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Innovation in Business: What It Is & Why It’s Important

• 08 Mar 2022

Today’s competitive landscape heavily relies on innovation. Business leaders must constantly look for new ways to innovate because you can't solve many problems with old solutions.

Innovation is critical across all industries; however, it's important to avoid using it as a buzzword and instead take time to thoroughly understand the innovation process.

Here's an overview of innovation in business, why it's important, and how you can encourage it in the workplace.

What Is Innovation?

Innovation and creativity are often used synonymously. While similar, they're not the same. Using creativity in business is important because it fosters unique ideas . This novelty is a key component of innovation.

For an idea to be innovative, it must also be useful. Creative ideas don't always lead to innovations because they don't necessarily produce viable solutions to problems.

Simply put: Innovation is a product, service, business model, or strategy that's both novel and useful. Innovations don't have to be major breakthroughs in technology or new business models; they can be as simple as upgrades to a company's customer service or features added to an existing product.

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Types of Innovation

Innovation in business can be grouped into two categories : sustaining and disruptive.

• Sustaining innovation: Sustaining innovation enhances an organization's processes and technologies to improve its product line for an existing customer base. It's typically pursued by incumbent businesses that want to stay atop their market.
• Disruptive innovation: Disruptive innovation occurs when smaller companies challenge larger businesses. It can be classified into groups depending on the markets those businesses compete in. Low-end disruption refers to companies entering and claiming a segment at the bottom of an existing market, while new-market disruption denotes companies creating an additional market segment to serve a customer base the existing market doesn't reach.

The most successful companies incorporate both types of innovation into their business strategies. While maintaining an existing position in the market is important, pursuing growth is essential to being competitive. It also helps protect a business against other companies affecting its standing.

Learn about the differences between sustaining and disruptive innovation in the video below, and subscribe to our YouTube channel for more explainer content!

The Importance of Innovation

Unforeseen challenges are inevitable in business. Innovation can help you stay ahead of the curve and grow your company in the process. Here are three reasons innovation is crucial for your business:

• It allows adaptability: The recent COVID-19 pandemic disrupted business on a monumental scale. Routine operations were rendered obsolete over the course of a few months. Many businesses still sustain negative results from this world shift because they’ve stuck to the status quo. Innovation is often necessary for companies to adapt and overcome the challenges of change.
• It fosters growth: Stagnation can be extremely detrimental to your business. Achieving organizational and economic growth through innovation is key to staying afloat in today’s highly competitive world.
• It separates businesses from their competition: Most industries are populated with multiple competitors offering similar products or services. Innovation can distinguish your business from others.

Innovation & Design Thinking

Several tools encourage innovation in the workplace. For example, when a problem’s cause is difficult to pinpoint, you can turn to approaches like creative problem-solving . One of the best approaches to innovation is adopting a design thinking mentality.

Design thinking is a solutions-based, human-centric mindset. It's a practical way to strategize and design using insights from observations and research.

Four Phases of Innovation

Innovation's requirements for novelty and usefulness call for navigating between concrete and abstract thinking. Introducing structure to innovation can guide this process.

In the online course Design Thinking and Innovation , Harvard Business School Dean Srikant Datar teaches design thinking principles using a four-phase innovation framework : clarify, ideate, develop, and implement.

• Clarify: The first stage of the process is clarifying a problem. This involves conducting research to empathize with your target audience. The goal is to identify their key pain points and frame the problem in a way that allows you to solve it.
• Ideate: The ideation stage involves generating ideas to solve the problem identified during research. Ideation challenges assumptions and overcomes biases to produce innovative ideas.
• Develop: The development stage involves exploring solutions generated during ideation. It emphasizes rapid prototyping to answer questions about a solution's practicality and effectiveness.
• Implement: The final stage of the process is implementation. This stage involves communicating your developed idea to stakeholders to encourage its adoption.

Human-Centered Design

Innovation requires considering user needs. Design thinking promotes empathy by fostering human-centered design , which addresses explicit pain points and latent needs identified during innovation’s clarification stage.

There are three characteristics of human-centered design:

• Desirability: For a product or service to succeed, people must want it. Prosperous innovations are attractive to consumers and meet their needs.
• Feasibility: Innovative ideas won't go anywhere unless you have the resources to pursue them. You must consider whether ideas are possible given technological, economic, or regulatory barriers.
• Viability: Even if a design is desirable and feasible, it also needs to be sustainable. You must consistently produce or deliver designs over extended periods for them to be viable.

Consider these characteristics when problem-solving, as each is necessary for successful innovation.

The Operational and Innovative Worlds

Creativity and idea generation are vital to innovation, but you may encounter situations in which pursuing an idea isn't feasible. Such scenarios represent a conflict between the innovative and operational worlds.

The Operational World

The operational world reflects an organization's routine processes and procedures. Metrics and results are prioritized, and creativity isn't encouraged to the extent required for innovation. Endeavors that disrupt routine—such as risk-taking—are typically discouraged.

The Innovative World

The innovative world encourages creativity and experimentation. This side of business allows for open-endedly exploring ideas but tends to neglect the functional side.

Both worlds are necessary for innovation, as creativity must be grounded in reality. You should strive to balance them to produce human-centered solutions. Design thinking strikes this balance by guiding you between the concrete and abstract.

Learning the Ropes of Innovation

Innovation is easier said than done. It often requires you to collaborate with others, overcome resistance from stakeholders, and invest valuable time and resources into generating solutions. It can also be highly discouraging because many ideas generated during ideation may not go anywhere. But the end result can make the difference between your organization's success or failure.

The good news is that innovation can be learned. If you're interested in more effectively innovating, consider taking an online innovation course. Receiving practical guidance can increase your skills and teach you how to approach problem-solving with a human-centered mentality.

Eager to learn more about innovation? Explore Design Thinking and Innovation ,one of our online entrepreneurship and innovation courses. If you're not sure which course is the right fit, download our free course flowchart to determine which best aligns with your goals.

