Historically, innovation has been defined as ‘the development of new products, changes in design of established products, or use of new materials or components in the manufacturing of established products’ – White et. al (1988).
In recent years, innovation has been categorized more broadly according to its objective. Thus, there is a multitude of different types of innovation with certain objects.
Product, service, process and business model innovation
The most common objectives of innovation are products, services, processes and business models. Despite there being various more types of innovation, like organizational, social and environmental innovation, I’ll focus on those main four in this post.
Product innovation refers to an improvement in performance characteristics and attributes of existing product offerings. By doing so, this type addresses a customer’s or company’s need and thereby adds value. Furthermore, products can be both tangible and intangible. Tangible or material products would cover a company’s new product like the latest iPhone. Intangible products cover services such as consulting services and are sold directly to the customer, just as material products.
However, product innovations do not always have to include new-to-the-world technology. Conversely, it can also be an incremental improvement of an existing version, e.g. a new generation or just a new feature.
How can it be that there is a differentiation between product and service innovation even if services can also qualify as intangible products? The difference is that there are many services which are not directly sold to the customer but still offered to them. Like in the case of return shipping, this might not be something that a customer intently purchases but still enjoys as a service. Therefore, service innovation include both the directly and indirectly offered services.
Moreover, this kind of innovation is often an elegant way for companies to differentiate themselves without necessarily putting in all the effort to create sustaining competitive advantages, as Amazon demonstrates with its customer friendly return policies.
Processes describe the way that certain inputs are turned into outputs. Therefore, processes often describe a way in which a product is produced or a service is provided. By innovating this process, the inputs and outputs stay the same but the method of production or provision is improved.
In a recent article I described how technology changes processes in the smelting industry. By introducing advanced analytics, the inputs and outputs remain unchanged but the process becomes more efficient leading to higher profitability.
Business model innovation
There are several different definitions of business models. The most pragmatic one I know is given by Amit and Zott (2012, p. 42) by stating that a business model is ‘a system of interconnected and interdependent activities that determines the way the company “does business” with its customers, partners and vendors’.
In terms of potential for the innovating company, Geissdoerfer et at. (2018) discuss that business model innovations have higher complexity but also higher competitive potential than pure product and service innovations. The reason for that is the nature of the business model change. Transforming the way a company “does business” also means that fundamental capabilities and processes are changed. Thus, a business model innovation might be more risky than a product objective, however, yields higher potential returns in the longer term.
Interestingly, this type of innovation is often connected with disruptive innovation (which is a sort of degree of innovation, will be covered in a future post!). On a constant basis since about 2003, Tesla is changing the way that cars are sold. Therefore, competitors adapt to the online sales channel of Tesla and fundamentally change their incumbent models of car dealerships. As a reason, many leading companies have had problems to adapt to this trend or are still refusing to adapt. Consequently, this might be less risky in the short-term but might make those companies miss out in the longer term.
The discussed types of innovation can appear in various different forms in a given organization. Often, there is no certain way to clearly tell apart the different kinds and thus, in practice they might blend together. Nevertheless, being able to implement those types of innovation in a company’s strategy and thereby aiming for a certain outcome leads to a much higher chance of actually achieving the desired innovation result.
Amit, R. & Zott, C. (2012): Creating Value through Business Model Innovation. MIT Sloan
Management Review, March 2012.
Geissdoerfer, M., Vladimirova, D., Fossen, K. V., & Evans, S. (2018). Product, service, and business model innovation: A discussion. Procedia Manufacturing, 21, 165–172. https://doi.org/10.1016/j.promfg.2018.02.107
White M., Braczyk J., Ghobadian A. and Niebuhr J. (1988): Small Firms Innovation: Why Regions Differ. Policy Studies Institute, University of Westminster.