of the question items chosen according to each IP stage. Afterwards, we conducted covariance structure analyses using the response data from the remaining question items, further selected the question items with paths with a high degree of t, and designated the management policies equivalent to those question items as the policies useful to the promotion of IP by Japanese companies. Moreover, if such repetition did not produce a sufcient degree of t, it would mean that the proposed IP model did not apply, to Japanese companies at least. The covariance analysis was used to check on the principle components analysis ndings, to see how various cutoff settings would impact the results, and it was generally found that the results were robust and sensitivity was low, which reassured the authors of the validity of the ndings and the model t. The results of the principal component analyses are shown in Figure 3. Innovation process model analyses based on covariance structure analyses As a positive analysis of the proposed IP model, we selected question items that served as observed variables based on the results of the principal component analyses of each stage while conducting covariance structure analyses. Since we chose the 137 companies that saw increased sales between 2004 and 2006 as data, we were able to test the appropriateness of the IP of the applicable companies. There is potential disagreement regarding the use of sales as an index to determine the success or failure of innovation, but this study denes innovation as activities that lead to economic benet so it is difcult to assess innovation with any other index. The results of the aforementioned analyses are shown in the path diagram in Figure 4.

IP Stage

Principal Component 1 Encourage employees to catch the needs (Q2-16), Bench marking (Q2-17), Arrang and accumulate the information (Q2-18) Originality management (Q2-23), Encouragemet of employee activities (Q2-35-01), Enough authority to researchers (Q2-35-02), In-house communications activated (Q2-36-01), Cross hierarchical and functional communication (Q2-36-04) Strategy directionality (Q2-03), Strategy innovation (Q2-04) Technological information management (Q2-38), Technological development guides (Q2-39) Innovation organization systems (Q2-25-02), Organizational culture for innovation (Q2-34-01), Create organizational culture (Q2-34-02), Risk-taking (Q2-34-04), Reflect effort of innovation activities (Q248-01) Degree of efforts to achieve innovation by Sales department (Q4-04), Degree of efforts to achieve innovation by Marketing department (Q4-04)

Principal Component 2 Order processing (Q2-13-01), Customer information gathering (Q2-13-02), Information sharing (Q2-13-04) Encourage the learning of knowledge and information (Q2-19), Training programs for employees (Q2-20)

Principal Component 3

Principal Component 4

Scanning

Japanese innovation processes 285

Figure 3. Principal component analysis for each IP stage

Idea Occurrence

IT and innovation (Q2-1201)

Decision making (Q2-26-01)

Strategy Formulation Resource Procurement

Implementation

Value Creation

e1

Order Processing (Q2-13-01) 0.71 Scanning

Customer Information Gathering (Q2-13-02) 0.82

e2

Encouragement of Employee Activities (Q2-35-01) 0.78 0.68 Idea Occurrence

e3

e01

Strategy Directionality (Q2-03) 0.98 0.45 Strategy Formulation 0.88 e04 Resource Procurement

e4

N = 137 CMIN = 29.227 DF = 26 GFI = 0.952 AFGI = 0.917 NFI = 0.782 CFI = 0.967 RMSEA = 0.030 AIC = 67.227

e02 e03

e5

Technological Information Management (Q2-38) 0.86 0.89 Technological Development Guides (Q2-39)

e05 0.84 Implementation 0.60

e06

0.76 Innovation Organization Systems (Q2-25-02)

e9 0.81

Value Creation

e7

e6

0.87
Degree of Efforts to achieve Innovation by Marketing Department (Q4-04)

Degree of Efforts to achieve Innovation by Sales Department (Q4-04)

e8

Figure 4. IP model of Japanese companies

In this study, we tested the path diagrams individually under the same conditions, with regards to the connections between each of the stages of the IP. For example, we analyzed the link between the scanning stage and idea occurrence stage only, and compared this case with the case of discussing the model as the sequence of processes shown in Figure 1. However, none of the models with a high degree of t when a sequence of processes was used showed any degree of t when they were analyzed as divided into individual steps. In other words, the proposed model has meaning only when understood as a sequence of processes, which also means that execution of the proposed IP can be considered key to the success or failure of innovation. This indicates that innovation success is a holistic concept and process, integrating all aspects of the process steps (Figure 1), and positively supported by dynamic capabilities as tested. In a sense the truth of the saying that a chain is as weak as its

