Innovation – Sources & Skills
Entrepreneur Success Series
Resource Note # 5
In the on-going entrepreneurial success series of SATTVA, entrepreneurship has been defined as the process of uncovering and developing an opportunity to create value through ‘innovation’ and seizing that opportunity without regard to either resources (human and capital) or the location of the entrepreneur – in a new or existing company. According to the Management guru Peter Drucker, innovation is an essential tool of entrepreneurs and intrapreneurs. Innovation has been defined as the creation and implementation of useful ideas for new products, services, production methods and management practices. Drucker observes that entrepreneurs try to create new and different values and new and different satisfactions, to convert a “material” into a “resource,” or to combine existing resources in a new and more productive configuration. He further adds that it is ‘change’ that always provides the opportunity for the new and different. Hence a systematic approach to innovation consists in the purposeful and organized search for changes, and in the systematic analysis of the opportunities such changes might offer for economic or social innovation. Drucker presents a framework based on monitoring of seven sources for innovative opportunity.
The first four sources lie within the enterprise, or within an industry. They are therefore visible primarily to people within that industry. They are basically symptoms. But they are highly reliable indicators of changes that have already happened or can be made to happen with little effort. These four source areas are:
The second set of sources for innovative opportunity, a set of three, involves changes outside the enterprise or industry:
Professor Lynda M. Applegate has also made a list of disruptive changes which create opportunities for innovation. Based on the work of Drucker and Applegate, we present a consolidated list of sources of innovation.
2. Sources of Innovation
2.1 The Unexpected
2.1.1 Unexpected Success
According to Drucker, no other area offers richer opportunities for successful innovation than the unexpected success. One may even look at unexpected success of other players in one’s value chain.
McDonald’s started because the company’s founder, Ray Kroc, paid attention to the unexpected success of one of his customers. At that time Kroc was selling milkshake machines to hamburger joints. He noticed that one of his customers, a small hamburger stand in a remote California town, bought several times the number of milkshake machines its location and size could justify. He investigated and found an old man who had, in effect, reinvented the fast-food business by systematizing it. Kroc bought his outfit and built it into a billion-dollar business based on the original owner’s unexpected success.
(Source: Drucker, P. F. (1994). Innovation and Entrepreneurship. Elsevier, 2ndedi.)
2.1.2 Unexpected Failure
Failures, unlike successes, rarely go unnoticed. But they are seldom seen as symptoms of opportunity. If something fails despite being carefully planned, carefully designed, and meticulously executed, that failure often indicates underlying change and, with it, opportunity.
In 1968, a scientist by the name Spencer Silver was working at 3M trying to create super strong adhesives for use in the aerospace industry in building planes. Instead of a super strong adhesive, though, he accidentally managed to create an incredibly weak, pressure sensitive adhesive agent called Acrylate Copolymer Microspheres. This adhesive did not interest 3M management as it was seen as too weak to be useful. But the same (Post-It notes) had become extremely popular internally at 3M labs after some time.
After 5 years of constant rejection for the adhesive and another seven years in development and initial rejection, Post-It notes were introduced to the world. It became a hit and has since become a mainstay in offices the world over.
2.1.3 Unexpected Event
Sometimes outside events, that is, events that are not recorded in the information and the figures which a company uses for its management, provide innovation opportunities. In order to explore innovation opportunities, every unexpected success, failure or outside event should be followed with the questions: (1) What would it mean to us if we exploited it? (2) Where could it lead us? (3) What would we have to do to convert it into an opportunity? and (4) How do we go about it?
Immediately after UN sanctions against Iran were lifted in middle of 2016, Daimler Trucks announced plans to restart sales and local production. In partnership with Iran Khodro it will produce engines and other parts. Daimler, which left Iran in 2010, says there is “huge demand for commercial vehicles, especially trucks”.
