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Innovation and Entrepreneurship

Peter F. Drucker

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The external sources of innovative opportunity

• Demographics

• Changes in perception, meaning, and mood

• New knowledge

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Chapter 7: Demographics

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Demographics

• It defines as changes in population, its size, age structure, composition, employment, education status, and income.

• They are unambiguous. They have the most predictable consequences.

• Demographics have major impact on what will be bought, by whom, and in what quantities.

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For example

• American teenagers buy a good many pairs of cheap shoes a year.

• They buy fashion, nor durability, and their purses are limited.

• The same people, ten years later, will buy very few pairs of shoes a year. But they will buy them for comfort and durability first and for fashion second.

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Dangerous error

• Populations changes were thought to occur so slowly and over such long time spans as to be of little practical concern.

• Twentieth-century societies, both developed and developing ones, have become prone to extremely rapid and radical demographic changes, which occur without advance warning.

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For example

• The most prominent American experts called together by F.D. Roosevelt predicted unanimously in 1938 that the U.S. population would peak at around 140 million people in 1943 or 1944, and then slowly decline.

• In 1949, the U.S. kicked off a “baby boom” that for 12 yrs produced unprecedentedly large families, only to turn just as suddenly in 1960 into a “baby bust”, producing equally unprecedentedly small families.

• The shift is not only dazzlingly sudden. It is often mysterious and defy explantion.

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Rewarding opportunity

• Demographic shifts in this century may be inherently unpredictable. Yet they do have long lead times before impact and lead times moreover are predictable.

• What makes demographics such a rewarding opportunity for the entrepreneur is precisely its neglect by decision markers, whether businessmen, public-service staffs, or governmental policymakers.

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Other important demographic changes

• Analysis of demographic changes begins with population figures. But absolute population is the least significant number.

• Particularly important in age distribution are changes in the center of population gravity, that is, in the age group which at any given time constitutes both the largest and the fastest-growing age cohort in the population.

• Segmentation by education attainment; labor force participation; occupational segmentation; income distribution.

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Chapter 8: Changes in Perception

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Perception

• In mathematics there is no difference between “The glass is half full” and “The glass is half empty”.

• If general perception changes from seeing the glass as “half full” to seeing it as “half empty,” there are major innovative opportunities.

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For example (I)

• For the years from 1960s, all indicators (mortality rate for newborn babies or survival rates for the very old) of physical health and functioning have been moving upward.

• And yet the nation is gripped by collective hypochondria. Never before has there been so much concern with health, and so much fear.

• Suddenly everything seems to cause cancer or degenerative heart disease or premature loss of memory. The glass is clearly “half empty”.

• It created, for instance, a market for new health-care magazines: one of them, American Health, reached a circulation of a million within two years.

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For example (II)

• Around 1950, the American population began to describe itself as being “middle-class.”

• William Benton went out and asked people what the words, “middle class” meant to them. The result: “middle class” in contrast to “working class” means believing in the ability of one’s children to rise through performance in school.

• Benton brought up the Encyclopedia Britannica company and started peddling it mostly through high school teachers, to parents whose children were the first generation in the family to attend high school.

• “If you want to be “middle-class”, your child has to have the Encyclopedia Britannica to do well in school.”

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“Existential”

• When a change in perception takes place, the facts do not change. Their meaning does.

• Economics do not necessarily dictate such change; in fact, they may be irrelevant.

• What determines whether the glass is “half full” or “half empty” is mood rather than facts. It results from experiences that might be called “existential.”

• The American blacks feel “The glass is half empty” has much to do with unhealed wounds of past centuries as with anything in present American society.

• The American health hypochondria expresses far more American values, such as the worship of youth, than anything in the health statistics.

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The problem of perception-based innovation

• The critical problem in perception-based innovation is “timing”.

• There is nothing more dangerous than to be premature in exploiting a change in perception. And it is not always apparent which is fad and which is true change.

• Perception-based innovation has to start small and be very specific.

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Chapter 9: Source: New Knowledge

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Knowledge-based innovation

• It is what people normally mean when they talk of innovation.

• The knowledge is not necessarily scientific or technical.

• Social innovations based on knowledge can have equal or even greater impact.

• Knowledge-based innovation is temperamental, capricious, and hard to manage.

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The characteristics of knowledge-based innovation – long lead time

• Knowledge-based innovation has the longest lead time of all innovation, a long time span between the emergence of new knowledge and its becoming applicable to technology, and anther long period before the new technology turn into products, processes, or services in the marketplace.

• The lead time for knowledge become applicable technology and begin to be accepted on the market is between 25 and 35 years.

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For example• The earliest was the binary theorem, a mathematical theory going b

ack to the 17th century.• It was applied to a calculating machine by Charles Babbage in the fi

rst half of 19th century.• In 1890, Herann Hollerith invented the punchcard, going back to an i

nvention by the early 19th century Frenchman J-M. Jacquard.• In 1960 an American, Lee de Forest, invented the audion tube, and

with it created electronics.• Between 1910 and 1930, Bertrand Russell and Alfred North Whiteh

ead created symbolic logic.• During WWI, the concepts of programming and feedback were deve

loped.• By 1918, all the knowledge needed to develop the computer was av

ailable.• The first computer became operational in 1946.

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The characteristics of knowledge-based innovation – convergence

• The knowledge-based innovations are almost never based on one factor but on the convergence of several different kinds of knowledge, not all of them scientific or technological.

