Of Innovation and Change

Avoid innovation traps.
Change leaders will be tempted by three innovation traps. They're so attractive that leaders can expect to fall into one of them--or into all three--again and again.

1. When looking for ways to innovate, the first trap to avoid is an opportunity that is not in tune with the five strategic realities: the collapsing birthrate; shifts in how disposable income is spent; new definitions of performance; global competitiveness; and the growing incongruence between economic globalization and political splintering. The misfit opportunity often looks very tempting--precisely because it looks truly innovative. But even if the innovation does not result in failure--as it usually does--it always requires extraordinarily wasteful amounts of effort, money, and time.

2. A second trap is confusing novelty with innovation. The test of an innovation is that it creates value. A novelty creates amusement only. Yet again and again, management decides to innovate for no other reason than that it is bored doing the same thing or making the same product day in and day out. The test of an innovation--as is also the test of quality--is not "Do we like it?" It is "Do customers want it and will they pay for it?"

3. The third trap is confusing motion with action. Typically, when a product, service, or process no longer produces results and should be abandoned or changed radically, management reorganizes. To be sure, reorganization is often needed. But it should come after the action--that is, after what must be abandoned has been faced up to. By itself reorganization is just motion and no substitute for action.

There is only one way to avoid those traps or to extricate oneself if one has stumbled into them: organize the introduction of change.

Introduce change on a small scale.
One cannot do market research on the truly new. Also, no innovation is right the first time. Invariably, problems crop up that nobody thought of. Invariably, problems that loomed very large to the innovator turn out to be trivial or nonexistent. It is almost a law of nature that anything that is truly new, whether it is a product or a service or a technology, finds its major market and its major application not where the innovator and entrepreneur expected.

The best example is an early one.

The improvement of the steam engine that James Watt designed and patented in 1769 is the event that, for most people, signifies the advent of the Industrial Revolution. Actually, throughout his life Watt saw only one use for the steam engine: to pump water out of coal mines. That was the use for which he had designed it. And he sold it only to coal mines. It was his partner, Matthew Boulton, who was the real father of the Industrial Revolution. Within 10 or 15 years after Boulton had first sold a steam engine to a cotton mill, the price of textiles had fallen by 70%. And that created both the first mass market and the first factory.

Studies, market research, and computer modeling are not a substitute for the test of reality. Everything improved or new needs first to be tested on a small scale--that is, it needs a pilot test.

And since everything new gets into trouble at some point, it needs a champion. And that person needs to be somebody the organization respects. It need not be somebody within the organization. A good way to test a new product or new service is often to find a customer who really wants the innovation and who is willing to work with the producer on making it truly successful.

If the pilot test is successful--if it finds the problems nobody anticipated but also finds the opportunities nobody anticipated--the risk of change is usually quite small. And it is usually also quite clear where to introduce the change and how to introduce it.

Budget for change.
In most enterprises there is only one budget. In good times expenditures are increased across the board. In bad times expenditures are cut across the board. That practically guarantees missing out on the future.

The change leader requires two separate budgets. Its first budget should be an operating budget that shows the expenditures needed to maintain the present business. That is normally 80% to 90% or so of all expenditures.

That budget should always be approached with the question "What is the minimum we need to spend to keep operations going?" And in bad times it should, indeed, be adjusted downward.

And then the change leader should have a separate budget for the future. That budget should remain stable throughout good times and bad times. It should rarely amount to more than 10% to 20% of total expenditures.

Very few of the expenditures for the future will produce results unless the budget is maintained at a stable level over a substantial time period. (It is important to note, however, that there may be times that are so catastrophic that maintaining those expenditures could threaten the very survival of the enterprise.) That goes for work on new products, new services, and new technologies; for the development of markets, customers, and distribution channels; and, above all, for the development of people. The future budget should be approached with the question "What is the maximum this activity can absorb to produce optimal results?"

The most common, but also the most damaging, practice is to cut back on expenditures for success, especially in bad times. The argument is always "This product, service, or technology is a success anyhow; it doesn't need to have more money put into it." But the right argument is "This is a success and therefore should be supported to the maximum possible." And it should be supported especially in bad times, when the competition is likely to cut spending and therefore is likely to create an opening.

Balance, change, and continuity.
Organizations that are change leaders are designed for change. But people need continuity. They need to know where they stand. They need to know the people they work with. They need to know the values and the rules of the organization. They do not function well if the environment is not predictable, not understandable, not known. Continuity is equally needed outside the enterprise. To be able to change rapidly, one needs close, long-standing relationships with suppliers and distributors.

Balancing change and continuity requires continual work on information flow. Nothing disrupts continuity and corrupts relationships more than poor or unreliable information (except, perhaps, deliberate misinformation). It has to become routine for any enterprise to ask at any change, even the most minor one, "Who needs to be informed of this?"

Information is particularly important when a change is not a mere improvement but is something totally new. Any enterprise that wants to be successful as a change leader has to have a firm rule that there are no surprises. Above all, there needs to be consistency in the fundamentals of the enterprise: its mission, its values, its definition of performance and results. Precisely because change is a constant in the change-leader enterprises, their foundations have to be extra strong.

Finally, the balance between change and continuity has to be built into compensation, recognition, and rewards. We learned long ago that an organization will not innovate unless innovators are properly rewarded; that a business in which successful innovators do not make it into senior management, let alone into top management, will not innovate. We will have to learn, similarly, that an organization will have to reward continuity by considering, for instance, people who deliver continuing improvement to be as valuable to the organization and as deserving of recognition and rewards as the genuine innovator.

The more an institution is organized to be a change leader, the more it will need to balance rapid change and continuity. That balance will be one of the major concerns of tomorrow's management.

One thing is certain: we face years of profound changes. It is futile to try to ignore the changes and to pretend that tomorrow will be like yesterday, only more so. But to try to anticipate the changes is equally unlikely to be successful. The changes are not predictable. The only policy likely to succeed--although it, too, is highly risky--is to try to make the future.

By Peter Drucker

Sponsored By: Harvard Business School Press

Comments

[Derrick Daye]

Via email, Peter Drucker's Grandson, Nova Spivack was kind enough to share this glimpse of his grandfather...

"My grandfather was the central pillar of my family and was a huge personal and professional inspiration to me, and to countless others around the world who studied with him, read his books, and worked with him over the years. He lived a legendary life, founded the field of management science, helped define modern corporations, originated the concept of the "knowledge worker," and wrote more than 30 books. He was also a professor, historian, economist and social theorist. In his spare time (for fun), as well as reading encyclopedias, biographies, histories and the entire literary corpus of western civilization (several times over), he collected and studied classical Japanese and Chinese paintings, eventually becoming a professor of Japanese art. And in addition to this, he also devoted tremendous time and energy to working with nonprofits, governments, non-governmental organizations and religious organizations.

My memories of him are of long walks as a child in the mountains, discussing history, philosophy, business, and the future of civilization. He was the person who taught me how to divine the future from the past, and to analyze the nature of systems of all kinds. Although I was no match for his photographic memory and vast knowledge, I was able to learn patterns and approaches from him that have served me in everything I have done. I'll also remember the feeling of his home where, amongst the minimalist imagery of the Japanese and Chinese ink paintings he collected, and walls upon walls of books, there was always a tangible sense of being in the presence of a sage. As I grew up and he grew more famous, I remember that whenever I visited him there was a constant flow of leaders coming to meet with him, interview him, or simply to ask for his insight and advice. He truly was a guru.

He was a great man, a Renaissance Man -- the kind that comes along only once in a century. He is missed."

Thanks Nova. We owe a great deal to your grandfather.

Derrick