What is Innovation?

In today’s rapidly changing business world, it seems the only thing that is constant is change. Nearly every new, ground-breaking product or service will eventually become obsolete, commoditized, or surpassed by new and better solutions. Innovation can be described in broad terms as any new idea, product, service, process, or business model, or a change to an existing product, service, process, or business model that adds value. While innovation is often linked to entrepreneurship, ongoing innovation is essential for any organization to remain competitive and survive.

Individuals and organizations innovate for many reasons, including the following:

• Solve a problem
• Take advantage of an opportunity
• Expand market share
• Improve efficiency and/or effectiveness
• Increase revenues
• Reduce expenses
• Keep up with evolving and shifting customer demands, preferences, and trends
• Adapt to and/or take advantage of changes in modern technology
• Remain competitive and relevant

Types of Innovation

Because not all innovation is the same, various typologies of innovation have been proposed. According to one framework, innovation can be distinguished based on:

1. How well a problem the innovation is aimed at solving is defined.
2. How well the domain in which the problem is situated is defined.

Considering these two factors together results in four types of innovation: basic research, breakthrough innovation, disruptive innovation, and sustaining innovation (Figure 13.1).^[1]

Basic research involves efforts to build knowledge and understand principles and phenomena. It often precedes practical applications and is generally undertaken without immediate commercial goals. It is often conducted in academic settings, labs, or research centers. For example, scientists discovered messenger RNA, or mRNA, in the 1960s, and spent decades working to understand its structure and function. This basic research eventually made it possible for companies like Moderna and Pfizer to rapidly develop vaccines targeting COVID-19, but was not undertaken with this specific objective in mind.^[2]

Breakthrough innovation seeks to solve problems that are well defined but exceptionally challenging to solve, often requiring knowledge and insights from seemingly unrelated domains. Open innovation is one approach to achieving breakthrough innovation in which organizations actively seek external insight and ideas. Unlike traditional closed innovation models, in which companies rely primarily on their internal research and development (R&D) departments, open innovation takes a more inclusive and integrative approach by actively seeking external inputs and partnerships.

For example, the National National Aeronautics and Space Administration (NASA) regularly engages in open innovation, including recent efforts related to “Moon and Mars” in which “NASA invited the national and global community to participate in its Moon to Mars planning through open innovation initiatives. These initiatives tapped into the ingenuity and passion of individuals of all ages and walks of life, resulting in ideas for lunar power and energy, life on the Moon, and managing payloads, deliveries, and storage.”^[4]

Disruptive innovation “describes a process by which a product or service initially takes root in simple applications at the bottom of a market—typically by being less expensive and more accessible—and then relentlessly moves upmarket, eventually displacing established competitors.”^[5] It takes two forms: low-end disruption, which targets customers who do not need the full performance valued by customers at the high end of the market, and new-market disruption, which targets customers who have needs that are unserved by existing offerings (Video 13.1).^[6] Notably, most disruptive innovations are not overnight sensations. Instead, a relatively small group of customers embrace a disruptive innovation as early adopters and then a critical mass of customers builds over time.

An example of low-end disruption is digital cameras. Few photographers embraced digital cameras initially because the cameras offered poor picture quality relative to traditional film cameras. As digital cameras improved, however, they gradually won over almost everyone who takes pictures. Similarly, cameras on mobile phones, which initially were far inferior in quality compared to digital cameras, have since disrupted the digital camera industry. An example of new-market disruption is smart phones, which disrupted the market for laptop computers by offering consumers a way to connect to the internet from a small, handheld device.

Sustaining innovation, also referred to as incremental innovation, involves making small-scale improvements to existing products, services, processes, and business models (Video 13.1). Sustaining innovation focuses on improving existing offerings to align with current consumer trends and is considered a relatively low-risk approach for businesses. This approach is the most common type of innovation and has helped many companies remain competitive for decades. For example, each new version of Apple’s iPhone that comes out typically reflects sustaining innovation. iPhone features such as the camera and processor are tweaked to make an improvement over the previous model.

Objects of Innovation

Another way to distinguish innovation efforts is by the object of innovation. Four of the most common objects of innovation are product, service, process, and business model.

