How social media can be used to innovate?

How social media can be used to innovate? Daniel Palacios-Marqués *, Clara Gieure, Olga Sastre Universitat Politècnica de Valencia, Department of Business Administration Camino de Vera, s/n, Valencia, 46022, Spain

KEYWORDS: Social media; Social networks; Innovation; Knowledge management; Web 2.0

Abstract Social media tools are being adopted by a large number of companies that seek to deploy them for the benefit of their business. The fast development of these tools is due to they are user-friendly, inexpensive, scalable internet-and mobile-based technologies allowing firms to engage in timely and direct end-consumer contact, with higher levels of efficiency that cannot be achieved with traditional communication tools. In this paper we explain how social media tools can be used to innovate in the organizations, launching new products or improving processes. Firms have to design new products according to customer requirements in order to satisfy customer preferences. We have developed an empirical study in two knowledgeintensive industries (biotechnology and telecommunications). In these firms innovation and social media work together and there are tools that allow customers to introduce contents and express their necessities.

1. Social media: Trend to necessity. Social media is a key concept for many business owners today. Firms try to identify ways in which they can make profitable use of applications such as Wikipedia, YouTube, Facebook, Second Life, and Twitter (Kaplan & Haenlein, 2010). Recent data from Forrester Research (2008) showed that 75% of Internet surfers used social media in the second quarter of 2008 by joining social networks, reading blogs, or contributing reviews to shopping sites which represents a significant rise from 56% in 2007.

Yet, the growth is not limited to teenagers; members of Generation X, now

35-44 years old, are increasingly joining the virtual communities as spectators, and critics. That is why social media represents a revolutionary new trend that should be of interest to firms operating in online spaces – or any space, for that matter (Kaplan & Haenlein, 2010). Nowadays business owners have begun to realize that the adoption and integration of social networks has become a competitive necessity, however, there is still much to learn about how best to ensure the greatest positive effect on the firm performance. The ability to obtain information about markets and customers helps to ensure that firms are more attuned to changes in the environment and can

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result in a competitive advantage over slower, ill-informed competitors (Barney et al., 2001). In competitive and turbulent environments firms struggle to maintain prosperity and so creativity and innovation become increasingly important (DeVanna & Tichy, 1990; Van Gundy, 1987). Social Media allow firms to have a timely and direct contact with their customers at a lower cost and higher levels of efficiency than can be achieved with traditional communication tools (Kaplan & Haenlein, 2010). In the line of the current research that tries to understand how firm resources and capabilities are combined to generate competitive advantages, the study of how social networks have an effect in the performance of firms continues to demand considerable attention. Therefore, Web 2.0 the platform for the evolution of Social Media, encourages underlying innovations to emerge, communicate, spread, and then to benefit themselves as well as entrepreneurial suppliers. This makes social media not only relevant for large multinational firms, but also for small and medium sized companies, and even nonprofit and governmental agencies (Kaplan & Haenlein, 2010). To illustrate this statement, consider the following examples: The global telecommunication firm, Orange, present in 32 countries around the world aims to bring the digital universe to the largest number of people with their phone, internet and tablet services. For this purpose, its customers use social media to connect with brand ambassadors, discover deals, new products as well as receive customer service and tech support. In order to support constant customer service requests and connect with customers,