About the Author

What is Innovation?

Understanding the foundation of innovation and applying its practical strategies fosters a culture of creativity and better positions organizations for growth.

Jessica A. Kent

From Apple to Zapier, innovative companies lead their industries and often transform culture. Because of the positive impact innovation can have, business leaders often hear they must innovate or be left behind. Yet one can’t just “innovate” without understanding what innovation is and taking steps to implement innovation across the company.

Here’s what business leaders need to know about innovation to utilize it effectively for business growth and to increase customer affinity and trust.

Meet Our Expert

Ben Little Instructor of Innovation and Strategy

Innovation isn’t just an idea or a tool. Instead, it’s a process that guides businesses through developing products or services that deliver value to customers in new and novel ways.

Innovation, as defined by innovation leaders like consulting firm McKinsey, and IDEO, includes several key traits:

• The ability to conceive, develop, deliver, and scale new products, services, processes, and business models for customers.
• The process of taking an idea from inception to impact.
• Knowing when and how to apply methods that allow new ideas to grow.

Ultimately, innovation is taking forward action and developing growth opportunities — not standing still or maintaining the status quo.

What Does the Innovation Process Look Like?

The innovation process will likely not look the same to every company, but there are a few steps that many companies have found to be the best approach.  

Ben Little , instructor of Innovation and Strategy with Harvard Division of Continuing Education’s Professional & Executive Development, calls this process of moving from early stages of development to bringing a new offering into the world the “zones of innovation.”

Understanding the problem

“At the beginning of the process, we typically have a general statement. Something that is a problem that doesn’t quite have shape yet,” Little says. “And we need to explore a little bit. We need to understand it. We need to understand the dynamics of it. And we need to figure out where can we make a change.” 

This step can involve lots of research and learning more about customer pain points.

Exploring solutions

The next zone is about collecting resources and exploring solutions that can address the specific problem, inquiring “what can we do about it and how do we build it,” says Little. For Little, the best approach to innovation involves exploring ideas as long as possible. 

“The longer we can explore multiple really good ideas, the richer the environment we might get to in the end. That sense of concurrency, of exploring more than one option at a time, maintaining just a little bit of potential to move one direction or another, gives us the potential to get somewhere really great,” he says.

Implementation

Lastly, the final zone is  “getting close to launching maybe a going concern, a running operation, a manifested idea that’s brought to life,” says Little. 

Questions to ask at this stage include:

• Am I putting in the right features? 
• Is it designed the right way? 
• Does it have the right technology, the right operations? 

“There’s a whole host of complexity I need to explore in that final zone to make sure [the solution] can be real and sustainable, and that I can bring it to life in a meaningful and impactful way,” Little says.

Another way to implement innovation is through design thinking , which has similar steps: clarify the problem you want to solve, ideate solutions to that problem through brainstorming, research, and talking to customers; develop early prototypes and test them; and then finally launch a product. 

The key to design thinking is collaboration with the customer or end user to make sure you’re solving a problem and providing a solution that meets their needs.

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What’s “Under the Hood(ie)” of the Innovation Process

Why is Innovation Important in Business?

The primary goal of a business is to deliver value to its customers, which it can only do if it creates new and original products or services that meet customer needs. Innovation enables businesses to:

• Compete Globally: Stay ahead of competitors by adapting to market needs
• Leverage Technology: Remain at the forefront of technological advancements
• Improve Processes: Streamline operations for better efficiency and cost reduction

Two examples of innovative companies are:

Since the launch of Apple II in 1977, one of the first mass-produced home computers, Apple has focused on simple product design and interface that makes technology easy to use and more accessible. Its innovation not only centers customer needs but takes risks on creating new products customers didn’t know they needed. 

In addition to innovative products, Apple has an innovative organizational structure as well. Business leaders are given full control over their functions, which Harvard Business Review says “aligns expertise with decision rights” to “meet the needs of their individual units’ customers and maximize their results.”

Beginning as a service to rent DVDs by mail, Netflix stayed ahead of societal and technological changes, innovating a new way — online streaming — to connect customers with the entertainment they wanted. It launched an open innovation challenge in 2006 to find developers who could improve its recommendations engine and was one of the first streaming platforms to invest in original content in 2011.

Opposite to Netflix, Blockbuster Video is an example of a company that went out of business in 2010 due to its failure to innovate. Once the world’s largest video and DVD rental company, it failed to meet changing customer behavior that was moving to online streaming services. Instead, it focused on brick-and-mortar rental locations and even passed on purchasing the new start-up Netflix in 2000.

The Competitive Advantage of Innovation

Building innovation into your business strategy can give you a competitive advantage — especially when your industry is highly saturated. This c may come through offering additional products and innovative services to customers, but can also come through enhanced manufacturing processes, supply chain management, organizational structures, technology adoption, and marketing approaches.

Innovating for Growth

According to McKinsey, 70 percent of top companies have used innovation to expand their markets or create new ones. The goal is to develop products and services that meet customers’ changing behaviors, and that solve customer problems and pain points. 

Developing innovative new products for customers can drive business growth, but so can improving internal processes around organizational structures or supply chains both can save time and money.

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Innovation and Strategy program

3 Types of Innovation in Business

There are three different types of innovation a business can adopt: product innovation, process innovation, and business model innovation — all of which can help a company increase revenue, customer trust, and ability to scale.

Driving Innovation Through Your Product

Companies use innovation to create new products or services, or improve their current offerings by taking some of the approaches above. 

Innovating Existing Processes

Innovating existing business processes like manufacturing, supply chain logistics, sales, customer acquisition, and employee management can lead to benefits like increased efficiency and reduced costs. 

For example, innovating on new approaches for supply chain management can bring increased transparency to how goods move through the system, which can increase third-party accountability and customer trust.

