Innovation – what is it and how to use it in business? Examples of innovation

Innovation is the driving force that transforms ideas into reality, catalysing change and leading to sustainable development in a rapidly changing world. What are the ins and outs of effectively using innovation to accelerate growth, increase competitiveness and drive progress in different sectors of the economy?

From this article you will learn:

• What is innovation?
• What are the types of innovation?
• What are the relationships between innovation and investment?
• How do you develop innovations?
• What are examples of known innovations?
• How does innovation affect the operation of a company?

Innovation – definition

Innovation, in its broadest sense, refers to the introduction of novelty or improvement. This can include new technologies, methods, processes or even business models. In an economic context, it is often seen as a driver of economic growth, increasing efficiency and competitiveness. The history of the concept in economics has its roots in the work of early economists, although the idea itself has evolved over the years. Early discussions of its role in economics can be found in the work of Adam Smith, who in the 18th century focused on the importance of division of labour and specialisation, although he did not use the term ‘innovation’ directly.

Innovation is the process of introducing new or significantly improved products, services, technologies or methods into an organisation with the aim of improving efficiency, increasing profits or strengthening competitive position in the market.

Definition of innovation

The real revolution in thinking about innovation was brought by Joseph Schumpeter in the first half of the 20th century. Schumpeter put forward the idea that innovation drives economic progress through a process he called ‘creative destruction’. According to him, innovation leads to the obsolescence of old technologies, products and modes of production, while creating new ones. This was a turning point in seeing innovation as a key element in the dynamics of the capitalist economy.

After the Second World War, with rapid technological growth and the Cold War, innovation became central to the economic policies of many countries. Theories emerged attempting to explain how innovation contributes to economic growth, focusing on investment in research and development (R&D) and the role of the scientific sector. With the end of the twentieth century and the beginning of the twenty-first century, innovation began to be seen in the context of globalisation and technological advances, particularly in the field of information and communication technologies (ICT). Discussions also focused on the concept of open and networked innovation, in which value is created through open platforms and collaboration between companies, as well as between the private, public and academic sectors.

In recent years, innovations aimed at sustainability, corporate social responsibility and addressing global issues such as climate change have started to play an increasingly important role. Social innovation, i.e. innovation that seeks to improve social well-being, has also become an important part of the discourse.

Types of innovation

Innovation comes in different forms and can affect different aspects of economic and social activity. Each type can occur separately or in combination with others, and often the greatest breakthroughs occur at the intersection of different types of innovation:

• Product innovation involves the introduction of new or significantly improved products or services to the market. They may involve changes in technical specifications, components and software, user features or other aspects of the product that offer new benefits to consumers.
• Process innovation focuses on the implementation of a new or significantly improved method of production or service delivery. This may include changes in techniques, hardware or software.
• Organisational innovation, which is the introduction of new ways of organising work in a company, may include new business practices, reorganisation of workplaces or external relationships or new management methods. These types of changes can be introduced in different types of companies – both corporations and family businesses.
• Marketing innovation involves the introduction of a new marketing strategy involving significant changes in product design, packaging, promotion, pricing or distribution.
• Social innovation focuses on strategies, concepts and ideas to address social needs and problems. They include new social practices, models of cross-sectoral cooperation and even policy solutions.
• Eco-innovation focuses on the development of new technologies, products, services and processes that contribute to environmental protection, sustainable development and the fight against climate change.
• The concept of open innovation (‘open innovation’) implies that companies can and should use external and internal ideas to accelerate technology development and innovation. This recognises the value of external collaboration and knowledge sharing, examples of which include collaboration with universities, research institutes, industry partners and even competitors.
• Lean innovation, also known in English as ‘frugal innovation’, focuses on simplifying products and services – creating high-quality solutions that are accessible and achievable for customers with limited financial resources. The aim is to reduce complexity and production costs.
• Disruptive innovation, popularised by Clayton Christensen, is innovation that creates new markets and values and then disrupts existing markets by replacing existing technologies, products or services. An example is the development of mobile telephony, which replaced traditional landlines.
• Incremental innovation, as opposed to disruptive innovation, involves incremental improvements to products, services or processes. Although they may seem less spectacular than others, they are an important part of continuous development and for companies to remain competitive.
• Architectural innovation occurs when existing technologies are reconfigured, giving them a new systemic context that can deliver new user benefits. An example of this is smartphones that combine the functions of mobile phones, cameras and MP3 players in a single device.

Innovation versus investment

Understanding the symbiosis of innovation and investment is crucial in assessing the macroeconomic dynamics and growth strategies of companies. Investment is a catalyst for innovation. Funding, whether in the form of venture capital, loans or investment by corporations, translates into research and development (R&D), which leads to new products, services and processes. Investing in technological innovation, training employees, purchasing new equipment or funding startups and research projects provides the basis for innovation.

In turn, innovation generates attractive opportunities for investors. Technological advances and new ideas create new markets and expand existing ones. Investors are willing to provide capital to innovative companies because of the potentially high returns on investment, despite the associated risks.

