Types of Innovation

Why This Matters

Innovation isn't just about inventing something new—it's about understanding how and where change happens within organizations and markets. You're being tested on your ability to distinguish between innovation types based on their scope, target, and market impact. Exam questions frequently ask you to identify which type of innovation a company is pursuing, or to recommend the appropriate innovation strategy for a given business scenario.

The key insight here is that innovations differ along two critical dimensions: what is being changed (products, processes, business models, or organizational structures) and how dramatically it disrupts existing systems (incremental tweaks vs. market-creating breakthroughs). Don't just memorize definitions—know what strategic purpose each type serves and when a company would choose one approach over another.

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Innovations by What Gets Changed

These categories describe the target of innovation efforts—where in the business the change actually happens. Companies often pursue multiple types simultaneously, but each requires different capabilities and resources.

Product Innovation

• Creates new or improved goods and services—the most visible form of innovation and often what consumers notice first
• Driven by changing customer needs—successful product innovation requires deep market research and customer insight
• Directly impacts competitive positioning—new features, designs, or technologies can differentiate offerings and capture market share

Process Innovation

• Improves production or delivery methods—focuses on how things get made rather than what gets made
• Targets efficiency, cost reduction, and quality—often invisible to customers but critical for profitability
• Enables faster time-to-market—automation, workflow re-engineering, and new technologies streamline operations

Service Innovation

• Enhances how services are created and delivered—particularly important in service-dominant economies
• Prioritizes customer experience—personalization, convenience, and responsiveness are key metrics
• Often technology-enabled—mobile apps, online support platforms, and AI-driven personalization are common examples

Business Model Innovation

• Changes how value is created, delivered, and captured—transforms the fundamental logic of the business
• Introduces new revenue streams or pricing strategies—subscription models, freemium offerings, and platform economics are classic examples
• Responds to market disruption—often necessary when traditional approaches become obsolete

Organizational Innovation

• Restructures internal systems and management practices—affects how people work together rather than what they produce
• Improves collaboration and decision-making—new team structures, remote work policies, and cultural initiatives fall here
• Enables other innovation types—organizational agility often determines whether product or process innovations succeed

Marketing Innovation

• Develops new strategies for customer engagement—changes how companies communicate and build relationships
• Leverages data and digital channels—social media campaigns, influencer partnerships, and targeted advertising are typical approaches
• Enhances brand positioning—aims to shift customer perceptions and reach new segments

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Innovations by Degree of Change

These categories describe how much disruption an innovation creates—from minor improvements to industry-transforming breakthroughs. Understanding this spectrum is critical for strategic planning and risk assessment.

Incremental Innovation

• Makes small, continuous improvements—enhances existing products, services, or processes without fundamental changes
• Low risk and easier to implement—builds on existing capabilities and customer relationships
• Sustains competitive position—software updates, minor redesigns, and efficiency tweaks keep offerings current

Radical Innovation

• Creates breakthrough changes that transform industries—fundamentally alters how markets function
• Requires significant investment and risk tolerance—often involves new technologies, capabilities, and business models
• Can create entirely new markets—the internet, smartphones, and electric vehicles exemplify this category

Disruptive Innovation

• Creates new markets by targeting overlooked segments—typically starts with simpler, cheaper alternatives that established players ignore
• Follows a bottom-up trajectory—begins serving low-end or non-consumers, then improves to challenge incumbents
• Displaces established market leaders—streaming services disrupting cable TV and digital photography replacing film are textbook examples

Architectural Innovation

• Reconfigures existing components into new systems—the individual technologies aren't new, but their combination creates novel value
• Changes relationships between components—modular designs and technology integration exemplify this approach
• Often overlooked by incumbents—established firms may have the components but fail to see new configuration possibilities

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Quick Reference Table

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Self-Check Questions

1. A company redesigns its supply chain to reduce delivery time by 40% without changing its products. Which type of innovation is this, and why doesn't it qualify as product innovation?

2. Compare and contrast disruptive innovation and radical innovation. How would you distinguish Netflix's streaming service (disruption) from the invention of the internet (radical)?

3. Which two innovation types both focus on customer-facing changes but differ in whether the output is tangible or intangible? Give an example of each.

4. A traditional retailer launches a subscription box service instead of one-time purchases. Is this business model innovation, marketing innovation, or both? Justify your answer.

5. If an FRQ describes a startup using existing smartphone components to create a new wearable device category, which innovation type best applies—and what makes this different from incremental innovation?