An incongruity is a discrepancy between what is and what “ought” to be, or between what is and what it is assumed to be. An incongruity creates an instability in which quite minor efforts can move large masses and bring about a restructuring of the economic or social configuration. However, incongruities do not feature in the figures or reports executives receive and pay attention to. They are qualitative rather than quantitative. But incongruity is clearly visible to the people within or close to the industry, market, or process; it is directly in front of their eyes. But because of the dominant logic or accepted mental models, incongruety is often overlooked by the insiders, who tend to take it for granted—“This is the way it’s always been,” they say.
There are several kinds of incongruity: an incongruity between the economic realities of an industry; an incongruity between the reality of an industry and the assumptions about it; an incongruity between the efforts of an industry and the values and expectations of its customers; or an internal incongruity within the rhythm or the logic of a process.
In the early 1950s, the ocean-going freighter was believed to be dying. The general forecast was that it would be replaced by air freight, except for bulk commodities. Costs of ocean freight were rising at a fast clip, and as the ports got congested delivery time strated getting longer. This, in turn, increased pilferage at the docks as more and more merchandise piled up waiting to be loaded while vessels could not make it to the pier.
A ship is capital equipment; and for all capital equipment the biggest cost is the cost of not working, during which interest has to be paid while the equipment does not earn. Though everybody in the industry knew that the main expense of a ship is interest on the investment, the industry kept on concentrating its efforts on costs that were already quite low—the costs of the ship while at sea and doing work. The shipping industry concentrated on the economics of the ship while at sea and in transit from one port to another. The focus was on designing and building faster ships, and ships that required less fuel and a smaller crew.
But somebody thought of another simple solution: Uncouple loading from stowing. Do the loading on land, where there is ample space and where it can be performed before the ship is in port, so that all that has to be done is to put on and take off pre-loaded freight. Concentrate, in other words, on the costs of not working rather than on those of working. The answer was the roll-on, roll-off ship and the container ship.
(Source: Drucker, Op.cit.)
2.3 Process Need
Process need starts out with the job to be done. It is task-focused rather than situation-focused. It perfects a process that already exists, replaces a link that is weak, redesigns an existing old process around newly available knowledge. Sometimes it makes possible a process by supplying the “missing link.”
In innovations that are based on process need, everybody in the organization always knows that the need exists. Yet usually no one does anything about it. However, when the innovation appears, it is immediately accepted as “obvious” and soon becomes “standard.”
For more than fifty years, since the end of World War I, the large, integrated steel mills in developed countries did well only in wartime. In times of peace its results were consistently disappointing, even though the demand for steel appeared to be going up steadily, at least until 1973. The minimum incremental unit needed to satisfy additional demand in an integrated steel mill is a very big investment and adds substantially to capacity. Any expansion to an existing steel mill is thus likely to operate for a good many years at a low utilization rate, until demand—which always goes up in small, incremental steps except in wartime—reaches the new capacity level. But not to expand when demand creeps up means losing market share, and permanently. No company can afford to take that risk. The industry can therefore only be profitable for a few short years: between the time when everybody begins to build new capacity and the time when all this new capacity comes on stream.
The integrated steel process creates very high temperatures four times, only to quench them again. And it lifts heavy masses of hot materials and then moves them over considerable distances. It had been clear for many years that the first innovation in process that would assuage these inherent weaknesses would substantially lower costs. “Mini-mill” was the innovation resulting from this understanding.
A mini-mill is about one-sixth to one-tenth the minimum economic size of an integrated steel mill. A mini-mill can thus be built to provide, economically, a fairly small additional increment of steel production for which the market already exists. The mini-mill creates heat only once, and does not quench it, but uses it for the rest of the process. It starts with steel scrap instead of iron ore, and then concentrates on one end product: sheet, for instance, or beams, or rods. And while the integrated steel mill is highly labour-intensive, the mini-mill can be automated. Its costs thus come to less than half those of the traditional steel process.
(Source: Drucker, Op.cit.)
