3 Types Of Innovation (The Prosperity Paradox)

I skate to where the puck is going, not where it has been.

— Wayne Gretzky

What Got Me Thinking 💭

Innovating is necessary for market disruption, but not all innovations are created equal. Peter Thiel speaks about avoiding competition by building something completely new, taking us from 0 to 1. Clayton Christensen echoes similar sentiments. He argues that efficiency and sustaining innovations take products from 1 to N while, market-creating innovations take you from 0 to 1.

In summary:

Sustaining Innovations

“Sustaining innovations are improvements to existing solutions on the market and are typically targeted at customers who require better performance from a product or service.” — Clayton M. Christensen

Sustaining innovation requires adjusting your product offering to suit the market’s needs better. They help to compete for the existing market share. It also usually results in higher prices and better margins.

Examples: Improving device memory, new car models and different product flavours.

Efficiency Innovations

“Efficiency innovations… enable companies to do more with fewer resources.” — Clayton M. Christensen

These efficiency gains allow for faster scale, lower prices and more profit. The benefits include fewer employees or taking on more functions in the long run. Efficiency is crucial as markets become increasingly crowded. These innovations are usually focusing on product creation and are process-centric.

Examples: Workflow automation, process optimisations and circumventing middlemen.

Market Creating Innovations

“Market-creating innovations… create new markets… that serve people for whom either no products existed or existing products were neither affordable nor accessible for a variety of reasons.” — Clayton M. Christensen

By targeting non-consumption, you can create markets where they’re currently non-existent. The most significant competitors here are workarounds and apathy.

Quantitative approaches to understanding the market fail as there’s no market to segment and no customers to characterise. Understanding the market’s complexity requires investigative, qualitative methods (i.e. the jobs to be done framework).

Once you begin satisfying uncatered needs, the market naturally brings a supporting ecosystem on top of this initial foundation. For example, this may include distribution channels, educational facilities, regulators, manufacturing, maintenance, etc.

Examples: Indomie’s expansion into Nigeria, Henry Fords’ Model T in America and M-Pesa in Kenya.

Final Thoughts

Companies should not overlook innovation types because they can’t go from 0 to 1 forever. No competition gives you the first-mover advantage, but that edge is temporal. They must transition from creating to maintaining the market.

Ford is a prime example. Their Model T created an entire U.S. market and it dominated 60% market share in 1921. However, they failed to invest in sustaining innovations - e.g. car upgrades, new colours and credit purchases. So they lost their market position to General Motors and Chrysler ( 43% and 25% market share respectively) within 15 years.

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