Innovation and Entrepreneurship by Peter Drucker

Peter Drucker - The Man who Invented Management

Peter Drucker died in 2005, eight days shy of his 96th birthday. The man literally invented the discipline of management and the management consultant. His 39 books have been translated into over 30 languages. The book of Drucker's I have read the most is The Effective Executive. The second-most powerful of his books I have read is Innovation and Entrepreneurship.

In order to get your attention, let me state that all this Lean Startup bullshit is really just reinvented, half-assed Peter Drucker. Sad because it doesn't even go back to the source, but of course very successful because at least half-baked Drucker is much more effective than no Drucker at all.

I've read this book quite a few times and taught it several times in a university course on Innovation and Organizational Change. I've also taught this book in an independent study on Entrepreneurship which one interested student wanted to do. The course clearly did little damage to his enthusiasm as he started his own business within a year of graduating.

Drucker is a Systematizer

The great thing about Drucker is that he is a systematizer. He consistently looks at what can be systematized and what cannot. Flashes of insight and genius cannot be systematized, nor can personality, so we need not include it. From the introduction:

This book presents innovation and entrepreneurship as a practice and a discipline. It does not talk of the psychology and the character traits of entrepreneurs; it talks of their actions and behavior... Entrepreneurship is neither a science nor an art. It is a practice.

What is Innovation

Innovation itself he calls the tool of the entrepreneur for exploiting change as an opportunity to create a new business or service.

The entrepreneur always searches for change, responds to it, and exploits it as an opportunity.

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 seven sources of change, and they can be systematically analyzed for opportunity. Drucker ranks them from the most reliable and predictable to the least reliable and predictable:

  • The unexpected - unexpected success, failure or outside event
  • Incongruity - between perceived and actual customer values and expectations
  • Process need
  • Change in industry or market structure
  • Demographics
  • Changes in perception
  • New knowledge

One funny thing is that these are generally considered obvious, yet they are still changes waiting to be exploited and are ignored at the peril of current incumbents. Drucker provides useful processes for this analysis and they point the way to opportunity.

Process Need

Process need is one of the source of change, and it consists of the following elements:

  • A self-contained process
  • With one weak or missing link
  • A clear definition of the objective
  • A specification for the solution clearly defined
  • Widespread realization of the need for a better way (receptivity)

Demographics

The discussion of demographics is especially illuminating. Obviously demographics are already taken-for-granted? Already baked into assumptions and market values? Not so! Here is what to look at:

  • Numbers, workforce, age distribution, especially the "center of gravity", which group is largest and fastest growing, values, vocation/occupation, income distribution, educational attainment, changes in perception (facts don't change, but their meaning).

Could anyone looking at the middle east and performing an demographic analysis have forseen the current arab awakening? Yes, it is obvious from what Drucker laid down in terms of how to analyze demographics, and this back in 1985, 26 years ago.

New Knowledge

With new knowledge there needs to be a clear focus on one of three strategic positions:

  • Complete system
  • Market focus (create market)
  • Strategic position (key function)

In terms of Internet/Software/Hardware businesses, a complete system something like SAAS or full-service (including customization), e.g., enterprise software. For market focus, the idea is to create a new market, e.g., Apple with the tablet market. For strategic position, this is the platform strategy, e.g., Microsoft with Windows and Office.

Rules for Innovation

  • Purposeful innovation begins with an analysis of the source of innovation
  • Innovation is both conceptual and perceptual (i.e., go out and see customers)
  • Innovation has to be simple
  • Effective innovation starts small
  • Aim for leadership
  • Innovation is work
  • Build on strengths
  • Market-focused

Entrepreneurial Management

Entrepreneurial management can be performed in large and small, old and new ventures. For the new venture, the following guidelines:

  • Focused on the market
  • Financial foresight needed, planning cash flow and capital needs
  • Bring in top management before they are needed
  • Think through key activities for the firm
  • Goals and objectives for each area
  • Make decision on entrepreneur's role regarding own work and relationships (what part of the company they will run and what parts they will not, based on their own strengths)

Entrepreneurial Strategies

According to Drucker, there are four basic entrepreneurial strategies.

  • Firstest with the mostest
  • Hitting them where they ain't
  • Ecological Niche
  • Change in economic characteristics of product, market or industry

The first strategy, which is the one most used by venture capitalists, is also the riskiest and least effective. There are two problems: 1) it requires complete accuracy of execution (as all the resources are poured into a specific direction), and the second strategy depends on the first one failing a good part of the time, and 2) the vast majority of markets aren't shaped as early winner-take-most.

Hitting them where they ain't

There are two approaches, one is creative imitation, which is understanding the market better than the creator. The second is market-focused and targets four errors which are common to leaders in a given market. This Drucker calls entrepreneurial judo:

  • Not Invented Here syndrome
  • Creaming the market (only focusing on the profitable segment)
  • The belief in quality (as that which is put into a product, rather than as that which the customer gets out if it)
  • Premium price (as something necessary to have and is something that can be preserved in the face of lower-cost rivals)

The analysis here is systematic and starts out with a look at the industry, producers, suppliers, habits and policies, then looks to markets and pinpoints the strategy that would meet with the most success and least resistance.

Benevolent Monopolist

As a leader it is important to cut prices before the competitor can, and to make products obsolete and introduce new ones before the competitors do.