The three levels of innovation
Paul Wright - Invetech
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In our previous article, we defined innovation as the successful exploitation of new ideas to increase customer value or create wealth for a company. Innovation is therefore outcome-oriented, with the outcomes being aligned with a company’s overall strategy. However, within this broad definition, it is possible to define three levels of innovation based on the degree of “newness” and the degree of “value add”. The diagram below describes the relative relationships between incremental, substantial and radical innovation with some indicative examples taken from the automotive industry.

Incremental innovation is unlikely to provide a dramatic change in business performance. However, sustained innovation in this area is required to fuel continuous improvement in both product and process-related aspects of a business. This is required to prevent a company from falling behind its competitors and ensuring its prospects for long-term survival.

Substantial innovation provides greater opportunity to value-add as it engenders the creation of business opportunities that are likely to lead the industry and provide a competitive advantage to the company developing them. This level of innovation requires considerable investment in the process and an effective strategy for managing the innovation from its gestation and development period through to successful commercialisation. (This topic will be explored further in future articles).

Radical innovation can turn an industry on its head, creating new bases of performance, new competitors and new business models. This level of innovation is often visible across industries and crops up as the subject of business articles and business school case studies. Radical innovation often comes from outside an industry and is frequently technology based - the result of long R&D exercises. For example, the recent creation of portable flash and hard drive-based devices has revolutionised the traditional market for portable music (portable CD and tape machines). It has allowed companies more noted in computer-based industries to enter the market for portable entertainment.

Creating an Innovation Strategy

Innovation is an essential component of business activity. This requirement can be generated from an offensive need to create competitive advantage and enter new markets. Or, from a defensive perspective, it’s all about protecting market share and ensuring long-term competitiveness in relation to industry players. Thus, business strategy will determine the requirement and appetite for innovation development activities and drive an effective portfolio of the three levels of innovation.

Three generic innovation strategies can be defined:

Pioneer: Focused on bring new and industry leading or transforming technologies to market.

Fast Follower: Adept at improving existing technologies through incremental innovation in both product and process technologies. Often focused on cost-downs.

Opportunistic: Makes some investment in substantial innovation but also sources innovation from third parties and invests in adapting these for its identified market opportunities.

Companies such as Sony, 3M, Toyota are widely recognised as Pioneers while the Korean car companies and Chinese computer manufacturers can be regarded as Fast Followers. A good recent example of an Opportunistic innovation strategy is the incorporation of digital camera and MP3 technology into mobile phones.

These strategies are characterised by different investment profiles across the three levels of innovation:

Often the level and focus of innovation is linked to the maturity of an industry. Companies in commodity and mature businesses tend to be fast followers. Commodity-based industries are largely cost driven and innovation is targeted at activities that build a sustainable cost advantage through continuous improvement. Equipment suppliers are often the source of incremental innovation meaning that all players have access to the technology leaving little opportunity to secure a competitive advantage. Companies in mature businesses often behave as if they are producing commodities and focus on incremental innovation to fuel continuous improvement activities. However, there is an emerging trend in industries such as building and construction, for example in wood-plastic composites, for increasing levels of substantial innovation that is customer driven, new product-focused and proprietary. This creates a situation where innovation can create competitive advantage in ways that were previously not possible within an industry. Companies not attuned to this often lack the processes to monitor developments and effectively respond with substantial innovative activities of their own.

New and emerging industries are built on substantial or radical innovation. Pioneering players in these industries usually have a strategy of growth from new products and market development and typically have made a large investment in technology development. Early industries typically develop with a number of competing technologies with the successful ones subsuming the market share of the also-rans. The beta-max v VHS story is typical of this Darwinian battle. However, often it is not the best or most innovative technology that succeeds. Effective business models, appropriate market and product positioning, manufacturing competitiveness, supply chain and distribution management, often prove the difference. It is not always the level of technology innovation that proves the deciding factor, rather, the ability to build and continuously improve all aspects of the business.

Thus, a company should develop an innovation strategy appropriate to the industry life-cycle, the competitive environment and its resources. For companies with a portfolio of businesses in different industry sectors, each of these businesses is likely to have different innovation needs and tailored strategies will be required. In addition, each main technology area employed by a business should be assessed separately. Having done this, an appropriate mix of innovation related activities can be developed based on realising the strategy(s).

Next time we will look at the possible sources of innovation and how to assess the strategic and business fit.

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