Evolving Your Business Model 

Changing the way a company operates, delivers value, or makes money can lead to industry disruption as well. This is why business model innovation re-centers business processes, resources, and practices at the leadership level so a company can better serve customers and deliver value into the future.

The Innovation and Strategy program inspired me to elevate my thinking about what is possible and inspired me to develop a big vision for my teams.

Head of Enterprise Systems (CIO office), LTIMindtree

Overcoming Barriers to Innovation

Despite the benefits of innovation, barriers can hold companies back from being as innovative as they desire. 

Fear of risk

According to McKinsey, the biggest barrier to innovation is fear, and 85 percent of executives say that “fear holds back innovation efforts often or always in their organizations.” 

Innovation involves risk-taking, and taking big risks may or may not pay off for one’s career and company. Risk aversion and playing it safe with predictable outcomes can undercut innovation efforts and negatively impact a company, from stifling ideas to losing market share by falling behind in meeting customer needs.

Lack of strategy

Innovation involves people, resources, and time. Business leaders who want to successfully adopt and integrate innovation into their current processes must have a strategy for doing so. Otherwise, “innovation” may just be a brainstorming session that goes nowhere.

Diversity deficits

An organization may also be held back from innovation due to a lack of resources: people with great ideas, the time needed for customer research, and the talent or tools needed to prototype. Homogeneous teams lack diverse perspectives, hindering the potential for innovation. 

One of the real ‘aha’ moments for me from the program was the importance of hiring a workforce with a diversity of perspectives. Of course, this is something that I already knew intrinsically, but it was really helpful to have it spelled out so explicitly.

Senior Director of Instructional Technology Services, San Diego State University

Building an Innovation-Driven Company Culture

However, many of the barriers to innovation above can be overcome by building an innovation-driven company culture that focuses on the following:

Set the tone for innovation

Apple wouldn’t be the innovative company it is if Steve Jobs hadn’t set the tone for the culture of innovation. Business leaders who want their organizations to further embrace innovation need to set the tone for it: build innovation into strategy, set goals and objectives around innovation, and be a leader in innovative thought and processes.

Encourage experimentation and ideation

Innovation is a process that involves idea generation and creativity, as well as the time and space to let those two actions lead to new and novel solutions. Start by encouraging creative thinking in everyday tasks, like inviting team members to brainstorm ideas at the weekly staff meeting, or challenging workers to come up with creative solutions instead of simply telling them what to execute.

Reward and recognize innovative approaches

Since the biggest roadblock to innovation is fear, business leaders can encourage more innovation if they reward and recognize attempts at innovation. If employees are encouraged to test out new ideas without fear of punishment if those new ideas fail, or if they constantly receive the message that failure is part of the process, they’re more likely to take risks to uncover big, disruptive innovations.

Provide training and tools

Innovative thinking and approaches may not come naturally, especially to those who haven’t been given the freedom to come up with out-of-the-box ideas. If you want to create a culture of innovation, provide the necessary tools and training to your team — like having an outside innovation team come in and train them on conducting a brainstorming session or taking a professional development program on implementing innovation. 

The program gave me a feeling of empowerment and greater confidence in myself. I came into the field of innovation based on my experience with identifying opportunities and helping bring new ideas forward over the years.

Founder of Wellspring Creative Solutions, LLC.

Measuring Innovation Success

Measuring the success of any business venture, including innovation initiatives, involves a few key steps:  

Define Goals: Clearly articulate what success looks like (e.g., new features, market expansion).

Identify KPIs: Track metrics like ROI, market share, customer feedback, and process efficiency.

Evaluate Impact: Measure R&D outcomes and their influence on sales or operational improvements.

Learning and Developing Your Innovation Skills

If you’re looking to introduce innovation into your company or improve your approach to innovation, stay updated on innovation methodologies and tools by enrolling in a business innovation program through Harvard Professional & Executive Development .

Learn how to leverage new technologies like AI in your innovation, grow a culture of creativity, implement the principles of design thinking, and strengthen your organization’s capacity to drive innovation.

Each innovation program is designed to meet the needs of different industry leaders and professionals who want to make an impact in their workplace today and into the future.

Explore all Innovation Strategy programs

About the Author

Jessica A. Kent is a freelance writer based in Boston, Mass. and a Harvard Extension School alum. Her digital marketing content has been featured on Fast Company, Forbes, Nasdaq, and other industry websites; her essays and short stories have been featured in North American Review, Emerson Review, Writer’s Bone, and others.

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The Division of Continuing Education (DCE) at Harvard University is dedicated to bringing rigorous academics and innovative teaching capabilities to those seeking to improve their lives through education. We make Harvard education accessible to lifelong learners from high school to retirement.

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What is Innovation? Meaning and Impact on Business Strategies

Published: 13 December, 2023

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In the contemporary business environment , the term “ innovation ” transcends mere rhetoric; it stands as a transformative force shaping the trajectory of organizational success and longevity. understanding the meaning, importance of innovation, and characteristics of innovation is paramount for businesses. Successfully navigating the innovation process within the framework of an innovation strategy and a digital transformation strategy has evolved into a prerequisite for organizations with aspirations to attain their business goals through business strategy by understanding the diverse types of innovation .

But, What is innovation then? Innovation, at its core, is the dynamic process of introducing novel ideas, strategies, and technologies to revolutionize the way organizations operate, enhance value creation, and interact with their stakeholders. Innovation, entwined with the innovation lifecycle and strategically leveraging innovative technology, is the catalyst reshaping the trajectory of progress across diverse fields.

At Digital Leadership, as experts in Innovation Consulting and Digital Transformation Consulting , our mission is to guide organizations from strategy to execution, ensuring a seamless integration of cutting-edge ideas. Our Innovation Blueprint service serves as the initial step, conducting a thorough assessment of existing innovation practices and seamlessly integrating them into the overarching business strategy .

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Corporate training, innovation consulting and much more.

What is Innovation?

