Drucker on Principles of Innovation, Part 3

In his book, The Essential Drucker: The Best of Sixty Years of Peter Drucker’s Essential Writings on Management, Peter Drucker analyzed the ways that management practices and principles affect the performance of organizations, individuals, and society. The book covers the basic principles of management and gives professionals the tools to perform the tasks that the environment of tomorrow will require of them.

These are my takeaways from reading the book.

Drucker believed that innovation is a practice, something that we can learn to do by applying hard, organized, purposeful work. He discussed the five “dos” of innovation.

  1. Purposeful innovation begins with a systematic analysis of the opportunities.
  2. Innovation is both conceptual and perceptual.
  3. Effective innovation must be simple and focused.
  4. Effective innovations start small, not grandiose.
  5. A successful innovation aims at the leadership of something.

Drucker also outlined three things that we should not do when building a practice of innovation.

  1. Do not to try to be clever. Keep things straight-forward!
  2. Do not diversify or try to do too many things at once. Focus!
  3. Do not try to innovate for the future. Innovate for the present!

In addition to the above points, Drucker believed that the following three conditions are necessary for successful innovation.

  1. Innovation is hard work and requires focused and purposeful effort which makes very high demands on diligence, persistence, and commitment. Innovation also requires a great deal of knowledge and ingenuity. These prerequisites imply that innovators rarely work in more than one area. While there are certainly very talented innovators with tremendous capacity, it is tremendously difficult for an innovator to look after several areas simultaneously.
  2. Drucker believed that innovators must build on their strengths to succeed. Successful innovators look at opportunities over a wide range, but they always look for the few opportunities that fit well with them. Successful innovators know that they must be doing something that they are good at doing and have the capacity to execute. Also, because the risks of innovation and the premium on knowledge and performance capacity the innovators must incur, very few innovators will be willing to put in the persistent, hard, frustrating work that successful innovation always requires.
  3. Innovations do not exist for their own sake. Innovation has an effect of a change in the economy and society. The effect could be a change in the behavior of people or a change in a process. For those people or process reasons, innovation always must be close to the market, focused on the market, and becomes market-driven.

Finally, Drucker wanted to dispel the myth that all innovators are idealistic risk-takers. The innovators Drucker knew were successful where they define risks and confine them. They were successful where they systematically analyze the sources of innovative opportunity, then pinpoint the opportunity and exploit it. In the end, all successful innovators go after the opportunities that could be big or small, but still with definable risk.

Successful innovators, therefore, are conservative. They must be, or they can find themselves out of the game due to single or a handful of failures. Successful innovators are not “risk-focused”; instead, they are “opportunity-focused.”

Drucker on Principles of Innovation, Part 2

In his book, The Essential Drucker: The Best of Sixty Years of Peter Drucker’s Essential Writings on Management, Peter Drucker analyzed the ways that management practices and principles affect the performance of organizations, individuals, and society. The book covers the basic principles of management and gives professionals the tools to perform the tasks that the environment of tomorrow will require of them.

These are my takeaways from reading the book.

Drucker believed that innovation is a practice, something that we can learn to do by applying hard, organized, purposeful work. He discussed the five “dos” of innovation.

  1. Purposeful innovation begins with a systematic analysis of the opportunities.
  2. Innovation is both conceptual and perceptual.
  3. Effective innovation must be simple and focused.
  4. Effective innovations start small, not grandiose.
  5. A successful innovation aims at the leadership of something.

Drucker also outlined three things that we should not do when building a practice of innovation.

The first “do not” is trying to be clever. Human beings are the ultimate user of the innovations, and incompetence or carelessness can easily derail an innovation. Anything too clever, whether in design or execution, is almost certain to fail.

The second “do not” is trying to diversify or to do too many things at once. When we design innovations that stray from a core, the innovations are likely to become diffuse.

Innovation needs the concentrated energy of a unified effort behind it. It also requires that the people who put together the innovation collaborate well with each other. This collaboration requires a unity or a common core. The core does not have to be technology or knowledge. Drucker believed that market knowledge supplies a better core of unity in any enterprise than technology does.

Lastly, Drucker suggested not trying to innovate for the future but to innovate for the present. Innovation may have long-range impact, but focusing solely on the distant future might incur the opportunity costs of shorter-term benefits.

Drucker explained the “not-waiting-for-the-future” suggestion using a pharmaceutical example. Although many years of research and development work are common in pharmaceutical research, no pharmaceutical company would start a research project for something that does not have potential, immediate application for needs that already exist.