Product Innovation

When people think of innovation, often, they’re thinking of product innovation. Product Innovation can come in three different forms: the development of a new product, an improvement in the performance of an existing product, or a new feature to an existing product. Drivers of product innovation might be technological advancements, changes in customer requirements and demands, or outdated product design. Product innovation is generally visible to the customer and should result in a greater demand for a product.^[7]

Service Innovation

With the growing economic importance of the services sector, service innovation is playing an ever more significant role in driving growth in today’s knowledge-intensive economy. Service innovation, which involves introducing new services or improving the delivery of existing services, ensures and enhances the utility, performance, and apparent value of an offering.  Some offerings are purely service, such as getting a haircut, hiring someone to paint your house, or taking an Uber to your friend’s place. Other services may be combined with product offerings, such as purchasing groceries (products) and having them delivered to your home (service), or buying a new television (product), and purchasing the warranty (service).

Process Innovation

An organization is essentially made up of a series of processes: how a product is designed is a process; how it is manufactured is another process; and how it is transported to reach customers is yet another process. If a company can make its processes work faster, cost less, and/or result in a higher quality product/service most likely that company will see higher profits and increasingly happy customers.

While product innovation is often visible to customers, a change in process is typically only seen and valued internally. Generally, changes in process reduce costs of production more often than they drive an increase in revenue. Process innovation, which involves the implementation of a new or significantly improved production or delivery method, can include changes in the equipment and technology used in manufacturing (including the software used in product design and development), improvement in the tools, techniques, and software solutions used to help in supply chain and delivery system, changes in the tools used to sell and maintain goods, as well as methods used for accounting and customer service.^[9]

Business Model Innovation

Business model innovation refers to the process of creating, adapting, or fundamentally changing the way a company delivers value to its customers and/or generates revenue. It involves rethinking and redesigning various elements of a business’s core model, which may include its customer segments, value proposition, channels, revenue streams, cost structure, and more.

Business model innovation is essential for organizations seeking to remain competitive and adapt to changing market conditions. It often involves thinking creatively and exploring new approaches to disrupt existing industry norms or create entirely new markets. This innovation can result in improved customer experiences, increased efficiency, and potentially higher profits. Successful business model innovation can be a source of sustainable competitive advantage for companies in an ever-evolving business environment.

Business Model Innovation is perhaps the most challenging of the innovation types as it will likely present an organization with major requirements for change. Often, the very capabilities or processes that have been optimized to make a company successful and profitable will become the targets for transformation. In some cases, these changes can threaten elements of the company’s identity and come into conflict with brand expectations or promises.^[10]

Whereas product, service, and process innovation can be incremental and moderate, business model innovation is almost always radical, risky, and transformative. When talking about business model innovation, without a doubt, names like AirBnB, Uber, or Spotify will come up. These are perfect examples of fast-moving companies that were able to disrupt age-old markets (hotel, taxi, music) by tweaking or inverting their industry’s traditional business model.^[11]

Creative Thinking

Creativity relates to generating ideas, which are integral to and fuel innovation. Organizations are increasingly turning to creative thinking and problem-solving techniques like SCAMPER and design thinking to help them continue to innovate.

SCAMPER

One of the easiest and most direct methods of creative thinking is the SCAMPER technique, which is based very simply on the idea that many “new” ideas are actually modifications of existing products, services, processes, and business models.^[12] The SCAMPER acronym refers to the following:

• Substitute (e.g., components, materials, people)
• Combine (e.g., mix, combine with other assemblies or services, integrate)
• Adapt (e.g., alter, change function, use part of another element)
• Modify/Magnify (e.g., increase or reduce in scale, change shape, modify attributes)
• Put to other uses (e.g., more than one way to use, more than one function)
• Eliminate (e.g., remove elements, simplify, reduce to core functionality)
• Rearrange/Reverse (e.g., turn inside out or upside down)^[13]

Click on the information icon beside each of the letters below to learn more about SCAMPER.

