Drucker Today

Failure and the Seven Sources of Innovation

Robert W. Swaim
Contributor: Robert W. Swaim
Posted: 01/23/2011

"Failure is our most important product.," once said R. W. Johnson, Jr., the Former CEO of Johnson & Johnson. In the second of his series of articles on Peter Drucker's approach to innovation, Dr. Robert Swaim - student, colleague, and friend of Drucker’s for almost thirty years – looks at failure and Drucker's other key sources of innovation.

Drucker suggested that purposeful, systematic innovation begins with analysis of the opportunities, and classifies "Seven Sources of Innovative Opportunity". The first four lie within the business or industry. They are basically "symptoms" but are reliable indicators of changes that have already taken place or which can be made to occur with little effort. Drucker classified the second set of sources for innovative opportunity as involving changes outside the business or industry.
These seven sources are depicted in Figure 1 below.

Sources Within the Business or Industry

Changes Outside the Enterprise or Industry

Unexpected Successes and Unexpected Failures

Changes in Demographics


Changes in Meaning and Perception

Process Needs

New Knowledge

Changes in Industry and Market Structure

Figure 1. Drucker’s Seven Sources of Innovative Opportunity
Source of Innovation Number 1: Unexpected Success and Failures

According to Drucker, the best source for successful innovation is from an Unexpected Success or Failure. Exploitation of this requires analysis simply because an unexpected success is a symptom.
For example: A competitor is having unexpected success in a particular market segment. Management must find out why this is happening, asking themselves what it would mean to them if they exploited it.
A classic example dates back to the early days when Marriott was still a restaurant chain before it diversified into hotels. Management observed that one of their restaurants in Washington, DC was outperforming all others in their chain in terms of monthly revenues. Upon investigation, they found the restaurant was located across from the National Airport. This was before airlines served meals on planes and they discovered that airline passengers would stop by the restaurant and purchase sandwiches and snacks to take on the plane with them. Marriott met with the old Eastern Airlines and suggested they provide food to be served on the plane – thus the beginning of the airline catering business. Of course now many airlines, in an attempt to control costs, have eliminated meals and passengers are left to bringing the snacks with them again.
Unexpected Failures can also lead to other opportunities for innovation as suggested by the following quotation by a former CEO of Johnson and Johnson:
"Failure is our most important product."
R. W. Johnson, Jr., Former CEO, Johnson & Johnson (1954)
As an example, the Ford Motor Company developed a new automobile, the Edsel, in 1957. The auto's design stemmed from extensive market research about customer preferences in appearance and styling, yet the Edsel became a total failure immediately after it was introduced. Barely a soul wanted it.
Instead of blaming the "irrational consumer", Ford's management decided there was something happening that was not in line with general auto-industry assumptions about the reality of consumer behavior. After reinvestigating the market, they discovered a new "lifestyle segment" to which they quickly responded by producing the superbly designed and produced Thunderbird model - one of the greatest successes in US auto history. Will the highly acclaimed innovation, the GM Chevy Volt follow in the footsteps of the Edsel should be interesting to follow?
"You can learn from success, but you have to work at it; It’s a lot easier to learn from failure."
Lewis Lehr, Former CEO – 3M Corporation
The above is another quotation from 3M that addresses failure as a potential source of innovation. A classic example is 3M’s product, Post-it-Notes, the little yellow stick on that are used in offices throughout the world. This was originally to be used in an industrial application but failed. Later, a 3M scientist who took some of the material home discovered his daughter had cut up some of these sheets and was using them to post notes on the refrigerator reminding her mother of what to buy at the super market. From this failure evolved a product that 3M has been selling for decades. Has your business had any successes or failures that perhaps should be investigated further?
Source of Innovation Number 2: Incongruities

Drucker described an incongruity as a discrepancy, a dissonance, between what is and what "ought" to be, or between what is and what everybody assumes it to be. Like the unexpected event, whether success or failure, an incongruity is a symptom of change that has already occurred, or change that can be made to happen.
Types of Incongruity
Drucker identified these as an incongruity between the economic realities of an Industry. He pointed out that if demand for a product or service is growing steadily, its economic performance should steadily improve too. It should easily be profitable in an industry with steadily rising demand because it is carried by the tide. A lack of profitability in such an industry suggests an incongruity between economic realities.
This type of incongruity typically occurs within a whole industry or a whole service sector, and presents a major opportunity for innovation for a small and highly focused new enterprise, new process, or new service. Also, the innovator who exploits this incongruity can count on few competitors for a long time before they wake up to the fact that they have new and dangerous competition. The inception of the "mini" steel mill is an example of successfully exploiting an incongruity before the management of the larger integrated steel mills in the United States realized what was occurring in the industry. Today’s success of micro breweries might also be an example of this type of incongruity. What incongruities exist in various industries that you have observed that can be exploited?
Incongruity Between the Reality of an Industry, and the Assumptions About it
This type of incongruity is characterized by management in an industry having a misconception of the reality of the industry, and therefore make erroneous assumptions about it, resulting in misdirected efforts. They concentrate on the area where results do not exist, and offer an opportunity for an innovator who can perceive and exploit it.
An example of this incongruity existed in the ocean-going freighter industry that was believed to be dying in the 1950s. The major assumption about the industry was that the main expense of the ship was while it was traveling from point A to point B. Considerable efforts were directed at getting faster and more efficient ships, fewer crew members, etc., in order to reduce costs. An innovator concluded that these assumptions about the industry were wrong, and that the major costs were while the ship was idle in port, awaiting cargo unloading and new cargo to be loaded.
The result was the innovation of the cargo container and the roll-on, roll-off ship and the container vessel. Overall costs were reduced by 60 percent, and the industry survived and has grown dramatically ever since. Actually the shipping container was developed by Malcolm McLean in the late 1950s and saw its original application by the government in shipping supplies for the Vietnam War. What assumptions are being made within your industry that may be contributing to this type of incongruity, and how can they be exploited?
Incongruity Between Perceived and Actual Customer Values and Expectations
Of all incongruities, this one may be the most common. Producers and suppliers typically misconceive what it is the customer actually buys. They assume that what is "value" to them is equally of "value" to the customer, whose expectations and values are usually different. The customer seldom perceives what he or she is buying as what the producer or supplier delivers.
While producers and suppliers may complain about "irrational" customer behavior, there are potential opportunities for an innovation that is highly specific and focused.
Numerous examples exist of people taking advantage of this incongruity, with a successful innovation such as by the Edward Jones Company, a financial service firm, exploiting the misperceptions of larger Wall Street firms relative to customer values. Jones identified a market segment, farmers and people about to retire as having a desire for secure investment before their retirement vs. the frequent trader of stocks that Wall Street firms focused on. As a result, it has become one of the largest financial services firms in the U.S. What customer values and expectations of consumers are not being met by existing suppliers?
Incongruity Within the Rhythm or Logic of a Process
This incongruity looks for something that is missing in a particular process, particularly how a consumer may use a product. The innovation of the Scott Spreader to allow home owners to spread fertilizer evenly is an example of taking advantage of this incongruity. What steps might be missing in how consumers use certain products that might offer an opportunity for innovation?
Source of Innovation Number 3: Innovation Based on Process Needs

