What type of innovation are you talking about?
People often don't understand each other when they talk about innovation. The main reason for this confusion is that there are different types of innovation. To be understood, it is fundamental to specify what type of innovation you are talking about.
To bring clarity to any discussion on innovation with our clients we distinguish between three different types of innovation, heavily borrowed from Harvard professor Clayton Christensen: efficiency, sustaining, and transformative innovation.
Those three different types of innovations require different skills, resources, experience levels, and support from the organization. Ideally, they also live in different parts of the organization and have different degrees of autonomy in order to succeed. Let’s dive into each of them, one by one.
Source: The Invincible Company, by Strategyzer
Efficiency Innovation
Efficiency innovation is about exploring opportunities that improve operational aspects of a company’s existing business model(s). They don’t change the business model in a substantial way. Typical examples include technologies that improve operations, distribution, or support, and process innovations that make an organization more effective.
Advantages
Low risk and uncertainty
Immediate impact
Predictability
Covers the entire range from small to large financial impact
Disadvantages
No protection from disruption
Doesn’t help position the company for the future
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Efficiency innovation can happen across the organization and at every level, ideally with the support of professional innovators.
Sustaining Innovation
Sustaining innovation is about exploring opportunities that build on top of a company’s existing business model to strengthen it and keep it alive. Typical examples of sustaining innovation are new products and services, new distribution channels, new support and production technologies, or geographical expansions.
Advantages
Relatively low risk and uncertainty
Short to medium-term time horizon
Substantial financial impact
Helps remain competitive
Disadvantages
Little to no protection from disruption
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Sustaining innovation requires dedicated innovation teams with strong support from or inside operating business units.
Transformative Innovation
Transformative innovation is the most difficult innovation. It’s about exploring opportunities outside of the traditional field of a company. This type of innovation usually requires a radical change or expansion of a company's business model(s). It includes opportunities that help a company expand and create new growth, but also covers opportunities that disrupt the existing business(es).
Advantages
Positions the company for the long-term
Offers protection from disruption
Disadvantages
High risk and uncertainty
Rarely quick returns
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Transformative innovation requires dedicated and autonomous innovation teams outside of business units, with access to skills and resources from operating businesses.
Illustration with Amazon
Source: Strategyzer
Efficiency Innovation
When Amazon implements robots in their warehouses, it is very innovative and improves the efficiency of their warehouse management. It changes the backstage of their e-commerce business model and can have a significant financial impact, be it in terms of operations cost savings or their ability to handle more orders. But robots in warehouses won’t protect Amazon e-commerce business model in the event it faces a risk of disruption in the future.
Sustaining Innovation
When Amazon launched e-books and the kindle e-book reader, they added value propositions that reinforced their online bookstore business model and significantly increased their revenue streams.
Transformative Innovation
The exploitation of their e-commerce business model enabled Amazon to develop strengths in Information Technology, both in terms of infrastructure (e.g. data centre management) and solutions (e.g. e-commerce management). They explored the opportunity to re-use those Key Resources to design completely new Value Propositions for new Customer Segments around “web services”. This led to the creation of a completely new business model with Amazon Web Services (AWS) that lives next to their e-commerce business model.
Most of our customers do not innovate like Amazon. They often have an innovation portfolio that is massively geared towards efficiency innovation, with a low percentage of sustaining innovation projects, and a few rare transformative innovation projects. Yet, it is this type of innovation that produces the highest long-term value and creates protection from disruption. One of our goals with The Invincible Company is therefore to help companies rebalance their exploration portfolio towards more transformative innovation
Find out more in our latest book: The Invincible Company
Note: an earlier version of this post was originally published on the Strategyzer blog
