Ten Types of Innovation
BY LARRY KEELEY, RYAN PIKKEL, BRIAN
Tired of wasting your time on brainstorming sessions that only improve upon existing offerings marginally? Invention does not always lead to innovation. Based on exhaustive case studies and research on industry trends and innovation, researchers have found ten distinct types of innovation that substantially drive progress. Rather than continuing to spin your wheels, use the ten types of innovation as a framework to turn your company’s next big thing into a successful reality.
TOP 20 INSIGHTS
On average, the world’s most innovative companies use 3.6 different types of innovation in a single new product or service, whereas average innovators only use 1.8 types of innovation altogether. Combining the types makes moves harder to replicate by competitors.
Hyatt uses "lab hotels" to find innovative solutions to recurring problems. A select number of its 488 global hotels have between 7 and 9 experiments running at the same time. Successful experiments then get implemented.
Chicago restaurant Next makes money on customers’ tabs paid in advance. To reserve a table, customers pay for their entire meal in advance. Next makes interest on those funds and dramatically decreases "no shows." Pricing also changes based on the time of the reservation rather than the quantity of food eaten, therefore maximizing margins.
Natura, a Brazilian cosmetics company, has a modest R&D team but continually launches products on the cutting edge of “skin science” to the tune of $3.4 billion annually. This was done by relying heavily on “open innovation” partners – 25 universities around the world that come up with 50% of Natura’s products.
In the 1990s, Dell hand-picked its customers to maximize revenue and profitability. It researched corporate customers to see which had the most predictable purchasing patterns and low service costs, including which were second-time computer buyers and are therefore more likely to have fewer service calls.
Gillette completely altered its profit model after customers got hooked on its products. Gillette started with selling cheap blades to train the customer to throw them away instead of sharpening them to reuse. Later on, it switched to a higher margin on the blades.
At $147 billion in revenues, growing 5% annually means that General Electric must create a new Fortune 500 company each year. Former CEO Jeff Immelt created the "Imagination Breakthroughs" program to meet this need. Each business unit presents its best new idea every year, and winners get support and funding for their ideas.
Henry Ford’s success with the Model T was due to more than just the assembly line innovation. Investing in his employees led to a decrease in turnover costs and an increase in employee satisfaction. Ford paid twice the minimum wage so his workers could afford to buy the cars they were building and reduced the workday from nine to eight hours.
Ford also sold modification kits that made the vehicle a multi-use machine. Now known as the product system innovation, owners could use their Model Ts to make cider, pump water, saw wood, or blow snow, among other uses.
To sell diapers in China, Procter & Gamble used network and profit model innovations. Chinese parents were not convinced that diapers were healthy for babies, so P&G partnered with Beijing Children's Hospital to prove they were safe and helped baby sleep longer. P&G also made the diapers at three different price points to increase their affordability.
Combine innovation “tactics” to produce innovations that can be replicated across industries. Zipcar and Chegg are both examples of companies that combined metered use and switchboard innovations. Zipcar provides easy-to-use and always available car rental by the hour. Chegg lends textbooks in a similar fashion.
By asking potential customers to vote on its website, fashion company Threadless figured out which designs customers would purchase before going through the trouble to produce them. Threadless has hosted over 42,000 designers pitching their designs, with over 80 million people voting for them.
Turn a successful innovation into even more money. Equipment manufacturer Caterpillar optimized its own supply chain and proceeded to capitalize on that knowledge and experience by forming CAT Logistics, a successful consultancy that helps others do the same. CAT Logistics garnered a revenue of $3.1 billion in 2010 and was spun into a separate company in 2012.
Harley-Davidson innovates in service and support systems, cultivating user communities among minority motorbike groups such as women and Latinos. Harley-Davidson was the top brand for minority riders with over $4.5 billion in sales in 2011.
Hyundai radically innovated its service just after the Great Recession. In 2009, customers gravitated towards the brand because of its guarantee that anyone who lost their job within a year of buying or leasing a Hyundai could walk away from the payments and the vehicle.
Almost 40% of the companies on 1999's Fortune 500 list were no longer in existence ten years later. This fact underscores the importance of continuous evolution and innovation.
Take company values one step more than needed, like cleaning brand Method. Method steers clear from any ingredient that has the slightest chance to make a cleaning product unsafe.
Starbucks may be coming out with a new drink every season, but the average caffeine addict doesn’t realize that Starbucks’s core innovation was providing a “third place between work and home”. By cultivating this sense of space and belonging, they built a regular customer base who connected with the brand and formed a habit.
