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The Innovation Hierarchy

In previous posts, I introduced the notion of innovation types – various business dimensions along which innovation is possible. So far, I haven’t said anything about their relative value. Scholars and others generally agree that some types of innovation produce more sustainable competitive advantage than others. For instance, Gary Hamel, Visiting Professor at London Business School and author of numerous management publications, has talked about a hierarchy of innovation:

“There's a hierarchy of innovation. Economic progress is driven by three forms of innovation: institutional innovation, which includes the legal and institutional framework for business; technological innovation, which creates the possibility of new products, services, and production methods; and management innovation, which changes the way organizations are structured and administered. Management innovation has produced the most profound shifts [in business productivity].”

I fully agree that some types of innovation produce more lasting benefits than others, but I do not believe the innovation hierarchy is static. It’s fairly obvious that the position of innovation types within a hierarchy varies by industry.

Consider the pharmaceutical industry, which invests heavily in research and development to uncover, test and bring new drugs to market. Product innovation is clearly the primary source of competitive advantage for pharmaceutical companies. They sustain this advantage by obtaining and defending patents, which prevent rival companies from copying their products. For pharma companies therefore, product innovation ranks high on the innovation hierarchy.

Compare this to the financial services industry, which some have described as a commodity business. If you consider products alone, it’s hard to argue with this characterization. Products from one institution have little differentiation from those of another. When new products are actually introduced, they are quickly and easily copied. For financial institutions therefore, product innovation ranks fairly low on the innovation hierarchy.

Of course, this begs an obvious question. If not product innovation, which type of innovation ranks high on the hierarchy for financial institutions? A research project known as The Relationship Experience, conducted recently by BAI and Strategic Horizons LLP, may provide an answer. The study suggests that customer experience innovation is the best way to avoid product commoditization and produce sustained differentiation.

I’ll take a closer look at findings from that study in the next post.

Posted by Nelson T. on December 2, 2006 8:04 PM

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