Innovation is the creative, rationalized, and incremental adaptation of known procedures, methods, processes, or systems to existing conditions or to obtain novel results relative to those existing conditions. Innovation can take many forms. It may be cultural, technological, commercial, or even political. One cannot emphasize the importance of innovation for the competitiveness and productivity of a nation.

Innovation can be diffuse or disruptive. The diffuse kind of innovation occurs through a broad range of activities, involving numerous entities, at diffuse scales. For instance, new manufacturing techniques may open up new markets or create new opportunities for manufacturers to expand their business models, by adopting new production processes and using innovative business models. On the other hand, when a business model innovation takes place, it usually creates new employment, often resulting in significant job creation or new business investment opportunities.

A disruptive innovation, on the other hand, occurs when an entirely new form of product or process is introduced that displaces an existing method or process. Disruptive innovations do not discriminate between types of products and processes; they tend to affect all businesses, irrespective of size, scale, or industry. Typically, there is either a short-term period of intense competitive pressure or a longer period during which a company must adapt to new practices and strategies. Such innovations are disruptive because management software needs to be able to respond quickly to market conditions in order to provide adequate support for the new system. In addition, because they do not rely on existing procedures and practices, disruption causes a large degree of loss of investment capital.

Business organizations face many instances of disruptive innovation. Examples include the open-source software movement, which was started as a way for programmers to create software development tools and collaborate on common business applications. This movement later spilled over into open source software development, where developers created software for every type of computer system. The process innovation examples listed here are just a few of the innovations that have transformed businesses.

Entrepreneurship is one business model that is often considered to create value through innovation. The most common examples of entrepreneurship are technological ventures like software and computer technology. However, many firms are designed to create value not by manufacturing something that solves a problem, but by selling something that solves a need. The most valuable innovation in this context would be the invention of a new process or method of solving a problem. For this reason, entrepreneurs should always strive to identify a problem or need and then find a way to apply an innovation that creates value.

Methodist economists distinguish three different types of innovations. They are innovating, fostering innovation, and competition and collaboration among the innovators. In their book, The Innovative Enterprise, scholars delineate these three categories on the basis of how the innovations create value for the innovator, the creation of new knowledge, and the distribution of that knowledge across multiple markets.

Examples of product innovations include the improvement of a product, the production of a better product, or the commercialization of new technology. Examples of fostering innovation include the research and development for new vehicles, computers, cell phones, etc. Business model innovation can include innovations in pricing, financing, marketing, distribution, and technology architecture. All of these examples require originality and a commitment to new ways of doing things rather than simply imitating existing business models. Some of the other business model innovations include innovations in information services, financial services, health care, and consumer products.

Inventors and business model innovators must meet certain criteria for coming up with an innovation. These include a clear view of the customer needs and expectations, and ability to think strategically, and a commitment to innovation. It takes creativity to design a business model that will ultimately serve customer needs and generate profit. A focus on the future, realistic approach and a commitment to customer needs are the cornerstones of successful innovation.