Peter Drucker and Entrepreneurship
Peter Drucker, who was announced as “The Man Who Invented Management” by BusinessWeek in the article published upon his death, had articulated the practice of Entrepreneurship in his precious book “Innovation and Entrepreneurship”. As an entrepreneur, I have experienced his following insights several times. He, as an opinion leader deserved all the praise.
Here is a brief summary of key ideas he emphasized:
Does scale matter ?
Drucker: Entrepreneurship is based on the same principles, whether the entrepreneur is an existing large institution or an individual starting. The rules are pretty much the same. Yet the existing business faces different problems, limitations, and constraints from the solo entrepreneur, and it needs to learn different things.
Do Big Businesses not innovate ?
Drucker: It is not size that is an impediment to entrepreneurship and innovation; it is the existing operation itself, and especially the existing successful operation. And it is easier for a big or at least a fair-sized company to surmount this obstacle than it is for a small one.
Operating anything requires constant effort and unremitting attention. The one thing that can be guaranteed in any kind of operation is the daily crisis. The daily crisis cannot be postponed, it has to be dealt with right away. And the existing operation demands high priority and deserves it. It thus takes special effort for the existing business to become entrepreneurial and innovative.
And yet successful innovators, start small and, above all, simple.
What happens if organizations do not innovate ?
Drucker: The enterprise that does not innovate inevitably ages and declines. And in a period of rapid change such as the present, an entrepreneurial period, the decline will be fast.
What should organizations do in order to innovate ?
Drucker: The conventional wisdom goes wrong is in its assumption that entrepreneurship and innovation are natural, creative, or spontaneous. But entrepreneurship is not “natural”; it is not “creative.” It is work. Hence, the correct conclusion from the evidence is the opposite of the one commonly reached.
Specifically, entrepreneurial management requires policies and practices in four major areas:
- The organization must be made receptive to innovation and willing to perceive change as an opportunity rather than a threat.
- Systematic measurement or at least appraisal of a company’s performance as entrepreneur and innovator is mandatory, as well as built-in learning to improve performance.
- Entrepreneurial management requires specific practices pertaining to organizational structure, to staffing and managing, and to compensation, incentives, and rewards.
- There are some “dont’s”: things not to do in entrepreneurial management.
Entrepreneurial management must make each manager of the existing business “rerum novarum cupidus.” (greedy for new things in Latin).
“How can we overcome the resistance to innovation in the existing organization?” is a question commonly asked by executives. Even if we knew the answer, it would still be the wrong question. The right one is: “How can we make the organization receptive to innovation,want innovation, reach for it, work for it?” When innovation is perceived by the organization as something that goes against the grain, as swimming against the current, if not as a heroic achievement, there will be no innovation. Innovation must be part and parcel of the ordinary, the norm, if not routine. This requires specific policies:
- First, innovation, rather than holding on to what already exists, must be made attractive and beneficial to managers.
- Second, the importance of the need for innovation and the dimensions of its time frame must be both defined and spelled out.
- And finally, there needs to be an innovation plan, with specific objectives laid out.
What are the “dont’s” in an entrepreneurial management ?
Drucker: The most important caveat is not to mix managerial units and entrepreneurial ones. Do not ever put the entrepreneurial into the existing managerial component. Do not make innovation an objective for people charged with running, exploiting, optimizing what already exists.
Innovative efforts that take the existing business out of its own field are rarely successful. Innovation had better not be “diversification.”Whatever the benefits of diversification, it does not mix with entrepreneurship and innovation. The new is always sufficiently difficult not to attempt it in an area one does not understand. An existing business innovates where it has expertise, whether knowledge of market or knowledge of technology. Anything new will predictably get into trouble, and then one has to know the business.
Finally, it is almost always futile to avoid making one’s own business entrepreneurial by “buying in,” that is, by acquiring small entrepreneurial ventures.
What should be the policies ?
1) First, there is only one way to make innovation attractive to managers: a systematic policy of abandoning whatever is outworn, obsolete, no longer productive, as well as the mistakes, failures,and misdirections of effort.
Innovation requires major effort. It requires hard work on the part of performing, capable people—the scarcest resource in any organization.
“Nothing requires more heroic efforts than to keep a corpse from stinking, and yet nothing is quite so futile,” is an old medical proverb. In almost any organization I have come across, the best people are engaged in this futile effort; yet all they can hope to accomplish is to delay acceptance of the inevitable a little longer and at great cost.
