Speaker 1: Hello everyone, welcome to business school 101. What is innovation? It is when Apple launched its first generation of iPhone. It is when Uber started its ride-sharing revolution. It is when Netflix built its realm of video streaming. It is when Canon made copier and printer small enough for small business and families. Innovation can be categorized in many ways. One way to categorize innovation is to classify it based on two dimensions, the technology it uses, and the market it operates in. In this video, we use a 2x2 innovation matrix to visualize the four most common types of innovation. Type 1. Incremental Innovation. An incremental innovation squarely builds on an established knowledge base and steadily improves an existing product or service offering. It targets existing markets using existing technology. After the first generation of iPhone, the following generations of iPhones are good examples of incremental innovations. From iPhone 2 to iPhone 14, the iPhone has undergone multiple iterations, with each new model offering a sleeker model, better camera, or improved speed or graphics. Another example of incremental innovation could be Gillette's razors. Gillette constantly upgrades its razors, adding new features, like extra blades, heated razors, and a pivoting head. Please keep in mind that in the real business world, most innovations belong to incremental innovations. Compared with other types of innovations, incremental innovation has four major benefits. Number 1. Reduce Risk. As we know, innovation failure rates are high, especially in a rapidly changing market. Many businesses can't afford to take major risks with any long-term investment, like developing new technology or R&D projects. However, with an incremental strategy, making small, continuous advances without putting the company's budget or sustainability on the line is possible. Number 2. Increase Product Diversification. If a business focuses more of its efforts and R&D budget on incremental innovation, the shift towards new concepts is more gradual. Consumers are more open to adopting familiar products with new upgrades. Number 3. Stay Competitive. By continually iterating on existing ideas, companies can develop newer, better versions of products while simultaneously generating profit from the current versions. This incremental innovation strategy enables companies to retain their market share and current customers by always staying top of mind in the industry with another update or new feature. Number 4. Lower Innovation Costs. Lastly, one of the most apparent benefits of incremental innovation is its relatively manageable impact on the company budget. An incremental strategy won't break the bank, as it offers a degree of affordability that allows a business to make minor enhancements without allocating a considerable amount of financial resources. However, incremental innovation also has two major drawbacks. Number 1. Overcomplicate the Product. There is a risk of overcomplicating products and adding too many features no one wants to pay for. Thus, companies shouldn't ignore the customers who just want a simple, low-cost alternative to their products unless they specifically choose to target the more demanding customer segment and provide them with premium products. Number 2. Miss the Opportunity for a Radical Change. Another risk related to incremental innovation is that the market may, and will, change at some point because of disruption. If that is the case, companies that only rely on incremental innovations aren't going to keep up their competitive advantages. Type 2. Disruptive Innovation. Disruptive innovation is when new technologies and products are created to serve an existing market. This type of innovation is enabled by new technology that provides a more efficient and accessible alternative to what already exists in the market. Businesses apply disruptive innovation to serve the evolving needs of their consumer base, creating entirely new value streams and service offerings that did not exist before. Netflix is an excellent example of disruptive innovation in the realm of video streaming. At the time, Blockbuster was the king of video rentals. But like many incumbents, it was focused on its current most profitable customers instead of new markets. The streaming video became extremely popular due to its cost and convenience, and Netflix quickly became the first choice for video watchers. Blockbuster executives were dismissing Netflix in 2008, but by 2010, Blockbuster was bankrupt. Another example of disruptive innovation could be Uber. Uber started a ride-sharing revolution with the launch of its peer-to-peer app. Traditional taxis were more unreliable, costly, and offered little in regards to customer service or recourse for a bad experience. By using Uber, passengers don't need to wander out to the street with the hopes of waving down a cab. They can simply press a few buttons on your phone and arrange for a driver to pick you up in a relatively short time frame. Type 3. Architectural Innovation Firms can also innovate by leveraging existing technologies into new markets. Doing so generally requires them to reconfigure the components of a technology, meaning they alter the overall architecture of the product. Therefore, an architectural innovation is a new product in which known components, based on existing technologies, are reconfigured in a novel way to create new markets. For example, the smartwatch used existing cell phone technology and was repackaged into a watch. This opened up a new market of purchasers by repackaging an existing technology. Copiers and printers can be another good example of architectural innovation. Copiers used to be large and expensive machines purchased only for large companies or universities. Canon reconfigured these copiers to be small and usable on desktops, creating a whole new market for small companies or families buying personal copiers or printers. Type 4. Radical Innovation Radical innovation targets new markets by using new technologies. It draws on novel methods or materials and is derived either from an entirely different knowledge base or from recombination of existing knowledge bases with a new stream of knowledge. Although radical innovations are rare, there have been more and more of them in the recent past. Well-known examples of radical innovations include the introduction of the mass-produced automobile, airplanes, x-rays, and the internet. Recent radical innovations could include artificial intelligence, blockchain technology, and genome sequencing. Because radical innovation is so different from what people are used to, it does usually face significant resistance at first. These types of innovations typically require a lot of time and technological development before they're ready for mainstream markets. However, when executed successfully, it often means the beginning of a new era that affects many sectors and geographies. Many business scholars found that radical innovations are generally introduced by new entrepreneurial ventures. Why is this so? Here are three major reasons. 1. Economic Incentives Economists highlight the role of incentives in strategic choice. Once an innovator has become an established incumbent firm, it has strong incentives to defend its strategic position and market power. An emphasis on incremental innovations strengthens the incumbent firm's position and thus maintains high entry barriers. In addition, the incremental innovation is particularly attractive once an industry standard has emerged and technological uncertainty is reduced. The incentives for entrepreneurial ventures, however, are just the opposite. Successfully commercializing a radical innovation is frequently the only option to enter an industry protected by high entry barriers. 2. Organizational Inertia From an organizational perspective, as firms become established and grow, they rely more heavily on formalized business processes and structures. In some cases, the firm may experience organizational inertia, resistance to changes in the status quo. Therefore, incumbent firms tend to favor incremental innovations that reinforce the existing organizational structure and power distribution while avoiding radical innovation that could disturb the existing power distribution. 3. Innovation Ecosystem A final reason incumbent firms tend to be a source of incremental rather than radical innovations is that they become embedded in an innovation ecosystem, which refers to a network of suppliers, buyers, complementors, and so on. They no longer make independent decisions but must consider the ramifications on other parties in their innovation ecosystem. Continuous incremental innovations reinforce this network and keep all its members happy while radical innovations disrupt it. Again, new entrants don't have to worry about pre-existing innovation ecosystems since they will be building theirs around the radical innovation they are bringing to a new market. To sum up, innovation can be categorized in many ways. One way to categorize innovation is to classify it based on two dimensions—the technology it uses and the market it operates in. With this approach, innovations can be classified into a two-by-two matrix. First, incremental innovation. An incremental innovation squarely builds on an established knowledge base and steadily improves an existing product or service offering. It targets existing markets using existing technology. The second, disruptive innovation. Disruptive innovation is when new technologies and products are created to serve an existing market. Third, architectural innovation. An architectural innovation is a new product, based on existing technologies, is reconfigured in a novel way to create new markets. Last, radical innovation. Radical innovation targets new markets by using new technologies. It draws on novel methods or materials and is derived either from an entirely different knowledge base or from recombination of existing knowledge bases with a new stream of knowledge. Alright, that's all for today's topic. So, what do you think about those four types of innovations? Do you have any related experience or story willing to share? Please leave your thoughts in a comment below. 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