Innovation in the UK Retail Sector - Nesta

Innovation in the UK Retail Sector
management while manufacturers tend to develop improvements to the equipment used
to deliver these new approaches.
3.11 The ‘retail type’ of innovation appears more difficult to record than the manufacturer
one, since manufacturing firms predominantly innovate in a ‘staircase’ mode characterised
by identifiable step-wise jumps in product development, while large part of retail
innovations tends to occur in a ‘continuous mode’ of organic change. This highlights the
broader problem of under-recording services innovations in cases where innovation
activities cannot be clearly described as definitive products or outcomes, for instance
pertaining to process or organisational innovations which are hard to identify, define and
grade. According to Tether (2005) the CIS, which was initially designed around the
manufacturing continues to be more suited to record ‘staircase’ innovations and may be
still significantly under-recording ‘continuous’ innovations more common service sectors
such as retailing.
b. Selected characteristics of retail innovation
3.12 The classic function of a retailer is as an intermediary, which involves the creation of
assortment, break of bulk and the facilitation of value creation for consumers at
convenient times and in convenient places, alongside the provision of product
information and appropriate pricing architectures. In this context, our research suggests
that innovation in retail organizations has five distinctive features: (1) Retailers’ role as
innovation hubs, facilitating ‘two-way’ innovation diffusion, (2) innovation in a retail
environment of low appropriability, (3) predominance of non-technological innovation,
(4) hybrid characteristics of retail innovation, (5) reverse innovation cycle (Hristov 2007).
i. Retailers as innovation hubs
3.13 First, retailers are increasingly innovating by acting as intermediaries well beyond their
core retail propositions. Firms such as Tesco, Wal-Mart, Carrefour, Best Buy, El Corte
Inglés, Nordstrom, Sainsbury’s & Metro are rapidly diversifying through tie-ups with
suppliers into financial services, telecoms, utilities, travel, amongst others. In many of
these cases they innovate by intermediating in the value chain and thus increase the
efficiency of market exchange. They do this through what we can call a two-way diffusion
process (see Figure 3.3) comprising supply diffusion - which conventionally aggregates,
augments and defuses new products, services and technologies from suppliers
downstream to consumers - and demand diffusion - a relatively new feature in which the
retailer deciphers existing or impending market/consumer needs and communicates them
upstream, thus initiating and often co-creating innovations with suppliers. (See Vignette
3.1 – Best Buy, 3.2 – The Local Epicurean/Budgens, 3.3 – Marks and Spencer)
3.14 This ‘innovation broadening’ role of modern retailers suggests that many of them are in
the position to act as innovation hubs within their supply chains. For instance Hughes
(2007) highlights the importance of the diffusion and use of ICT as a general purpose
technology beyond the ICT and other R&D intensive high-tech producing sectors. This
may help explain why so-called ‘unexpected’ user sectors with negligible conventional
R&D spend such as retailing have been dominating movements in US aggregate
productivity growth for the past ten years. The DIUS/BERR 2007 Scorecard exercise
points towards similar examples of consumed R&D that is subsequently diffused by
industries such as retailing and financial services (DIUS/BERR, 2007).
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