by Anne Yeiser

The foremost management consultant of our time, Peter F. Drucker, promoted a provocative concept on how to make a profit: "Because its purpose is to create a customer, the business enterprise has two--and only two--basic functions: marketing and innovation. Marketing and innovation produce results: all the rest are 'costs'." He further taught that bright ideas are the riskiest and least successful source of innovative opportunities. Instead, he advised the systematic, managed, purposeful and organized search for changes and the systematic, managed, purposeful and organized analysis of the opportunities such changes might offer for innovation.

He said that to 'practice' innovation, we must be students of change, and suggested monitoring seven sources for innovation opportunities. Four of these lie within the enterprise and are primarily visible to people within that industry or service sector. Three involve changes outside the enterprise or industry. Here is a list of the seven sources, taken from his book, Innovation and Entrepreneurship: Practice and Principles.

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.
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.

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.

Innovation and Entrepreneurship: Practice and Principles by Peter F. Drucker. Harper & Row, 1985.