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weakest link does well seem to apply in this innovation domain. It would seem that the innovation success comes from the integration of the newstream and mainstream steps as in Figure 1. In addition, we conducted an analysis into whether or not a path diagram with the same conditions could be tted to companies with decreasing sales. Because these analyses were targeted at the 31 sample companies with decreasing sales, the sample size was too small to use in a covariance structure analysis. No degree of t was seen, but we will designate this as no more than a reference survey due to the insufcient sample size. Furthermore, we analyzed the degree of t of the same model targeted at all companies including those with increasing and decreasing sales, but the degree of t was signicantly lower than that when only companies with increasing sales were used. This is encouraging in respect of the analysis process which focused on growing rms only. To summarize our ndings, it can be said that there is a high likelihood that companies with increasing sales are executing the proposed IP model. The model proposed as Figure 1 with a holistic and integrated set of process steps, and supported by dynamic capabilities which embody managements strategies for innovation, is supported. From the results obtained from the covariance structure analyses, we found that there is a high likelihood that companies with increasing sales employ the following management policies when executing IP: . Scanning stage Q2-13-01 order processing, Q2-13-02 customer information gathering. . Idea occurrence stage Q2-35-01 encouragement of employee activities. . Strategy formulation stage Q2-03 strategy directionality. . Resource procurement stage Q2-38 technological information management, Q2-39 technological development guides. . Implementation stage Q2-25-02 innovation organization systems. . Value creation stage Q4-04 degree of efforts to achieve innovation by each department (sales department), Q4-04 degree of efforts to achieve innovation by each department (marketing department). Figures 3 and 4 show the strength and detail of the elements and their t to the proposed model which builds on past literature. These items are stressed as being the most important to come from the analysis, and provide a guideline as to which particular practices fall out from the large number that were surveyed, as being the most pervasive in being connected to ultimate value creation. In summary, it was shown that information intelligence, strategic focus, employee effort, integration and systems of information management are critical as success factors in driving dynamic innovation success. Innovation success comes from a highly organized set of these connected activities. Case study of Toyota Toyota is well known and well regarded as an industry leader mainly through its excellence in manufacturing and assembly, best illustrated in the Toyota production system (Liker, 2004). This case study was conducted by examining policy documents from Toyota and interviewing numerous senior Toyota managers in two countries,

Japan and Australia. The purpose is to go beyond what is possible in a survey, namely to observe and report more richly on the practices which enact capabilities and the IP. The case study questions were based on the expected questions in Figure 1. We conducted this case study just prior to Toyota experiencing its quality difculties of 2009/2010, and note that these problems come at the end of a 30 plus year journey of growth and success, much of which is at the expense of major companies which previously led the global industry such as GM, Ford and Chrysler. We propose that the recent quality problems can best be interpreted as a serious blip in Toyotas long record of success, and that with corrective actions, this company is likely to be able to use its dynamic capabilities to recover and continue to dominate its sectors of the industry. For at least two decades now, Toyota has gained market share through its superior value of offerings to customers, which makes its cars very competitive to purchasers in the marketplaces all around the world. In more recent years, Toyota has invested in many forms of innovation as well, from continuous process improvement practised intensively through the company, through to cutting edge new technologies. The foundation of all of this competitiveness driving activity is the Toyota Principles. Since its foundation, Toyota has conducted business activities under the guiding principle of contributing to the development of a prosperous society through the manufacture of automobiles. Toyotas guiding principles reect creativity and innovation (source: www2.toyota. co.jp/en/vision/philosophy/index.html):
1. Honor the language and spirit of the law of every nation and undertake open and fair corporate activities to be a good corporate citizen of the world. 2. Respect the culture and customs of every nation and contribute to economic and social development through corporate activities in the communities. 3. Dedicate ourselves to providing clean and safe products and to enhancing the quality of life everywhere through all our activities. 4. Create and develop advanced technologies and provide outstanding products and services that fulll the needs of customers worldwide. 5. Foster a corporate culture that enhances individual creativity and teamwork value, while honoring mutual trust and respect between labor and management. 6. Pursue growth in harmony with the global community through innovative management. 7. Work with business partners in research and creation to achieve stable, long-term growth and mutual benets, while keeping ourselves open to new partnerships.

