Types of Innovation

The goal of creating new value is something that many managers aspire to and few truly achieve. Prior to attempting to create new value, it’s wise to understand how the new value will enhance the position of your business. When a leader embarks on innovation efforts, there are four potential outcomes:

  • 1. Differentiation: providing a distinct offering that leads to new profits
  • 2. Neutralization: eliminating a gap in offerings or performance relative to the competition and market standards
  • 3. Productivity: increasing efficiency or efficacy of processes in order to reduce costs
  • 4. Waste: efforts that don’t result in the first three outcomes and miss the mark of providing new value at an acceptable cost45

Obviously, no one is seeking waste, the fourth potential outcome of innovation efforts. The key to avoiding wasted innovation efforts is to understand the strategic context the business is in and select the type of innovation initiatives that have the greatest likelihood of economic value at that point in the category’s evolution. As Harvard Business School Dean Nitin Nohria wrote, “A lack of contextual sensitivity can trip up even the most brilliant of executives . . . the risks of contextual insensitivity are concrete. If you can’t read the business landscape, you risk leading your organization in the wrong direction.”46

As you identify and vet ideas for creating new value, research by author Geoffrey Moore provides a powerful analytical framework for matching different types of innovation options with the context of the business.47 Building off the value disciplines research of Michael Treacy and Fred Wiersema, Moore proposes that there are 14 different types of innovation that could be leveraged when aligned with the appropriate category life cycle (growth, mature, or declining).48 The value-disciplines concept uses research to support the fact that financially successful firms focus a disproportionate amount of resources in one of the following three value disciplines:

  • 1. Product leadership: cutting edge offerings
  • 2. Customer intimacy: tailored solutions
  • 3. Operational excellence: low cost and/or convenience

Coupled with these concepts are the four phases of the buying hierarchy described by professor Clayton Christensen:49

The buying hierarchy explains that when no current offering satisfies a customer’s need for functionality, the decision-making factor becomes functionality. Once two or more offerings demonstrate adequate functionality, the buying criterion shifts to reliability—does the offering consistently perform at the desired level? As reliability is shown by two or more players, the purchase decision moves to convenience—is it easy to use and hassle-free? Finally, if offerings demonstrate reliable functionality and similar convenience, the decision point in the buying hierarchy shifts to price.

The buying hierarchy can be overlaid onto the Innovation Zones framework from left to right, with functionality lining up with product leadership, reliability and convenience with customer intimacy, and price with operational excellence. As an example, working on customer intimacy innovation initiatives for an offering in a relatively new market will probably not be as productive because customers will be more focused on functionality (Does it work?) and reliability (Does it work consistently?).

Figure 1.8 shows the stages of the category life cycle aligned with the value disciplines and 14 types of innovation. According to Moore, in a growth market, the product leadership value discipline tends to produce more effective types of innovation that relate to disruption, product, application, and platform. Here, the market is searching for improvements in functionality and reliability. In an early maturing market, the customer-intimacy value discipline has a greater likelihood of yielding fruitful innovation in the form of line extensions, enhancement, marketing, and user experience. At this point in the buying hierarchy, market entrants are reaching parity as it relates to an offering’s features and benefits. Therefore, an investment in customer intimacy types of innovation helps deepen relationships with current customers.

As the category life cycle moves to late maturity, the operational excellence zone featuring value engineering, integration, process, and value migration innovation offer greater chances of producing value. While both in the mature market part of the category life cycle, the

Types of Innovation

Figure 1.8 Types of Innovation

Customer Intimacy Zone works on differentiating the offering by making it more attractive to the customer (e.g., external, demand side). The Operational Excellence Zone focuses on enhancing the offering from the perspective of the company (e.g., internal, supply side). Finally, as the market declines, efforts around organic innovation and acquisitions provide opportunity for creating new value.

There are 14 different types of innovation that can create new value, depending on where you are in the category life cycle and what capabilities your firm possesses. Table 1.5 provides brief definitions and examples of the types of innovation in the Product Leadership Zone.

Table 1.6 provides brief definitions and examples of the types of innovation in the customer intimacy zone.

Table 1.7 provides brief definitions and examples of the types of innovation in the Operational Excellence Zone.

Finally, Table 1.8 provides brief definitions and examples of the types of innovation in the Category Renewal Zone.

The following questions can help you facilitate thinking and conversation around using the Innovation Zone framework to find areas for creating new value:

Which phase of the category lifecycle are we in: growth, early maturity, late maturity, or decline?

Which phase of the buying hierarchy are potential customers looking to satisfy: functionality, reliability, convenience, or price?

Table 1.5 Product Leadership Zone

Type

Definition

Example

Disruptive

Discontinuous technology change or business model

CVS Caremark MinuteClinics

Application

Develop new markets for existing products by finding untapped uses for them

LinkedIn for talent management

Product

Differentiate via features and functions not currently available

Coming’s Gorilla Glass for iPhones

Platform

Create a simplifying layer over a complex layer

Facebook

Table 1.6 Customer Intimacy Zone

Type

Definition

Example

Line extension

Structural changes to offering to create a unique subcategory

Lego Friends series for girls

Enhancement

Alter a single dimension of the offering to stimulate interest

Coors Light Cold Activation bottles

Marketing

Create a unique interaction with a prospective customer during the purchase process

Apple retail stores

Experiential

Experience of the offering as primary value driver

Xbox Live gaming with users around the world

Table 1.7 Operational Excellence Zone

Type

Definition

Example

Value engineering

Remove cost from materials and manufacturing of offering without altering benefits to customer

LCD televisions

Integration

Decrease customer’s cost of maintaining a complex operation by offering a centrally managed system

Amazon.com cloud services

Process

Remove waste from the processes producing the offering

IKEA

Value migration

Alter business model elements to shift from commodity points to profit points in value chain

Netflix original content distributed through streaming video versus DVDs delivered by mail

Table 1.8 Category Renewal Zone

Type

Definition

Example

Organic

Employ resources to

McDonald’s specialty

reposition into a growth phase

drinks

Acquisition

Merge or acquire

Google (Motorola)

Based on the phase of the category lifecycle and buying hierarchy you’re in, utilize the following questions from the corresponding Innovation Zone to stimulate thinking:

 
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