Monday, October 13, 2008

Finding sources of innovation.

According to the late Peter Drucker, there are seven systematic methods that have been used to understand needs and produce specific innovations.

The first of these techniques is to carefully watch for the unexpected event that may be signal a new trend. The introduction of the personal computer produced several events that were missed by companies that actually had people on their staff to spot just such events. IBM did react to Apple Computers' unexpected success but completely missed the opportunity to control the operating systems for these computers. An expected failure also needs to be analyzed for clues to creating a successful innovation. The Edsel car, introduced in the 1950s, was a big unexpected failure. Ford had spent considerable time and money researching and introducing this car, which was quickly laughed out of the marketplace. When Ford went back to analyze what had happened, they discovered the customers they’d targeted had shifted their tastes to a new lifestyle - sportier and more luxurious. Ford was then able to take this information and create the Thunderbird, which was a tremendous success.

The second source for identifying needs is to search for incongruities. These are not specific events, but trends that may be exhibited throughout an entire industry or company. An example is the way the large U.S. electronic companies responded to Japanese electronic products. U.S. companies would abandon any product line that couldn't produce at least a 15% return on investment. The Japanese priced their products low to start with, then gradually increased their prices to recover their investments. This incongruity happened many times over until U.S. companies decided to fight for market share with more aggressive tactics and innovative marketing.

The third source for identifying innovation possibilities involves looking at specific processes that can be improved. When analyzing a manufacturing process or a service process, there are always improvements that can be made. The automation of factories, when done systematically and rationally, is an example of the containing evolution in innovations. The problem here is not in identifying what to look at, but exactly what should be done to effect change. Quite a few companies become paralyzed in arguments over the correct changes to apply to the process.

The fourth method of identifying needs that require innovation is to examine market and industry structures. Markets go through cycles and stages that are fairly predictable. The beginning of new industries usually produces hundreds of competitors that are narrowed to half a dozen serious competitors during the maturing phase. The railroad, automobile, airplane, computer, and steel industries all went through these stages.

The fifth method of determining sources for innovation concerns demographics. These are changes in the size, age, composition, educational status, income, etc. of any population. Demographic studies can produce very clear and unambiguous information concerning what needs will exists in the future. In the U.S. population, members of the "baby boom" are currently changing from consumers of houses and material goods and are instead preparing for retirement. The current discussion on health care in U.S. is really about the needs of this aging middle class.

The sixth method looks for changes in perception. During the last twenty-five years, the life expectancy of Americans has increased substantially. However, the people have been gripped by fears over their health during the same period. This perception has been fertile ground for a range of innovative and entrepreneurial health products. One of the fastest growing industries currently is the sale of "organic" foods. Here’s an example of a negative fixation that’s driving billions of dollars into new purchasing patterns. Those who understand these perceptions can respond and / or act pro-actively.

The seventh type of innovation is "knowledge based." This popular theme includes the famous stories of Edison inventing the light bulb or the Chinese inventing paper. Knowledge based innovations usually cover long time spans and are high-risk propositions for the individual entrepreneur or organization. The Fax machines was invented 100 years ago but only became a major business product 75-years later. The technologies that are changing the way we work tend to be based on knowledge that’s at least 10 to 20 years old. Knowledge based innovations also tend to converge with other innovations before they become integral to our economy. The computer industry is a good example of knowledge based convergence covering 200 years and thousands of innovations.

The last source of innovation is "bright ideas." These are the flashes of brilliance that occur to individuals in the middle of the night and are the most difficult to fit into a methodical system. These ideas are generated in a situation that may have no connection to any organization, market, industry, convergence of available knowledge, or management. While there are an unlimited number of these ideas, only a very few become part of the economy.

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