The business enterprise has two, and only two, basic
functions: marketing and innovation. It is not necessary for
a business to grow bigger; but it is necessary that it
constantly grow better.
- Peter F. Drucker

The organization that fails to continually innovate new
products and services will not survive long.

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.

Patsi Krakoff, Psy. D. writes articles for business and
executive coaches and consultants. She provides articles on
leadership and executive development for sale, and formatted
into customized newsletters. Get Patsi's Secrets of
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