Indian “smart basics” hotel chain Ginger operates with a room to staff ratio of 1 to 0.36, as compared to the industry average of 1:3. They do this through a combination of tactics such as outsourcing tasks such as laundry and food service, promoting a self-service mentality, and eliminating under-appreciated luxuries that caused extra work and expense.
The Mayo Clinic achieves medical breakthroughs with a five-phase process that prevents risks in potential investments and innovations. As ideas move through these checkpoints, they are improved and gain access to more funding.
Innovation is so much more than just inventing a new product or designing the next version of an existing offering. Innovation can be anything from re-thinking your profit model, to improving your delivery channel, to revamping your customer engagement strategies. There are ten major types of innovation. Within each type, there are also dozens of proven tactics to pull from. The ten types of innovation are:
TYPE 1 – PROFIT MODEL
Profit model innovations are new tactics and strategies for setting prices. Great profit models reflect a deep understanding of what customers and users actually value and where new revenue and pricing opportunities might lie.
PROFIT MODEL INNOVATION EXAMPLES
Ad-Supported – Charge companies to place advertisements on your product.
Flexible Pricing – Pricing changes based on market demand.
Membership – Offer additional benefits in exchange for a membership fee.
Metered Use – Users pay by the quantity of use instead of a flat fee.
Switchboard – Create a new marketplace by connecting multiple sellers to multiple buyers.
Known for its ever-evolving line of razors and razor blades, Gillette is the quintessential example of a profit model that takes advantage of an installed base, charging high margins on a consumable product.
Back in the 1920s, Gillette enjoyed healthy profits from its patent on disposable razor blades. Gillette sold blades quite inexpensively and used a savvy profit model that trained its customers to throw away dulled blades and purchase more. Customers became hooked on Gillette’s cheap disposable blades and their convenience.
Once Gillette’s patent ran out, however, it was time for a change. Gillette took advantage of its customers’ user habits and strategically began to charge more and more for the once inexpensive blades. Without thinking twice, customers began to pay a lot for a razor that would soon dull and be tossed aside. Gillette enjoyed substantial profit boosts as a result of its timely shift in profit model.
TYPE 2 – NETWORK
Network innovations provide a way for firms to take advantage of other’s processes, technologies, offerings, channels, and brands. A network innovation is anything a company does to partner with others to be more competitive in its market.
NETWORK INNOVATION EXAMPLES
Alliances – Share the risks and benefits of a partnership with a common goal, such as greater purchasing power.
Open Innovation – Outsource research and development by making R&D needs known widely.
Supply Chain Integration – Acquire or create a relationship with a supplier to lower costs.
Secondary Markets – Find customers for “by-products” not initially seen as products.
Amid the clutter of the big box stores and the looming threat of Amazon, Target succeeds by leveraging its unique partnerships with high-end designers to elevate its brand from just inexpensive wares. When Target launched its first of many major design partnerships, this innovation distinguished them from competitors.
To date, Target has worked with over 75 major designers, from clothing to houseware. Standouts include renowned architect Michael Graves’s line of kitchen appliances, Liberty of London pop-up shops, and a five-year collaboration with Isaac Mizrahi that created $300 million in annual profits. By looking outside the ordinary and stretching its network in product design and development, Target has achieved a network innovation.
TYPE 3 – STRUCTURE
Structure innovations are focused on organizing company assets – hard, human, or intangible – in unique ways that create value. Structure innovations can provide an excellent competitive advantage because they are inherently hard to copy. Structure innovations often require major organizational change in addition to investment and sponsorship from senior leaders. Although they may be hard to pull off, structure innovations can make workplaces more efficient, employees more satisfied, and the organization much healthier when done right.
STRUCTURE INNOVATION EXAMPLES
Competency Center – Create hubs of people and resources that specialize in a given skill and support an entire organization in that particular area.
Corporate University – Invest in large-scale training for employees with a dedicated space and methodology.
Knowledge Management – Codify information and insights for internal dissemination so multiple business units can all benefit.
Outsourcing – Use external firms rather than internal staff to handle discrete tasks and projects.
Decentralization and transparency are at the core of Whole Food’s management philosophy. These conscious structural decisions by founder John Mackey led to a culture of healthy competition and growth. Rather than making decisions at the corporate level and issuing edicts to individual stores, each department within a given store has a wide berth for decision making. For example, management gives individual departments the responsibility to determine which products to stock and who to hire.
