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Innovation - The Ultimate Guide & Definition
In this guide, you will find everything you need to know about innovation, why it matters, and what’s critical to the success of innovation in your organization.
Definition: What is innovation?
|When you try to find an answer to what innovation is, you will get hundreds of different definitions. In essence, innovation is about creating something new. The term is derived from the Latin verb innovare, which means to renew. Today, innovation refers to creating, improving, or replacing a process, product, or service. The standard ISO 56000:2020 defines innovation as “a new or changed entity realizing or redistributing value."
When comparing various existing definitions, they all focus on novelty, improvement, and spread of ideas or technologies. Moreover, value creation is a defining characteristic of innovation. It means that novel solutions should solve meaningful problems to create new value. Based on these common elements, ITONICS defines innovation as:
Innovation is the process of turning an idea into a product or service which addresses a certain problem and creates value for the organization and the customer.
The history of innovation
It can be said that the history of innovation started with humans walking upright. The first human invention was stone tools about 2.6 million years ago. The series continues with the discovery of fire, the first calendar created (8,000 B.C.), the first wine developed in China (7,000 B.C.), or the invention of eyeglasses (1285), to mention a few. Three of the most famous inventions and disruptive innovations in former times were the light bulb (1879) by Thomas Edison, the first car (1886) by Carl Benz, and the Internet in the late 20th century.
With time, the frequency of radical innovations has accelerated. Our world, as well as the economy, has become more dynamic and fast-paced. Consumer needs and expectations are constantly changing. To remain competitive organizations are required to respond timeously. As a result, the current business landscape is largely characterized by, and dependent on innovation.
Why is innovation important?
Innovation in general offers tremendous opportunities for economic growth and solving critical problems amongst society such as poverty, global warming, or diseases. Examples of this are demonstrated in the attempts to reduce global CO² emissions, mitigate the climate crisis and develop innovative approaches to meet Sustainable Development Goals (SDGs).
Beyond this, innovation has evolved to pursue the ambitions of providing broader access to individuals. Solutions are increasingly focused on addressing inclusivity so that disadvantaged social groups or communities can access critical needs, such as the Internet or infrastructure. Innovations such as Mego ATM of the India-based fintech firm Finivis Pvt. Ltd can be looked to for inspiration on this front. The white-label micro-ATM costs half as much as a typical bank ATM and has no maintenance costs to meet the needs of rural communities and promote financial inclusion.
Given the importance of innovation for organizations, fast-changing consumer demands, and daunting competitive pressure, innovation is at the top of every strategic agenda. Established organizations must cultivate quick response times and a proactive approach to remain competitive when facing the increasing number of startups and new market entrants. Overall, innovation helps organizations and businesses grow, stay relevant for consumers and users, and differentiate themselves from the competition.
Also see: How Companies Can Innovation And Scale
The different types of innovation
As with the term innovation, you will encounter numerous suggestions when defining the different types of innovation. For this guide, we unpack the three most commonly referenced categorizations for "types of innovation." To provide more clarity, we offer a detailed explanation of The 4 Types of Innovation, which is the most common categorization, 9 Types of Innovation by Focus Area, which are referring to various fields in which innovation can take place within an organization, and, finally Doblin's 10 Types of Innovation.
The 4 types of innovation
Interchangeably known as the four levels of innovation, the four types of innovation represent recurring patterns of how companies can innovate. The innovations differ in what problems they aim to solve depending on the market and technology.
1. Incremental innovation
Incremental innovation entails the gradual yet continuous improvement of existing technologies, products, or processes to maintain an existing customer base and sustain a certain level of strategic positioning. As part of a balanced growth portfolio, incremental innovation makes up the first, inner horizon of the Three Horizons of Growth framework. It should account for approximately 70% of resource allocation, according to the 70-20-10 Rule of Innovation.
Example: The market for smartphones is an excellent example of incremental innovation. Innovations in this field are primarily updates in design or additional features. Another commonly referenced example is the innovation of razor blades. Companies like Gillette base their revenue models on iterative improvement, enhancing their product offering with new features such as heated razors, cooling technology, or precision trimmers.
