The different types of innovation

It has never been that easy to open a new business as it is today. Comparatively to previous generations, and time and investment wise, we are lucky. The problem that arises, and that’s true for anyone who’s owned a company or worked for one is: how do I drive growth and stay competitive with so many new business ideas and initiatives worldwide? That’s the question we’ll explore here.

Pamela Mazini Stürmer

Pamela Mazini Stürmer

June 29, 2021 | leitura de 10 minutos

business

The United States alone registered 4.35 million new business applications in 2020. That number represents an increase of 74% compared to 2010, when the registered number was 2.5 million. The same is happening in other countries. One of the reasons that explain these events is how easy it became to open a business. Take Brazil for example, legislators are adapting and supporting the development of brazilian technology, there is a support network pivoted by large companies, universities and netweaving institutions, and there are tons of investments being poured into Brazilian entrepreneurship and startups. That's true not only in Brazil, as was brought up by this year's SXSW's edition, but also all over the world. What this means is that in order to make our businesses set themselves apart in the market, we need to make them become more efficient and competitive. And we will discuss below how implementing innovation in your strategy plan is the first step you need to take to transform your company competitively. One crucial step in integrating innovation into your strategy is by understanding the three types of innovation.

Growth and Competitiveness

With the opportunity to leverage development worldwide, economies have improved reforms and legislations to reduce time and costs of starting new businesses. Not only were legislations improved, but also processes were improved. In many countries, governments have introduced new technologies and online services to assist entrepreneurs in their process of opening a new business up. 

Additionally to the government, other institutions are born with the purpose of supporting new businesses, such as incubators, accelerators, netweaving institutions, HR techs and Legal Techs, for example. There is also so much free content available with instructions and processes, and one is simply one "google" away from learning experiences shared by other entrepreneurs. Knowledge and learning are everywhere now. 

In a similar way, if money was ever a deadlock to business openings, it isn't anymore. The investment sector is more democratized than ever. Traditional banks are not the only source of credit. We now have Venture Capitals, Incubators, Accelerators and even fintechs, that are credit enablers to entrepreneurs nowadays, making risk decentralized.

According to the World Bank, starting a business is not only faster, but also cheaper than previous years. Take a look at some of the numbers below. In 2003, the cost of opening a new business was around 100 percent of the income per capita of economies globally, today it is "only" approximately 20 percent on average. Taking one country, Rwanda,  as an example, the reduction of the number of days it took an entrepreneur to open a business is indirectly correlated to the number of new limited liability companies in the country. Coincidence? I don't think so.

Source: World Bank Blog

Great news, right? Right! Business democratization is essential for the improvement of quality and pricing of products and services. The only "but" in this case is an increase in competitiveness. Don't get me wrong, competitiveness is the greatest input of quality of products and services, but it becomes very difficult for companies to remain competitive and have competitive advantage in a world where you compete with suppliers from all over the world. However, don't let this information demotivate you and your company. Below I'll give you some tips on how to remain competitive even in a globalized world.

So how does my company remain competitive and grow with so many competitors out there? This is the million-dollar question. There are a lot of variables that affect the result: resources, people, culture, processes, market fit, and I could go on and on. And although there isn't a perfect answer and a perfect recipe to follow, I can pinpoint one thing that is definitely something that almost all successful companies nowadays work with and something that you can start working on today, which is: including innovation into your strategic planning.

A bit of context on Business Strategy

Surprisingly or not, most companies still focus on the first horizon of McKinsey's "Three Horizons of Growth", which represents companies that focus heavily on activities and resources aligned with the business's core product and/or service and those that provide the greatest profits. There is nothing wrong with this approach, the problem is that this alone will not give your company leverage in remaining competitive in the future, especially because companies in various industries are already innovating.

Strategizing and planning the future of your company is an essential component for growth and competitive advantage. But this is something you already heard of, right? In case you aren't just remembering why, i'll give you a few reasons:

  1. Strategizing provides a vision of where you want your company to go and to look like in the future;

  2. If accompanied by great communication, strategizing can prevent employees from losing sight of your company's aims and objectives. It can also be a tool for your employees to make faster decisions and better allocate resources.

So how does business strategy look like today? The answer is, it varies. But what we are really here to discuss is what the strongest and most successful companies are doing today, that you can start doing for your business now is incorporating innovation to your business strategy.

Ungoverned innovation initiatives are nonetheless great, because they are good enough to get your engines going. However, ideally, innovation needs to be inserted in your business plan, as a strategy. This way innovation will for sure be on your employees' agendas.

So if one wants to remain competitive, one needs to innovate. There's no question about that. If one wants to innovate, one needs to plan it. There's no question about this either. And in order to plan it, one needs to understand the different types of innovation.

The three types of Innovation - and how you can insert them in your business plan

The concept "innovation" has been used for a long time to describe different things. Commonly, when we talk about innovation, we talk about making changes and developing new products. In this article, I won't be referring to innovative technologies and products, I will be referring to innovation as a strategy framework. 

