Wednesday, June 1, 2011
Author: Peter F. Drucker immitation
Title of the Book: “Innovation and Entrepreneurship”
Year of Publication: 1993
Place of Publication: New York
Publisher: Harper & Row, Publishers, Inc.
Number of Pages: 277
Price (Paperback): US$ 16.99
The author of this book is Peter F. Drucker, a renowned authority on Management. He was a writer, teacher, philosopher, reporter, consultant and professor at Claremont Graduate University in which he became the namesake of its Graduate School of Management. The book is intended for entrepreneurs and aspiring entrepreneurs alike. It is equally useful for managers especially in their decision-making process.
The book is divided into two parts. The first part delved into the importance of innovation and how to go about it and the second part tackles entrepreneurship in which he provided insights on how one can be successful in that endeavor. The ideas he presented in the first part is connected to that of the second part.
Though Drucker published the book in 1986, yet it continues to be an authoritative source for entrepreneurship. His views and anecdotal evidences showcase the wide array of business cases and answer the question why some measures employed in tackling those cases worked and why other measures did not.
Peter Drucker developed the thesis of his book by building up one concept over another. In this regards, the first thing that he did was review the history of entrepreneurship and built his concepts on innovation on it. This is one aspect that I like about the book. It also provided a vivid account of how the paradigm for entrepreneurship unfolded. In addition to that, it offers a different view of management which is not only a discipline but a technology. This is truly a revolutionary idea.
The first part of the book provided the seven sources for innovative opportunity which are as follows:
1. The unexpected
2. The incongruity
3. Innovation based on process need
4. Changes in industry structure or market structure
6. Changes in perception, mood and meaning
7. New knowledge
These sources are still true to these days even if the dynamics of business environment already changed for the past two decades. On this account, he vividly described and gave examples of what those sources of opportunities are and he prescribed ways on capturing those opportunities. His discussion as I would aptly put it, resonates intellectual rigor and dogmatism.
Drucker’s approach in the book evokes further thinking as exemplified in the following statement: “Still, an incongruity is a symptom of an opportunity to innovate. It speaks an underlying “fault,” to use the geologist’s term. Such a fault is an invitation to innovate. It creates an instability in which quite minor efforts can move large masses and bring about a restructuring of the economic or social configuration.” Moreover he added, “Incongruity between economic realities is a call to action.” In here the reader is provoked to think, that in his or her circumstance whether he or she is an entrepreneur, would-be entrepreneur or manager, he or she is forced to think of the impetuses of exploiting the incongruities on the company’s business prospects. He is also very pragmatic in his view when he said, “The innovation that successfully exploits an incongruity between economic realities has to be simple rather than complicated, “obvious” rather than grandiose.”
He also provided a discussion on the opportunities arising from process needs. In this regards, he provided the five basic criteria for coming up with successful innovation which are
1. A self-contained process
2. One “weak” or “missing” link
3. A clear definition of the objective
4. The specifications for the solution can be defined clearly
5. Realization that “there ought to be a better way,” that is high receptivity.
These criteria are useful guidelines or best practices in so far as the implementation of innovation is concerned. Drilling down on these criteria would help us put order in our innovative opportunities especially in grassroots innovation wherein we have no information to start with.
The book provided the second group of innovative opportunity sources. The first of which is the demographics. For me, this is quite interesting because this is almost always overlooked. Yes, we’re taking a look at the population growth but we usually don’t see it as a source of innovative opportunities. But Drucker made it clear, “The basic assumption for our time must be that populations are inherently unstable and subject to sudden sharp changes – and that they are the first environmental factor that a decision maker, whether businessman or politician, analyzes and thinks through.”
It is also interesting to note that the change in perception, mood and meaning creates an opportunity for innovation. Primarily, this can be known when the “general perception changes from seeing the glass as “half full” to seeing it as “half empty.” Moreover Drucker added, “What determines whether the glass is “half full” or “half empty” is mood rather than facts. It results from experiences that might be called “existential.” However, when these changes becomes apparent, one has to be prudent in judgement whether this is just a spur of the moment or permanent. As such Drucker prescribe that opportunities arising from this should start small and be very specific. If it is warranted that the change is permanent then the innovation in the future should expand.
The last source of innovative opportunities is the new knowledge. Drucker said “Knowledge-based innovation is the “super-star” of entrepreneurship.” He continued “Knowledge-based innovation differs from all other innovation in its basic characteristics: time span, casualty rate, predictability, and in the challenges it poses to the entrepreneur.” This kind of innovation takes a long lead time from new knowledge to its application. So this is now the challenge but Drucker did not give his prescription. He also emphasized that this is not only true of technological innovation but also social innovation that could even have more significant impact.
