Innovation and Entrepreneurship

by Peter F. Drucker

"The entrepreneur shifts resources out of an area of lower and into an area of higher productivity and greater yield" -- J.B. Say.

"Creative destruction." -- J. Schumpeter

One of my favorite Drucker books.

Entrepreneurship: To work like a demon for long years and to choose grave risks rather than security in a big organization. To do something new, something different, rather then to do better something that is already done. The Entrepreneur always searches for change and exploits it as an opportunity. He innovates.

In the long run, defending yesterday is more risky than making to-morrow.

Principles of Innovation

Don't wait for the "big" innovation, the "bright, billion dollar idea".

Search out opportunities. Look, ask, listen -- be awake.
Keep it simple. Don't try to be clever, most people are morons.
Do only one thing. Don't diversify.
Aim at leadership. Focus on one area of expertize, build on your strengths.
Start small. Forget grandiose plans.
Innovate for the present. Don't innovate for the future!

The strategies must be very simple, as they face large uncertainty. Innovation needs to be immediately applicable, or you'll never get there, and anyways the future will not be what you expect it to be.

Sources of Innovation

New knowledge, both scientific and non-scientific is a source of innovation. It does not exploit change, it creates it. It is the most powerful, least predictable, and hard to manage; it has the longest lead time. Often there's a window period of a few years with hundreds of companies founded when a technology becomes ripe through convergence, followed by a shakeout that destroys massive amounts of capital, and leaves few survivors standing. One cannot do market research on something that does not exist, expert opinion is as often wrong as right about receptivity: one must take the risk. Areas not 'hot' or in the public eye carry less risk, as there is less competition and more time.

Since change creates opportunities for innovation look for change: change in industry or market structure, for example rapid growth, most easy to spot -- but beware, fast growth tempts to skim the cream, which invites competition. Society wide change, for example in demographics: the aging society, education trends, income distribution, labor force participation. Change in perception, mood, and meaning.

Practical sources for innovation are unexpected success or failure, also customer's, suppliers, competitor's. Unexpected 'outside' events, that do not show up in regular reporting by numbers, and may be qualitative, not quantitative, but may be even more important. A mismatch between reality as it is, and as it "should be" according to your assumptions or experience. Look closer and try to understand: what is going on? Investigate. Go out, look around, listen: to customers! Don't study and run 'analysis' within in your company in isolation. You must be able psychologically to accept the unexpected that does not match your views, especially success, which is easily overlooked or disregarded. If too much research is still needed, it is not yet ready for the entrepreneur. The solution should be obvious and straightforward in hindsight.

The "bright idea" is the riskiest and least successful of innovative ideas.

Innovation is not just in products, you can also innovate by improving processes. Another source is when existing expertize can be applied to a new area.

Timing is essential. If you imitate, you will be too late. (I think this is not always true; if you're better in execution, you can copy a good idea and outpace your competition -- see Microsoft).

Decisions: The essence of any decision is uncertainty.

Entrepreneurial culture

The temptation for existing business is to feed yesterday and starve tomorrow.
Entrepreneurship requires looking at change as an opportunity for new rather than threat for old. It needs policies to abandon whatever is outworn, obsolete or misdirection of effort. Have the performance report show two first pages: of opportunities, overshooting goals and of problems, failing targets.

Put every single product, process, tech, market, channel, staff activity on the block every few years. Ask "Would we start this now, if we were not already doing it?" If the answer is no, ask "What do we have to do to stop wasting resources on it?"

Slough off past successes, near-misses, failures. Make a business x-ray, list all products, their markets, channels, stage in life cycle. Make a plan to determine efforts, deadlines, manpower for innovation projects.

Nothing so concentrates managers on innovation, then knowing the existing will be abandoned tomorrow. Put your best performers on innovation. Success exploitation must be staffed with the ablest people available, rather then with whom we can spare. Match org structures, staffing, incentives.