There Are 3 Types of Innovation

1. Sustaining Innovation
2. Efficiency Innovation
3. Market-creating Innovation

1. Sustaining Innovation

• “Sustaining innovations are improvements to existing solutions on the market and are typically targeted at customers who require better performance from a product or service.”—Clayton Christensen
• Customers know what the basis of the competition is, they know how to identify a superior product from a less desirable one. Companies know what performance attributes customers value. The rank-ordering of the criteria by which customers choose one product or service over another is also known as the “Value Network” of a product.
• In the context of sustaining innovation companies innovate within the Value Network of a particular product. They improve those product attributes that customers traditionally value.
• Sustaining innovation is not aimed to create new markets or target an entirely new set of customers. It tries to sell more for existing customers, often for higher prices and at a higher margin.

Companies rarely need to build new sales, distribution, marketing, and manufacturing engines when they develop sustaining innovations in a mature market, because they are selling to a relatively known segment of the population in a largely established way.

Here is an illustration of how sustaining innovation works.

“Consider the three concentric circles, with each circle representing a different market composed of different members of a society. It’s a simple illustration, but we hope it makes our point easy to follow. Market A represents the smallest, wealthiest, and most skilled consumers. Market B represents a larger but less wealthy and less skilled set of consumers. And similarly, Market C represents the largest segment but also the least wealthy and least skilled. Sustaining innovations in any of the concentric circles—no matter the size of the market—are typically concerned with selling more products to the same customers in that particular market.”

A few examples

• When Mondelez International introduces yet another Milka flavour.

Source

• When Unilever introduces another flavor of Lipton Ice tea.

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• Installing heated seats in cars.

2. Efficiency Innovation

• “Efficiency innovations, as the name implies, enable companies to do more with fewer resources. In other words, as companies squeeze as much as possible from existing and newly acquired resources, their underlying business model and the customers they are targeting with their products remain the same.”—Clayton Christensen
• It focuses on how the product is made.
• As industries become more saturated and competitive crucial for the viability of companies. Some other scholars, such as Michael Porter may call it “Operational Effectiveness”, by which we mean continuously improving processes and optimizing the resources of a company to get the job done more effectively and efficiently.
• Efficiency innovations are typically good for the profitability of a company, they are not always good for the employees.

A few examples

• You decide not to hire 3 customer service people, but install a chatbot instead.

• You invest in new technologies.

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• Formula 1 illustrates how powerful efficiency innovation can be.

Market-Creating Innovation

3. Market-Creating Innovation

• Market-creating innovations create new markets, by enabling a large number of customers to do things they couldn’t do before.
• These innovations transform complex and expensive products into simple, more affordable, and more accessible ones. By making them accessible to a whole new segment of people they can create an unprecedented demand. They democratize previously exclusive products and services by making products and services simpler and more affordable to millions of new customers.
• Market-creating innovations often target a specific of customers, called “non-consumers”. These are the people who previously didn’t have the time, money, or expertise to use a particular set of products.
• Disruptive products often result in worse product performance, at least in the near term. These technologies are usually simpler, cheaper, smaller, and more convenient to use. In other words, they underperform in mainstream markets BUT have other features that new customers value.
• Over time these disruptive products close the performance gap, move up-market, serving more and more customers and capturing more and more portion of the market, ultimately disrupting the industry.

A few examples

• Sony’s 1954 pocket transistor radio. It is smaller, cheaper, and more convenient to use and o than traditional vacuum-tube radios. It enabled an entirely new segment of the market to listen to the radio: teenagers.

• Apple Shuffle —> smaller and more convenient to use and offer functionality than traditional mp3 players.

• Netflix offers a more convenient solution with less functionality. You don’t own a film, just rent it.

• The Google search engine —> easy-to-use tool that enable millions of new customers to search on the web.

In summary

All businesses need innovation to grow, but not all innovations are created equal. There are three different types of innovation – sustaining, efficiency, and market-creating – and each one should be used in different circumstances. Sustaining innovations are incremental improvements to existing products or services, and they are important for keeping businesses competitive. Efficiency innovations are designed to reduce costs or improve the efficiency of production, and they can be essential for businesses that are struggling to survive. Market-creating innovations are radical new products or services that create entirely new markets, and they offer the greatest potential for growth. By understanding the different types of innovation, businesses can make better decisions about when and how to innovate.

References

• Dillon, Karen, et al. The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty. United States, HarperCollins, 2019.
• Christensen, Clayton M.. The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. United States, Harvard Business Review Press, 2013.
• Raynor, Michael E., and Christensen, Clayton M.. The Innovator’s Solution: Creating and Sustaining Successful Growth. United States, Harvard Business Review Press, 2013.