Goktug Yilmaz's Reviews > Innovation and Entrepreneurship: Practice and Principles

Innovation and Entrepreneurship by Peter F. Drucker
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3 Keys:

- The test of an innovation, lies not on its novelty, its scientific content, or its cleverness. It lies in its success in the marketplace.
- 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. A product is not “quality” because it is hard to make and costs a lot of money. That is incompetence. Customers pay only for what is of use to them and gives them value. Nothing else constitutes quality.
- All economic activity is by definition “high-risk.” Defending yesterday is far more risky than making tomorrow.

Notes:

- A “premium” price is always an invitation to the competitor.
- Innovation, creates a resource. Until men founds how to use them, every plant is a weed and every mineral just another rock.
- There is no greater resource in an economy than purchasing power.
- High tech does not generate enough jobs to make the whole economy grow. But the “low tech” of systematic, purposeful, managed entrepreneurship does.
- Because of high amount of inventors rather than entrepreneurs, high-tech industries follow the traditional pattern of great excitement, rapid expansion, and then sudden shakeout and collapse, the pattern of “from rags to riches and back to rags again” in five years.
- People who need certainty are unlikely to make good entrepreneurs, politicians, military commanders. Decisions have to be made, and the essence of any decision is uncertainty.
- Everyone who can face up to decision making can learn to be an entrepreneur and to behave entrepreneurially. Entrepreneurship, is behavior rather than personality trait.
- Entrepreneurship rests on a theory of economy and society that sees change as normal and healthy. The major task in society and economy is doing something different rather than doing better what is already being done.
- Technology can be imported at low cost and with a minimum of cultural risk. Institutions, by contrast, need cultural roots to grow and to prosper.
- Clever innovative strategy always fails, particularly if it is aimed at exploiting an opportunity created by a change in industry structure. Only the very simple, specific strategy has a chance of succeeding.
- Innovations that exploit changes in industry structure are particularly effective if the industry and its markets are dominated by one or few large manufacturer or supplier. Large, dominant producers and suppliers, having been successful and unchallenged for many years, tend to be arrogant. At first they dismiss the newcomer as insignificant and amateurish. But even when the newcomer takes a larger share of their business, they find it hard to mobilize themselves for counteraction.
- Serious limitation: Incongruity is usually available only to people within a given industry or service. It is not something that somebody from the outside is likely to spot, to understand, and hence is able to exploit.
- Users are always away of incongruity (Things don't match to expectations). What is lacking, however, is someone willing to listen, somebody who took seriously what everybody proclaims: That the purpose of a product or a service is to satisfy the customer. If this axiom is accepted and acted upon, using incongruity as an opportunity for innovation becomes fairly easy and highly effective.
- Innovation requires major effort. It requires hard work on the part of performing, capable people the scarcest resource in any organization.
- Innovation is organized, systematic, rational work.
- Innovation, is an economic or social rather than a technical term.
- Innovation, by definition, has to be decentralized, ad hoc, autonomous, specific, and micro-economic. It had better start small, tentative, flexible.
- If the leader uses his leadership position to raise prices or to raise profit margins except by lowering his cost, he sets himself up to be knocked down by anyone who uses entrepreneurial judo against him.
- The leader in a rapidly growing new market or new technology who tries to maximize rather than to optimize will soon make himself vulnerable to entrepreneurial judo.
- In an entrepreneurial society individuals face a tremendous challenge, a challenge they need to exploit as an opportunity: the need for continuous learning and relearning.
- In traditional society it is assumed that learning came to an end with adulthood. What one had not learned by age 21, one would never learn. But also what one had learned by age 21 would apply, unchanged, the rest of one’s life. On these assumptions traditional apprenticeship was based, traditional crafts, traditional professions, but also the traditional systems of education and the schools. Crafts, professions, systems of education, and schools are still based on these assumptions.

