Davenport, Leibold, Voelpel: A broad taxonomy of innovation

• Disruptive Innovation. Gathers much attention, particularly in the press, because markets appear as if from nowhere, creating massive new sources of wealth. It tends to have its roots in technological discontinuities, such as the one that enabled Motorola’s rise to prominence with the first generation of cell phones, or in fast-spreading fads like the collector card game Pokémon.

• Application Innovation. Takes existing technologies into new markets to serve new purposes, as when Tandem applied its fault-tolerant computers to the banking market to create ATMs and when OnStar took Global Positioning Systems into the automobile market for roadside assistance.

• Product Innovation. Takes established offers in established markets to the next level, as when Intel releases a new processor or Toyota a new car. The focus can be on performance increase (Fitleist Pro V1 golf balls), cost reduction (HP inkjet printers), usability improvement (Palm handhelds), or any other product enhancement.

• Process Innovation. Makes processes for established offers in established markets more effective or efficient. Examples include Dell’s streamlining of its PC supply chain and order fulfillment system, Charles Schwab’s migration to online trading, and Wal-Mart’s refinement of vendor-managed inventory processes.

• Experiential Innovation. Makes surface modifications that improve customers’ experience of established products or processes. These can take the form of delighters (“You’ve got mail!”), satisfiers (superior line management at Disneyland), or reassurers (package tracking from FedEx).

• Marketing Innovation. Improves customer-touching processes, be they marketing communications (use of the Web and trailers for viral marketing of The Lord of the Rings movie trilogy) or consumer transactions (Amazon’s ecommerce mechanisms and eBay’s online auctions).

• Business Model Innovation. Reframes an established customer need base, reinvents value proposition(s) to the customer, redefines a company’s established role in the value system, or combinations of these. Examples include Gillette’s move from razors to razor blades, IBM’s shift to on-demand computing services, and Apple’s expansion into consumer retailing.

• Structural Innovation. Capitalizes on disruption to restructure industry relationships.

Innovators like Fidelity and Citigroup, for example, have used the deregulation of financial services to offer broader arrays of products and service to consumers under one umbrella. Nearly overnight, those companies became sophisticated competitors to traditional banks and insurance companies.