Lassi A Liikanen Essay 100111-Drucker Innovation Entrepreneurship PDF

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Essay based on Peter F. Drucker (1993) Innovation and Entrepreneurship (Harper Business edition, first edition 1986). HarperCollins Publishers; New York.

Summary  Thisessayreferencesthevolume“InnovationandEntrepreneurship”(IE henceforth)byPeterDrucker.Drucker(1909–2005)wasascholarand consultantwithanexceptionallylongcareer.HemovedfromGermanyin early30’stoUKandduringSecondWorldWarheimmigratedtoUnited Statesattheage34.Druckerhasmadeanimpactonvariousareasof management,businessstrategy,organizationcultureandalsoinnovation. Druckeriscommonlycreditedforcoiningtheterm“knowledgeworkerʺ.IE presentsarelativelylateadditionamong39otherbooksalongDrucker’s extensivecareer,whichincludedconsultationtonumerouslargecompanies. Hewasknownforpronouncedcriticismof existingcontrolstructures, includinggovernment,forauniqueviewofliberalismwithequalrights, privatizationandthoughtslateronleadingtoformationofNewPublic Managementtheory(http://en.wikipedia.org/wiki/Peter_Druckerreferenced 2.12.2009). Thebookitself,IE,isbuiltuponaphilosophythatinfuture(orrightnow, consideringthetimeperspectiveofthebook),anentrepreneurialsocietywill betheonlyonethatcansustainthedevelopmentofawelfaresociety.And theentrepreneurialsocietywillbeaproductofaneconomyofinnovative entrepreneurshipcombinedwithgovernmentfacilitation,oratwith governmentofminimalinterferencewiththisdevelopment.Allthroughthe book,DruckerpresentsUnitedStatesasanexampleofsuccessful entrepreneurialeconomy,inwhichanentrepreneur‐friendlyeconomyhasin

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variousbusinessareasbeenabletocountertheissuesoffalling“smokestack” industriesinthepastdecades.IthasprovidedUSmorejobsthanthe considerablegrowthofpopulationwouldhavedemanded.Japanisalso mentioned,whichshowsadmirableinsightevenifthe2009economicslump didagainhitJapaneseveryhard.Anotherrepeatingmotifinthebookisthat inallinnovationtalk,hightechisalwaysexaggerated.Whilehightechmay havepotentialbigimpact,andtherearegoodmanyolderandnewer examples,Druckerseesitatveryriskyandcurrentlymismanagedindustry. Thushisexamplesofinnovationaremainlyderivedfromotherbusiness domains. ThebookIEisdesignedtoprovideguidelinesonhowentrepreneurscan becomeinnovativeandnotjustinventiveengineersandeconomicalfailures. Thebookisthusorganizedintothreeparts:innovationpractice, entrepreneurshippracticeandentrepreneurialstrategies.Eachofthesehas eachitsownroleintheinnovationgameandwillbenextreviewed separately.  Innovationpractice Successfulinnovationpractice,accordingtoDrucker,isbasedonsystematic hardwork.Notonluckorsingleinsightfulideas.Druckerintroduces systematicinnovationasaframeworkforexploitinginnovativeopportunities. Heintroducessevensourcesofinnovationthatcanbemonitoredforstarting upnewinnovations.Thesesevenfallintotwocategories:internalandexternal toanenterprise.Fourchaptersinthebookdealwiththeformer,threewith thelatter.TheywillnextberecappedintheorderusedbyDrucker.Hesees thatthefirstonesaretheeasiestopportunitiesforinnovationandthe implementation,andriskincreasetowardstheendofthelist.Theabstract Drucker:InnovationandEntrepreneurship/summarybyLassiA.Liikkanen