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These principles, long established, recognise and guide creativity and innovation, on top of a base of stability and quality that this company is renowned for. They were developed and published in 1990, updated and built upon the original principles from 1935:
1. Always be faithful to your duties, thereby contributing to the Company and to the overall good. 2. Always be studious and creative, striving to stay ahead of the times. 3. Always be practical and avoid frivolousness. 4. Always strive to build a homelike atmosphere at work that is warm and friendly. 5. Always have respect for god, and remember to be grateful at all times.

(source: www2.toyota.co.jp/en/vision/traditions/jan_feb_06.html). Principle 2 of these, clearly signals and guides creative and innovative behaviour, over the past 75 years. Toyotas founder, Sakichi Toyoda delivered key messages about innovation, continuous improvement and sustainability in his founding ideas as.

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Throughout his life Sakichi Toyoda believed in and lived by the three maxims of labor, gratitude and service. Although ordinarily a man of few words, Sakichi would often drill the importance of teamwork into his staff, saying in 1935 that Entrepreneurs, managers and staff must all work together. He managed his employees with directions like, Lets give it a try and, Dont be afraid to make mistakes, which he himself put into practice. Toyota executives stress that the innovation and continuous improvement in Toyota spring from the behaviours and practices that are its focus, at every level. Toyota has core values of continuous improvement and respect. These drive the widespread use of innovative processes and the desire for constant improvement. Toyota has a strong focus on teamwork as one of its core behavioural expectations. There is within all teams, a focus on the process at hand and how to improve it and this focus on process improvement means that there is a diminution of any sense of personal blame for people. Toyotas culture strongly emphasises consensus building, and consultation and inuence leading to agreement of impacted stakeholders, on issue or process change. Hence an idea put forward for improvement or innovation by a person becomes through the process of discussion and consensus building Toyotas idea. Then it is implemented once consensus is achieved as our idea. This is seen as a key strength of Toyotas culture, and it leads to full collective effort once an idea is ready for implementation. This is a particular way of enacting the second major step of our IP model (Figure 1) of idea occurrence, ensuring commitment at very high levels for ideas that leave this second stage and go forward for the next steps (Figure 1) of strategising and resourcing. Toyotas strategising and the Japanese historical culture within it has been in existence for decades as such and has matured. Toyota is driven by the big lift in performance that comes from its effectiveness of continuous improvement and innovation. Toyota is target driven, sets stretch targets and this includes its rate of improvement and innovation such as in quality and cost reduction. Toyota expects great things from its suppliers too, and provides active assistance and encouragement to them, conrming much of what Song and Thieme (2009) found in their study of supplier management. To achieve substantial improvement, Toyota conducts systematic and regular gap analysis, breaking down problems between actual performance in any period and a stretch target into components and analysing carefully where the improvement can come from. Again, the Toyota culture comes clearly into play here: We bring up problems, we are not hiding problems (Toyota manufacturing manager, Australia). There is widespread use within all functions of Toyota of charts and data to illuminate problems and opportunities, and key performance indicators (KPIs) are set. This set of activities relates to the scanning step of Figure 1. Toyota staff systematically scan inside and outside aspects of its environment for problems and opportunities that can be attacked via small and large innovations. This is not a small or token effort but is given great prominence and substantial time and monetary resources are devoted to scanning. The culture of continuous improvement continues to mature in Toyota. For example, Toyota effectively uses the Andon cord system in many of its functions, and it works well, whereas competitors have not yet implemented it as maturely. Andon requires every worker to take responsibility when any defect or out of specication work is seen to occur, by stopping the line, and hence bringing great and immediate

