Innovation and Entrepreneurship
Unlike many popular books on entrepreneurship, Drucker avoids talking about the characteristic traits of entrepreneurs. In fact, he actually challenges they exist, but more on that later... Instead, his book aims to represent innovation and entrepreneurship as part of systematic work within the organisation that needs to be organised by an executive.
In Part 1, Drucker challenges the misconceptions surrounding innovation and entrepreneurship. He propagates the notion of change as normal (and necessary) and it is entrepreneurs who drive that innovation. Moreover, he continues, to discuss the dos and don'ts of developing a viable innovation.
In Part 2, Drucker focuses on the institution that is the vehicle of innovation. This section focuses on entrepreneurial management in existing businesses, public-service institutions and startups.
In Part 3, Drucker discusses how to bring innovations to market successfully: "The test of innovation, after all, lies not in its novelty, its scientific content, or its cleverness. it lies in its success in the marketplace."
These three sections are flanked by an introduction and conclusion relating innovation and entrepreneurship to the economy and society as a whole.
Please note that Part 3 was excluded from the summary due to its size.
Part I: The Practice of Innovation
1. Systematic Entrepreneurship
The standard definition of an entrepreneur is frequently drawn from economics. French economist J.B. Say claimed, "The entrepreneur... shifts economic resources out of an area of lower and into an area of higher productivity and yield." Drucker challenges this textbook definition of the entrepreneur. Specifically, he differentiates between the 'businessman' and the entrepreneur.
All new small businesses share many factors in common. "But to be entrepreneurial, an enterprise has to have special characteristics over and above being new and small," Drucker argues, "they create something new, something different; they change or transmute values."
Entrepreneurship should be thought of as a behaviour rather than a personality trait. Drucker's definition of an entrepreneur is not specified by character traits. He claims, "he has seen diverse temperaments act as entrepreneurs..." Since anyone capable of decision-making can learn "to be an entrepreneur and behave entrepreneurially."
The entrepreneur according to mainstream economic theory optimises what already exists. However, "the entrepreneur" argues Drucker "always search for change, responds to it, and exploits it as an opportunity."
2. Purposeful Innovation and the Seven Sources for Innovative Opportunity
What makes a "resource" a resource is that it has some pragmatic purpose - thus endowing it with economic value. Innovation increases the utility of a resource. "Equally, whatever changes the wealth-producing potential of already existing resources constitutes innovation."
"Innovation then... can be defined the way economist J.B. Say defined entrepreneurship, as changing the yield of resources. Or, as a modern economist would tend to do, it can be defined in demand terms rather than in supply terms, that is, as changing the value and satisfaction obtained from resources by the consumer."
The type of innovation Drucker promotes is called "Systematic Innovation." Where - innovation is a distinct activity within an organisation - and innovation is a purposeful and organised search for changes and analysis of opportunities these changes might offer.
There are seven main sources of innovative opportunity. The first four sources are found within the enterprise or industry. The other three sources involve changes outside of the enterprise or industry.
The four internal sources of innovation are:
- "The unexpected" - This source can be thought of as a 'black swan,' an unforeseen event. For example, the New Coke blunder of 1985. Now a cautionary tale of altering established brands.
- "The incongruity" - This occurs when companies over-develop their products without their end-user in mind. The difference between what consumers want and what the company delivers represent "the incongruity."
- "Process needs" - As can be inferred from its name, innovation based on process needs involves investigating flaws within internal enterprise functions.
- "Unforeseen trends" - Markets and industries can be disrupted overnight from technological developments. Organisation leaders need to treat these trends as opportunities to profit from, rather than as threats.
The three external sources of innovation are:
- "Demographics" - Constantly forming demographics will affect the demand for companies' products and ultimately what products they should be offering. Once again, these changes should be viewed as an opportunity rather than a threat.
- "Dynamic perceptions" - With the aid of social media networks, trends develop faster than ever. Changed perceptions of certain products or industries become apparent very quickly. As customary with the change, changed perceptions can also be acted on from an innovative standpoint, such as developing specialised products that align with new perceptions.