D. Palacios, C. Gieure, O. Sastre

Orange uses different social media tools actively. According to David Anglister, Orange Corporate & Digital Communications Director, Social Networks help the firm grow because they bring something really new “–it is almost a one-to-one interaction with our customers. We can follow them better, accompany them better, and so meet their expectations better” (Milbrath, 2013). Customer’s relationship with the brand can be strengthened by monitoring feedback and comments on social media allowing brand advocates to respond with their personal accounts. Another example is Dell Computers, a firm which generated $3 million in revenue directly through Twitter from 2007 to 2009 when it started posting coupons and new products on the microblogging site. Also as part of their social media program, employees in Dell Outlet posted the inventory of returned and refurbished products on Twitter and followers were immediately informed about the new stock (Cain, 2009). Dell has about 200 employees who talk to customers on Dell’s Twitter accounts, responding to complaints or asking for feedback. This is thanks to Dell’s training and certification program in social media available for employees. This program trains team members to use the different social media tools in their jobs, customer care and technical support. Among the biotech sector, most firms are small and medium enterprises with less than 100 employees. Yet, many of the ﬁrms are very well-funded start-ups that have enjoyed remarkable investments without making a single sales dollar – for example, the blood substitute start-up BioPure16 had invested $200m in its new product without having sold a single unit (McCarthy et al., 2007).

The impact of Social Media on firm performance

To help firms improve their performance we analyze in this research paper the role that social media plays in moderating the relationship between Web 2.0 and innovation for firms to create competitive advantages. The purpose of this study is to identify whether firms that correctly use social media tools perform significantly better than firms that do not. For that purpose we develop a model that relates Web 2.0, innovation distinctive competences and its potential to create value in the firm. Social media is a relatively new phenomenon that appeared a few years ago due to technological progress. Since its first appearance, it has grown so fast and attained such success that it is becoming a widely studied phenomenon on academies. The Internet and social networks have evolved to become part of almost every facet of our personal and business lives on a daily basis (Ubeda, et al., 2013). The entire world has become accessible in a way that differentiates online social networks from traditional media, which offered a one-way experience instead of the two-way interactive one we find today. The impact of social media (often referred to as Web 2.0) on consumer perceptions, attitudes and behavior is substantial, and social media is becoming a major source of costumer empowerment and influence (Urban, 2003). For example, social media websites offer an open forum that gives consumers their own voices, as well as access to product information helping on their purchase decisions (Kozinets et al., 2010). Today’s consumers have gone a step forward because of these dramatic developments that are constantly occurring. As Garretson (2008, 12) so aptly observed, ‘Consumers increasingly use digital media

not just to research products and services, but to engage the companies they buy from, as well as other consumer who may have valuable insights’. Social media sites are applications that allow users to create their own personal profiles and invite other users to have access to their profiles, as well as send e-mails and instant messages between each other. These personal profiles can include any type of information, including photos, videos, audio files, and blogs (Kaplan & Haenlein, 2010). Social media, if deployed well, has the potential to positively affect business outcomes such as sales growth, brand image, and company reputation (Fisher & Reuber, 2011). For instance, Verizon Communications, one of the largest telecom companies in the world increased its competitive advantage with social media. The firm developed its social-media strategy and took the top spot on Twitter in North America in 2012 ranking 3rd worldwide. 2. Innovation competences: conceptualization and types.

Innovation in firms refers to activities that are intended to gain an (at least temporary) absolute competitive advantage over competitors by either achieving a monopoly position in the product market (i.e. offering products that are clearly distinguished from other products in that market by quality characteristics) or by achieving marginal costs of production for a certain product that are clearly below those of competitors and thus result in a price advantage (Rammer, 2006). The ability of firms to introduce new products and new processes may be viewed as a main determinant of a country’s technological performance (Schmoch et al., 2006).

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It is the novel combination of existing ideas and new information and know-how that promotes further innovation (Díaz, et al., 2002; Ruef, 2002; Schumpeter, 1934). Innovation is particularly important for small industries. This is exposed by Sandee (1995) who states that innovation is an important strategy for small industries in strengthening their competitive position. We argue that innovation competences refer to knowledge, skills and attitudes needed for the innovation activities in the firm to be successful. Continuous improvement competences refer to skills and attitudes to improve each day in small steps. These competences lead to small changes with regard to the organization’s practices and strengthen its competences and capabilities. An example of this would be the employees of Apple who had to undertake training to improve their skills when the firm introduced in the market its first Iphone. Schumpeterian competences can be defined as the product and technology commercialization that have a strong impact on the market offering customers new benefits relative to the previous product generation in the category. They lead to discontinuous changes in the activities developed in an organization by developing new technological or organizational abilities (Palacios, et al., 2009). The impact of innovation competences in the firm will be greater when Schumpeterian competences and continuous improvement competences have a powerful feedback flow (Liao et al., 2007; Tsai, 2001; Chandy & Tellis, 1998; Gopalakrishnan & Damanpour, 1997; Damanpour 1996). In this sense, Chandy & Tellis (1998) state that when a radical innovation is introduced in a firm it results in other incremental innovations.


