In business and economics, innovation is the catalyst to growth. Fuglsang and Sundbo (2005) suggest that there are three modes of innovation. The first is an entrepreneurial value-based method where change is initiated by an individual's actions. The second is a technology-based functional mode in which the development of new technology drives innovation. The third is a strategic-reflexive mode in which innovation results from individual's interactions with their organization's set of common values and goals. The following graphic provides an example of the innovation process.
Innovation process
Innovation involves continuous improvement throughout phases of a development program. Phases can be iterative and recursive (meaning that they do not proceed linearly from one to the next; rather, earlier phases can be returned to for further improvement as needed). Such phases include market analysis and consumer research, which progress to design and prototyping, after which follow naming and packaging design and ultimately retail and production support.
Entrepreneurial Innovation
The innovation dimension of entrepreneurship refers to the pursuit of creative or novel solutions to challenges confronting a firm. These challenges can include developing new products and services or new administrative techniques and technologies for performing organizational functions (e.g., production, marketing, and sales and distribution).
Technological Innovation
Technological innovation takes place when companies try to gain a competitive advantage either by reducing costs or by introducing a new technology. Technological innovation has been a hot topic in recent years, particularly when coupled with the concept of disruptive innovation. Disruptive innovation is usually a technological advancement that renders previous products/services (or even entire industries) irrelevant. For example, the smartphone disrupted landlines, Netflix made Blockbuster obsolete, and mp3s have marginalized CD players.
Strategic Innovation
The strategic-reflexive mode of innovation is the most effective mode for change and innovation. While technological innovation is clear and easy to define, strategic innovation is inherently intangible and organizational in nature. Strategic innovation pertains to processes: how things are done as opposed to what the end product is. Strategic changes can be disruptive but are more often incremental. Incremental innovation is the idea that small changes, when effected in large volume, can rapidly transform the broader organization.
Walmart's "Hub and Spoke" distribution model is a classic example of strategic innovation. Walmart succeeded thanks to process efficiency enabled via innovative operational paradigms and distribution strategies. By utilizing a maximum efficiency warehousing and distribution model, refined over and over again incrementally for improvement, Walmart has sustained a competitive advantage for decades.
Other Applications of Innovation
- Generational innovation involves changes in subsystems linked together with existing linking mechanisms.
- Architectural innovation involves changes in linkages between existing subsystems.
- Incremental innovations improve price/performance advancement at a rate consistent with the existing technical trajectory. Radical innovations advance the price/performance frontier by much more than the existing rate of progress.
- Manufacturing process innovation refers to all the activities required to invent and implement a new manufacturing process.
- Cumulative innovation is any instance of something new being created from more than one source. Remixing music is a direct example of cumulative innovation.
- Financial innovation has brought many new financial instruments with pay-offs or values depending on the prices of stocks. Examples include exchange-traded funds (ETFs) and equity swaps.