2. Disruptive innovation
Disruptive innovation results in new technologies, products, concepts, or business models that drive transformation. It fundamentally changes an existing industry, creates new markets and value networks, displaces conventional practices, and eventually leads to new customer expectations. Compared to incremental innovation, disruptive innovation makes up the third, outer horizon of the Three Horizons of Growth framework and should account for approximately 10% of resource allocation.
Example: Netflix is a typical disruptive innovation business. Introducing a new, innovative business model supported by technology, Netflix's streaming services have disrupted an existing market and revolutionized how people consume television and rent movies.
|Harvard Business School Professor Clay Christensen, who first framed the term “disruptive innovation," has posited that every established company will one day be threatened or outpaced by a revolutionary newcomer. Customer preferences differ in every market. Some customers may be satisfied with very basic performance levels; others are more demanding and feel satisfied only with a very high level of performance of a technology. Disruptive small players that enter the market with a very low level of performance soon outperform more established than incumbents, and they move upmarket. Remaining competitive in a global environment is a dilemma faced by many cumbersome organizations.
3. Architectural innovation
Architectural innovation involves modifying existing components of a product, such as technology, and modifying them for a new market and purpose. This type of innovation usually holds a lower risk level since an already existing technology is applied elsewhere.
Example: Memory foam is one example of architectural innovation. Initially developed to improve the safety of aircraft cushions at NASA, we today use memory foam for mattresses or pillows in our beds.
4. Radical innovation
Radical innovation is the rarest of the four types. It is about developing technologies, products, or services that entirely replace existing offers and unlock a new market.
Example: One of the most famous radical innovations is the airplane. It reinvented traveling and created a whole new industry and market.
9 types of innovation by focus area
In the business context, innovation can take place in several areas. We have compiled the most common focus areas you should be aware of.
1. Organizational innovation
Organizational innovation describes the development of new ways to manage resources and organizational processes. It affects, for example, a company’s workplace structure and organization.
Example: Companies that first adopted the four-day week are a good example of organizational innovation. Spotify is famous for reinventing its organizational structure completely by introducing a unique agile model based on Squads, Tribes, Chapters, and Guilds.
2. Process innovation
Process innovation refers to implementing new solutions to improve processes, for example, in production, delivery, or customer interaction, and thus increase efficiency or effectiveness of the status quo.
Example: Companies that first adapted SaaS (Software as a Service) technology have changed the way data is aggregated, accessed, and managed. This has provided new avenues for process optimization.
3. Product innovation
Product innovation considers the development of new products or product features based on improved technology, material, or software.
Example: The evolution of the motor vehicle has led to the advancement of battery-powered engines in electric cars.
4. Service Innovation
Service innovation refers to the creation and improvement of new and existing service offerings. This could include for instance customer support, training, warranties, and guarantees.
Example: Online delivery services offered by Supermarkets have created new value for customers through providing convenience.
5. Business model innovation
Business model innovation looks to find new means of delivering value to customers and makes use of technologies, channels, or markets to generate new revenue streams and create customer value.
Example: An example is the car-sharing services of OEMs (Original Equipment Manufacturers) in the automotive industry. By renting out their cars they created an entirely new business model to attract a new customer audience.
6. Technology innovation
Technology Innovation refers to the development of solution drivers and represents a tool designed through R&D and innovation in response to new consumer needs or desires. Technologies are an indication of market push, enabling new business models, products, and services.
Example: Novel technologies like AI (Artificial Intelligence) or IoT (Internet of Things) are technology innovations. These often are the basis for other innovations in various fields.
7. Marketing innovation
Marketing innovation describes new methods or strategies in terms of product design/packaging, promotion, price, or channels.
Example: Brands like Coca-Cola or Nutella with campaigns that allow customers to create and buy individual product packaging (e.g. with their name on the bottle).
8. Social innovation
Social innovations are new solutions for improved welfare and wellbeing of individuals and communities. This could imply for instance a change of products, processes, working conditions, or education.
Example: Regulations ensuring a certain share of females on boards or measures to tackle the gender wage gap.
