Innovation in Business: Importance, Types & Examples

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  • 0:00 What Is Innovation?
  • 1:05 Types of Innovation
  • 3:20 How Does Innovation Happen?
  • 5:20 Is Innovation Always Good?
  • 6:40 Lesson Summary
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Lesson Transcript
Instructor: Andrea Rea

Andrea is a practicing attorney and MBA with 15 years experience in health care administration, litigation and business law.

Innovation is everywhere. Learn several key concepts in the study of innovation, including leading theories, forms of innovation, and its impact on the competitive market.

What Is Innovation?

Simply stated, innovation is the process of creating something new. The last century has witnessed explosive innovation with dramatic results. Innovation makes our lives easier, enhances our productivity, improves our health, entertains us, and broadens our ability to communicate and connect on a global scale. Virtually every improvement in the quality of living in the past century can be traced back to innovation at some level.

Innovation is a broad, diverse, complex, unpredictable, and widely studied force in business. Hundreds of books, articles, and research papers have been written by scholars devoted to the study of innovation, its sources, objectives, trajectories, and lasting impact. Innovation serves as the catalyst for growth in business and economics. Yet, far more reaching, its impact can transform virtually any industry from government to education, even the delivery of health care. Sources of innovation can be found across any business, service line, organization, or industry.

Types of Innovation

We often think of innovation today in terms of technology. While it's true that technological innovations in the recent past have been groundbreaking, innovation can come in many forms. It can be a creative new teaching method to enhance student engagement. It can be a unique incentive program to reward high-performing employees, or it can be a process such as lean methodology, a model which streamlines workflows and eliminates waste to keep costs low while maintaining quality.

Innovation can be incremental, such as a slight variation on an existing product formulation, like adding a new color or fragrance, or a groundbreaking product that revolutionizes an industry - think iPod. Innovation can respond to a clearly defined problem, or create a complete paradigm shift when the problem itself is undefined or the path to a solution is unclear.

The benefits of innovation are not limited to new product development. The models of innovation are just about as numerous as the objectives they are intended to serve. Innovation can improve almost every aspect of a product or service life-cycle, from business model innovation to pricing strategies, marketing, and service delivery. Think of how discount airlines, such as Southwest, transformed the airline industry with innovative pricing. transformed e-commerce with its innovative distribution channels, making a huge array of products available nationwide virtually overnight.

Innovation doesn't always produce something entirely new. Sometimes innovation makes an existing product or service better. Small entrepreneurial businesses often develop new products that are components of products that larger, more established firms manufacture and sell under an established brand name. Improvements to everyday products, such as DVD players, digital cameras, and prescription drugs, are not unique to the companies that sell them. Cutting-edge component parts or pioneering research and development were provided by smaller firms with innovative ideas. Some small firms have built their entire business models around developing and producing products that help larger, well-known companies be more efficient or effective, and ultimately more competitive.

How Does Innovation Happen?

There are dozens of published theories of innovation. Perhaps the best known is the concept of creative destruction. Joseph Schumpeter was a renowned economist who first coined the term. He argued that innovative thinkers develop new products and technologies that, over time, make obsolete a product or process that had once dominated its market. The innovation often starts at the low end of the market, with lower priced goods or components of higher-end products, for example, and slowly works up to the higher end, taking market share from the big players as processes and products improve. Word processors made typewriters, and often their manufacturers, obsolete.

This is a common theme in the study of innovation. World-renowned innovation expert Clayton Christensen wrote about similar themes in his bestselling book The Innovator's Dilemma. He called his theory disruptive innovation, but the essence is the same. Innovation starts with disrupting the old way of doing things. At first, the disruption may be too small to be noticed by the established players. However, as the disruptor continues to improve processes and develop more complex products or services, the establishment must either take notice or risk becoming obsolete.

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