When it comes to an innovation strategy everyone these days wants to be a “disruptor” – an organization bringing an innovation to the market that upends established industries. Disruptors (think Amazon, Apple, Netflix, Google, Facebook, etc.) can go on to make massive profits and are celebrated in popular writings on innovation. The disrupted (think Sears, Nokia, Blockbuster, etc.) go bankrupt and are ridiculed. Given the choice, it’s not surprising most managers would aim to be the former rather than the latter!
The common belief that disruption is a universally attractive innovation strategy reflects a grossly simplified and inaccurate view of how innovation creates value. There are different types of innovation and each can lead to juicy long-term profits and sustained competitive advantage. A key job of senior leaders is to determine which types of innovation are best to pursue for their organizations given unique capabilities, competitive circumstances, market environment and technological landscape. That is, they need to create an innovation strategy.
Innovations can embody some combination of change to an organization’s technology base or to its business model.
Four types of innovation to create your innovation strategy:
- Routine Innovation exploits a company’s existing technology base and its current business model. An example would be Audi launching a next generation model.
- Disruptive Innovation breaks from a company’s existing business model but does not require learning fundamentally new technological capabilities. For instance, ride sharing services represent potential disruptive innovation for the auto industry because they fundamentally change the business model from one of product sales to service. Audi has been offering on a pilot basis a ride sharing service (Audi on Demand). It’s a new business model for Audi, but there is not much new technology: the cars they use are traditional Audi models.
- Radical Innovation is the mirror opposite of disruptive innovation – it requires the creation of new technology but has little impact on the company’s existing business model. The capability to design and manufacture an electric vehicle is radically different from that which is required for internal combustion cars but the business model for electric vehicles is essentially the same.
- Architectural Innovation combines both new technology and a new business model. A car company that developed an autonomous vehicle, but then commercialized it through ridesharing, would be engaged in architectural innovation.
A commonly held view is that routine innovation is not “real” innovation and that any company focused on it is myopic at best and suicidal at worst. But the truth is that routine innovation can, under the right conditions, be extremely profitable. Just look at Apple’s astronomical growth, fueled largely by the routine innovation of new iPhone models. Routine innovation should also typically be an essential part of a company’s innovation strategy mix. Alphabet, the holding company that owns Google, is a great example. Its core internet search/advertising business (Google) is growing rapidly and is massively profitable. It only makes sense to focus on exploiting the Google platform through routine innovation. But Alphabet also puts a small fraction of resources into “other bets”—which include such concepts as autonomous vehicles, drone delivery, health and life sciences and balloon WiFi.
Innovation strategy is about getting the right mix of projects devoted to different types of innovation. In rare instances, it is a good idea to go all in on one type of innovation. And some companies’ core business may be growing so strongly that they can focus completely on routine innovation. But for most companies, the right answer is a portfolio composed of different types of innovation. There is no single project mix – a “golden rule,” so to speak – that is best for every company. The balance between investments in routine, disruptive, radical and architectural innovation depends on where you are in technology cycles, the unmet needs of customers and competitive and market dynamics. To be an effective innovator, you need a strategy, not a slogan. Explore “Creative Construction” to learn more.