The Different Types of Business Innovations

The dictionary defines “Innovation” as: “the introduction of something new”…a fairly broad and useless definition. Let’s see if we can do better. “Innovation is something new that solves a problem in the marketplace for which there is demand, and in the process of solving that problem, creates value for the solution provider.” A far more meaningful working definition.

Now let’s look a little deeper by breaking it down and pulling out the important components.

Innovation is something new that solves a problem in the marketplace for which there is demand, and in the process of solving that problem, creates value for the solution provider.

Notice I highlighted “new”, “problem”, “demand” and “value”. Why?  Well those are the the operative words in the definition.

The word “new” is obvious. For something to be innovative it must new.

The word “problem” is highlighted because without an existing problem you don’t a have a solution (i.e. your innovative new product at the center of your business model).

But why are “demand” and “value” highlighted? Well, “demand” refers to a customer’s willingness to pay. A customer can “want” and “need” a product but unless they “demand” it your business model doesn’t work. Again, demand is a need and a want, backed by the willingness to part with one’s money to obtain something.

In other words, your customer must “demand” your innovative “new” product in order for your business model to work—that is, generate “value”—so you can stay in business.

What types of innovations are there and how are they different?

It seems these days everyone seems to be talking about innovation. The word has become a common buzzword. Many people feel threatened by the specter of disruption happening in their industry and most people feel some pressure to be “innovative”.

So why take the time to analyze the above definition?

Well while a lot of people talk about innovation very few have any real clue what the word actually means. What I’ll attempt to do in this post is give you a basic overview of how to look at innovation and think about how it might apply to you.

1. Product Innovation

A product innovation is either the introduction of an enhancement to an existing product or service, or the creation of a completely new product or service.

For example, the well known inventor James Dyson created a type of vacuum that uses a new patented suction technology to collect dust without losing power. This innovation allowed Dyson to capture 13% market share in the UK in a mere two months.

Proctor & Gamble regularly launches innovations on their existing products—an example of an innovation designed to enhance something already in market. Innovations to existing products can be seen everywhere—TVs, computers, B2B technology etc.

 

2. Process Innovation

A process innovation is an improvement to an existing process—whether that improvement is to how a product is manufactured or how a service is delivered. 

A process innovation can often have a huge return on investment (ROI). Probably the most well known process innovation was Henry Ford’s invention of the assembly line, which shortened the assembly of an automobile from twelve hours to only 90 minutes (now think about that ROI!).

Often process innovation and product innovation are intertwined. A rise in process innovation usually comes after a new, innovative product is introduced to the marketplace because other entrepreneurs flock to come up with new ways to create a business model around it. For example, after Edison introduced the incandescent lightbulb a vast number of process innovations designed to make manufacturing it more efficient followed.

 

3. Sustaining Innovation

An improvement in a feature or the reduction in the cost of manufacturing are considered “incremental” or “sustaining” innovations.

These are important but generally not disruptive enough to drive meteoric growth for a startup. In fact, sustaining innovations usually come from existing industry players. They are considered far less risky when compared to more radical innovations but can get in the way of “true” innovation.

Kodak is a perfect example of the hazards of the complacent reliance on sustaining innovation. Leading up to the digital photography revolution, Kodak spent the majority of their focus and resources on incremental improvements to existing products and consequently entirely missed this industry sea change. In little over a decade, Kodak went from its revenue high watermark to filing for bankruptcy.

 

4. Business Model Innovation

A business model innovation is an improvement on the way a product or service is brought to market.

A business model innovation requires an organization to undertake massive changes usually to those processes that have been highly optimized over the years to maximize profits. Business model innovations are generally a challenge to undertake for existing companies because, more often than not, they’re radical, risky and transformative. Not to mention, they threaten the status quo and foment internal conflict. So for all of these reasons, we usually see business model innovations coming from industry outsider entrepreneurs. Well known examples are: Uber and AirBnB—two companies that disrupted very well established legacy markets. That said, business model innovation doesn’t have to be the exclusive domain of industry outsiders. Here are a couple of ways you can start thinking about it:

  • Consider these four fundamental questions:
    1. What new, emerging tech might make your product or service easier for the end user?
    2. What new, emerging tech might make your product or service easier for you to deliver to the end user? 
    3. In which human resources areas is your company spending the most money and could new, emerging tech do that work faster and/or more affordably?
    4. Are there examples in the marketplace of unused capacity that new, emerging tech might help monetize? 
  • Now research answers to them:
    • Interview stakeholders inside (employees, contractors) and outside (partners, vendors, even competitors) of your company in an attempt to answer those questions. This type of primary research can uncover surprising feedback and help clarify where there are ripe areas of opportunity for your business.

In the case of Uber, the unused capacity inherent in car ownership (i.e. people on average only use 5% of a car’s available utility) became the underlying value which the advent of peer-to-peer commerce, made possible by the smartphone, allowed Uber to unlock and build a business model around.

 

5. Radical Innovation

Radical innovation is the breakthrough type that drives exponential growth.

At the heart of radical innovation is usually new technology that brings with it drastic change in a product, service or process. Taking advantage of these tech advancements usually requires patience and creativity when assessing how to make a viable business from them.

For example, when the PC first came on the scene they were considered toys but ultimately served to push the mainframe into obsolescence. Cell phones, MRI’s, the Internet—these are all examples of radical new technologies that required patience and creativity to fully realize the value (how’d those turn out?).

Keep in mind, the cost of (thoughtfully) introducing new tech to your business plans today will always be lower than doing it tomorrow. It’s well worth spending time analyzing those emerging trends and technologies in your industry.

April 5, 2020
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