9. Open innovation
Open innovation is a collaborative approach to innovation. By opening up the innovation process and integrating external stakeholders and knowledge, organizations increase their own innovation capabilities and achieve a competitive advantage.
Example: Crowdsourcing challenges, whereby companies like BMW or Cisco collect innovative ideas or solutions for a problem from an external crowd, exemplify open innovation.
Doblin’s 10 types of innovation
Doblin's Ten Types of Innovation is a framework that encourages organizations to look beyond product innovation and explore innovation opportunities across multiple channels—including product offering and a company's configuration and customer experience. You can combine multiple types to unlock new opportunities and strengthen your approach to innovation.
The different types within the innovation framework are categorized into three focus areas:
- Configuration: The types of innovation in this area focus on an organization's internal processes and its business system.
- Offering: The types of innovation are focused on an organization’s core product or service, or a set of products and services.
- Experience: Here, the types of innovation focus on elements of an organization and its business system that are more customer-oriented.
- Profit Model: New ways to generate revenue, reflecting what customers value.
- Network: Innovative approaches to connecting and collaborating with other people or organizations to create value.
- Structure: Innovations on how to manage hard, human, or intangible company assets for value creation.
- Process: Enhancement of the activities and operations required in an organizations’ value chain.
- Product Performance: Innovations addressing distinguishing product features and functionalities.
- Product System: Innovations addressing the development of complementary products and services.
- Service: Innovative ways to support and amplify the utility, performance, and value of your products and services.
- Channel: New innovative approaches on how to deliver an organization’s offerings to clients.
- Brand: Innovative ways organizations communicate and promote their offerings and business to increase brand awareness.
- Customer Engagement: Developing meaningful customer relationships by fostering interactions with customers through new approaches.
The innovator's dilemma
More than ever, companies must strive for a holistic approach to innovation and sustainable innovation culture in order to not disappear from the landscape. Due to a lack of necessary resources, the permanent overload of too much information, and the constant pressure to focus on operational business and performance, many do not know how to approach the topic properly. Only a few companies are ready to embark on the entire innovation journey and embrace the associated adventures. However, the majority still experience the "Innovator's Dilemma", i.e. they rely too much on old successes and thus run the risk of soon being overrun by digital disruption and the increasing speed of innovation.
Yet innovation managers and their teams today face a number of challenges that sometimes make innovation management in companies seem like a doomed endeavor.
Among those challenges are:
- Lack of leadership buy-in and budget
- No structure or measurement
- Missing processes
- Passive monitoring of trends, tech, startups
- Inability to act on signals
- Unstructured idea collection
- Lack of collaboration
- Information silos
How to avoid 'innovation theater'
Given the many challenges innovation teams face today, it's no wonder that innovation tends to end up stepmotherly in a company suggestion scheme in many organizations. In particular, a lack of commitment from management and thus a lack of empowerment of innovation departments and their initiatives often lead to so-called innovation theater. Innovation theater describes a state in which innovation initiatives appear to be effective and impact the business but actually have only a little relevance.
As such, common activities are well and truly marketed as breakthrough initiatives, which can be detrimental to innovation managers whose actual breakthrough initiatives may have been shelved or unsuccessful due to a lack of adequate funding. The innovation process is about exploring unknown territories and developing measures of the future. Innovation is also about meeting current challenges with the right actions, whether it is political instability, the emergence of breakthrough technological advances, or a global pandemic. Particularly for organizations that have not stepped out of their comfort zone when it comes to disruptive innovation strategies in the past, it can quickly become overwhelming.
So the key is to keep pushing boundaries and not be constrained by failed projects or a lack of commitment from management. Failure is an important stop on the innovation journey and fertile ground for change.
The innovation ecosystem
A company is surrounded by a number of other players working on innovation topics and wanting to shape the future. The goal should, therefore, be to build and align an ecosystem that is as complete, thriving, and interlinked as possible in order to provide the necessary breeding ground for innovative developments. On the one hand, this gives you access to external perspectives, resources, and inspiration; on the other hand, it also allows you to significantly drive and test your own initiatives. Let's take a look at the different players.