focus on the problem and solving it quickly and effectively. This stops the propagation of errors and reduces the creation of all forms of waste. This is just one of the many aspects of the Toyota system that works well in Toyota that is a mature part of the Toyota worldwide approach. These techniques and the knowledge of how to apply them and benet from them are extended throughout Toyotas supply chain. We have a team who work on all these things throughout our supply chain, with all our suppliers, its win-win (Toyota senior executive, Japan). This corresponds closely to Figure 1 stages of resource procurement and implementation. Toyota have mastered this aspect of inter-rm management, given that they are essentially a designer and assembler, with a great deal of the value adding done by a network of manufacturers which require to be closely integrated and coordinated into the innovation processes. One of the aspects driving innovation process which was highly signicant in the veried model (Figure 4) is the encouragement and commitment of staff. People who join Toyota are given two to three weeks on job development and workplace induction. They are taught the tools and methods, even the philosophies of work process improvement and innovation. Toyota executives know that many small improvements add up to make a big difference, especially when they are locked in and aggregated over time. Toyota practices innovation of all small issues, working to what is often called quality circles. This strongly includes waste reduction in all forms and performance improvement that is related: . safety; . cost; . time; and . materials. Waste reduction is a key driver of innovation in this company that has a strong eye for detail. Toyota engages intensively in using powerful improvement and innovation techniques such as root cause analysis and poka yoke (mistake proof device). Some interesting points of difference between Toyota and many other companies are that: . Toyota makes these tools of quality; continuous improvement and innovation work to great effect, whereas many other companies have done so in ts and starts, and then abandoned them. . Toyota has been improving its ability to systematically improve their use for some 50 years. . Toyota uses these methods in every function, not just in the factory. It works in the ofce, in administrative processes, as much and as well as in the factory. In terms of stafng, Toyota tries hard to recruit from the family and friends of existing staff, where possible. It tries hard to be a valuable and integral part of the local community. Toyota does a series of tests of potential staff, and tries to ensure there will be a t with the Toyota way philosophy, values and methods. It engages in a cultural t assessment. This assists on the creation of the dynamic capabilities that underpin the Toyota way of working. Toyota staff can be rotated through a series of jobs, to benet their perspective on working at Toyota and assist with staff development. People are rotated in recent

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years on a global basis, which opens up opportunities and hence people nd Toyota a very attractive place to work:
People stay, they are generally long serving, and this preserves the culture (Toyota manager, Japan).

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These human resource practices greatly support the companys ability to successfully implement innovations. At any time, in any function or department, staff rotation practices mean that there will be people present who can understand, appreciate and explain to colleagues the implications of innovations and changes on other departments. This encourages cross functional understanding and work processes between mainstream and new stream activities. Bonuses are awarded to staff when targets are achieved, such as a cost reduction target. The value creation outcomes of innovation, which can be as much in the form of cost reductions as new products and services are thus signalled to staff, and the processes of value creation, learning and re-innovation are thus energised in this rm. When it comes to innovation based improvement, a good question is often asked as to why it works in Toyota when others have not been able to stay the course:
We accept and recognise that it works, it delivers. Its proven here. Others dont practise the behaviours (Toyota manager, Japan).

So how does Toyotas leadership drive for successful implementation of these cultural and systematic innovation and improvement behaviours? It started as a leader driven initiative, but has now taken hold throughout the company and occurs through team behaviours: it is just the expected norm. This is a similar leadership factor as was lu and Ilsev (2009): found by Gumusluog
It is a way of thinking, it takes a lot of practice, and it takes years to mature. A key to the behaviour is genchi genbutsu (go to the source), we practice humility as a key point. Innovation is expected (Toyota plant manager, Australia).