Unless there is an immediate application in the present, innovation is like the drawings in Leonardo da Vinci’s notebook—a “brilliant idea” but that is all.

Drucker on Principles of Innovation, Part 1

In his book, The Essential Drucker: The Best of Sixty Years of Peter Drucker’s Essential Writings on Management, Peter Drucker analyzed the ways that management practices and principles affect the performance of organizations, individuals, and society. The book covers the basic principles of management and gives professionals the tools to perform the tasks that the environment of tomorrow will require of them.

These are my takeaways from reading the book.

Drucker believed that innovation is a practice. While we view some innovations as a “flash of genius,” innovation-as-a-practice is something that we can learn to do by applying hard, organized, purposeful work.

The purposeful innovation requires systematic analysis and hard work, and this approach certainly covers at least 90 percent of all effective innovations. Just like in every other area, the extraordinary performance in innovation also requires us to be a master in the discipline.

Drucker outlined five items of the “dos”— things that we must do when building a practice of innovation.

#1: Purposeful, systematic innovation begins with the analysis of the opportunities. It begins with thinking through what Drucker had called the seven sources of innovative opportunity.

  • The organization’s own unexpected successes and unexpected failures, but also the unexpected successes and unexpected failures of the organization’s competitors
  • Incongruities, especially incongruities in the process, whether of production or distribution, or incongruities in customer behavior
  • Process needs
  • Changes in industry and market structures
  • Changes in demographics
  • Changes in meaning and perception
  • New knowledge

All the sources of innovative opportunity should be systematically analyzed and systematically studied. It is not enough to be alerted to them. We must search for those opportunities on an organized and systematic basis.

#2: Innovation requires both thinking and doing. It is not enough to simply think of something “innovative;” we need to go out to look, to ask, to listen. Another word, successful innovators use both the right side and the left side of their brains.

#3: Effective innovation must be simple and focused. All effective innovations are breathtakingly simple. Even the innovation that creates new uses and new markets should be directed toward a specific, clear, designed application.

#4: Effective innovations start small, not grandiose. Starting small can allow the innovators to get started at first with little money, few people, and only a small and limited market. Grandiose ideas or plans that aim at “revolutionizing an industry” right from the start usually do not work.

#5: A successful innovation aims at leadership. Successful innovation does not aim necessarily at becoming eventually the biggest. It aims to be a leader of some market segment or mindshare. Drucker asserted that all strategies aimed at exploiting an innovation must achieve leadership within a given environment. Otherwise, they will simply create a low-barrier opportunity for the competition.

Entrepreneurial Strategies, Part 7

In his book, Innovation and Entrepreneurship, Peter Drucker presented how innovation and entrepreneurship can be a purposeful and systematic discipline. That discipline is still as relevant to today’s business environment as when the book was published back in 1985. The book explains the challenges faced by many organizations and analyzes the opportunities which can be leveraged for success.

Drucker wrote that entrepreneurship requires two combined approaches, entrepreneurial strategies and entrepreneurial management. Entrepreneurial management are practices and policies that live internally within the enterprise. Entrepreneurial strategies, on the other hand, are practices and policies required for working with the external element, the marketplace.

Drucker further believed that there are four important and distinct entrepreneurial strategies we should be aware of. These are:

  1. Being “Fustest with the Mostest”
  2. “Hitting Them Where They Ain’t”
  3. Finding and occupying a specialized “ecological niche”
  4. Changing the economic characteristics of a product, a market, or an industry.

These four strategies need not be mutually exclusive. A successful entrepreneur often combines two, sometimes even three elements, in one strategy.

In addition to the four entrepreneurial strategies previously discussed, Drucker believed there is another approach for introducing innovation. This strategic approach focuses on customer creation, and we can implement the “customer creation” strategy in one of the four ways:

  1. Creating Utility

This strategy asks the very fundamental question of “What do the customers need for a product/service to be truly a service to them?” By answering this question, the entrepreneur can design the product or service for changing utility, values, and economic characteristics. Price is usually almost irrelevant in the strategy of creating utility. The strategy works by enabling customers to do what serves their purpose.

  1. Pricing

The pricing strategy takes one step further than simply adding up the costs of material for producing a product or service. Drucker used Gillette’s razor as the example of customers buying a shave, rather than a piece of metal. What is being paid in the end is structured to the needs and the realities of the consumer. It is structured by what the consumer buys. And it charges for what represents “value” to the customer rather than what represents “cost” to the supplier.

