The first step to understanding entrepreneurship is realizing that it is futile without innovation. Innovation is the means by which an entrepreneur exploits change as an opportunity for a new or different business or service. As such, innovation is very much a discipline that can be learned and should be practiced.
Learning the discipline of innovation starts with the seven sources of innovative opportunity. While they could be considered symptoms, they are actually highly reliable indications that changes are happening in any given industry.
Source #1: The Unexpected
Perhaps the richest of opportunities for innovation success comes from unexpected success. This is the path by which entrepreneurs meet the least amount of risk and least arduous pursuits. More often than not, unexpected success appears in an existing company’s blind spot. Currently, management teams are trained to comb through reports that highlight expected results, so that unexpected success is left unexplored and vulnerable for exploitation. Drucker advises that reports must be revamped to include all results so that people can analyze their businesses properly and, more importantly, look for innovative opportunities.
Unexpected failures rarely go unnoticed; however, they are seldom seen as symptoms for opportunity. Executives typically call for more reports and more studies to analyze failures, but instead should be stepping out to investigate possible situations. Understanding customers’ experiences (i.e., the true reality of a product) is how to exploit opportunities of an unexpected failure.
Source #2: Incongruities
Stemming from unexpected failures, the second source, incongruities, appears when there is a dissonance between what is and what “ought to be.” It invites innovators to investigate why results are not lining up with expectations and what can be done to exploit opportunities. The only major downside to this source of innovation is that it is largely only apparent to industry insiders. Someone from the outside is not likely to spot or understand any type of incongruity, no matter which form it takes. Incongruity appears in several different ways, including:
*Incongruity between the economic realities of an industry.
*Incongruity between the reality and the assumptions about an industry.
*Incongruity between the efforts of an industry and the values and expectations of its customers.
*Internal incongruity within the rhythm or the logic of an existing process.
Of all the incongruities, that between perceived and actual reality may be the most common due to the fact that producers and suppliers almost always misinterpret what customers actually buy and why.
Source #3: Process Needs
New and existing businesses alike can lead innovation in their industries using process needs as a source for opportunity. Here, existing processes are perfected, replaced, or redesigned around newly available knowledge. Sometimes it gives light to a whole new process by providing “missing links” for different industries. Drucker, however, advises that the most common place to look for process needs are not missing links, but demographics and incongruities–both of which give ample opportunity and are largely overlooked.
Innovators seeking to exploit process need opportunities must understand that they will not be successful unless their processes are self-contained, there is only one missing or weak leak, clear objectives and solutions are defined, and there is a widespread belief that there could be a better way to do business. Without a thorough analysis and strategy of all these criteria, innovations are likely to be unsuccessful.
Source #4: Industry and Market Structures
Next, Drucker moves onto the sources of opportunity that can be seen by industry outsiders–the most critical of which are the structures that comprise industries. Indeed, industry and market structures appear so solid to people within specific industries that they are likely to consider them certain to endure forever. However, Drucker points out that most industry structures are actually quite brittle. To most outsiders, industry structures are highly visible and predictable and can innovate under the radar quickly and with relatively low risk. Meanwhile, insiders continue to assume their positions are permanent. There are four near-certain indicators of industry structure changes that individuals must keep an eye out for:
- Rapid growth of an industry.
- Changes in the way the services or products are perceived in the market.
- Convergence of technologies that before had seemed distinctly separate.
- Rapid changes in the way business is conducted.
Innovators must always scan for these four indicators if they want to be at the forefront of their industries’ structural revolutions.
Source #5: Demographics
Demographics are part of the external changes that lead to innovative opportunities. Of all the external changes, demographics are the most unambiguous. They include any changes in population, including its size, age structure, composition, employment, educational status, and income. Executives in any industry typically do not pay close attention to demographics because they have the most lead time; that is, they occur over such a long time span that they appear to be of little concern.
Source #6: Changes in Perception
Changes in perception include any shift in public opinion. While the facts often do not change, their meaning to the public does. This can lead to innovative opportunity, but Drucker warns that it is a dangerous source because it is hard to distinguish between a genuine change and a short-lived fad. However, done correctly, this can be an excellent source of innovation for entrepreneurs.
Source #7: New Knowledge
New knowledge is perhaps the flashiest of all innovation as it gets the most publicity. While most sources for opportunity have overlapping themes with one or more other sources, new knowledge differs greatly from the rest. First, it has the longest lead time because innovations are essentially started from scratch. Secondly, knowledge-based innovations are almost never based on one factor, but on the convergence of multiple knowledge sources. Not until these sources of knowledge are analyzed and understood will innovations be successful.
Knowledge-based innovations also carry great risks. They must be solid both in product and business structure when they hit the market, otherwise a company will have introduced a new technology which other, more stable businesses will couple with their strengths to render the new business obsolete.