The term “innovation” finds its origins in the Latin verb Innovare, signifying renewal, a definition that resonates through time. In its essence, innovation conveys the act of improvement or replacement, be it in processes, products, or services. However, within the intricate landscape of business, a more precise definition is requisite.

Innovation is a dynamic and multifaceted concept that encapsulates the process of introducing novel ideas, methods, products, or services to create positive change and enhance value. It goes beyond mere invention, emphasizing the practical application of inventive thinking to bring about tangible improvements in various aspects of business, technology, or society. Innovation involves a continuous and adaptive journey, requiring organizations to foster a culture that encourages creativity, embraces change, and pursues solutions that lead to meaningful advancements.

Innovation differs from invention , Invention refers to the creation of something entirely new, innovation involves the effective application and implementation of inventive ideas to generate practical and impactful outcomes, driving continuous improvement and positive change in the dynamic landscapes of business, technology, and society.

Beyond its fundamental definition, innovation takes on heightened importance through a unified approach. The UNITE Innovation Approach amplifies the significance of innovation, making it a collective force driving positive change across the broader spectrum of human endeavor.

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You can now access the complete Innovation Approach Package, including a full presentation, related models and instructions for use.

The UNITE Innovation Approach | Overview

For a comprehensive guide to innovation, including various approaches and strategies, explore our latest offering, the FREE book titled  “HOW TO CREATE INNOVATION. ” This resource is a treasure trove of insights, offering mindsets, structures, and strategies to innovate more efficiently, with fewer resources and greater success. Don’t miss out – register now for a free download!

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What is Innovation in Business? Innovation Definition in Business

In the dynamic landscape of business, innovation serves as the linchpin that harmonizes business strategy orchestrating a symphony of positive change and sustained value creation. Beyond the conventional realm of product development, business innovation is a strategic imperative interwoven with overarching business strategy. It involves leveraging novel ideas, processes, and technologies to gain a competitive edge, explore new markets, and ensure long-term viability. Simultaneously, innovation seamlessly integrates with digital transformation strategy , propelling businesses into the technologically driven future. This strategy becomes the conduit for reimagining processes, enhancing customer experiences, and staying agile in response to evolving consumer expectations.

Business Model Canvas model serves as the blueprint for translating innovative ideas into tangible outcomes. By outlining the processes, structures, and frameworks for fostering creativity and managing innovation initiatives, a well-defined business innovation model becomes a guiding framework.

Download the Complete eXtended Business Model package, including instructions for putting it to work for you today.

The UNITE Business Model Canvas

One crucial aspect of fostering innovation is its alignment with the Jobs-to-be-Done . This framework recognizes that customers “hire” a product or service to get a job done in their lives. Understanding these jobs and designing solutions that address them is integral to successful innovation. It shifts the focus from merely improving products to solving specific customer problems, providing a more targeted and customer-centric approach. You can download it now. 

You can now access the complete Jobs to be Done Package, including a full presentation, related models and instructions for use.

The UNITE Jobs-To-Be-Done Statement & Map

Why is innovation important.

The importance of innovation in fostering competitive advantage, long-term sustainability, and organizational growth is pivotal. It propels businesses forward by differentiating them from competitors, reducing operational costs, and opening up new revenue streams. Moreover, innovation enhances customer satisfaction, attracts top talent, and ensures adaptability in the face of evolving market conditions. In essence, the importance of innovation extends beyond strategic choice; it is the heartbeat of thriving and resilient businesses in the modern world.

The Value Proposition Canvas which is a key tool in this step of fostering innovation, becomes invaluable. This canvas provides a structured framework for understanding customer pains, and gains , aligning them with your product or service features. It facilitates a deep understanding of customer segments and aids in crafting a value proposition that directly addresses their requirements.

8. Learn from Failures and Iterate

• Failure as a Learning Opportunity: Acknowledge that not every idea will lead to success. Instead of viewing failures negatively, treat them as learning opportunities. Extract valuable insights from unsuccessful attempts and use them to refine future approaches.
• Iterative Approach: Embrace an iterative approach to idea generation and implementation. Continuously gather feedback, make improvements, and iterate on existing ideas to enhance their effectiveness over time.

By integrating these strategies into their organizational DNA, businesses can foster an innovation culture and consistently generate impactful ideas. Idea generation is not a one-time event but an ongoing innovation process that, when nurtured, becomes a key driver of organizational success and longevity.

How to Measure and Manage Innovation In Innovation Process for Innovation Strategy Success

Successfully measuring and managing innovation within the innovation process is crucial for the overall success of an organization’s innovation strategy . Here’s a comprehensive guide on how to achieve this synergy for innovation success:

• 1. Define Clear Business Objectives: Clearly articulate the objectives of your innovation strategy. These objectives should be specific, measurable, achievable, relevant, and time-bound (SMART). Having well-defined goals provides a basis for measuring progress.
• 2. Establish Key Performance Indicators (KPIs): Identify and establish key performance indicators that align with your innovation objectives. These KPIs can include metrics such as the number of new ideas generated, time-to-market for innovations, cost-effectiveness, and customer satisfaction. Tailor KPIs to reflect both quantitative and qualitative aspects of innovation.
• 3. Implement an Innovation Process: Develop a structured innovation process that guides idea generation , evaluation, and implementation. This process should incorporate stages from ideation to execution, ensuring that innovative concepts are systematically nurtured and brought to fruition.
• 4. Foster Innovation Culture: Cultivate an organizational culture that encourages creativity, risk-taking, and continuous improvement. Ensure that employees feel empowered to contribute ideas, experiment, and challenge the status quo. A supportive culture is essential for the success of any innovation strategy.
• 5. Provide Resources and Support: Allocate the necessary resources, including budget, time, and expertise, to innovation initiatives. Leadership support is critical to overcoming challenges and ensuring that innovative projects have the backing required for success.
• 6. Regularly Assess Progress: Regularly assess and analyze progress against established KPIs. Use data-driven insights to evaluate the effectiveness of innovation initiatives. Identify successful practices and areas for improvement, adjusting strategies accordingly.
• 7. Encourage Cross-Functional Collaboration: Facilitate collaboration among diverse teams and departments. Cross-functional collaboration brings varied perspectives to the innovation process, fostering a rich environment for creativity and problem-solving.
• 8. Embrace Continuous Learning: View setbacks and failures as opportunities for learning and improvement. Encourage a mindset that values experimentation and views failures as stepping stones to success. Continuous learning enhances adaptability and resilience in the face of challenges.
• 9. Integrate Feedback Loops: Establish feedback loops that allow for ongoing communication between different stages of the innovation process. This ensures that adjustments can be made promptly based on insights gained during implementation.
• 10. Align with Business Strategy : Ensure that innovation efforts align with the broader business strategy. A cohesive integration of innovation into the organizational strategy ensures that innovative endeavours contribute directly to long-term business goals .

