When companies pursued innovation in the past, they typically worked on one of two innovation types: product innovation (also called new product development) and process innovation. Over the last two decades, however, a compendium of modern innovation types has emerged that allow companies to play the innovation game in many new ways. But as with any other game, you need to follow a set of rules. In this 2-part article we’ll look at the spectrum of modern innovation types, and then learn more about the 10 rules that you need to understand and follow.
The spectrum of modern innovation types
At Thinkergy, we position modern innovation types on three levels related to operations, value creation, and the leverage of a created value offering:
- Operation innovations locate at the entry level. Companies pursue them to enhance and optimise the operations needed to create value propositions. Here we can see two innovation types: process innovation (redesigning operational processes in leaner, more efficient and cheaper ways) and structure innovation (restructuring the units and related assets needed for creating value).
- Value innovations aim to create meaningful, novel and original value propositions. The related innovation types encompass product innovation (developing new products in an established or new category), service innovation (new services offered stand-alone or in connection with a product), solution design (new solutions that address specific problems of business clients or end consumers), and customer experience design (crafting an impactful customer journey full of emotional, sensory-pleasing and “sticky” moments).
- Finally, leverage innovations aim to allow organizations to multiply revenues or magnify profits from their value propositions. Innovation types include channel innovation (delivering the value through new channel concepts), network innovation (mushrooming analog and digital networks through delivery partnerships and digital platforms), business model innovation (creating new ways to get paid for a given value), brand design (creating an impactful, emotive brand that attracts a tribe of loyal customers), campaign design (crafting moving, clever and effective campaigns) and packaging design (presenting a value offering in elegant, sensory-pleasing and aesthetics coverings).
Now you have a good overview of modern innovation types, with the exception of strategy innovation and social innovation, which we will cover later. But what about the rules for playing the innovation types game?
Rule #1: Play to stay in the game.
In today's innovation economy, you need to play the game on the field to avoid falling behind. Watching the moves of other innovators as a spectator on the sidelines won’t suffice. What happens to a company that only settles for milking the cash cows of a once-better past? Gradual decline and eventual extinction.
Nowadays, depending on the industry you’re in, you may fall behind faster than you think possible. Who dominated the photographical film business before the turn of the millennium? Kodak, which missed the transition from analog to digital imaging. Who led the mobile phone market mid in the early noughties? Motorola and Nokia, who were slow to embrace the shift from dumb to smart phones.
As Rubert Murdoch said: “The world is changing very fast. Big will not beat small anymore. It will be the fast beating the slow.” So, get on the field and start playing. And if you’re already on the field, keep playing and enjoy the innovation game.
Rule #2: You won’t win with a strong defense only.
The easiest way to innovate is through operation innovations, which is why most corporations do it. Successful process and structure innovation initiatives help save costs, increase efficiencies and improve the bottomline. They add a few pennies to your corporate piggy bank, but won’t bring you industry-leading profits. Having a strong defense is keeping you in the game longer, but it won’t bring you a major trophy.
Rule #3: Create meaningful new value first.
Value innovations such as product and service innovation as well as solutions and customer experience design are on the next level. Focus your efforts on creating a novel, original and meaningful value proposition first. In particular, ensure that a new product, service, solution or experience truly makes meaning to customers; when it does, it will make you money, too. But when it does not, you end up with a wacky invention such as the Dynasphere (a monowheel electric vehicle from 1932) that may be new and original, but fails to impress buyers. As Thomas Edison said: “Anything that won’t sell, I don’t want to invent. Its sale is proof of utility, and utility is success.”
Rule #4: Shift the value differential in your favor.
While pursuing value innovation, aim to boost your profit margins by raising the value perception in the eyes of your customers. You can do this through one of two strategies:
- Aim to add significantly more value to an existing value proposition. For example, Dyson has concentrated on product innovation in traditional household goods such as vacuum cleaners, fans and hair dryers. While staying in established product categories, Dyson has pushed the value differential to new levels of usability, aesthetics and performance, enabling the company to command higher prices and enjoy higher margins. Inventor James Dyson puts it simply: “People buy products if they’re better.”
- Climb up the value pyramid to higher levels of value perception by moving from products or services to solutions and customer experiences. For example, carmakers are promoting car-sharing solutions to urban consumers who don’t want to own a vehicle. Likewise, Starbucks is not just a coffee shop; it has designed an experience that allows guests to hang out in a “third place” between home and work where they can relax and connect with like-minded, sophisticated people.
Rule #5: Leverage meaningful value only.