2.4 Industry Dynamics
Generally changes in industry structure are visible and quite predictable to outsiders. But the insiders perceive these same changes primarily as threats. The outsiders who innovate can thus become a major factor in an important industry or area quite fast, and at relatively low risk. Such developments often lead to disruptive innovations.
The first wave of industrial liberalization in India started in mid 1980s, when Rajiv Gandhi became the prime minister. Japanese automobile makers like Honda, Suzuki, Yamaha & Kawasaki grabbed the opportunity to enter India in two-wheeler industry. Bajaj Auto Ltd, the then leader in this industry, had a fairly successful portfolio of scooters like Bajaj Chetak & Bajaj Super. Though, very popular these models had low fuel efficiency. Having realized a latent need for fuel efficient motorcycles, Hero group, a bicycle manufacturer, joined hands with Honda of Japan. Hero Honda came up with fuel efficient bikes fitted with ‘four stroke’ engines. For a long while Bajaj Auto ignored this development and eventually lost the leadership to Hero Honda in early 2000.
Of all external changes, demographics—defined as changes in population, its size, age structure, composition, employment, educational status, and income—are the clearest. They are unambiguous. They have the most predictable consequences. The known and almost certain lead times of changes in demographics often present innovation opportunities.
A study conducted by McKinsey Global Institute in 2015,predicts that aging of population in China and many developed countries will lead to fall in GDP growth rate to 2.1% globally and 1.9% in developed countries within the next 50 years. Aging of population coupled with declining birth rates over the years, are resulting into labour shortage and increased labour cost in countries like China. However, this demographic change throws open new opportunities for firms engaged in Robotics and manufacturing automation.
Government of India has also been trying to ride this demographic change by highlighting large pool of young population in India. It has launched a ‘Make In India’ initiative to attract global manufacturers to set up their plants in India.
2.6 Socio-cultural change
Socio-cultural changes in a market can be a source of innovation opportunities. It leads to change in perceptions and the way things are interpreted.
Today a large proportion of bank employees are females. In US, City Bank was one of the pioneers in this regard. Citibank became conscious of the opportunity offered by the moving of women into the work force when its college recruiters reported that they could no longer carry out their instructions, which were to hire the best male business school students in finance and marketing. The best students in these fields, they reported, were increasingly women. College recruiters in many other companies, including quite a few banks, told their managements the same story at that time. In response, most of them were urged, “Just try harder to get the top-flight men.” At Citibank, top management saw the change as an opportunity and acted on it.
(Source: Drucker, Op.cit.)
With increased globalization, new innovation opportunities have emerged especially in the areas of off shoring and outsourcing.
Companies need to ask questions such as: What’s happening in another part of the world that we could adopt or adapt in our environment? What are the proprietary advantages that we have based on our access to people, information, materials, or capital? Are new markets or businesses emerging in other parts of the world that create innovation opportunities?
Are there opportunities to create value by outsourcing or off shoring activities that we currently perform inside our organization? Are there activities that we currently source from outside that we should be doing inside to create proprietary advantage?
2.8 New Knowledge
New knowledge has always been a source of innovation for businesses. This is especially true in the twenty-first century, where we have seen rapid technological growth revolutionizing nearly every industry. But when we talk of knowledge, we do not necessarily refer to scientific or technical. Social innovations based on knowledge can have equal or even greater impact.
3. Discovery Skills for Innovation
After having discussed the sources of innovation opportunities, now we turn our attention to discovery skills related to innovation. Dyer, Gregersen, and Christensen have identified five ‘discovery skills’ that are commonly employed by most creative executives. These skills are associating, questioning, observing, networking and experimenting. Collectively, these discovery skills constitute the innovator’s DNA, or the code for generating innovative business ideas. Associating is like the backbone structure of DNA’s double helix; four patterns of action (questioning, observing, networking and experimenting) wind around this backbone, helping to cultivate new insights.
