Supply Side Innovation

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William Cohen, Ph.D.
12/02/2011

Peter Drucker wrote that any business organization had just two basic functions: innovation and marketing. Last month we talked about demand side innovation where the innovator has a definite objective or problem he is trying to solve. This month we’ll look at supply side innovation, where he stumbles on something unexpectedly. It’s what he does that makes the difference. If you apply the principles of supply side innovation it can lead to your promotion, an increase in compensation, and be of great benefit to your organization.

During World War II most rubber came from rubber trees grown in the Southwest Pacific and were under Japanese control. In response, the U.S. looked at developing synthetic rubber. A General Electric engineer was attempting to create a synthetic rubber by mixing boric acid and silicone oil and came up with something which had some very unusual properties. When dropped from someone’s hand, the material bounced to a higher height than when it was released. It was impervious to rot. It was also soft and malleable. It could even be stretched many times its length without breaking. Finally, it could copy the image of any printed material with which it came in contact and to which pressure was applied.The only trouble was, with all of these properties, one thing it was not. It was not a good substitute for rubber. General Electric had a product, but without a practical use. Fortunately, no one threw it away it.

A few years later, a man named Peter Hodgson went to a party at which this material was the entertainment of the evening. He witnessed adults playing with and enjoying the product for its properties. Hodgson discovered where the product originated and who owned the rights. General Electric sold Hodgson the rights. Hodgson named it Silly Putty ® and it became world-famous and made Hodgson a fortune.

Supply side innovation is innovation based primarily on your capability and usually unexpected results. It’s what you do with those unexpected results that makes the difference and gets you the promotion, fame and fortune. Because of the focused demands of the war and after the war due to lack of rigorous logical analysis, no successful innovation resulted from this product at GE. I don’t mean the GE should have gone into the toy business. Only that something else in GE’s line could have resulted from it. Peter Hodgson was simply at a party. What Hodgson did was to grasp the potential and create the concept of Silly Putty®. He didn’t go to the party to witness a demonstration of the product’s capabilities, or even knew that the product existed. He did not decide instantly that he would create what would become a profitable and internationally famous toy. But over time he did apply analysis and investigation which resulted in the successful innovation and accomplished exactly that. Some potential innovations are outright rejected by those with the capability of exploiting them.

R. H. Macy’s War on Appliance Sales

After World War II, appliance sales at R.H. Macy’s unexpectedly began to increase. Not only did sales increase. Profit margins were higher with appliances than on fashion goods, and unlike fashion goods there were almost no returns and no pilferage. Customers who came in the store to buy appliances frequently stayed and also bought fashion goods. We might expect Macy’s to celebrate and exploit this unexpected windfall. Yet the biggest department store around not only failed to do this, it did everything possible to make these unexpected results go away.

When fashion goods failed to increase as a percentage of total sales despite considerable effort, Macy’s actually began a campaign to intentionally restrict appliance sales. Bloomingdales noted the same phenomenon. However, it not only built on its appliance sales, it built a whole new market around a new Housewares Department. It didn’t stop there. Next Bloomingdales examined the customer that represented the symptom behind the increasing demand for appliances, and sought other product lines to satisfy this new customer and his demand. Bloomingdales had been a weak number four in the marketplace previously. Its successful innovation based on these unexpected results soon enabled it to become a very strong number two.

Things didn’t improve at Macy’s until new management twenty years later. But what caused Macy’s to reject the clear signals for innovation in the first place? Simple. Everyone in the industry "knew" that in a well-run store, fashion should produce 70% of total sales. But those errant appliance sales were providing three-fifths of total Macy’s revenue. This had to be stopped! The chairman of Macy’s came to the conclusion that if fashion sales couldn’t be increased, appliance sales would have to be limited. And so he set out to do just that. Whether your organization is responsible for sales, human resources, finance, or something else has it made this kind of error? It is far from uncommon.

What to Do about Unexpected Results

Drucker recommended that management look at every unexpected results and ask four questions:

What would it mean to us if we exploited it? That is, what are the short term costs and benefits of developing this unexpected result into an opportunity?
Where could it lead us? Looking ahead to the future, where might this lead us?
What would we have to do to convert it to an opportunity?
How can we do it? What would be the plan for doing this? What resources would be needed? What would it cost? What would the timing look like? What would be the approximate quantified results of the investment?

The Unexpected Outside Event

Drucker also saw that innovations could come from unexpected outside events. Entrepreneur E. Joseph "Joe" Cossman, who built his fortune by innovation. Consider the "Cossman Ant Farm." No one had ever heard of an "Ant Farm" until Cossman came along. However the product had existed since the turn of the century. The manufacturer constructed an ant cage through the use of wood and glass and mostly classroom teachers were provided with instructions as to how to select the soil and ants to build an ant colony which could be observed through the glass. Of course the colony cage, made of glass represented a danger, and adults, again mostly teachers, were advised to supervise children observing the ant colony. It was not considered a toy, but more of an educational tool. A few thousand of these containers for any colonies were sold every year.

Cossman looked at this educational tool and realized that construction materials had changed dramatically since the 1890’s. If the colony’s cage could be constructed of clear plastic, the dangers of unsupervised observation by children would be eliminated. The ant colony would no longer be just an educational tool, but an educational toy which every child could own and enjoy. Substituting the new plastic materials for the old wood and glass structures constituted innovation based on capability and the unexpected results based on this substitution. Cossman innovated and did the following in addition to substituting the materials for the ant colony:

Renamed the product an "Ant Farm"
Lowered the price based on cheaper plastic materials and simpler manufacturing methods
Provided a "stock certificate" with each unit sold which would be sent to Cossman who in return would guarantee the live delivery of 25 ants to start the "farm"
Repositioned the product as a toy and sought new distribution channels.

The results of this innovation were nothing short of spectacular. In short order Cossman sold over 1,000,000 ant farms and it propelled him into national fame. He even sold one Ant Farm to the White House for Caroline Kennedy.

Here’s another example of Cossman’s use of supply innovation. A firm manufacturing diving equipment decided to make a diving toy. A human figure in a diving helmet was connected to a plastic bulb with a hose. The figure was weighted, and it sank when placed in a tub of water. A child would squeeze the plastic bulb which sent air into the diving helmet and helmet and the figure would rise to the surface. The problem was, plastic was the wrong material for the bulb. About 10 squeezes was all it would take before the bulb cracked and ruined the toy. Cossman got the rights and manufacturing machinery for a few hundred dollars. Now many would just replace the bulb with a rubber bulb and that would be it. But Cossman figured that the toy already had a bad name. So he went to a local university and asked a chemistry professor if there was a harmless chemical he could use to make the figure move under water. "Sure,’" was the answer, "baking soda pellets." So Cossman threw away the diving helmet, hose, and bulb, added rubber flippers to the diving figure’s feet and where the hose was attached inserted a baking powder pellet. His new product "swam" under water realistically, and he called it "Flippy the Frogman." He sold several hundred thousand. But then he noted some additional outside unexpected results: the frogman figure moving underwater attracted fish. Presto, he had another product which he sold all over the world, "Fisherman Joe’s Fishing Lure."

Success in Innovation

Drucker defined innovation as "the design and development of something new, as yet unknown and not in existence, which will establish a new economic configuration of the old, know existing elements." He summarized by suggesting that it was the missing link between a number of disconnected elements, each marginally effective, and an integrated system of great power. Thus the innovator had a major characteristic which differentiated himself from a non-innovator: the ability to envisage as a system what to others are unrelated, separate elements.

To develop areas where innovation would create maximum opportunities, he recommended three questions for the would-be innovator to ask: