Understanding Innovation & Its Sources

Innovation is considered to be the specific function of entrepreneurship, whether in an existing business, a public service institution or a new venture started by a lone individual in the family kitchen. It is a mean by which entrepreneur creates a new wealth producing resources or ends existing resources with enhanced potential for creating wealth.

Sources of Innovation:

There are of course, innovations that spring from a flash of genius. Most innovations, however, specially the successful ones, result from a conscious, purposed full search for innovation opportunities, which are found only in few situations.

Four such areas of opportunities exist within a company or industry: unexpected occurrences, incongruities, process needs, industry and market changes. Three additional sources of opportunities exist outside a company in its social and intellectual environment: demographic changes, changes in perception, and new knowledge.

1. Unexpected Occurrences:
Consider first the easiest and simplest source of innovation opportunity: the unexpected. In the early 1930s, IBM developed the first accounting machine, which was designed for banks. But banks in 1933 did not buy the new equipment. What saved the company (IBM)? According to a story that Thomas Watson, Sr., the company founder and long-term CEO, often told was its exploitation of unexpected success: The New York Public Library want to buy the machine. Unlike the banks, libraries, in those early NEW DEALS had money, and Wastson sold more than a hundred of his otherwise unsellable machines to libraries.

The unexpected failure may be an equally important source of innovation opportunities. Everyone knows about the Ford Edsel as the biggest new-car failure in automotive industry. What very few people seem to know, however is that the Edsel’s failure was the foundation for much of the company’s later success. Ford planned the Edsel, the most carefully designed car to that point in American automotive history, to give the company a full product line with which to compete with General Motors. When it bombed with all the planning, market research, and design that had gone into it, Ford realized that something was happening in the automobile market that ran counter to the basic assumption on which GM and everyone else had designing and marketing cars. No longer was the market segmented primarily on income groups; the new principle of segmentation was what we now call ‘Lifestyle’. Ford’s response was the Mustang, the car that gave the company a distinct personality and reestablished it as an industry leader.

2. Incongruities:
Alcon Laboratories was one of the success stories of the 1960s because Bill Conner, the company cofounder, exploited an incongruity in medical technology. The cataract operation is the world’s third or fourth most common surgical procedure. During the past 300 years, doctors systematized it to the point that the only ‘old-fashioned’ step left was the cutting of ligament. Eyes surgeons had learned to cut the ligament with complete success, but it was so different a procedure from the rest of the procedure and so incompatible with it, that they often dreaded it. it was incongruous.
Doctors had known for 50 years about an enzyme that could dissolve the ligament without cutting. All Conner did was to add a preservative to this enzyme that gave it a few months shelf life. Eye surgeons immediately accepted the new compound, and Alcon found itself with worldwide monopoly. Fifteen years later, Nestle bought the company for a fancy price.

Such an incongruity with the logic or rhythm of process is only one possibility out of which innovation opportunities may arise. Another source is incongruity between economic realities. For instance, whenever an industry has a steadily growing market but falling profit margins—as, say in steel industry of developed countries in 1950 and 1970 – an incongruity exists. The innovative response: minimills.

3. Process Needs:
Anyone who has driven in Japan knows that the country has no modern highway system. Its road still follow the path laid down for – or by- oxcarts in the tenth century. What makes the system work for automobiles and trucks is an adaptation of the reflector used on American highways since the early 1930s. The reflector lets each car see which other cars are approaching from anyone of half-dozen directions. This minor invention, which enables traffic to move smoothly and with a minimum of accidents, exploited a process need.
What we call now the media had its origin in two innovations developed around 1890s in response to process needs.

4. Industry and Market Changes:
Managers may believe that industry structures are ordained by the good Lord, but these structures can – and often do – change overnight. Such change creates tremendous opportunity for innovation.

One of the America’s business’s great success stories in recent decades is the brokerage firm of Donaldson, Lufkin & Jenrette, recently acquired by the Equitable Life Insurance Society. DL&J was founded in 1960 by three young men, all graduates of the Harvard Business School, who realized that the structure of financial industry was changing as institutional investors becomes dominant. These young men had practically no capital and no connections. Still with a few years, their firm had become a leader in the move to negotiated commissions and one of the Wall Street’s stellar performers. It was the first to be incorporated and go public.