Associating means the ability to successfully connect seemingly unrelated questions, problems, or ideas from different fields. Associating happens as the brain tries to synthesize and make sense of novel inputs. Innovative breakthroughs often happen at the intersection of diverse disciplines and fields. Apple’s founder Steve Jobs was an expert at exploring new and unrelated things—the art of calligraphy, meditation practices in an Indian ashram, the fine details of a Mercedes-Benz.
Pierre Omidyar launched eBay in 1996 after linking three unconnected dots: (1) a fascination with creating more-efficient markets, after having been shut out from a hot internet company’s IPO in the mid-1990s; (2) his fiancée’s desire to locate hard-to-find collectible Pez dispensers; and (3) the ineffectiveness of local classified ads in locating such items.
Innovators constantly ask questions that challenge common wisdom: ‘If we did this, what would happen?’ Michael Dell got his idea for founding Dell Computer because he was perturbed by a question: why a computer cost five times as much as the sum of its parts. This resulted into his revolutionary business model.
To question effectively, innovative entrepreneurs Ask “Why?” and “Why not?” and “What if?” Their queries frequently challenge the status quo, just as Steve Jobs did when he asked, “Why does a computer need a fan?” They love to ask, “If we tried this, what would happen?” Innovators, like Jobs, ask questions to understand how things really are today, why they are that way, and how they might be changed or disrupted. Collectively, their questions provoke new insights, connections, possibilities, and directions.
Innovators carefully, intentionally, and consistently look out for small behavioural details—in the activities of customers, suppliers, and other companies—in order to gain insights about new ways of doing things. Intuit founder Scott Cook hit on the idea for Quicken financial software after two key observations. First he watched his wife’s frustration as she struggled to keep track of their finances. Then a buddy got him a sneak peek at the Apple Lisa before it launched. Immediately after leaving Apple headquarters, Cook drove to the nearest restaurant to write down everything he had noticed about the Lisa. His observations prompted insights such as building the graphical user interface to look just like its real-world counterpart (a check book, for example), making it easy for people to use it. So Cook set about solving his wife’s problem and grabbed 50% of the market for financial software in the first year.
Innovators spend a lot of time and energy finding and testing ideas through a diverse network of individuals who vary wildly in their backgrounds and perspectives. They actively search for new ideas by talking to people who may offer a radically different view of things. For example, Jobs talked with an Apple Fellow named Alan Kay, who told him to “go visit these crazy guys up in San Rafael, California.” The crazy guys were Ed Catmull and Alvy Ray, who headed up a small computer graphics operation called Industrial Light & Magic (the group created special effects for George Lucas’s movies). Fascinated by their operation, Jobs bought Industrial Light & Magic for $10 million, renamed it Pixar, and eventually took it public for $1 billion. Had he never chatted with Kay, he would never have wound up purchasing Pixar, and the world might never have thrilled to wonderful animated films like Toy Story, WALL-E, and Up.
Finally, innovators are constantly trying out new experiences and piloting new ideas. Experimenters continuously explore the world and test their hypotheses. They visit new places, try new things, seek new information, and experiment to learn new things. Jobs, for example, tried new experiences all his life—from meditation and living in an ashram in India to dropping in on a calligraphy class at Reed College. All these varied experiences would later trigger ideas for innovations at Apple Computer.
Applegate, L. M. (September 4, 2007). ‘Jumpstarting Innovation: Using Disruption to Your Advantage.’ Harvard Business Working Knowledge.
Dobbs, R., Koller, T., Ramaswamy, S., Woetzel, J., Manyika, S. J., Krishnan, R. and Andreula, N. (September 2015). ‘Playing to Win: The New Global Competition for Corporate Profits.’ McKinsey Global Institute.
Drucker, P. F. (1994). Innovation and Entrepreneurship. Elsevier, 2ndedi.
Dyer, J., Gergersen, H.,& Christensen, C. (July 20, 2011). ‘Five Discovery Skills that Distinguish Great Innovators’. Harvard Business Working Knowledge
Dyer, J., Gergersen, H., & Christensen, C. (December , 2009). ‘The Innovator’s DNA’. Harvard Business Review.