Solo Entrepreneur vs. Partnership

A business needs to be drived by at least three different and somehow conflicting roles. This resembles but not the same as the “seperation of powers” in governance of a state.

  • Business perspective: This quality resides in people who can think strategically, who inspires people through her/his vision. Although it requires a general tendency to think differently and creatively this skill can be learned through experience. Innovation, marketing efforts and business development are perpetual in this perspective.
  • Production/Technological perspective: This perspective is generally reinforced by people who have strong analytical skills such as engineers. If the business shall succeed, the services/products offered by the business should have excellent qualities.
  • Administration perspective: This perspective is generally reinforced by people who tries to systematize processes in the organization. This role is needed for instutionalization stage of the organization.

Although a person can have a combination of those perspectives, she/he has only one or at most two dominant mindsets.

Considering the above facts, which one is preferrable? To be a solo entrepreneur or to form a partnership?

I favor and recommend partnership. But to form a long lasting and sustainable partnership you have to find someone who acquires (at least) all of the following three qualities :

  • whom you can trust;
  • who complements you; It is better to have a partnership who bring different perspectives, who can think different than you.
  • whom you can have an open dialog; Trying to understand you by listening without prejudice, bias and without hidden agendas, but at the same time contributing with her/his own thoughts rationally. This is neccessary to arrive at conclusions through a dialectic method.

My business life intersected with my current partner in 2002, and I am lucky to form a partnership with him, who is respectable, honest, dependable, ethic, reliable, who shows empathy towards not only me but also towards all of our stakeholders, who is consistent in his thoughts, is open to new ideas and innovation, who brings vision to business and who shares the same dream and purpose with me, I strongly favor partnership over being a solo entrepreneur.

Here are the views of two influencial authors and one great theory which support my point of view:

  • Napoleon Hill, in his great book “Think and Grow Rich”, who observed and interviewed extremely successful people (such as Henry Ford, Thomas Edison and Andrew Carneige), introduced the “Mastermind” concept, which is defined by him as: “Coordination of knowledge and effort, in a spirit of harmony, between two or more people, for the attainment of a definite purpose”. He asserts that the extremely successful people all credited their success to the creative energy generated by the team spirit of their management groups.
  • Darel Rutherford in his book “Being the Solution” reinforced Napoleon’s views with the “Powerpact” idea which is defined as: “a separate entitly, a powerful force, called into being when two or more minds combine forces for a common purpose and mutual support“.
  • Ichak Adizes, in the PAEI theory, suggests that different phases (start-up, early stage, development, growth or death) require different management styles. Since a single person can not exhibit different management styles, this theory implies that “a team of partners” is better than “a solo entrepreneur”.

Moral of the article: As a matter of fact, I strongly believe (and experience) that the success is created by good teams and partnerships not by a super solo entrepreneur which is often mislead by the press intentionally. The press loves super heros because it creates more attention from the public but it is not real. It is an exception if not a myth.

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Employee of the Month: Robert Owen

McDonald’s “Employee of the Month” is a widely-known application for recognizing and motivating successful employees. Do you know that the pioneer of this idea was Robert Owen, who was a successful entrepreneur and paradoxically, a utopian socialist during the last decade of 1790’s.

Owen, created a new factory ethos, and used moral suasion rather than corporate punishment. He developed one particularly unique method, “the silent monitor” to aid discipline. Under this system, he awarded four types of marks to his superintendents, and in turn rated their subordinates. These marks were translated into color codes of black, blue, yellow and white in ascending order of merit.

A block of wood was mounted on each machine and the four sides painted according to the code. At the end of each day, the marks were recorded, translated, and the appropriate color side of the block turned to face the aisle. Owen reported that he “passed daily through all the rooms and the workers observed me always to look at these telegraphs- when black I merely looked at the person and then at the color”.

Owen used the tools of “peer pressure”, “self-respect”, “recognition” as a motivating factor. It was a humanistic application which was an innovative method in eighteen century, and it is still applicable after more than 200 years.

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Etymology of Entrepreneur

Etymology: “Entrepreneur” is a loanword from French:

  • Entreprende” (a verb in French) means “to undertake
  • In Sanskrit, “Antha Prerna” (which sounds close to entrepreneur) means “Self motivated

Thus, we can deduct that in ancient times when a person is called as “an entrepreneur”, that person is perceived “as a someone who undertakes some responsibility and pursues a goal with self motivation”. Originally, the word does not neccessarily reflects a merchant.

Richard Cantillon (1680-1734), an Irishman, who lived in French, was the first person to use the term “entrepreneur” in an economic sense in his book “Essai sur la Nature du Commerce au General (Essay on the Nature of Commerce)” which was published in 1755 after his death. In his words, “entrepreneur” applied to anyone who bought or made a product at a certain cost to sell at an uncertain price. In his description, it described the work of any self-employed people such as farmers, water-carriers, brewers, hatmakers, chimneysweeps and so forth.