  1. Adaptation to the Customer’s Reality

In Drucker’s view, there are no “irrational customers,” rather, there are only lazy businesses. The customer has to be assumed to be rational because her reality is usually quite different from that of the business. This innovative strategy acknowledges and accepts these customer’s realities by designing products and services to satisfy the needs created by those realities. Whatever customers buy has to fit their realities, or it is of no use to them.

  1. Delivering True Value to the Customer

The last innovative strategy delivers what is “value” to the customer rather than what is “product” to the business. It is one step beyond the strategy of accepting the customer’s reality. Smart businesses understand the realities and create tailored value to match those realities. While a customer may be purchasing a tangible product/service, they are buying intangible values created by the product/service. And the “true value” is what the customers should be paying for.

 

Entrepreneurial Strategies, Part 6

In his book, Innovation and Entrepreneurship, Peter Drucker presented how innovation and entrepreneurship can be a purposeful and systematic discipline. That discipline is still as relevant to today’s business environment as when the book was published back in 1985. The book explains the challenges faced by many organizations and analyzes the opportunities which can be leveraged for success.

[https://smile.amazon.com/Innovation-Entrepreneurship-Routledge-Classics-Drucker/dp/1138168343]

Drucker wrote that entrepreneurship requires two combined approaches, entrepreneurial strategies and entrepreneurial management. Entrepreneurial management are practices and policies that live internally within the enterprise. Entrepreneurial strategies, on the other hand, are practices and policies required for working with the external element, the marketplace.

Drucker further believed that there are four important and distinct entrepreneurial strategies we should be aware of. These are:

  1. Being “Fustest with the Mostest”
  2. “Hitting Them Where They Ain’t”
  3. Finding and occupying a specialized “ecological niche”
  4. Changing the economic characteristics of a product, a market, or an industry.

These four strategies need not be mutually exclusive. A successful entrepreneur often combines two, sometimes even three elements, in one strategy.

These four strategies need not be mutually exclusive. A successful entrepreneur often combines two, sometimes even three elements, in one strategy.

Successful practitioners of “Fustest with the Mostest” and “Hitting Them Where They Ain’t” can become big and highly visible companies. Successful practitioners of the ecological niche take the cash and wallow in their anonymity. The whole point of the ecological niche strategy is to be so inconspicuous that no one is likely to try to compete in the same segment.

To practice an ecological niche, Drucker outlined three distinct niche strategies, each with its requirements, its limitations, and its risks:

  • the toll-gate strategy;
  • the specialty skill strategy; and
  • the specialty market strategy.

Within the “Ecological Niche” strategy, the specialty market builds around specialized knowledge of a market. The specialty skill, on the other hand, builds around a product or service. Other than that difference, both specialty strategies are similar.

The specialty market is found by looking at a new development with the question, What opportunities are there in this that would give us a unique niche, and what do we have to do to fill it ahead of everybody else?

The specialty market niche has the same requirements as the specialty skill niche: systematic analysis of a new trend, industry, or market; a specific innovative contribution; and continuous work to improve the product and service. After the specialty market organizations achieve the leadership, they often could retain it.

And it has the same limitations. The greatest threat to the specialty market position is a success. In the early days of the specialty market’s success, the market was not large enough to tempt anyone else. Furthermore, running a specialty market organization often requires a specialized organization, which had to be maintained anyhow to service their customers. Nobody else had any reason to build one. Once the specialty market becomes a mass market, it gives incentives for outside competitors to invade the market and compete with the established leader.

Entrepreneurial Strategies, Part 5

In his book, Innovation and Entrepreneurship, Peter Drucker presented how innovation and entrepreneurship can be a purposeful and systematic discipline. That discipline is still as relevant to today’s business environment as when the book was published back in 1985. The book explains the challenges faced by many organizations and analyzes the opportunities which can be leveraged for success.

Drucker wrote that entrepreneurship requires two combined approaches, entrepreneurial strategies and entrepreneurial management. Entrepreneurial management is practices and policies that live internally within the enterprise. Entrepreneurial strategies, on the other hand, are practices and policies required for working with the external element, the marketplace.

Drucker further believed that there are four important and distinct entrepreneurial strategies we should be aware of. These are:

  1. Being “Fustest with the Mostest”
  2. “Hitting Them Where They Ain’t”
  3. Finding and occupying a specialized “ecological niche”
  4. Changing the economic characteristics of a product, a market, or an industry.

