(Business Model) Innovation vs. (Product) Invention

I've always found the author tandem John Hagel and John Seely Brown interesting to follow. In a recent article they made a particularly interesting point related to business design: They outlined that in the 21st century we must shift our attention from "invention" to "innovation". They stress that nowadays competitive advantage increasingly comes from the ability to creatively combine new and existing things in order to innovate rather than from trying to invent a new "silver bullet". This is pure business design:

If we shift our attention from invention to innovation, we begin to see a much broader horizon. Innovation -- the ability to create and capture economic value from invention -- is what really drives both the economic prosperity of nations and the shareholder value of corporations.

An example that nicely illustrates this and which I have described on this blog before is the business model of VoIP provider Skype. The company has taken several different inventions that have been on the market for a while and creatively mixed them together to build an innovative business model. They combined Peer-2-Peer (P2P) technology with free Voice over Internet (VoIP) and Instant Messaging (IM) and commercialized the whole thing in a viral manner over the Internet. The lego pieces that Skype used to build its business model weren't all that new, but it was the way they put them together that allowed them to disrupt the telco market.

It is this ability to innovate and come up with new business designs that will be the driver of success in the 21st century:

Innovation isn't just confined to commercialization of new products. It can also build upon creative new practices, processes, relationships, or business models, and even institutional innovations such as open-source computing -- invention occurs in all these domains. And while breakthrough innovations can generate significant economic value, sustaining that value requires a capacity for continual incremental innovations.

So while some companies are still trying to invent new products and processes to gain a competitive edge others are trying to innovate through careful business design that fits all the pieces together. Successful examples of the latter category are:

  • Apple (http://www.apple.com) that combines Hardware (iPod) with Software (iTunes) to succeed in the music business
  • Arvind Mills Ruf n Tuf Jeans (www.arvindmills.com) that sells stylish jeans to poor Indians by using innovative distribution channels and which makes a profit based on scale.
  • Grameen Phone (www.grameenphone.com - my all time favorite) that combines micro-credits and women entrepreneurship with the teleco business to sell telecommunication services to rural Bangladesh.
  • Tecnovate (http://www.tecnovate.co.in) that brings young Europeans to work in call centers in India to sell multi-language outsourcing back to Europe.