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sourcecategoriesarenotmutuallyexclusive,butaninnovationmaybe relatedtoseveralsourcecategories. Unexpectedsuccessisaneventwheresomebusinessareasuddenlystartsto boombeyondexpectations.Thisshouldprovidethecompanyachanceto renewtheiroperationandmakethebestofthesituation,whateverthe underlyingcause,andacceptthatthemarketis changing.Unexpectedfailureisasimilarindicatorof changestakingplaceintheworld.Severalexamplesare given,includingFordautomobile’sEdsel.Thismodel wascarefullydesignedtotarget‘upper‐middle’class people.However,itturnedoutthatduringtheyearsof design,productionandlaunch,themarkethad changed.Therewerenomorecustomersinterestedin thecar,asthecustomervalueswerechangedquicklyinthepostWWII society.Instead,Ford’sThunderbird,averydifferenttypeofcarfordifferent typeofcustomersmadeabighitandalegendofitsown (http://en.wikipedia.org/wiki/Edsel). Itmustbenotedthatatthispoint,Druckerisclearlywronginprovidingthis examples.Forddidnotactuallyactupontheunexpectedfailure.Thefamous T‐birdhadalreadybeenonthemarketthreeyears (since1955)beforeEdselwaslaunchedin1958. Unexpectedoutsideeventsarealsomentionedasone Ford Thunderbird (1955)

sourceofsurprise.Inthiscase,thereisalsoachangein themarketthancanbeexploitedbyacompany.The

importantdetailstressedbyDruckeristhatexploitingeachofthese unexpectedchangesrequiresonlyrelativelysmalleffortsfromthecompany,

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notdiversificationoftheirbusinessarea‐justembracingtheopportunityby adjustingexistingtools. Incongruitiespresentanotherlargegroupofinnovationsources.They mostlyrefertoexternaloperationenvironmentandchangeswithin.Theyare usuallycreatedwhenthe“realities”ofamarketandcompany’sperceptionof  itbecomemisaligned.Asanexample,aproductionmodelmaybecometoo expensive.DruckerlistsoldAmericansteelindustryandhealthcare.Inboth domainsnewoperationandproductionmodelshavegainedspacefromold waysofdoingthings.Druckerseesincongruityalsoinprocesses,forinstance aninnovationforeyesurgery,anenzymecompoundtopreventbleeding. Necessityisthemotherofinvention,itissaid.Needisalsodiscussedasone sourceofinnovation.Forinstance,theincongruenceineyesurgeryindicated anunsatisfiedneed.Theimportantstepisidentificationoftheneed.Ifthe needcanbeexplicated,thenitoftencanalsobesatisfied.Theneed‐based innovationisassociatedwithaprogramresearch(orwhatmightbetypically calledappliedresearch).Thisresearchisspecificallycommittedtosolvethe needinquestion.Druckerlistssomeconditionsorfeaturesofaninnovation thatexploitsaneed: a. weakormissinglink, b. cleardefinitionoftheobjective, c. specificationsofthesolutionclearlydefinable, d. widespreadrealizationthattheremustbeabetterway (receptivitytoinnovation).  Industryandmarketstructurescanalsoprovideamomentumfor innovation.StartingfromFordcarexamples,Druckerlistsseveralcasesfrom automobileindustryinwhichmanufacturerssuchasVolvo,BMW,Mercedes

