How do entrepreneurs advance the future? What’s Innovation and Entrepreneurship about?
Innovation is the process of discovering new ways of living, working, and doing business. In Innovation and Entrepreneurship, Peter F. Drucker describes innovation as a methodical process to find ways to improve every aspect of business and life.
Read below for a brief Innovation and Entrepreneurship book overview.
Overview of Innovation and Entrepreneurship
Nothing lasts forever. Business methods, organizational structures, technologies, products, and even how people live their everyday lives inevitably change, grow obsolete, and are replaced by something new. Innovation is the process of discovering those new ways of living, working, and doing business, and entrepreneurs are the people who work to bring the future into being. The process by which entrepreneurs bring innovations to light is one of society’s most important jobs, without which the only alternative is stagnation.
In the book Innovation and Entrepreneurship, published in 1985, Peter F. Drucker debunks the popular stereotype that innovators and entrepreneurs are risk-taking geniuses who follow insights at random to bring marvels to the world. Instead, Drucker says the process of innovation is one of deliberate and methodical study to locate opportunities to improve every aspect of business and life. Drucker also argues that simply coming up with an innovation isn’t enough. Entrepreneurship—the process of introducing innovations into society—must be just as well-thought-out as the work to produce the innovations in the first place.
Drucker (1909-2005) is widely regarded as one of the most influential thinkers in the field of modern management practices. Drawing from his knowledge acquired through decades of experience as a professional management consultant, Drucker authored dozens of volumes on management, including The Effective Executive, Managing Oneself, and The Essential Drucker. His writings cover the gamut of organizational development and innovation from the period between the World Wars to the start of the 21st century, and he’s been cited as a powerful influence on many important business leaders of today.
The Entrepreneurial Mindset
Entrepreneurship and innovation are buzzwords used so often that their true meanings have eroded. Drucker argues that entrepreneurship requires more than simply starting a new business and that innovation takes many shapes beyond inventing new products or techniques. We’ll begin by looking at Drucker’s definitions of innovation and entrepreneurship and how businesses can retool themselves to be more entrepreneurial.
Drucker writes that entrepreneurship is the act of creating new markets and new customers. An entrepreneur brings about change by introducing novel products, services, or business models that disrupt the status quo. This ability isn’t limited to small startups—even large corporations can be entrepreneurs. Likewise, entrepreneurship isn’t confined to the business world—nonprofits can also introduce new ideas and challenge the traditional ways they operate. At its core, entrepreneurship is a mindset that embraces change as a normal and necessary force in society, rather than something to be feared or ignored.
Going hand-in-hand with entrepreneurship, innovation is the tool that entrepreneurs use to create value and drive progress. Drucker explains that innovation involves either changing something that wasn’t a resource into a resource, or changing the way an existing resource is used in a way that increases its value. Innovation isn’t limited to technological advancements—it can also manifest as new social institutions or ways of doing business. Successful innovators identify and leverage emerging trends and opportunities before others. Rather than creating those changes from scratch, most innovators capitalize on existing shifts in society and the market, which they leverage to introduce novel products and solutions.
Gearing Up for Innovation
Innovation and entrepreneurship don’t come naturally to most organizations, and yet it’s a necessity in modern business for leaders, managers, and employees to think like entrepreneurs. Drucker argues that even successful companies must make a purposeful effort to invest in innovation and establish structures that promote entrepreneurship.
Embracing an entrepreneurial mindset is a challenge for established and successful companies. The real impediment to entrepreneurship isn’t a company’s size, but its inertia. Successful businesses give the bulk of their resources to maintaining their existing operations, leaving little room for innovative side projects. However, preserving the status quo can be deadly, since disruptive innovations can undermine even the most stable companies. Therefore, Drucker argues that businesses have a social obligation to innovate, since their stability impacts jobs and the economy. Overcoming this inertia requires a deliberate effort on a business’s part to divert resources to entrepreneurial endeavors, even if they don’t seem immediately important.
