Design thinking. Open innovation. Closed innovation. Iterative innovation. Disruptive innovation. There are scores of books and articles about innovation (and here's another!); countless conferences dedicated to it, and numerous processes and methodologies being developed, evangelized and debated around it. But amidst it all, there is one critical issue that isn't getting the attention I believe it warrants--or needs: the difference between product innovation and business innovation. Why does this distinction matter? While product innovation can create great business value, the most successful companies today (and those that will continue to thrive tomorrow) are business innovators.

There are, of course, a group of companies legendary for their repeated triumphs in product innovation. Apple, GE and IBM top this class. They all have immense innovation budgets and well-established processes for converting their investments into lucrative commercial products. It is notable that these companies take a variety of approaches to product innovation. Some centralize their efforts in an R&D department that is tasked with developing new products and new technologies to be commercialized--Think Bell Labs, IBM Research or Google X. Others create multiple individual innovation silos that operate in almost total secrecy from one another. Innovation is budgeted for in the individual business units. To varying degrees, GE and Apple operate in this way. These different methods can all work and have all produced brilliant commercial successes at various times. Some of them you would even call disruptive. However, the focus in these companies tends to be on the thing--the technology or the product that can be packaged, marketed and purchased for commercial success. Their products and services tend to build in a linear way on past knowledge and past achievement. (There is no criticism implied here; you could do a lot worse than enjoy the success that the best companies in this category enjoy.)

Business innovators, on the other hand, zero in on systems and experiences. They concentrate on creating entirely new ways for customers to meet goals, or even to accomplish things people couldn't even imagine before. Their innovation efforts involve a combination of elements that result in something entirely new in the world. Many of the most famous Silicon Valley startups are business innovators: Paypal, Amazon, and Uber are leading examples.

Interestingly, when we hear of a business or an industry being "disrupted," it's often product innovators being disrupted by business innovators. For instance, Kodak was a legendary product innovator in the photography space. Yet if you had asked its leaders what business they were in, they would have likely told you they were in the film business. Suddenly, digital photography arrived on the scene; and then--Instagram. Could Kodak have competed in these spaces? Of course. Just not by creating better and better versions of its existing products. The auto industry is another sector in the throes of disruption. And again, the product innovators are being disrupted by business innovators. This disruption is in the early stages so it's not yet obvious to everyday consumers, but the category will look vastly different in a few years. This doesn't mean all car manufacturing companies disappear, but it does mean the best of the product innovators in automotive will learn to become business innovators. And those that don't will face a Kodak-like event.

How can you become a better business innovator?

Effort follows money. Start by allocating budget for innovation. Instead of concentrating on product innovation in your current category, establish a cross functional innovation budget. Set some clear goals. Put someone with business innovation experience in charge of that money. Institute ground rules for accessing the money. Encourage thinking that crosses disciplines and silos. And give the entire team one overarching objective: to invent the company that will put your present company out of business.

When you look at a problem that way you often discover that your greatest threat comes from outside your current category. Or that winning in the future will require rethinking your business model. Another way to think about this is to look at things through the eyes of your customer. What is the totality of the experience they have with you today? What experiences are they having with other businesses in other categories that might be applied to yours? What are the opportunities to completely change the experience they have with your product or service?

The simple act of establishing a budget for innovation that cuts across silos in your company will put you ahead of most of the small and midsized companies in the world, and many of the really big ones. Taking a more holistic approach to thinking about (and funding) innovation encourages a more collaborative working style by your organization. Which bring different perspectives to bear on problems and hopefully help you see around some of the corners in the future.

If you're the CEO, you don't need anyone's permission to implement this budget. But if you're not head honcho, and you need to build a business case for doing this, the 70 20 10 rule is a good place to start. A 10 percent allocation to transformative business innovation can be a very effective hedge against threats that you can't see today, but could turn your tomorrow upside-down.

The bottom line is this: innovation needs to be more than a buzzword in your company. It needs to be integral to your business and threaded throughout everything you do. Companies can no longer compete on great products. Instead, be a business innovator and create a customer experience no one else can rival.

Published on: Nov 13, 2014