CHAPTER | TWENTY-NINE
Where the Best Innovations Come From
Wouldn't it be nice if a genie arose from a magic lamp and revealed the richest source of innovation for profitability in your business? With just one such innovation you could make a fortune for yourself or your employer. Peter F. Drucker was not a genie, but he was a genius. So respected was Drucker that even today, almost ten years after his death, there are Drucker Societies all over the world that meet once a year at his old school in Claremont, California. They are still teaching and applying his business principles.
I had the good fortune to be the first graduate of Drucker's Ph.D. program, and perhaps even more fortunate today in being president of a graduate school that teaches his principles as part of every MBA course. So I can pass on to you what Drucker said was the richest source of innovation, just as if he were a genie and you had a magic lamp calling him forth.
The Richest Source of Innovation
Drucker wrote that the “unexpected” was the richest source of opportunity for successful innovation. Unfortunately, unexpected occurrences are not only many times neglected but also are frequently actively rejected. As a result, they are never exploited as innovations. As noted earlier, German chemist Alfred Einhorn became distressed when dentists began using his anesthetic drug Novocain, which he intended to be used only by medical doctors. He was so upset that he refused to sell it to dentists, and he traveled up and down Germany spending a lot of money to discourage this “incorrect” use until a smarter entrepreneur took over and made millions by selling Novocain to dentists, its most common use today.
Example: When R.H. Macy's Tried to Dump Their Appliance Business
After World War II, appliance sales at R.H. Macy & Co. suddenly and mysteriously began to increase dramatically. Not only did sales increase but profit margins also were significantly higher on appliances than on fashion goods, Macy's flagship product line. Plus, unlike fashion goods, for appliances there were almost no returns and no pilferage. If that weren't enough, customers who came in the store to buy appliances frequently stayed to buy products in other Macy departments, so sales of fashion goods and other classes of Macy's product line all increased.
You would expect Macy's to celebrate and exploit this unexpected occurrence as an immediate and profitable innovation and to put additional resources into its appliance business. Yet this experienced retailer, the biggest department store around, not only failed to take advantage of this potential innovation but it also did everything possible to make these unexpected, profitable results go away.
When its fashion goods failed to increase as a percentage of total sales even after Macy's tried everything to make this happen, the department store actually began a campaign to restrict appliance sales. “We'll teach those stubborn appliance people how to lose money” almost seemed to be its mantra. Competitor Bloomingdale's saw the same thing happen in its store. However, Bloomingdale's not only built on its appliance sales but it also built a whole new market around a new housewares department. Previously, Bloomingdale's had been a weak number four in the marketplace. Its successful innovation based on these unexpected results, however, soon catapulted it into a very strong number two position.
What caused Macy's strange behavior? Everyone in the industry “knew” that in a well-run department store, fashion should produce 70 percent of total sales. But those errant appliance sales were providing three-fifths of total Macy's revenue! This had to be stopped! Obviously, nobody at Macy's had considered Drucker's principle that “what everybody knows is usually wrong.”
The chairman of Macy's came to the conclusion that if fashion sales couldn't be increased, appliance sales would have to be reduced. And so he set out to do just that. Not such good thinking, Mr. Chairman!
Is the Classical Glass of Water Half Empty?
You know the classic question about optimism: Is the glass of water half full or half empty? That all depends on how you look at things, of course. Moreover, a person's mood, values, beliefs, or what has been seen or known previously all affect one's perception of possibility.
How can you take advantage of perception as a source of innovation? At one time, a rip in clothing was cause for the quality inspector to reject the product and throw it out, or if the tear was minor, it might be sold at a significant discount. However, the late 1960s saw the onset of the Hippie Generation, with young people wearing clothing that was often intentionally ripped. Almost overnight, worn-out, faded, frayed, and, yes, even ripped jeans became status symbols preferred by many younger prospective buyers.
In response to what was perceived as desirable, jean manufacturers began to make clothing that intentionally resembled clothing once considered damaged, suitable only to be thrown away or donated to worthy organizations for recycling. This is an example of exactly what Peter Drucker meant by an unexpected occurrence.
There undoubtedly was risk involved in producing large quantities of ripped, frayed, and faded jeans and then to market them to an unsuspecting public. But once a market arose for clothes that had been discarded in the past, jean manufacturers would have been foolish to ignore it.
Sometimes the Market Talks to You
Drucker's advice was that when something unexpected happened, the entrepreneur should immediately examine that closely. Indeed, the market may be giving you the richest of all sources of innovation. I've mentioned earlier in the book about my friend Joe Cossman, the well-known entrepreneur. Cossman had created a sprinkler system based on simply making holes in a plastic hose. He saw an unexpected increase in orders from poultry farms rather than from the households or gardeners that he had anticipated. He looked into this unexpected development and found that the poultry farms were using these hose sprinklers as inexpensive air conditioners for their chicken pens. Cossman did not refuse to sell to them; instead, this opened up a new market for his product, which he quickly exploited.
The modern bikini was another unexpected innovation. It was introduced in 1946 by Louis Réard, an automotive engineer who was managing his mother's lingerie boutique near Paris, and his partner in the venture, the fashion designer Jacques Heim. Heim noticed the increasingly revealing two-piece bathing suits that women were wearing and the more liberal laws and attitudes toward skimpy clothing in France. The partners named their new swimsuit after Bikini Atoll, where the United States had tested the atomic bomb. They chose the name because they believed that the revealing swimwear would cause as much of a stir worldwide as had the atomic bomb, which had been dropped on Japan the year before.
They advertised their bikini as “smaller than the smallest swimsuit.” At first, they were unable to find a model willing to be photographed wearing it (and this was France, known to have the most liberal dress codes for women!). They ended up hiring a nude dancer from a Paris casino, who was not afraid to wear it. Today, we all know that their innovation paid off. The bikini in its many varied forms is a billion-dollar business—and not just in France, either.
What You Should Do When Strange Things Happen
As mentioned above, managers looking for new innovations should study every unexpected outcome or occurrence. In doing so, they need to ask four basic questions:
- What would it mean if we exploited this development? That is, what are the short-term costs and benefits of developing this unexpected result into an opportunity?
- Where could it lead us?
- What would we have to do to convert it into an opportunity? In other words, how would we convert the unexpected result into a profitable product or system for the company?
- What would be the plan for doing this? What resources would be needed? What would it cost? What would the timing look like? What would be the approximate quantified results of the investment?
Peter Drucker not only told us that the unexpected was the richest source of innovation, but instructed exactly what to do to take advantage of this innovation—follow Bloomingdale's actions: When sales are surprisingly blooming, embrace the unexpected success.
Have you thrown away any potential billion-dollar innovations by ignoring the unexpected results?