Innovation refers to the act of creating new products or processes. There are two main types of innovation:
• Product innovation
• Process innovation.
Product innovation is the development of products that are new to the world or have superior attributes to existing products.
Process innovation is the development of a new process for producing products and delivering them to customers. Examples include Toyota, which developed a range of new techniques known as the Toyota lean production system for making automobiles: just-in-time inventory systems, self-managing teams, and reduced set-up times for complex equipment.
Product innovation creates value by creating new products, or enhanced versions of existing products, that customers perceive as having more utility, thus increasing the company’s pricing options. Process innovation often allows a company to create more value by lowering production costs. Toyota’s lean production system, for example, helped to boost employee productivity, thus giving Toyota a cost-based competitive advantage.
In the long run, innovation of products and processes is perhaps the most important building block of competitive advantage. Competition can be viewed as a process driven by innovations. Although not all innovations succeed, those that do can be a major source of competitive advantage because they give a company something unique—something its competitors lack. Uniqueness can allow a company to differentiate itself from its rivals and charge a premium price for its product or, in the case of many process innovations, reduce its unit costs far below those of competitors. A company can achieve a lower cost structure is by pioneering process innovations. A process innovation is an innovation in the way production processes operate that improves their efficiency. Process innovations have often been a major source of competitive advantage. Toyota’s competitive advantage is based