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But not all innovations produce commercial success. A new business idea must offer customers exceptional utility at an attractive price, while delivering a tidy profit.
Most business opportunities emanate from methodical analysis of seven areas of opportunity, according to Peter Drucker (Harvard Business Review, 2002).
1. Unexpected Occurrences and Failures
Unexpected occurrences can be illustrated by what happened in the early years of computer technology. Univac, which had the most sophisticated machine, spurned business applications. IBM quickly realized their potential and redesigned a computer for payroll applications, making them an industry leader within five years.
Unexpected failures may also prompt innovation opportunities. While Ford's Edsel was a colossal flop, company leaders consequently realized the value of segmentation: categorizing consumers by "lifestyles. " This led Ford to create the Mustang, which appealed to consumers' tastes and reestablished the company as an industry leader.
2. Incongruities
Incongruities become apparent during many stages of a product's life cycle. They can then be used to create better services or designs.
3. Process Needs
Many innovations develop from process needs - notably, the invention of Linotype in 1890, which allowed newspapers to substantially boost their press runs.
4. Industry and Market Changes
When an industry grows quickly - the critical figure seems to be about 40 percent growth within 10 years - its structure changes. Established companies, which defend approaches that have consistently worked for them in the past, tend to ignore challenges from newcomers. When market or industry structures change, traditional leaders may shortsightedly neglect faster-growing market segments.
5. Demographic Changes
Demographics are reliable, with predictable lead times. For example, baby boomers will begin to reach retirement age in a few years. Business leaders who pay attention to such population changes can reap great rewards.
6. Changes in Perception
Along with greatly improved health care in the last 20 years, there has been a growing awareness of personal-care needs. Exercise equipment, health clubs and natural foods are industry sectors that have experienced immense growth in the last two decades.
Consumers' perceptions are based on moods that can be studied, analyzed and exploited for innovative opportunities.
7. New Knowledge
When newfound knowledge is used to create sought-after products, leaders generate "buzz, " publicity and funding. These innovations have the longest lead time, with a protracted span between the acquisition of knowledge and its distillation into usable technology. During a long period of incubation, there is much talk and little action. Then, all of a sudden, there is a flurry of activity that produces myriad new products, followed by a shakeout and survival of only the most viable.
Knowledge-based innovation can be difficult, but competently managed. Innovators must go out into the field, observe consumers' behavior and listen to them.
When Innovation Leads to Complexity
The pursuit of innovation, however, can be taken too far. As a company increases the pace of innovation, its profitability often begins to stagnate or even erode. The reason can be summed up in one word: complexity.
The continual launch of new products and line extensions adds complexity throughout a company's operations, and as the costs of managing this complexity multiply, margins shrink.
To meet the complexity challenge, you must begin at the source: the way your company views customers and their needs. In most cases, managers overestimate the value buyers place on having many choices. But some companies have begun to challenge this belief. They have launched efforts to determine how many product or service choices customers really want; then, they gear their operations to efficiently provide that degree of complexity - and no more.
When organizations prune their offerings to better fit customers' needs, they do more than cut costs. They often boost sales, as well.
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