Innovation is the core source of value creation in companies and an important enabler of their competitive advantage. Innovation is not only the systematic approach to monetize corporate research but also the processes to enable successful commercialization of product and services.
The firm can innovate through five axes. The functional axes are (1) product and service, (2) business process, (3) organizational, (4) relational innovation, or through total innovation with (5) business model innovation.
Axis of Innovation
Product and Service Innovation. The firm can develop innovative products and services to differentiate itself from the competition. This is the most common type of innovation and the most obvious to the consumer. Product innovation ranges from the newest consumer product to the new banking product.
- Apple product lines of first to market products such as music players, tablets and phones revolutionized and created the market.
- JP Morgan Chase, offers “Chase Private Client” where banking clients are offered access to the investment bank research and capabilities.
Process Innovation. The firm can develop innovation around manufacturing processes and its supply chain to create value for its shareholders. In commodity and in heavy investment industries business process innovation is a requirement to be competitive.
- Toyota and its production system is one of the most innovative approaches to manufacturing. This process innovation has allowed Toyota to have the most efficiency facilities.
- Boeing is the top innovator in supply chain and complexity management. Components such as wings, fuselage components, are manufactured globally with final assembly in the US.
Organizational Innovation. The firm has to develop the correct structures and processes to compete and innovate in the market place.
- Whirlpool after years of implementing large innovation program with little success, they created the i-mentor program where key team members would facilitate the innovation projects.
- Lockheed, HP & IBM, developed semiautonomous team to focus on disruptive innovation. If these teams were structured within a business unit it would be difficult to produce disruptive innovation.
Relational Innovation. The firm needs to understand how to foster and maintain the customer relationships. It is important how they market its products but also how to keep the customer engaged.
- ING bank a successful Dutch expanding in the US. They could not compete with the incumbents so they develop an online strategy to enter the US market, becoming one of the top online banks.
Business Model Innovation. The business model defines how the firm competes in the market and leads to superior value creation. Through the coordination of multiple axes the firm can deliver superior results for a longer period of time. However business model innovation is a specific capability that the firm must nurture, as the business model needs to evolve with the market to maintain competitiveness.
- Virgin America has taken the low cost airline process innovation model and coupled with a new way to relate to its customers, and new products and services.
- Apple Ecosystem. The combination of new innovation models on how they provide content their customers through their innovative products has allowed apple to create a best in class ecosystem of product and services that is very difficult to duplicate.
- Rolls Royce Turbines, as customers required certainty of the total life-cycle cost, including parts, service, maintenance and turbine uptime, RR offer “Power by the Hour” an all inclusive operational package that allows the customer to know their cost and RR long term steady contracts.
Return on Investment of Innovation Models
Our research shows that innovative firms provide superior returns to its shareholders. Continuous product, process, organizational and relational innovations returns on average 1.5-2% above median peer performance, this advantage can be maintained for around 3 years. Business model innovators return 8% above median peer performance, maintaining the advantage up to 5 years.
The rate at which competitors can copy a product or process innovation and a business model is dramatically decreasing as technology and knowledge diffusion occurs through industry. Furthermore it wildly varies from industry to industry, while in consumer electronics product innovation occurs twice a year, in other markets like transportation could be 36 to 38 months. Business models, on the other hand, have significant more barriers to copy and execute properly.
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