This structural innovation has created a culture wherein departments compete for profitability, and employees strive to outperform one another. The success of decentralization was made possible by an equal commitment to transparency. Whole Foods reveals data such as sales, profitability, and performance to employees. Overall, decentralization and transparency improved profitability of both individual departments and stores.
TYPE 4 – PROCESS
Process innovations involve activities and operations that produce an enterprise’s primary offerings. Process innovations enable a company to produce its product or service in a more time or cost-efficient way than competitors, or in a manner more accessible or pleasing to the customers. Process innovations are usually proprietary technologies or represent the essence of how a company does business, day in and day out.
PROCESS INNOVATION EXAMPLES
Crowdsourcing – Outsource given tasks and cast a wide call for others to complete them.
Flexible Manufacturing – Set up a manufacturing process that can be easily changed, customized, or redirected.
Lean Production – Dramatically eliminate the waste and associated costs through everyday processes.
On-Demand Production – Set up purchasing and fulfillment systems such that products are only produced when ordered.
Long lines, high rates, and high employee oversight indicated a car rental industry that was in dire need of innovation. Zipcar’s answered with cars that could be rented for short periods of time and were hassle-free.
Rather than building a complex infrastructure, Zipcar focused on cars and parking spots. This streamlined design lead to an exceedingly smooth rental experience for customers. Customers simply walked up to the car and unlocked it with their pre-approved "Zipcard”. No long longs, unnecessary paperwork, or add-on fees. Since the process was automated, management could easily focus on statistics such as which cars were rented the most, which might be having issues, or ways to fill inventory gaps.
TYPE 5 – PRODUCT PERFORMANCE
Product Performance innovations address the value, features, and quality of a company’s offering. While perhaps the most visible to customers, product performance innovations typically provide a competitive advantage only for a limited amount of time because they can be easily copied by competitors.
PRODUCT PERFORMANCE INNOVATION EXAMPLES
Added Functionality – Upgrade an existing product with new features or uses.
Conservation – Highlight how a given product conserves environmental resources.
Feature Aggregation – Combine the functions of multiple products into one.
Performance Simplification – Dumb down a product to only its core and most useful function.
OXO GOOD GRIPS
OXO Good Grips Founder Sam Farber saw an opportunity to dramatically increase the ease of use of everyday tools and has built a behemoth brand from it as a result. OXO Good Grips was initially focused on enabling those with relatively minor motor disabilities (e.g., trouble gripping or bending over) to maintain their independence while cooking. From observing his arthritic wife, Farber saw someone whose life could be significantly improved by cooking tools that were easier to grasp and maneuver and more ergonomically designed.
Farber priced his Good Grips tools at roughly three times the cost of the existing kitchen devices. This price point was made possible because his tools did take away the pain and discomfort that many experienced. Today, OXO Good Grips has over 850 products available, and the brand is synonymous to smart and functional design.
TYPE 6 – PRODUCT SYSTEM
Product System innovations make the customers think that they need extra or additional components to perfectly complement what they are already enjoying. This type of innovations is rooted in how individual products and services connect or bundle together to create a robust and scalable system. It is a way to create valuable connections between otherwise distinct and disparate offerings.
PRODUCT SYSTEM INNOVATION EXAMPLES
Complements – Put forth new products that are related to older products.
Extensions/Plugins – Offer products, often from other manufacturers, that “go with” or “plug in” to a product you sell.
Modular Systems – Design products that are functional separately but increase in functionality when used together.
Product/Service Platforms – Sell products and services that work in conjunction with one another.
Scion ingeniously leveraged the concepts of a product system in each of its car sales. As a brand of Toyota, Scion was an effort to capture sales from younger generations that preferred customization and choice in their purchases. Whereas competitors sold new pre-designed vehicles, Scion took the approach of allowing buyers to customize each detail of their new car. Each add-on was part of the greater product system and offered the potential for higher margins. After selecting their “base” type of car from one of five options, drivers could choose from multiple options for everything from the type of lights, special engines, audio, to apps.
TYPE 7 – SERVICE
Service innovations make a product easier to try, use, and enjoy. They reveal features and functionality customers might otherwise overlook, and they fix problems and smooth rough patches in the customer journey. Service innovations can be powerful because when a company provides innovative service, it transforms its products from a mere product to an experience. Innovative service makes customers feel a certain way and associate these positive experiences with a given product.
SERVICE INNOVATION EXAMPLES
Concierge – Offer indirectly related and unexpected services at customer’s request.
Guarantee – Assure that products or services will be refunded if they fail to meet expectations.