These four strategies need not be mutually exclusive. A successful entrepreneur often combines two, sometimes even three elements, in one strategy.

Successful practitioners of “Fustest with the Mostest” and “Hitting Them Where They Ain’t” can become big and highly visible companies. Successful practitioners of the ecological niche take the cash and wallow in their anonymity. The whole point of the ecological niche strategy is to be so inconspicuous that no one is likely to try to compete in the same segment.

To practice an ecological niche, Drucker outlined three distinct niche strategies, each with its requirements, its limitations, and its risks:

  • The toll-gate strategy
  • The specialty skill strategy
  • The specialty market strategy

The companies which practice the specialty skills have established the products that are considered the “standard” in their industry. They may not be the household names, but they are the leader in their respective niches. These companies established their controlling position when the industry was in its infancy. But once these companies had attained their controlling position in their specialty skill niche, they retained it.

Unlike the toll-gate companies, the specialty skill company occupy a large niche, yet it is still unique. Those companies develop the highly-regarded skill at a very early time. Such specialized skills put these companies so far ahead in their field that it was hardly worth anybody’s while to try to challenge them. They had become the “standard.”

Timing is critical in establishing a specialty niche. Those companies establish the niche at the very beginning of a new industry or a new market. To attain a specialty niche always requires something new, something added, something that is genuine innovation. In the early stages of major new development, the specialty skill niche offers an exceptional opportunity.

There are several points to note about the specialty skill companies. First, companies rarely find a specialty skill niche by accident. The entrepreneur intentionally looks for the place where a specialty skill can be developed and can give a new enterprise a unique controlling position. Therefore, in the early stages of a new industry or a new market, there is the opportunity to search systematically for the specialty skill opportunity—and then there is usually time to develop a unique skill.

Second, the specialty skill niche does require a skill that is both unique and different. The business that establishes itself in a specialty skill niche is therefore unlikely to be threatened by its customers or by its suppliers. Neither of them wants to get into something that is so alien in skill and temperament.

Third, a business occupying a specialty skill niche must constantly work on improving its skill. It must stay ahead. It must make itself constantly obsolete.

While the specialty skill niche has unique advantages, it also has severe limitations. One is that it inflicts tunnel-vision on its occupants. To maintain themselves in their controlling position, they must learn to look neither right nor left, but directly ahead at their narrow area, their specialized field. The second, serious limitation is that the occupant of a specialty skill niche is usually dependent on somebody else to bring his product or service to market. It becomes a component. Finally, the greatest danger to the specialty niche manufacturer is for the specialty to cease being a specialty and to become universal.

The specialty skill niche, like all ecological niches, is limited in scope and in time. Species that occupy such a niche, biology teaches, do not easily adapt to even small changes in the external environment. And this is true, too, of the entrepreneurial skill species. But within these limitations, the specialty skill niche is a highly advantageous position. In a new industry or a new market, the specialty skill strategy offers an optimal ratio between opportunity and risk of failure.

Entrepreneurial Strategies, Part 4

In his book, Innovation and Entrepreneurship, Peter Drucker presented how innovation and entrepreneurship can be a purposeful and systematic discipline. That discipline is still as relevant to today’s business environment as when the book was published back in 1985. The book explains the challenges faced by many organizations and analyzes the opportunities which can be leveraged for success.

Drucker wrote that entrepreneurship requires two combined approaches: entrepreneurial strategies and entrepreneurial management. Entrepreneurial management is practices and policies that live internally within the enterprise. Entrepreneurial strategies, on the other hand, are practices and policies required for working with the external element, the marketplace.

Drucker further believed that there are four important and distinct entrepreneurial strategies we should be aware of. These are:

  1. Being “Fustest with the Mostest”
  2. “Hitting Them Where They Ain’t”
  3. Finding and occupying a specialized “ecological niche”
  4. Changing the economic characteristics of a product, a market, or an industry.

These four strategies need not be mutually exclusive. A successful entrepreneur often combines two, sometimes even three elements, in one strategy.

Successful practitioners of “Fustest with the Mostest” and “Hitting Them Where They Ain’t” can become big and highly visible companies. Successful practitioners of the ecological niche take the cash and wallow in their anonymity. The whole point of the ecological niche strategy is to be so inconspicuous that no one is likely to try to compete in the same segment.

To practice an ecological niche, Drucker outlined three distinct niche strategies, each with its requirements, its limitations, and its risks:

  • The toll-gate strategy
  • The specialty skill strategy
  • The specialty market strategy

The toll-gate strategy positions a firm as a leader in a market space that is so limited as to make it unattractive for any would-be competitor. The toll-gate position is thus in many ways the most desirable position a company can occupy, but it has stringent requirements.

