New Knowledge

Many believe that innovation is all about the discovery and application of new knowledge.

For all the visibility, glamour, and importance of science-based innovation, Peter Drucker, however, believed new knowledge is actually the least reliable and least predictable factor for innovation.

Knowledge-based innovation also has the longest lead-time of any innovation.

Another potential complication to watch out for is the incoming competition, as the introduction of innovation creates excitement and attracts a host of competitors.

Drucker used the example of Apple and personal computer.

Apple first brought the personal computer to the mass market. Later, IBM was able to wrest market leadership from Apple through creative imitation.

Apple subsequently failed to maintain its leadership position and became a niche player because it failed to predict and respond to the competition it would face.

If your organization is an inventor, rather an imitator, be sure to account for the competition that your successful invention might inspire, and plan your response accordingly.

Changes in Perception

Strictly from a mathematics perspective, there is no difference between the notions of “the glass is half full” and “the glass is half empty.”

To most people, these two statements represent totally different meanings, as well as their consequences.

Peter Drucker believed if general perception changes from seeing the glass as “half full” to seeing it as “half empty,” there are major innovative opportunities.

Unexpected success or unexpected failure is often an indication of a change in perception and meaning for the consumer.

When a change in perception takes place, the facts do not change. However, their meaning does.

Drucker used the example of the change in American health awareness and in the corresponding values.

Five or six decades ago even minor improvements in the nation’s health were seen as major steps forward. Now dramatic improvements are barely paid attention to.

This change in perception has created a vast market for new health-care magazines, alternative sources of medicine, physical fitness centers, and other “wellness” goods and services.

Drucker taught us to identify or define a major change in perception influencing your industry. Exploit this change to your advantage.

Demographics

Demographics are defined as changes in population, its size, age structure, composition, employment, educational status, and income.

Of all external sources of innovation, Peter Drucker believed that changes in Demographics are the clearest. They are unambiguous, and they often have the most predictable consequences.

Demographic shifts may be inherently unpredictable, yet they do have long lead times before impact.

Lead times help to make the shifts more predictable.

Changing demographics is both a highly productive and a highly dependable innovative opportunity. Statistics are only the starting point.

For those genuinely willing to go out into the field, to look and to listen, changing demographics is both a highly productive and a highly dependable innovative opportunity.

What are the demographic factors that affect the market for your products or services?

Can you project these factors five to ten years into the future and see what opportunities do they create?

Industry and Market Structure

Peter Drucker described the market and industry structures as a source of innovation opportunity as “brittle.”

He argued that one small scratch and they disintegrate, often quite fast.

Often industry and market structures appear so solid that the people in an industry consider the structure to have the ever-lasting enduring power.

Think about the US Postal Service before the UPS and FedEx.

Think about the newspaper industry before the Internet-based publishing.

Think about the taxi industry before Uber and Lyft showed up.

A change in market or industry structure is a major opportunity for innovation.

Drucker also asserted that, in industry structure, a change will require entrepreneurship from every member of the industry.

It requires that each one ask anew: “What is our business?” And each of the members will have to give a different, but above all a new, answer to that question.

Large, dominant producers and suppliers, after having been successful and unchallenged for many years, tend to be complacent or even arrogant.

At first, they dismiss the newcomer as insignificant and, indeed, amateurish.

But even when the newcomer takes a larger and larger share of their business, they find it hard to mobilize themselves for counteraction.

Never stop asking yourself, “What is our business?”

Process Need

The unexpected success, unexpected failure, and incongruity as sources for innovation are opportunity driven.

Peter Drucker discussed the “process need” opportunity as anchored by the old proverb, “Necessity is the mother of invention.”

Everybody in the organization always recognizes the need for robust processes. Yet it is usually very hard for the process needs to be addressed fully.

However, when the innovation appears, the improved process is immediately accepted as “obvious” and soon becomes “standard.”

Drucker described that the process innovation starts with the job to be done and requires the presence of five basic criteria:

  • a self-contained process
  • a weak or missing link
  • a clear definition of the objectives
  • clearly defined specifications for the solution
  • widespread realization that there ought to be a better way.

To innovate around a process need is to define a process in your organization that has a missing link.

Address the five criteria by articulating the process itself, the objectives of the process, the level of awareness of the existence of a missing link, the missing link, and the designs for a solution.