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andRollsRoyce.Eachofthemhasestablishedaleadingpositioninacertain marketbyfocusingtheireffortstoacertaincustomersegment. Aswenowturntoexternalsourcesofinnovation,wefirstencounter demographics.Asasource,theyrefertounexpectedorunforeseenchanges takingplaceintheage,gender,lifestyleandeducationaldistributionof customers.Thesekindsofchangesusuallyindicateopportunitiesfornew enterprise.Author’sexamplesincludeestablishmentofnewkindoftravel guidesandSears,RoebuckCEO’sdoingfieldresearchontheprospectsof Middle‐Americaasagrowingareaforbusiness. Seeingglassasahalffullorhalfemptyisadifferenceorachangein perception,anotherpotentialsourceofinnovation.Thisperceptioncantarget avarietyofthings,forinstancetransitionfrommiddle‐classtoanoutdoors person,orfromeatingtodining.Theimportantsignalforanentrepreneuris thatoncepeoplestartseeingthingsdifferently,theyarereceptivetoactonit aswell–halfemptyglassgivesmorereasontoactthanaglasshalffull.In thesecases,innovationmustbetimedrightasthechangestoexploitthe changearequicklyexploitedandthenvanish. Finally,innovationsourcecallednewknowledgeiswhatpeopletypically thinkofinnovation,newtechnologies,newinventions,usuallyresultinginsome hightechapparatus.ThissourceisinthebottomofDrucker’slistforseveral reasons.Knowledge‐basedinnovationcomesslow(longleadtime),ithas verylowchancesofsuccessanditalmostalwaysrequiresconvergenceof multipletechnologiestosucceed.Business‐wisethiscripplestheinnovation beforeitisabouttohappen.Asrequirementsforaninventiontosucceed, Druckerbelievesincarefulanalysisofallnecessaryinternalandexternal

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factors(whatevertheymaybeineachcase)andfocustooccupyastrategic positioninthemarket. Technology‐basedinnovationshaveuniquerisks.Thesearemostlyrelatedto theirlifespan.Itisarguedthattheinventionshavefairlylimitedtimewindows whichopenandthencloseabruptlyforanindefinitetime(sometimesmayre‐ open).Thefailuretoactinthiswindowwillmeanfailure.Evencorrecttiming willinevitablyshowupinastrongcompetitionasmanypeoplewilltrytodo thesameinthegiventime.Theclosingofthewindowisprecededbya shakeoutinwhichthecompaniesthatmadeitthroughthewindowwillbe competingtoholdtheirpositioninthemarket.Drucker’sviewisvery skeptic,hebelievesthatformostwindows,therearecanbeonlyacouplebig playersleftoncetheshakeoutisover.Finally,thewindowmaynotappearat allifthereisnoreceptivityfortheinvention.Ifthemarketisnotripeforthe newideatherecanbenobusiness.Somenewvaluemustbeprovidedforthe customertojustifyitsexistence. Relatedtonewknowledge‐basedinnovations,Druckerdiscussessocalled ‘bright,newideas’.Heisverypessimisticintheirregard.Hearguesthatthe greatmajorityofbrightideaswillcommonlyjustfailandmoreimportantly, noonecanreallytellwhy.So,thebookactuallywarnsaboutgamblingwith goodideaswithoutproperanalysisofitssusceptibilityasabusiness; adheringtoDrucker’sbasicmodelofbusinessdeliveringnewvaluetoa customer.Orputanotherway,hearguesthatideasmustbeproperly justified.Theimaginedaddedvalueshouldbebasedonsomecustomerneed toensurethatthereisreceptivityfortheinvention. Druckerprovidessomerulesofthumbonhowtoinnovate.Inhislistof thingstodoright(pp.134‐140)hesaysthatideasshouldstartbyanalyzing

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opportunitycarefullyandto“gooutandlookatthecustomers,theusers,tosee whattheirexpectations,theirvalues,theirneedsetc.are.”(p.135)Thisisclearly verysimilarwhatmoderndesignconsultancies,forinstanceIDEOaredoing (seeKelley,2001,2005)Theresultingideamustbefocusedondoingonething rightifitwantstosucceedonasomespecificcustomersegment.Someactions arebestavoidedintheinnovationgame,theseinclude:tryingtobetoo clever,tryingtodiversifythebusinessbeyondownareaofexpertiseand settingtheaimforsomedistantfuturewhenthefocusshouldbeinhereand now.Finally,hepresentsthreeconditionsforinnovation:innovationiswork, innovatorsmustbuildupontheirstrengths,andinnovationisaneffectineconomy andsociety.   Entrepreneurshippractice Enterprisesbuiltuponinventionsrequiremanagement.Druckergoeslong wayinarguingabouttheimportanceofmanagement,theverydisciplinehe claimstohavegreatlycontributedfromitsbirthin1950’s.Thesecondpartof thebookconsidershowinnovativeenterprisesshouldbemanaged.Hedeals separatelywiththreebranches:existingbusiness,public‐serviceinstitutions,and newventures.Eachofthesehascertaincharacteristicsonhowtobestsustain innovation. Forbig,establishedbusinessesinnovationisnecessaryforkeepingthemin themarketandaheadofcompetitors.Thelessonstartsfromrepeatingthat innovationiswork.Thisworkrequirespoliciesandpracticesthatmake innovationpossible.Theserulesshouldgovernfourareasofenterprise’s operation:

