A Modern Reading of Drucker’s Classic “Innovation and Entrepreneurship”

By: Marta Domínguez

Peter Drucker wrote Innovation and Entrepreneurship in the 1980s as a book that for the first time put innovation as a regular management tool, side-by-side with strategy and operations in a managed business. It offers little mystification of the term “innovation” and there is much of a practical approach to where innovation is made—or might be made.

Drucker had a personal purpose towards innovation: eliminate the terror of mid-managers for eating the vegetable soup so as to make entrepreneurship a systematic job to be done within any type of business (venture business, corporate enterprise or public business).

Indeed he would be abashed today of how over the last thirty years—especially since the early years of this century—the cult to the personality of genius entrepreneurs like Steve Jobs and genius companies like Google has put aside the key questions on his works. Yet dealing with innovation management free of poetic endeavors is necessary.

The Essence is to Exploit Change

If you read Innovation and Entrepreneurship you inevitably realize that the two big problems around innovation from then are repeated now.

We are still looking at the tiny percentage of self-born-innovator-heroes as the change masters that matter. And while doing this, we have been neglecting a more relevant group of change masters: the other 99% of innovator-made-entrepreneurs that belong to the 99% of innovative companies.

Innovations that in themselves constitute a major change like the Wright brothers’ aeroplane, says Drucker, are exceptions and uncommon: “Most successful innovations are more prosaic”. And he gives the example of McDonald’s: the introduction of management to an easy business so that eating a burger in any city of the world replicates the same experience as that of an American burger.

The second major problem is that managers usually neglect the biggest source of successful innovation. Although R&D is the most known source of innovation, entrepreneurs out there do not need to bring about the change themselves. “The entrepreneur always searches for change respond to it and exploits it as an opportunity”, explains Drucker.

Actually he gives us a purposeful definition of the term “innovation” that any startup in the 21^st century, be it based on technology or not, would rapidly nod on: “Innovation is the specific tool of entrepreneurs” and entrepreneurs are a minority who “create something new, something different, they change or transmute values”; and thus “Innovation is the means entrepreneurs exploit change as an opportunity for a different business or a different service”

See the Symptoms of Change? See the Opportunity of Innovation!

What changes become potential sources of innovation then? The most rewarding opportunities are in changes that can be anticipated. The kiss of the muses cannot. These are changes that are visible to the people within the same industry and market. But signals do not necessarily have to wait for new applicable technology to irrupt on stage. “Thus the discipline of innovation is a diagnostic discipline: a systematic examination of the areas of change that typically offer entrepreneurial opportunities”, wrote Drucker.

There is the unexpected change: the product that sells in a market different than that we planned for. Or the little line of business that out of surprise and out of the planning studies of the company outperforms for an unknown reason.

There is the incongruity of industry putting effort on a set of assumptions and the reality requiring improvements in a complete different set of objectives. It is interesting to learn that this is how modern international freighters, the container ship we all well know, were created. Ships were faster than ever but port times were longer than ever and thus the long deliveries. Roll-on, roll-off ships and the container ships solved the incongruity and created a new line of innovation in freighters.

Although the most common source of incongruity is perceived versus actual customer values and expectations. The “TV sets are not for the poor and farmers” said in the 1950s by a Japanese manufacturer resonates with the “renting rooms from a sharing economy platform like Airbnb is not for high-end and business travellers” said by a major accommodation chain in the 2015s.

And, of course, there are the demographics and its capacity to signal the important changes in new populations coming to education, to work, and to the consumer segment. As Drucker pointed out, “the competitors will accept demographic reality, as a rule, only when it’s already to be replaced by a new demographic change or reality”.

Gamble on the Receptivity to it

Certainly some answers are not in the books. The common mantra of startups in our time (of which Steve Blank and Eric Ries’ Lean Startup are the greatest exponents) about getting out of the building and get to know the real needs and pains of the customer was also a pattern that Drucker noticed in earlier times. “Market research does not work—one cannot do market research on something that does not exist”, says Drucker, “We must gamble on receptivity to it”. Receptivity can be perceived, explains Drucker, not only from reading statistics but from “going into the field to look and listen”.

In his book he tells about the American department store Sears which in the mid 50s—before the population change in Latin America was already a reality—decided to open stores in major Latin American cities based on what he “sensed” and “observed” during his trips. The story of encyclopedia sellers was also the result of an entrepreneur, William Benton, asking outside the building to people and finding that the words “middle-class” had changed the meaning to “the ability of one’s children to rise through performance in school”. So to be middle class you would have to have an encyclopedia.

Manage the New Products and the Old Products Consciously and Separately

All innovation and change management books always present innovation as the savior but also as a threatening shadow. It is an “innovate or die” choice. If your company does not innovate, then the competitor will take you off the market. It often means stress on the same people who are told to run the business and milk the market. It is like telling a child he needs veggies to grow healthy but the bad-tasting soup threatens to be there for breakfast if he does not eat it all for dinner.

The whole point of book Innovation and Entrepreneurship is to lower the risk of innovations. On that matter Drucker has advice for entrepreneurial businesses as for inventors and technologists: “(high tech entrepreneurs) tend to be contemptuous of anything that is not ‘advanced knowledge’, and particularly of anyone who is not a specialist in their own area. They tend to be infatuated with their own technology, often believing that ‘quality’ means what is technically sophisticated rather than what give value to the user. They are, by and large, nineteenth-century inventors rather than twentieth-century entrepreneurs”.

And here is where Drucker tells us the hows of managing so the company structure has natural “greed for new things” instead of managing to perceive in the new a threat.

Innovators, points out Drucker, are successful “to the extend to which they define risks and confine them”. The tools for that are based on the right financial and business planning and on the systematic abandonment of products. A business plan in innovation is so much a lie in our times as it was thirty years ago (the lean startup method did promote the cite but did not create it). We cannot plan the results we do not know. But according to Drucker, companies should know the budget and the time spans in their specific industry, technology and market. So the idea is to use time spans to review unexpected successes (changes). Staff and work today on the products, services, processes and technologies of tomorrow. Do not do it in the same meeting where you run the business: “it must be properly featured”. And remunerate on results of the future business instead of on return on the current sales.

Today, companies like Ikea, the giant of ready-to-assemble furniture, are live examples of the validity of Drucker’s innovation structure in the organization. Its more than 70 years on the market are deeply rooted in its founder ability to instill in Ikea organizational structures that manage and keep refreshing the products of tomorrow. Most recently Ikea has set a lab that mixes internal and open work and that has the mission of devising what the contents of its most iconic showroom, the printed Ikea catalogue, may be stuffed with in the span of a few years ahead.

Meanwhile there are still enterprises that see their innovations dry or underperform when the founder’s strong personality is not longer around acting as “the boss”.

One cannot but wonder if Tesla Corp and founder Elon Musk, among the most innovative businesses today, will follow the steps of its counterparts in the past Walt Disney and McDonald’s (Ray Kroc). If this is another case of companies that did not build innovation principles into their company structure, and so stopped performing well in innovation when founder was not longer there.

We could say that Ikea is a rare avis and that systematic innovation is still an area that most companies neglect. And this is a topic where Drucker’s Innovation and Entrepreneurship delivers. Or as Drucker himself put it: “Innovation can be ‘low-risk’. It needs to be systematic. It needs to be managed. It needs to be based on purposeful innovation”.

By Marta Domínguez