Innovation: Pressures and Types

Innovation is a key source of competitive advantage. Firms that fail to innovate risk being overtaken by competitors or disrupted by new entrants. This lesson examines the internal and external pressures that drive innovation, the distinction between product and process innovation, and the strategic significance of innovation for business success.

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What Is Innovation?

Innovation is the successful exploitation of new ideas. It involves turning an invention, concept, or improvement into a product, service, or process that creates value for customers and the firm. Innovation is not the same as invention:

Concept	Definition	Example
Invention	Creating something entirely new	Tim Berners-Lee inventing the World Wide Web (1989)
Innovation	Commercially exploiting a new or improved idea	Amazon using the internet to create an online retail business

Innovation can be radical (a completely new product or process that transforms an industry) or incremental (a small, gradual improvement to an existing product or process).

Type	Definition	Example
Radical innovation	A breakthrough that creates entirely new markets or fundamentally changes existing ones	The smartphone — Apple's iPhone (2007) transformed telecommunications, computing, photography, and entertainment
Incremental innovation	Small, continuous improvements to existing products or processes	Annual updates to iPhone models — improved cameras, faster processors, longer battery life

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Pressures to Innovate

Firms face both internal and external pressures to innovate. Understanding these pressures helps explain why firms invest in innovation and how they prioritise their efforts.

Internal Pressures

Pressure	Explanation	Example
Desire to improve efficiency	Firms seek to reduce costs and improve productivity through process improvements	Toyota's continuous improvement (kaizen) culture drives constant operational innovation
Need to utilise spare capacity	Firms with underused resources may innovate to find new revenue streams	Google's "20% time" policy (now discontinued) encouraged engineers to work on side projects, producing innovations like Gmail and Google News
Entrepreneurial culture	Firms with a strong innovation culture attract creative employees and encourage risk-taking	3M expects its divisions to generate 30% of revenue from products introduced in the past five years
Profit motive	New products can command premium prices and generate supernormal profits	Pharmaceutical firms invest heavily in R&D because a successful drug can generate billions in revenue
Obsolete products	Firms must replace products reaching the end of their life cycle	Nintendo regularly innovates its gaming hardware (Wii, Switch) as older consoles become obsolete

External Pressures

Pressure	Explanation	Example
Competition	Rivals launching new or improved products forces the firm to respond or lose market share	Samsung and Apple constantly innovate smartphones to compete with each other
Changing customer needs	Consumer tastes, expectations, and behaviours evolve over time	The shift towards plant-based diets pressured food manufacturers to develop meat-free alternatives — Quorn, Beyond Meat, THIS
Technological change	Advances in technology create opportunities and threats	Cloud computing enabled new business models (SaaS) and forced traditional software firms like Microsoft to adapt
Legislation and regulation	New laws may require firms to change their products or processes	EU emissions regulations forced car manufacturers to invest heavily in electric vehicle technology
Globalisation	International competition increases the pressure to innovate to remain competitive	UK manufacturers face competition from lower-cost producers in Asia, driving investment in automation and advanced manufacturing
Economic conditions	Recessions may force firms to find more cost-effective ways of operating; booms may fund innovation investment	During COVID-19, many firms innovated rapidly — pubs offered delivery services, restaurants created meal kits, and gyms launched online classes

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Product Innovation

Product innovation involves developing new or significantly improved products or services. It is the most visible form of innovation and is critical for maintaining competitiveness.

Types of Product Innovation

Type	Explanation	Example
New-to-the-world products	Entirely new products that create new markets	The first digital camera, the first electric car, the first streaming service
New product lines	Products new to the firm but not to the market	Dyson entering the hair care market with the Supersonic hairdryer (2016)
Product improvements	Enhancements to existing products	Cadbury reformulating its chocolate bars, Samsung adding foldable screens
Repositioned products	Existing products targeted at new markets or customer segments	Lucozade repositioning from a medicinal drink to a sports energy drink

Benefits of Product Innovation