To enable innovation, businesses must restructure themselves to reward entrepreneurial thinking. Drucker says to start by reframing your company’s mindset toward change. Instead of viewing it as a threat, actively empower employees to seek out opportunities for new products, services, and markets to enter. Innovation should be a routine operation, with goals, timelines, and dedicated resources. Additionally, businesses should proactively analyze and project the life expectancy of their existing products and services to identify areas most in need of innovation. By doing this, your business can develop a comprehensive innovation plan for success in an ever-changing marketplace.
Where to Find Innovation
Once you’ve achieved an entrepreneurial mindset and structured your business to reward innovation, it’s time to go out and find that innovation. To do this, businesses should adopt a systematic and practical approach to identifying opportunities for innovation rather than relying on rare strokes of genius. Drucker lists many avenues a determined entrepreneur can investigate when looking for their next innovation, including analyzing business successes and failures, identifying discrepancies between people’s expectations and reality, and watching for changes in the market and the public—all of which are preferable to trying to invent something new from whole cloth.
New innovations should be simple and focused, addressing a specific problem or opportunity. Drucker cautions against overly complex or futuristic innovations, as they often lack practical, present-day applications. Instead, businesses should prioritize innovations that create a tangible economic impact by changing consumer behaviors or optimizing existing processes. Companies should play to their strengths and areas of expertise, recognizing that innovation requires continuous effort and commitment. By embracing a disciplined approach to innovation, organizations can uncover opportunities that align with current market realities as well as their own core competencies, increasing their likelihood of success.
Surprise Success and Failure
Innovation often comes wrapped in unexpected packages, such as unforeseen successes or failures. Companies must be ready to respond to these unanticipated events, as they can offer valuable insights into potential growth opportunities. Surprise successes present a challenge because they often undermine a business’s basic assumptions or else go completely unnoticed. Surprise failures are similarly disruptive, as they sometimes necessitate organizational changes, a shift in resources, or new business assumptions altogether.
Drucker writes that the clearest sign of a potential innovation is unexpected business success. However, capitalizing on a surprise triumph can be a challenge for a business that’s deeply entrenched in its traditional ways of operating. This is especially true if the success undermines the core product or service upon which the company has built its identity. For instance, if a prestige winery makes an unexpectedly large number of sales through a discount liquor chain, this might shatter its self-image as a business that caters to high-end, luxury tastes. However, if a business can embrace an open and humble perspective, it can transform surprise success into a catalyst for unlocking new avenues for growth.
Surprise successes slip under the radar when organizations aren’t actively looking. Drucker warns that shifts in customer behavior and emerging market trends can go unnoticed if they fall outside the company’s established reporting mechanisms, which can prove disastrous if competitors take advantage of these opportunities first. To avoid missing out, leaders must continuously watch for signs of unanticipated success. When surprises occur, management must honestly assess what organizational changes may need to happen to nurture and expand on these wins, allocating top talent and resources if needed.
The Mismatch and the Missing Link
The lesson to be learned from successes and failures is that opportunities to innovate can be found in the discrepancies between how things are and how people think they ought to be. In particular, Drucker emphasizes mismatches in economic assumptions, customer value perceptions, and inefficient industrial processes as fertile ground for innovators.
First, Drucker states that economic realities that defy long-held assumptions are powerful indicators of innovation opportunities. For instance, when increasing demand for a product fails to translate into higher profits, it signals a disconnect between conventional wisdom and market forces. Mismatches between assumptions and reality often stem from deeply ingrained industry practices that have gone unchallenged for many years. Such discrepancies create openings for innovators to disrupt the status quo by introducing more effective practices. However, Drucker emphasizes that to successfully capitalize on these opportunities requires that solutions be supported by readily available technology to increase their ease of adoption.
Another avenue for innovation stems from the disconnect between how a business values its product and the actual values that drive its customers. Drucker points out that a product’s users may be seeking to fulfill entirely different needs than those envisioned by its creators. Savvy innovators will reframe their question from “What is our product?” to “What do people need from our product?” Pricing and positioning your products in the market based on what the customer wants to buy, rather than what the manufacturer wants to sell, unlocks a way to bridge this difference in values and create an entirely new market for a product.