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a) Receptivityforinnovation(rerumnovarumcupidus;eager…) b) Measurementofcompany’sperformanceasaentrepreneur c) Managingforinnovation:staffing,structure,incentivesand rewards d) Avoidingpitfalls:mixingentrepreneurialandnon‐ entrepreneurialunits,diversifyingbusiness,buyingin entrepreneurialspiritthroughacquisition  Eachofthesepointsiselaboratedinthebook.Iconsiderthattheimportant messagesarethefollowing.Forthemanagement,itissuggestedtokeepthe newentrepreneurialunitsdistinctfromestablishedones.Intheorganization, thereshouldbededicatedinnovationmanagersadequatelyhighupinthe administrativehierarchy.Theyshouldperceivetheprioritiesofinnovative effortsinrelationtoexistingbusinessstructures.Theexistingunitshavetheir owndemandsthatcanoverrideallinitiallyunprofitableentrepreneurial activities.ThisisimportantalsobecauseDruckerthinksthattheleadtimefor innovationtendstobelong,sothatfirstthreeyearsarelikelytobe unprofitableandonlyyears4‐5canbeexpectedpayofftheinvestment. Inbigcompanies,thespecialfocusonmanagementisnecessary.Thereseems tobesomespecialentrepreneurialspiritcommonlyassociatedwiththe foundersofthecompanieswhoseroleusuallygetssmallerandsmallerasthe sizeofthecompanygoesup.Iftheinnovationisnotactivelymanagedbythe timethisinnovativeforceleavesthebuilding,thecompanyisboundtolose itsentrepreneurialspiritaltogether. Druckeralsoconsidermanaginginnovationsinpublic‐servicesettings.His viewsarequiteextreme.Hebelievesthatpublicservicesshouldbeproduced accordingtothesameprinciplesasentrepreneursworkwith.Hebelievesin privatizationandthenecessityofmeasuringtheattainmentofthese organizations.Insteadofthinkingservicesasproducingmoralgood,whichis Drucker:InnovationandEntrepreneurship/summarybyLassiA.Liikkanen

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inhispointofviewimmeasurablequantity,theyneedtomeasureupin quantity,orbetteryet,incurrency.Oncemonetaryvaluefortheservicesis established,theirfunctioningcanbeoptimizedperfundingdollarandthe goalssetaccordingly.Whilethegoalismoralgoodiskeptasthegoal,it suggeststheprincipleofmaximization(incontrasttooptimization),whichin realityisoftenimpossible(removingpoverty,improvingemployeerights, etc.).Druckerbelievesthatthisoptimizationwillimproveservices(p.184). Hethinksthatonlybychangingthestructureofthepublic‐service organizationcantheybemadeflexibletoadapttothecontinuouschangeof theenvironment.Itcannototherwisehandlethechangeandrespondto transformedneedsoftheaudience. Thepartofnewventuresfollowslargelywhathasbeensaidbefore.Four requirementsarestated:marketfocus,financialforesight,topmanagementteam andentrepreneurdecidingonherownroleforthefuture.Thenewwisdomabout managementisthateverynewventureshouldplanforfutureearlyon.The planningshouldincludefinancing(howtogrowsustainably)and management,creatingatopmanagementteamtosharethekeydecision makingresponsibilityaccordingtocapabilityandinterest. Entrepreneurialstrategies Thefinalpartofthebooksdealswithhowtheinnovativecompanycan proceedinordertoreallyattainsuccess.Fourstrategiesareconsidered: I.