1. INTERNAL CAPABILITIES
At the core of an innovation ecosystem are all the teams and departments that work every day to plan the innovation agenda, execute initiatives, and drive product developments. Those functions also manage innovation and technology portfolios and are the starting point for any innovation effort.
The key players include:
- Leadership team
- Innovation, foresight & strategy departments
- R&D functions
- Enterprise architects
An organization’s innovation initiatives are the connection point to the outside world. This is where the hot stuff happens! In addition to innovation labs, intrapreneurs, and innovation competitions, you'll also find so-called hackathons and workathons here - in other words, everything that is specifically intended to drive change inside and outside your company.
Innovation initiatives include:
- Innovation labs
- Global innovation challenges and competitions
- Innovation events
2. EXTERNAL DRIVERS
An established organization should constantly be on the lookout for the next big thing to stay competitive in the long run. While innovative newcomers to the market are still looking for infrastructure, resources, and market access, corporates should seek access to the entrepreneurial ecosystem to bring external innovation power into their own businesses. This ecosystem is bustling with a number of players, such as incubators, accelerators, or venture capitalists, that will connect your organization with the right ventures and entrepreneurs.
The key players of the entrepreneurial ecosystem include:
- Startups & ventures
- Venture capitalists and business angels
In addition to entrepreneurial actors, there are a number of other sources of innovation that companies should look at more closely as part of their environmental scanning activities. In this way, the entry of new players into an industry, changing consumer tastes, technological developments, or political movements can be continuously monitored to understand potentially disruptive changes and future-proof your business.
Your scanning strategy should include:
- Research institutions & academia
- Suppliers & other partners
3. Combining EXTERNAL DRIVERS with INTERNAL CAPABILITIES
All of the above-mentioned players acting in a corporate innovation ecosystem should come together in a Digital Innovation Space - a collaborative innovation platform or shared knowledge that links the inside and outside world. Learn here more about the most important innovation tools.
The innovation process
Let’s agree on something at the very beginning: innovation starts with information, not with ideas.
Simply put, innovation is much more than ideation or out-of-the-box ideas — it should provide answers to these three strategic questions as parts of one holistic innovation strategy: ‘Where to play?’, ‘How to win?’ and ‘What to execute?’.
We believe that successful innovation management requires a structured innovation strategy that nurtures innovation culture and enables efficient process flows to make sense of and manage the ever-increasing amount of data at every stage of innovation and strategic planning and execution. An end2end innovation process looks at everything from scanning a corporate environment to planning future innovation initiatives on a roadmap.
1. Where to Play
Before starting collecting ideas into the blue, important questions might include: What should new ideas be gathered for? What is the next big thing that our existing or new customers need? In which business areas is future growth possible or even necessary? The goal of ‘Where to Play’ is to identify the drivers of change, trends, technologies, and startups that are shaping your business environment. This work forms the basis for all subsequent steps in a holistic innovation process.
By considering the relevance, and associated impact related to this information as well as the interconnections between data points, teams are empowered to derive fresh opportunity spaces.
During the ‘Where to Play’ phase you:
- Collect customer needs, market trends, and technology trends (e.g. by markets, target groups, pain points)
- Focus on what has changed, given on the new situation, and your expectations about how your future customers will behave
- Evaluate the collected trends and technologies with regard to the new situation
2. How to Win
This stage employs organizational capabilities to align people, processes, and objectives and establish innovation-friendly conditions for targeted opportunity and idea development. By collaboratively engaging with teams to evaluate opportunity spaces and generate qualified concepts, teams are enabled to identify promising courses of action and selectively pursue the right ones.
In the ‘How to Win’ phase you:
- Collect innovation and R&D projects in your innovation pipeline
- Connect them to your Trend & Technology Radar: To which trends, technologies, and customer needs are related to?
- De-Invest projects that are connected to irrelevant/ no longer viable topics
- Develop new ideas in prioritized areas where you don’t have projects yet
3. What to Execute
This stage focuses on establishing balanced innovation portfolios and executing innovation activities throughout the process with excellence. By executing against a balanced innovation portfolio, mapping and monitoring strategic projects to shared roadmaps, teams are able to unify information and successfully operationalize innovation activities with transparency.
