Understanding Market-Creating Innovations

Innovation is the process of translating an idea or invention into a good or service that creates value for which customers will pay.

There are three main types of innovation, — efficiency innovations, sustaining innovations, and market-creating innovations.

Efficiency innovations (EI) often assume the form of a process improvement or a more efficient business model. It enables businesses to: simplify and streamline their existing processes, and produce their existing products with fewer resources. Examples are outsourcing a firm’s activities to take advantage of lower wages or using technology, like automation, to reduce costs. With efficiency innovations, companies can become more profitable and, critically, free up cash flow, but they often sell to already crowded and competitive markets, which limits growth potential.

Sustaining Innovation (SI) allows companies to make existing good products better. It does not create new markets but develops existing ones with better value. Examples of sustaining innovations are all around us: a new model of a mobile telephone, a new car model, or a new TV model.

Neither of these creates growth; rather they minimize growth. It is the third type of innovation that creates net growth for a corporation and for a country. We call these market-creating innovations.

Market-creating innovations transform products that historically were so complicated and expensive that only the rich had access to them, into affordable and accessible products that many more people can own and use them. Market-creating innovations not only create jobs for the people who build these products, they also create jobs for the people that distribute, sell, and service them.

3 examples of market-creating innovations:

1. Singer Sewing Machines - The Singer sewing machine is a great example of a market-creating innovation. Prior to their invention, if you needed to have a new piece of clothing, our mothers had to do it by hand. It took them about a day to make a piece of clothing — trousers or pants, or shirts, and only the rich could have more than one pair of clothing. When Isaac Singer developed his foot-operated sewing machine, thousands and tens of thousands of customers — and ultimately millions of customers — could own and use the sewing machine. The company had to hire more people to make the machines, it hired more people to sell them, and then more people to distribute and service the machines and to teach people how to use them. Singer understood that to create this market he needed to build and manage a system that would make it easy for customers to purchase and use these machines. The success of Singer’s company was unprecedented. I. M. Singer & Co. became the first major multinational American company built by an entrepreneur without major government support. His operation led to the creation of many other industries: the closet/wardrobe industry so people could store their clothes, the fashion industry, textile manufacturing, clothing stores, and many others. The key to Singer’s success, however, wasn’t simply the technology. It was in his business model, which targeted non-consumption and created a new market for a whole set of people who previously had no sewing machine. In Singer’s case, and whenever that happens, society benefits immensely.
2. Ford Model T - Henry Ford made cars that, in the beginning, were available only to the wealthy. By making cars affordable and accessible, millions of people could own them. But it wasn’t that Henry Ford had to only make the car. He had to find somebody to provide the steel. He had to create a network of dealerships that could sell and service the car. For every person that Henry Ford sold a car to, he had to hire in his system eight more people to do all the things that were inherent in this market-creating innovation. So, there is a causal mechanism. First, you make a product or service affordable and accessible, and then you set up a system to service those people who now are enabled by this affordable product or service.
3. The internet - The internet is an innovation that created entirely new industries and subsequent new technologies, making it perhaps the most important market-creating innovation of modern history. It has evolved into a key enabler of today’s economy and society and has become integral to business, communication, education, and community building. It is also an essential tool in social life, empowering individuals and communities in ways previously unimagined.

Now, as in the past, the pathway to progress will be blazed not by ideas or institutions but by market-creating innovations.