By conscientiously integrating these measures into the busin ess purpose organizations can effectively measure, manage, and enhance their innovation strategies , fostering an environment conducive to continuous growth and success.

Types of Innovation and Strategic Selection for Business Strategy Success

In the pursuit of organizational growth and competitiveness, understanding the various types of innovation and strategically selecting the right one is paramount. Here’s an exploration of different types of innovation and a guide on how to choose the most fitting for your business strategy :

• Description: Making small improvements to existing products, processes, or services.
• Benefits: Low-risk, continuous improvement, often well-received by existing customers.
• When to Choose: Suitable for steady progress without radical changes, maintaining market share, or refining existing offerings.
• Description: Introducing new products or services that significantly alter existing markets.
• Benefits: Opens new markets, and can lead to industry transformation.
• When to Choose: Ideal for revolutionizing industries, entering new markets, or challenging existing business models.
• Definition: Involves the development of entirely new products, services, or processes that significantly disrupt and reshape existing markets or industries.
• Transformational impact.
• High level of risk.
• Shift in customer expectations.
• The introduction of the personal computer in the 1970s.
• The advent of smartphones combines communication, computing, and entertainment.
• Definition: Involves making significant changes to the underlying design or structure of a product, system, or organization.
• Structural modification.
• Integration of components.
• Optimization of interactions.
• The transition from traditional landline telephony to Voice over Internet Protocol (VoIP) technology.
• The development of hybrid electric vehicles that combine traditional combustion engines with electric propulsion.
• Description: Collaboration with external partners, customers, or even competitors to generate ideas and solutions.
• Benefits: Access to diverse expertise, accelerates innovation cycles.
• When to Choose: Ideal for organizations looking to tap into external creativity, leverage external resources, and foster a collaborative ecosystem.
• Description: Creating a foundation (platform) that allows others to build upon and contribute.
• Benefits: Enables ecosystem growth, and fosters third-party innovations.
• When to Choose: Suitable for businesses aiming to create ecosystems, expand service offerings, and leverage external contributions.
• Description: Optimizing internal operations and workflows.
• Benefits: Increased efficiency, cost reduction, improved productivity.
• When to Choose: Ideal for enhancing operational effectiveness, streamlining workflows, and reducing costs.
• Description: Focusing on creating new or significantly improved products.
• Benefits: Appeals to customer preferences, potentially opens new markets.
• When to Choose: Suitable when there’s a need for differentiated offerings, entering new markets, or responding to changing customer demands.
• Description: Introducing new or enhanced services to meet customer needs.
• Benefits: Improved customer experience, and differentiation in the market.
• When to Choose: Appropriate for enhancing customer satisfaction, creating new revenue streams , or standing out in a service-oriented market.

Choosing the Right Type of Innovation for Your Business Strategy:

By carefully considering the following factors, organizations can strategically select the type of innovation that best suits their business strategy, ensuring sustainable growth, and maintaining a competitive edge in the dynamic business landscape.

• Align the choice of innovation with overarching business goals and objectives.
• Consider the competitive landscape, market trends, and customer needs to identify opportunities for innovation .
• Assess the organization’s internal capabilities, resources, and readiness for different types of innovation.
• Evaluate the organization’s risk tolerance and choose an innovation type that aligns with the acceptable level of risk.
• Prioritize innovation types that resonate with customer needs and preferences.
• Choose innovations that align with the organization’s long-term strategic vision and positioning.
• Assess the potential for collaboration and determine if open innovation or platform innovation aligns with the organizational culture.
• Stay abreast of industry trends to identify emerging opportunities and disruptive forces that may influence the choice of innovation.

In conclusion, understanding the meaning, importance, and characteristics of innovation is paramount for businesses striving to thrive in today’s competitive environment. Whether incremental or disruptive, innovation is the driving force behind sustained success.

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The eight essentials of innovation

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January 4, 2024

In the time since this article was first published, McKinsey has continued to explore the topics it covers. Read on for a summary of our latest insights.

Innovation may sound like a creative art: hard to quantify, dependent on lightning-bolt inspiration, subject to the availability of magic dust and luck. It’s true that innovation relies, to an extent, on the vagaries of ingenuity. But according to McKinsey research, innovation—and, crucially, the type of outperformance that innovation can spark in organizations—is much more likely to happen when there is a rigorous process  in place to bring ideas to fruition.

The simple fact is that innovation translates to growth : innovation leaders generate almost twice as much revenue growth from innovation as their competitors. Our research in the years since the COVID-19 pandemic has found that these organizations, which we call “innovative growers,” do this by cultivating four best practices :

• Link innovation to growth aspirations and reinforce its importance in strategic and financial discussions.
• Pursue multiple pathways to growth, both in core businesses and when entering adjacent customer segments, industries, or geographies. Innovative growers also only enter markets where there are clear opportunities to create value.
• Invest productively in all innovation capabilities, including research and development, resourcing, and operational agility.
• Cultivate strong M&A capabilities, particularly programmatic dealmaking.