Being“FustestwiththeMostest”

II.

“HittingThemWhereTheyAin’t”

III.

Findingandoccupyingan“ecologicalniche”

IV.

Changingthemarket,productoranindustry

 BeingFustestwiththeMostestisDucker’squotationfromNathanBedford

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Forrest(1821–1877)whowasalieutenantgeneralintheConfederateArmy. However,Duckerhaspickedupawrongdetail,asthephrasehasbeen transformedandcoinedmuchlater,ina1917issueofNewYorkTimes (http://en.wikipedia.org/wiki/Nathan_Bedford_Forrest).Nevermindthe quotation,theprincipleofthisstrategyistoquicklyobtainadominionina (new)marketsegment.Afterthismove,thecompanythencanstartbattling tomaintainitsposition,butitwillprobablybeeasierthantheotherway around.Thisstrategyisriskyandrequireslotofeffort.Eventuallyitmayturn outthatthereisnoadequatereceptivityordemandtosupportthistactic. Hittingthemwheretheyain’tisanotheroldproverbandtranslatesintotwo distinctentrepreneurialstrategies:creativeimitationandentrepreneurialjudo. Theformerstrategyrefertoaselectionofasuccessful,existingmarketand overtakingitbyofferingcustomerssomesuperiorproductorservice.This requiresastronguserfocus,orseeingwhatuserneedmightbebetterserved. Thismakesitcreativeimitation,exploitationthesuccessofothers.Several examplesareprovided,forinstanceIBMiscreditedforovertakingApplein late70’sinthepersonalcomputerbusiness(p.223).Veryinteresting quotationobserved30yearslater. Theentrepreneurialjudoissimilartothis,amarket‐drivenandmarket‐ focusedstrategy.Druckeremphasizesthepowerofjudoinexploitingthe weaknessesandthebadmovesoftheopponent.Thesemovescaninclude: a) Arrogance,mindingonlyourownbusinessandideas b) “Creaming”themarket(high‐endfocus) c) Falseimpressionofquality(“weinvestedalot”) d) Sellingpremiumwithhighprofitmargins e) Maximizingproductfeaturestosatisfyall (consequentiallydegradingusabilityandusefulness)

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 Asanexample,SwissSwatchoverlookedtheintroductionofquartz oscillatorsandelectronicclockleavingittotheJapanese.Belllaboratoriesdid notseeanyneedforimprovingthetuberadios.AgainSonyJapanesetackled themonlysomeyearslater. Ecologicalnichestrategyisaimedatmarketcontrol,notleadershipasthe previousones.Itincludesthreeapproaches:toll‐gate,specialtyskilland specialtymarketstrategies.Thetollgateisbasedonuniqueproduct,unique market.Thisenablesonebusinesstoholdthewholearea,althoughbeing highlydependentontheneed.Specialtyskillisnotfarfromthis,itrefersto acquiringadominantpositionwhentheneedsremainstable.Thisisalsovery sensitivetochangesinexternalenvironmentandeasilyinducestunnelvision, incapabilitytoreachbeyondoneestablishedniche.Forinstance,Boschsolely dominatescarignitionmanufacturinginGermany,butisoutofairplane electronics.Thesamegoesforspecialtymarket,whichisaclearcounterpart oftheskill,therightpiecefortherightpuzzle.

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Conclusion  Bytheendofthebook,Druckerendsupdiscussionhowthesystemofvalues, needsandpricingworks.Hebelievesthatultimatelyeverythingisaboutthe valuethatisofferedtoacustomer.Pricingisimportantdeterminingwhocan paytheproduct,regardlessofhowimportant...