How to innovate: A step-by-step guide

(Fortune Small Business) -- The funeral business might not be the first place you'd look for inspiring new products or services. But in recessionary times, necessity drives invention all across the economy. So when Louis Salazar quit the undertaking company his great-grandfather had founded and launched one of his own, he had to think outside the casket.

Salazar had seen the warning signs back in 2004, when his customers started choosing $1,000 cremations over full-service burials costing $3,000 to $7,000. So he and his wife, Gloria, decided to get personal. Death wasn't just an opportunity for grim commiseration, after all. What about celebrating unique individuals and the lives they lived?

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Innovation Nation

Call it the Eureka Moment: The sudden, blinding flash of inspiration that leads to a new product or company. We asked four inventors to share the story of theirs.

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63% In a July poll of small business owners conducted by Zogby International for FSB, six in 10 respondents said they have had a "eureka moment" - a sudden, blinding flash of inspiration that led them to offer a new product or start a new company. More than a third - 35% - have not had such a moment.

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Six steps to creative breakthroughs

Innovation is a process. Follow our road map to generate game-changing ideas for your business.

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With the exquisite delicacy of undertakers, they started interviewing customers about the dearly departed in order to brainstorm how best to honor them.

It worked. In the past five years the Salazars have hauled furniture, fishing poles and a Harley-Davidson into their funeral home for services. They have held fully catered memorials on golf courses. They've hosted games of bingo in which the deceased's name was spelled out on the cards, and sold jewelry etched with the departed's thumbprints.

As the recession continues to bite, the other 13 funeral homes in town have laid off workers, sold out to conglomerates or shut down. Salazar's business, Reflections Funerals and Life Celebrations, grew sales by 19% between 2007 and 2008. Business is growing this year too.

"You have to change with the times," says Salazar, 48. "You have to give people new options. If you're not willing to learn, it's time to get out."

It has never been easier or cheaper to alter the direction of a business, and companies that don't evolve in response to changing market conditions may not survive at all.

"In an economic downturn, innovation isn't your best friend," says Jeff DeGraff, director of the Innovatrium Institute for Innovation at the University of Michigan. "It's your only friend."

You don't need to be Steve Jobs to come up with a novel business idea. Nor is innovation all about high-tech inventions or new products. As many successful entrepreneurs will tell you, incremental ideas can be just as important as breakthroughs. The Eureka Moments we've profiled may have happened by accident, but in all cases the business owners were paying attention and followed through on their initial flash of inspiration.

But how do you find that clear, purposeful frame of mind amid the pressures of modern business life? What makes for an innovative company? How much should owners listen to their employees? Is there an ideal company size for generating good ideas? Does time off get the juices flowing?

Here are some tips from the trenches of modern American entrepreneurship.