Innovation and Entrepreneurship

Drucker presents innovation and entrepreneurship not as mysterious gifts but as disciplines that can be learned, organized, and practiced. The book is organized around three sections: the Practice of Innovation, the Practice of Entrepreneurship, and Entrepreneurial Strategies.

Drucker opens by challenging the belief that the American economy of the 1970s and early 1980s was stagnating. Between 1965 and 1985, the number of Americans in paid jobs grew from 71 million to 106 million, absorbing both the baby boom generation and a massive influx of married women into the workforce. The traditional job creators, including America's largest corporations and government agencies, had been shedding jobs since the late 1960s. The new jobs came from small and medium-sized enterprises, many of which had not existed twenty years earlier. Drucker dismisses the assumption that high technology drove this growth, noting it contributed only about five to six million jobs. The real engine was "entrepreneurial management": the systematic application of management principles to new ventures, small businesses, and nonbusiness institutions.

To explain why predicted stagnation never materialized, Drucker introduces the Kondratieff long-wave cycle, a theory predicting prolonged stagnation after a major technological wave crests. He concedes the theory describes the decline of traditional heavy industries like automobiles, steel, and rubber but argues it cannot account for America's 40 million new jobs. What offset the predicted downturn was entrepreneurship itself.

Part I develops a systematic framework for innovation. Drucker defines entrepreneurship through the formulation of J. B. Say, the early nineteenth-century French economist: entrepreneurs shift resources from areas of lower to higher productivity. He distinguishes genuine entrepreneurship from merely starting a new business. McDonald's, by standardizing products, redesigning processes, and defining customer value, created a new market and a new customer. Entrepreneurship is behavior, not a personality trait. It rests on a theory that sees change as normal and the entrepreneur's task as what economist Joseph Schumpeter called "creative destruction," the displacement of established products and businesses through innovation.

Drucker identifies seven sources of innovative opportunity in descending order of reliability. The first four are internal to an enterprise or industry: the unexpected, incongruities, process needs, and changes in industry or market structure. The remaining three are external: demographics, changes in perception, and new knowledge.

The unexpected success is the richest yet most neglected source. R. H. Macy's department store suppressed its booming appliance sales because they deviated from its fashion-dominated identity, while Bloomingdale's seized the same trend and rose to prominence. A major steel company rejected the mini-mill, a small steel mill using a cheaper production model, and fired the employees who advocated it, only to watch mini-mills later prove highly successful. Unexpected failures prove equally instructive: Ford's meticulously planned Edsel failed in 1957, but the investigation revealed that "lifestyle segmentation" was replacing traditional socioeconomic market divisions, leading to the Thunderbird's success.

Incongruities take several forms. In shipping, the industry focused on reducing costs at sea while ignoring the far greater cost of idle time in port. The container ship and the roll-on/roll-off vessel, a ship loaded by driving cargo on and off, addressed this gap, cutting port time by three-quarters and reducing costs by 60 percent. Process need starts with a job to be done: Ottmar Mergenthaler's 1885 linotype machine solved the bottleneck of hand typesetting in an era of exploding demand for printed material, using no new science but considerable ingenuity.

Changes in industry structure appear stable but are brittle. Drucker traces the automobile industry through two structural shifts, showing that companies making decisive strategic choices succeeded while those that hesitated became marginal. Demographics, the clearest external source, have known lead times yet are chronically ignored. Changes in perception offer another source: when the meaning of facts shifts, opportunities emerge. New knowledge is the most glamorous but least reliable source, with lead times of 25 to 35 years and a near-universal requirement for the convergence of several knowledge streams before the innovation becomes viable. The computer, for example, required five separate strands of knowledge before it could become operational.

Drucker closes Part I with principles of innovation: begin with systematic analysis of all seven sources; keep innovations simple and focused; start small; aim at leadership. He challenges the image of the entrepreneur as a risk-taker, arguing that successful innovators systematically define and confine risk rather than seeking it.

Part II shifts to the institutions that carry innovation. For existing businesses, the main obstacle is not bureaucracy but the success of the existing operation, which absorbs attention and makes the new look unpromising. Drucker prescribes systematic abandonment of outworn products every three years, measurement of innovative performance, organizational structures that separate the entrepreneurial from the managerial, and avoidance of pitfalls such as mixing entrepreneurial and managerial units or trying to acquire entrepreneurship by buying small ventures. Procter & Gamble, Johnson & Johnson, and 3M exemplify success by setting up each new venture as a separate business under a dedicated project manager.

Public-service institutions, including government agencies, unions, churches, and universities, need entrepreneurship even more than businesses but face structural obstacles: they are funded by budgets rather than results, depend on multiple constituencies each holding veto power, and tend to view their missions as moral absolutes. Drucker illustrates exceptions, including Lincoln, Nebraska, which pioneered contracting out municipal services through competitive bidding, and the Girl Scouts, which recruited minority members and redesigned programs for working mothers.

For new ventures, the central problem is management. Drucker identifies four requirements: market focus, since products often find customers in unanticipated markets; financial foresight, since growth consumes cash and reported profits are often accounting fictions; a top management team built before it is needed; and founders' honest assessment of where they can contribute. Polaroid founder Edwin Land chose to run the research laboratory rather than the company, while McDonald's leader Ray Kroc appointed himself the company's "marketing conscience" and spent his time visiting restaurants.

Part III addresses entrepreneurial strategies. "Fustest with the Mostest" aims at dominance from the start, as when Hoffmann-LaRoche gambled on vitamins in the 1920s when the scientific establishment doubted their existence. This is the highest-risk approach: like a moon shot, it must hit on target or miss entirely. "Hit Them Where They Ain't" encompasses two sub-strategies. Creative imitation waits until someone else establishes the new and then perfects and repositions it, as IBM did with both the mainframe and the personal computer. Entrepreneurial judo exploits the bad habits of established leaders, such as arrogant dismissal of outside innovation and neglect of underserved segments. Sony exploited American manufacturers' dismissal of the transistor for consumer electronics. Citibank's German Familienbank gained a beachhead in consumer finance because established banks considered ordinary depositors beneath their dignity.

Ecological niche strategies aim at practical monopoly in a small area through toll-gate positions, in which an inexpensive but essential product commands a captive market too small to attract competitors, specialty skills, or deep market knowledge. The final strategy changes the economic characteristics of existing products. Postal reformer Rowland Hill transformed mail service in 1836 by making it prepaid and uniform in price. Razor manufacturer King Gillette priced what the customer buys, a shave, rather than what the manufacturer sells, a razor. General Electric built world leadership in steam turbines by providing consulting engineering for free and recovering costs through equipment pricing, because utility commissions would not let power companies pay directly for consulting. Each case rests on starting with the customer's utility rather than the producer's product.

Drucker concludes by arguing that innovation and entrepreneurship must become integral to all institutions as a pragmatic alternative to revolution. Government planning is incompatible with entrepreneurship, and promoting only high tech will fail. Two social innovations are needed: programs to retrain displaced industrial workers and mechanisms for systematic abandonment of obsolete government policies. Tax policy must encourage capital formation and protect new ventures during their cash-consuming early years. Individuals must accept responsibility for continuous learning throughout their careers. The entrepreneurial society, Drucker suggests, may represent a historical turning point, offering a way to keep institutions flexible and self-renewing without the bloodshed and broken promises of revolution.