Incongruity

Incongruity, another one of the sources for innovation discussed by Peter Drucker, can indicate an underlying “fault.”

This “fault” is essentially a discrepancy between “what is” and what “ought to be.”

Incongruity can take place within an industry, a market, and a process.

Sometimes, the incongruity may be visible to the people within or close to the industry, market, or process — the “insiders.”

However, the same insiders often may notice it but treat the status quo as a reason for not initiating change.

Therefore, they miss the great innovation opportunities to exploit these incongruities to the organization’s advantage.

Did you notice any incongruities within a process or your market that you can exploit to your advantage?

Unexpected Failure

Just like the unexpected success, Peter Drucker advocated that unexpected failure also should be considered a symptom of an innovative opportunity.

Many failures often are nothing but human mistakes, the results of greed, impulsiveness, thoughtless groupthink, or incompetence.

Yet if something fails despite being carefully planned, thoughtfully designed, and conscientiously executed, that failure often can provide hints to under-the-surface change and with it, opportunity.

The underlying changes, often shift in customer values and perceptions, can challenge our assumptions. The failure may show that the assumptions we apply to a product or service in its design or marketing can be outdated.

The unexpected failure demands that we go out, look around, and listen to the customers. Equally, a competitor’s unexpected success or failure should be noticed and studied.

When trying to get the most understanding out of a failure, Drucker suggested we do not only analyze internally but also investigate externally.

Identify the important unexpected failures, both yours or a competitor’s. Identify plausible explanations for the failure and apply these lessons to future activities.

Unexpected Success

Peter Drucker talked about seven sources of innovation opportunities, and unexpected success was one of the sources.

Drucker also indicated that often managements tend to neglect it or actively reject it.

Compared to the other six categories of innovative opportunities, capitalizing on the unexpected success is arguably the least risky and requires the least additional effort.

One reason why we overlook this unexpected opportunity is our tendency to adhere to the status quo, anything that has lasted a fair amount of time must be “normal” and go on “forever.”

Drucker explained the reasoning further by using an example of a major U.S. steel company, rejected the “mini-mill” concept back in the 1970’s.

Management knew that its manufacturing processes were rapidly becoming obsolete and would need billions of dollars of investment to modernize. At the same time frame and almost by accident, the company acquired a “mini-mill.”

The “mini-mill” soon began to grow rapidly and generate profits. Some in the company believed and proposed that available investment funds be used to invest in additional “mini-mills” and to build new ones.

Top management eventually rejected the proposal, citing the belief that the integrated steelmaking process is the only right one with everything being a fad and unlikely to endure.

As history would show, thirty years later the only parts of the steel industry in America that were still healthy, growing, and reasonably prosperous were “mini-mills.”

Drucker taught us that unexpected successes jolt us out of our preconceived notions, our assumptions, and our certainties about the reality. That is why it is such a fertile source of innovation.

Do not overlook or dismiss unexpected success. Identify it, learn from it, and absorb it into your DNA through change management effort.

Systematic Innovation

Peter Drucker described systematic innovation as the process of monitoring seven sources for an innovative opportunity.

The first four sources are internal within the organization:

  • The unexpected events – the unexpected success and the unexpected failure;
  • Incongruity — between reality as it is and reality as it is assumed to be or as it “ought to be”;
  • Innovation based on process need;
  • Changes in industry structure or market structure, especially those that catch everyone unawares in the organization.

The other three external sources involve changes outside the organization or industry:

  • Demographics – population changes or some other macro factors;
  • Changes in perception, mood, and meaning;
  • New Knowledge – both scientific and nonscientific

Drucker observed, “Successful entrepreneurs do not wait until the “the Muse kisses them” and gives them a bright idea; they go to work.”

Organized Improvement

It seems intuitive and logical that continuous improvements in any area eventually transform the operation.

Just about anything an organization does internally and externally can and needs to be improved systematically and continuously.

The performance of marketing, production processes, service management, technology, training and people can all be improved over time with available, relevant information.

However, what constitutes “performance” in a given area?

If performance is to be improved, we need to define clearly what “performance” means.

More importantly, who will benefit from the performance improvement?

By carefully defining the beneficiary of the improvement, the definition allows the organization to apply a targeted effort, instead of a shotgun wide blast approach.

Always be asking, who it is for?