2010 Volume 13 Issue 4

The Four Levels of Innovation

The Four Levels of Innovation

Assess the Time, Effort, and Resources Necessary to Join the Ranks of Innovation

Is innovation just a convenient buzzword? Or, is it a paradigm-changing force that allows companies to compete on the global stage? The true answer might be a little bit of both.

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Making the decision to innovateHeading into the second decade of the 21st century, innovation has been a frequently used word to describe the creation of new products and services that will assist companies in surviving the market crash of 2008.[1] Is innovation just a convenient buzzword? Or, is it a paradigm-changing force that allows companies to compete on the global stage? The true answer might be a little bit of both. Some companies and organizations have overused “innovation” to such an extent that it has just become a marketing ploy to sell products that are merely rebranded.[2] On the other hand, many more companies are innovating products and services as a reaction to the economic downturn and the mere fact that drastic measures in product development need to be taken just to continue to be a viable entity in the world market.[3][4]

The purpose of this article is to create a system that will help business executives determine the importance of innovation to their company. The system will aid in assessing: 1) How much risk can we afford to take?[5] 2) How are we going to pay for development; and 3) Do we have the talent and culture to be innovative?[6][7] The concept of innovation is divided into four distinct levels so that executives and management can more efficiently assess the ability of their organizations to generate new products and services. The four categories are broken down by level of time and effort involved and, thus, it becomes important to recognize the commitment that each level demands to be successful.

Level One

The first level emphasizes minimal changes to existing products, a low amount of new investment, and very low risk. Examples at this level would be changing the color of a product or putting a new logo design on a label. Essentially all companies are capable of achieving this level, as it does not require unique skills. There are products that exist that never change or evolve over time; however these are reserved for products that hold emotional value to the public. Think of the classic American Coca-Cola. Coca-Cola has changed its packaging and updated its look many times over the years, and often the company launches different flavors and types (i.e. Coke Zero, vitamin-enhanced Diet Coke, Vanilla Coke), but the classic recipe remains the same. Conversely, they also release the old glass bottles in short supply for nostalgia’s sake.

For most products though, if changes are not made, even small ones, the public will soon forget about them, to the point of obsolescence. Therefore, most companies need to be constantly making a minimal effort to innovate at Level One.

Level Two

The second level is a higher level of changes. Level Two changes include integrating new features into existing products on the market or creating differentiated versions of the same new product to sell to various demographic groups. These new features require what can be considered a medium level of investment and risk. Think of an automobile company that debuts a standard model and then decides to come out with a deluxe version of the same car with a few additional features. Or, that same automobile company takes the standard car design, then renames it, adding different features for each world market—the Americas, Europe, and Asia for example—that the company sells to. Company leaders are typically comfortable with this medium level of investment, because they are simply making improvements on an existing product that has already proven its worth in the market, and adding features that consumers desire. Given their knowledge of the industry and talent to create their core product, company executives can decide to move forward based on an analysis of payback time for a given level of investment.

Level Three

Innovation PlanThe third level is the beginning of large financial and product risk, but it is also where the rewards are potentially larger. Before delving into this level of risk, executives will want to determine how large a market exists for their innovation so that a forecast of sales can be made to calculate return of investment curves for given levels of capital outlay. This level also requires that the business devote resources to monitoring progress and actively assessing risk throughout the development process. It is also imperative for the company to try to discern how much of their product or service sales are based on new product features and how much are based on the effectiveness of the marketing and sales campaign. If the company can determine that sales can be increased from solely a new marketing/sales campaign for an existing product, then the innovation could just involve creation of new marketing techniques. This is further evidence that the company leaders need to be aware of the cause and effect of decisions so that they can spend capital in the appropriate places. Examples of product development at this stage are auto companies realizing that SUV’s were a larger market than station wagons, or smart phones being more desirable than regular cell phones. As you can see, this level of innovation requires substantial resources—a research and development team, extensive market knowledge and analysis, design talent, and executive leadership, to name a few. Thus, not all companies are capable of innovation at this level. Executives will need to be brutally honest about the abilities of their organization and staff before proceeding toward acquiring new people and facilities to start these projects.

Level Four

The highest level of innovation is where companies are able to create innovations that change how people live. If the third level can be described as evolutionary development, than the fourth stage is the revolutionary step. The 20th century has seen many examples of products that have changed the world, such as the gas-powered automobile, the radio, the airplane, television, personal computers, and the Internet, just to name a few.

