Different types of innovation

There are different types of innovation, depending on the product lifecycle. But Apple remains the exception that proves the rule.

Innovation might well be one of the most used words on this blog, and perhaps in the whole industry as well. The tech industry is obsessed with innovation. Since Clayton Christensen coined the term disruptive innovation, it has risen to the ranks of the most popular concepts in business theory. In the past, we’ve argued for different types of innovation: besides disruptive innovation, we also need sustaining and sustainable innovation.

While disruptive innovations create new products and markets, these products then need to be continuously refined and improved, in incremental steps on a sustainable path, until they finally get disrupted themselves. This would amount to a two-step cycle of product innovation. But at NEXT19, Efosa Ojomo drew a cycle with three different types of innovation: market-creating innovation, sustaining innovation and efficiency innovation.

Now this makes a ton of sense.

The three types of innovation

The first type, market-creating innovation, is broader than disruptive innovation. This way, Efosa avoids some of the pitfalls disruption theory suffers from. If we look back to the quarter-century of digital innovation ignited by the web in the nineties, we see a lot of market-creating innovation, and not everything turned out to be disruptive to the incumbents. This is especially true in places like Africa (Efosa was born in Nigeria) and Asia, where technology often needs to create its own infrastructure first, since there is not much to disrupt in the first place.

The second type, sustaining innovation, is about making good products better. This kind of innovation has been a boon to the German economy for decades. It’s also what Apple does to the iPhone and its other products, in varying degrees. (Not all Apple products are treated equally.) This kind of innovation doesn’t create much growth. But it’s important to keep the economy vibrant.

The third type, efficiency innovation, is the missing piece of the puzzle. It is about making good products cheaper. This translates into job losses, outsourcing, and freeing up capital, cash flow and labour. Efficiency innovation is associated with rationalisation and commoditisation. It sits at the end of the product lifecycle. And it is about creating or freeing up the resources you need to fund the next wave of market-creating innovation.

Goto 1.

An error by definition

Just a few months ago, we’ve stated that innovation per se is never about efficiency. This was an error by definition. Efosa’s typology of innovation is not only broader than the disruption theory of his teacher, Clayton Christensen. It also includes efficiency as another type of innovation. Efficiency innovation is defensive by nature. It paves, at least in theory, the way for market-creating innovation, that is then superseded by sustaining innovation.

So, we need different types of innovation for every stage of the product cycle. Products in the third stage of innovation may be ripe for disruptive (i.e. market-creating) innovation, for example when a new technology comes along. But they might also linger on as commodities, simply fading into the background. They resemble the cash cows in the classical BCG Matrix. This strategic planning technique divides product portfolios in four groups, with stars, question marks and dogs as the other three.

The iPhone on a sustaining innovation trajectory

To reconcile Efosa’s theory of innovation with the BCG Matrix and its two axes, market growth and market share, we could roughly map market-creating innovation to question marks and sustaining innovation to stars. But neither market growth nor market share make a lot of sense when it comes to creating new markets. Too much depends on the definition of the market.

Think of the iPhone back in 2007. The market at the time was the mobile phone market, Apple’s market share was tiny, and the market grew at little more than 10% per year. The iPhone clearly was a question mark. But what it did over the next couple of years was redefining the product category and then capturing the great majority not of market share, but of profits. It created a new market and disrupted the old mobile phone market at the same time.

More than a decade later, the iPhone is on a sustaining innovation trajectory. It’s no longer a growth story, but it’s not going to get cheaper anytime soon. Apple, and other premium brands as well, withstand the forces of commoditisation. They keep the customer experience and thus differentiation as well as product price constantly high. Apple routinely sells older versions of its products at lower prices. But cheaper versions, like the ill-fated iPhone 5C, often failed.

The lesson for the rest of us

To sum things up: The Clayton Christensen school of innovation theory, if we put Efosa and his teacher in the same basket, still doesn’t come to grips with Apple’s premium strategy. You can of course treat Apple as an exception that proves the rule. But that leaves us with the desideratum of a proper innovation theory that includes Apple, one of the greatest innovators of our times.

For the rest of us who are not Apple, Efosa has an important lesson: know where you are in the product lifecycle. And use efficiency innovation to free up the resources you need to invest in market-creating innovation. Especially the last leg is oftentimes the missing link, when companies employ efficiency innovation and free up resources, only not to invest.

Failing to invest in market-creating innovation is what leads to the demise of great companies.