Seven Sources of Innovation by Peter Drucker

The most effective way to compete in a changing environment is to churn out new products and services rapidly according to the needs of the market. Innovation helps a company to stay ahead of the pack and move into less crowded areas. No wonder all companies are talking about innovation these days. Very often, innovation is misunderstood as invention. Invention is creating new things. But innovation is all about taking new ideas to the market place. History is full of examples of many companies that developed a new technology or product but failed to take it to the market.  For example, Xerox developed many of the concepts associated with the modern day PC but failed to make a commercial proposition out of them.

Seven Sources of Systematic Innovation

“Entrepreneurs innovate and innovation is the specific instrument of entrepreneurship” Peter Drucker – page 44, Innovation & Entrepreneurship

Peter Drucker refers to innovation as the effort to create purposeful focused change in an enterprise’s economic or social potential. Innovation must begin with an analysis of opportunities, in a systematic and organized way. The starting point in innovation is identifying the scope for improvement with respect to customers, suppliers and internal processes. Innovations must be market focused. Opportunities to innovate are provided by new customer segments which are just emerging; customer segments that existing competitors are neglecting or not serving well, new customer needs which are emerging and new ways of producing and delivering products to customers.

“Systematic innovation therefore consists in the purposeful and organised search for change, and in the systematic analysis of the opportunities such change might offer for economic or social innovation” Peter Drucker – page 49, Innovation & Entrepreneurship

Seven Sources of Innovation by Peter Drucker

In his book “Innovation and Entrepreneurship,” Drucker has listed seven sources of opportunity for innovative organizations. Four are internal to the enterprise and three external. In order of increasing difficulty and uncertainty, they are as follows:

  1. Unexpected success or failure : Understanding the reasons for the unexpected success or failure of a product generates opportunities to innovate. Take the case of IBM, which wanted to sell accounting machines to banks, but discovered that it was libraries that wanted to buy these machines. IBM’s Univac, designed for advanced scientific work, became popular in business applications such as payroll. Unexpected product failures can also give companies new ideas that may help them to come up with something that the market likes.
  2. The incongruity between what actually happens and what was supposed to happen : If things are not happening as they should, there is scope to innovate. For example, in industries which are growing, but where the margins are falling, there is tremendous potential for innovation. Similarly, when companies continue to work at improving something to reduce costs but fail to do so, an innovator can look at other options to cut costs. This is exactly how container ships emerged by focusing on the ship’s turnaround time rather than fuel efficiency.
  3. The deficiencies in a process, that are taken for granted : If a process is inefficient or suffers from a big gap, there is scope to innovate. Sometimes, a process that is widely used may have certain deficiencies. An innovator, by thinking out of the box, may come up with a new idea that removes this deficiency. Pilkington’s float glass manufacturing process, for example, paved the way for the development of glass with a smooth finish.
  4. The changes in industry or market structure that catch everyone by surprise : The emergence of new, fast-growing segments provides scope for innovation. Innovators can serve the needs of these segments. The success of the small floppy disk drive manufacturers had much to do with the emergence of new customer segments who wanted smaller and lighter disk drives. According to Drucker, “New opportunities rarely fit the way the industry has always approached the market, defined it, or organized to serve it. Innovators therefore have a good chance of being left alone for a long time.”
  5. Demographic changes : Demographic changes result in new wants and new lifestyles that call for new products. The Japanese pioneered robotics because they anticipated the rising levels of education and the consequent shortage of blue-collared workers. In recent years, the ageing of Japan and Europe has put pressure on governments to control healthcare expenses. This has fuelled the rise of generic drugs. Demographic changes provide innovation opportunities that are the most rewarding and the least risky, as the trends are easier to predict.
  6. Changes in perception : By changing the common perception of people, new needs can be created. For example, capitalizing on people’s concern for health and fitness, a booming industry has emerged for exercise and jogging equipment.
  7. The changes brought about by new knowledge : New knowledge can be used to develop innovative products. Innovations of this sort usually combine many sorts of knowledge. The development of the computer, for example, was facilitated by a combination of binary arithmetic, calculating machine, punch card, audion tube, symbolic logic and programming. Such innovations are also risky, because there is usually a gap between the emergence of new knowledge and its conversion into usable technology and another gap before the product is launched in the market. Drucker has mentioned, “Contrary to almost universal belief, new knowledge is not the most reliable or most predictable source of successful innovations. For all the visibility, glamour and importance of science-based innovation, it is actually the least reliable and least predictable one.”

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