Changes in Markets, People, and Perceptions
The previous opportunities for innovation all occur within an industry or between that industry and its consumers. The next set of signals that innovation is needed—and will likely be successful—stem from changes outside your organization’s sphere of control. Specifically, Drucker writes that entrepreneurs ought to keep a keen eye on market shifts, demographic changes, and the evolution of public perception.
Entrepreneurs should always watch for changes in a market or industry. Drucker explains that when the basic elements of a market start to shift, larger companies that are set in their ways often struggle to adapt, creating an opening for creative thinkers. This is especially true when industries experience rapid growth, which usually signals an impending structural shift in that industry as a whole. For instance, the auto industry’s rapid expansion in the 20th century gave birth to the “Big Three” US automakers—Ford, GM, and Chrysler. However, with demand still on the rise in the turbulent 1960s and ’70s, the Big Three failed to adapt soon enough, opening the door for foreign automakers to introduce less costly and more fuel-efficient cars.
Demographic shifts also pave the way for innovation, since they provide a broad indication of who will be spending money and on what. Fluctuations in the population’s average age or education level can give you a glimpse into the future pool of consumers. Drucker writes that contrary to what some business leaders believe, these changes don’t always occur slowly—in the 20th century, demographic changes happened quickly, such as the famous post-World War II “baby boom.” The key lies in interpreting how and when these changes will affect consumer behavior. By keeping an eye out for major demographic shifts, you can design new products and services for markets as they emerge.
Pure Invention
The final innovation strategy—and one that Drucker doesn’t actually endorse—is that of innovation purely from scratch. Drucker objects to the romanticized notion of genius inventors and their groundbreaking products. Launching totally new inventions is highly risky and usually depends on the convergence of multiple factors in the market—a single missing ingredient may delay or derail your product’s success.
According to Drucker, breaking into the market with brand-new inventions is a losing game—for each success, there are countless failures, and predicting which invention will take off is a near-impossible task. As alluring as they may seem, new inventions carry higher risks compared to other types of innovation opportunities, as well as very long development periods from concept to application, followed by another lag from development to market entry, with a total average time in development spanning 30 years for a single invention to grow into wide acceptance by the public.
Furthermore, Drucker points out that innovation through invention rarely hinges on a single new development—instead, it commonly depends on the union of two or more technologies or practices. For instance, even though cathode ray tubes (CRTs) were invented in 1897, it wasn’t until Philo Farnsworth leveraged the newly discovered “photoelectric effect” that he could build the first CRT-based television. Therefore, until every piece of the puzzle is ready, an innovation isn’t ripe for deployment. It follows, then, that your first step must be to analyze everything that needs to exist for your invention to succeed. Not doing so can result in a misfire—either your innovation will bomb, or a competitor will swoop in and seize the advantage after you fumble.
Bringing Innovation to the Market
Just as important as coming up with innovations is finding the right way to introduce them in the market, whether as a new product or a new way of doing business. Any market-entry strategy carries its own set of risks and rewards and requires careful planning and execution. Drucker presents three options—you can corner a brand-new market, take advantage of another innovator’s mistake, or take over a narrow niche within an existing industry or marketplace.
Corner the Market
Creating a new market and cornering it immediately is an audacious yet risky move for innovators aiming to achieve market dominance. Drucker says that this technique, while widely publicized, leaves no room for error and demands flawless execution. This path is also narrow and unforgiving—success depends on careful planning and setting appropriate goals from the outset. Once your innovation yields returns, it’s essential to channel all your resources into sustaining its success, but staying ahead also requires constant innovation at a faster pace than the competitors who’ll be nipping at your heels. The high risk associated with this strategy leads some entrepreneurs to base their tactics around its potential failures.
Outfox a Competitor
Drucker says that rather than trying to conquer the world, one savvy innovation strategy is to capitalize on another innovator’s missed opportunities by taking someone else’s innovation and introducing it into a different market, such as retooling a business product for the home use sector. The key to success lies in understanding what customers want better than the original innovator. Unlike trying to corner the market, this strategy is less risky because it operates within an existing market where you can conduct consumer research to find out what the market leader missed. Ultimately, you aren’t creating something new—your innovation is to refine what’s already there and position it correctly by viewing it from a consumer’s perspective.
