One of the points that I consistently stress in my innovation classes is that there are many forms of innovation, and that people and firms need to think about more than simply product innovation. This idea goes back at least to Schumpeter and his five forms of innovation:

• New product or service
• New method of production
• New source of supply
• New market or application
• New method of organising your firm or industry

A lot of people think only of the first type when they think of innovation, and I think that’s a mistake. John Hagel, John Seeley Brown and Lang Davison have recently published a report called the 2009 Shift Index for Deloitte, which tries to identify the key forces of long-term change for business. Today they published a follow-up report looking at specific industries. Hagel discusses the key points in today’s publication in a blog post, which includes this point:

Innovation, at least as traditionally defined, does not appear to offer a solution –
Perhaps one of the most innovative industries in the US – the technology industry – has also experienced one of the most significant declines in ROA since 1965. This suggests that innovation defined as product or even process innovation is also not sufficient as a response to growing economic pressure. With knowledge flows becoming more and more important as a source of value creation relative to knowledge stocks, we suggest that another form of innovation – institutional innovation – may be much more helpful in turning the performance trends around. This kind of innovation focuses on redefining roles and relationships among institutions to generate and sustain richer knowledge flows across institutional boundaries, something most institutions find very challenging today.

I think that this is an essential point. It’s one of the reasons that I keep talking about business model innovation. Yes, new products and services are important. But the firms that make a difference are the ones that are coming up with new business models – these are the things that re-organise an industry. When you are developing an innovation strategy, it pays to think about all of Schumpeter’s different types of innovation. Pay particular attention to the last one – new ways of organising are the ones that will make your fancy new product or service obsolete before it even comes out. It’s better for you to be making these changes than your competitors.