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Innovation and Entrepreneurship (Peter Drucker, 1985)


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The essential Drucker writes on sources of innovation way before the word became a vogue.
Drucker defines innovation as "Innovation is the specific tool of entrepreneurship, the means by which they exploit change as an opportunity for different business or a different service. It is capable of being presented as a discipline, capable of being learned, capable of being practiced. Entrepreneurs need to search purposefully for the sources of innovation, the changes and their symptoms that indicate opportunities for successful innovation. And they need to know and to apply the principles of successful innovation."
The seven sources of innovation are:
1. The unexpected success
2. Incongruities
3. Process needs
4. (Changing) industry and market structures
5. Demographics
6. Change in perception, and
7. New knowledge

Published in: Business
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Innovation and Entrepreneurship (Peter Drucker, 1985)

  1. 1. 11/10/2014 Drucker, 1985 1 Drucker, P. F. 1985. Innovation and Entrepreneurship. HarperCollins Publishers.
  2. 2. 11/10/2014 Drucker, 1985 2 About the book • Focus isn’t the entrepreneurial psychology or traits, but on their actions and behavior • Innovation and entrepreneurship is a purposeful task (practice) that needs to be organized in a systematic way • Ideas got developed through 1950s when Drucker used to take evening seminars at New York University with working executives and entrepreneurs
  3. 3. 11/10/2014 Drucker, 1985 3 Entrepreneurial economy • Shift in America from managerial economy to entrepreneurial economy (1965- 85) • People getting employed in new- economy sectors • Technology transformation from mechanical to organic (information) • Kondratieff Fifty- Year Cycles (triggered by oil shocks) • But US and Japan beat the Kondratieff cycles in technology waves • Demographic changes (baby- boomers as adults) is a factor in emergence of entrepreneurial economy in America • Where did new jobs come from • Growth beyond high-tech industry (Inc. Magazine) • Mid- size companies leading the job- creation wave (70s and 80s) • Rise of non- for profits firms and public- private partnerships • They are ‘new technologies’- new application of knowledge to human work…where low-tech leads the high-tech
  4. 4. 11/10/2014 Drucker, 1985 4 Entrepreneurship in economy • Economists treat entrepreneurship as a meta- economic event, that is shapes the economy • Cultural and psychological underpinning • Entrepreneurship due to new applications of management (emerged as a discipline post WWII) • Management not limited to large firms, but also smaller ones and non- profit making ones • Deinstitutionalization of American society, rather than deindustrialization
  5. 5. 11/10/2014 Drucker, 1985 5 The practice of innovation Innovation is the specific tool of entrepreneurship, the means by which they exploit change as an opportunity for different business or a different service. It is capable of being presented as a discipline, capable of being learned, capable of being practiced. Entrepreneurs need to search purposefully for the sources of innovation, the changes and their symptoms that indicate opportunities for successful innovation. And they need to know and to apply the principles of successful innovation - Drucker, 1985 (p. 19)
  6. 6. 11/10/2014 Drucker, 1985 6 Systematic entrepreneurship (1/) • “The entrepreneur shifts economic resources out of an area of lower and into an area of higher productivity and greater yield” (Say, J. B. 1800) • Not all business owners are entrepreneurs. An entrepreneur requires special characteristics… they care something different, they change or transmute value • An enterprise doesn’t even have to be small or new to be entrepreneurial (e.g. GE) or it’s not even confined to economic institutions (e.g. modern universities, hospitals) or even a capitalist • Foundations of entrepreneurship lies in concept and theory rather than in intuition. The theory rests on economy and society • Entrepreneurs see change as normal and healthy. Their investment in innovation isn’t risky after all, if done properly
  7. 7. 11/10/2014 Drucker, 1985 7 Purposeful innovation • Innovation creates a resources • Purchasing power is the creation of an innovating entrepreneur • Innovation is economic or social rather than technical…best defined in demand terms than supply terms • Last century has witnessed the ‘invention of invention’ • Entrepreneurs must learn to practice systematic innovation 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 innovations.
  8. 8. 11/10/2014 Drucker, 1985 8 Seven sources of innovation opportunities Sources (descending order of reliability and predictability) Changes within the enterprise or industry • The unexpected (success, failure and events) • The incongruity (between reality and ‘ought to be’) • Innovation based upon process needs • Changes in industry structure or market structure (that catch everyone unaware) Changes outside the enterprise or industry • Demographics • Changes in perception, mood and meaning • New knowledge (scientific and non- scientific)
  9. 9. 11/10/2014 Drucker, 1985 9 I: The unexpected • The unexpected success • Typically neglected by the management… as it challenges managements’ judgment and requires humility to say ‘we are wrong’ • Unexpected success is a symptom • Requires analysis and demands innovation • Set aside specific time and people to discuss unexpected successes • Examples: Mini-mills, veterinary medicines, nylon (DuPont), payroll processing (IBM), fast food (McDonalds) • The unexpected failure • Failure often bespeak underlying changes • Even failures and success of competitors • Examples: Edsel to Thunderbird (Ford) owing to demographic shifts • The unexpected outside event • Opportunity to apply already existing expertise in new applications • Examples: Video games’ impact on IBM’s mainframes and creation of PCs, bookstore chains on lines of superstores