A notable example of “outfoxing a competitor” is when Steve Jobs’s Apple Computers usurped one of Xerox’s innovations, which the latter company failed to optimize for the market. Though Drucker praises Xerox’s successful innovations in the world of business products, they famously dropped the ball on their Graphical User Interface (GUI) through which a user can control a computer by pointing and clicking on a screen with a mouse. Xerox developed its GUI interface strictly for high-end, expensive business machines, but Jobs recognized its potential to revolutionize the home computer market, and he used it as the basis for Apple’s groundbreaking Macintosh computer. Xerox’s product, on the other hand, flopped.
Monopolize a Niche
As opposed to making a big splash in the general market, Drucker highlights an alternate approach—to dominate a small, specific niche within a larger process or market in a way that renders competition impractical. By creating an innovation or providing a specialized skill that’s integral to another product or process, you effectively make your business indispensable. As long as the market is limited in size, potential competitors can only reduce prices at the expense of their own profits. These niches are rare and can only be discovered through dedicated research, and while they provide security, niche markets come with downsides, such as limited room for growth and a total dependence between your business and the larger market you serve.
One such business that occupied a narrow niche was the Pullman Company that dominated the market for railcar sleeper services in the United States for decades. Pullman designed, built, and owned the sleeper cars that were then leased to railroads, and it also hired and managed the porters and attendants that provided customer service onboard the trains. Because it would have been too expensive for a rail company to provide all of Pullman’s services separately, they had little choice but to use Pullman cars and staff for their sleeper car operations.
Management for Entrepreneurial Startups
While Drucker aims most of his advice at the established corporation that needs to shed its old habits, he directs the remainder of his writing at startups. While big businesses need to learn how to innovate, the entrepreneurial startup needs to learn how to manage itself. According to Drucker, startups need to focus on four specific things: their market, financial planning, setting up a management team, and what role their founder should play in the business.
Watch the Market
Drucker writes that entrepreneurial startups must always keep a watchful eye on their markets. Innovation’s unpredictability often leads to surprise failures and successes that the startups didn’t anticipate, and it’s crucial to spot and seize new markets as they emerge before they fall into competitors’ hands. As discussed before, with truly novel innovations, predicting the exact market is impossible. Therefore, startups should always expect that their innovation might resonate with an unforeseen market segment. Remember: Both successes and failures can serve as indicators, revealing wholly unexpected avenues for growth.
Watch Your Money
Drucker writes that a lack of robust financial controls can doom the most promising startups, particularly those that grow too rapidly. Many entrepreneurs fall into the trap of wanting to withdraw profits prematurely, which can starve their businesses of much-needed funds during their growth stage. Drucker insists that any “profit” made by a startup should be reinvested back into the business—anything less leads to problems down the line. Also, as your startup expands, it will outgrow its initial funding method, necessitating the addition of partners or a public offering of stock. Anticipate your future needs and set them in motion today.
Establish a Management Team
Drucker says that after you make your startup’s financial plan, the next step is to set up a management team. The reason is simple—if successful, a startup cannot be run by the founder alone indefinitely, and you have to prepare for this transition before managing the business reaches a crisis point. As a general guideline, if it looks like your startup might double in size over the next four years, it’s time to start shifting the management structure. This process should begin informally, allowing each potential member of your management team to reflect on what they have to contribute while learning how to work with each other. Then, when you need a management team, you already have one in place.
Determine Your Founder’s Role
Creating a management team begs the question, “What will the startup’s original founder do?” The original entrepreneur must make sure that their ego doesn’t hinder the business. Founders who insist on maintaining absolute control often drive their businesses into the ground. Therefore, founders need to reflect on several key questions: “What does the business need going forward? Which of those needs can I effectively address? What role do I genuinely want to play in this company—or do I even want to be a part of it at all?” Sometimes, the answers lead entrepreneurs to realize they’d rather step away from day-to-day management and find a niche where they can contribute while letting someone else make the big decisions.
