What is innovation?

It starts with an idea, addresses a market need and creates value. And it’s something that every company should be looking at.

8-minute read

Simply put, innovation is about successfully implementing a new idea and creating value for your customers and stakeholders.

Innovation starts with a new idea. It could be a plan for an improved product or service; it could be an updated method for running your operations; it could also be a new business model. It can touch on any part of your business and does not necessarily need to be novel—it could have been implemented at another company.

Innovation also implies value creation.

Some people think that creativity and innovation are synonyms. They are not. Creativity means coming up with a new idea. Innovation is taking this novel idea, and solving customer pain points and creating value.

While it’s become a buzzword, innovation does play an important role, acting as a key lever to help a company survive and thrive.

Why is innovation important?

Innovation allows your company to remain competitive.

Your business may have a solid customer base, an excellent product, a number of suppliers and a perfectly working supply chain. Your sales may even be growing. But outside your company, your industry is changing—quickly. If you stand still, you are at risk.

The most important question for a business owner to ask is “What will happen to us if we do not innovate?”

The question is rhetorical. A company that does not innovate risks becoming irrelevant, reducing its productivity, losing customers and ultimately going out of business.

Innovation requires taking stock and measuring impact, whether by qualitative means, like interviews to assess customer satisfaction, or quantitative means, like sales metrics.

Profitable and successful innovations do not have to be extravagant or make headlines. They need to solve problems.

Innovation: How can it help your company?

  1. Transform your existing business model to adapt to a changing environment
  2. Satisfy existing but unanswered market needs
  3. Bring new technologies, products or services to market
  4. Create entirely new markets
  5. React to market disruption

3 types of innovation: Incremental, expansive and disruptive

For a company looking at change, there are three levels of innovation you can implement:

1. Incremental innovation

These are small changes that increase the efficiency of your current business model.

For instance, you could adjust your processes, increase your digital offerings, cut costs or upgrade your products and services. This type of innovation is typically ongoing and can be done in the short term.

Small businesses should generally spend 60% of their efforts—whether in money or manpower—on incremental innovations.

2. Expansive innovation

This is a change that results from exploring new ideas. Its purpose is to sustain and grow the company in the long term.

Here, we are plumbing new depths, areas where competitors are not going.

Expansive innovation is usually related to science and technology. Many of these innovations that we’re currently seeing will use artificial intelligence or become part of the Internet of things.

Expansive innovation also implies testing and prototyping, as well as evolving the business model. It can take 12 to 24 months to implement. A company should focus about 30% of its efforts on expansive innovation.

3. Disruptive innovation

Innovation at a disruptive level: This is what comes to mind when people think about innovation. It’s the new products and services that are being talked about.

A disruptive innovation is an innovation that creates a completely new business model, offering a novel value proposition.

In practice, this means to invent or reinvent a product or service. While the rewards are potentially great, it comes with much uncertainty. This type of innovation, when successful, takes three to five years to develop. Most companies should devote no more than 10% of their efforts to this kind of innovation.

Real-world innovators

What are some real-world examples of innovation?

WhatsAppIn 2009, WhatsApp launched a messaging service and platform. The company targeted anyone with a smartphone and an internet connection, regardless of device and location. It disrupted a very competitive messaging market dominated by both telecoms and free desktop messaging like Yahoo! Messenger and Skype. The company operated at a radically lower cost structure and benefited from the growth of smartphone use. In 2013, WhatsApp serviced 200 million users with only 50 staff members. In 2014, Facebook acquired WhatsApp for more than $19 billion.

SalesforceIn 1999, Salesforce disrupted the customer relationship management (CRM) arena by offering CRM-as-a-service over the Internet. Its goal was to make the enterprise software easy to use. Salesforce was visionary in predicting the potential of the cloud, which made it easy to scale to organizations of all sizes and with minimal cost. The company invested in hosting, monitoring, customer support and account management, and benefited from recurring revenues from a service subscription.

Source: The Invincible Company, Alex Osterwalder, Yves Pigneur, Fred Etiemble, Alan Smith

Business model innovation

Business model innovation takes place when the processes the business has been using or the way its product is brought to market have been transformed. It’s a challenging type of innovation and is often imposed on a company that has little choice but to radically change. This is not change at an incremental level but one that can threaten elements of the company’s brand.

Airbnb, Uber and Spotify are examples of companies that disrupted the hotel, taxi and music industries. Many large operations had to completely rethink their business model because of these innovations.

How can CEOs lead innovation?

CEOs have a strategic role to play with innovation. They can be the true drivers of innovation, but they can also get in the way.

To spur innovation, CEOs need to be specific with their people about what they’re trying to achieve. Too often, we forget why we do things.

CEOs should allocate a budget and allow their team a certain amount of freedom to explore solutions. Innovating is like entrepreneurship and entails a degree of creative trial and error. The team, or the employee taking the lead, needs to be given some autonomy to play out different ideas.

What are the three stages of innovation?

Innovation projects generally go through three stages: design, testing and scaling.

1. Design stage: This is the time for ideas, where you imagine a new business model or a solution that will address a product or service innovation. You then design a prototype that will become your minimum viable product, meaning it will have enough features to attract early adopters or investors.

2. Testing stage: This is where you quickly test the different versions of your innovation. The faster you test your idea with potential users and customers, the faster you will learn about what works well or not. This will allow you to adjust your solution before you go too far and it becomes harder to make changes. It’s a risk reduction strategy.

3. Scaling stage: Once the design and testing have shown how your innovation can solve a real problem, you are ready to scale up. In practice, this means developing a detailed business plan based on evidence and making your product or service available to larger numbers of people and launching a dedicated marketing strategy.

It’s too easy to design a business plan on hypotheticals and assumptions. That’s why it’s important to go through the three stages of innovation: they reduce your risk by limiting the scale of a failure.

Protect your innovation

It’s not enough to innovate. You also need a strategy to protect your innovation and ensure you get the full value from your investment.

Use this free intellectual property strategy assessment, developed by the Canadian Intellectual Property Office (CIPO) in partnership with BDC, to help guide the development of your IP strategy.

Opportunities to innovate
The innovation that led to drive-throughs really just meant punching a hole in the side of a fast-food restaurant, while rolling luggage was a logical solution to lugging our heavy suitcases. Learn about how simple changes bring on great opportunities by watching the video What does innovation mean at BDC?

Next step

Adopting an innovative mindset is all about implementing small, incremental changes that pave the way for continuous improvement and growth. Download our PDF to discover other simple tips to make your business more innovative.

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