Once you have created a meaningful new value proposition (a new product, service, solution, or experience), you can move to the top level of innovation types and leverage it. Why do you need to wait until you know your value differential is good? Leverage is a neutral agent. It boosts your reputation and profits if your value wows your customers, and it can sink your firm if your value proposition sucks.
In order to leverage a value offering, you can use two different strategies (and related innovation types):
- Leverage through multiplication helps you sell your creation dozens, hundreds, thousands, and even millions of times. Innovation types that leverage through multiplication are channel innovation (physical and virtual distribution), network innovation (strategic partnerships, physical and virtual networks, and digital platforms), and business model innovation (multiplying revenues through new ways to get paid for your value).
- Leverage through magnification: Make your product appear more valuable in the eyes of your customers through a strong brand, cool campaigns or sensual packaging. If you successfully magnify the value perception, you entice customers to pay more and thus increase your margin.
Rule #6: Strategy innovation to redraw the business on all levels.
Proactive corporations —or those with their backs against the wall— may pursue a strategy innovation project at least once every decade. Strategy innovation aims to create and leverage meaningful new value propositions produced in more cost-effective ways. Ideally done in an uncontested and/or newly emerging market, strategy innovation can lead to sustainable revenue and profit margin growth at a lower cost base by using all three innovation type levels (operations, value creation and leverage).
For example, Cirque du Soleil reinvented the circus by dropping all the elements perceived as antiquated (animals, clowns, etc.), and keeping and amplifying the artistic and aesthetic elements to deliver artistic, sensational show experiences under a circus tent. Cirque du Soleil enjoys higher profit margins because it created a memorable customer experience magnified through a global acknowledged brand and delivered at reduced cost.
Rule #7: Innovation leaders play on the full spectrum of innovation types.
Many companies that lead innovation in their industry have gradually built their dominance by starting with one innovation type, and then adding more and more.
For example, after Steve Jobs returned as CEO in 1997, Apple created not only super-strong products including game-changing devices (iPhone, iPad) that launched new categories (smartphones and tablets), but also expande repair and training services, opened experiential stores and hosted cult-like product launch events and developer conferences. Apple also created new channels and platforms (iTunes, App Store) to multiply revenues, and is a design-driven company with eclectic brands, sleek packaging and trendy campaigns.
Rule #8: Focus on “orphan” innovation types.
Most players in an industry focus their innovation efforts on the same “traditional” innovation types. You can stand out by identifying what your industry is ignoring.
For example, Nestle started to sell its Nespresso coffee machines and capsules in luxury shopping malls, which was a channel innovation in an industry used to selling coffee in supermarkets or coffee shops.
Likewise, Tesla Motors and SpaceX achieved prominent positions in electric cars and space transport because Elon Musk’s insistence on developing all required components in-house (a structure innovation that allows them to be faster and cheaper than their industry peers who have outsourced the production of major components to external suppliers).
Rule #9: Connect the dots on different levels.
Newcomers to an industry can create new value for customers —and shock incumbents— by combining a focused selection of innovation types on all three levels (operations, value creation and leverage).
For example, AirBnB has created a digital solution to connect people in need of affordable lodging with people who can supply it. Some guests also get to experience a city like a local and connect with the hosts on a personal level. Likewise, Uber created a meaningful new solution to connect consumers who need car transportation with drivers eager to earn income with their personal vehicles. Uber drivers also provide transportation services to users living in remote areas where most taxis don’t want to go.
Both AirBnB and Uber facilitate the match between the demand and supply via mobile apps and websites. These are network innovations that easily leverage matching solutions and can quickly multiply to different cities and countries. Best of all, unlike their competitors, neither needs to commit any physical assets. AirBnB is now considered the largest accommodation company in the world without owning any hotel room, while Uber is the biggest taxi company without owning any cars. Both have integrated this structure innovation into their business set-up.
Rule #10: Innovate for the less fortunate through social innovation.
Social innovation aims to empower the less fortunate and make the world a better place. But how can you actually innovate here? Look at a particular social issue, then pick the innovation type that best suits your challenge.
For example, micro-finance is a social service innovation of Grameen Bank to reduce poverty in Bangladesh by providing micro-loans to poor women only. In contrast, Greenpeace rights environmental wrongs by creating whopping action campaigns with local, regional or even global impact (social campaign design).
Would you love to learn how to play with modern innovation types in one of our Thinkergy training courses? Contact us or one of our certified trainers and tell us more about your needs.
© Dr. Detlef Reis 2017.