CHAPTER | THIRTY-ONE
The Mysteries of Supply-Side Innovation
After some very deep thinking, Peter Drucker concluded that any business organization had just two basic functions: innovation and marketing. After a closer examination of innovation, he decided that innovation itself should be further divided into two categories. One category was demand-side innovation, in which the innovator has a definite objective or problem he is trying to solve. That is, the innovation is demanded by the need. The other category was supply-side innovation, in which the innovator stumbles on something unexpectedly.1
”Supply side” is a term of economics. Its origins go back to an eighteenth-century French businessman and economist, Jean-Baptiste Say. But it was best explained by John Maynard Keynes, known for his Keynesian economics, as “supply creates its own demand.”2 In terms of innovation, this means that one becomes aware of the existence, value, and use of something, and that awareness then helps create the innovation.
About ten years ago, I was giving a seminar on marketing in southwest China. I wanted to surprise the attendees with a product that I thought would be unknown and strange in China. I took the product from my briefcase and held it above my head. Before I could utter a word, almost in unison the fifty-plus attendees—none of whom spoke fluent English—shouted out: “Silly Putty!”
The beginnings of this product date back about seventy years, to the early days of World War II. Rubber, which was essential for the war effort, came from rubber trees grown on islands in the Southwest Pacific, which were under Japanese control. In desperation, the United States started a massive program to develop a synthetic rubber. Now, if there had been positive results to this effort, it would have constituted a demand-side innovation. However, this was not the case with Silly Putty.
A General Electric engineer working on the synthetic rubber mixed boric acid and silicone oil, and came up with something that didn't work, but nevertheless had some unusual properties. When he dropped it, the material bounced higher than from where it had been released. It was impervious to rot. It was also soft and malleable. It could even be stretched many times its length without breaking. Finally, it could receive the image of any printed material that was pressed into it. The only trouble was, though it had all of those properties, there was one thing it was not. It was not a suitable substitute for the rubber coming from plants on islands now under enemy control.
A few years later, a man named Peter Hodgson attended a party at which this strange material was the entertainment. He witnessed adults playing with and enjoying the product for its properties. Hodgson looked into where the product had originated and who owned the rights. General Electric sold Hodgson the rights, and Hodgson named it Silly Putty. It became world famous and made Hodgson a fortune.3
Supply-side innovation, then, is based primarily on unexpected results, as it was with Silly Putty. But it's what you do with those unexpected results that makes the difference; it's what gets you the promotion, the fame, and the fortune. Because of the focused demands of the war and the lack of rigorous logical analysis after the war, no successful innovation resulted from this discovery at GE. I don't mean that GE should have gone into the toy business; I only mean that GE could have found a way to use this unexpected innovation. Peter Hodgson was just a guest at a party, but he grasped its potential and created the new product. He didn't go to the party to witness a demonstration of this product's capabilities, or even go knowing that the product existed. He did not decide instantly that he would create a profitable and internationally famous toy. But over time he used analysis and investigation, which ultimately resulted in the successful innovation and accomplished exactly that. Note: Some potential supply-side innovations are rejected outright by those with the capability of exploiting them—something you should be particularly careful not to do.
Whether your organization is responsible for sales, human resources, finance, or another facet of business, has it ever made this kind of error? All sorts of unexpected results crop up in business, and they are commonly ignored or rejected outright, instead of being exploited as supply-side innovations.
Example: The Master of Supply-Side Innovation
Entrepreneur E. Joseph “Joe” Cossman, whom I have mentioned several times elsewhere in this book, built his fortune through innovation, almost entirely through supply-side innovation. Consider the Cossman ant farm. No one had ever heard of an ant farm until Cossman came along, yet the product had existed since the turn of the twentieth century. Essentially an ant cage made of wood and glass, the ant farm came with instructions on how to select the soil and get the ants to build a colony, the activity of which could then be observed through the glass. Of course, because it was made of glass, the cage represented a potential danger to children. Adults, mostly teachers, were advised to supervise children while they observed the ants at work. It was not considered a toy—rather, more of an educational tool. And only a few thousand of these ant cages were sold every year.
Cossman looked at this educational tool and realized that construction materials had changed dramatically since the 1890s. If the colony's cage could be constructed of clear plastic, the dangers of unsupervised observation by children would be eliminated. Then, the ant colony would no longer be just an educational tool but also an educational toy that every child could own and enjoy at home. Substituting new plastic materials for the old wood and glass structures constituted innovation based on capability, and the unexpected results were based on this substitution. Cossman innovated and did the following as well to enhance its appeal:
- Renamed the product an “ant farm”
- Lowered the price based on using cheaper plastic materials and simpler manufacturing methods
- Provided a “stock certificate” with each unit sold, which would be sent to Cossman, who in return would guarantee the live delivery of twenty-five ants to start the farm
- Repositioned the product as a toy and sought new distribution channels
The results of this innovation were nothing short of spectacular. Cossman sold over 1 million ant farms, which propelled him into national fame. He even sold one ant farm to the White House for Caroline Kennedy.
But here's another example of Cossman's use of supply-side innovation. A company that was manufacturing diving equipment decided to make a diving toy. They connected a human figure in a diving helmet to a plastic bulb with a hose. The figure was weighted, and it sank when placed in a tub of water. A child could squeeze the plastic bulb, which would send air into the diving helmet, and the figure would rise to the surface. The problem was that plastic was the wrong material for the bulb. After only about ten squeezes, the bulb would crack and that would ruin the toy. Cossman bought the rights to the toy and its manufacturing machinery for a few hundred dollars.
Many people would simply have replaced the plastic bulb with a rubber bulb, and that would be it. But Cossman figured that the toy already had acquired a bad name. So he asked a chemistry professor at the local university if there was a harmless chemical he could use to make the figure move under water. “Sure,” the professor replied, “baking soda pellets.”
Cossman threw away the diving helmet, hose, and bulb; he added rubber flippers to the diving figure's feet, and where the hose had been attached, he inserted a baking powder pellet. His new product “swam” realistically underwater, and so he called it “Flippy, the Frogman.” Cossman sold several hundred thousand Flippies. But then he noted some unexpected results: The frogman figure moving underwater also attracted fish. Presto, he had another product that he sold all over the world, called “Fisherman Joe's Fishing Lure.”
Innovation Tactics
To develop areas where innovation can create maximum opportunities, Drucker recommended three questions for the would-be innovator to ask:4
- What is lacking to make effective what is already possible?
- What one small step would transform your economic results?
- What small change would alter the capacity of the whole of your resources?
Can you apply supply-side innovation to your marketing or other duties? There's a fortune to be made if you can.