3. Are firms with a presence in the Social Media more likely to be innovative? The development of firms depends on their innovation activities that are closely related to information or knowledge. The new knowledge or information can be obtained from various sources such as the mass media, customers, or social networks. This indicates that in a community or cluster with a good social capital, information will be shared evenly, thus having more and better chances to innovate. Shaw (1998) demonstrates that social networks have a positive effect upon the innovative behavior of small firms. Social networks capture tacit knowledge of the customers and allow the introduction in the market of products that meet customer requirements. It also reveals that through the innovative use of social networks, small, professional business service firms are able to expand their customer and resource base while minimizing the costs involved. Consider the following example: In 2009, The Marsh Cafe in San Francisco showed that they were ahead of the social media curve. The cafe published a poster on the window promoting 'Foursquare mayor drinks for free!' and received great coverage for their new marketing campaign, including on mainstream media outlets, such as CNN. Since starting the offer, The Marsh cafe observed a surge in demand and had to hire extra staff and extend opening hours. This is also argued by Phillips & Kirchhoft (1989) who state that small firms that engage in innovation have the greatest potential for growth. The information, support, bartering-exchanges and normative expressions contained in social networks are


shown to have an impact upon the innovative behaviors of firms (Shaw, 1998). Demirkan & Demirkan (2011) also contribute to the literature on social networks and firm innovation by opening the black box of network relationships and empirically showing that partner quality, knowledge heterogeneity, and relational strength are among the important determinants of network characteristics affecting the innovativeness of firms in the biotechnology industry. Although the impact of social media can be observed on different areas of a firm’s performance, we focus our attention on its financial effect, understanding that this one is the main objective of any firm. The claim of a direct association between the use of social media tools by a firm and its innovative capacity is a widely discussed issue in the literature. In the light of the growing attention that innovation practices are receiving nowadays, it is worthy to ask the next question: are firms with a presence in the social media likely to be more innovative? The Internet undoubtedly plays as a platform for customer engagement in innovation (Sawhney et al., 2005), and increasingly covers wider demographics for social networking; such trends could be seen in Web 2.0 sites like Facebook, Flickr, and Youtube. Web 2.0 creates a context that facilitate firms the way to find innovative users and exchange information to help one another. In summary, we propose that the use of social media networks by firms creates a context in which innovative users can launch and disseminate innovative ideas, and thus these firms are in an advantage position to adopt new practices.

We propose that the innovative capacity of a firm is highly related with the position and connection it has with social networks. The ability of firms to innovate is linked with its capacity to recognize and exploit new information, and social networks give them the opportunity to increase the quantity and quality of knowledge that a firm is exposed to. The widespread deployment of the Internet has enhanced greatly the ability of firms to engage with customer for aggressively utilizing the creativity of diverse users from all over the world (Dahan & Hauser, 2002). The function of social networking in the context of Web 2.0 escalates the possibility and broadens the innovation space (Turban et al, 2009). Thus, we find three positive relationships related to Web 2.0: first, there is a direct and positive relationship between Web 2.0 technologies and innovation distinctive competences; second, we find a direct and positive relationship between Web 2.0 technologies and Schumpeterian distinctive competences; and third, we also find a direct and positive relationship between Web 2.0 technologies and Continuous improvement competences. It is necessary to consider the relationship between the two dimensions of innovation competences, since it makes the theoretical model more valuable. Accordingly, we find a direct and positive relationship between Continuous improvement competences and Schumpeterian distinctive competences. On the other hand, there is also a direct and positive relationship between Schumpeterian distinctive competences and Continuous improvement competences. Following Schumpeter (1943), we can distinguish between two means for creating profits: profiting from market power in