Sources For Opportunities:

1. The Unexpected: Accidentally finding an opportunity. Least risky.
2. Incongruities: Difference between reality and how it should be. Someone is faulty.
3. Process Need: Task focused, perfects a process that exists
4. Industry and Market Structures: Industries change overtime as products get cheaper to build (Mass market)
5. Demographics: Population changes and their demands
6. Changes in Perception: People choosing other products (Veganism)
7. New Knowledge: New science or tech or method becomes available (Microchips)

New Knowledge:

New tech becomes available. Has short time span, high casualty rate, low predictability.

- Wright Brothers’ airplane had 2 knowledge roots. 1. Gasoline engine, designed to power the first automobiles built. 2. Mathematical: aerodynamics, developed primarily in experiments with gliders. Each was developed quite independently. It was only when the two came together that the airplane became possible.
- Computer required the convergence of 5+ different knowledges: a scientific invention, the audion tube; a major mathematical discovery, the binary theorem; a new logic; the design concept of the punchcard; and the concepts of program and feedback. Until all these were available, no computer could have been built.
- Swan developed his light bulb at exactly the same time as Edison. Technically, Swan’s bulb was superior, to the point where Edison bought up the Swan patents and used them in his own light bulb factories. But Edison not only thought through the technical requirements. Before he even began the technical work on the glass envelope, the vacuum, the closure, and the glowing fiber, he had already decided on a “system”: his light bulb was designed to fit an electric power company for which he had lined up the financing, the rights to string wires to get the power to his light bulb customers, and the distribution system. Swan, the scientist, invented a product; Edison produced an industry.

- Even when based on meticulous analysis, endowed with clear focus, and conscientiously managed, knowledge-based innovation still suffers from unique risks and, worse, an innate unpredictability.
- For a long time, there is awareness of an innovation about to happen but it does not happen. Then suddenly there is a near-explosion, followed by a few short years of tremendous excitement, startup activity and publicity. Five years later comes a “shakeout,” which few survive.

- In 1856, Werner Siemens in Germany applied the electrical theories Michael Faraday had developed around 1830 to the design of the 1st dynamo. It caused a worldwide sensation. From then on, it became certain that there would be an “electrical industry” and that it would be a major one. Dozens of scientists and inventors went to work. But nothing happened for 22 years. The knowledge was missing: Maxwell’s development of Faraday’s theories.
- Edison invented the light bulb in 1878 and the race was on. Within the next five years all the major electrical apparatus companies in Europe and America were founded. But only few survived out of a hundred companies in 20 countries. All eagerly financed by the investors of their time and all expecting to be unicorns. This upsurge of the electrical industry gave rise to the 1st great science-fiction boom. But by 1900, most of these companies had already disappeared, whether out of business, bankrupt, or absorbed by the few survivors.
- In 1910: 200 automobile companies in the USA. 1930s: 20 left. 1960: 4 left.

- This pattern happened in every industry.
- Each time the survivor has been a company that was started during the early explosive period. After that period is over, entry into the industry is foreclosed for all practical purposes. There is a “window” of a few years during which a new venture must establish itself in any new knowledge-based industry.
- But today the “window” time length is the same, but because of globalization it is becoming more and much more crowded. These companies have less chance of survival.
- The number of knowledge-based innovators that will survive when an industry matures and stabilizes is no larger than it has traditionally been. When the shakeout comes, the casualty rate is therefore much higher than it used to be. And the shakeout always comes; it is inevitable.