Innovation can be especially rewarding when deployed as a crisis-management measure . During periods of uncertainty, organizations that invest in innovation—contrary, perhaps, to the impulse to batten down the hatches—are also more likely to emerge ahead of competitors. More specifically, innovative organizations are more likely to find emerging pockets of growth  in times of uncertainty.

Looking ahead, we expect innovative organizations to keep outpacing their peers. Our 2023 McKinsey Global Survey  reveals a striking connection  between organizations’ innovation capabilities and their abilities to increase value through the newest digital technologies, including generative AI. Everyone is talking about gen AI, but organizations with strong innovative cultures are walking the walk, too: thirty percent of top innovators we surveyed said they are already deploying gen AI at scale in their innovation and R&D functions, more than six times the rate of companies that are lagging on innovation. Top innovators are also already reaping significantly better business outcomes from their AI investments than slower-moving competitors.

Articles referenced:

• “ Companies with innovative cultures have a big edge with generative AI ,” August 2023
• “ Innovation: Your solution for weathering uncertainty ,” January 2023
• “ Committed innovators: How masters of essentials outperform ,” June 2022
• “ Innovation in a crisis: Why it is more critical than ever ,” June 2020

It’s no secret: innovation is difficult for well-established companies. By and large, they are better executors than innovators, and most succeed less through game-changing creativity than by optimizing their existing businesses.

Yet hard as it is for such organizations to innovate, large ones as diverse as Alcoa, the Discovery Group, and NASA’s Ames Research Center are actually doing so. What can other companies learn from their approaches and attributes? That question formed the core of a multiyear study comprising in-depth interviews, workshops, and surveys of more than 2,500 executives in over 300 companies, including both performance leaders and laggards, in a broad set of industries and countries (Exhibit 1). What we found were a set of eight essential attributes that are present, either in part or in full, at every big company that’s a high performer in product, process, or business-model innovation.

Since innovation is a complex, company-wide endeavor , it requires a set of crosscutting practices and processes to structure, organize, and encourage it. Taken together, the essentials described in this article constitute just such an operating system, as seen in Exhibit 2. These often overlapping, iterative, and nonsequential practices resist systematic categorization but can nonetheless be thought of in two groups. The first four, which are strategic and creative in nature, help set and prioritize the terms and conditions under which innovation is more likely to thrive. The next four essentials deal with how to deliver and organize for innovation repeatedly over time and with enough value to contribute meaningfully to overall performance.

To be sure, there’s no proven formula for success, particularly when it comes to innovation. While our years of client-service experience provide strong indicators for the existence of a causal relationship between the attributes that survey respondents reported and the innovations of the companies we studied, the statistics described here can only prove correlation. Yet we firmly believe that if companies assimilate and apply these essentials—in their own way, in accordance with their particular context, capabilities, organizational culture, and appetite for risk—they will improve the likelihood that they, too, can rekindle the lost spark of innovation. In the digital age, the pace of change has gone into hyperspeed, so companies must get these strategic, creative, executional, and organizational factors right to innovate successfully.

President John F. Kennedy’s bold aspiration, in 1962, to “go to the moon in this decade” motivated a nation to unprecedented levels of innovation. A far-reaching vision can be a compelling catalyst, provided it’s realistic enough to stimulate action today.

But in a corporate setting, as many CEOs have discovered, even the most inspiring words often are insufficient, no matter how many times they are repeated. It helps to combine high-level aspirations with estimates of the value that innovation should generate to meet financial-growth objectives. Quantifying an “innovation target for growth,” and making it an explicit part of future strategic plans, helps solidify the importance of and accountability for innovation. The target itself must be large enough to force managers to include innovation investments in their business plans. If they can make their numbers using other, less risky tactics, our experience suggests that they (quite rationally) will.

Establishing a quantitative innovation aspiration is not enough, however. The target value needs to be apportioned to relevant business “owners” and cascaded down to their organizations in the form of performance targets and timelines. Anything less risks encouraging inaction or the belief that innovation is someone else’s job.

For example, Lantmännen, a big Nordic agricultural cooperative, was challenged by flat organic growth and directionless innovation. Top executives created an aspirational vision and strategic plan linked to financial targets: 6 percent growth in the core business and 2 percent growth in new organic ventures. To encourage innovation projects, these quantitative targets were cascaded down to business units and, ultimately, to product groups. During the development of each innovation project, it had to show how it was helping to achieve the growth targets for its category and markets. As a result, Lantmännen went from 4 percent to 13 percent annual growth, underpinned by the successful launch of several new brands. Indeed, it became the market leader in premade food only four years after entry and created a new premium segment in this market.

Such performance parameters can seem painful to managers more accustomed to the traditional approach. In our experience, though, CEOs are likely just going through the motions if they don’t use evaluations and remuneration to assess and recognize the contribution that all top managers make to innovation.

Fresh, creative insights are invaluable, but in our experience many companies run into difficulty less from a scarcity of new ideas than from the struggle to determine which ideas to support and scale. At bigger companies, this can be particularly problematic during market discontinuities, when supporting the next wave of growth may seem too risky, at least until competitive dynamics force painful changes.

Innovation is inherently risky, to be sure, and getting the most from a portfolio of innovation initiatives is more about managing risk than eliminating it. Since no one knows exactly where valuable innovations will emerge, and searching everywhere is impractical, executives must create some boundary conditions for the opportunity spaces they want to explore. The process of identifying and bounding these spaces can run the gamut from intuitive visions of the future to carefully scrutinized strategic analyses. Thoughtfully prioritizing these spaces also allows companies to assess whether they have enough investment behind their most valuable opportunities.

During this process, companies should set in motion more projects than they will ultimately be able to finance, which makes it easier to kill those that prove less promising. RELX Group, for example, runs 10 to 15 experiments per major customer segment, each funded with a preliminary budget of around $200,000, through its innovation pipeline every year, choosing subsequently to invest more significant funds in one or two of them, and dropping the rest. “One of the hardest things to figure out is when to kill something,” says Kumsal Bayazit, RELX Group’s chief strategy officer. “It’s a heck of a lot easier if you have a portfolio of ideas.”

