Switzerland’s economy is facing some tough challenges: technologies are developing rapidly, processes are being amalgamated both inside and outside production facilities, and business units are becoming increasingly interconnected. This means businesses need to constantly adapt. The issue has been taken up by researchers from the Chair of Strategic Management and Innovation and from the KOF Swiss Economic Institute, both at ETH Zurich.
The KOF Swiss Economic Institute has been conducting regular innovation surveys of around 6,000 Swiss businesses since the 1990s. The primary aim of the study is to establish how companies utilise access to external knowledge and modern information and communication technologies (ICT) - as these factors aid process innovation with a view to lowering production costs. In their with ETH News, Georg von Krogh, Chair of Strategic Management and Innovation and author of the study, and co-author Martin Wörter, Head of the Research Division Innovation Economics at the KOF, explain how good Swiss companies actually are at process innovation.
Mr von Krogh and Mr Wörter, how good are Swiss companies at introducing new processes?
Georg von Krogh: Swiss businesses perform very well: around half of the companies we examined have introduced new processes in the last two years, helping them to achieve an average cost saving of 4.8 percent.
"By optimising their processes, companies are strengthening Switzerland’s position as an industrial centre." Georg Von Krogh
Is that a good result?
Martin Wörter: Yes, that’s a good result. For one thing, Swiss industry finds itself in a challenging economic situation due to the relatively strong appreciation of the Swiss franc. Moreover, there are many new technologies available for businesses to use. One way to respond to this is with process innovations, which can help to reduce costs so that companies can remain competitive on the international stage.
Von Krogh: I also see process innovations as a countertrend to the offshoring of jobs. By optimising their processes, companies are strengthening Switzerland’s position as an industrial centre.
Did you expect this result?
Von Krogh: Swiss industry fosters a culture of optimisation and improvement, which means that Switzerland can also be expected to perform strongly in terms of process innovation. In discussions with managerial staff, it often emerges that they are open to new technologies and are particularly interested the topic of digitalisation.
One theme of your study is the value of modern information and communication technologies. To what extent are these technologies an important and even necessary part of process innovation?
Wörter: ICT can have a variety of uses in business. We looked at two of them: data access systems and networking systems. The former can be used to provide quantitative support for process flows and to gather information, while networks can streamline communication within the company. Both types of system boost the impact of external knowledge sources on process innovation.
Von Krogh: By making greater use of networking technologies, companies can speed up the dissemination of knowledge within the business. As a consequence, businesses absorb new knowledge more rapidly, and it is precisely this capacity for absorption that is essential for process innovation. In short: the integration of external knowledge is key to lowering production costs.
What exactly do you mean by external knowledge?
Von Krogh: We draw a distinction between implicit and explicit knowledge. Routines used for manufacturing processes are based on implicit knowledge and are therefore hard to grasp. It requires a great deal of effort to be able to understand and use these knowledge sources.
Wörter: The knowledge built into processes is not as obvious as that built into a product. With a product, you can keep track of where and how it was manufactured, but unpicking processes requires intensive with the knowledge source. The more a business taps into sources of this kind, the greater the resulting effect.
"Sharing knowledge is an efficient way to bring about innovation." Martin Wörter
But how can companies create access to this knowledge if it is implicit?
Von Krogh: One option is to use ‘open innovation’ platforms, over which companies can connect with people with specialist skills who can solve urgent problems facing businesses. They can also build up long-term research relationships, as many businesses do with ETH Zurich, for example. This results in efficient technology transfer. Or they can seek out knowledge in subsections of their own supply chain and incorporate customers into the process.
In your study’s conclusion, you advise businesses to use an open innovation process in order to learn from other companies’ technologies and procedures. Does this not go against the overarching principle of competition within the economy?
Wörter: Newly created knowledge is a semi-public good, and the accumulation of knowledge makes it more likely that new things will be created. Sharing knowledge is therefore an efficient way to bring about innovation.
Are there any factors that hinder process innovation?
Wörter: In Switzerland, some of the most significant obstacles to innovation are the costs and risks associated with it, as well as the fact that companies lack funds of their own and payback periods are long.
Von Krogh: In our study on open innovation, we also showed that limited access to international markets can act as an obstacle to innovation. Other studies drew our attention to the ‘not invented here’ syndrome: we don’t like to implement things that were invented by someone else. This attitude can block open innovation.
You recommend relying increasingly on process innovations to cut production costs. Do businesses now need to take a more exploitative approach in this area to remain commercially viable?
Wörter: No, that is not what we mean. I can increase productivity by selling more or by producing existing products more cheaply - or ideally both. However, when a technology has reached a certain level of maturity, it becomes increasingly difficult to optimise it further, as the costs of any further improvement to the product rise sharply. It is therefore advisable to focus on process optimisation instead: when a new product is subsequently launched, the price will likely be similar to that of the previous model; however, thanks to the optimised processes, the company can produce it more cheaply and thus increase its productivity.
Is there also a need for action at Swiss companies?
Von Krogh: The next big challenge is digitalisation. Process innovations are possible when businesses improve existing process technologies or begin to use digital technologies. Many companies are already turning their attention to digitalisation, and those who haven’t should do so now, as it is set to fundamentally change the Swiss economy. The good thing about Switzerland is that policymakers are aware of this and are taking a very pragmatic approach by supporting industry.
Trantopoulos, K., von Krogh, G., Wallin, M., & Wörter, M. (forthcoming): External Knowledge and Information Technology: Implications for Process Innovation Performance. MIS Quarterly.