Innovation is an extremely counterintuitive business.
For most people outside the innovation space, Innovation means radically new or significantly improved products. Interestingly enough, product innovation is the least successful model. There are various ways to innovate. Highly successful and radically disruptive innovations today come from business model innovation. For instance, in my old company, Computer 2000, we changed the business model for tech distribution from the ground up. With our tiny startup in the 1980s, we took on competitors of multi-hundred million dollars in revenue. It looked like the chance to survive is exactly 0.00%. Today it is a $37 billion business leading the tech distribution in the world. And still, most competitors did not notice the difference and why we could become a global market leader. It was a business model disruption that went unnoticed. Another example is Airbnb. The company caters to travelers’ needs to stay in a more individual apartment or house instead of a small room in a hotel. Hotels, however, perceive the competition as a price war since there are less expensive apartments too. The hotel industry managers, who never understood the competition, fought back with legal acts and did not compete on the service. As a result, they never brought their services in alignment with customer needs. Zappos, an online shoe dealer, changed both. Their business model and commitment to organizational innovation. Soon thereafter, they also started an experience innovation project and became a great example of multi-facet innovations. Let’s explore the big five innovation types.
The Big Five Innovation Types
Obviously, the topic can split even further. Still, we realized that these five innovation types need different approaches, different methods, have different financial or operational impacts, and call for a different innovation team composition.
Focused on the product side. This is the classic way to innovate and the most obvious to be recognized by the market. However, it is also the easiest to copy and to outperform quickly. Product innovation offers room for different degrees of innovation like a profound improvement of a product that changes the way users work or introduces a radically different product that may change a whole industry segment. Competing with product innovation is oftentimes done by starting a price war, and very quickly, the innovator may be forced to reduce pricing, increase marketing effort, or take a much longer time to grow market share. Alternative products as such innovation can quickly substitute product innovation is the most obvious, the most visible, and the fastest to understand. In the past 20 years, business model innovation, experience innovation, or organizational innovation continuously won over product innovation. Probably one of the best examples is the automobile industry. Companies fight on the product level: electric motor or combustion engine. One company, Tesla, does not lead on the product level but uses one of the hardest nuts to crack, multi-facet innovation. On the surface, it is, of course, the electric car. But when looking under the hood, not literally speaking, it is the business model innovation, the organizational innovation, and the experience innovation that makes the company the market leader despite having a much smaller production volume. While the global awareness for Tesla was achieved with its super fast and wide-ranging electric car plus its early engagement in autonomous driving, the whole wide-angle view of the Tesla management, including building the charging stations and the gigantic innovation on the battery side, came from an organizational innovation thinking, the way the cars can be configured and ordered and how easy it is to understand what a user gets is part of the experience innovation, the whole pricing pressure, initial losses and ways the cars get sold is part of the business model innovation. No other car manufacture in the world was so innovative on all fronts and took the automobile no longer as a single product – but a part of holistic user experience. Another example is Microsoft. It’s no news that Microsoft never invented a single product. The operating systems, DOS, and Windows have been acquired, and so were all the office products, the SQL server, and other tools acquired. So one could say Microsft is the least innovative tech company in the world. All they did is integrated all the products and sold them under their own brand. Many are still not fully integrated – 30 years later. Instead of putting all the resources, time, and money into building the solution, they needed to fulfill the vision they acquired. Microsoft’s real innovation is to create a user experience through integration and seamless exchange of data that nobody else saw as important. Nobody else did as well as they did. The experience innovation did not need a product but an architecture. The other innovation was a business model innovation. From the very early days, they committed not to build their own computers but pushed computer manufacturers to use their software. The non-compete commitment from Microsoft was compelling enough to get an exclusive commitment from the computer vendors. And knowing that all the office apps will need their operating system was good enough to give the OS away for peanuts. Business model innovation and experience innovation were strong. Understanding how the company operates and what they offer was so confusing for most competitors that nobody cracked their dominance – till today. As we will discuss other innovation types in the following posts, you will see the difference of those innovation types relative to the ‘good old’ product innovation. You will see that product innovation is not going away – it’s still an important part of an innovative business. Product innovation is becoming a commodity – but is no longer a differentiator.
In the next parts, 2, 3, 4, and 5, we will go into the other innovation types details. Here is just a quick snapshot to put the above in context.
The most effective way to innovate, only recognized by users and communicated through advocacy. Experiences include general customer experience all the way to entire entertainment solutions such as theme parks or highly interactive restaurant types, and lately, space travel. Experience innovation is very hard to copy and very hard to compete with. Usually, it takes highly creative minds to piggyback on a concept and develop a different model that makes the experience unique.
Business Model Innovation
The most successful way to innovate with a big impact on the industry. Typically, business model innovation goes hand in hand with experience innovation. It is the hardest innovation type for any competition to copy, even to compete with. Changing a business model is hard enough for a business to develop – it takes years for the competition to emulate and follow. Business model innovation has been the most successful type of innovation in the past 20 years. The biggest number of business model innovations emerged from the US.
Innovation within the organization, mainly for process acceleration, customer experience, resulting in increased profitability. It is tough to copy (if not done by consultants), making it very hard to understand from the outside and even the inside. Organizational innovation often requires a deep injection of new processes, different employees, and often a different management team. In large organizations, hundreds or even thousands of people may be affected by organizational innovation when they cannot unlearn and learn new ways of conducting their work. One question quickly rises to the top: “Is innovation killing jobs or the wrong team killing innovation?”
Supra-Enterprises, companies bigger than 25,000 employees, seem to have the hardest time creating truly ground-breaking innovation. In particular, in the western world, Top Executives, boards, Investor representatives, Unions, Industry associations, local government representatives, and maybe more have to agree on creating a new leadership structure to bring innovation forward. Inventing disruptive solutions often require major changes in the current teams as skills and experiences may shift significantly. Disruption in the automotive, energy, food industry requires knowledge and deep experiences in those industries not only on the enterprise side but also in external structures. A startup as a small company can go under the radar – a public company cannot.
Learn more about the General Innovation Type Differences.