Primarily, the sources of innovative opportunities tells us that in business and the market on which it is operating, there are gaps or discrepancies that exist. These discrepancies are nothing but symptoms of looming opportunity. It is good for an entrepreneur to reflect frequently on what is going on in the industry so that these gaps can be identified and taken advantage of before a competitor sieze it. All these sources of innovative opportunity applies globally. Hence, in this respect nothing is peculiar to businesses in Asia. The Asian context might be different but the underlying sources of opportunities are the same.
Insofar as initiating innovation is concerned, the book specifically provided the do’s, dont’s and conditions for such innovation. The do’s are
1. Analysis of the opportunities
2. Innovation as both perceptual and conceptual
3. An effective innovation, has to be simple and focused.
4. Effective innovations start small.
5. Aimed at leadership.
On the other hand the dont’s are
1. Not to try to be clever
2. Don’t diversify, don’t splinter, don’t try to do too many things at once.
3. Don’t try to innovate for the future.
These do’s and dont’s are in itself very practical and strategic. It could help us in deciding what innovations to pursue now and what we will pursue later. The book also provided the three conditions which are
1. Innovation is work. In innovation as in any other work there is talent, ingenuity and predisposition. As such one should have the qualities of diligence, persistence and commitment. Without these values, no talent, ingenuity or knowledge will work.
2. Build on strength. By this we mean strategic fit in which we are enjoined to pursue innovative activities that will help us develop competitive advantage. This is important because whatever is the company’s strength, the company can leverage on that. It can also help the company stay ahead of the competition.
3. Effect in economy and society. As espoused by Drucker, innovation should be market driven. This makes sense because the life-blood of the business is its customer and to keep this customers, they should be satisfied. It is their demands, needs or wants that should give reason for innovation. However, we have to bear in mind that we cannot satisfy everybody and if we do that, we will end up satisfying nobody.
The book also discusses the entrepreneurial personality. There had been two school of thoughts on these, the first one being advocated by psychologists in which they said that entrepreneurs have the natural tendency to take risks. However, entrepreneurs view it differently because as one famous entrepreneur claimed that entrepreneurs take only calculated risks. I would agree with the latter because in entrepreneurship, taking risk is inevitable but that should be exercised with prudence. In here the concept of conservatism arise. This can be illustrated by an old banker’s rule of thumb, which I quote, “in forecasting cash income and cash outlays one assumes that bills will have to be paid sixty days earlier than expected and receivables will come in sixty days later.” So our degree of conservatism can help us in choosing the risk to be taken. This entrepreneurial personality is a good point raised by Drucker because it connotes that indeed in entrepreneurship, there is always risk taking. Probably this personality affects the decision-making pattern of an entrepreneur especially when there is trade-off between profitability and risk, which is usually the case.
The book shed light on the wide scope of entrepreneurship including entrepreneurship in service institutions. In here, Peter Drucker presented the contrast between a business and a service institution. He encourage every service institutions to be as entrepreneurial as their business counterparts, otherwise it is counter productive. Furthermore, Drucker also provided entrepreneurial policies for them. Among these are as follows:
1. Clear definition of its mission
2. Realistic statement of goals
3. Failure to achieve objectives means the objective is wrong
4. Constant search for innovative opportunities
I would just want to emphasize something on the third point. It is but natural for individuals to try and try again whenever his or her objective is not attained. However, this should give a signal that the objetive should be change because it is not working. In fact this is backed-up by mathematical evidence in which mathematicians knew for three hundred years that the probability of success decreases with each succeeding try.
On the fourth point, it is difficult to identify innovative opportunities for service institutions. However, there are various institutions which demonstrated such innovative opportunities such as this certain Roman Catholic church in the US as well as the American Association for the Advancement of Science. Peter Drucker concluded the chapter on Entrepreneurship in the Service Institution with the following thought, “To build entrepreneurial management into the existing public-service institution may thus be the foremost political task of this generation.
I also like the entrepreneurial strategies that Peter Drucker provided which are as follows:
1. Being “Fustest with the Mostest”
2. “Hitting Them Where They Ain’t”
3. Finding and occupying a specialized “ecological niche”
4. Changing the economic characteristics of a product, a market, or an industry.
These strategies have varying risks associated with it. The most risky from among these strategies is the first one. As such, more return is expected especially that this requires swift response to innovation.
From among these strategies, the second strategy roused my curiosity because of the concepts of creative imitation and entrepreneurial judo. The concept of creative imitation is quite interesting because from the strategic standpoint, companies should anticipate the day in which they might loose their business if somebody in the proverbial “garage” is creating an improved version of their products and services. Hence, staying ahead of the competition through aggresive innovation strategies becomes imperative in this situation.
