Monday, October 21, 2019

Rethinking Innovation: An Updated, Practical List of Where to Look

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While writing Innovation on Tap, I had the opportunity to study our modern concept of innovation—what it is and how it arises.  

My research reacquainted me with economist Joseph Schumpeter and consultant Peter Drucker, two thoughtful students of innovation and entrepreneurship.

It is on their giant shoulders that I have constructed an updated, practical list of questions that may help entrepreneurs identify their next innovation.

As Schumpeter and Drucker both advise, the process of innovation is less about a moment of inspiration or some breakthrough technology, and more about the diligent investigation of the often mundane opportunities already lying around us.


The Rise of the Entrepreneur

When Ronald Reagan used the word “entrepreneur” in his January 1981 inaugural address, he may have sent thousands of Americans scurrying to their Funk and Wagnalls. Likewise, had I told my fellow MBA grads two years later that I was heading off to be an “entrepreneur,” many would have assumed I was planning to open a French bakery. 

It turns out that the ideas of an "entrepreneur," used most famously by economist Joseph Schumpeter in 1911, was being rediscovered after three generations of neglect.  By the late 1980s, one academic concluded, we had entered the Age of Schumpeter, and soon after, historian Thomas K. McCraw wrote, the prosperity of the 1990s “turned entrepreneurs into folk heroes.”[1]

Schumpeter’s theories about entrepreneurs and the critical role they played launching novel combinations, or innovations, gained passionate disciples.  In later writings, Schumpeter defined five cases in which innovation was most likely to arise, fertile ground for entrepreneurs in search of their own novel combinations.  These situations included 1) the introduction of a new good or new quality of good, 2) a new method of production or new way of handling a commodity, 3) the opening of a new market, 4) a new source of supply of raw material, and 5) a new way to organize a company or industry.[2]


Schumpeter’s New
Combinations (1934)
New Good
New Method of Production/Process
New Market
New Source of Supply
New Organization


Realizing that innovations were, to some extent, in the eye of the beholder, Schumpeter's definition was expansive, saying innovation need not be Carnegie’s Bessemer steel or Ford’s explosion motor.  Instead, he wrote, “it can be the Deerfoot Sausage,”[3] a premium priced pork sausage made famous by radio advertising, possibly the economist’s main course on the evening he drafted his thoughts about innovation.  Deerfield Sausage was promoted as “only the tenderest, leanest parts of the pig—chopped not too fine—with spicy herbs to lend piquant flavor.”  

For Schumpeter, the right texture and spice on his palette could apparently lead to market disruption and creative destruction.

Joseph Schumpeter
Image available for free publishing
from the Volkswirtschaftliches Institut,
Universität Freiburg, Freiburg im
Breisgau, Germany.
Copyrighted free use.
[CC BY-SA 3.0
(https://creativecommons.org/
licenses/by-sa/3.0)]
The economist also emphasized that innovation need not be technological.  “It is entirely immaterial whether an innovation implies scientific novelty or not,” he wrote,[4] a reminder that our modern infatuation with technology can be distracting.  Focus on “the doing,” he advised; it was the act of bringing a novel combination to market that resulted in disruption and innovation.  This refrain, of getting the business model right, echoes throughout the entrepreneurial stories examined in Innovation on Tap.

Schumpeter’s gift was to begin organizing the vast world of innovation into five clear segments, an excellent first-cut that would eventually be reframed and expanded.

Peter Drucker Reframes Innovation

In 1985, consultant Peter Drucker (1909–2005) turned his attention to the topic of innovation to help further demystify it. He was writing during Reagan’s presidency, the resurgence of Schumpeter, and the steady rise of Silicon Valley.  “In innovation, as in any other endeavor, there is talent, there is ingenuity, and there is knowledge,” he wrote, “but when all is said and done, what innovation requires is hard, focused, purposeful work.[5]

In other words, innovation is a function, much like accounting and marketing.  It requires diligence and process.  It is toil; nobody can afford to sit around and wait for lightning to strike.  “Purposeful, systematic innovation begins with the analysis of the sources of new opportunities,”[6] he wrote. 
 
