Each year consulting firm PwC takes the pulse of leaders around the world to see what excites them, what concerns them, and what drives their actions now and in the future. Innovation is usually at the forefront, driven in large part by the concerns around the pace of social, economic and technological change during the so-called 4th industrial revolution. The mainstream and trade presses are awash with stories of new technologies threatening to disrupt businesses, industries, and even entire countries.
Breathless tales abound of nimble and agile startups who have, or are about to, upend venerable institutions who were broadsided by such a rapid pace of change. The late Intel CEO Andrew Grove may have believed that only the paranoid survive, but it’s increasingly believed that only the innovative survive. Doyens of the field, from the late Clayton Christensen to John Kotter, share their prescriptions for how your organisation can innovate successfully, and yet there remains a strong sense that we’re not doing it well enough, or at least we’re not doing it as well as our immediate rivals.
Part of the problem is that innovation is such a catch-all term that it makes it very difficult to pin down precisely what it means. The stereotypical notion of smart people in lab coats churning out patents and potions is perhaps a common one, and yet it fails to tell the whole story, as innovation can also cover everything from novel business models to new processes. It can be incremental and sustaining just as much as it can be radical and disruptive.
This guide will help to demystify just what innovation can be, and through that enable you to innovate more effectively. It will look at why innovation matters, the various types of innovation that exist, and how you can make the best use of each of them.
Why innovation matters
As you’ll see later, measuring innovation purely by spending on R&D is an extremely blunt instrument, but nonetheless, the $782 billion spent by the largest 1000 companies in the world should give you an indication as to the amounts spent on innovation around the world each year.
Research from Stanford University highlights the growing cost pressure involved in this kind of R&D, with research productivity declining by a factor of 41 since the 1930s, which works out at around 5% per year. In other words, organisations need to spend considerably more just to achieve the same research outputs.
Despite this, jumping off the carousel has even worse consequences. Research from the London School of Economics shows that firms who achieve at least one new product launch per year obtain a boost to their revenue productivity of around 17%, with each new product launch adding an extra 22% to this. What’s more, another study, from the University of Houston, found that investing in one’s innovation capacity had a significant impact on both the profitability of firms, and their share price.
Indeed, at a macroeconomic level, policy makers and economists have long bemoaned the poor state of productivity growth in much of the western world, and Cambridge University researchers believe this is almost entirely down to the uneven distribution of innovation across the economy, with those at the vanguard producing very healthy productivity growth, while the laggards producing next to none.
Innovation Comes In Many Shapes And Sizes
This is perhaps compounded by the distorted view of innovation as akin to Archimedes leaping from his bath and running down the street after splashing upon the concept of displacement. It’s something that has to be scientific, it has to be highly disruptive, and it often has to be something done by a lone individual.
All of those assumptions are wrong, and a number of projects that aim to classify the various types of innovation illustrate that (or at least the first two – more on the last point a little later).
The Innovation Matrix or 4 types of innovation
One of the most common ways of looking at innovation is via the Innovation Matrix, which is included below.
The Innovation Matrix classifies innovations according to both the technology it uses, and the market the innovation operates in. It therefore allows us to conceive four distinct forms of innovation:
Architectural innovation may be referred to as ‘recombinative’ innovation. It involves taking an approach, a technology, or some lessons from one field, and applying it elsewhere. This sounds deathly dull, but is actually an incredibly common form of innovation. Research suggests that around 40% of the patents registered over the past 150 years fall into this camp, with the ratio growing each year. Similarly, that so many of our most successful entrepreneurs are immigrants is an example of this, as the norms and values of a homeland are applied in fresh ways when moving to an adopted land.
Radical innovation is perhaps what most springs to mind when we think of innovation, as it involves the birth of new industries and the application of revolutionary technologies. It’s also a relatively rare form of innovation, as such revolutions don’t happen all that often. They do allow society to make substantial leaps forward, however, and advocates of the various technologies that form the 4th industrial revolution believe that they will power radical innovation in how we perform everything from transportation to healthcare.
The overwhelming majority of innovations are incremental in nature. Think of things such as lean, where a culture of continuous improvement strives to make a lot of small and seemingly insignificant improvements across a wide range of areas, with this culminating in substantial improvements across the organisation. Such incremental improvements are often smaller, and are therefore more accessible as they can often be performed without requiring huge budgets, a large team, or a reorientation of the businesses strategy. Companies such as Amazon have become masters at this, with continuous experimentation of their web interface resulting in daily optimisation of the user experience.
The notion of disruptive innovation has been popularised by the late Clayton Christensen, and refers to when an innovation creates a fundamentally new value network. It typically does this by creating a new market, but it can also do so by entering an existing market and changing how consumers interact with it. Christensen’s theory sees innovations typically entering the market at a lower performance point, at least when measured by the traditional metrics of that market. They nonetheless offer value in an alternative way to a subset of the market for whom that feature is highly important. This bridgehead is then used to rapidly scale and disrupt the whole market.