The highest level of innovation also brings the highest level of risk, as many times this level of innovation involves products or services that no one has thought of and customers do not know they want.[8] Innovating at this level requires an organizational belief system that drives employees toward realizing that their unknown project will produce a product or service that everyone will want.

The energy and passion it takes to innovate at the fourth level is not only mesmerizing, but also contagious. The energy is so intriguing that it causes people and sub-tier companies to want to participate. Similar to Level Three, company owners or executives need to evaluate the innovation to determine how successful it can be. However, the difference at this level is also determining if the company can survive the amount of time and resources it may take to complete the innovation and whether or not they will go bankrupt in the process. This is true not only for finances, but also emotional toll on employees. When it comes to fostering innovation, every employee must understand the goals of the organization and be working toward them in unison. There is nothing worse than a company executive that declares an unachievable goal, only to have the employees and customers realize it and work against its success. Only a handful of companies, such as Apple, 3M, GE consistently manage to achieve success at Level Four innovations. This level is not meant for all organizations or all executives. Caution should be taken when deciding to proceed forward.

Key Takeaways

Table 1 - Innovation Levels
Table 1 - Innovation Levels

In an effort to better understand your company and where it exists on the innovation scale, the following are four key takeaways to consider before starting down the path of becoming more innovative. Table 1 offers a quick description of the four levels of innovation.

1. Innovation requires an honest self-assessment of a company’s capabilities.

In the end, it is not important which level a company chooses to innovate at. It is more important that management has a self-awareness to know what level of investment in innovation is in line with the organization’s objectives and budget. Levels One and Two require minimal resources; they mainly just take an act of management to make the decision to perform the simple changes. With the two higher levels of innovation though, management has to set up the correct environment to foster creative thinking that is focused on developing ideas that can sell products or services. In this era of political correctness and strict company behavior, companies must be cognizant that innovation requires a culture shift, or else they will be managing a futile effort. This is where the art of management comes into play, as the executives have to get their staff moving in a new direction without sacrificing focus. The differences are not just in the structure of the company or based on a model of past success, but in a true desire to fuel the creative process with enough capital, energy, support, and drive to make a ground-breaking idea turn into a business reality. Reading about this concept may give the impression that the differences between all four levels are minimal; however there is a huge split in the mentality of the organization that needs to occur if Level Three and Four projects are started. It all starts with the correct people pushing toward completion of the innovation through all its up and downs in the development cycle. Ultimately, you may realize that innovation is not a priority in your company’s business model or culture and you may wish to keep it that way. Or you may discover that you need to recruit new individuals to your company that are more driven to innovate and create new products and services that add value to people’s lives. It is this honest assessment of the business’ capabilities that will lead executives to choose the correct level of innovation for their organizations. Healthy, well-run companies can just as easily create ground-breaking devices (Level Four) as well as simple innovations (Level One). As far as the employees go, if they are energized and motivated to improve, then creating new innovations at any level will foster a satisfying work environment.

2. Build innovation into the business model.

Eleven of the 27 companies born in the last quarter century, which grew their way into the Fortune 500 in the past 10 years did so through business model innovation.[9] The key to morphing a company into a free-thinking innovation center is rooted in the company structure. It is also essential to empower employees by supplying enough capital, time, marketing, and leadership to get the innovation from concept to production. The organization will need to give employees the freedom to create, but also hold them accountable for their performance. It is wise not to micromanage a team of creative individuals with small details and bureaucracy, but it is also necessary to monitor the effort and give them guidance toward the ultimate goal so the capital is not spent going off on tangents. Innovation expert Theodore Levitt notes, “What is often lacking is not creativity in the idea-creating sense but innovation in the action-producing sense, i.e., putting ideas to work.”[10] Managing this delicate balance of trust versus oversight is very important.

An obstacle in becoming a third or fourth level innovation company is to get the organization moving in a direction that breeds creativity. One can imagine the difficulty a manufacturing company might have in taking time away from its production schedule to generate new designs. This is one reason why many existing companies fail at innovation. Brand new start-ups have it much easier than established companies as they are not well-established in an industry and have much more freedom to try new ideas. These companies also tend to shape the culture of innovation by recruiting young, enterprising individuals who are filled with the energy of getting the business off the ground to make it a success.