The product must be essential to a process. The risk of not using it must be infinitely greater than the cost of the product. The market must be so limited that whoever occupies it first preempts it. It must be a true “ecological niche” which one species fills completely, and which at the same time is small and discreet enough not to attract rivals.

Such toll-gate positions can be difficult to find. Normally they occur only in an incongruity situation. The incongruity might be an incongruity in the rhythm or the logic of a process. Or it might be an incongruity between economic realities—between the cost of malfunction and the cost of adequate protection.

The toll-gate position also has severe limitations and serious risks. It is a static position. Once a company successfully occupies an ecological niche, there is unlikely to be much growth. There is nothing the company that occupies the toll-gate position can do to increase its business or to control it. No matter how good its product or how cheap, the demand is dependent upon the demand for the process or product to which the toll-gate product furnishes an ingredient.

The toll-gate position might be impregnable—or nearly so. But it can only control within a narrow radius. Once the toll-gate strategy has attained its objective, the company is “mature.” It can only grow as fast as its end users grow. But it can go down fast. It can become obsolete almost overnight if someone finds a different way of satisfying the same end use.

The company that deploys the toll-gate strategy must never exploit its monopoly. It must not abuse its monopoly to exploit, to extort, to maltreat his customers. If it does, the users will put another supplier into business, or they will switch to less-effective substitutes which they can then control.

Entrepreneurial Strategies, Part 3

In his book, Innovation and Entrepreneurship, Peter Drucker presented how innovation and entrepreneurship can be a purposeful and systematic discipline. That discipline is still as relevant to today’s business environment as when the book was published back in 1985. The book explains the challenges faced by many organizations and analyzes the opportunities which can be leveraged for success.

Drucker wrote that entrepreneurship requires two combined approaches, entrepreneurial strategies and entrepreneurial management. Entrepreneurial management is practices and policies that live internally within the enterprise. Entrepreneurial strategies, on the other hand, are practices and policies required for working with the external element, the marketplace.

Drucker further believed that there are four important and distinct entrepreneurial strategies we should be aware of. These are:

  1. Being “Fustest with the Mostest”
  2. “Hitting Them Where They Ain’t”
  3. Finding and occupying a specialized “ecological niche”
  4. Changing the economic characteristics of a product, a market, or an industry.

These four strategies need not be mutually exclusive. A successful entrepreneur often combines two, sometimes even three elements, in one strategy.

“Hitting Them Where They Ain’t” manifests in one of the two ways: creative imitation and entrepreneurial judo.

Amongst the entrepreneurial strategies, Drucker believed that entrepreneurial judo is the least risky and the most likely to succeed.

Entrepreneurial judo aims first at securing a beachhead by designing a product or a service which is specific to a given market segment and optimal for it. Once the newcomers have an adequate market and revenue stream, they can move on to the rest of the “beach” and finally to the whole “island.” The newcomers take advantage of the situation where the established leaders ignore them or beat them to this game before the newcomers have taken over the leadership and acquired dominance.

There are three situations in which the entrepreneurial judo strategy is likely to be successful.

  • The common situation is in which the established leaders refuse to act or overlook it altogether.
  • The second situation is where a new technology emerges and grows fast. But the innovators who have brought the innovation to the market do not know or refuse to behave as a “benevolent monopolist.” A benevolent monopolist cuts his prices before a competitor can cut them. And he makes his product obsolete and introduces a new product before a competitor can do so. But 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.
  • Finally, entrepreneurial judo works as a strategy when market or industry structure changes fast. Entrepreneurial judo is always market-focused and market-driven.

To use the entrepreneurial judo strategy, we start out with an analysis of the industry, the producers and the suppliers, their habits, especially their bad habits, and their policies. Next, we look at the markets and try to pinpoint the place where an alternative strategy would meet with the greatest success and the least resistance.

Entrepreneurial judo requires some degree of genuine innovation. It is not good enough to offer the same product or the same service at a lower cost. There must be something that distinguishes it from what already exists.

Like being “Fustest with the Mostest” and creative imitation, entrepreneurial judo aims at obtaining a leadership position and eventually dominance. But it does not compete with the leaders head-on — or at least not where the leaders are aware of competitive challenge or worried about it. Another word, entrepreneurial judo “Hits Them Where They Ain’t.”