Some key messages from Toyota managers are that despite their accomplishments, complacency is guarded against. They are in a global competition that never goes away. Toyota must be competitive on cost, and this means with other car makers and other Toyota plants around the world. Another key capability is exibility; it supports and goes hand in hand with innovation and continuous improvement:
We encourage teamwork, and it works well in our quality circles. Every year we have a quality circles convention, executives and their families come to it, and people volunteer to participate. As to rewards for being involved, they are of job satisfaction, they are psychological not monetary most of the time (Toyota executive, Japan).

The Toyota approach to innovation is that 80 percent of what is accomplished is small step improvement of all processes, along with a few big things. The company is very systematic about decisions and systems, especially involving managing innovation (Figure 1) in a robust and systematic manner. Consensus is key to those decisions being implemented effectively. While there is some recycling of steps shown in Figure 1, this is very minor in Toyota. The meticulous planning and consensual decision making leads to a process that is slower than in some other companies and industries, but tends to proceed straight and forward because of the rigour which is implemented in each step of Figure 1.

As to the model shown in Figures 1 and 4 that was veried in the survey part of our research, it is indeed directly and richly illustrated in Toyota. Toyota engages in scanning the environment in a very systematic manner, considering new consumer trends and technologies in particular, but also social and economic changes and agendas. This is done on a global basis. The next step in Toyotas dynamic innovation capability (Figure 1) is its idea generation. This takes two major forms, being of process such as manufacturing process improvements and product design and features. Examples of judgement assist and driving assist have been brought through product development to commercial reality in recent years, in which Toyota marries its dynamic innovation capability to its lean capability and brings these features to its products in the mass market at a point where most others in the industry are doing similar only in more expensive vehicles. The systematic approach then takes the best of ideas and consolidates them deliberately into future strategy making them Toyota ideas, through much debate and consensus building. Toyotas virtuous circle meaning its protable mainstream that funds its innovations then cuts into place, meaning that it is able to allocate budget to its chosen projects once the strategic commitment is in place. In implementation of innovation projects, structure and discipline abound, and stretching goals are set as hard targets. Since marketing and sales functions are involved from inception, there is a quite seamless transfer into sales and value creation (Figure 4). Toyota showed strength in its practices in essentially all of the practices shown in Figure 3. This high degree of systematization and robustness of innovation process in Toyota is applied to process innovations as much as its new products. The Hybrid Synergy Drive was a ne example of this IP process. A large amount of scanning was conducted before ideation became mature, and indeed there was some cycling between these stages. Once the strategy was formulated for the Hybrid Synergy Drive, it was given extremely strong focus and prominence in the company, and it was fully resourced, with explicit support and signoff from the very top levels of the company. Implementation involved using the resources including partnering with outside technology sources (e.g. Panasonic for batteries), as well as internal sources of science and engineering/technologies (Figure 4). The innovation systems applied by Toyota were intensive and systematic. As the Prius car approached launch stages, sales and marketing staff and dealers too were fully informed and engaged to commit to this product, which given its radical nature, required much effort and persuasion. However, just as for internal innovations, through following the IP model, Toyota was able to bring a very radical set of ideas and technologies to achieve commercialisation and value creation success. The Hybrid Synergy Drive was a ne recent example of breakthrough technology required in a short time, with a signicant budget allocation. Concluding implications for managers For managers wishing to drive forward the innovativeness and hence the business success of their companies, this study can provide guidance. At the various innovation process stages of Figure 1, managers can try to ensure that they are effectively making use of practices that were demonstrated in this study to be signicantly associated with success. Examples are of: . gathering information from customers at the scanning stage; . encouraging employees creativity at the idea occurrence stage;

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. . . .

ensuring strategic focus and coherence at the strategy formulation stage; taking care with technology decisions at the resource procurement stage; driving a systematic approach at the innovation implementation stage; and making sure that marketing and sales efforts are focused on innovations at the value creation stage.