Loyalty Programs – Establish a system wherein customers are incentivized to buy even more due to special perks, rewards, and points.
Personalized Service – Harness an individual’s specific preferences to provide tailored service.
Zappos, acquired in 2009 by Amazon, pioneered innovation in service as an e-commerce company. Zappos had ten core values, the first of which is “Deliver WOW through service.” Key to this value is the fact that management empowered customer service representatives to take extraordinary actions on behalf of customers. These representatives have been known to send shoppers flowers, troubleshoot with customers on the phone for hours to find just the right pair of shoes, and actually buy from competitors and put the overnight shipping on Zappos’s tab if a certain product was out of stock. These features not only made Zappos an attractive acquisition for Amazon, but they also enabled Zappos to spin off a consultancy, Zappos Insights, that helps other companies transform their approach to service.
TYPE 8 – CHANNEL
A channel is the way that customers access products or services. Channel innovations are new ways to connect with customers that more effectively drive sales, enhance margins, or increase exposure and positive associations with the brand. Channel innovations ensure that users can buy what they want, when and how they want it, with minimal friction and cost and maximum delight. A channel innovation can also alleviate wasted time or effort via outsourcing sales through methods such as indirect distribution.
CHANNEL INNOVATION EXAMPLES
Flagship Store – Invest in heavily branded, experience-rich retail stores where customers can experience your brand fully.
Go Direct – Sell to customers directly online.
Multi-Level Marketing – Utilize a third-party, unaffiliated sales force to sell the products they buy from you in bulk.
Pop-Up Presence – Create temporary, low budget but high impact experiences for customers via these pop-up “shops” with more than a kiosk feel.
Nespresso’s channel innovations ensured that customers never have to search hard to find the capsules for their pint-sized espresso machines. While Nespresso’s multitude of channels did add some complexity to the business, it allowed customers a variety of buying preferences that ultimately made it more attractive to customers. It has over 270 unique retails stores and coffee shops of its own worldwide, but also runs kiosks within dozens of department stores frequented by older buyers. To appeal to younger, tech-savvy generations who prefers to buy online, Nespresso has an online Nespresso Club that sends automatic email reminders when it’s time to re-order. Lastly, Nespresso finds even more channels via B2B sales to hotels and airlines.
TYPE 9 – BRAND
Brand innovations can transform commodities into prized products, and confer meaning, intent, and value to your offerings and your enterprise. When achieved, brand innovations can be a strategic differentiator.
BRAND INNOVATION EXAMPLES
Certification – Create a unique designation named after your brand that can be applied to products or services made by others.
Component Branding – Elevate the overall value of new products by using branded components.
Private Label – Establish your brand for goods manufactured by others.
Value Alignment – State and bring into line company values and brand identity.
Traditional groceries rely on the power of individual product brands to drive sales within their stores. Trader Joe’s, however, has famously taken the opposite approach. With its private label Trader Joe’s brand, the store seeks out unique, seasonal, and quality products. Customers are more likely to pop in to see what is new or make an out-of-ordinary purchase to try a seasonal item. By sourcing directly from individual suppliers, it locates lesser-known products and often appeals to customers' fancies for buying local.
TYPE 10 – CUSTOMER ENGAGEMENT
Customer Engagement innovations are all about understanding the deep-seated aspirations of customers and users, and using those insights to develop meaningful connections between them and your company. Customer Engagement innovations are occurring more and more digitally, especially via social media. These innovations enhance the overall customer experience and often make a complex task simple, a mundane experience magical, or an everyday obligation fulfilling.
CUSTOMER ENGAGEMENT INNOVATION EXAMPLES
Community and Belonging – Create opportunities where your customers can foster connections with one another.
Experience Automation – Remove a repetitive task from a customer’s plate, freeing up their time for more enjoyable activities.
Experience Simplification – Transform a complex experience into something simple, delighting customers.
Mastery – Help customers deepen their skills or knowledge in a given subject through experiences or products you enable.
Few would claim to enjoy personal financial management and budgeting. Mint.com understood this deeply and transformed the experience of managing one’s own money. For many, checking up on one’s spending, savings, or investments is no longer a begrudged responsibility but instead a calming exercise. By making it possible to see the full picture of one’s financial status in one place, Mint.com substantially simplified the challenge of keeping tabs on personal finances. Examples of how Mint.com engages users in new ways with their finances include automatically update information based on recent transactions, automatically tag and categorize purchases, and suggestions for ways to save or budget.