Once the opportunities are defined, companies need transparency into what people are working on and a governance process that constantly assesses not only the expected value, timing, and risk of the initiatives in the portfolio but also its overall composition. There’s no single mix that’s universally right. Most established companies err on the side of overloading their innovation pipelines with relatively safe, short-term, and incremental projects that have little chance of realizing their growth targets or staying within their risk parameters. Some spread themselves thinly across too many projects instead of focusing on those with the highest potential for success and resourcing them to win.

These tendencies get reinforced by a sluggish resource-reallocation process. Our research shows that a company typically reallocates only a tiny fraction of its resources from year to year, thereby sentencing innovation to a stagnating march of incrementalism. 1 1. See Stephen Hall, Dan Lovallo, and Reinier Musters, “ How to put your money where your strategy is ,” McKinsey Quarterly , March 2012; and Vanessa Chan, Marc de Jong, and Vidyadhar Ranade, “ Finding the sweet spot for allocating innovation resources ,” McKinsey Quarterly , May 2014.

Innovation also requires actionable and differentiated insights—the kind that excite customers and bring new categories and markets into being. How do companies develop them? Genius is always an appealing approach, if you have or can get it. Fortunately, innovation yields to other approaches besides exceptional creativity.

The rest of us can look for insights by methodically and systematically scrutinizing three areas: a valuable problem to solve, a technology that enables a solution, and a business model that generates money from it. You could argue that nearly every successful innovation occurs at the intersection of these three elements. Companies that effectively collect, synthesize, and “collide” them stand the highest probability of success. “If you get the sweet spot of what the customer is struggling with, and at the same time get a deeper knowledge of the new technologies coming along and find a mechanism for how these two things can come together, then you are going to get good returns,” says Alcoa chairman and chief executive Klaus Kleinfeld.

The insight-discovery process, which extends beyond a company’s boundaries to include insight-generating partnerships, is the lifeblood of innovation. We won’t belabor the matter here, though, because it’s already the subject of countless articles and books. 2 2. See, for example, Marla M. Capozzi, Reneé Dye, and Amy Howe, “ Sparking creativity in teams: An executive’s guide ,” McKinsey Quarterly , April 2011; and Marla M. Capozzi, John Horn, and Ari Kellen, “ Battle-test your innovation strategy ,” McKinsey Quarterly , December 2012. One thing we can add is that discovery is iterative, and the active use of prototypes can help companies continue to learn as they develop, test, validate, and refine their innovations. Moreover, we firmly believe that without a fully developed innovation system encompassing the other elements described in this article, large organizations probably won’t innovate successfully, no matter how effective their insight-generation process is. 

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Business-model innovations—which change the economics of the value chain, diversify profit streams, and/or modify delivery models—have always been a vital part of a strong innovation portfolio. As smartphones and mobile apps threaten to upend oldline industries, business-model innovation has become all the more urgent: established companies must reinvent their businesses before technology-driven upstarts do. Why, then, do most innovation systems so squarely emphasize new products? The reason, of course, is that most big companies are reluctant to risk tampering with their core business model until it’s visibly under threat. At that point, they can only hope it’s not too late.

Leading companies combat this troubling tendency in a number of ways. They up their game in market intelligence, the better to separate signal from noise. They establish funding vehicles for new businesses that don’t fit into the current structure. They constantly reevaluate their position in the value chain, carefully considering business models that might deliver value to priority groups of new customers. They sponsor pilot projects and experiments away from the core business to help combat narrow conceptions of what they are and do. And they stress-test newly emerging value propositions and operating models against countermoves by competitors.

Amazon does a particularly strong job extending itself into new business models by addressing the emerging needs of its customers and suppliers. In fact, it has included many of its suppliers in its customer base by offering them an increasingly wide range of services, from hosted computing to warehouse management. Another strong performer, the Financial Times , was already experimenting with its business model in response to the increasing digitalization of media when, in 2007, it launched an innovative subscription model, upending its relationship with advertisers and readers. “We went against the received wisdom of popular strategies at the time,” says Caspar de Bono, FT board member and managing director of B2B. “We were very deliberate in getting ahead of the emerging structural change, and the decisions turned out to be very successful.” In print’s heyday, 80 percent of the FT ’s revenue came from print advertising. Now, more than half of it comes from content, and two-thirds of circulation comes from digital subscriptions.

Virulent antibodies undermine innovation at many large companies. Cautious governance processes make it easy for stifling bureaucracies in marketing, legal, IT, and other functions to find reasons to halt or slow approvals. Too often, companies simply get in the way of their own attempts to innovate. A surprising number of impressive innovations from companies were actually the fruit of their mavericks, who succeeded in bypassing their early-approval processes. Clearly, there’s a balance to be maintained: bureaucracy must be held in check, yet the rush to market should not undermine the cross-functional collaboration, continuous learning cycles, and clear decision pathways that help enable innovation. Are managers with the right knowledge, skills, and experience making the crucial decisions in a timely manner, so that innovation continually moves through an organization in a way that creates and maintains competitive advantage, without exposing a company to unnecessary risk?

Companies also thrive by testing their promising ideas with customers early in the process, before internal forces impose modifications that blur the original value proposition. To end up with the innovation initially envisioned, it’s necessary to knock down the barriers  that stand between a great idea and the end user. Companies need a well-connected manager to take charge of a project and be responsible for the budget, time to market, and key specifications—a person who can say yes rather than no. In addition, the project team needs to be cross-functional in reality, not just on paper. This means locating its members in a single place and ensuring that they give the project a significant amount of their time (at least half) to support a culture that puts the innovation project’s success above the success of each function.