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static market structures characterized by imperfect competition, and profiting from innovation through creating new sources of value added associated with some distinctive technological and organizational path for learning (Cantwell & Wang, 2002). As suggested by Schumpeter, innovation brings in the most sustainable long term corporate profits by facilitating an ongoing stream of long-term profit creation through the continued expansion in the scope of the value creating activities of the firm. In this sense, it is more appropriate to consider innovation as a problem-solving search that creates and continually renews technological or social capability within firms than a search for positions of market power as such. In this event, the major issue in the ability of firms to profit from innovation (or from positions of leadership in innovation) is not so much how well firms exploit some specific new technology when considered in isolation, but is rather how smooth is a firm’s internal creative process (although it often draws upon cooperation with other firms or organizations) in adapting and extending its knowledge base, or more especially, its technological capabilities. Taking into account these relationships we find a direct and positive relationship between Schumpeterian distinctive competences and firm performance. Firms will have a better absorptive capacity to taking advantage of the knowledge being created by others when they have a higher degree of technological complementarity between their profiles of specialization and the external innovation. Current interdisciplinary research suggests that to innovate successfully firms need to have key competencies relating to customers and technology (Belderbos et al.,


2004; Danneels, 2002; Griffin & Hauser, 1992). In addition, it argues that a successful integration of competencies allows firms to outperform their competitors because such interaction strengthens firm efficiency (Walker & Ruekert, 1987) and inhibits imitation by rivals (Reed & DeFillippi, 1990). Previous research on complementarities has focused on establishing synergetic effects between customers and technological firm capabilities. The greatest innovative profits may rather occur to firms whose social capabilities are best adapted to absorb, and to further develop and entrepreneurially to apply, the new lines of innovation that have emerged from the fields of greatest technological opportunity to novel contexts, and in new combinations with other branches of (and perhaps with more traditional fields of) technology. In accordance with these assertions, we finally can observe a direct and positive relationship between Continuous improvement competences and firm performance. 3. An overview of two knowledgeintensive industries

This study focuses on two knowledgeintensive industries, since we consider that information processes may be a potentially stronger source of competitive advantage in this type of sectors. The biotechnology and telecommunications industries were chosen for the research because they are dynamic industries characterized by technological discontinuity, where innovation (usually radical) is a basic goal and the R&D effort is very high.


Furthermore, these industries are widely acknowledged as science-driven industries. Another interesting feature of the new firms is almost always pure cases of entrepreneurship, in the sense that they are new technology based firms. Firms are built upon the production of a new product or a new technology. They usually do not use generic technologies already widely developed elsewhere. Taking into account that one of the most important aims of the biotechnology industry is to improve health and wellness for patients worldwide, then social media is a great platform to facilitate and encourage open communication with a focus on consumer-driven innovation. Social media has become an effective tool for telecommunication firms to contact with their customers, expanding existing marketing channels. Consequently, two Spanish industries have been selected as the population for the study: biotechnology and telecommunications. The fieldwork was carried out in 2012 through interviews to general managers based on a structured questionnaire. The general manager was chosen as the most suitable respondent taking into account two criteria: (a) he or she has a holistic view and it is the person with a wider knowledge to the extent to which ICT have been introduced into the firm, and of the organisational processes to which it has led; (b) the general manager has the appropriate knowledge of the issues under study. A total of 222 valid questionnaires were received, 120 from the telecommunications industry and 102 from the biotechnology industry. Through this sample we obtained a

margin of error for the whole population of +5.7% for a confidence level of 95%, which means a low margin of error. As refers to the measurement of the theoretical constructs, to measure Web 2.0 we have used the scale tested by Carmichael et al. (2011). A five-point Likert scale was used to measure these items, where 1 = never, 3 = sometimes and 5 = always. This scale has 8 items:

I1: Blogs are used to issue firm releases or to spread ideas. I2: The firm uses collaborative software to communicate with the rest of employees. I3: The firm uses an intranet for knowledge management. I4: The site of the firm allows users to introduce contents and express their necessities. I5: Employees have information about suggestions formulated by customers. I6: The site of the firm has, apart from text, multimedia files to enable interaction with the user. I7: The firm develops practices so that employees share knowledge. I8: Employees store the know-how of the processes in an electronic way. See Figure variables

1.

Relationships

between

the

As refers to the measurement scale of Innovation distinctive competences, we have used the previous work developed by Palacios et al. (2006) as our base. This scale is based on the self-classification by managers of the firm in relation to its competitors. Respondents evaluate how they perceive the organization’s stock of distinctive competences in each specific area in comparison with the competition. A

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Likert-type scale was used, with a range of five points from 1 = “much worse” to 5 = “much better”. To measure Schumpeterian competences 84 items were used and 73 items for measuring Continuous improvement competences. Both scales meet the sociometric conditions (dimensionality, reliability and validity) required for measurement scales in social sciences. All the items that make up the Innovation distinctive competences scale are described in the article of Palacios et al. (2006). To measure firm performance we used the scale from (Nakata et al., 2008). The relationships between all the variables are shown in Figure 1. Results confirm theoretical reasoning developed in Section 3. There is a direct and positive relationship between web 2.0 techniques and innovation competences. The effect of web 2.0 is higher in continuous improvement distinctive competences (0.845) than in Schumpeterian distinctive competences (0.786). Both types of innovation competences have a positive effect on firm performance. Schumpeterian distinctive competences have a higher impact (0.895) on firm performance than continuous improvement distinctive competences (0.814). Results show that the effect of social media is not direct on firm performance, so managers that introduce social media programs create intangibles resources that allow them to innovate and it has a positive impact on firm performance.

4. Lessons to be learned

Social media offers organizations the opportunity to join a conversation with millions of customers around the globe every day, allowing them to reach out and


understand consumers as never before, knowing who is talking about their brand and their products or services as well as helping them monitor perceptions and identifying positive and negative comments. Results show that the introduction of social media tools has a relevant and direct effect on the creation of innovation distinctive competences which results in an ongoing improvement of their performance. Thus, we have exposed that innovation distinctive competences are a mediating variable between Web 2.0 technologies and firm performance. For many firms the use of social media tools comes as a big challenge since they have to learn how to use Web 2.0 technologies in order to create competitive advantage. However, our main point is that this step is crucial for the future of a firm, its development and its outcomes. There are tangible benefits of social media in the front end of innovation, such as faster production adoption, faster time to market, lower product development cost or lower product cost. If employees improve innovation competences, it will create a future where problem solving will crucially depend on the ability to adequately raise the problem, following the path of more pragmatic already existent initiatives, such as crowdsourcing. Thus, a useful starting point for practitioners should emphasize on the creation and renovation of innovation competences, since they have a strong impact on firm performance. Managers should design the site of the firm in order to allow customers introduce contents and express their necessities. Firms have to design new products according to customer requirements instead of designing new products without taking into account clients’


preferences. Web 2.0 technologies are a good platform where customers can express their necessities. Web 2.0 sites should include as many multimedia tools as possible to interact with the user. This is useful to know the quality of the services carried out by the firm.

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The impact of Social Media on firm performance Figure 1. Relationships between the variables

SCHUMPETERIAN DISTINCTIVE COMPETENCES

0.786 WEB 2.0 TECHNI QUES

0.845

0.895

FIRM PERFORM ANCE

0.845 0.513

CONTINUOUS IMPROVEMENT DISTINCTIVE COMPETENCES

0.814