At the same time, innovation can increase efficiency and productivity, reduce costs and make companies more competitive. This means higher returns, which can be reinvested in further R&D activities – the cycle helps to maintain the momentum of development and growth, contributing to overall economic prosperity.

It is also worth noting that innovation often encourages investment in entire sectors or regions. A centre of innovation in a particular field (e.g. Silicon Valley in digital technologies) attracts domestic and foreign investment, which translates into more job opportunities, better wages and an overall higher standard of living. However, it is important to remember that innovation and investment come with risks – not every innovation will be a commercial success and not every investment will deliver the expected returns.

Methods of developing innovations

Each method of developing innovation has its merits, but it is important to remember that the use of specific ones depends on the specific situation of the company, its strategic goals, available resources and organisational culture in a company. The most effective innovation strategies often combine different approaches. Traditionally, companies rely on research and development departments to generate innovation. These departments focus on creating new products or improving existing ones by conducting rigorous scientific and applied research. Investment in R&D can lead to significant breakthroughs or incremental improvements in products, technologies or processes.

Alongside this, companies often collaborate with external partners such as universities, research institutes, suppliers, start-ups or even competitors to develop innovations. Such partnerships can combine resources, technologies and expertise, creating synergistic effects and accelerating the innovation process. They also rely on open innovation, which involves using external knowledge, ideas and technology to develop new products and services. Companies can, for example, launch competitions, hackathons or crowdsourcing platforms to gather ideas from people outside the organisation.

Lean management methodologies are also useful in developing innovations – this strategy, often used by start-ups, involves rapid prototyping, testing and iteration of ideas to minimise risk and time to market. Equally effective is design thinking (also known as ‘design thinking’) – this humanistic approach focuses on understanding user needs and solving problems creatively and innovatively.

Innovation is also supported by business incubators and business accelerators. These are organisations that support start-ups and innovative projects by providing resources, funding, mentoring or access to larger business networks. In turn, some companies promote innovation by launching internal initiatives such as intrapreneurship programmes where employees can develop and test their own ideas.

Large companies often buy start-ups or younger companies to access ready-made innovations and implement them on a larger scale. This allows them to enter the market faster and gives them access to new segments. They equally often use corporate venture capital (CVC) programmes – some companies invest directly in innovative start-ups through their own venture capital funds.

Examples of innovation

Examples of innovation can be found in different industries and at different levels of business. Here are innovations that have revolutionised certain aspects of economic and social life:

• The Internet is undoubtedly one of the most significant innovations in history – it has changed the way we communicate, do business, trade, learn and function on a daily basis. The development of the Internet has led to the creation of entirely new economic sectors and business models.
• Smartphones have revolutionised communication and access to information, combining the functions of computers, cameras, music players and phones in one portable device. They have become the management centres of many people’s daily lives, as well as tools for work, study and entertainment.
• E-commerce has changed the way we shop, with the introduction of platforms such as Amazon and Alibaba, which allow us to buy almost anything online. This has had a huge impact on logistics or retailing, among other things.
• Music and video streaming and companies such as Spotify, Netflix or YouTube have changed the way music, films and series are consumed.
• Social media, such as Facebook, X or Instagram, have created new ways of creating and maintaining social relationships, marketing and exchanging information and ideas. In a short period of time, they have become an important part of personal, social and political life around the world.
• Financial technologies such as blockchain, cryptocurrencies or mobile payments are transforming the financial sector.
• Artificial intelligence (AI) and machine learning have proven themselves in many industries – from healthcare to automotive – and can change the way we make decisions, conduct research or manage data.
• 3D printing has revolutionised manufacturing, enabling rapid prototyping, custom production and experimentation with new materials and shapes, which has had a significant impact on manufacturing, medicine or construction.

The role of innovation in business operations

Innovation shapes almost every aspect of your company’s operations, strategy and long-term success. In today’s fast-changing world, the ability to innovate often determines whether a company grows or gets left behind. One of the most important aspects affected by innovation is a company’s competitiveness in the marketplace. Continuous improvement of products and services is necessary to meet consumer expectations and to respond to the actions of competitors, so innovation not only allows a company to stand out, but also acts as a barrier to entry for new entrants.

Innovation drives the optimisation of a company’s internal processes. By introducing innovative solutions in production, logistics, human resources management or internal communication, your company can increase productivity, reduce costs and improve profitability.

Innovations, especially those focused on technology, data and knowledge, translate into more accurate decisions. Advanced data analysis, market research and forecasting through artificial intelligence are becoming the basis for marketing strategies, product development planning or setting the direction of your business.

The impact of innovation on a company’s organisational culture cannot be overlooked either. Companies that promote creativity, openness to new ideas and a willingness to take risks often attract talent and boast higher employee morale and engagement and therefore better quality of work. Innovation also allows the creation of new business models and the exploration of new markets.