Producing Innovation: A Systems Approach

Editor's Note:

Almost every organization wants to produce meaningful innovation, but it’s only one part of the so-called "Drucker change management process." 

We are always looking for acronyms to jog our memory. The one we coined for this all-powerful Drucker change management process is ACE–I:

1. Abandonment of the unproductive and the obsolete

2. Continuous productivity improvement of people, capital, crucial physical assets, and knowledge

3. Exploitation (and systematic identification) of successes 

4. Innovation—meaning producing the truly new and different as opposed to the typical strategy of the ongoing business which is "better and more."

In this article we discuss just one component of Drucker's ACE–I process: innovation.

In subsequent articles we will discuss the other components of change management and host of other subjects related to making innovation happen.


Of late, the subject of "a systems approach to innovation" has become "in," with dozens of articles, seminars, conferences, podcasts, and webinars devoted to it. 

Peter F. Drucker once defined the systems aspect of innovation as:

The design and development of something new, as yet unknown and not in existence, which will establish a new economic configuration out of the old, known, existing elements…

It will give these elements an entirely new economic dimension. It is the missing link between having a number of disconnected elements, each marginally effective, and an integrated system of great power.

A few examples will show better than any theoretical discussion what Drucker's systems aspect of innovation is, how it works, and what it requires. 

Capitalizing on the Growth of Continuing Professional Education and Training

In the 1970s, the publishers of Industry Week magazine co-founded a company called Penton Learning Systems (PLS is the owner of this website and IQPC).

PLS's mission and purpose was to "supply the missing link between a number of disconnected colleges and universities, each marginally effective in designing and developing short courses for managerial and professional workers, into an integrated system of great power." 

The Concept Was Simple

Let's say Michigan State University (MSU) offered the best short course on Developing the Annual Marketing Plan and California Institute of Technology (CIT) offered the best short course on Conserving Energy in Buildings and Plants.

MSU could "import" CIT's energy management course and "export" its marketing planning seminar to CIT. 

If 100 schools entered the consortium, and each provided just one outstanding two- or three-day seminar and faculty member, then every institution would have access to 100 outstanding seminars and faculty members.

The concept proved valid: 105 colleges and universities joined the consortium.

Schools, such as Southern Methodist University, University of California—Berkeley, University of Cincinnati, California Institute of Technology, Northwestern University, Michigan State University, and the University of Minnesota became active importers and exporters of timely/timeless seminars that could be offered to their local markets.

For 15 years, Penton Learning Systems managed this consortium with great success.

It assisted in the design and development of over 30,000 short courses/seminars in the fields of quality management, project management, finance and accounting, marketing management, strategic planning, EEOC compliance and the like.

The Point?

Schools could not by themselves continuously define and staff short courses that met a wide variety of training needs of the institutions in their market area.

In reality, universities and colleges know how to produce degree-granting programs.

But most know very little—or have the appropriate market intimacy knowledge or diversity of faculty skills—to design and develop a continuing series of timely/timeless short courses that solve very specific problems faced by target audiences in their local markets.

What Was PLS's Innovation?

PLS's innovation was to supply the missing link between a vast number of disconnected colleges and universities and combine them into an integrated system capable servicing the training needs of the markets they served. 

All the elements were there. What was lacking was the simple element of a dedicated entity designed to organize a disorganized industry. 

Other value-added services were required: the disciplined selection of a faculty that could face an adult audience; the design of the right programs; direct marketing expertise; negotiation with faculty to keep their fees realistic and sensible; and a logistical support system to facilitate the exporting/importing of quality faculty.

These were the essential "knowledges" required to realize this economic opportunity. As this example illustrates, innovation does not necessarily require new knowledge(s) or new technology.

In other words, innovation is not a technical but rather an economic term. Innovation, said Drucker, "can be defined in terms of its impact on economic capacity, the capacity to produce and utilize resources with which 'innovation' is concerned."

Bottom line: Tremendous economies of scale were achieved. New economic capacity was created for each and every school in the network.

Universities and colleges now had the wherewithal to offer a wide variety of extremely well-taught short courses that professional, managerial, and technical workers in their local markets wanted, needed, valued, and were willing to pay for.

PLS's systems approach enabled schools, really for the first time ever, to tap into the rapidly growing continuing professional education/training short-course market.

Invention Versus Innovation 

Drucker clearly distinguished between "invention" and "innovation."

Innovation is not technical, that is, it does not necessarily result from spinoffs from science and engineering.

Of course, "innovation" often follows "invention." The invention of the movie projector/film provides a great example.

Creating studios to make the then novel concept of motion pictures coupled with distributive channels (i.e., movie theaters) was the true innovation.

According to Drucker, the defining success characteristic of the innovator is the ability to "envisage as a system what to others are unrelated, separate elements."

Successful innovation results from finding and providing the smallest number of missing parts that will convert already existing elements—knowledge, products, customer demand, distributive channels, markets—into a new and much more productive whole. 

Of course, in certain instances, new technology and new knowledges are required. But in the majority of cases, they already exist.

Drucker once defined "entrepreneur" to be "somebody who endows existing resources with new wealth-producing capacity."

In the PLS example, no new inventions or spinoffs from science or technology were required. All the existing knowledges existed.