This advice resulted in Drucker naming seven sources of innovation—an attempt, just as Schumpeter had made fifty years earlier, to help entrepreneurs till the most fertile ground.  These sources ranged from unexpected occurrences (book sales grew rapidly in the US after the advent of television) to demographic changes (childcare services arose with the growth of women in the workforce) to new knowledge (penicillin).[7]


Drucker’s Seven Sources of Innovation (1985)
Unexpected Occurrences
Incongruities
Process Needs
Industry and Market Changes
Demographic Changes
Changes in Perception
New Knowledge


Of Drucker’s seven sources, the first six represent opportunities that already exist in the market and are waiting to be noticed.  UCLA professor Richard Rumelt reinforced Drucker’s conclusions when he described successful companies as those that exploit a change “in technology, consumer tastes, laws, resource prices, or competitive behavior—and ride that change with quickness and skill.”[8] 
This understanding of innovation shifts emphasis from an inward search for the new and unusual to an outward quest for the existing and sometimes obvious.

Drucker knew the typical entrepreneur placed great faith in his seventh category, new knowledge, which was the superstar of the modern economy and almost always associated with technology.  He warned that relying on new knowledge could be the riskiest way to innovate, the most likely way to fail.  As a rule, he felt that focusing on the first six categories—thinking through process needs or demographic changes, for example—would often yield the most far-reaching innovations.  “Few technical innovations can compete in terms of impact with such social innovations as the newspaper or insurance,” he wrote, while “installment buying literally transforms economies.”[9]

Peter Drucker
Jeff McNeill [CC BY-SA 2.0
(https://creativecommons.org/licenses/by-sa/2.0)]
This critical idea is shared by Drucker and Schumpeter: The most powerful innovations tend to involve new combinations of knowledge, process, and people, not technology.  Schumpeter lists crop rotation, deep plowing, and the introduction of existing crops to new regions as among the most powerful agrarian innovations, and banking, the rise of credit, and the invention of the limited liability corporation as essential to the industrial revolution.[10]  Drucker emphasizes the research laboratory, which “may well be the most successful invention of the nineteenth century,” and the modern army, the civil service, and the postal service—all “surely had as much impact as railroad or steamship.”[11]

If we focus on technology, the two agree, we will miss the innovations that truly move the world.
Schumpeter also recognized the grip of consumerism when he wrote, “It was not enough to produce satisfactory soap, it was also necessary to induce people to wash.”[12]  Finding novel combinations whose goal was to incite desire and generate new demand—illustrated by the rise of functional “marketing management” in the 1950s—would become a sturdy branch in the evolution of innovation.

Treading on Toes, Standing on Shoulders

Despite Drucker’s expanded categories, I encountered innovation that did not fit easily into the schemes proposed by Schumpeter and Drucker while researching Innovation on Tap.  When Branch Rickey began to rebuild his baseball teams by keeping pitch-by-pitch analytics on his ballplayers, what kind of innovation was that?  And how might we think about Thomas Downing’s nineteenth-century New York City oyster house, whose novel combination had been the ability to “attract the aristocracy as well as ladies in the company of their husbands”?  And, what to do with Hamilton, an innovation that combined rap with America’s Founding Fathers to create a legion of new Broadway fans?

In response to these questions, and with apologies to the giants who came before me, I combined and expanded their models to make better sense of what I was seeing.  Drucker’s “The Unexpected” and “Incongruities” became one category, for example.  I broke Schumpeter’s “New Form of Organization” into “New Business Models,” “New Ways of Organizing People and Services,” and “New Ways of Organizing Knowledge.”  I added a category for “New Artistic Combinations.” 

The author's bookshelf
The goal was not so much to split hairs or complicate the categories, but to distinguish between types of innovation in a way that would be helpful to modern entrepreneurs in search of their own novel combinations.

As a result, an entrepreneur might use Schumpeter’s model to ask, “What new forms of organization are available?  Similarly, a student of Drucker might ask, “Is there a process need in my company that can lead to an innovative idea?”  These are excellent questions, but so open-ended as to be difficult to answer.  In the expanded model of innovation, this search for innovation results in three, more targeted questions:

  • Do I see a new, attractive business model emerging, or a new model that can be created?
  • Is there a novel way to organize people or the services I provide to create a competitive advantage?
  • Is there a novel way to organize knowledge or the way it is delivered to people (or machines)?
By re-sorting and matching Schumpeter and Drucker’s schemes, finding the overlap and then filling in gaps, the following new model evolves:


Schumpeter’s New
Combinations (1934)
Drucker’s Seven Sources
of Innovation (1985)
Expanded Sources of Innovation (2019)

Unexpected Occurrences
Incongruities
The Unexpected
New Method of Production/Process
New Source of Supply

Process Needs
New Processes
New Market
Industry and Market Changes
New Markets (found, created, or reached through price)



New Business Models

New Form of Organization

New Ways of Organizing People and Services



New Ways of Organizing Knowledge


Demographic Changes
Demographic Changes



New Artistic Combinations


Changes in Perception
Changes in Perception

New Good

New Combinations of Existing Technology


New Knowledge
New Applied Knowledge


The result of this new scheme is a comfortable resting place for each of the innovations found in Innovation on Tap, and a new set of questions that entrepreneurs can use when they undertake the disciplined search for innovation that Drucker recommends.


Expanded Sources of Innovation (2019)
Innovation on Tap
(chapter)
Other Examples
The Unexpected
Comfort air conditioning (7)
Novocain
First computers

New Processes
Cotton gin (1)
Automated candy production (5)
Factory air conditioning (7)

The assembly line
Venture capital
New Markets (found, created, and reached though price)
Life insurance for people of color (6)
Rooftop hydroponic gardens (16)
Sears catalog
Model T

New Business Models
Renewable energy (14)
Clean water > new entrepreneurs (15)
SaaS
Netflix

New Ways of Organizing People and Services
Downing Oyster House (3)
Mt. Hope Finishing/N. Dighton (10)
Sweeten (18)
RunKeeper (20)

Labor union
Facebook
Accelerators
New Ways of Organizing Knowledge
Market/product segmentation (11)
Early “moneyball” (12)
EverTrue (19)
Books
R&D Labs
Wikipedia

Demographic Changes
Integrating baseball (12)
Hamburger Helper/Beyoncé (22)

Senior cruises
Retirement communities
New Artistic Combinations
Jazz (8)
Hamilton (23)
Top 40 Radio
Mashups

Changes in Perception
Model year/consumerism (11)
Cosmetics/beauty (9)
National Parks/conservation (13)
The New Deal/social net
Bottled water/diet
Palliative care/death

New Combinations of Existing Technology
New sail designs (3)
Smart City (17)
Laser-printed prescriptions (22)

iPhone
Autonomous vehicles
New Applied Knowledge
Single-use razor blade (4)
RedOwl analytics (21)
Telegraph
CRISPR


Innovation is fluid and the categories in this new model are not mutually exclusive.  Willis Carrier’s modern air conditioning was a new combination of existing technology (fans, cold pipes, baffles, etc.) and fits well in that category.  It also involved new applied knowledge in the form of Carrier’s evolving theories of humidity control that would result in his Rationale Psychrometric Theory; that category works as well.  

Modern air conditioning also relied on changes in perception, the stunning idea that humans could (and should) control their environment—a third category of innovation.  

But ultimately, Carrier’s invention fit best in the “New Processes” category because, once deployed, it improved the manufacturing processes of hundreds of industries, from textiles to pharmaceuticals. Meanwhile, comfort air conditioning—the adaptation of factory air to cool movie theaters, department stores, and ultimately homes—was something of “the unexpected” in a world that had lived with heat and humidity for thousands of years.  Many consumers were shocked that they could press a button and manufacture cool, dry air.  Some were embarrassed that they choose to pay for air conditioning when their parents and grandparents had gone without.  

Carrier spent millions in advertising convincing them that comfort air was a product they could afford and deserved to own.  Consequently, this product falls into “The Unexpected” category, though also fits into one or two others.

If there is a theme to this expanded story of novel combinations, at least for modern entrepreneurs, it is to deemphasize technology in the search for innovation.  Both Schumpeter and Drucker were clear on this point. Schumpeter emphasized that the real magic occurred in the “carrying out of new combinations,”[13] and Drucker wrote that “the test of an innovation, after all, lies not its novelty, its scientific content, or its cleverness. It lies in its success in the marketplace.”[14]

Many of history’s most powerful innovations have been those that reorganized people, process, and knowledge.  Some involved new technology, such as Bessemer steel and the Model T Ford, but many others did not.  The stories of entrepreneurs featured in Innovation on Tap such as John Merrick, Stephen Mather, and Emily Rochon reinforce the idea that innovation can also arise in the form of a life insurance policy, a system of national parks, an attractive renewable energy business model—or, thanks to Schumpeter, something as simple but disruptive as a dinner sausage.