- Time is working against science and tech based innovators. In all innovation based on any other source—the unexpected, incongruities, process need, changes in industry structure, demographics, or changes in perception—time is on the side of the innovator. In any other kind of innovation innovators can reasonably expect to be left alone. If they make a mistake, they are likely to have time to correct it. And there are several moments in time in which they can launch their new venture. Not in scientific and tech knowledge based innovation. Here there is only a short time the “window” during which entry is possible at all. Here innovators do not get a 2nd chance. The environment is harsh and unforgiving. Once the “window” closes, the opportunity is gone forever.
- In some knowledge-based industries a 2nd “window” does in fact open 20-30 years or so after the 1st one has shut down. Computers are an example. (1955 & 1978)
- The 1st “window” in computers was between 1949-1955. During this period, every single electrical apparatus company in the world went into computers. By 1970, every single one of the “biggies” was out of computers. The field was occupied by companies that didn't exist at all or had been small. Late 70s, a 2nd “window” opened with the invention of micro-chips. But the companies that had failed in the 1st round did not come back in the 2nd one. Even those that survived the 1st round stayed out of the 2nd, or came in late and reluctantly. The one exception was IBM, the undisputed champion of the 1st round. And this has been the pattern too in earlier knowledge-based innovations.

The Shakeout:

- The “shakeout” sets in as soon as the “window” closes. And the majority of ventures started during the “window” period do not survive the shakeout.
- Which will survive, die, become crippled is unpredictable. It is futile to speculate. Sheer size may ensure survival. But it does not guarantee success in the shakeout.
- At 1st such industries are in the limelight and attract far more entrants and far more capital than more mundane areas. Also the expectations are much greater. More people become rich building businesses like shoe-polish or a watchmaking company than have become rich through high-tech businesses. No one expects shoe-polish makers to build a unicorn or considers them a failure if all they build is a sound but modest family company. High tech is a risky high-low game.
- High tech is not profitable for a very long time.
- To be successful, a knowledge-based innovation needs receptivity to it. The innovation brings about the change. It aims at creating a want and no one can tell in advance whether the user is going to be receptive, indifferent, or actively resistant.
- There are exceptions. Whoever produces a cure for cancer need not worry about “receptivity.” But such exceptions are few. Inmost knowledge-based innovations, receptivity is a gamble. There may be great receptivity, yet no one realizes it. And there may be no receptivity or even heavy resistance when everyone is quite sure that society is actually eagerly waiting for the innovation.
- If we want knowledge-based innovation, we must gamble on receptivity to it.
- Areas that are not in the public eye have far lower risks, if only because there is more time. But high risk is inherent in knowledge-based innovation. It is the price we have to pay for its impact.

The Bright Idea:

- Innovations based on a bright idea probably outnumber all other categories taken together. 7-8 of 10 patents belong here.
- Bright ideas are the riskiest and least successful source of innovative opportunities. 1 out of 100 patents breakeven. 1 out of 500 makes money.
- No one knows which ideas for an innovation based on a bright idea have a chance to succeed and which ones are likely to fail.
- Belief that you’ll win if only you keep on trying out bright ideas is no more rational than to win the jackpot at Las Vegas one only has to keep on pulling the lever. The machine is rigged to have the house win 70% of the time. The more often you pull, the more often you lose.
- The greatest inventive genius was Leonardo da Vinci. There is a breathtaking idea—submarine or helicopter or automatic forge—on every page of his notebooks. But not one of these could have been converted into an innovation with the technology and the materials of 1500. None of them would have any receptivity in the society and economy of the time.

Do's:

1. Analysis of the opportunities.
2. Go out, look, ask, listen.
3. Should do one thing. Has to be simple and focused.
4. Start small try to do one specific thing.
5. Aim at leadership.

Don'ts:

1. Don't try to be clever.
2. Don’t diversify, don’t split, don’t try to do too many things at once.
3. Don't try to innovate for the future.

3 Conditions:

1. Innovation is work. It requires knowledge. It often requires great ingenuity. Also, innovators rarely work in more than one area.
2. Innovators must build on their strengths. Ask, “Which of these opportunities fits me, fits this company, puts to work what we are good at and have shown capacity for in performance?"
3. Innovation is an effect in economy and society, a change in the behavior of customers. Innovation always has to be close to the market, focused on the market, market-driven.