In the last phase, ‘What to Execute’, you plan your way forward:
- Map your activities on an integrated roadmap and provide transparency
- Harmonize all activities across units and organizational boundaries
- Keep track of the overall status, progress, and milestones
Key success factors of innovative companies
Innovation is embedded in the DNA of some of the most successful companies of our time. If you look at these organizations, it quickly becomes clear that they have the following things in common: quickly understanding and responding to change, a high willingness to experiment, an innovation culture that not only promotes innovation but requires it, strong employee engagement, and a heavy focus on customer needs.
- Ability to pivot: being attentive to change and fast enough to shift a course of action.
- Failing fast and forward: letting room for risk and failure can lead to opportunities.
- Making bold bets on the future: focusing on innovation portfolios that pursue incremental as well as disruptive initiatives.
- Employee engagement: leveraging collective intelligence and activating all employees, e.g. in global innovation campaigns or ideation challenges to engage with the future of the company.
- Customer centricity: understanding and responding to changes in customer behavior and needs.
- Innovating everywhere: enabling innovation from anywhere by empowering innovation teams with transparent and collaborative tools.
Best practices of innovative companies
Below, we have taken a closer look at some of the companies that are already successfully implementing the approaches mentioned in the previous chapter.
Netflix: Champion of disruptive innovation
Netflix is a prime example of disruptive innovation, as it has completely revolutionized the way people enjoy entertainment on a daily basis. By primarily targeting the competition's fringe audiences, such as early adopters and digital natives, Netflix was able to enter with an alternative product relatively cost-effectively and then gradually work its way up into the competition's core market. In this way, classic industry giants like Blockbuster were pushed out of the market forever.
Having expanded into more than 190 different countries, the streaming provider continues to strive for innovation excellence at scale. Now with its own film production division, Netflix has not only made the leap from being a pure streaming provider into the mainstream film business, but also serves countless niche groups in addition to the masses. The strong focus on personalized movie experiences, user experience (UX) optimization for multiple devices, and a smart algorithm make Netflix a platform that is hard to imagine everyday life without.
The power of purpose-driven innovation at Distell
Distell, Africa's leading producer and marketer of wines, spirits, ciders and other ready-to-drink beverages sold around the world, experienced significant disruption under the severe and unexpected pressure of the COVID-19 pandemic. During that time, only companies offering essential goods and services were allowed to operate during this time. Alcohol, of course, was not one of them, massively affecting all areas at Distell. The organization had to decide what could be done within its means. The situation provided an incredible platform as employees who could not go about their daily work came together online to somehow make a difference and work together on accelerating innovation.
Among these initiatives were:
This agile approach resulted from the availability of open-minded, resilient, and quick-response cross-functional team members who could identify opportunities even in such challenging circumstances by applying existing skills in new ways. For a beverage manufacturer, this could lead to the production of alternative beverages. But it could also be about finding new ways to leverage go-to-market capabilities, deep consumer insights and understanding of future consumer needs. In terms of transformative innovation, you could be looking at completely new and different business models.
Tune into the podcast episode “The Power of Purpose-Led Innovation” with Caroline Snyman from Distell or read the blog article "The Power Of Purpose-Driven Innovation In A Pandemic".
Accelerating innovation at DZ Bank
|The days when a solid business model worked for decades are long gone. The banking sector in particular has a lot of catching up to do. The new customer expectations of financial service providers in the digital age and the appearance of new digital competitors (fintechs) on the market are challenging all areas of the value chain in the banking business. This also poses new challenges to innovation departments in particular. So how does a major bank manage to become an innovative thought leader?
DZ BANK Group, Germany's second-largest bank by assets, has successfully implemented a software platform called the "DZ BANK Innovation Radar" to link emerging trends and technologies (external perspective) with its own innovation activities (internal perspective) to gain a better understanding of the company-wide innovation portfolio (see also: DZ BANK Innovation Blog). With hundreds of employees on the platform, innovation has become accessible across different departments, fostering company-wide collaboration and transparency.
