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Innovation is More Than Just New Knowledge

Robert S. Olszewski, CPA, AMSF
Robert S. Olszewski, CPA, AMSF Director, Outsourced Accounting & Finance Services

innovation-is-more-than-new-knowledgeContrary to popular wisdom, most types of innovation are not derived from technical innovation. For example, one could argue that Apple’s success – particularly in the last 12 years – did not result so much from technical innovation as it did from recognizing changes in customer mood and meaning, creating new business models (such as the iTunes licensing model), and developing ecosystems (like the App Store).

Famed management consultant Peter Drucker outlined seven sources of innovation in his bestselling book Innovation and Entrepreneurship. Here’s a brief definition of each.

  1. Unexpected (regarded as unlikely to happen): A great example of unexpected innovation is Viagra. It was originally developed to address a heart problem, but today everyone knows what it is more commonly prescribed for. Viagra became one of the greatest drug success stories of the last 20 years, but that success came from something completely unexpected.
  2. Incongruity (when the reality is different from what everyone acknowledges): Shipping containers seem like a simple thing today, but their invention was actually the key to unlocking lower international trade costs. Historically, transporters assumed the expensive part of shipping came when the boat was in the water. In the 1950s, transport entrepreneur Malcolm McLean spotted an incongruity. He discovered that the highest costs actually resulted from transporting materials on and off the boat. His innovation – the shipping container – made it much easier to mix goods and utilize space efficiently, driving down costs as a result.
  3. Process Need (a series of actions or steps taken in order to achieve a particular end): A company will identify a common problem within a process and design a workaround that becomes a game changer. A great example of this is Dropbox. In recent years, the explosion of electronic devices created a need to save and share photos, music, and documents being gathered across multiple devices like cameras, phones, and computer desktops. Dropbox designed a cloud-based file storage solution that made the process of downloading, storing, and sharing files easier and more intuitive.
  4. Market Structure (multiple companies producing or selling similar products in a territory): Burger King, McDonald’s, and Wendy’s are examples of competition within a market structure. They all sell similar products, so their advertising aims to differentiate themselves from the others. The concept of the value menu was an innovation in this space, as it offered a new way to attract people to the restaurants and increase profits. Another example of a market structure is Coca- Cola and Pepsi. Both are colas, but each has a slightly different flavor and we all have a preference.
  5. Demographics (changes in the size or makeup of a population): In many countries, the proportion of older people in the population is rapidly increasing. This has significant implications for consumer purchasing patterns; e.g. housing, vehicles, and entertainment. Demographics also have a significant impact on governments for expenditures related to health care and retirement plan funding.
  6. Mood or Meaning (changes in perception): When I was a kid, a meal from Kentucky Fried Chicken or McDonald’s was considered a special treat; we thought it was fantastic. Now, most of us have a different view of fast food. Over the last 30 to 40 years, we’ve cycled through several waves of perceptions about food and nutrition. Initially, high fat items were viewed as “bad.” Then the thinking gradually shifted to carbs and sugar becoming the enemies (the era of the Atkins Diet). Now there is a focus on eating “clean.” These perceptions have implications for the types of food people want to eat, where they want to eat, and the types of restaurants they want to go to. As such, the food industry is constantly forced to respond and change.
  7. New Knowledge (facts, information, and skills acquired through experience or education): Most people think new knowledge is the only source of innovation. Ironically, Steve Jobs – who, as I mentioned earlier, is very often associated with technical innovation – didn’t really come up with a lot of new knowledge. Much of Apple’s innovation came from repackaging existing technologies and understanding shifts in customer needs and wants. While technical innovation can lead to significant breakthroughs, the lead time is often very long and that breakthrough can be just as likely to flame out.

Innovation is a critical element of successful businesses. But don’t get trapped by only searching for new knowledge unless you want to be six steps behind everyone else.

Robert S. Olszewski can be reached at Email or 215.441.4600.

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Robert S. Olszewski, CPA, AMSF

Robert S. Olszewski, CPA, AMSF

Director, Outsourced Accounting & Finance Services

Outsourced Accounting & Finance Services Specialist

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