The Next Big Thing
Posts about next generation technologies and their effect on business.

Innovation Models - part two

This article continues my series of posts on innovation models started in "Innovation Models - part one".

Peter Drucker (1909 - 2005)

In his groundbreaking book, Innovation and Entrepreneurship, Peter Drucker describes the seven sources of innovation. I remember the first time I read it, and thought to myself that there were surely more than seven sources, but then the deep(er)-thinking Drucker made his case, and I was convinced. Drucker presents his list of sources from most likely to succeed to least likely, where success here is the realization of increased economic or social value.

In Drucker's words, "Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service. It is capable of being presented as a discipline, capable of being learned, capable of being practiced." He writes further, "Systematic innovation consists in the purposeful and organized search for changes, and in the systematic analysis of the opportunities such changes might offer for economic or social innovation."

There are many surprising ideas here. First, innovation is a tool. Second, innovation is the means to exploit an opportunity created by change. Third, it is a discipline that can be learned and practiced. Fourth, innovation should be systematic, purposeful, and organized. Fifth, of the seven sources, it is somewhat shocking, at least to me, that "new knowledge" is the least likely to create successful, value-producing innovations.

This last surprise arises at least in part because Drucker was able to identify the first six sources of innovation, sources that might have been overlooked by the rest of us. But I also think it is caused by two inherent obstacles to monetizing "new knowledge": first, the difficulty in getting new knowledge commercialized; and second, the critical importance of adoption in determining the success of an innovation and the challenge of navigating the changing market phases.

As always, Drucker supports his analysis with slews of real examples taken from his decades defining and pioneering the management profession.

In the context of Everett Rogers' innovation models, discussed in "Innovation Models - part one", Drucker's seven sources of innovation fit primarily in the first step, "Recognizing a problem or need", of the innovation-commercialization process.

The Economics of IT Solutions

There can be significant differences in the economics of custom, replicated, shared, and infrastructure solutions. This is summarized in the following table:

Custom solutions are engineered to order, like custom homes; Replicated solutions are engineered to order from templates, like tract homes; a Shared solution on-boards clients into an existing integrated solution, like units in an apartment complex; Infrastructure solutions are fully leveraged, like utility services.

The key factor affecting the economics of a solution is its economic denominator, which acts as a divisor to determine an individual client's share of the total cost of ownership.

  • For one-off, client-specific custom solutions the client must bear the full cost of design and build (denominator = 1) and of run (denominator = 1).

  • For replicated commercial-off-the-shelf (COTS) solutions, like packaged software or hardware components, each client bears its proportional share of the total design and build costs (denominator = NR = Number of copies of the Replicated COTS solution), but must bear the full cost of run (denominator = 1).

  • For shared, multi-tenant solutions, like Software-as-a-Service (SaaS) applications and Business Process Outsourcing (BPO) services, each client bears its proportional share of the design and build costs (denominator = NS = Number of service consumers of the Shared service) and of the run costs (denominator = NS = Number of service consumers of the Shared service).

  • Shared infrastructure and platform utilities, like Infrastructure-as-a-Service (IaaS) and Application Platform-as-a-Service (PaaS), act similar to shared, multi-tenant solutions, but with a potential for significantly more leverage because the infrastructure or platform can be used for multiple solutions, making their economic denominator (NI = Number of service consumers of the Infrastructure solution) much larger than that of individual segment-specific Shared solutions.

As I argued in "Outsourcing and BATOG", company-specific custom applications or dedicated platforms should be reserved for core activities that need to be differentiated to create competitive advantage. To use Peter Drucker's terms from On the Profession of Management, Chapter 2, "these are unique decisions that need to be solved on the merits of the specific case".

In contrast, many activities needed to run a company are context functions and should be outsourced by using either replicated or shared solutions. Shareholder value cannot benefit from executing these functions better than best practice. Industry and Enterprise frameworks (including standard process taxonomies, domain vocabularies, data and message models, integration flows, and service interface contracts) and packaged commercial-off-the-shelf (COTS) applications are examples of replicated solutions. Infrastructure, application platform, software, and business processes, each being delivered as services (i.e., IaaS, PaaS, SaaS, BPO), are examples of shared utility solutions. In Drucker's terms, these are "routine decisions", that "need to be solved by applying the appropriate generic rules".

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About the Author(s)
  • Steve Simske is an HP Fellow and Director in the Printing and Content Delivery Lab in Hewlett-Packard Labs, and is the Director and Chief Technologist for the HP Labs Security Printing and Imaging program.