3. If you reward it, it will come.

First, it is important to reward innovation, including celebrations, financial awards, recognition, and the chance to work on future innovation projects. Second, it is also important to reward innovators intrinsically by granting them the freedom to be creative with all aspects of their work environment. Lower the amount of bureaucracy and office rules to help foster a creative culture. And third, support the innovators with sufficient resources to develop their ideas and create prototypes. In their article, “Creativity and the Role of the Leader,” Teresa M. Amabile and Mukti Khaire note that innovation is often motivated through a diversity of perspectives. One example, Brown University’s brain science program that created a system in which a monkey moved a computer cursor with only its thoughts, came from the collaboration of a team of mathematicians, medical doctors, neuroscientists, and computer scientists.[11]

4. People are captivated by innovation.

A valuable point that is rooted in the human psyche of people today is that youth sells. If the following logic path is taken, it is easy to see why innovation is so important right now during our economic recession. The logic is: innovation equals new products, new products are youthful, youth is good; therefore product innovation is good. There is no denying that human beings love youth and beauty and this corresponds to current marketing/sales efforts being geared to capitalize on this fact. A quick look through magazines will reveal that many products are advertised with youthful looking people. Trying to survive and emerge from the recession many companies have realized the need to declare that they are “innovating” just to prove to the market, and maybe to themselves, that they are still a capable company that can change and adapt to the cycle of markets. However, in the zeal to declare their company is “innovative” and “youthful,” the executives need to have a plan on which products or services to innovate and how they are going to execute the effort to accomplish the goal. Just claiming the company is innovative is not enough, it has to be proven with business models and, ultimately, in the introduction of innovation products/services into the market.


Using the guiding principles of the four levels of innovation, business leaders can accurately target which level they want to take their company to. A strategic vision for the organization will point the organization toward the correct innovation level based on the priorities of the company, how much capital can be risked, marketing reports that indicate a specific direction, and desire of the entire organization to achieve the goal. Many different perspectives are needed, including a measure of risk tolerance and payback time. Use the four key takeaways to address how you transform your company to an innovative one, how you pick your innovation level, and why innovation is an important aspect of the business cycle.

If an organization is willing to invest in innovation, then tremendous opportunities exist. In the present business climate, innovation is a key to staying relevant and there is no one specific way to become successful. It is more important to select an innovation level, foster ideas, gather the data, and proceed to implement the project.

Innovation is important as it shows to investors and customers alike that the company is working hard to remain relevant in the world market and meeting the needs and wants of the people. This achieves the goal of producing profit, investing in the longevity of the company, and proving to the market that it can adapt to survive in tough economic times.

[1] Jessica Silver-Greenberg, “Time to Slip Into Something Less Comfortable?” Bloomberg BusinessWeek, p. 48, Issue no. 4183, June 14-20, 2010.

[2] Reena Jana, “The Innovation Backlash,” Bloomberg BusinessWeek, p. 28, Issue no. 4025, March 12, 2007.

[3] Steve Hamm, “A Radical Rethink of R&D,” Bloomberg BusinessWeek, p. 35, Issue no. 4145, September 7, 2009.

[4] Adrian Slywotzky, “How Science Can Create Millions of New Jobs,Bloomberg BusinessWeek, p. 37, Issue no. 4145, September 7, 2009.

[5] Richard Farson and Ralph Keyes, “The Failure Tolerant Leader,” Harvard Business Review, pp. 64-71, August 2002.

[6] Jeffrey H. Dyer, Hal B. Gregerson, and Clayton M. Christensen, “The Innovator’s DNA,” Harvard Business Review, pp. 61-67, December 2009.

[7] Jeffery Cohn, Jon Katzenbach, and Gus Vlak, “Finding and Grooming Breakthrough Innovators,” Harvard Business Review, pp. 62-69, December 2008.

[8] Jessi Hempel, “How Symbol Got Its Mojo Back,” Bloomberg BusinessWeek, p. 20, Issue no. 4025, March 12, 2007.

[9] Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann, “Reinventing your Business Model,” Harvard Business Review, pp. 50-59, December 2008.

[10] Theodore Levitt, “Creativity is Not Enough,” Harvard Business Review, pp. 137-145, August 2002.

[11] Teresa Amabile and Mukti Khaire, “Creativity and the Role of the Leader,” Harvard Business Review, pp. 100-109, October 2008.

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Author of the article
Mr. Kris Miner, MBA
Mr. Kris Miner, MBA, has worked in the aerospace and energy industries for more than 20 years in the areas of new product innovation, product development, and business development. He is currently leading an innovation project for a solar energy power plant concept. Miner has a BS in mechanical engineering from the University of Washington and an MBA from Pepperdine University.
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