Soul Hangout: Innovation and Entrepreneurship

8/02/2010

Innovation and Entrepreneurship | Peter Drucker

"Quality" in a product or service is not what the supplier puts in. It is what the customer gets out and is willing to pay for Peter Drucker
Innovation and Entrepreneurship

Practice and Principles

By Peter F. Drucker

If you're looking for a good, theoretical introduction to entrepreneurship with a healthy dose of business history thrown in, consider the classic, Innovation and Entrepreneurship: Practice and Principles by management theoretician Peter F. Drucker.

Drucker focuses on large-scale entrepreneurship, e.g., aiming to dominate an industry niche or entire industry, rather than small business management. Drucker discusses innovation, which Drucker says is both conceptual and perceptual. Perceptual in that you must go out and talk with your market to learn from it. Drucker's recurring theme is that good entrepreneurship is usually market-focused and market-driven.

Contrary to the belief of many, Drucker says that innovation isn't inspired by a bright idea, rather it "is organized, systematic, rational work." Innovation can be mastered and integrated into a company or non-profit organization.

Drucker gives us guidelines for identifying innovative opportunity. For example, unexpected successes or unexpected failures within an industry often point to opportunity. Drucker also suggests that innovative opportunity exists where there is "an internal incongruity within the rhythm or the logic of a process" or a process need.

As a great example, Drucker tells us the story of William Conner, a salesman to the medical industry who decided he wanted to start his own company. Conner went out and spoke with surgeons about the problems and difficulties the surgeons faced.

While talking with surgeons, Conner learned that the process for cataract surgery was generally routine and easy, except there was one incongruity making the surgery difficult and unpleasant for physicians. During the surgery, surgeons had to cut one ligament which involved some risk.

With research Conner learned that there was an enzyme that dissolved this ligament. Conner also learned that new methods of storage could preserve this enzyme allowing it to be used in surgery. After patenting his compound, Conner quickly captured a niche market providing his compound to surgeons performing cataract surgery. No longer did they need to cut the ligament. They could dissolve it. With process need, the market already exists for the innovation. Drucker notes this is a relatively low-risk type of entrepreneurship.

While process need is a great area of entrepreneurial innovation, Drucker also suggests demographics may provide opportunities. I'm more dubious of this. Even though we may know how the population will change in ten years, capitalizing on this change isn't easy. Further, most entrepreneurs already tend to be focused on a particular industry or market and large-scale demographic changes wouldn't induce them to change their company's focus. Plus, there are entrepreneurial opportunities even in declining industries.

Sometimes, there is a dissonance between reality and the perception of reality in an industry. This may offer innovative opportunities, according to Drucker.

For example, Drucker mentions the evolution of the ship container industry. While established shipping companies focused on cutting transit time and cost by making ocean-going ships faster and more cost effective, this really wasn't the key. Ships were already very efficient in transit.

Rather, the real problem with the shipping industry was the loading and unloading of cargo, which kept ships in port and tied up valuable harbor space. When the shipping container was developed, it could be pre-loaded on land before the ship arrived. The pre-loaded container could then quickly be loaded onto the ship when the ship arrived in port. This made ocean transit much more cost effective and efficient. Drucker notes that the big cost of ocean transit was having ships held up in port, effectively tying up a capital asset without being able to utilize its full earnings capability.

Drucker discusses entrepreneurial management, claiming three keys to building a successful new organization are

having a market focus

financial foresight, i.e., cash flow budgeting and planning for capital needs

assembling a top management team

Other topics covered in Innovation and Entrepreneurship include creative imitation, entrepreneurial judo, and filling a specialized, ecological niche. Peter Drucker's Innovation and Entrepreneurship provides great insight into seeking entrepreneurial opportunities.

Innovation and Entrepreneurship

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