Distinguishing Three Types of Innovation
Christensen (2014) argues that investing in different types of innovation will influence markets and firms in different ways. Therefore it is important to make a distinction between the different types of innovations, and when assessing them to use appropriate metrics.
Basically,
3 different types of innovations exist:
1. PERFORMANCE-IMPROVING INNOVATIONS: Those innovations will replace old products or models with new and more effective ones. The products or models that are improved are substitutes, as a result that consumers will only buy the new one. Therefore, these innovations do not lead to the creation much more jobs.
2. EFFICIENCY INNOVATIONS: These innovations support firms and organizations to build and sell already established goods or services at lower prices to the same consumers. These innovations can be low-end disruptions (creating a new business model) or process advancements. Efficiency innovations have two important effects. They increase productivity and as such, they make the capital - that would otherwise be used in the less productive products or models – available for more-productive uses.
3. MARKET-CREATING INNOVATIONS: These type of innovations make radical changes in complex or costly products so that they create a new class of customers, or even a whole new market. The two main ingredients for market-creating innovations are:
A. A new technology that lead to lower costs as volume increases, and
B. A new model that enables the company or organization to also reach people that couldn’t access the original good/service.
Market-creating innovations generally lead to more jobs internally as more people are reached.
Source: Christensen, C.M. “The Capitalist’s Dilemma” HBR June 2014
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