[1] Thomas K. McCraw, Prophet of Innovation: Joseph Schumpeter and Creative Destruction, Cambridge, MA: The Belknap Press of Harvard University Press, 2007, 5, 504.
[2] Joseph A. Schumpeter, The Theory of Economic Development (New Brunswick, US and London: Transaction Publishers, 2010 [rpt:1934]), 66.  In 1939, Schumpeter had a slightly different take, saying that innovation could be  “technological change in the production of commodities already in use, the opening up of new markets or of new sources of supply, Taylorization of work, improved handling of material, the setting up of new business organization such as department stores---in short, any ‘doing things differently’  in the realm of economic life—all these are instances of what we shall refer to by the term Innovation.  It should be noticed at once that that concept is not synonymous with ‘invention.’”
[3] Italics by author.  Joseph A. Schumpeter, “The Creative Response in Economic History,” Essays on Entrepreneurs, Innovations, Business Cycles, and the Revolution of Capitalism, Richard V. Clemence, ed., New Brunswick, NJ: Transaction Publishers, 2000 [rpt: 1951], 223.
[4] Joseph A. Schumpeter, Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, vol. 1 (1939; repr., Chevy Chase, MD: Bartleby’s Books and Mansfield Centre, CT: Martino Publishing, 2005), 84.
[5] Peter Drucker, “The Discipline of Innovation,” HBR’s 10 Must Reads on Innovation, Boston: Harvard Business Review Press, 2013, 156.
[6] Peter Drucker, “The Discipline of Innovation,” HBR’s 10 Must Reads on Innovation, Boston: Harvard Business Review Press, 2013, 154.
[7] I should admit here that I do not find all of Drucker’s examples in each category to be compelling.  The illustrations used to define “Incongruities” such as the shipping container seem especially confusing; this device I would place in “Process Needs.”  Most “Incongruities” seem like “Unexpected Occurrences,” and for clarity, I combined these two categories in my own model.
[8] “Strategy’s Strategist: An Interview With Richard Rumelt,” McKinsey & Company, November 2007.
[9] Peter Drucker, Innovation and Entrepreneurship, New York: HarperBusiness, 1993 [rpt: 1985], 31.
[10] Joseph A. Schumpeter, Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, vol. 1 (1939; repr., Chevy Chase, MD: Bartleby’s Books and Mansfield Centre, CT: Martino Publishing, 2005), 240, 278, 292.
[11] Peter Drucker, The Essential Drucker: The Best of Sixty Years of Peter Drucker’s Essential Writings on Management, (New York: HarperBusiness, 2001), 4684.
[12] Joseph A. Schumpeter, Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, vol. 1 (1939; repr., Chevy Chase, MD: Bartleby’s Books and Mansfield Centre, CT: Martino Publishing, 2005), 243.
[13] Joseph A. Schumpeter, The Theory of Economic Development (New Brunswick, US and London: Transaction Publishers, 2010 [rpt:1934]), 75.
[14] Peter Drucker, Innovation and Entrepreneurship, (1985; repr., New York: HarperBusiness, 1993), loc. 75.

4 comments:

  1. "Some were embarrassed that they choose to pay for air conditioning when their parents and grandparents had gone without." This is still true. Living in Upstate New York, I saw no reason to pay for air conditioning rather than endure the two weeks of summer that counted as unbearable. It took moving to Florida to reconcile me to that. My grandparents had, indeed, done just fine in Florida without A/C, but their house (and lives) had been engineered to deal with it. In my own case, air conditioning greatly improved productivity, just as it had done for business.

    I know nothing about Peter Drucker's business ideas, but his book, "Adventures of a Bystander," is not to be missed.

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    Replies
    1. They say in Florida that when the price of air conditioning became competitive with the price of a sunroom, everything tipped to A/C. Willis Carrier grew up outside of Buffalo and lived in Syracuse for many years--and I don't believe he ever felt the need to air condition his own home. As for me, the day we moved into an air-conditioned home, the world got better. :)

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  2. Congratulations on another scholarly work!

    ReplyDelete