An innovation strategy is a company's approach to developing and implementing new ideas to drive growth and gain competitive advantage. Companies with formal innovation strategies are 3x more likely to achieve above-average growth according to McKinsey research, making strategic innovation essential for long-term business success.
Key benefits of a well-defined innovation strategy include:
- Enhanced competitiveness through new products and services
- Improved customer experience by addressing unmet needs
- Increased profits from innovative offerings
- Organizational growth and sustainability
Think about some of the most life-changing inventions: the printing press, the lightbulb, smartphones. Before all of these inventions existed, there were centuries of human history in which people lived without them.
Innovation moves societies forward, and it's a major driver for business growth too. While transformative ideas can seem like miracles or luck, they are often the result of a focused effort to solve a particular problem.
Your ecommerce business can replicate that approach. An innovation strategy doesn't guarantee you'll invent a world-changing product. However, it increases your odds of uncovering high-value new ideas and sets you up for long-term business success.
What is an innovation strategy?
An innovation strategy is a company's comprehensive approach to developing and implementing new ideas. It's typically a document or other record that outlines your innovation philosophy and processes, aligning your team around a common innovation mission and encouraging employees to pursue new ideas.
Developing an innovation strategy creates a structure for operational efficiency, allowing companies to quickly identify, test, and implement innovative ideas. Harvard Business Review research shows that organizations with structured innovation processes achieve 67% higher success rates in bringing new products to market.
Core strategy components
Effective innovation strategies must include four fundamental components that guide strategic decision-making and execution:
Identifying unmet customer needs and market opportunities: Systematic research reveals gaps in the market where innovation can create value. This involves analyzing customer feedback, market trends, and competitive landscapes to uncover areas for improvement or entirely new solutions.
Setting clear innovation objectives aligned with business goals: Innovation efforts must directly support broader business objectives. Whether targeting revenue growth, market expansion, or operational efficiency, each innovation initiative needs measurable goals and success metrics.
Developing structured processes for idea generation and evaluation: Successful innovation requires repeatable processes for capturing ideas, evaluating their potential, and moving promising concepts through development stages. This includes establishing criteria for prioritizing projects and allocating resources effectively.
Regular assessment and adjustment of innovation efforts: Innovation strategies need continuous refinement based on results and changing market conditions. Companies that review and adjust their innovation approaches quarterly achieve 40% better outcomes than those with static strategies.
Types of innovation strategies for ecommerce
There are three main categories of innovation strategies, each serving different business objectives and market conditions. Understanding these types helps you select the right approach for your specific situation:
Incremental Innovation
Incremental innovation focuses on improving existing products, services, or processes. This approach builds on your current capabilities while reducing risk. Common incremental innovation types include:
- Product innovation. A product innovation strategy focuses on bringing new products to market or improving existing products.
- Service innovation. Service innovation improves a company's services or introduces new service offerings within your existing business strategy.
- Process innovation. A process innovation strategy introduces new business processes or improves existing ones for better efficiency.
- Technological innovation. Technological innovation reshapes the tools you use to do business without necessarily changing your product, service, or business model.
The Apple Watch exemplifies incremental innovation: Apple recombined existing technologies to create and launch a new product type within their established ecosystem.
Disruptive Innovation
Disruptive innovation creates new markets or significantly changes existing ones by offering simpler, more accessible, or more affordable solutions. This strategy targets underserved market segments and gradually moves upmarket. Key characteristics include:
- Business model innovation. A business model innovation strategy introduces new business models that challenge industry norms.
- Value innovation. Value innovation reshapes your value proposition to increase differentiation and improve your company's competitive advantage.
- Market disruption. These innovations are significant enough to disrupt competitors' business models or cause industry-wide change.
Amazon Prime's two-day shipping commitment exemplifies disruptive innovation in ecommerce. By offering fast, free shipping to members, it gained market share and pressured competitors to offer comparable services.
Radical Innovation
Radical innovation introduces entirely new technologies or creates breakthrough products that didn't exist before. This approach involves the highest risk but offers the greatest potential rewards:
- Breakthrough technology. Developing new technologies that enable previously impossible solutions.
- New market creation. Creating entirely new product categories or market segments.
- Transformative solutions. Solving problems in fundamentally new ways that make existing solutions obsolete.
Radical innovations are less common but can generate significant competitive advantage for businesses willing to invest in long-term research and development.
How to craft an effective innovation strategy
- Revisit business fundamentals
- Conduct market research
- Set innovation goals
- Keep your core values top of mind
- Build your process
- Monitor and adjust
An effective innovation strategy will help you address current challenges, unlock new value-creation opportunities, and position your company for future growth. Here's how to develop one and use it to drive innovation:
1. Revisit business fundamentals
Review your core business goals and unique value proposition, ensuring that both are accurate and up to date. Next, review your business development plan, growth plan, or any other strategies outlining your plan to meet those goals.
You'll use this information to align your innovation efforts with your other business activities. Conducting a SWOT analysis in which you review your strengths, weaknesses, opportunities, and threats will help you identify promising areas of innovation for your company.
2. Conduct market research
Market research will help you understand the role of innovation in your market, identify opportunities, and anticipate what's next. Here are four key research areas:
Product life cycles
Different industries innovate at different rates. The shorter the product life cycle in an industry, the faster companies need to innovate to keep up.
