This article is an excerpt from the Shortform book guide to "The Essential Drucker" by Peter Drucker. Shortform has the world's best summaries and analyses of books you should be reading.
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How do management and innovation go hand-in-hand? Where does innovation come from?
Managers are responsible for keeping an organization afloat. In addition, says Peter Drucker, innovation is required by managers to steer their business toward the future, which requires experimenting with new ideas.
Here’s how managers can use innovation to put their business on the right path.
Management and Innovation
According to Peter Drucker, innovation is vital for any organization because the world in which it operates is continually changing. Drucker describes how organizations should approach innovation as a part of doing business, how market analysis can generate new ideas, and how businesses should structure themselves to enable risk-taking experiments while protecting the organization as a whole.
To be clear, innovation isn’t limited to new technological developments. It includes new business practices, sales strategies, or moving a company into new markets. Drucker states that even the basic premise on which an organization is founded can go out of date. For example, video rental stores saw their business evaporate when streaming replaced physical media. The question that managers should always be asking is “What will our organization’s mission be in the future, not just in the present?” The needs you’re currently fulfilling may vanish, while new needs (and therefore customers) emerge that your organization may be suited to engage with. Watching for changes keeps organizations alive and creates opportunities for growth.
(Shortform note: According to Mark W. Johnson and Josh Suskewicz, it’s not enough just to prepare for the future—a business in a shifting marketplace must take an active role in shaping what the future looks like. In Lead From the Future, they lay out a visionary planning process to envision how your business will operate in the future, just as Drucker suggests, then develop a strategy to innovate for that future so that you can remain years ahead of your competition. Johnson and Suskewicz argue that an organization can be structured so that forward-looking innovation is baked into its culture and doesn’t rely solely on management’s perspective.)
Innovation and the Market
Drucker says that innovation comes from hard, diligent market analyses. Managers should watch for anomalous events, ongoing changes in demographics, and unforeseen failures or triumphs, either within the organization itself or from elsewhere in the market. If these lead to new ideas, Drucker insists that you should test innovations on a small, simple scale before developing them further. Small-scale innovations will let your organization fail, recover, and experiment again without a major loss of resources. Once you have a successful innovation, you should then be able to scale it up as much as your business and the market can bear.
It’s a common, though untrue, stereotype that big businesses aren’t innovative. The kernel of truth behind that idea is that within large, corporate structures, new ideas have a hard time taking root. Drucker writes that the solution to that is to create new, innovative business programs as separate startup ventures outside the regular chain of operations. Rather than running wild, however, the organization’s entrepreneurial side venture should be managed by someone high in the organization who can give it their full attention. If the venture is successful, it can be folded back into the larger institution, and if it fails, its negative returns won’t impact the ongoing success of the parent company.
| Innovation to Scale Drucker’s idea of small-scale innovation that grows if successful has entered the modern management parlance as the “bullets before cannonballs” approach. In Great by Choice, Jim Collins and Morten T. Hansen cite the successes of businesses that test innovations with “bullets”—low-cost, nondisruptive business experiments—before committing all their resources to full-scale “cannonball” changes. Companies that fire cannonballs first, overcommitting to large, costly projects, risk depleting the organizations’ resources. Even if their untested, large-scale projects succeed, a business often learns the wrong lesson and continues its risky behavior in the future. Nevertheless, even small innovations can end up being costly or disruptive. In The Innovator’s Dilemma, Clayton M. Christensen repeats Drucker’s assertion that businesses should spin off small startups to pursue potentially disruptive projects, or alternatively they can purchase a small company to try out the innovation for them. In either case, Christensen insists that the spin-off business should have a tight budget to discourage inefficiency and promote a quick turnaround. In Invent and Wander, Amazon founder Jeff Bezos gives two examples of this process by describing the genesis of Amazon Marketplace and Amazon Web Service as side ventures that were folded into the Amazon brand once they proved successful. |
Three Innovation Strategies
While discussing the importance of innovation in general, Drucker lays out three different approaches that managers can apply to entrepreneurial endeavors. These include innovations that establish preeminence in a market, those that improve upon competitors’ work, and those that identify a specialty niche in which there’s no competition at all.
According to Drucker, the first of these options—establishing a commanding lead in the market—is the most popular in the literature on entrepreneurship, but it’s also by far the most risky approach. It requires extensive research, planning, and a willingness to commit all your resources to pushing forward one single gamble. If your innovation succeeds and your organization takes control of a market, your work will only get harder after that. You’ll constantly have to push for the next innovation, and the next, or else your competitors will pass you by and you’ll lose any advantage you may have had.
The second and somewhat less risky strategy is to identify someone else’s innovation that isn’t being used to its fullest extent. Drucker says this commonly happens in the tech industry, where innovators are so focused on the technology that they’re not paying attention to how customers actually use it. The primary catch to riding someone else’s coattails is that when you copycat someone else’s innovation, you have to give your version a distinctive twist that sets it apart from the original. Looking for these almost-successful innovations can let your business open up whole new markets.
Drucker’s final strategy is one that comes along rarely but can yield rich rewards. The trick is to identify a niche in a market that isn’t being served and where there’s no competition. Taking advantage of this kind of opportunity usually involves your organization having a specialized skill or body of knowledge that’s otherwise absent in the market you’re exploring. If you spot such a niche and can fill it, it offers a form of monopoly protection—others may be discouraged from competing because the cost to duplicate your business’s specialty may be high. However, if your company successfully establishes a niche monopoly, it’s vital not to abuse that monopoly. Dissatisfied customers create a demand for competitors to step into the game.
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