8.1 Innovation: Types, Essentials and Leading Innovation

8.1 Innovation: Types, Essentials and Leading Innovation

Executive Summary: Module 4 turns analysis into options for growth, and innovation is the engine behind most of them. This section defines innovation, classifies its types (including Doblin's ten types), summarises McKinsey's eight essentials of an innovative organisation, explains why early-stage innovation cannot be judged by traditional return-on-investment tests alone, and sets out the paradoxes leaders must manage to make innovation happen.

What Counts as Innovation?

Innovation is the introduction of something new—a product, service, process or business model—that creates value, either by increasing what customers will pay for or by improving efficiency, cost or market position. An invention that never reaches customers or operations is not yet an innovation. For organisations seeking above-industry growth, innovation is one of the most reliable sources of competitive advantage, because it creates positions that rivals have not yet matched.

Degrees and kinds of innovation

• Incremental innovation improves what already exists (a faster model, a lower-cost process); radical innovation creates something substantially new.
• Sustaining innovation improves performance for existing customers; disruptive innovation starts with simpler, cheaper offerings that existing leaders overlook (Section 13.2).
• Joe Tidd and John Bessant's 4Ps classify innovation by target: product (what is offered), process (how it is made or delivered), position (the context or market in which it is introduced) and paradigm (the underlying business model).

Doblin's Ten Types of Innovation

The Doblin framework (Larry Keeley and colleagues) shows that innovation can occur anywhere in a business, not only in the product. Its ten types fall into three groups:

Doblin's research found that innovations combining several types are harder to copy than a single product feature. A fast-fashion retailer, for example, may combine process innovation (very short design-to-shelf cycles), network innovation (tightly coordinated suppliers) and channel innovation (seamless online and store experience).

The Eight Essentials of Innovation

McKinsey's study of innovative companies (2015) identified eight essentials. The first four are strategic and creative; the last four are organisational:

1. Aspire: leaders treat innovation as essential and set measurable targets for it.
2. Choose: the organisation invests in a balanced portfolio of initiatives, allocating time, money and people according to risk.
3. Discover: it generates differentiated insights about customers, technology and business models.
4. Evolve: it is willing to change its business model, not just its products.
5. Accelerate: it moves ideas from concept to launch quickly, cutting bureaucracy.
6. Scale: it launches at the right magnitude, with the capacity to meet demand.
7. Extend: it uses external networks—partners, suppliers, universities, customers.
8. Mobilise: it motivates and rewards people to take the risks innovation requires.

Judging Innovation Financially

Traditional return-on-investment and payback tests assume predictable cash flows, known markets and stable costs. Early-stage innovation has none of these, so forcing it through standard capital budgeting usually makes it look unattractive and starves it of funds. Finance professionals can help by:

• funding innovation in stages, releasing money as milestones are met (a real-options approach);
• managing a portfolio across core improvements, adjacent extensions and transformational bets rather than judging each project in isolation;
• tracking learning milestones (customer evidence, prototype results) before financial returns are expected;
• asking hard questions: How will this affect our financial position? Have hidden implementation costs been included? Can we fund the period before the innovation becomes profitable? How will we measure success?

Leading Innovation: Managing Paradoxes

Innovation is a collective activity, and leaders must design a culture and structure that supports it. Research by Linda Hill and colleagues (Collective Genius) describes six paradoxes that leaders of innovation must balance rather than resolve:

Companies known for innovation, such as 3M, combine stretch targets with a collaborative culture that treats failure as information, encourages people to challenge assumptions and brings diverse perspectives into decisions.

Applying the Frameworks to a Case

When a case asks you to evaluate an organisation's innovation, work through three steps:

1. Classify what the organisation is doing using the ten types. Many firms innovate only in product performance, which is the easiest type for rivals to copy.
2. Diagnose capability against the eight essentials. For example, an organisation may generate good ideas (discover) but fail to fund them consistently (choose) or launch too slowly (accelerate).
3. Recommend changes to leadership and resourcing: a portfolio with staged funding, cross-functional teams, partnerships to extend capability, and incentives that reward sensible risk-taking.

This links innovation to the strategic options generated later in the module: the Ansoff growth vectors (Section 6.1), new product and service development (Sections 8.2 and 8.3) and the approaches in Section 8.4.