Innovation in the UK Retail Sector - Nesta

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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). Page 20
Innovation in the UK Retail Sector “In the supply chain, the retailer has the final responsibility towards the customers and thus for the whole chain” (Chairman of the Board) Figure 3.3. Two-way innovation diffusion Source: Hristov, 2007 Retailers as intermediary innovators Supply ‐Generate ‐Adopt Demand Diffusion ‐Adapt ‐Augment ‐Diffuse Diffusion Efficiency Differentiation ii. The low appropriability of the retail environment. 3.15 Secondly, the retail environment is one in which innovations can be easily copied. Teece (1986) defines what he calls ‘regimes of appropriability’ - environmental factors external to innovating firms which affect an innovator’s ability to extract profits from their innovation. Such regimes can comprise the availability of legal instruments for protecting innovations like patents or copyrights, alongside technological conditions including production cycles or codified and tacit knowledge. 3.16 But operating in conditions of ‘low appropriability’ causes knowledge spillovers between firms resulting in the rapid erosion of any first mover advantage. Sir Terry Leahy, Tesco CEO, has observed that the average dwell-time of an innovation in grocery retailing is “around six weeks”. In retailing there are low barriers to protecting intellectual property and thus high risk of not being able to extract profit from innovation. “It is very difficult for retailers to make continuous big changes because they're constantly sort of measuring and matching each other” (Board Director). “In retailing generally you have those who create something new and those that copy. For example Home Depot has been copied everywhere by different retailers” (Marketing Director). 3.17 If retail innovations can rapidly be copied, then continuous incremental change coupled with building ‘airtight’ market matching capabilities through the rapid scaling up of innovation to the point of profitability, or simply through sheer economies of scale are the kinds of defence mechanisms used by retailers to protect their innovations. For instance Tesco uses the strap line “start small, scale up, think big”. Page 21
Page 1 and 2: Report for NESTA December 2007 Inno
Page 3 and 4: Contents Innovation in the UK Retai
Page 5 and 6: Innovation in the UK Retail Sector
Page 9 and 10: 2. The nature and contribution of r
Page 19: Innovation in the UK Retail Sector
Page 23 and 24: v. Retailers’ reverse innovation
Page 41 and 42: Vignette 5.3: Currys customer recyc
Page 43 and 44: 6. What are the barriers to retail
Page 47 and 48: 7. What are the measures of retail
Page 49 and 50: . Types of Measures Innovation in t
Page 65 and 66: . Promoting innovation in sustainab
Page 69 and 70: Conclusion/Next Steps: Innovation i
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Innovation in the UK Retail Sector
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Recommendation 4: Innovation in the
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Innovation in the UK Retail Sector
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Appendix 1 Research Methodology 350
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