To allow it to innovate, a business has to be able to free its best performers for the challenges of innovation. Equally it has to be able to devote financial resources to innovation.
2) The second step, the second policy needed to make an existing business “greedy for new things,” is to face up to the fact that all existing products, services, markets, distributive channels, processes, technologies, have limited—and usually short—health and life expectancies.
3) The Business X-Ray furnishes the information needed to define how much innovation a given business requires, in what areas, and within what time frame. In this approach a company lists each of its products or services, but also the markets each serves and the distributive channels it uses, in order to estimate their position on the product life cycle. How much longer will this product still grow? How much longer will it still maintain itself in the marketplace? How soon can it be expected to age and decline—and how fast? When will it become obsolescent? This enables the company to estimate where it would be if it confined itself to managing to the best of its ability what already exists.
4) Systematic abandonment; the Business X-Ray of the existing business, its products, its services, its markets, its technologies; and the definition of innovation gap and innovation need—these together enable a company to formulate an entrepreneurial plan with objectives for innovation and deadlines.
The business must be managed as to perceive in the new an opportunity rather than a threat. It must be managed to work today on the products, services, processes, and technologies that will make a different tomorrow.
What are the Entrepreneurial practices for existing businesses?
Drucker: Entrepreneurship in the existing business also requires managerial practices:
1) First among these, and the simplest, is focusing managerial vision on opportunity. People see what is presented to them; what is not presented tends to be overlooked. And what is presented to most managers are “problems”—especially in the areas where performance falls below expectations—which means that managers tend not to see the opportunities. They are simply not being presented with them. Of course, problems have to be paid attention to, taken seriously, and tackled. But if they are the only thing that is being discussed, opportunities will die of neglect. In businesses that want to create receptivity to entrepreneurship, special care is therefore taken that the opportunities are also attended to.
Typically, in companies that are managed for entrepreneurship,there are therefore two meetings on operating results: one to focus on the problems and one to focus on the opportunities.
2) The second practice is to generate an entrepreneurial spirit throughout the entire management group.
3) A third practice, and one that is particularly important in the large company, is a session—informal but scheduled and well prepared—in which a member of the top management group sits down with the junior people from research, engineering, manufacturing, marketing, accounting and so on. The senior opens the session by saying: “I’m not here to make a speech or to tell you anything, I’m here to listen. I want to hear from you what your aspirations are, but above all, where you see opportunities for this company and where you see threats. And what are your ideas for us to try to do new things, develop new products, design new ways of reaching the market? What questions do you have about the company, its policies, its direction… its position in the industry, in technology, in the marketplace?”
How should the companies organize to innovate ?
Drucker: First, that the entrepreneurial, the new, has to be organized separately from the old and existing.
Second, there has to be a special locus for the new venture within the organization, and it has to be pretty high up. Even though the new project, by virtue of its current size, revenues, and markets, does not rank with existing products, somebody in top management must have the specific assignment to work on tomorrow as an entrepreneur and innovator.
The best, and perhaps the only, way to avoid killing off the new by sheer neglect is to set up the innovative project from the start as a separate business.
There is another reason why a new, innovative effort is best setup separately: to keep away from it the burdens it cannot yet carry. Both the investment in a new product line and its returns should, for instance, not be included in the traditional return-on-investment analysis until the product line has been on the market for a number of years. To ask the fledgling development to shoulder the full burdens an existing business imposes on its units is like asking a six-year-old to go on a long hike carrying a sixty-pound pack;
The innovative effort and the unit that carries it require different policies, rules, and measurements in many areas. How about the company’s pension plan, for instance? Often it makes sense to give people in the innovative unit a participation in future profits rather than to put them into a pension plan when they are producing, as yet, no earnings to supply a pension fund contribution.
The returns on innovation will be quite different from those of the existing business and will have to be measured differently. To say, “We expect all our businesses to show at least a fifteen percent pre-tax return each year and ten percent annual growth” may make sense for existing businesses and existing products. It makes absolutely no sense for the new project, being at once much too high and much too low. For a long time (years, in many cases) the new endeavor shows neither profits nor growth. It absorbs resources. But then it should grow very fast for quite a long time and return the money invested in its development at least fifty-fold—if not at a much higher rate—or else the innovation is a failure. An innovation starts small but it should end big.