When an industry grows quickly, the critical figure seems to be in the neighborhood of 40% growth in ten years or less—its structural changes. Established companies, concentrating on defending what they already have, tend not to counterattack when a newcomer challenges them. Indeed, when market or industry change, traditional industry leaders again and again neglect the fastest growing market segments. New opportunities rarely fit the way the industry has always approached the market, defined it, or organize to serve it. Innovators therefore have a good chance of being left alone for a long time.

5. Demographic Changes:
Of the outside sources of innovation, opportunities, demographics are the most reliable. The Japanese are ahead in robotics because they paid attention to demographics. Everyone in the developed countries around 1970 or so knew that there was a both a baby bust and an education explosion going on; about half or more of the young people were staying in school beyond high school. Consequently the number of people available for traditional blue-collar work in manufacturing was bound to decrease and become inadequate by 1990. Everyone knew that but only Japanese acted on it, and now they have ten year lead in robotics.

Managers have known for longtime that demographics matter, but they have believed that population statistics change slowly. Indeed, the innovation opportunities made possible by changes in number of people and in their age distribution, education, occupations, and geographic locations are the most rewarding and least risky of entrepreneurial pursuits.

6. Changes in Perception
‘The glass is half full’ and ‘the glass is half empty’ are descriptions of the same phenomenon but have vastly different meanings. Changing from manager’s perception from half full to half empty opens up big innovation opportunities.

Rather than rejoicing in great improvements in health, Americans seems to be emphasizing how far away they still are from immortality. This view of things has created many opportunities for innovations, markets for hew health care magazines, for exercise classes and jogging equipment, and for all kinds of health foods. The fastest growing new business in 1983 was a company that makes indoor exercise equipment.

A change in perception does not alter facts. It changes their meaning, though – and very quickly. It took less than two years for the computer to change from being perceived as a threat and as something only big businesses would use to something one buys from average income.

Economics does not necessarily dictate such a change, in fact they may be irrelevant. What determines whether people see a glass as half full or half empty is mood rather than fact and a change in mood often defies quantification. But it is not exotic, it is concrete. It can be defined. It can be tested and it can be exploited for innovation opportunity.

7. New Knowledge:
Among history making innovations, those that are based on new knowledge – whether scientific, technical or social – rank high. They are the super stars of innovation; they get the publicity and money. They are what people usually mean when they talk of innovation, although not all innovations based knowledge are important.

Knowledge based innovations differ from all others in the time they take, in their casualty rates, as well as in the challenges they pose to entrepreneurs. Like most superstars, they can be temperamental, capricious, and hard to direct. They had for instance the longest lead time of all innovation. There is protracted span between the emergence of new knowledge and its distillation between the usable technologies.

To become effective, innovation of this sort usually demands not one kind of knowledge but many. Consider one of the most potent knowledge-based innovations: modern banking. The theory of entrepreneurial bank—that is, of the purposeful use of capital to generate economic development, was formulated by the Comte de Saint-Simon during the era of Napoleon. Despite Saint-Simon’s extraordinary prominence, it was not until 30 years after his death in 1825 that two of his disciples, the brothers Jacob and Isaac Periere, established the first entrepreneurial bank, the Credit Mobilier, and ushered what we now call finance capitalism.

The Perieres, however did not know modern commercial banking, which developed at about same time across the channel of England. The Credit Mobilier failed ignominiously. A few years later, two young men, one American, J.P.Mrgan, and one German, Georg Siemens—put together the French theory of Entrepreneurial banking and the English theory of commercial banking to create the first successful modern banks: J.P. Morgan and Company in New York, the Deutsche Bank in Berlin. Ten years later, a young Japanese, Shibusawa Eiichi, adapted Siemen’s concept to his country and thereby laid the foundation of Japan’s modern economy. This is how knowledge-based innovation always work.

The computer, to cite another example, required no fewer than six separates strands of knowledge:

• Binary arithmetic
• Charles Babbage’s concept of a calculating machine, in the first half of nineteenth century
• The punch card invented by Herman Hollerith for the U.S. of 1980
• The audition tube, the electronic switch invented in 1906
• Symbolic logic, which was developed between 1910 and 1913 by Bertrand Russell and Alfred North Whitehead
• And concepts of programming and feedback that came out of abortive attempts during the World War I to develop effective antiaircraft guns.

Although all the necessary knowledge was available in 1918, the first operational digital computer did not appear until 1946.

Careful analysis of the needs – and, above all the capabilities of the intended user are also essential. It may seem paradoxical but knowledge based innovation is more market dependent than any other kind of innovation.