However, making the consortium work required assembling all the essential knowledges and competently directing them toward specific performance and results.

Thinking through the design of the ideal business, is perhaps another way of viewing this. This determines the direction a company should take to attain effectiveness.

It also determines what skill sets are missing and forces discussion on how they are best acquired/supplied. 

Thomas Edison's Systems Approach to Creating a New Industry 

What did Thomas Edison invent? One could answer: “the electric lightbulb.” 

But one could also answer: “the electric power and light industry.”

It is this "systems" aspect of innovation that is invoked when we say Edison created a new industry.

Drucker, in many essays, discussed the new vistas opened up by the scientific developments in electricity, especially by the work of the great Michael Faraday. 

Again and again, Drucker stressed the importance of Edison asking the questions: What are the major economic opportunities which Faraday's new knowledge opens up? What is needed to realize this economic opportunity?" 

Edison did not design the first light and power plant, complete with generating stations, transformers, and distribution system, because he had invented a practical lightbulb.

He went to work on the lightbulb because it was the one thing missing in his design of an integrated citywide power and light industry.

Simply put, Edison systematically defined the opportunity for new knowledge and new capacity to achieve it—that is, the opportunity for innovation.

Said Drucker: "Thinking through the design of the ideal business determines the direction a company should take to attain effectiveness."

This, in essence, is what Apple did when Steve Jobs detected a change in behavior with respect to music consumption: People were already downloading music from Napster onto MP3 players.

Steve Jobs recognized this change and responded with the iPod and iTunes. Both changed Apple and facilitated a dramatic change to the way we consume music.

Just like Edison, Jobs created a new industry by using a systems approach to innovation.

More About Edison's Systems Approach to Producing Innovation

In an excellent Harvard Business Review article titled, "How to Jump-Start the Clean-Tech Economy," Mark W. Johnson and Josh Suskewicz wrote:

Thomas Edison grasped the systemic nature of technological transformation a century ago when he introduced the electric light bulb...

He realized that the technology he envisioned—no matter how innovative—couldn’t by itself sweep aside the kerosene-based lighting industry…

Instead of asking how he could solve the technical problem of inventing a light bulb, Edison asked how he could get consumers to switch from kerosene to electricity…

He understood that despite the many advantages of electric light, it would replace kerosene only if it had its own, economically competitive network…

So, while scores of people worldwide worked on inventing a light bulb, Edison conceived a fully operational system…

His technical platform included generators, meters, transmission lines, and substations, and he mapped out both how they would interact technically and how they would combine in a profitable business…

Edison tested his concept in a pilot project...on a small scale in Lower Manhattan, a favorable foothold market because the buildings were close together and filled with potentially enthusiastic customers: Wall Street firms that were eager to be on the technological cutting edge and that had employees who worked long into the night…

It was not coincidental that he was demonstrating his system to the very people who could fund its expansion…

He also used his public standing to acquire regulatory support—for example, to get the needed permits despite opposition from the lamplighters’ union. 

To Reiterate

All the ingredients of creating a successful electricity business existed, except one. Adding the electric light bulb created an entirely new economic capacity.

Said Drucker: "Innovation is not invention or discovery. It may require either—and often does. But its focus is not knowledge but performance—and in a business, this means economic performance."

Edison, in essence, asked: What is lacking to make effective what is already possible?

To describe the need is not to satisfy it. But, according to Johnson and Suskewicz, describing the need gives a specification for the desirable results. Whether they are likely to be obtained can then be decided.

Summary and Conclusions

Maximizing opportunities looks for the best way toward realizing the ideal business. Thinking through the ideal business design—that is, focusing on the whole rather than parts—increases the probability of success.

Johnson and Suskewicz summed it up best when they said:

"The framework for thinking about new systems consists of four interdependent and mutually reinforcing components: (1) an enabling technology; (2) an innovative business model; (3) a careful market-adoption strategy and; (4) a favorable government policy."

Just to be clear: Technology does not necessarily mean a collection of inventions spun-off from science and engineering. Some technology—the glamorous part—does come that way.

The Definitive History of Technology (5 vol. Oxford) produced in the U.K. under the editorship of Charles Singer, chronicles what technologies really are: bodies of skills, knowledge, and procedures for making, using, and doing useful things (e.g., the PLS example). 

The systems approach is now a requirement for many institutions in society—businesses, government, colleges and universities, and the like—that want to produce and manage meaningful innovation.

We are living in an age where there is a profound sense of unreality about what's really happeningand what's apt to happen in today's New World. 

Our most cherished institutions now need new and successful systems-type innovations to thrive and survive in the years just ahead. 

The assumptions upon which many business and nonbusiness organizations have been built and are being run no longer fit reality.

A good many institutions and their managements have managed to survive because they've been able to coast a long time on the courage, work, and vision of earlier executives.

But tomorrow it is quickly arriving. There is a need for new thinking and radical new systems innovations(e.g., learning/delivery systems for colleges and universities, reigniting economic growth while simultaneously creating competencies to narrow income inequality). 

A piecemeal/vacuum thinking approach to innovation won't suffice. To produce real innovation, executives must be able to see resources and efforts as a whole.

This requires, above all, a high level of management competence—people who can think through what needs to be done and convert selected strategies into operational reality.