Title: Innovation and Entrepreneurship
Author: Peter Drucker
ISBN: 0-06-091360-6
Reviewed by: Richard Chambers
Innovation and Entrepreneurship is an enjoyable read of some 260 pages in the paperback edition from HarperBusiness. It was originally published in 1985 yet is still fresh and informative twelve years later. Drucker is obviously well read and explains his concepts with both historical and contemporary examples in an interesting as well as informative manner.
The one point that Drucker hammers home is that innovation and entrepreneurship are not limited to high technology industries. Most innovation and entrepreneurship happens in low technology industries just as most job creation also comes from low technology industries.
Drucker basically says that entrepreneurship is doing something differently so as to better use resources and expand markets for the product and/or service. Ray Kroc took a hamburger stand in a single city and turned it into an international business, McDonalds, by applying innovation to his products, services, and marketing. Ray Kroc was an entrepreneur. Someone else running that hamburger stand without Kroc's entrepreneur spirit may have had a thriving hamburger business but it wouldn't have been McDonalds and that person wouldn't have been an entrepreneur, just another hamburger stand owner.
Drucker also believes that entrepreneurship and innovation are not inborn characteristics. They are behaviors that most anyone who is willing to apply themselves can learn. In his book, Innovation and Entrepreneurship, Drucker describes these behaviors and the ideas behind them that so that the willing pupil can learn them and apply them.
In the first of three sections, Drucker describes seven sources of innovative opportunity: The Unexpected, Incongruities, Process Need, Industry and Market Structures, Demographics, Changes in Perception, and New Knowledge. He debunks the believe that innovation is "a bright idea" and maintains that dependable innovative ideas come from systematic exploration of the seven sources of innovative opportunity.
The second section covers entrepreneurship and especially the development of an entrepreneurial culture within an organization. Along with suggestions for things to do, there are a couple of suggestions of things that will probably fail such as buying an entrepreneurial company in order to help a non-entrepreneurial company change.
The third section covers four major entrepreneurial strategies ("fustest with the mostest", "hit them where they ain't", ecological niches, and changing values and characteristics) with a discussion of some derivatives of each strategy and a look at the advantages and pitfalls of each.
I enjoyed the book and it fit in well with several other books concerning innovation and strategic management that I have read as well as a course in Strategic Management of Technology that I just completed as a part of an MBA course of study.
In the first section of Innovation and Entrepreneurship Drucker discusses innovation by itself, removing it from the organization in which innovation is embedded. This first section discusses the basic sources from which ideas for innovative products and/or services spring. The section also contains a brief review of what Drucker calls "the riskiest and least successful source of innovation opportunities", the Bright Idea. The millions of worldwide patents that sit in patent offices gathering dust lends credence to his assertion.
Drucker begins chapter 2, "Purposeful Innovation and the Seven Sources for Innovative Opportunity", with the following:
Entrepreneurs innovate. Innovation is the specific instrument of entrepreneurship. It is the act that endows resources with a new capacity to create wealth. Innovation, indeed, creates a resource. There is no such thing as a resource until man finds a use for something in nature and then endows it with economic value. Until then, every plant is a weed and every mineral just another rock.
He then follows up with details on what he calls "the Seven Sources for Innovative Opportunity":
The first section ends with a discussion of a set of principles of innovation containing a short list of Do's, Don'ts, and Conditions.
The second section of the book embeds the innovating agency within an organization and tries to answer the question of "what kind of organization encourages and exploits innovation?" Drucker looks at three types of organizations: the established private sector business, the established public sector service institution, and the new start up business.
The established private sector business, despite the prevailing idea of innovation only happening in new ventures, is the major wellspring of innovation. The reasons for an established company spewing out innovation is because the established company usually has the financial resources as well as the knowledge base to innovate. Unfortunately, established companies have a track record of not exploiting innovation usually resulting in new competitors being built by dis-enfranchised employees who build their own business around the spurned innovation. Other organizations, started by entrepreneurial founders, have languished once that founder left the company because the innovative effort was based on the efforts of those founders rather than being spread through out the organization as a whole.
