What is Innovation?
In the context of business, innovation means bringing something new to the market. The word “innovation” is derived from the Latin verb “Innovare”, which means to renew. In essence, the word has retained its meaning up until today. Innovation means to improve or replace something, for example, a process, a product, or a service. In the context of companies, however, the term needs a definition. In the complex context of business, a definition is needed.
Innovation can be defined as an alteration in production processes (new methods), products (new features), services (new offerings), or markets (new customers). Innovation is often confused with invention, however, they are not synonymous terms because while innovation is something that already exists but has been improved upon, invention is something that has never been done before. An example might be when you invent a new app for your smartphone and then when it becomes available for other users to download on their phones it becomes an innovation because it’s different than what was previously available on those devices prior to its introduction into their lives by you or someone else who created it first.
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The 4 Types of Innovation
Innovation can take many forms, and the way that companies approach innovation can vary widely, but by classifying innovation into four distinct categories, companies can assess the opportunities that exist and how different approaches can enable them to create and capture value.
The Four Main Types of Innovation are:
Incremental innovation also known as sustaining innovation is the continuous improvement of existing products or services to provide more value to an existing market. It focuses on reducing defects and incrementally improving performance with features like product line expansions, cost reductions, and next-generation products. This type of innovation occurs in the short term and has low technological advancement and low market impact.
“Some sustaining innovations are the incremental year-by-year improvements that all good companies grind out. Other sustaining innovations are breakthrough, leapfrog-beyond-the-competition products. It doesn’t matter how technologically difficult the innovation is, however: The established competitors almost always win the battles of sustaining technology, because this strategy entails making a better product that they can sell for higher profit margins to their best customers, the established competitors have powerful motivations to fight sustaining battles. And they have the resources to win.”Clayton Christensen
Examples: Gillette, Coca-Cola, Cadbury & the Smartphone Market
Architectural Innovation is the modification of existing solutions for an entirely new market. Architectural innovation refers to changing the overall design of a product by putting existing components together in new ways. This innovation occurs in the short to medium term.
Examples: Winchester Disk Drives, Desktop Photocopiers & Multi-core Processors.
Disruptive innovation is when new technologies and products are created to serve an existing market. This type of innovation is enabled by new technology that provides a more efficient and accessible alternative to what already exists in the market. Businesses apply disruptive innovation to serve the evolving needs of their consumer base, creating entirely new value streams and service offerings that did not exist before.
“The reason why it is so difficult for existing firms to capitalize on disruptive innovations is that their processes and their business model that make them good at the existing business actually make them bad at competing for the disruption.”Clayton Christensen
Examples: Digital currency, 3D Printing & Cross-platform instant messaging apps
Radical innovations require radical thinking and are often associated with breakthroughs in science and technology. For example, in the 1950s, IBM introduced its first computer system that was designed for business use. It was not until the 1960s that computers became more accessible to small businesses.
Examples: Personal Computers, Cloud Technology & Washing Machine.
Other Types Of Innovation
- Technological Innovation
- Business Model Innovation
- Organizational Innovation
- Product Innovation
- Open Innovation
Which Type of Innovation to Apply for your Organization?
A Business Model is composed of five key models that jointly form a business model (Value, Service model, Experience, Operating, Revenue & Cost Model). Based on our research, there is a clear link between the type of innovation and the predominant part of the business model you consequently have to work on within your innovation strategy:
The Innovation Matrix
Horizon 1: Execute and incrementally improve an existing business (Incremental Innovation)
Here your organization executes its existing business model (composed of the six domains: the service, revenue, cost, operating, value, and performance model). It uses existing assets and capabilities and has a low risk of getting the next product out the door. Management focuses its efforts on this horizon by building repeatable and scalable processes, procedures, incentives and KPIs to execute and continuously improve the existing business model (and if they’re smart, they’ll teach their teams to operate with mission and intent, not just processes and procedures).
Innovation and improvement occur on this horizon on the level of processes, procedures, and costs. Product management in this horizon uses existing product management tools, such as StageGate® or its equivalents.
The risks in this first horizon are typically low: organizations and management, in general, know how to approach such incremental changes since they are part of everyday business.
Horizon 2: Transform and make a step-change improvement to an existing business (Architectural Innovation)
In this horizon, an organization looks for new opportunities within the realms of its existing business model. To do so, you will change at least one of the six domains (service, revenue, cost, operating, value, and performance model) in a more significant way. This is the moment to be very cautious: changing one of the domains in this horizon typically has quite severe effects on other horizons and domains! These effects are often overlooked and underestimated.
Developing an existing business is often done on an ad hoc basis based on a particular insight. But it can also be done systematically, through Business Model innovation practices.
Since this horizon uses mostly existing capabilities augmented with new ones, it has a moderate risk of successfully developing new products.
Horizon 3: Radically innovate a new business model (Radical – Disruptive Innovation)
In this third horizon, an organization is essentially really incubating something novel, similar in purpose to a start-up. A start-up, in contrast to an established business that is executing its current business, is in the (sometimes desperate) search for a new business model. These types of innovations are new and could potentially lead to disruptive business models.