4 entrepreneurial strategies:
 
1. Being “Fustest with the Mostest”: Aim at quick leadership
2. Hitting Them Where They Ain’t: Creative imitation
3. Ecological Niche: Obtain a practical monopoly in a small area
4. Changing the economic characteristics of a product, a market, or an industry.

Fustest with the Mostest:

- The strategy of being “Fustest with the Mostest” is very much like a moon shot. Once launched, the “Fustest with the Mostest” strategy is difficult to adjust or to correct.
- To use this strategy, in other words, requires thought and careful analysis. In fact, for this strategy to succeed at all, the innovation must be based on a careful and deliberate attempt to exploit one of the major opportunities for innovation.
- After the innovation has become a successful business, the work really begins. Then the strategy demands substantial and continuing efforts to retain a leadership position; otherwise, all one has done is create a market for a competitor. The entrepreneur who has succeeded in being “Fustest with the Mostest” has to make his product or his process obsolete before a competitor can do it.

Creative Imitation:

- Starts out with markets rather than with products, and with customers rather than with producers. It is both market-focused and market-driven.
- Requires a rapidly growing market. Creative imitation satisfies a demand that already exists rather than creating one.
- Creative imitation is likely to work most effectively in high-tech areas for one simple reason: high-tech innovators are least likely to be market-focused, and most likely to be technology-and product-focused. They therefore tend to misunderstand their own success and to fail to exploit and supply the demand they have created.
- Because creative imitation aims at market dominance, it is best suited to a major product, process, or service. It carries less risk. By the time creative imitators go to work, the market has already been identified and the demand has already been created.


Lessons from History:

- Japanese manufacturers: “television would not grow fast in Japan.” “Japan is much too poor to afford such a luxury” But the Japanese farmers apparently did not know that they were too poor for television. What they knew was that television offered them access to a big world. They could not afford television sets, but they were prepared to buy and pay.
- Japanese made a deliberate decision 100 years ago to concentrate their resources on social innovations, and to imitate, import, and adapt technical innovations with startling success.
- What made universal schooling possible was a lowly innovation, the textbook. Without the textbook, even a very good teacher cannot teach more than one or two children at a time; with it, even a pretty poor teacher can get a little learning into the heads of 35 students.
- Publishers and the existing bookstores knew, that book sales were soaring. Neither, did anything about it. The unexpected event was exploited, by a few mass retailers such as department stores. None of them knew about books, but they knew the retail business. They started bookstore chains that are different more like supermarkets. They didn't treat books as literature but as “mass merchandise” and they concentrate on the fast-moving items that generate the largest dollar sales per unit of shelf space. They are located in shopping centers with high rents but also with high traffic, whereas everybody in the book business had known all along that a bookstore has to be in a low-rent location. Traditionally, booksellers were themselves “literary types” and tried to hire people who “love books.” Managers of the new bookstores are former cosmetics salespeople. The joke among them is that any salesperson who wants to read anything besides the price tag on the book is hopelessly overqualified. These new bookstore chains have been among the most successful and fastest-growing segments in the country.
- Math: Max 20% of students, learn math easily. The rest never really learn it. It is possible to make a very much larger percentage to pass math tests. Japanese do this through heavy emphasis on the subject. But that does not mean that Japanese children learn math. They learn to pass the tests and then immediately forget math. 10 years later Japanese do just as poorly on math tests as do westerners. In every generation there is a math teacher of genius who somehow can make even the untalented learn. But nobody has ever been able to replicate what this one person does. The need is acutely felt, but we do not understand the problem. Is it a lack of native ability? Is it that we are using the wrong methods? Are there psychological and emotional problems? No one knows the answer. And without understanding the problem we have not been able to find any solution.
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Reading Progress

June 24, 2015 – Shelved
June 24, 2015 – Shelved as: to-read
June 9, 2017 – Shelved as: audio
July 13, 2018 – Started Reading
September 1, 2018 – Finished Reading

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message 1: by Han (new) - added it

Han Tuzun Thank you for the comprehensive comment.


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