Large established companies such as 3M or Procter & Gamble have built entrepreneurial management into their organization. Innovation is expected and encouraged through out the organization. Both companies have established processes that encourage innovation and provide methods for employees to fund innovative efforts.
An interesting sidebar is that Drucker warns that a business to acquire an innovative company in the hope that the newly acquired company will provide an innovation injection usually results in failure of the objective as well as the destruction of the acquired company. An example would be the acquistion of Burgmaster machine tools by Houdaille Industries in 1964 followed by a slow decline of Burgmaster until the liquidation of the it's assets in 1986 as described in When the Machine Stopped: A Cautionary Tale from Industrial America by Max Holland (1989).
The third section of the book examines several entrepreneurial strategies to allow the business to thrive in the marketplace. The first two sections are focused on business internals, the last section is focused on the external environment.
The entrepreneurial strategies that Drucker identifies are: "Fustest with the Mostest", "Hit Them Where They Ain't", Ecological Niches, and Changing Values and Characteristics. Each of these strategies have advantages and disadvantages and they may also be combined to form hybrid strategies. Some of these strategies are also riskier than others. Market structure such as demographics or economic conditions within the market will certainly influence the possibility of success with a particular strategy.
Drucker points to the growth of the pharmaceutical company Hoffmann-LaRoche from its beginnings as a small chemical firm in the 1920's and the decision at DuPont to grow its plastics industry after the discovery of Nylon as examples of "Fustest with the Mostest." This strategy is also one of the riskiest because it appears so much like a gamble that insufficient resources may cause the strategy to fail. Nylon was a commercial success, according to Drucker, because World War II's impact on the Japanese silk industry essentially protected the fledgling plastic fiber industry so that it was able to become cost competitive with the natural fiber by the time the silk industry was able to rebuild itself in the late 1940's. DuPont was able to follow up a technology innovation with the process innovations necessary to reduce costs and keep the market built during silk's absence.
The next strategy, "Hit Them Where They Ain't", is interesting as it is essentially a follower of a market leader exploiting the market leader's innovation better than the original innovator. This strategy hits home to one of the major weaknesses of the "Fustest with the Mostest" strategy, the most innovative product without a market is a cost center, not a profit center. Drucker uses IBM as an example of a market follower within the Personal Computer market. The IBM PC was not the first nor the most innovative but the market that IBM went after was the business market while Apple was going for the educational market. The Hattori Company in Japan took a Swiss innovation, the quartz watch, and created a market standard with the Seiko brand after the Swiss put the new idea on the shelf after demonstrating its feasibility. Sony, not in consumer electronics at the time, licensed the transistor technology from Bell Labs and, starting with cheap portable radios, became a major player in the home electronics market.
Drucker lists five "fairly common bad habits that enable newcomers to use entrepreneurial judo and to catapult themselves into a leadership position in an industry." These five habits, allowing competitors to use the "Hit Them Where They Ain't" strategy, are:
The Ecological Niche strategy aims at controlling a market and comes in three flavors: the toll-gate strategy, the specialty skill strategy, and the specialty market strategy. The toll-gate strategy aims at market control through providing a product or service, based on patented or otherwise protected intellectual property, which enables some essential product or service. The problem with the toll-gate strategy is that market conditions may render the product superfluous through substitution of either the product itself or the products or processes the toll-gate product complements or enables. The growth toll-gate product is also dependent on the products or services the toll-gate product enables. The example that Drucker provides is an enzyme developed by a company called Alcon which is used during cataract surgery to dissolve a ligament. Sales of the enzyme depend on the number of cataract operations performed.