Design Thinking

Design thinking is another well-known and widely-used technique for creative problem-solving. Design thinking encourages organizations to keep the user at the center of everything and is focused around asking different questions and looking at problems in new ways.

Design thinking is an iterative and non-linear process involving the following five phases (Figure 13.2):

• Empathize with users: learn about and understand the people you’re designing for.
• Define the design problem: identify users’ needs and focus on a design challenge.
• Ideate: generating and evaluating creative ideas.
• Prototype solutions: turn insights and ideas into tangible models.
• Test: evaluate and evolve solutions by gathering actionable feedback from users.

The iterative and ideation-oriented nature of design thinking means that individuals constantly question and acquire knowledge throughout the process. This helps them redefine a problem so they can identify alternative strategies and solutions that aren’t instantly apparent with their initial level of understanding (Figure 13.3).

A common core of design thinking is its application beyond the design studio, as the methods and tools have been articulated for use by those outside of the field, particularly business managers. Design practice is now being applied beyond product and graphic areas to the design of digital interactions, services, business strategy, and social policy (Video 14.2).

Chapter Review

Optional Resources to Learn More 

	Articles
	“What is Disruptive Innovation?” https://hbr.org/2015/12/what-is-disruptive-innovation
	“The Four Types of Innovation and the Problems they Solve” https://hbr.org/2017/06/the-4-types-of-innovation-and-the-problems-they-solve
	Books
	How Innovation Works by Matt Ridley https://www.mattridley.co.uk/books/how-innovation-works/
	Creativity Rules by Tina Seelig http://www.tinaseelig.com/books.html
	The Innovator’s Dilemma by Clayton M. Christensen https://www.hbs.edu/faculty/Pages/item.aspx?num=46
	The Innovator’s DNA by Jeff Dyer, Hal Gregersen, and Clayton M. Christensen https://www.innovatorsdna.com/books-publications
	Podcasts
	Leaders in Innovation https://www.fastcompany.com/podcasts/leaders-in-innovation
	Most Innovative Companies https://www.fastcompany.com/podcasts/most-innovative-companies
	Better Innovation https://teybip.libsyn.com/website
	Videos
	“Business Innovation” https://youtu.be/Ve7vs_jAB_8
	Hard Reset (series) https://www.freethink.com/series/hard-reset
	“Mapping Innovation” https://youtu.be/ByccBS30M2E
	Websites
	IDEO: Innovation Resources https://www.ideou.com/pages/innovation-resources

Chapter Attribution

This chapter incorporates materials from the following sources:

Shields, K. (2022). Leading innovation. https://ecampusontario.pressbooks.pub/leadinginnovation/. Licensed with CC BY-NC-SA 4.0.

Chapter 7 of Kennedy, R. (2020). Strategic management. https://pressbooks.lib.vt.edu/strategicmanagement/chapter/7-4-types-of-innovation/. Licensed with CC BY-NC-SA 4.0.

Matrix, S. (n.d.). Design thinking. https://pressbooks.pub/innovationbydesign/chapter/introduction/. Licensed with CC BY-NC-SA 4.0.

Media Attributions

Figure 13.1: Hoopes, C. (2024). Types of innovation. Licensed with CC BY-NC-ND 4.0.

Figure 13.2: Dam, R. F. and Teo, Y. S. (2022, June 27). What is design thinking and why is it so popular? Interaction Design Foundation. https://www.interaction-design.org/literature/article/what-is-design-thinking-and-why-is-it-so-popular#the_take_away-7. Licensed with CC BY-SA 3.0.

Figure 13.2: Dam, R. F. and Teo, Y. S. (2022, June 27). What is design thinking and why is it so popular? Interaction Design Foundation. https://www.interaction-design.org/literature/article/what-is-design-thinking-and-why-is-it-so-popular#the_take_away-7. Licensed with CC BY-SA 3.0.

Video 13.1: HBS Online. (2023, July 26). Sustaining vs. disruptive innovation. [Video]. YouTube. https://youtu.be/vF9jLDyp7cE

Video 13.2: Sprouts. (2017, October 23). The design thinking process. [Video]. YouTube. https://youtu.be/_r0VX-aU_T8