Failure and the Seven Sources of Innovation

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 Druckers
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

Incongruities

Changes in Meaning and Perception

Process Needs

New Knowledge

Changes in Industry and Market

Structure
Figure 1. Druckers 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; Its 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 3Ms 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.
Todays 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 machines lubricator begin to ask a question were 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 Christensens book, Innovation and the General Manager (New York: McGrawHill 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 todays 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 youre moving.
Richard P. Carlton - Former CEO, 3M Corporation (1950)