Measuring innovation success
As already mentioned in a previous chapter, innovation can quickly end up in innovation theater - in other words, much ado about nothing. In order to identify the really profitable innovation initiatives in your organization, you should have the right performance metrics at hand that can answer this very question.
We differentiate between four types of innovation metrics:
- Innovation Strategy Metrics
- Innovation Organization Metrics
- Innovation Culture Metrics
- Innovation Operation Metrics
1. Innovation strategy metrics
The job of strategic KPIs is to measure the progress in reaching a future competitive advantage. They help to manage the strategy capabilities. Thus, they are most often quality-related and operationalize future markets, action fields, and goals.
KPIs include e.g. innovation portfolio balance, market growth proportion, growth opportunity index.
2. Innovation organization metrics
The job of organization KPIs is to align people and processes to your strategic objectives. They help to manage the coordination process. Thus, they are a mix of quality-related, time-related and cost-related metrics to ensure the efficiency and effectiveness of your organization.
KPIs include e.g. innovation time, R&D budget, activity index.
3. Innovation culture metrics
The job of innovation culture KPIs is to ensure a high engagement level of actors inside and outside an organization. They help to manage the engagement capabilities. Thus, they are mostly a mix of quality-related and time-related metrics to ensure efficient and effective collaboration.
KPIs include e.g. failure index, employee contribution, employee retention or budget for incentives.
4. Innovation operation metrics
The job of innovation operation KPIs is to ensure the effectiveness and efficiency of innovation projects. They help to manage the steps of the execution process. Thus, they are mostly a mix of revenue-related and cost-related metrics ensuring the transition of efforts into value.
KPIs include e.g. health status, time-to-adoption, stickiness or time-to-insight.
Most important tools for innovation rockstars
Innovation big picture - understanding
The Innovation Big Picture gives you a holistic overview of the (innovation) value chain. Where does innovation start? Where does it end? And how do individual measures within the innovation process interact and depend on each other? If you're at the very beginning of the innovation journey, it's best to start with just that - developing an understanding of the bigger picture.
Innovation glossary - defining
If you want to deepen your knowledge of innovation terminology, use this Innovation Glossary or create your own to align your organization around a common language. An innovation glossary defines the most important key terms you are most likely to encounter on your innovation journey. It is fundamental to understanding innovation methodology and its core concepts.
Innovation maturity assessment - focusing
After understanding the process and terminology, you should be able to answer an important question: Where do I actually start? The Innovation Maturity Assessment will help you to understand where to put focus. Use this quick assessment to determine the maturity of your company's forward-looking activities and amplify the impact of your innovation initiatives. The assessment can be used both as a status analysis and benchmark to other industry leaders, and as a guide for setting priorities.
Innovation framework - developing
The success of the innovation leaders of our time can be systematized. The Innovation Framework maps all areas of innovation competence relevant for long-term impact and forms the perfect follow-up step after having accomplished the Innovation Maturity Assessment. Use it to set your focus, develop new competencies in your organization and monitor progress in key areas.
The Innovation Framework is based on extensive experience from hundreds of innovation projects and academic expertise. It thus holistically bundles the most important goals of innovation management into a controllable framework.
Innovation posters - inspiring
Are you lacking inspiration? Pimp your innovation workspace with these inspiring posters that remind you daily why innovation is key to success! Download, print, hang and become a true Innovation Rockstar!
Digital innovation platform - scaling
You have made it this far? Awesome! But that was only half the battle. If you really want to maximize the impact of your innovation activities and firmly anchor them globally in your organization, only a digital innovation space can take you there. A central go-to space for all topics related to innovation in your organization helps you create transparency, break down silos, and involve different teams or even locations to work collaboratively on the growth of your company.
The ITONICS Innovation Software maps your innovation value chain from start to finish and provides touchpoints to various stakeholders - innovation and strategy departments, R&D, the leadership board, suppliers, clients, academia or your whole organization.
Get started today!
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