Jean Baptiste Say (1767-1832), French economist, is often believed to have coined the word “Entrepreneur” because he had provided a definitive explanation of the entrepreneurial role as “the one who undertakes an enterprise, especially a contractor, acting as intermediatory between capital and labour”. He said that “The Entrepreneur shifts economic resources out of an area of lower and into an area of higher productivity and greater yield”.

According to Peter Drucker (1909-2005), there has been total confusion over the definitions of “entrepreneur” and “entrepreneurship”. The clarification of entrepreneurship in his words:

“In the United States, for instance, the entrepreneur is often defined as one who starts his own, new and small business. Indeed, the courses in “Entrepreneurship” that have become popular of late in American business schools are the linear descendants of the course in starting one’s own small business that was offered thirty years ago, and in many cases, not very different.

But not every new small business is entrepreneurial or represents entrepreneurship.
The husband and wife who open another delicatessen store or another Mexican restaurant in the American suburb surely take a risk. But are they entrepreneurs? All they do is what has been done many times before. They gamble on the increasing popularity of eating out in their area, but create neither a new satisfaction nor new consumer demand. Seen under this perspective they are surely not entrepreneurs even though theirs is a new venture.

Admittedly, all new small businesses have many factors in common. But to be entrepreneurial, an enterprise has to have special characteristics over and above being new and small. Indeed, entrepreneurs are a minority among new businesses. They create something new, something different; they change or transmute values.

Drucker suggested that “entrepreneurs see change as the norm and as healthy. Usually, they do not bring about the change themselves. But – and this defines entrepreneur and entrepreneurship – the entrepreneur always searches for change, responds to it, and exploits it as an opportunity.

1. The History of Management Thought, by Daniel A. Wren
2. “Innovation and Entrepreneurship” by Peter Drucker

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How to distinguish the winner in a job interview?

If the duty of the human resource professionals and recruiting managers is to distinguish the person with a winner attitute among the applicants for a job, is there an easy way to distinguish the winner in an interview?

My answer is YES.

During the interviews with the potential candidate to our company, I try to understand the “mental model” of the candidates. Their attitutes and thinking styles are much more important than their direct answers. Although there are a couple of ways to understand their way of thinkings, one attitute is a great indicator of success. That is responsibility.

What is responsibility?

Most of the people are inclined to accept responsibility for those things that are going well in their life, and disregard for those things that are not going so well.

How do you distinguish the responsibility?

Ask the candidate: “What are your failures ?” and then listen. Ask the next question: “What are the reasons of those failures ?” and listen carefully, try to understand the mental model of the candidate. Does the candidate attribute failure to her/his environment (as 99% will do), or does she/he attribute failure to a more broad set of parameters including herself/himself (only 1% will do).

  • If the answer of the candidate is “no failure”, then it reveals that she/he is not aware of the areas where she/he underperformed. That means, the candidate did not acquired the habit of setting challenging objectives for herself/himself. Even if the person’s technical knowledge exceeds the expectations, think twice before offering her/him a job.
  • If the answer of the candidate reveals that she/he attributed failure only to external conditions, that means the self-awareness of the candidate is low.
  • If the answer of the candidate reveals that she/he thought about the causes of failure objectively, this is a qualified attribute. This means the candidate is smart and may show progress. Consider the candidate to the open position even if she/he lacks some knowledge in order to carry out the job requirement.
  • Furthermore, if the answer of the candidate reveals that after the failure, candidate challenged herself/himself and changed (or tried to change) her/his behaviour which she/he thinks as one of the causes of failure, it is a greater indicator of success. That means candidate is willing to develop so that she/he will not be trapped in that failure position once again. The candidate is not only smart but also have the courage to show progress.

Important reminder: The sincerity of the candidate should be checked in both of the answers.

Theory supporting this practice:

There is a natural tendency among people to attribute success to themselves and attribute failure to anything (such as environment, other people and conditions) other then themselves. The opposite is true for attributing success or failure of other people. If a person fails, it is attributed to their personality rather than the conditions.  This phenomenon is called as “fundamental attribution error“.

If people learn to cease attributing problems and failures to their environment, and learn to take responsibility of their actions both in the downtimes and uptimes, this is an indicator of progress.

Moral of the story: The winners attitute is accepting both the credit and blame for whatever the consequence is. Winners are the ones who can take the responsibility after failures.

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Your enemy is your best ally;

Benefits of having an enemy outweighs the costs. Moreover, you will suffer if you do not have a real oppponent because a strong opponent makes you tougher, bolder, stronger and wiser. Your oppponent makes you challenge your limits and makes you  alert to threats.

