Wednesday, August 09, 2006

IBM has identified three kinds of innovation

IBM recently published a continuation of its Global CEO Study entitled Expanding the Innovation Horizon. One key finding is that a large proportion of the 765 CEOs surveyed are beginning to pay a lot more attention to business model innovation.

IBM saw three types of innovation in general:

  1. Business model - Innovation in the structure and/or financial model of the business
  2. Operational - Innovation that improves the effectiveness and efficiency of core processes and functions
  3. Products/services/markets - Innovation applied to products or services or "go-to-market" activities

I always find it useful to think about business concepts in terms of their impact on shareholder value, since in many respects the buck stops with them. Most shareholders care about sustainable growth, generally meaning profit growth.

The third type of innovation, products/services/markets, gets to profit growth directly by creating new streams of revenue.

The second type of innovation, operational, gets to profit growth by attacking the cost side of the profit equation: make a business more efficient so it can claim more profit for itself. The other possible outcome of operational innovation is lowering your prices by reducing cost. That can allow you to capture more market share, albeit at a lower price, and grow by increasing volume--as long as the numbers work out.

The first type of innovation, business model, gets to growth by changing the game. By thinking creatively about how to deliver value to the customer you can achieve growth through new revenues, increased volume, lower costs, lower prices that increase volume, or all of the above.

A popular example of business model innovation is the DVD rental market. Blockbuster Video's business model was to deliver DVDs to customers in retail outlets. The rental terms were you rent for 3 days and return the video on time or pay a late fee. Then NetFlix came out with the same product but a different business model. With NetFlix you pay a subscription fee with all-you-can-eat DVDs. NetFlix recognized some of the problems customers hated about the Blockbuster business model and they solved them. For instance, customers didn't like it when all the videos they wanted to see were checked out, they didn't like late fees, and they didn't like not having some certainty the movie they were about to watch was any good or not.

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