Innovation and Entrepreneurship

Over 20 years since publication, Innovation and Entrepreneurship is still the landmark work on a subject that, before Drucker, had had little real analysis. At the beginning, the author is clear that his book is not about the psychology or character of entrepreneurs. It is not the mysterious ‘flash of genius’ so often ascribed to the wealth creator that interests him, but actions and behavior - how innovation and entrepreneurship can be boiled down to a system that can be learned and applied by anyone.

Drucker was unusual among business gurus for working with people in all types of organizations including unions, girl scout bodies, science labs, churches, universities and relief agencies. His message was: wherever you work, there is huge scope for changing how you do things that can make a massive difference. The author began teaching innovation and entrepreneurship in the mid-1950s, and this book represents three decades of testing of his ideas. Many of the examples come from his own experience as a consultant, or from the experience of people he taught. Though some have now dated, overall this is a timeless work that should be read by any aspiring entrepreneur or organization-starter.

The three most powerful points I took from the book were;

  1. Entrepreneurs do not just do something better, but do it differently.

  2. The nature of the entrepreneur is to ‘upset and disorganize’. He or she is a wildcard that generates wealth through the process economist Joseph Schumpeter described as creative destruction

  3. Good innovations are very focused, not trying to do many things, but just one thing extremely well.

It’s management, stupid.

Innovation and Entrepreneurship starts with Drucker drawing attention to a mystery: why, in the American economy from 1965 to 1985, despite inflation and oil shocks, recessions and major job losses in certain industries and government, there had been huge jobs growth. These jobs – 40 million of them - had not been created by large corporations or government, but mostly in small and medium sized businesses. Most people explained the growth in one word: ‘hi tech’. In fact, only 5 or 6 million of the new positions came from the technology field. The key ‘technology’ driving jobs growth, according to Drucker, was not widgets and gadgets, but entrepreneurial management. The force of the entrepreneur, he suggests, is always greater than the current ‘state of the economy’. Even the famous Kondratieff waves – cycles of technology and production that are meant to drive economies – did not explain a lot of economic growth, says Drucker. Management, or how things can be done better, is best appreciated as a ‘social technology’, as much as a discipline like engineering or medicine. Drucker notes that the huge success of McDonald’s was in large part due to better management of a service that had previously been run by Mom and Dad owners. Everything - the product, the time it took to make it, the way it was made, the way it was sold and served - was refined and standardized beyond belief. This was not ‘high tech’, Drucker observes - it was doing things in a different, better way, and in the process creating new value.

What is an entrepreneur?

“The entrepreneur”, wrote Frenchman J B Say in 1800, “shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.” This was the original definition – and the best, Drucker maintains. Entrepreneurship is not a ‘personality trait’; it is a feature to be observed in the actions of people or institutions. Entrepreneurs in health, education or business work basically the same way. Essentially, they do not just do something better, but do it differently. Classical economics says that economies tend towards equilibrium – they ‘optimize’, which results in incremental growth over time. But the nature of the entrepreneur is to ‘upset and disorganize’. He or she is a wildcard that generates wealth through the process economist Joseph Schumpeter described as creative destruction. This involves dealing with uncertainty and with the unknown, and having the ability to exploit change or respond intelligently to changes. It is a misconception, Drucker says, to think that everyone who starts a new business is being entrepreneurial. People do take a risk in opening a shop or a franchise, but they are not really creating anything new, not creating a new type of value for the customer in a way that, say, McDonald’s did.

The risk myth.

Drucker asks: why does entrepreneurship have the reputation of being very risky, when its purpose is simply to shift resources from where they yield less, to where they yield more? In fact, it is less risky than just ‘doing the same thing better’; in following this course it is easy to totally miss out on new opportunities and run an enterprise into the shoals without hardly noticing.

Embracing change and assiduously trying out different things is actually the best way to invest resources, says Drucker. He points to the amazingly successful record of constantly innovating hi-tech companies – Bell Lab, IBM, 3M (today, you would say Apple) - to see that this is true. Entrepreneurship is only risky, he observes, when so-called entrepreneurs “violate elementary and well-known rules”. It is not risky when it is 1) systematic, 2) managed and 3) purposeful. Drucker notes: Entrepreneurship is not ‘natural’; it is not ‘creative’. It is work! Entrepreneurial businesses treat entrepreneurship as a duty. They are disciplined about it, they work at it, they practice it. Entrepreneurship can exist in large organizations, and in fact Drucker says they must become entrepreneurial if they are to have long-term futures. General Electric in America, and the retailer Marks and Spencer in the UK are both big companies which have strong records of creating new value. The big expansion in American universities from the original elite college system was driven by entrepreneurship: finding new ‘customers’ for higher education by providing new worth and relevance. This was not a case of taking great risks – rather, identifying opportunities.

How to be an innovator.

According to Drucker, innovation is “…whatever changes the wealth-producing potential of already existing resources”. The best innovations can be alarmingly simple, and often have little to do with ‘technology’ or ‘inventions’. For example, there was nothing technically remarkable about creating a metal container that could be easily offloaded from a truck onto a ship, but the advent of container shipping as a standardized system of moving things around the globe was an innovation that quadrupled world trade.

Many of the greatest innovations are some kind of social value creation, such as insurance, the modern hospital, buying by installment, or the textbook, says Drucker. Were it not for the humble textbook, which emerged in the mid-seventeenth century, universal schooling would not have been possible, and if American farmers had not had access to installment purchasing, the surge in agricultural productivity would not have happened.