On the other hand, entrepreneurial judo as Drucker put it, “aims first at securing a beachhead, and one which the extablished leaders either do not defend at all or defend only halfheatedly.” This is more like choosing the most important battle to win the war. Drucker also pointed out five common bad habbits which enables the new entrants to exploit entrepreneurial judo. These five common bad habbits are as follows:
1. Not Invented Here. There are big companies in which there is this attitude of dismissing new products that are being offered in the market by their smaller competitors because they believe that since it is not their idea, it is not good. But this kind of mindset is wrong as exemplified by the missed opportunities of the American electronics manufacturer in the market for transistor radios.
2. Tendency to “cream” a market. As Drucker would put it, “Creaming is a violation of elementary managerial and economic precepts.” The idea behind this is basically disregarding a market segment that could have been more profitable. When this segment loses their patience because a certain business does not cater to their needs, they stop from availing the products and services of that business, hence there is a resulting market loss.
3. Belief in quality. In here the basic rule that we have to put in mind is the value of our products or services in the minds of our customers. Usually, product quality is associated with product complexity. However, no matter how complicated our product is, but if that is not the value being desired by the customers then still that product has a high chance of failing.
4. Delusion of the premium price. Drucker said that charging a premium price “is an invitation to the competitor.” It was known since J.B. Say’s and David Ricardo’s time that higher profit margin can only be attained by cutting on cost (except in the case of monopoly) instead of charging a premium price. However, in recent years there are companies that show higher margin despite of the fact that they are not cutting on cost.
5. Maximize rather than optimize. Drucker provided the example of Xerox for this bad habit. In here, there is the so-called “one-size-fits-all” strategy. In our world today, customers are more demanding and they want customized products for themselves. The looming danger of the “one-size-fits-all” strategy is that the customers may not be satisfied and when there is a new entrant offering products tailored to one of these segments, then there is a high probability that the business will loose one of these segments.
On the whole, the book is worth reading because it presents so many ideas backed-up by so many examples. In doing so, Drucker made it easy for the reader to understand his point. In addition to that, he did not use sophisticated language to illustrate management concepts. It also provided rich insights on entrepreneurial venture from the macro- and micro-economic standpoint. It can also help in diagnosing strategic issuess for wide range of businesses as it happened to me when I probe on the strategy of our family corporation. Moreover, it provided so many valuable insights, the foremost of which is “To succeed in doing a job, one has to believe in it and take it seriously.” This is true because if one believes in his or her job, he or she can draw inspiration or motivation from it. This also to say that this can inspire or motivate one to transcend beyond capabilities. I got from Drucker that individual entrepreneurs have to decide what are their own roles and commitments. I think this is very important to bear in mind so that the entrepreneur or manager will not lose focus in the disposal of his or her job. Drucker would constantly remind focus on customers. He mentioned that “What was lacking ... was someone willing to listen, somebody who took seriously what everybody proclaims: That the puspose of a product or a service is to satisfy the customer.” This has probably become the universal tenet for making a successful business. To reinforce this, he even cited the elementary axiom of marketing which is “Businesses are not paid to reform customers. They are paid to satisfy customers.”
The part of the book that I liked most is that which discusses entrepreneurial management for existing business, for public-service institution and the new venture. From among these three, the new venture poses a lot of challenge. To achieve entrepreneurial business, entrepreneurship should be deemed a duty. The company culture should be passionate about it.
There were also discussions on entrepreneurial policies. The one which captured my attention was the recommendation of making the managers of existing businesses “rerum novarum cupidus.” One has to be greedy for new things. But my question now is, to what extent should we tolerate that greed? Too much of it could lead to nowhere.
It seems from the discussion of the book that Peter F. Drucker is akin to be skeptical of high-tech innovations. He would even say that quality is not tantamount to technical sophistication. This is quite intriguing for me because being an engineer, all the high-tech innovations such as the personal computer or electric fan more or less made our life easier. In that aspect, Drucker failed to recognize the imperative of high-tech innovation which in itself catalyzes low-tech or no-tech innovation as the market respond to high-tech innovation. In management itself, high-tech innovation impacted the way we do business especially with the advancements in information technology. Drucker has the propensity to look at the unattractiveness of high-tech innovation based on the lead time from development to commercialization and the time that it takes for the innovation to generate cash flow. Despite of this however high-tech innovation has intangible benefit to society which could last for many years.
I have the impression that Peter F. Drucker resonates the “teachings” of Adam Smith and Joseph Schumpeter. He mentioned Adam Smith’s book “Wealth of Nations” twice and he expounded on the Schumpeterian concept of “creative destruction” in which a company should develop new products to make its existing products obsolete.
To encapsulate of what the book is all about, it was captured by what Drucker himself said, “Innovative opportunities do not come with the tempest but with the rustling of the breeze.”
Jed M. Bellen
Asian Institute of Management
Jed Bellen is currently pursuing his Masters in Business Administration at the Asian Institute of Management in Makati City. He received his Bachelor of Science in Chemical Engineering from Bicol University in Legazpi City. Prior to pursuing his MBA, he had experience as Process Engineer in an Engineering and Construction firm.