The 4 Organizational Innovation Types—Explained

This article is an excerpt from the Shortform book guide to "Ten Types of Innovation" by Larry Keeley, Helen Walters, Ryan Pikkel, and Brian Quinn. Shortform has the world's best summaries and analyses of books you should be reading.

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What are the best types of organizational innovation? How should you organize your company’s operations?

Ten Types of Innovation by Larry Keeley and his co-authors identify four types of innovations that relate to organizing your company or its operations. The distinction between them lies in whether they relate to your capabilities, your internal organizational structure, your external relations with other organizations, or how you monetize your product.

Continue reading for more details on these organizational innovation types.

1. Capability Innovations

This organizational innovation type describes any unique method of producing your product or providing a service that allows you to make it better or more efficiently. Maybe you invest in greater automation to increase efficiency, make use of patented production processes, or crowdsource part of your service by giving users tools to help each other.

(Shortform note: In Zero to One, innovation proponent Peter Thiel argues that to be viable, a new innovation must either provide you with unique capabilities—enable you to do something no one else in your industry can do—or provide at least a 10X improvement in existing capabilities. In Thiel’s view, improvements to your capabilities that don’t meet these criteria are often counterproductive and don’t really count as innovation. Keeley and his co-authors would probably agree with Thiel’s assessment since he emphasizes that all types of innovation must be both beneficial and novel enough to set you apart. A unique or 10X better capability would make you stand out, while 15% better capabilities probably wouldn’t.)

2. Organizational Innovations

In this type of organizational innovation, you consider any novel corporate structure or other unique arrangement of personnel and assets that gives you an advantage. Maybe an exceptionally flat corporate hierarchy empowers your company by facilitating the free flow of information between upper management and line-level employees. Or maybe decentralizing key production assets lets you adapt more rapidly to changing market conditions.

(Shortform note: There is arguably some overlap between organizational innovations and capability innovations because how your company and its assets are organized affects your capabilities. For example, the authors describe radical standardization of equipment or infrastructure as an organizational innovation because it deals with how you organize your assets. But streamlining production and training by standardizing equipment also seems like an example of a capability innovation, much like investing in automation.)

3. Relational Innovations

With this type of organizational innovation, you find novel ways to collaborate with other organizations so that they bring additional value to your product—in other words, you’ find ways to leverage your relationships with other companies. This might include absorbing those other companies: The authors consider mergers, corporate acquisitions, and vertical consolidation to be examples of relational innovations when the context makes them unique and valuable. Other examples include finding new ways to leverage the influence of companies that sell complementary products or turning your service into a franchise that you train local companies to provide instead of providing it directly.

(Shortform note: Some corporate relationships confer more mutual benefit than others. In Crossing the Chasm, Geoffrey Moore argues that “strategic alliances,” which involve mergers or large-scale coordination between different companies, are usually counterproductive, while “tactical alliances,” which involve only simple agreements between companies, are more likely to be mutually beneficial.)

4. Revenue Stream Innovations

This organizational innovation type encompasses anything unique and beneficial about how a company makes money.

There are many different tactics companies use to make money: Some sell products or services, others sell subscriptions or memberships for access to products or services, and still others offer services to users for free while selling advertising space to other companies. Some charge fixed prices, others adjust prices according to usage or outcomes, and still others let prices fluctuate according to demand through auctions or other mechanisms. Many try to price their products strategically, whether by charging a premium to increase profits per sale or accepting lower profits per sale to drive more sales, and thus more total profits, with lower prices.

Any of these could be a revenue stream innovation if you’re the only one doing it in your industry and it provides you or your customers some advantage.

Innovation and Strategic Pricing

Regardless of which tactic you use to innovate your revenue stream, you’ll need to price your offerings strategically. In Blue Ocean Strategy, Chan Kim and Renée Mauborgne present a strategy for strategically setting your price, which will allow you to create a meaningful revenue stream innovation.

First, you research customer expectations and prices for alternative products or different products that fill a similar need. Then, if your product is the market-leading option, add about a 30% premium to the typical price. Otherwise, consider pricing at the low end of the normal range to take advantage of economies of scale. And don’t let your production costs dictate your prices. Instead, set your price first and then figure out a way to deliver your product or service efficiently enough to provide a profit margin.

Kim and Mauborgne’s point about setting prices first based on customer expectations and then managing production costs creates a strong connection between capability innovations and revenue innovations: In many cases, you’ll have to develop a capability innovation in order to make a revenue stream innovation viable.

The 4 Organizational Innovation Types—Explained