Head: (5 of 5)
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How much of innovation is inspiration, and how much is hard work? In this classic work on innovation originally published in 1985, and re-released in 1993, 2007, and in a digital version in 2009, Harvard Business school professor and well-known management thinker Peter Drucker says the answer must be somewhere in the middle. One the one hand, he argues that innovation is real work that can and should be managed like any other corporate function, with preset roles, goals, processes, and measures, and progress reviews at every step of the way. On the other hand, it's not quite the same kind of work as other functions: it is the discipline of knowing rather than simply doing. And there is some magic to it, for which hiring the right people, in the right mix, is essential.

There are, Drucker says, innovations that spring from sudden flashes of genius or insight. But most innovations-especially the successful ones-result from a "conscious, purposeful search for innovation opportunities."  Indeed, most innovative business ideas arise through the methodical analysis of seven distinct areas of opportunity, he argues.

Four of these areas of opportunity can be found within a company or industry:

(1) Unexpected occurrences and failures (such as the current severe economic downturn): Drucker cites the example of the first accounting machines-the first computers-from IBM.  They were designed for banks, but the banks didn't want them. What saved IBM was that the New York Public Library did want them. Banks didn't have any money during the midst of the Great Depression, but libraries did. Thomas Watson sold more than 100 of his otherwise unsalable machines to these libraries. Fifteen years later, when most people thought that the more complex computers would only be useful for scientific use, businesses suddenly showed an interest in machines that could handle payroll. Univac spurned the idea of businesses using their computers, but IBM seized the opportunity, and within five years became the leader in the computer industry.   

(2) Incongruities: Drucker writes that Alcom Laboratories was one of the most successful companies of the 1960s because the company exploited an incongruity in medical technology.  Doctors had been performing cataract surgeries for years, but they dreaded, and hated, the final step of cutting the ligament, because it was so discongruous with the rest of the operation. Bill Connor, co-founder of Alcom Laboratories, took an enzyme that had been known by doctors for 50 years to dissolve this ligament, and simply extended its shelflife.  Eye surgeons immediately accepted the new compound, and Alcom found itself with a worldwide monopoly that extended for 15 years until the company was bought by Nestle for a princely sum.

(3) Process needs: Here, Drucker cites examples from Japanese using American-invented auto-deflectors on their cars to let the driver of each car see where other cars are coming from on their chaotic roads; how modern (print) media evolved from two process inventions, the Linotype and social advertising; and more.

(4) Changes in a market: Drucker cites examples from banking, insurance, healthcare and telecommunications.  He points out that when an industry grows (or shrinks) rapidly. its structure changes. Established companies tend to concentrate on defending what they already have and tend not to counterattack when a new company challenges them. In times of rapid structural change, traditional leaders "again and again neglect the fastest growing market segments," paving the way for more innovative companies and entrepreneurs to exploit the new opportunities that don't "fit" traditional approaches.

The remaining three of Drucker's seven areas of opportunity can be found outside a company or industry, in its social or intellectual environment:

(5) Demographic and generational changes: Policy makers often neglect demographic changes, so "those who watch them and exploit them can reap great rewards," Drucker says. He cites Japanese' lead in robotics in the 90s from paying attention to the baby bust and the education explosion, and Club Med's success from watching the burgeoning numbers of affluent young adults who didn't want their parents' vacations.  

(6) Changes in perception:  Changing a manager's perception from a glass half full to that of a glass half empty can open up big innovation opportunities, Drucker says. For example, rather than rejoicing in their greatly improved health, Americans seem to focus on how far they still are from immortality--a glass-half-empty way of thinking. This brought, and continues to bring, huge opportunity for health care magazines, health care improvements, diet supplements, exercise fads. A change in perception does not alter facts, but it does alter their meaning, he argues.

(7) New knowledge: Innovations based on new knowledge are not always big deals, but when they are, they are the super-stars, the famous examples of innovation.  Such innovations differ from all others in the time they take, in their casualty rates, in their predictability and reliability, as well as the challenges they pose to entrepreneurs.  They can be temperamental, capricious and hard to direct, with long lead times.  But when they do occur, it is most likely the result of horizontal thinking beyond one's own products, company, or industry; demanding not one kind of knowledge, but many. 

The sources may overlap, and the potential for innovation may well lie in more than one area at a time. Innovations based on new knowledge tend to have the greatest effect on the marketplace, but it often takes decades before the ideas are translated into actual products, processes, or services. The other sources of innovation are easier and simpler to handle, but they still require managers to look beyond established practices, Drucker explains. He emphasizes that innovators need to first look for simple, focused solutions to real problems, be they from team members, internal end users, or external customers.

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