Types of Technological Innovation

Why This Matters

Understanding technological innovation isn't just about memorizing definitions—it's about recognizing how and why markets transform over time. You're being tested on your ability to distinguish between innovations that strengthen existing market leaders versus those that overthrow them, and between changes to what firms produce versus how they produce it. These distinctions are fundamental to analyzing competitive dynamics, market structure evolution, and the creative destruction that drives economic growth.

The types of innovation you'll encounter fall into clear conceptual patterns: magnitude of change, target of change, and strategic intent. When you see an exam question about Netflix disrupting Blockbuster or Apple reconfiguring smartphone components, you need to identify which innovation type applies and explain the underlying mechanism. Don't just memorize these ten terms—know what economic principle each one illustrates and when to apply it.

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Innovations by Magnitude of Change

The scale of technological change determines whether firms can adapt incrementally or must fundamentally reinvent themselves. The greater the departure from existing knowledge bases, the more disruptive the competitive implications.

Incremental Innovation

• Small, continuous improvements to existing products—think annual smartphone upgrades or software patches
• Driven by customer feedback and market signals, making it relatively low-risk and predictable
• Reinforces existing competencies of incumbent firms rather than threatening their market position

Radical Innovation

• Introduces fundamentally new technologies that create entirely new performance trajectories—not just better, but different
• Requires substantial R&D investment and carries significant uncertainty about market acceptance
• Can spawn new industries (biotechnology, semiconductors) or render existing ones obsolete

Breakthrough Innovation

• Redefines industry boundaries through transformative advances that reshape consumer expectations
• High research intensity distinguishes it from incremental refinements—often emerges from basic science
• Creates new market categories rather than competing within existing ones (think smartphones creating the mobile app economy)

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Innovations by Strategic Intent

Why a firm innovates shapes what kind of competitive advantage it gains. Sustaining innovations protect market share; disruptive innovations capture it from others.

Sustaining Innovation

• Targets existing customers with performance improvements they already value
• Strengthens incumbent position by meeting the needs of a firm's most profitable customers
• Does not alter competitive hierarchy—market leaders typically win sustaining innovation battles

Disruptive Innovation

• Starts in overlooked segments—low-end customers or entirely new markets that incumbents ignore
• Initially inferior on traditional metrics but offers simplicity, convenience, or affordability
• Displaces established competitors as the technology improves and moves upmarket—this is Christensen's core insight

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Innovations by Target of Change

Innovation can target what a firm offers, how it produces, or the logic of value creation itself. Each target has different implications for competitive advantage.

Product Innovation

• Creates new or improved offerings that address unmet customer needs or emerging trends
• Can be incremental or radical in magnitude—the category refers to what changes, not how much
• Drives differentiation and allows firms to capture premium pricing or enter new segments

Process Innovation

• Improves production or delivery methods to increase efficiency, reduce costs, or enhance quality
• Often invisible to customers but critical for competitive positioning—think Toyota's lean manufacturing
• Can involve technology, workflows, or management practices—not limited to factory automation

Business Model Innovation

• Rethinks value creation logic—how a firm generates revenue, reaches customers, or structures costs
• May require no new technology at all—Uber's innovation was the model, not the cars
• Often more difficult to imitate than product or process innovations because it requires organizational change

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Innovations by System Architecture

How components fit together matters as much as the components themselves. Architectural and modular innovations explain why some technological changes favor incumbents while others favor new entrants.

Architectural Innovation

• Reconfigures how components interact while leaving core component knowledge unchanged
• Particularly threatening to incumbents because existing organizational structures mirror old architectures
• Creates new system-level performance through novel combinations—the whole becomes greater than the sum of parts

Modular Innovation

• Changes specific components without altering overall system architecture
• Allows flexible upgrades and specialization—firms can focus on modules where they have advantage
• Facilitates industry ecosystems where different firms contribute different modules (think PC industry)

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Quick Reference Table

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Self-Check Questions

1. A startup offers a simpler, cheaper product that established firms initially dismiss as "not good enough" for their customers. Which innovation type does this represent, and why do incumbents typically fail to respond effectively?

2. Compare and contrast architectural and modular innovation. Which type is more threatening to incumbent firms, and what organizational factor explains this difference?

3. Netflix's shift from DVD-by-mail to streaming changed how it delivered content, while its shift to original programming changed what it offered. Classify each change by innovation type.

4. Why might a firm successfully pursue sustaining innovation yet still lose market share to a competitor pursuing disruptive innovation? What does this reveal about the limitations of listening to existing customers?

5. Identify two innovation types that typically favor new entrants over incumbents and explain the mechanism that creates this advantage for each.