In the absence of innovation a product starts to look identical to all other offerings. This process is called commoditization. When there is a lack of differentiation between offerings, a race to the bottom for the lowest price ensues, with competitors cutting their margins until they are losing money. The key to not reaching this stage is the finding new ways to set your product, process, and brand apart and create product leadership. Part of this can be reflected back from your brand if you are seen as being innovative, have exceptional quality, or have legions of engaged fans extolling your virtues. Those qualities help set you apart when compared with the competition and allow you to charge a premium price. Having features that no other competitor has gives you competitive separation and increased permission to have a larger price.
Imagine, for instance, the airline industry: most consumers simply look for the most affordable flight from Point A to Point B. There is little differentiation to cause consumers to choose an airline that is charging significantly more than the one at the bottom because all airlines generally have a similar experience and get you from one place to another safely. But some airlines have managed to create enough separation to charge a little premium and avoid being a typically low-to-no-margin bottom of the cost pack due to business class service, baggage rules, and frequent flyer programs.
Types of Innovation:
Innovation is not limited to just coming up with new ideas or features for products.
Disruptive Innovation: This is the big one, in which a whole new market is created, almost always at the expense of an old one. Apple iTunes, Uber, and AirBnB all fall into this category, but so do many smaller inventions.
Application Innovation: This is when you find a new use for an existing product, tapping into a new base of customers and potential.
Product Innovation: Creates a difference with an existing product line and existing market, usually through features.
Enhancement: This is usually a small change to create a difference between other offerings. (For example, offering in a different color or size).
Line Extension: Takes an existing line and makes a change to set it apart and create differentiation. Line extensions is one of the most common types for companies in a mature market.
Experiential: In markets where most offerings are the same you can create a difference through the experience. Going back to our airline example, you can create a difference by creating a better user experience if most airlines have the same expectation . Several airlines have focused on creating a more friendly experience, better lounges, a better business class, in-flight entertainment, food, etc. The experience applies to almost every kind of business. This includes customer service and sales innovations that affect the customer experience.
Marketing Innovation: You can create difference by the way you connect with your customers and the tools you use to reach them. Absolutely everything affects your customers perception of you, down to the font and pictures on your website. If two companies have similar offerings but one has superior marketing with more beautiful pictures and a more professional looking website, they will be perceived as being a superior product and given price permission.
Value Engineering: Innovation that helps decrease the cost of parts and labor, giving you a price advantage or increasing margins.
Process Innovation: Streamlining of the workflow to reduce cost and be quicker to market.
Cultural Innovation: The culture of your company defines not just how people see you but also how well your company operates. Ideas that help produce less employee turnover, higher productivity, and greater satisfaction led to real world returns in more ways than one. This can include improvements to performance management and how your company celebrates its goals and defines its values.
Safety Innovation: This one is particularly important for manufacturing and workplaces in which safety can be a major issue. Innovations here can lead to reduction in workplace injuries, lower premiums, more productivity, and less risk of a damaging lawsuit.
Security Innovation: Any idea brought to development that causes greater security both in reference to physical security and information technology security. This is especially important to the financial and retail sectors where any breach can cost millions and result in a crisis of consumer confidence in the service.
Improvements across your organization can help give you a competitive advantage and need not be focused on a single area but instead adopt a process that allows stakeholders around the company to propose and adopt innovations.