I‘m a big fan of Peter Drucker, and his book Innovation & Entrepreneurship remains in my opinion the definitive work on business innovation. Following is my synopsis of the innovation process he espouses.
drucker chart 1
Let’s look at an example. The banks are trying to figure out how to get more revenue from services that aren’t connected to the tight ‘spread’ between the rate they charge on loans and mortgages and the rate they pay account-holders and investors. Drucker would say they should (step A) consciously decide to get out of some of the lines of business that have tight spreads and hence lousy profit margins. They then calculate how much revenue needs to be made up with new, innovative and more profitable services.

A separate Innovation Team is charged with finding these new services. They look at seven sources of innovation opportunities (step B, elaborated in Fig.2 below).
Source 1:
What surprises have occurred in the banking industry? Well, the success of ‘virtual’ banks like ING, which have no self-standing branches and hence low premises costs. The disappointing take-up of Internet banking. Scandals that have hit investment banks for hawking over-priced investments and exploiting insider information, hurting the reputation of that whole segment of the industry.
Source 2:
What gaps have occurred between the perception of banks and the reality? They are perceived to focus exclusively on big corporate customers and not care about ‘retail’ customers, when in reality most banks get the large majority of their revenues from small business and retail customers. Customers expect banks to be willing to take a chance on them, in return for higher interest rates, when banks are very risk-averse, and prefer to leave the high-risk, high-margin accounts to secondary lenders.
Source 3: What are the weak links in the banks’ processes? Customers complain that they don’t have a real, human, single-point-of-contact, a Customer Relationship Manager, and when they do find a CRM they like, he or she gets transferred. Meanwhile the CRMs feel they don’t get the information they need from the big ‘head office’ bureaucracy, to provide effective personal service.
Source 4: What’s happening in the banking industry? Some banks are looking at customers holistically, instead of having different departments deal with each of the customer’s financial needs.
Source 5: What’s happening to customer demographics? The middle class is disappearing, the population is aging, and family sizes are shrinking, with unattached singles and single-parent families the fastest growing customer segments.
Source 6: How are customer attitudes changing? Customers feel ‘nickel-and-dimed’ to death by bank service charges and are angry at usurous rates charged on unpaid balances and loans with a single missed or late payment.
Source 7: What new knowledge and technologies are available? New organizations like Capital One are crowding the banks in many areas of operations using huge, sophisticated customer databases that let them market to very specific customer niches.

The Innovation Group must rigorously assemble and draw together all of the trends, findings and intelligence from these seven Innovation Sources. It’s a continuous process that requires a continuous environmental scan to stay on top of.
drucker chart 26

The next step (step C, elaborated in Fig.3 above), entails two types of analysis of all the data compiled in step B:

  • Conceptual analysis: Studying what each of the data from step B could mean to the company — how does it tie into the company’s strengths, surfacing opportunities, how does it reveal the company’s weaknesses, and expose the company to threats, and what creative solutions can be found to exploit the opportunities and counter or minimize or even capitalize on the risks. In short, does each new idea meet the nine criteria in Fig.3? Drucker talks about how to do this analysis, and other creativity experts like De Bono and Minto have produced a host of tools to help the Innovation Group with the analysis.
  • Perceptual analysis: This entails having the Innovation Group talking, listening, observing people in the field, on the front lines and in discussions with customers, to qualify the conceptual analysis. These are the people, mostly skeptics to be sure, who can provide the acid test of each of the ideas stemming from the conceptual analysis. And even when they’ve passed this acid test, the prototypes of the new ideas then need to be exposed to ‘focus groups’, representative cross-sections of the front-line of the organization and its customers, to be refined and perfected before the marketing people take over.

Only at the end of this rigorous process are the innovations actually implemented (step D). And even then small-scale pilots are used to ensure the market is ready, and the new product or service is ready for that market. Many innovations fail even at this late stage, and the secret is to fail early and to constantly improve the offering before a major investment is made in it.

This is of course an enormous oversimplification of Drucker’s remarkable book. In the last three years business innovation has gone from business’ Job One to an insignificant part of corporate strategies, as executives have become obsessed instead with slashing costs and heads in an insane race to the bottom, quality and customer be damned. Such an approach is, like seemingly everything else in vogue in the Bush era, short-sighted and unsustainable. You cannot cut yourself to greatness. It’s time to start a new bandwagon for business innovation.

My comprehensive Prescription for Business Innovation and my table of contents of Business Papers provide some further food for thought and practical advice on this subject.

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  1. Rob Paterson says:

    vry nice bit of work Dave

  2. Avi Solomon says:

    You might also want to follow up Andrew Hargadon’s research on the innovation process:http://faculty.gsm.ucdavis.edu/~hargadon/http://www.si.umich.edu/ICOS/Presentations/20030131/

  3. You’re really on a roll lately Dave. Must be all that time on airplanes. ;-) It’s been a while since I went through this Drucker book and I see I need to pull it off the shelf and refresh. I also really liked the earlier piece on DeBono’s creativity book.I like to think the race to the bottom is nearing its end, but since actual innovation (as opposed to simply spending money on innovative technologies) was always in pretty short supply at big companies I’m not sure we’ll see a return to it any time soon.– twf

  4. Mike Warren says:

    Nice to see someone else who appreciates Drucker’s work – I must visit your website again sometime.RegardsMike WarrenPropeller-Management.com

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