• Until all the needed knowledge can be provided, knowledge-based innovation is premature and will fail.

• Until all the knowledge converge, the lead time of a knowledge-based innovation usually does not begin.

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What knowledge-based innovation requires? – careful analysis

• It requires careful analysis of all the necessary factors, whether knowledge itself, or social, economic, or perceptual factors.

• The analysis must identify what factors are not yet available so that entrepreneur can decide whether these missing factors can be produced or whether the innovation had better be postponed as not yet feasible.

• Scientific and technologists are reluctant to make these analyses precisely because they think they already know.

• This explain why, in so many cases, the great knowledge-based innovations have had a layman for their father.

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What knowledge-based innovation requires? – focus on strategic position

Three major focuses for knowledge-based innovation

• Complete system

• Market focus

• Key function

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What knowledge-based innovation requires? – entrepreneurial management

• Entrepreneurial management is more crucial to knowledge-based innovation than to any other kind.

• Yet knowledge-based, and especially high-tech, innovation tends to have little entrepreneurial management.

• They tend to be contemptuous of anything that is not “advanced knowledge”. They tend to be infatuated with their own technology, often believing that “quality” means what is technically sophistically rather than what gives value to the user.

• They are still, 19th century inventors rather than 20th century entrepreneurer.

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Unique risks• It’s turbulent. The combination of the two characteristics of

knowledge-based innovations – long lead time and convergences – give these innovations their peculiar rhythm.

• For a long time, there is awareness of an innovations about to happen – but it does not happen.

• Then suddenly there is a near-explosion, followed by a few short years of tremendous excitement, tremendous startup activity, tremendous publicity.

• The it comes a “shakeout”, which few survive.• There is a “window” of a few years during which a new

venture must establish itself in any new knowledge-based industry.

• The window is becoming more and more crowded. A great many countries have today what only very few small places has a hundred years ago.

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Two implications

• Science-based and technology-based innovators alike find time working against them.

• Because the “window” is much more crowded, any one knowledge-based innovator has far less chance of survival.

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The shakeout

• The “shakeout” sets in as soon as the “window” closes.

• High tech companies need to plow more and more money back into research, technical development, and technical services to stay in the race.

• There is only one prescription for survival during the shakeout entrepreneurial management.

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The receptivity gamble

• All other innovations exploit a change that has already occurred. They satisfy a need that already exists.

• In knowledge-based innovation, the innovation brings about the change. It aims at creating a want. And on one can tell in advance whether the user is going to be receptive, indifferent, or actively resistant.

• The authorities can be right or wrong. Only hindsight can tell us whether the experts are right or wrong in their assessment of the receptivity.

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Chapter 10: Bright Idea

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The bright idea

• Innovations based on a bright idea probably outnumber all other categories taken together.

• Bright ideas are the riskiest and least successful source of innovative opportunities.

• This belief that you’ll win if only you keep on trying out bring ideas is no more than rational than the popular fallacy that to win the jackpot at Las Vegas one only has to keep on pulling the lever.

• The entrepreneur is therefore well advised to forgo innovations based on bright ideas.

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Chapter 11: Principles of Innovation

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“miracle cures”

• “Miracle cures” for terminal illnesses.

• No physician is going to put miracle cures into a textbook or into a course to be taught to medical students.

• They cannot be replicated, cannot be taught, cannot be learned.

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“flash of genius”

• There are innovators who are “kissed by the Muses,” and whose innovations are the result of a “flesh of genius” rather than hard, organized, purposeful work.

• There is no known way to teach someone how to be a genius.

• All the genius had was a brilliant idea. It belongs in the history of ideas and not in the history of technology or of innovation.

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The Do’s (I)

• Purposeful, system innovation begins with the analysis of the opportunities.

• Innovation is both conceptual and perceptual. Successful innovators look at figures and they look at people.

• An innovation, to be effective, has to be simple and it has to be focused. The greatest praise an innovation can receive is for people to say: “This is obvious. Why didn’t I think of it?”

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The Do’s (II)

• Effective innovations start small. Initially innovations rarely are more than “almost right”. The necessary changes can be made only if the scale is small and the requirements for people and money fairly modest.

• A successful innovation aims at leadership. It does not aim necessarily at becoming eventually a “big business”.

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The Dont’s

• Simply not to try to be clever. Incompetence is the only thing in abundant and never-failing supply.

• Don’t diversify. Don’t try too many things at once.

• Don’t try to innovate for the future. Innovate for the present.

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Three conditions

• Innovation is work. When all is said and done, innovation becomes hard, focused, purposeful working making every great demands on diligence, on persistence, and on commitment. If these are lacking, no amount of talent, ingenuity, or knowledge will avail.

• To succeed, innovators must build on their strengths. And in innovation, as in any other venture, there must also be temperamental fit.

• Innovation is an effect in economy and society. It has to be close to the market, focused on the market, indeed market-driven.

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The conservative innovator• “Entrepreneurial personality”, which was characterized by a

“propensity for risk-taking”.• In fact, they are not “risk-takers”. They try to define the risks

they have to take and to minimize them as much as possible.• Of course, innovation is risky. But so is stepping into the car

to drive to the supermarket for a loaf of bread.• All economic activity is by definition “high-risk.” and defending

yesterday – that is, not innovating – is far more risky than making tomorrow.

• The innovators are successful to the extent the extent to which they define risks and confine them.

• Successful innovators are conservative. They have to be. They are not “risk-focused”; they are “opportunity-focused.”