5 Timeless Innovation Theories Every Company Should Know About

disruptive innovation, blue ocean, red ocean, value innovation

A Doctoral program can seem like a long trek through a multitude of academic papers and hypothetical exercises. However, after looking back at my own Doctoral program files, I thought it would be helpful to revisit several seminal theories. They provide a useful foundation for all future discussions in the innovation space.

Disruptive Innovation

Clayton Christensen first published the disruptive innovation theory in 1995. The theory explains how a new entrant in a market can overtake an incumbent market leader. It happens when an entrant targets a low-end of the market by introducing a product or service of perceived lower quality and typically lower price.

At first, the market leader ignores the entrant, not viewing a new product or service as a competitive threat. After all, the incumbent is under constant pressure to show short-term results, and it has limited resources. The market leader chooses to spend these resources on improving the existing products and services not to alienate its current customers.

The new entrant takes advantage of this pressure on the incumbent and continues to improve the quality of what was initially an inferior product or service. As time goes by, the entrant takes the market share away from the incumbent.

The key elements of disruptive innovation are:

  • A product appeals to a large population of customers who are not yet using the product.
  • The customers are willing to buy an inferior quality product as long as it costs less.
  • The product impacts all companies operating in the sector.
  • Overlooked segments of the market are a target for disruptive innovation.

Value Innovation

Professors W. Chan Kim and Renée Mauborgne discuss value innovation in their teachings. When a company follows a value innovation theory, it aspires to provide superior and unprecedented value to its customers by significantly enhancing certain aspects of the product offering and diminishing the features that do not appeal to most customers. At the same time, the company is also pursuing profitable growth by lowering operating costs.

Value innovation does not see the industry conditions as fixed, implying that companies can cause a change in the industry. Value innovators do not focus on competitors, and instead, strive to be market leaders. Value innovators are not afraid to lose customers in order to appeal to a mass audience. They approach situations with a newcomer mindset and aspire to provide a holistic solution. Finally, they pay close attention to what customers want and need and adjust their products accordingly.

Blue Ocean Strategy

A blue ocean is a new market space that is created to capture new and unmet demand. The new market space has no competition and provides a tremendous opportunity for fast growth and profits over a long period of time, often decades. Blue oceans reject the traditional strategy mindset and show that companies can pursue differentiation and low cost at the same time.

In order to execute the blue ocean strategy successfully, a company must take a holistic approach and develop three strategy propositions:

  • Value proposition – highlight the importance of creating a product that attracts customers
  • Profit proposition – develop a business model that will make the company money
  • People proposition – motivate employees to execute the strategy successfully

The final step is alignment. The top executives are responsible for aligning the three strategy propositions to achieve a sustainable strategy.

Red Ocean Strategy

Red ocean strategy is the complete oppose of blue ocean strategy. Instead of creating an uncontested market space, companies that implement red ocean strategy compete in existing market space. Instead of viewing the competition as irrelevant, red ocean strategy guides companies to beat the competition. Instead of creating and capturing new demand, companies using red ocean strategy focus on exploiting existing demand. While blue ocean strategy encourages pursuing differentiation and low cost at the same time, red ocean strategy makes you choose: differentiation or low cost.

Fast Second Innovation

Not everyone wants to be first, which is why some organizations chose to follow fast second innovation strategy. Fast second followers wait for someone else to create a new market space. Once the pioneers establish a new market space, the fast second companies come in and overtake the first movers. Facebook is a prime example of this phenomenon.

The above-mentioned innovation theories are indeed the foundation of all strategy and innovation ideas. They were a part of my first class in the Doctoral program and set the stage for all future discussions.

Leave a Comment