There are 3 phases in innovation.
The first is the process innovation. It is a typical example that Ford Model T was distributed at cheap price through mass production, using the conveyor belt-based assembly. They brought about innovation in the manufacturing process and distributed cars in the price range that customers could afford to buy and surpassed the other companies.
What comes next is the product innovation. For instance, the Sony Walkman became a huge hit as it transformed music players which normally used to be immobile into a portable form. As opposed to the case of Ford Model T, basically manufacturing of the same products as the other companies, product innovation is to give big innovation to the product itself.
And what has been getting a great deal of attention now is the business model innovation. In the case of iPod, when it first came out, it remained in the product innovation phase for its ease of use due to the Click Wheel.
However, by adding the iTunes store to it, they were able to provide smooth music experiences through buying music with one click. The convenience of being able to buy just one song gained strong supports from its users.
What is excellent about this business model is that once you buy one, it would be hard to switch to other companies; in other words, it functioned as the so-called switching cost. After that, no matter how high-quality music players Sony sells, users were forced to continue to use their iPods.
In a situation where the market is saturated and consumers already own products as now, simply creating new products is not enough. Creating a new business model that brings about unprecedented experiences is demanded.