This financial innovation allowed them to become much more productive today, instead of having to wait years to afford a purchase. Drucker suggests that science and technology are actually the least promising of all the sources of innovation, generally taking the most time to realize any benefits, and costing the most. In reality, anything that takes advantage of an unexpected change in society or a market is actually quicker, easier or more likely to result in success.

The unexpected success.

Drucker includes several fascinating examples of the ‘unexpected success’, and the extent to which those involved were able to take advantage:

  • Macy’s, the New York department store, did poorly for several years because it considered itself primarily a fashion store, and was downplaying the growing effect of appliance sales on its bottom line. To the company’s directors, these sales were an ‘embarrassing success’. Only later, after it had accepted the place of appliance sales as a bona fide part of its image and range, did the store again prosper.

  • Many antibiotics developed for humans can be used on animals, yet when vets tried to buy these drugs they met resistance from the manufacturers. Allowing the drugs to be sold for animal use was beneath them. But another firm bought the rights to the drugs and marketed them specifically to vets, as a result creating the most profitable segment of the pharmaceutical industry.

  • IBM and Univac initially made computers aimed at the scientific market. Both were surprised by the interest from business users. IBM steamed ahead and ‘lowered itself’ to sell to the business market.

  • After television began, everyone ‘knew’ that book sales in America would plummet; no one would be bothered to read again when they could enjoy TV. In fact, the opposite happened; book sales boomed. Yet it was not the traditional bookstore owners who took advantage of this. Large book chains were established, not by book lovers, but by experienced retailers who worked out which titles generated most profit per feet of bookshelf.

  • The big American steel companies, used to gargantuan steel-making complexes requiring huge investment, did not invest in the new type of ‘mini mill’, even though they were throwing off cash and profits, because it was not ‘how things were done’.

Changing your whole direction to take account of an unexpected success requires humility. If you are a company that has staked its reputation on a particular quality product, but a cheaper, less grand product has booming sales, it is difficult not to view it as a threat, because, as Drucker puts it, “The unexpected success is a challenge to management’s judgment”. Industries change because ‘newcomers’, ‘outsiders’ and ‘second raters’ are willing to create new products or change old ones that segment the market. They see niches which the existing players either are not interested in, or do not see the market potential of. Often, the entrepreneur does not create a new product, Drucker observes, but simply appreciates the value of an unexpected use for it. To an uncommon degree, they keep their eyes and ears open.

The customer is everything.

Most people associate innovation with the ‘bright idea’, like the clothes zip or the ballpoint pen. But Drucker notes that barely one in five hundred such ‘bright ideas’ ever cover the costs of their development. On its own, innovation is not worth a great deal. It is only when it meets the market through the catalyst of entrepreneurial management that you start to create things of great value. An innovation is much more than a technological advance; it is “…an effect in economy and society” – something that changes the way people do things. Real innovation is always about the end customer. For example, De Havilland, the British company, produced the first passenger jet plane, but Boeing and Douglas took the industry lead because they created ways for airlines to finance such expensive purchases. Dupont did not just invent Nylon. It created new markets for its product in women’s hosiery and underwear, and automobile tires. The innovator must figure out the market and system of delivery of their product, or the markets will be taken away from them, says Drucker In receptivity to new innovations, conventional wisdom is often wrong. The King of Prussia predicted failure for railroads, because, he asserted, “no one will pay good money to get from Berlin to Potsdam in one hour when he can ride his horse in one day for free”. No one expected people in poor countries to buy television sets, given their high cost. But the experts misjudged the wish for people living in villages to have a window on the larger world, and they found a way to buy TVs anyway. You can’t do market research on people’s reactions to things which don’t yet exist. In this sense, innovation will always be a risk, but becomes less risky when you remain open about how, and by whom, your innovation will be used. Good innovations are very focused, Drucker observes, not trying to do many things, but just one thing extremely well. They are not too clever, and can be used by simpletons. They attract the comment, ‘Why wasn’t this done before?’ The economist David Ricardo once said, “Profits are not made by differential cleverness, but by differential stupidity”. He meant that the most successful products or services are those which allow their users not to have to think. They save effort, money and time. A good example: the disposable razor developed by King Gillette. Prior to it, shaving was a time-consuming and difficult business best left to barbers – if you could afford them. Drucker writes, “Anyone who asks the question, what does the customer really buy - will win the race. In fact, it is not even a race since nobody else is running.” People do not buy products, but what the product does for them. The purpose of innovation is to provide satisfaction where before there was none.

What I took from it.

In his field, Drucker always seemed to be years, if not decades ahead of anyone, and his book - Innovation and Entrepreneurship was, perhaps remarkably, the first to treat the subject in a systematic, non-sensational way. It is not suggested you throw away your existing books on these subjects, yet you could quite easily prosper by following the advice of this one alone.

It is an endlessly fascinating work that should bring new rigor to your thinking about ways to create new value. Get it for the many examples and elaboration of themes of which there is not room to cover here. One particularly useful chapter relates to the ‘Do’s’ and ‘Don’ts’ for starting any new venture. The book concludes with Drucker’s noting that the welfare state had been with us for over a century, but that the burden it had put on wealth producers meant it would not be around for long. He then wonders: is it being replaced by the Entrepreneurial Society? In most countries today, entrepreneurialism is more than a fad; there are university programs, foundations and policies focused on creating a new generation of wealth creators. Drucker died in 2005, but he saw the future clearly.

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