Demystifying Innovation

A new book defines four types of innovation and argues that by matching the appropriate type with a company's culture and leadership, the risks of innovation can be reduced.

Innovation is a misunderstood concept, and that's why pursuing it often results in costly disappointment. But it doesn't have to be that way, argue the authors of "Breaking Away: How Great Leaders Create Innovation That Drives Sustainable Growth -- And Why Others Fail" (McGraw-Hill), a new book that identifies the factors that lead to the creation of successful innovations. The authors -- Jane Edison Stevenson, vice chairman, board and CEO services, Korn/Ferry International, and Bilal Kaafarani, who has served as a global innovation executive at consumer products companies including P&G, Kraft, FritoLay and Coca-Cola -- draw from their experiences in the corporate world to create what they call an innovation framework, principles that can be applied to any organization regardless of industry.

"I see corporate America being driven more and more by fear … and defining success as not making a mistake, as opposed to moving forward and taking the risk that's essential to unleash people's capabilities," says Stevenson. The premise of "Breaking Away," she explains, is that by understanding what innovation is and isn't, and by understanding different kinds of innovation, businesses and their leaders can reduce the risks of innovation.

"[People] use the word 'innovation' a lot but really don't have any idea what [they're] talking about -- people trot it out at analyst meetings to suggest growth is on the way," she continues, adding that that's not the only misconception. "A lot of times people use the word innovation to mean something different, but just because it's different doesn't mean it's innovation. It's also not the same as 'invention.'"

4 Categories of Innovation

Rather, Stevenson says, "We define innovation as something that's unique, of value and worthy of exchange." To help companies get to that ideal, she and Kaafarani have defined four categories of innovation, identifying risk, profile, impact and upside within each. The first category is Transformational Innovation -- the big innovations "that change your life and impact society," the authors say. However, transformational innovation can take years to be adopted and also is the most risky "because you don't know what it is, or who will purchase it, or how long it will take till you could," says Kaafarani. "You can't define the business case."

It also is the foundation of the second kind of innovation: Category Innovation, which builds on transformational innovation by identifying new markets to serve or new applications of the transformational innovation. It is half as risky as transformational innovation, says Kaafarani, but it still has plenty of uncertainty. "You're making a bet on a consumer proposition within a developing category to make money," he explains. For example, if the Internet is a transformational innovation, services such as EBay or Google would be the category transformations, Kaafarani adds.

Marketplace innovation is the third form. It takes a category innovation and adds "a feature or benefit that makes it unique again," creating "incremental growth opportunities" -- for example, apps would be the marketplace innovation for the category innovation of the iPhone and iPad, Stevenson says.

The last category is Operational Innovation, which is internally focused and the type most prevalent in the insurance industry. "This impacts the supply chain, financial algorithms, the cheaper-faster-better quotient inside the business," Stevenson says. It doesn't create change that's external to the company, but rather "how things are done," she adds. "It's low risk, you know what the upside is likely to be, and you can define and measure it."

Realistic Expectations

Understanding these distinctions helps a company's management figure out "what's realistic in terms of risk and time, and the leadership characteristics and cultural environment that are essential to driving each," Stevenson notes. "We can realistically say, 'We're going to go after this; this is how much we're going to bet on it.' You're not setting yourself up to have expectations that aren't realistic." Adds Kaafarani, the CEO can assess what kind of innovation is really needed "and put the right resources against it."

It's not just about matching the type of innovation to the corporate culture -- different kinds of executives are best suited to lead particular types of innovation, the authors emphasize. There's no right or wrong approach, they say, and ideally a company will have executives typifying all four types of innovation.

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio