7 Sources of Innovation (Peter Drucker, 1985)

The Unexpected

“The Unexpected” source of innovation comes as a result of unexpected success, failure or outside events. 

In Peter Drucker’s book “Innovation and Entrepreneurship” he explains how Macy’s New York missed the opportunity to cash in on appliance sales because they didn’t want growth of appliances, they were focused on growth in fashion goods.  Bloomingdale’s however, recognized the unexpected success of the appliance sales and responded to the opportunity and prospered from it.  One can also find themselves on the other side of unexpected success by seeing a competitor stumble onto unexpected success; the key is to pay close attention (data) to what customers’ value, not what you think they value.

Failure offers the chance to learn, pivot and try again.  There is a great story of unexpected failure in the book “The Checklist” by Atul Gawande where he shares the events of a flight competition (to compete for a contract to build long range bombers) held by the U.S. Army Air Corps October 30, 1935.  Boeing’s model 229, was much more capable than the specifications the Army gave for the plane.  The flight competition was merely a formality, it seemed obvious that the best plane was the Boeing 229.  Shortly after takeoff, the Boeing 229 stalled, turned on one wing and crashed.  Clearly Boeing, nor the Army, expected the failure of the 229.  The response to the tragic failure was the creation of a pilot’s checklist, making simple and succinct.  This illustrates rebounding from a failure nicely.

The unexpected outside event refers to events that take place independent of what the enterprise is working on.  When a new fad kicks in and a company sees the chance to cash in on the opportunity, this is the unexpected outside event. If a natural disaster decreases the number of suppliers, then this unexpected outside event could be a chance for other suppliers to increase their sales volumes or perhaps innovation will lead to a substation as a result.

Incongruities

An incongruity is a disconnect between what is and what should be (or people assume it to be).  There are several examples of economic incongruities that Mr. Drucker references.  One example is of the steel mills and the creation of “mini-mills.”  The demand for steel increased, but the economic performance from traditional large steel mills did not.  The “mini-mill” at one-sixth to one-tenth the size of the integrated steel mill, was more cost effective and better able to meet customer needs.  The paper mill is another industry that is incongruent in economic reality of demand verses the reality of the process.

            Another type of incongruity is between reality and assumptions.  The book gives the example of the shipping industry in the 1950’s and their efforts to reduce the fuel consumption and crew size; they were focused on the costs of the ship (asset) when it was working.  What they should have been working on was the cost of not working (loading time), because the revenue lost when not working is much greater than the incremental gains made by changes to the design when the ship is at sea (working). 

            Incongruity between perceived and actual reality is, according to Peter Drucker, the most common incongruity.  This pertains to the perception of what the customer wants from the supplier in comparison to the actual need of the customer. 

            Lastly, there can be incongruity in the rhythm of a process.  In other words, the process continues at a predictable, normal, steady pace until a certain step or stage occurs.  This offers one the chance to innovate such that the process can remain rhythmic from beginning to end.  Examples offered in the book include an enzyme to bridge the gap in cataract eye surgery and the fertilizer spreader “Scotts”. 

Process Need

The source of innovation for a process need is an imperfect task or step in an existing process.  For example, the process for exiting I-95N at exit 109 in Georgia is to get in the right hand lane to exit, drive up over the hill in the road (about a mile before the exit) and exit when you arrive at the exit.  With the increase in population in Effingham county the traffic using this exit has increase exponentially over the last 10 years.  The line to exit the highway can grow to a couple of miles, which means at some point the cars are slowed or stopped just beyond the hill, where there is no visibility of the traffic to the driver that is driving 65 miles per hour toward the exit.  After several deaths occurred, the DOT increased the number of lanes to exit at exit 109 to accommodate the volume of cars and relieve the congestion that was creating the hazard. 

Industry and Market Structures

            Changes in industry and market are the prime time to innovate.  The rapid growth of the automobile industry in the early 1900’s is an example in the book.  More recent examples of industry and market structure changes include cell phones, tablets and even the shift from product-based business models (buying CD’s) to service-based (on-line streaming for videos  or downloading songs for a fee) represents a change in structure that offered platforms for innovation.  The caveat for innovation in response to industry and market structures, according to Peter Drucker, is that the innovation must be kept simple.

Demographics

            Innovation can be based on demographics, in particular age distribution.  The datum is already available and there is known lead time, all that is missing is the ability to see the future as a result of the present situation (and future projection) and not a result of the past.  Identifying changes in the center of population gravity (the age group that is the largest and the fastest-growing age group in the population) can be exploited by capitalizing on the anticipated needs/wants of that group. 

Changes in Perception

            Perception-based innovation occurs when one capitalizes on the perception (not reality) of a group (sector, society, etc.).  One example given was the unprecedented advance and improvement in the health of Americans (though I am not sure that is the case today!).  Americans, however, had the perception that we were unhealthy and needed to change and this opened up opportunity in health foods, education, exercise facilities, equipment and attire and so on.  Peter Drucker states that spotting inaccurate perceptions and acting on them can be risky, they may not be sustainable.  For this reason, he recommends that perception-based innovations start small and specific. 

New Knowledge

            Knowledge-based innovation is the sexiest of entrepreneurship; it is what many think of when they think of the term “innovation.”  Peter Drucker suggests that knowledge-based innovations have long lead times (longest of all innovations) and convergence of knowledge.  Once the research and synthesis of knowledge are complete thorough analysis followed by practice of entrepreneurial management must ensue. Analysis is necessary to confirm and validate the innovation and entrepreneurial management is needed to manage the risks. (Google may be a good example of a company that is lacking in entrepreneurial management, one that is market-focused and driven.)

Intellectual property protection and proper timing (window of opportunity) are also important aspects of knowledge-based innovation. This innovation seems akin to an “all in” approach given the long lead times and the creativity needed to converge knowledge that leads to the breakthrough.