The real harm is not made by your opponent because you are expecting the possible attacks/threats and you are presumably well prepared for them. However, the real damages result from the ones you do not expect: Your seemingly friends; Voltaire was definetly right in his pray: “Lord, protect me from my friends; I can take care of my enemies“. And the damage from your friends is more psychological than material.

My personal manifestation:

I have always thanked to all who tried to willingly and  consciously deceive or hurt me. I do not  curse them. Actually, they have not worked against me, on the contrary, they worked for me. They are my best allies. Their cruel intentions trained my receptors to seize the hidden agendas easily, accurately  and promptly more than ever. I think that if I want to be a better manager, I have to distinguish the good from bad, honest from hypocrite, and real from false. I would not learn to distinguish them unless I have been deceived or tried to be deceived by my opponents. And I have always protected my self respect and self image by not applying any immoral tactics as my antagonists did. I believe that the key point is this. You should resist not to be pulled to the immoral area. The merit is not to be right but to sustain the legitimacy.

Moral of the story: Competition is great. Opponents are greater. Challenged by an opponent, you leave your comfort zone. You practice, think and develop strategies. If your competitor is as clever as you, than you are luckier because you develop faster and better. You need to thank to your enemies rather than cursing them.

Song of Desree (You Gotta Be) makes you feel like you are stronger :

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What did Peter Drucker said about “The New Venture”?

Peter Drucker and The New Venture

In the previous post, Peter Drucker’s suggestions for the entrepreneurial  management of an “Established Business” were summarized. In his “Innovation and Entrepreneurship” book, he dedicated a separate chapter for the “New Venture” as well. Or we may call it “Start-up” also.

Here is a brief summary of the key ideas he emphasized:

What is the difference between existing businesses and the new venture in terms of entrepreneurship ?

Drucker: For the existing enterprise, whether business or public-service institution, the controlling word in the term “entrepreneurial management”is “entrepreneurial.” For the new venture, it is “management.”In the existing business, it is the existing that is the main obstacle to entrepreneurship. In the new venture, it is its absence.

What are the priorities of an entrepreneur in a new venture ?

Drucker: Entrepreneurial management in the new venture has four requirements:

  1. A focus on the market.
  2. Financial foresight , and especially planning for cash flow and capital needs ahead.
  3. Building a top management team long before the new venture actually needs one and long before it can actually afford one.
  4. It requires of the founding entrepreneur a decision in respect to his or her own role , area of work, and relationships.

Can you elaborate the entrepreneur’s focus on market?

Drucker: When a new venture does succeed, more often than not it is in a market other than the one it was originally intended to serve, with products or services not quite those with which it had set out, bought in large part by customers it did not even think of when it started, and used for a host of purposes besides the ones for which the products were first designed. If a new venture does not anticipate this, organizing itself to take advantage of the unexpected and unseen markets; if it is not totally market-focused, if not market-driven, then it will succeed only in creating an opportunity for a competitor.

Why is financial foresight is important for the new venture ?

Drucker: Lack of market focus is typically a disease of the “neo-natal,” the infant new venture. It is the most serious affliction of the new venture in its early stages—and one that can permanently stunt even those that survive. The lack of adequate financial focus and of the right financial policies is, by contrast, the greatest threat to the new venture in the next stage of its growth. It is, above all, a threat to the rapidly growing new venture. The more successful a new venture is, the more dangerous the lack of financial foresight.

Suppose that a new venture has successfully launched its product or service and is growing fast. It reports “rapidly increasing profits” and issues rosy forecasts. The stock market then “discovers” the new venture, especially if it is high-tech or in a field otherwise currently fashionable. Predictions abound that the new venture’s sales will reach a billion dollars within five years. Eighteen months later, the new venture collapses. It may not go out of existence or go bankrupt. But it is suddenly awash in red ink, lays off 180 of its 275 employees, fires the president, or is sold at a bargain price to a big company. The causes are always the same: lack of cash; inability to raise the capital needed for expansion; and loss of control, with expenses, inventories, and receivables in disarray. These three financial afflictions often hit together at the same time. Yet any one of them by itself endangers the health, if not the life, of the new venture.

Growth has to be fed. In financial terms this means that growth in a new venture demands adding financial resources rather than taking them out.

The new ventures that are the darlings of the newspapers and the stock market letters, the new ventures that show rapid profit growth and “record profits,” are those most likely to run into desperate trouble a couple of years later.

Fast growth always makes obsolete the existing controls. Again, a growth of 40 to 50 percent in volume seems to be the critical figure.