Incongruities in Process Needs essentially look for a "weak" or "missing" link in an existing process. Opportunities for innovation exist if there is a recognized need to complete the process. It must be felt that there is a "better way" to do something which will be enthusiastically received by users.

A classic example of this source of innovation is the little known inventor that made his name a part of our vocabulary, Elijah McCoy. In 1870 he earned a degree in engineering but as a black man in the 1870s, the only job he could find was that of a lowly oiler on the Michigan Central Railroad. Trains had to stop frequently then and had to be oiled by hand. McCoy figured out there must be a better way and designed a lubricating cup that automatically dripped oil onto the moving parts. His innovation became a hit and soon, no piece of heavy machinery was considered complete unless it had a McCoy lubricator. And people looking at a machine’s lubricator begin to ask a question we’re still asking … is it the real McCoy?
Source of Innovation number 4: Changes in Industry and Market Structures

Changes in industry and market structures usually take place as a result of changing customer preferences, tastes and new values. The rapid growth of a particular industry is a reliable indicator of changing industry structures. Japanese penetration of the U.S. auto market with smaller and more fuel-efficient cars allowed them to take advantage of changing consumer preferences for autos, motivated largely by dramatic increases in gasoline prices.
Clayton Christensen’s book, Innovation and the General Manager (New York: McGraw-Hill Companies, Inc. 1999) tends to support this source of innovation with his discussion of Disruptive Technologies.

Disruptive Technologies address a lower market or a market that is not fully developed. These are markets that do not need the functionality of products that the high-end market requires. On the other hand, they will have a trajectory to eventually move up. Japanese auto manufacturers utilized this approach, delivering less expensive, but more fuel efficient autos to the low-end of the market and eventually took the U.S. car market away from the "Big Three."

Drucker classified the second set of sources for innovative opportunity as involving changes outside the business or industry.
Source of Innovation Number 5: Demographics (population changes)

Drucker felt that demographics and population changes (age, education, disposable income, geographic shift, etc.,) are one of the most reliable predictors of the future, and offer opportunities for innovation. What opportunity does an aging population in the developed world including China offer for innovation?
Source of Innovation Number 6: Changes in Meaning and Perception

The earlier discussion of Unexpected Successes and Unexpected Failures are often an indication of a change in perception and meaning. The success of Ford's Thunderbird and failure of its Edsel, were attributed to changes in perception. The automobile market that had always been segmented by income group was seen by customers as segmented by "lifestyles". Identifying opportunities for innovation in this category requires timing and judgment; are there actual changes taking place in perception, or just fads that will be short-lived? What changes in meaning and perception are taking place among today’s consumers?
Source of Innovation Number 7: New Knowledge (scientific and non-scientific)

New knowledge can be a source of innovative opportunities but has the longest lead time of all innovations. There is a long time span between the emergence of new knowledge and it becoming applicable to technology - plus another length of time before the new technology turns into products in the marketplace. Another characteristic of knowledge-based innovations is that they are almost never based on one factor but on the convergence of several different kinds of knowledge.
A classic example of the length of time from knowledge to a commercial application is the jet engine originally patented in 1930. Its first military test was in 1941 and the first commercial jet plane was the Comet in 1952. Boeing eventually developed the 707 in 1958, 28 years after the patent and required the convergence of the technologies of aerodynamics, new materials, and fuels.
Drucker also commented on the "Bright Idea" as one of the major sources of patents, but few reach product development and introduction to the marketplace. He concluded that "Bright Ideas" are the most risky and least successful source of innovative opportunities although he never provided research to substantiate this view.

"This is a new era of opportunity, but only for those who are willing to accept change as an opportunity, not for those who are afraid of it".
Peter Drucker

In summary, this Part has defined what are the major sources of innovation as identified by Drucker. This Part has also attempted to put these concepts into a business perspective not necessarily providing all the answers, but suggesting the questions that executives of businesses need to ask.
"Our company has, indeed, stumbled onto some of its new products. But never forget that you can only stumble if you’re moving."
Richard P. Carlton - Former CEO, 3M Corporation (1950)
Robert W. Swaim
Contributor: Robert W. Swaim
Posted: 01/23/2011


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