This type of initiative is substantially different in nature compared to operating and developing an existing business, so it typically makes sense to physically separate the creation of new business from operating divisions (in a corporate incubator, or their own facility). And they need their specific approaches, procedures, policies, incentives, and KPIs different from those that you use when executing an existing business.
The 12 Types of Innovation
To great surprise, over 90% of all Business Model Innovations simply recombine existing ideas and patterns from other industries. Consequently, we can leverage those patterns for the design of new business models. To assist you in the journey of adapting patterns and creating your own innovative business model, we have assembled a framework of patterns that we see as the most commonly used in Business Model Innovation and mapped it to the Business Model Canvas.
In order to create the Business Model Innovation Patterns, we have drawn on work from multiple sources, including most importantly the 10 types of Innovation Framework and The University of St. Gallen’s 55 business models. Do also consider the Business Model Gallery, an online database of Business Models, which outlines the business models of numerous prominent companies, as well as industries, topics, and design themes.
Here are the 12 Types of Innovation:
|#||Type of Innovation||Framework|
|1.||Cost Model||Create Value through unique cost Strategies.|
|2.||Revenue Model||Create Value through creative ways of making money.|
|3.||Value Chain||Create Value through Superior processes.|
|4.||Key resources||Create Value through talent & Assets.|
|5.||Key Partners||Create Value through better networks.|
|6.||Value Proposition||Create Value through products.|
|7.||Product System||Create value through product systems.|
|8.||Service Model||Create value through services.|
|9.||Channels||Create value through the way of delivery.|
|10.||Customer Engagement||Create value through smart ways of customer engagement.|
|11.||Customer Relationships||Create value through the nature of your customer relationships.|
|12.||Brand||Create value through a brand strategy.|
Types of Innovation #1-2: Financial Model
- Cost Model: Create Value through unique cost Strategies.
- Revenue Model: Create Value through creative ways of making money.
Types of Innovation #3-5: Operating Model
- Value Chain: Create Value through Superior processes
- Key resources: Create Value through talent & Assets
- Key Partners: Create Value through better networks
Types of Innovation #6-8: Value Model
- Value Proposition: Create Value through products.
- Product System: Create value through product systems.
- Service Model: Create value through services
Types of Innovation #9-12: Experience Model
- Channels: Create value through the way of delivery
- Customer Engagement: Create value through smart ways of customer engagement
- Customer Relationships: Create value through the nature of your customer relationships
- Brand: Create value through a brand strategy
Where to Innovate & Where to cut costs?
One of the biggest challenges for organizations is deciding where to innovate and where to cut costs. Luckily, there is a guideline to help solve that puzzle.
Most activities within a business, such as accounting, forecasting, marketing, and HR, are not even sector-specific. And while many of these can theoretically add to the differentiation of an organization, most of them do not and are unlikely to do so.
This is an important point: most of what we do (and what any firm does) does not support our differentiation, and may not even be part of our core operations. What does that mean for how we should think about strategy? This graphic provides an overview of the non-core, core, and differentiating areas of a business and connects them to a matching business objective, business strategy, and IT strategy:
Why Innovation is Important for a successful business?
As the world becomes more connected, businesses must adapt and grow with it. Technological advancements have made it easier than ever before for customers to connect with brands, they can now use social media to voice their opinions and interact with businesses on a daily basis.
This means that businesses must be able to keep up with the needs of their customers in order to stay competitive in their industry. By embracing innovation, companies are able to better understand and meet the demands of their consumers, which ultimately leads to greater success.
The second factor in the importance of innovation in business is competition. In today’s global market, competition is fierce among businesses — especially when it comes to attracting new customers or retaining old ones. This means that businesses must work harder than ever before in order to set themselves apart from the rest of the pack; otherwise, they risk being left behind by innovative competitors who are willing to take risks and push boundaries.
Finally, there’s internal motivation – or lack thereof – within companies themselves. When employees feel like innovations are happening outside of them, they often become less motivated.
How To Encourage Innovation In Your Company?
Innovation is sometimes a critical area for the survival of many businesses and industries. But encouraging your employees to come up with new ideas can sometimes be exhausting.
Here are some tips on how to get more innovation going:
- Actively motivate employees.
- Ask customers for feedback/invite customers to the feedback round.
- Ask stakeholders for feedback.
- Invest in training your employees.
- Actively invest resources in research and development (R&D).
- Establish a reward system for innovative thinking.
- Partner with startups and innovative companies.
- Build an intrapreneurship program.
- Actively research on the Internet (industry news, tech news, etc.).
- Survey/interview/meet with experts.
Innovation is a calculated risk that must be dealt with. Not all projects will be successful, and the business process needs to be managed to filter out potential failures before they have too big an impact on your innovation budget. Try to streamline the process and perhaps create your own innovation program that covers some of the above points. This way you can manage it better and get a better overview.