Once control has been lost, it is hard to recapture. Yet the loss of control can be prevented quite easily. What is needed is first to think through the critical areas in a given enterprise. In one, it may be product quality; in another, service; in a third, receivables and inventory; in a fourth, manufacturing costs. Rarely are there more than four or five critical areas in any given enterprise. (Managerial and administrative overhead should, however, always be included. A disproportionate and fast increase in the percentage of revenues absorbed by managerial and administrative overhead, which means that the enterprise hires managerial and administrative people faster than it actually grows, is usually the first sign that a business is getting out of control, that its management structure and practices are no longer adequate to the task.)

After the new venture focus on the market and finds  the financial system  what is the NEXT PROBLEM?

Drucker: The new venture has successfully established itself in the right market and has then successfully found the financial structure and the financial system it needs. Nonetheless, a few years later it is still prone to run into a serious crisis. Just when it appears to be on the threshold of becoming an “adult”—a successful, established, goingconcern—it gets into trouble nobody seems to understand. The products are first-rate, the prospects are excellent, and yet the business simply cannot grow. Neither profitability nor quality, nor any of the other major areas performs. The reason is always the same: a lack of top management. The business has outgrown being managed by one person, or even two people, and it now needs a management team at the top. If it does not have one already in place at the time, it is very late—in fact, usually too late. The best one can then hope is that the business will survive.

The remedy is simple: To build a top management team before the venture reaches the point where it must have one. Teams cannot be formed overnight. They require long periods before they can function. Teams are based on mutual trust and mutual understanding, and this takes years to build up. In my experience, three years is about the minimum.

But the small and growing new venture cannot afford a top management team; it cannot sustain half a dozen people with big titles and corresponding salaries. In fact, in the small and growing business, a very small number of people do everything as it comes along. How, then, can one square this circle?

Again, the remedy is relatively simple. But it does require the will on the part of the founders to build a team rather than to keep on running everything themselves. If one or two people at the top believe that they, and they alone, must do everything, then a management crisis a few months, or at the latest, a few years down the road becomes inevitable.

How should be the top management team formed ?

Drucker: First of all the founders, together with other key people in the firm, will have to think through the key activities of their business. What are the specific areas upon which the survival and success of this particular business depend?

The next step is, then, for each member of the group, beginning with the founder, to ask: “What are the activities that I am doing well? And what are the activities that each of my key associates in this business is actually doing well?” Again, there is going to be agreement on most of the people and on most of their strengths.

Next, one asks: “Which of the key activities should each of us, therefore, take on as his or her first and major responsibility because they fit the individual’s strengths? Which individual fits which key activity?”

Then the work on building a team can begin. The founder starts to discipline himself (or herself) not to handle people and their problems, if this is not the key activity that fits him best. But all key activities need to be covered by someone who has proven ability in performance.

It is prudent to establish the top management team informally at first. There is no need to give people titles in a new and growing venture, nor to make announcements, nor even to pay extra. All this can wait a year or so, until it is clear that the new setup works, and how.

The founder has to learn to become the leader of a team rather than a “star” with “helpers.”

What should the founder do after all of these (market focus, finance, top management) are met ?

Drucker: As a new venture develops and grows, the roles and relationships of the original entrepreneurs inexorably change. If the founders refuse to accept this, they will stunt the business and may even destroy it.

The next question the founder must ask is: “What am I good at? What, of all these needs of the venture, could I supply, and supply with distinction?” Only after having thought through these two questions should a founder then ask: “What do I really want to do, and believe in doing? What am I willing to spend years on, if not the rest of my life? Is this something the venture really needs? Is it a major, essential, indispensable contribution?”

Can you give real life examples ?

Drucker: Edwin Land, for instance, the man who invented Polaroid glass and the Polaroid camera, ran the company during the first twelve or fifteen years of its life, until the early 1950s. Then it began to grow fast. Land there upon designed a top management team and put it in place. As for himself, he decided that he was not the right man for the top management job in the company: what he and he alone could contribute was scientific innovation. Accordingly, Land built himself a laboratory and established himself as the company’s consulting director for basic research. The company itself, in its day-to-day operations, he left to others to run.

Ray Kroc, the man who conceived and built McDonald’s, reached a similar conclusion. He remained president until he died well past age eighty. But he put a top management team in place to run the company and appointed himself the company’s “marketing conscience.” Until shortly before his death, he visited two or threeMcDonald’s restaurants each week, checking their quality carefully, the level of cleanliness and friendliness. Above all, he looked at the customers, talked to them and listened to them. This enabled the company to make the necessary changes to retain its leadership in the fast food industry.

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What did Peter Drucker said about Entrepreneurship?

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:

  1. The organization must be made receptive to innovation and willing to perceive change as an opportunity rather than a threat.
  2. 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.
  3. Entrepreneurial management requires specific practices pertaining to organizational structure, to staffing and managing, and to compensation, incentives, and rewards.
  4. 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.

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