The specialty skill flavor of the Ecological Niche strategy depends on developing a high degree of competence in a difficult field so that entry barriers into the market are high enough to keep out competitors. The difference between the toll-gate strategy and the specialty skill strategy is that the specialty skill is not necessarily based on protected intellectual property. It just isn't economically feasible for a competitor to enter the market. The specialty skill strategy usually requires the innovator to be first into the market and to then build sufficient market penetration and branding before any other competitor thereby dominating the market. Like the toll-gate strategy, the specialty skill will live or die on the products or services it enables.
The specialty market flavor of the Ecological Niche strategy depends on the innovator seeing a market that is being ignored by other businesses. The death of the specialty market is when it becomes a mass market. An example would be the modern perfume market, first created by the French perfumery Coty after World War I and originally targeted for the upper middle class, which has become a mass market with perfumes sold at the grocery store.
The Changing Values and Characteristics strategy has a difference focus from the other strategies. Where as the other strategies attempt to satisfy existing customers by creating new products or services, the Changing Values and Characteristics strategy attempts to find new customers for existing products or services by observing changes in markets which allow the existing products to enlarge their market by going after different customers.
Drucker provides four ways of exploiting the Changing Values and Characteristics strategy: creating utility from an existing product, pricing the product differently, adapting the product to the customer's social and economic reality, and delivering what represents true value to the customer.
An example of creating utility from an existing product is Rowland Hills's re-engineering the British postal system with the introduction of fixed postage rates and the postage stamp in 1836. By changing postal rates to fixed sums and indicating payment by the use of a postage stamp, Hill made it possible for consumers of postal services to serve their own purpose namely sending a letter quickly and easily. Previously, postage depended on the distance the package or letter had to travel and the consumer was required to visit a postal center where the rate was calculated. Standard postage improved the utility of the postal service by allowing collection boxes as well as dropping the price of posting a letter.
The classic example of pricing the product differently involves pricing a product which consumes supplies low and making a profit on the supplies themselves. Two examples are the Gillette safety razor and introduction of the copier by the Haloid Company, later Xerox. In both cases the product, a razor or a copier, were sold at a steep discount and the supplies, the razor blades in the case of the razor, or the end product, the paper copy itself in the case of the copier, were priced to make a profit.
Adapting the product to the customer's social and economic reality usually means providing a system whose heart is the product and then selling the entire system. Examples would be General Electric's packaging of GE consulting expertise with replacement turbine blades for its steam turbine products. This solved the problem of public utilities being unable to charge their customers for the consulting engineering services they needed due to political problems with the state public utility regulatory agencies. GE's competitors adopted the same practice but by then GE had market dominance. Another example would be the financing that Cyrus McCormick provided to American farmers who purchased his harvesting machine. Banks considered farmers a poor risk in the 1840's and farmers, under capitalized and with cyclic cash flows that depended on crop harvests, were unable to afford to purchase out right a McCormick reaper despite the obvious advantages of the machine. McCormick provided farmers an installment plan which spread payments over several years with the payments due when the farmers had cash, at harvest time.
Delivering value to the customer means using the product to deliver what the customer values rather than the product itself. An example would be a lubrication company that sells lubricant not as lubricant but as part of a maintenance program for heavy equipment. The company essentially sells the maintenance program, which uses the company's lubrication products, as an insurance program to heavy equipment operators guaranteeing a certain level of downtime of the equipment due to lubrication problems will not be exceeded.
I found this book to be extremely interesting. As I have read other books such as The Prize by Daniel Yergin about the oil industry or Hard Landing by Thomas Petzinger about the air line industry, I read of people who are innovating new products and services and I can see the same patterns that Peter Drucker has so ably identified in Innovation and Entrepreneurship.
This book complements James Utterback's Mastering the Dynamics of Innovation (1994). Utterback speaks to innovation models and how a technology innovation first spawns derivatives of a particular technology until the market selects out unpromising versions selecting towards a particular standard platform. As the family of products enabled by the technology stabilizes there is another shakeout in the market as the competition moves from technology innovation to manufacturing and distribution process innovations.