Alongside digitization, innovation is probably one of the most frequently used buzzwords in business jargon in recent years. But what actually constitutes an innovation?
It is helpful to distinguish between an innovation and an invention in the true sense of the term. An invention without direct economic application or benefit remains merely an invention.
A successful market introduction, on the other hand, constitutes an innovation. However, innovations are not limited to commercializing technical inventions – they include any successful market novelty that creates value.
Two Examples
The invention of the transistor in 1947 was probably one of the most important inventions of the last century. Among other things, it laid the foundation for the computer and ultimately for what we now call digitalization. At the time, however, the invention was initially dismissed, and no practical use was seen. Even the inventors expected only niche applications, for example in the military sector. The first real innovation based on this invention was the portable transistor radio. Radios already existed, but they were tube-based and stationary. The transistor enabled mobility and allowed Texas Instruments to successfully launch a new product category on the market.
In my view, one of the most important innovations in banking over the last 25 years is the exchange-traded index fund (ETF). Today, ETFs are among the most popular investment vehicles for both individual and institutional investors. In this case, the innovation was not driven by a fundamentally new technology. Instead, it resulted from a user-oriented idea that cleverly combined existing building blocks such as passive investment mandates and electronic exchanges, ultimately enabling a massive market breakthrough.
This second example illustrates that innovations do not necessarily require a preceding invention. More often, innovation results from the creative combination of existing elements to address a market need.
Three types of Innovations
One way to classify innovations is into market innovations, functional innovations, and process innovations.
Market innovations describe new ways of bringing supply and demand together, or new ways of reaching the customer. Amazon in its early years is a good example. The company fundamentally redesigned the market for books without introducing a new product.
Functional innovations address needs through new technical capabilities. Examples include the transistor radio mentioned above or the smartphone, which was not a completely new invention but rather a user-friendly evolution of the mobile phone into a pocket computer with internet access, camera and GPS functionality. Apple’s two-finger zoom gesture was a seemingly simple but essential component of this innovation. The iPhone was not the first phone to include these features, but it was the first to combine them in a highly intuitive product, paving the way for the mobile Internet.
However, this alone was not enough to fundamentally change the world. It required an additional market innovation in the form of the App Store, where developers could offer software programs tailored to the smartphone, from then on known as apps.
Finally, there are process innovations, which aim to produce goods and services more efficiently, faster, cheaper, or more individually through technology. Examples include the digitization of work processes as well as industrial 3D printing.
Organizations that succeed in creatively combining market, functional, and process innovations significantly increase their chances of achieving lasting success in the market.