Book Review: Innovation and Entrepreneurship

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Peter F Drucker is a prominent thinker on corporations and their management. Recently I discovered a book of his laying around and thumbed through it. Some excellent thoughts regarding where innovation comes from, how entrepreneurship can harness innovation, and how to engage in “entrepreneurial management” to bring those innovations to market.

Innovation - A Consequence of Change

Innovation and entrepreneurship lie right at the edge of change. Sometimes this change takes place in high-profile and obvious ways, such as the creative destruction taking place in Silicon Valley. Other times, this change is less obvious, such as improvements in industrial retail or sales. Drucker points out when change is taking place, opportunities for innovation abound. All one has to do is “just” notice changes taking place and then structure yourself and/or your organization to take advantage of them.

Drucker highlights seven sources of change which drive innovation:

  • The Unexpected: Either by its success or failure, if a product is being received by the market in an unexpected way, then there is a chance to exploit that success or figure out the reason for the failure. For the latter outcome, a new success can probably be found by looking through the reasons for failure and identifying customer new behaviors, which in turn can lead to new products.

  • Incongruities: Customers will pay for services and products which align reality to their expectations of how it should work.

  • Process Need: Find the weakest link in a process, improve it substantially and thereby add further value to the process. We are all looking for improvements, especially in enterprise (supply chains, production techniques, etc.).

  • Industry/Market Structure: When the structure of the market changes, or the industry re-organizes itself, new market segments may come into existence that can be tapped. Usually entrenched interests focus on increasing market share within segments where they have compentency, and may hesistate to branch out. Hence, someone who services the needs of new segments will have the lot to themself. (As the US steel industry changed from an integrated operation to a “mini-mill” operation, companies which pursued old practices lost market share to those, such as Nucor, who adopted the newer practices.)

  • Demographics: A changing population is a basic market development any organization has to respond to. Thankfully, demographic trends are easy to forecast using historical data. Organizations should use this information to prepare for a shift in how they do business. (Universities can project future enrollment based on aggregate birth information, and hospice care facilities can determine what services they will be asked to provide based on demographic surveys of the elderly.)

  • Shifting Attitudes: A changing demographic is often accompanied by changes in social norms, attitudes, and culture. These changes are hard to quantify, and one always has to avoid embracing something which turns out to be a passing fad. (As of this writing, Millenials are purchasing homes later in their lives, which means we will be in a different life situation when acquiring our first home. Those construction and real estate businesses who figure out appropriate marketing and advertising strategies will do well.)

  • New Knowledge: Research and development, either in an academic or corporate setting, has the potential to produce new products and market segments. However, as R&D leads the creation of new revenue streams, organizations must be willing to front the requisite capital to make new discoveries, accept that some failures are inevitable, and define what constitutes a suitable return on investment.

Practicing Entrepreneurship

The practice of entrepreneurship requires organizing your business to take advantage of innovation. How that organization looks depends on what kind of business you are in. Drucker identifies three basic “businesses” - the Service Institution, the New Venture, and the Existing Business. For each, he describes how entrepreneurship can be practiced.

  • Service Institution: A “service instititution” can be a governmental agency, non-profit, or NGO. Service institutions are characterized by a lack of “profit motive”. Further, these institutions are judged based on how close they come to achieving essentially unattainable goals, such as “eradicating hunger” or “eliminating poverty”. Drucker observes this incentivizes these institutions not to optimize their delivery of services, but instead to grow and grow to maximize them. As such, these institutions tend to become bloated and inefficient, and are hard to change. Instead of holding service institutions to impossible standards, objective, measurable, and rational goals should be crafted for these institutions to pursue. Further, efficiencies can be introduced contracting these services out to the private sector via privatization.

  • New Ventures: A new venture is characterized by the presence of ideas and potential customers and a lack of capital and human infrastructure to bring those ideas to market. New ventures are capital intensive and have negative returns while the business is being formed. These ventures also suffer from the problem of formalizing management and transitioning from a founders-based corporate hierarchy to one where professional managers and boards of directors take control of running the business. Drucker observes that managing this transition can be difficult, and that doing so successfully requires founders to look long and hard at themselves and figure out how they can best help the company move forward. (Sometimes that involves leaving!)

  • Existing Business: Existing businesses suffer from institutional inertia. This inertia need not be a stale corporate bureaucracy. In fact, Drucker points out a much more difficult inertia: that of “crisis management”. The day to day operations of the business can consume so much of the time of its employees that suggestions for innovations are brushed off as a “waste of time”. In place of innovation, capital is spent on the maintenance of existing product lines, and eventually the point of diminishing returns is passed. In order for existing businesses to be innovative, they may need to create a walled-off organization within the business charged with the task of coming up with new products or other innovations. (See, for instance, what Alphabet does with Google X.)

Entrepreneurial Strategies - Creating a Viable Business

Once a relevant innovation has been created by a service institution, new venture, or existing business, some strategy for introducing this innovation to the marketplace and using it to generate net revenue for the company needs to be developed. Drucker highlights 4 strategies specifically geared towards entrepreneurial ventures:

  • “Fustest With the Mostest”: Be the first to introduce the innovation, and grab up as large a share of the market as you can. Gain dominance by virtue of being the largest player. (For instance, the transportation service company Uber went from having roughly 9% of the market in 2014 Q1 to 29% in 2015 Q1.) This strategy is risky in the sense that failure to become the biggest player means competitors will overtake you in market share and may drive you out entirely.

  • “Hit ‘Em Where They Ain’t”: Figure out where competitors are not and go there. Dominate not by sheer size, but by adaptability and nimbleness.

  • Occupy an “Ecological Niche”: Some markets support only a handful of key players. Drucker gives the example of oil well blowout preventers. These are highly specialized pieces of equipment, and what is more, the marketplace already has enough manufacturers. Hence, the only competition is that which already exists - there’s little need to worry about new firms joining the market. Find an ecological niche and become indispensible. This strategy is substantially less glamorous, and the returns are going to be dependent on the market segment being served, but those returns should be fairly dependable and consistent.

  • Change what “Value” and “Utility” are : Customers use services and products because they have some utility and value. However, what that value and utility actually is varies from customer to customer. Most products have a consistent utility across customers, but we should avoid thinking that utility is the only one that product can have. An entrepreneurial business will be thinking of how to help customers discover other value/utility propositions with their products, possibly up to redefining what the product is. (For instance, Herman Miller is not a just “chair design and manufacture company”. It could also be an “office space design company”.)

Concluding Thoughts

Drucker’s book was a really engaging (and witty!) read, and offers practical advice for those who want to do entrepreneurship. What is more, this book is also helpful when read through the lens of career development. If you want to better understand how to manage change and be innovative, this book is a great place to start.