Innovation is the new Strategy
I think, to borrow an idea from Michael Treacy, that a firm has three options to survive. First, become the low price leader and remain the low price leader. Drive all costs out of the product or process. Second, become the customer intimacy leader. Know the customer and fill his or her every need. Finally, become a firm that creates new things, new ideas, new products and services people just have to have. There are some other competitive slots in this pantheon, but those are reserved for special niches, like products or services that cater to people who don't care how much something costs.
Ok, so let's break it down. Statistics show that the top three competitors in any industry usually control well over 50% of the market share. One firm will position itself as the cost leader. One firm will position itself as the firm that "knows" the customer. One firm will be able to position itself as an innovator in products or services. The rest of the firms fight to be the follower in one of these segments or to control a small niche.
Innovation will play a role in all three of these competitive positionings. The firm that is the cost leader will have to innovate its products, its services, its processes and systems to constantly reduce its costs. It may well invent new ways to do business to reduce costs. The firm that owns the customer intimacy position must constantly innovate its business processes and how it interacts with the customer. Finally, the firm that is positioned as the product or service innovator must constantly bring forth new products and services that people want.
Ultimately, regardless of the positioning and strategy your firm takes, you'll be competing on innovation. Whether its finding new ways to cut costs, or finding new ways to get closer to your customer, all of these strategies rely on constantly developing and implementing new ideas for products, services and business models.