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While we cannot argue that these practices will guarantee success, they are clearly associated with higher probabilities of it. Conclusions and further research directions In this study our objective was to propose an IP model that allows modern companies and organizations to respond to dramatically changing market environments. To achieve this objective we reconsidered the IP in the creation stage using the approach of existing theoretical studies about IPs and DCs. Furthermore, we conducted empirical tests using the data from the results of the questionnaire surveys targeted at Japanese companies. Using this method, we found that there was a high likelihood that the IP of Japanese companies thought to have had success with innovation matched the proposed model. We were also able to clarify the management policies used in each individual stage when executing the IP. Further, we demonstrated the nature of systematic innovation capability and its relationship with business success (value creation) in this large set of Japanese companies and illustrated it in Toyota, showing how innovation process elements relate to each other and to organizational outcomes. Both the statistical validation of Figure 1 model and the Toyota case study show the relatively high degree of structure and organizational discipline and process denition that exist in successful (value creating) innovators. These details have not previously been determined and validated in eld studies, especially in the Japanese business context, nor have they been illustrated as applications of dynamic capabilities in this innovation process context Teece (2007), Teece et al. (1997) and Tidd et al. (2001). Dynamic capabilities species characteristics yet further research is warranted following the present study to clarify the process of precisely how DC manifests in contexts such as innovation. We have found a rst level of process type that should be subjected to further renement, which will evolve both theory and practice. This model needs to be further tested, and rened in a number of ways in future studies. First, it should be tested in countries other than Japan to check its generalisability beyond the Japanese culture and way of working. Second, while it is likely that sales growth is a reasonable measure for innovation success, and other quantitative measures are even more problematic, the model should be tested further on known innovative companies. This can be done using methods such as further case studies. These studies should be ultimately extended beyond the manufacturing sector. Finally we acknowledge that innovation is not a linear forward-stepping process only and that there may be some cycling back in this set of process steps. This can be tested in future more rened versions of our primary model. This limitation of our study does not detract from the primacy of our ndings, but merely suggests future renements. It may be that in future replications, cycling steps are indeed found to be quite or completely insignicant compared to the primary/forward steps. The rst step was to conceptually propose and then test our comprehensive model, and to illustrate it via

a case study of one of the worlds most consistently successful companies, which is Japanese. Renement should follow in studies of further case study documentations. Ultimately, both the model as built from the DC literature and its validation via survey and case study show that no single factor leads to innovation success, and that in Japan, innovation success comes from a holistic set of practices, which connect and inform each other.
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Trott, P. (2008), Innovation Management and New Product Development, Prentice-Hall, Englewood Cliffs, NJ. Utterback, J.M. (1994), Mastering the Dynamics of Innovation: How Companies Can Seize Opportunities in the Face of Technological Change, Harvard Business School Press, Boston, MA. Utterback, J.M. and Abernathy, W.J. (1975), A dynamic model of process and product innovation, Omega, Vol. 3 No. 6, pp. 639-56. von Hippel, E. (1988), The Sources of Innovation, Oxford University Press, New York, NY. Zollo, M. and Winter, C. (2002), Deliberate learning and evolution of dynamic capabilities, Organizational Science, Vol. 13 No. 3, pp. 339-51. Further reading Herstatt, C., Stockstrom, C., Tschirky, H. and Nagahira, A. (2006), Management of Technology and Innovation in Japan, Springer, Berlin. Porter, M.E. (1991), Toward a dynamic theory of strategy, Strategic Management Journal, Vol. 12, winter special issue, pp. 95-117. Porter, M.E. (2003), What is strategy?, in Burgelman, R.A., Christensen, C.M. and Wheelwright, S.C. (Eds), Strategic Management of Technology and Innovation, 4th ed., McGraw-Hill, New York, NY. Corresponding author Danny Samson can be contacted at: d.samson@unimelb.edu.au

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