  10. 10. 11/10/2014 Drucker, 1985 10 II. Incongruities • Discrepancy or dissonance between what is and what ‘ought to be’ • Symptom of change and are qualitative rather than quantitative • Creates an instability in which quite a minor effect can move large masses • Often overlooked by insiders, but visible to those on periphery (yet are part of the industry) • Sources • Economic realities • Between reality and the assumptions about it • Between perceived and actual customer values and expectations • Within the rhythm of logic of a process • Fueled by intellectual arrogance, and dogmatism • Opportunities of small, highly focused organizations
  11. 11. 11/10/2014 Drucker, 1985 11 III. Process needs • Starts with the job to be done and is task- focused rather than situation- focused • Need is know, but no one addresses it typically • Properties of such innovations • A self- contained process • One weak or missing link • A clear definition of the objective • Specifications of solution can be defined clearly • Widespread realization that there ought to be a better way • Examples: telephone switches (AT&T Bell), robots in Japan, simplified photography (Kodak), electric power industry (Edison), highway reflectors in Japan,
  12. 12. 11/10/2014 Drucker, 1985 12 IV. Industry and market structures • Against the widely held belief, industry and market structures are quite fragile • Changes as opportunities for outsiders and threats for insiders • Indicators for structural changes • Rapid growth of the industry • Obsolescence of market definition and segmentation • Convergence of hitherto distinct technologies • Rapid changes in the way business is done (demand or supply) • Typical in concentrated markets • Examples: • Automobile: Rolls- Royce (luxury), FIAT (military), Ford (masses), GM (design), marginalization of Chrysler, British Leyland, and Peugeot; innovation by BMW, Volvo, and Porsche; and failure of Beetle to create a small car leadership
  13. 13. 11/10/2014 Drucker, 1985 13 V. Demographics • Sharp demographic changes (migration, policies, baby-booms, baby- busts, labor force participation of women) offer opportunities for entrepreneurs • Most such events have already happened, and need is to accept the reality and not just see it as an opportunity • Focusing on age distribution • Identification of ‘representative’ behavior • Income distribution (disposable and discretionary)
  14. 14. 11/10/2014 Drucker, 1985 14 VI. Changes in perception • Being open to changes in perception • Timing is of essence • Short- lived fads? • Examples: concerns over healthcare, rise of the black community in the west, distinction between middle-class and working- class, emergence of homosexuals and lesbians
  15. 15. 11/10/2014 Drucker, 1985 15 VII. New knowledge • Knowledge- based innovation is the superstar of entrepreneurship! • Characteristics • Long lead times between emergence and application of knowledge into knowledge- based innovations, but could be shortened by external crisis (e.g. WWII) • Convergence of different types of scientific and non- scientific knowledge (e.g. computers, universal bank, airplanes) • What knowledge based innovation requires? • Careful analysis of missing social, economic, and perceptual factors (e.g. Britain’s failure to commercialize inventions of penicillin, and jet plan). Often such an analysis is led by layperson, than scientists • Clear focus on strategic position and market focus • Practice entrepreneurial management to reduce risk • Unique risks due to uncertainty and windows of opportunities, followed by shake-outs and shaped by receptivity
  16. 16. 11/10/2014 Drucker, 1985 16 VIII. The bright idea • Innovations based upon bright ideas outnumber all other categories taken together • Hard to predict the success of such ideas • They are vague and elusive • Need to practice entrepreneurship • Society needs initiative, ambition and ingenuity to promote such ideas • Increasing patent fee could be harmful
  17. 17. 11/10/2014 Drucker, 1985 17 The principles of innovation The do’s • Begins with analysis of opportunities • Going out to look, ask and listen • Innovation to be effective, simple and focused • Effective innovations start small • Aiming at leadership The Dont’s • Anything too clever, fails • Not to diversify or do too many things at once • Not to innovate for the future Three conditions • Innovation is work • To succeed, innovators must build on their strengths • Innovation is an effect in economy and society The conservative innovator: Innovators are successful to the extent to which they define risks and confine them
  18. 18. 11/10/2014 Drucker, 1985 18 The practice of entrepreneurship • The entrepreneurial business • Bigness is not an obstacle to innovation and entrepreneurship, rather it is the ‘successful operations’ • Required entrepreneurial policies • Innovation to be made attractive and beneficiary to managers • Need to innovation and dimensions of its timeframe must be defined and spelled-out • Have an innovation plan and specific objectives • The entrepreneurial practices • Focusing managerial vision on opportunity • Spot and promote businesses and individual who do different • Scheduled and well prepared dialogue with key teams • Separate teams for administration and entrepreneurship