Last night I came across an article by John Hagel in his blog Edge Perspectives where he classifies business innovation into three hierarchical levels - product innovation, process innovation and institutional innovation. He presents a strong case for the importance of the institutional level, noting that it is fundamental and therefore constrains the success of the other two above it.

I drew a pyramid to illustrate this important hierarchy.

Fig . 1. Business innovation is stacked into three different levels. Each level of innovation is constrained by the capabilities of the one below it.

To sum up, product innovation cannot be better than the underlying processes permit, and similarly, the capability to create innovative processes is limited by the organisation of the underlying institution.

At the end of his article, John points out “the single most wealth creating innovation over the past several centuries”. According to him, this is the development of the limited liability joint stock company. Is The Transaction Company going to become the next big institutional innovation?