Short product life cycles are common in fields like SaaS and consumer technologies, meaning companies need to regularly introduce new products and services to stay relevant.
Market dynamics
Is your market growing or shrinking? What was the most recent major disruption in your market, and what caused it? What external events or policies drive market change?
Competitors
Conduct a competitive analysis, identifying areas where your competitors outperform you and noting any performance trends. You can also identify major players and determine their collective market share.
Customer
Study the customers in your market, including those you're already serving and any potential customers you haven't yet reached. Then identify customer needs, taking note of the needs you meet and those that your competitors meet.
Pay special attention to unmet needs—these represent opportunities to gain market share. Gyve Safavi and Mark Rushmore, founders of electric toothbrush company SURI, discussed how they used market research to disrupt the electric toothbrush market on a recent episode of the Shopify Masters podcast.
"When we looked at share data, we found that there were two main brands that dominated most of the share in most developed markets," says Gyve. "The first thing Mark and I did was we ran a lot of surveys."
The results showed that despite market consolidation, customers weren't particularly loyal to the brands they were using—a sign that an emerging company could challenge major players. Gyve and Mark used survey insights to develop sustainable electric toothbrushes with plant-based recyclable heads, generating more than $30 million in sales in their first two years.
3. Set innovation goals
Use what you've established in your overall business strategy—including goals, core capabilities, and market strengths—to set goals for your innovation strategy.
Here are key questions to ask yourself during the innovation process:
What innovations do we need to make to stay competitive?
Start by identifying the bare minimum. If successful companies in your market introduce new or updated products every few years, you need to as well to remain competitive.
How stable is our market?
Look for signs that your market is vulnerable to disruption, such as low levels of customer satisfaction, high prices, limited product accessibility, and high levels of consolidation among a few major players.
You should target disruptive innovation tactics yourself or pursue value creation to insulate you from potential changes.
What opportunities aren't we pursuing?
Consider the opportunities you identified in your SWOT analysis and the unserved potential customers and unmet needs you discovered during the market research phase.
You probably haven't pursued these opportunities because you aren't yet positioned to do so; they require new innovations, so you can set a goal to take them on now.
What are my company's biggest areas for improvement?
You can also use innovation to target weaknesses and reduce risk. Identify your biggest expenses, your most time-consuming processes, and any areas where your competitors outperform you.
You can also ask yourself what customer needs your company doesn't meet, or identify the products or services with which customers are least satisfied and set a goal to improve your offerings.
What are our internal capabilities and available resources?
Identify the innovations you can realistically pursue. Ask yourself which innovation techniques your infrastructure can support and if you have the financial resources for innovation investments.
Consider your level of risk tolerance. Disruptive or radical innovation strategies can yield big returns, but they can also lead to dead ends.
Use these questions to identify your competitive needs, set goals, and select innovation initiatives to pursue. Then select the corresponding innovation strategy type, keeping in mind you might pursue multiple types of innovation and build more than one strategy.
4. Keep your core values top of mind
Before moving on to the next step, take a beat to revisit your business's core values. Plans that take you away from those values should be revisited.
For example, when Gyve and Mark struggled to find a supplier, they returned to their sustainability commitment.
"Our brush is one-third the size of most brushes, and we're using new materials that have never been used in a toothbrush before," says Gyve.
Many suppliers weren't up to the challenge. "The immediate reaction was, 'We don't trust you. We don't think this is a good idea. This sounds very complex," he added.
Mark and Gyve didn't compromise on their vision, and eventually, the team found a supplier excited about bringing their product to market.
"I don't think I've ever believed in anything as much as I believe in this," Mark says. "I can look into the eyes of my children and say, 'Dad is working on something meaningful, which in some little way contributes to making the world a slightly better place. That really helps with the rejections."
5. Build your process
Develop or outline the organizational structures, business processes, and techniques that will support your organization's innovation activities. Your process will depend on the type of innovation you plan to pursue.
A service innovation strategy will involve regular cycles of reviewing customer feedback and market research. It should involve brainstorming improvements to existing services, testing and piloting ideas, and going to market.
A disruptive innovation strategy, on the other hand, may be less defined. You should assemble a team of key people, give them a budget, a reporting schedule, and a list of needs, and task them with proposing inventive solutions to your market's biggest challenges.
6. Monitor and adjust
Track progress and adjust your strategy for better outcomes. Most innovative businesses commit to regular feedback cycles. They solicit employee and customer input and use it to create positive feedback loops for continuous improvement.
Ask yourself on a regular basis: Is this strategy producing quantifiable results? If not, set aside time with your team to identify fault lines and adjust course.
Innovation strategy FAQ
What are the elements of innovation strategy?
An innovation strategy includes your business's innovation mission, goals, and process. It gets your entire company on the same page and includes all the details your employees need to pursue innovation initiatives.
How do you build an innovation strategy?
Here's how to build an innovation strategy:
- Review your value proposition, business goals, strengths, and weaknesses.
- Research your market, identifying market opportunities and risks.
- Set goals for innovation activities that support your other business strategies.
- Build a repeatable process designed to facilitate each goal.
How do you choose the right innovation strategy for your business?
To choose the right type of innovation strategy, identify the innovations that would provide the most value to your business. Then determine what types of innovations these are and develop an innovation strategy designed to support each one.