The Doblin Framework or ten types of innovation
Another highly popular categorisation of innovation comes from Doblin, who highlight ten distinct forms of innovation that provide a framework through which you can better assess your approach to and performance in innovation. The aim of Doblin’s framework is to provide a more practical perspective than the more strategic viewpoint provided above.
The 10 categories are broadly divided across business model innovations, product innovations and marketing innovations:
Business model innovations
Innovation in terms of profit models typically look to package up existing offerings in new ways. They often require a detailed knowledge of the customer and what they really crave from your business, and can involve a disruption to your industry’s traditional way of looking at the customer relationship.
Network innovation is increasingly common as supply and value chains become more complex and interconnected. They involve the creation of new ways of taking advantage of the processes, technologies, or other resources of other companies, allowing an organisation to significantly punch above its own weight.
Structural innovations look internally at the assets your organisation has, and how they can be utilised to create fresh value. This could be improving internal software and processes to make better use of your talent or equipment. Managerial innovations often fall into this category, with organisations often using their culture and processes as a means of attracting the brightest talent.
Process innovations are another inward looking innovation and look at changing the way you go about your business. Just as with companies like Toyota, these innovations often form a key part of the core competencies of the business, and can provide a significant advantage over your rivals. For instance, several hundred ideas were submitted by employees across Kent Police force, resulting in several process improvements to the organisation and measurable improvements to efficiency, employee engagement and empowerment.
The product categories are perhaps what many of us most relate to in terms of innovation, with product performance the first product-related categorisation proposed by Doblin. Innovations in this area include everything from the features offered to the quality of the product and can involve both improvements to existing product lines or completely new offerings. The key is that you look to add significant value.
The product system is not as popular as the product itself, but is no less important. Innovations in this domain revolve around the complementary products and services that can add real value to a core product. You might look to establish interoperability, modularity and integration with other products and services to provide value added to the customer.
The final category revolves around the customer experience, and begins with service-related innovations. Innovations in this domain enhance the offering of your product or service, whether through making it easier to use, highlighting overlooked functionality, or fixing common problems. Such innovations are easy to overlook but they can really make an offering stand out.
Channel innovations focus on the way you deliver your offering to consumers. E-commerce has been an obvious innovation in this domain, but as bricks-and-mortar retailers have got to grips with the changing retail landscape, there have been clear innovations in how stores and retailers interact with customers. The ultimate goal of innovations in this category is to delight consumers by ensuring they get what they want, when they want it, and how they want it.
Branding remains hugely valuable, and innovations in this domain can help protect a company from competitors or substitutes. Great branding innovations typically involve a wide range of customer touch points and involve a range of advertising, customer engagement, channel, and employee behaviour innovations.
Last, but not least, are innovations centring around how you build compelling interactions with your customers. Innovations in this domain begin with a deep understanding of the customer and flow all the way through the creation of meaningful connections between you and them. At insurance company Covea, they innovated improvements to their customer processes that delivered approximately £2.5 million in savings.
The classifications highlighted above are not intended to be an exhaustive list, nor indeed a prescription that requires you to innovate in each of the ways that are possible. Rather, they are intended to showcase the breadth of innovations that your organisation might seek based upon your specific circumstances.
The most innovative companies seldom operate across all of the categories, but rather find the right mix for them. Just as the most successful investors don’t put all of their eggs into one basket, neither do the most successful innovators. The key is to ensure that the approaches you do employ work effectively together and help to propel your organisation towards a common goal.
As Clayton Christensen famously reminded us,
The above frameworks provide a degree of structure and inspiration for your efforts to do that, but the tactical implementation possibilities are legion.
John Kotter famously advocates the dual operating system approach to innovation, Vijay Govindarajan proposes a three box method. Henry Chesborough is a strong advocate for open innovation, with Kaihan Krippendorff making the case for intrapreneurship. The lean startup methodology has been strongly promoted by Eric Ries, with the likes of Amy Edmondson and Carol Dweck looking at the cultural and individual aspects of ‘bucking the norm’ respectively.
There are a litany of approaches one can take, but perhaps the first step is to recognise that innovation has to be a priority. A recent survey from Harvard Business School revealed that just 30% of executives believe this to be so, which perhaps underlines why executives placed innovation as the 18th strongest capability in their organisation, some way behind areas such as compliance and financial planning.
This perhaps underlines why just 14% of companies surveyed by Accenture thought they were getting a return on the £2.5tn they had spent on innovation over the past 5 years. Accenture sagely remind us that what you spend is less important than how you spend it, and they argue that the best innovation tends to:
- Tackle the most pressing concerns of customers
- Harnesses the power of the crowd, both of internal employees and external stakeholders
- Tap into the best talent you can, regardless of whether that’s inside or outside the business
- Ensure that data drives everything you do
- Tap into the latest technologies to drive your innovation
- Involve a wide range of stakeholders to not only tackle the needs of customers, but society more broadly
Innovation is anything but straightforward, and there are many ways you can approach things, but hopefully the above will provide a degree of guidance to help you on your way. If you would like help in facilitating each type of innovation, contact us and our innovation experts will be happy to help.