Peter Drucker on the Seven Sources of Systematic Innovation

When Peter Drucker died, his obituaries were so laudatory I thought that I really should become familiar with his work.  So I’ve been reading through some of his major books.  It’s striking how well-written and timeless they are.

I just finished his classic “Innovation and Entrepreneurship“.  For my purposes in working with funds to identify attractive investments, the most interesting and pertinent part of the book is his exploration of how to identify entrepreneurial white space.  He writes that systematic innovation means monitoring seven sources for innovative opportunity. The first four lie within the enterprise; they are essentially symptoms:

1. The unexpected– The unexpected success, failure or outside event.

2. The incongruity– between reality as it actually is and reality as it is assumed to be or as it “ought to be.”

3. Innovation based on process need

4. Changes in industry structure or market structure that catch everyone unawares.

The second set of sources for innovative opportunity involve changes outside the enterprise or industry:

5. Demographics— population changes

6. Changes in perception, mood and meaning

7. New knowledge, both scientific and nonscientific.

The lines between these seven sources are blurred and they often overlap, nevertheless each area requires separate analysis. FastZone.com writes (paraphrasing and updating Drucker):

“First source: The Unexpected. Look to see if a particular product or service has been in greater or lesser demand than anticipated. If so, ask, Why? What would it mean to us if we exploited the unexpected success? What would we have to do to convert it into an opportunity? Set aside time to discuss unexpected success or failures. Do it for your clients, too.

Second source: The Incongruity. A discrepancy between what is and what should be. An example of this is given in Drucker’s trademark book noted above. In the early 1980s a midwest securities firm did not assume that people invested to get rich and to play the market. Small business people and successful professionals who had modest spending habits were approached in respect to investment opportunities, to preserve their wealth not to trade. They took the bait. Eventually, money market funds were invented for this type of investor. The big securities firms thought all investors wanted to trade. They didn’t. Do you have any misperceptions about who your best customers might be?

How does one find incongruities? Listen for customer complaints. These indicate that what the supplier or producer values is different from what the consumer values. They indicate an opportunity for an innovation that is specific and has a good chance of success.

Third source: Process Need. This one is task focused rather than situation focused. A process is perfected or redesigned or a weak link replaced. For example, a motel that was short on help and was having problems keeping up with the laundry simply installed the washer and dryer in the room behind the receptionist desk. That way, in her or his spare time, the reservations clerk could do the sheets and towels.

Fourth source: Industry and Market Structure Change. An obvious example is deregulation. Watch for rapid growth of an industry. If an industry grows significantly faster than the economy or population, structural problems will occur and changes are certain. Also, when technologies converge, change is certain.

Fifth source: Demographics. Changes in population, age structure, educational status, income. Discover these in the census findings at your public library or online.

Sixth source: Changes in Perception, Meaning, Mood. For example, today there is a trend called “downaging.” No longer do we see people who are 50 as 50. We see them as 45. We see those who are 70 as 65 or younger. Think of Raquel Welch. How old is she? The cosmetic and medical industries have changed the way we regard age and the way we look. What products and services would address this change in perception?

Seventh source: New Knowledge. It has been said that in the information age, we will need a college education every three years to keep pace with all the new knowledge. That, of course, is impossible for all but bionic brains, but we can stay informed in our respective areas of endeavors, and get together with associates and friends from differing backgrounds to exchange ideas.”

The book is highly focused on the entrepreneur‘s point of view. However, Drucker’s concluding chapter consists almost entirely of a warning of the various ways in which the government can make it far more difficult for entrepreneurs to succeed. Unfortunately, his warnings are clearly not being heeded.

(Image by marklarson via Flickr)