- "New knowledge" - "Knowledge-based innovation" is the stereotypical understanding of what innovation is. Technological and scientific breakthroughs typically get lots of publicity. This source of innovation is likely to be considered the riskiest.
3. The Bright Idea
A 'bright idea' is an idea that has been thought up at random. "Attempts to improve the predictability of innovations based on bright ideas have not been particularly successful."
The old adage of inventing until you succeed is an inferior way of innovation. Thomas Edison's quote on the lightbulb: "I have not failed. I've just found 10,000 ways that won't work." represents an ineffective method of innovating successful products. "This belief that you'll win only if you keep on trying out bright ideas is, however, no more rational than the popular fallacy that to win the jackpot at Las Vegas one only has to keep on pulling the lever."
4. Principles of Innovations
The best innovations are:
- Purposeful. They aim to resolve a well-defined problem, such as those that arise from one of the 'sources of innovative opportunities' (written above).
- Simple. "It should do only one thing, otherwise, it confuses."
- Effective. "Innovations start small. They are not grandiose. They try to do one specific thing."
And remember, the most effective innovations don't try to innovate for the future. The goal of innovation is to solve current issues.
Part II: The Practice of Entrepreneurship
The Entrepreneurial Business
There is a common belief that big businesses are incapable of innovation. However, it seems to Drucker that the largest businesses are also the biggest innovators.
For a business to become entrepreneurial, innovation must be routine. "To allow it to innovate, a business has to be able to free its best performers for the challenges of innovation. Equally it has to be able to devote financial resources to innovation." Moreover, innovative performance should be included among measures by which the business measures its success.
The cleanest organisational structure for entrepreneurship, though suitable only in the very large company, is a totally separate innovating operation or development company.
When innovating in large companies, the end goal should be to create a major new business. Not just another addition to a pre-existing product line.
"One method 3M and Johnson & Johnson use effectively is to promise that the person who successfully develops a new product, a new market, or a new service and then builds a business on it will become the head of that business: general manager, vice president, or division president... It does not commit the company to anything except in the case of success."
"It is only fair that their employer share the risk. They should have the option of returning to their old job at their old compensation rate if the innovation fails. They should not be rewarded for failure, but they should certainly not be penalised for trying."
Entrepreneurship in the Public Service Institution
According to Drucker, entrepreneurship in the service institution is hardest to implement and "most innovations in public-service institutions are imposed on them either by outsiders or by catastrophe."
Part of the problem with service institutions, Drucker argues, is that public-service institutions exist to perform some moral good. Meaning "they tend to see their mission as a moral absolute rather than as an economic one and subject to a cost/benefit analysis."
To improve a service institution its objectives should be clear and well-defined. And most importantly, quantifiable, so the effect of changes can be measured.
"Finally, public-service institutions need to build into their policies and practices the constant search for innovative opportunity. They need to view change as an opportunity rather than a threat."
The New Venture
Entrepreneurial management in the 'start-up sphere' has four requirements:
- A focus on the market. It is near impossible to conduct market research for a genuinely new product. Further, the original assumed target market may reject the product, however, an alternative market may find a better use for the product.
- Financial foresight (particularly for cash flow and future capital needs). The faster a startup grows the faster the threat of liquidity issues arise.
- Building a top management team before the startup actually needs one.
- A decision from the founding entrepreneur to determine their place in the company as the start-up grows and develops.
Part III of the book was excluded from the summary due to its size. However, Parts I and II effectively synthesise the bulk of Drucker's ideas and theories.
Innovation and entrepreneurship are ongoing activities. The best innovations are typically opportunistic and therefore not planned, but take advantage of developing trends. Moreover, the best innovations "are pragmatic rather than dogmatic and modest rather than grandiose" thus enabling business (and society as a whole) to remain dynamic, flexible and self-renewing.
"This requires executives in all institutions that they make innovation and entrepreneurship a normal, ongoing, everyday activity, a practice in their own work and in that of their organisation. To provide concepts and tools for this task is the purpose of this book."
And remember, innovation doesn't have to be risky. As Drucker states: "Successful innovators are conservative ... They are not 'risk-focused'; they are 'opportunity focused.'"