Specifically in this case, I'd like to refer back to Clayton Christiansen's framework of innovation, in order to be able to give you a better explanation of how innovation and strategy are crucial elements for growth and competitiveness of our companies.

Take a look at the different types of innovation and see how it applies to your business:

1. Low-end disruption

Low-end disruption refers to one type of disruptive innovation. Low-end occurs when new businesses start building products and services that are at lower profit markets for the incumbents (companies that are well established in the market, called). This happens because these new businesses find cheaper and better ways to produce products and services that are "not that interesting" to incumbents. This, in a way, "forces" incumbents to focus on products that will give them larger profit margins. This wouldn't be that much of a threat if it were for one product or service. It can be damaging if you are an incumbent and you are underserving some of your clients with high-cost and not-so-good-quality products and services. 

A great case of low-end disruption is Itaú vs. XP Investimentos. Itaú, one of Brazil's largest banks (the incumbent) faced a distinct threat with the consolidation of XP. XP, a brokerage firm, emerged as the "democratizer" of investing on the stock exchange in Brazil, which until then was restricted to a small number of wealthy individuals. With an easy-to-use and scalable platform, XP evolved so much that it became able to service Itaú's underserved investments customers. Because XP's "attack" didn't threaten Itaú's best customers, the incumbent decided to avoid direct retaliation. As time went on, XP became one of the greatest brokerage companies in the country, because the incumbent wasn't able to better service part of its customers.

2. New Market disruption

The other type of disruptive innovation strategy is called the New Market Disruption. In this type of innovation, companies focus on completely underserved customers. 

My favorite case of New Market Disruption strategy in one of Brazil's largest retail stores, Magazine Luiza (Magalu). Relative to the super app market, Magalu is pioneering this type of product in Brazil. In an interview to Exame (Fillippe, 2021), a brazilian business magazine, Magalu's Chief Financial Officer, Roberto Belissimo, gave out that the strategy today is to turn Magalu into a super app and create a digital ecosystem that can be a one-stop-shop for its customers.

Magalu is developing a new-market disruptor in Brazil because it is creating an entirely new product for the market by offering services that are common to brazilians, but that are centralized in one application, allowing for convenience, saving phone memory (very important to brazilians who don't possess cell phones with large memories) and best of all, allowing Magalu to gather incredible amounts of data about her customers, something that allows its to better serve its clients.

3. Sustaining Innovation

This is typically the type of innovation common to incumbents. Sustaining innovation is not a type of disruptive innovation, but it is characterized by incremental improvements in either products, services or even processes with a goal of making them better and more efficient than their previous versions.

The reason why incumbents almost always win the battles of sustaining innovation is because this strategy entails making a better product that they can sell for higher profit margins to their best customers, who incumbents end up knowing really well. Additionally, incumbents have more resources to invest in maintaining a competitive advantage over new entrants.

A great example of sustaining innovation today in the software industry for example are updates being released in apps repetitively at a constant pace in order to improve usability, service offerings and other features to maintain engagement of users. Netflix's recommendation engine is a great example of a Sustaining Innovation relative to Netflix's core business. When you first had your Netflix account, the recommendation engine was not yet available. But because one of Netflix's core business strategies is to invest in research and development they get to improve user's usability by implementing sustaining innovations in their core service: on demand streaming.

How can knowing this help me and my company?

It can help you prepare, either for the growth of your company or the growth of your competitors and not only in the industry you work in. If, for various reasons, like resources and team, you aren't able to focus on innovation then there is a way you can "look out" for the threats in your industry. 

See also: How to use metrics to measure innovation to evaluate how your teams are executing your innovation business strategy.

Evaluate your business positioning compared to the market - what defines you as a company. Are you an incumbent? Are you a small business? Where is my company compared to other competitors? A great tip to spot disruption is by studying customers who stopped using your product or service. What are they purchasing now instead?

The great thing about getting to know these theories, and cases, is that even if you are not investing in innovation today, you can start planning today. Also, it is important to keep in mind that the world is changing fast, so planning and the way you are executing your route should be constantly revisited. If needed, realign your strategy, but don't forget to invest in innovation. Start innovating today.

Referências:
- O embate Itaú vs. XP e a disrupção
- Disrupção Raiz vs. Disrupção Nutella: Aprenda o que é realmente disruptivo
- Disruptive Innovation theory: what it is and 4 key concepts
- Why do you need to focus on sustaining innovation
- McKinsey's three horizons model defined innovation for years. Here is why it no longer applies
Pamela Mazini Stürmer
Pamela Mazini Stürmer

Negócios Internacionais | futurista, entusiasta tec e people person. Tenho uma queda por culturas diferentes e qualquer lugar que ofereça um bom cinammon roll.

LinkedInMedium