Cross-functional collaboration can help ensure end-user involvement throughout the development process. At many companies, marketing’s role is to champion the interests of end users as development teams evolve products and to help ensure that the final result is what everyone first envisioned. But this responsibility is honored more often in the breach than in the observance. Other companies, meanwhile, rationalize that consumers don’t necessarily know what they want until it becomes available. This may be true, but customers can certainly say what they don’t like. And the more quickly and frequently a project team gets—and uses—feedback, the more quickly it gets a great end result.

Some ideas, such as luxury goods and many smartphone apps, are destined for niche markets. Others, like social networks, work at global scale. Explicitly considering the appropriate magnitude and reach of a given idea is important to ensuring that the right resources and risks are involved in pursuing it. The seemingly safer option of scaling up over time can be a death sentence. Resources and capabilities must be marshaled to make sure a new product or service can be delivered quickly at the desired volume and quality. Manufacturing facilities, suppliers, distributors, and others must be prepared to execute a rapid and full rollout.

For example, when TomTom launched its first touch-screen navigational device, in 2004, the product flew off the shelves. By 2006, TomTom’s line of portable navigation devices reached sales of about 5 million units a year, and by 2008, yearly volume had jumped to more than 12 million. “That’s faster market penetration than mobile phones” had, says Harold Goddijn, TomTom’s CEO and cofounder. While TomTom’s initial accomplishment lay in combining a well-defined consumer problem with widely available technology components, rapid scaling was vital to the product’s continuing success. “We doubled down on managing our cash, our operations, maintaining quality, all the parts of the iceberg no one sees,” Goddijn adds. “We were hugely well organized.”

In the space of only a few years, companies in nearly every sector have conceded that innovation requires external collaborators. Flows of talent and knowledge increasingly transcend company and geographic boundaries. Successful innovators achieve significant multiples for every dollar invested in innovation by accessing the skills and talents of others. In this way, they speed up innovation and uncover new ways to create value for their customers and ecosystem partners.

Smart collaboration with external partners, though, goes beyond merely sourcing new ideas and insights; it can involve sharing costs and finding faster routes to market. Famously, the components of Apple’s first iPod were developed almost entirely outside the company; by efficiently managing these external partnerships, Apple was able to move from initial concept to marketable product in only nine months. NASA’s Ames Research Center teams up not just with international partners—launching joint satellites with nations as diverse as Lithuania, Saudi Arabia, and Sweden—but also with emerging companies, such as SpaceX.

High-performing innovators work hard to develop the ecosystems that help deliver these benefits. Indeed, they strive to become partners of choice, increasing the likelihood that the best ideas and people will come their way. That requires a systematic approach. First, these companies find out which partners they are already working with; surprisingly few companies know this. Then they decide which networks—say, four or five of them—they ideally need to support their innovation strategies. This step helps them to narrow and focus their collaboration efforts and to manage the flow of possibilities from outside the company. Strong innovators also regularly review their networks, extending and pruning them as appropriate and using sophisticated incentives and contractual structures to motivate high-performing business partners. Becoming a true partner of choice is, among other things, about clarifying what a partnership can offer the junior member: brand, reach, or access, perhaps. It is also about behavior. Partners of choice are fair and transparent in their dealings.

Moreover, companies that make the most of external networks have a good idea of what’s most useful at which stages of the innovation process. In general, they cast a relatively wide net in the early going. But as they come closer to commercializing a new product or service, they become narrower and more specific in their sourcing, since by then the new offering’s design is relatively set.

How do leading companies stimulate, encourage, support, and reward innovative behavior and thinking among the right groups of people? The best companies find ways to embed innovation into the fibers of their culture, from the core to the periphery.

They start back where we began: with aspirations that forge tight connections among innovation, strategy, and performance. When a company sets financial targets for innovation and defines market spaces, minds become far more focused. As those aspirations come to life through individual projects across the company, innovation leaders clarify responsibilities using the appropriate incentives and rewards.

The Discovery Group, for example, is upending the medical and life-insurance industries in its native South Africa and also has operations in the United Kingdom, the United States, and China, among other locations. Innovation is a standard measure in the company’s semiannual divisional scorecards—a process that helps mobilize the organization and affects roughly 1,000 of the company’s business leaders. “They are all required to innovate every year,” Discovery founder and CEO Adrian Gore says of the company’s business leaders. “They have no choice.”

Organizational changes may be necessary, not because structural silver bullets exist—we’ve looked hard for them and don’t think they do—but rather to promote collaboration, learning, and experimentation. Companies must help people to share ideas and knowledge freely, perhaps by locating teams working on different types of innovation in the same place, reviewing the structure of project teams to make sure they always have new blood, ensuring that lessons learned from success and failure are captured and assimilated, and recognizing innovation efforts even when they fall short of success.

Internal collaboration and experimentation can take years to establish, particularly in large, mature companies with strong cultures and ways of working that, in other respects, may have served them well. Some companies set up “innovation garages” where small groups can work on important projects unconstrained by the normal working environment while building new ways of working that can be scaled up and absorbed into the larger organization. NASA, for example, has ten field centers. But the space agency relies on the Ames Research Center, in Silicon Valley, to maintain what its former director, Dr. Pete Worden, calls “the character of rebels” to function as “a laboratory that’s part of a much larger organization.”

Big companies do not easily reinvent themselves as leading innovators. Too many fixed routines and cultural factors can get in the way. For those that do make the attempt, innovation excellence is often built in a multiyear effort that touches most, if not all, parts of the organization. Our experience and research suggest that any company looking to make this journey will maximize its probability of success by closely studying and appropriately assimilating the leading practices of high-performing innovators. Taken together, these form an essential operating system for innovation within a company’s organizational structure and culture.

Marc de Jong is a principal in McKinsey’s Amsterdam office, Nathan Marston is a principal in the London office, and Erik Roth is a principal in the Shanghai office.

The authors wish to thank Jill Hellman and McKinsey’s Peet van Biljon for their contributions to this article.

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