discussion

Reading(s): Drucker: Ch. 6 [76-87]; Chs. 11-12 [133-146]; Aulet: Step 1

DISCUSSION QUESTIONS

Choose from one or more of the following:

1. What did you find interesting about this week’s readings? Be specific.

2. What in the readings have you experienced or heard an anecdote about – does it support / reinforce or qualify / call into question any aspect of the readings?

3. What other comments, questions or perspectives do you have about this week’s readings? Again, be specific.

DISCUSSION GUIDELINES

Aim for a brief but substantive discussion (150 to 250 words). You can do any combination of the following:

A – Making a new observation by starting a new discussion thread

Peter F. Drucker
Innovation and Entrepreneurship
Practice and Principles
2

Contents
Preface
Introduction: The Entrepreneurial Economy
I. The Practice of Innovation
1. Systematic Entrepreneurship
2. Purposeful Innovation and the Seven Sources for Innovative
Opportunity
3. Source: The Unexpected
4. Source: Incongruities
5. Source: Process Need
6. Source: Industry and Market Structures
7. Source: Demographics
8. Source: Changes in Perception
9. Source: New Knowledge
10. The Bright Idea
11. Principles of Innovation
II. The Practice of Entrepreneurship
12. Entrepreneurial Management
13. The Entrepreneurial Business
14. Entrepreneurship in the Service Institution
15. The New Venture
III. Entrepreneurial Strategies
16. “Fustest with the Mostest”
3

17. “Hit Them Where They Ain’t”
18. Ecological Niches
19. Changing Values and Characteristics

Conclusion: The Entrepreneurial Society

Suggested Readings
Searchable Terms
About the Author
Praise
Other Books by Peter F. Drucker
Credits
Copyright
About the Publisher
4

Preface
This book presents innovation and entrepreneurship as a practice and a
discipline. It does not talk of the psychology and the character traits of
entrepreneurs; it talks of their actions and behavior. It uses cases, but
primarily to exemplify a point, a rule, or a warning, rather than as
success stories. The work thus differs, in both intention and execution,
from many of the books and articles on innovation and entrepreneurship
that are being published today. It shares with them the belief in the
importance of innovation and entrepreneurship. Indeed, it considers the
emergence of a truly entrepreneurial economy in the United States
during the last ten to fifteen years the most significant and hopeful event
to have occurred in recent economic and social history. But whereas
much of today’s discussion treats entrepreneurship as something slightly
mysterious, whether gift, talent, inspiration, or “flash of genius,” this book
represents innovation and entrepreneurship as purposeful tasks that can
be organized—are in need of being organized—and as systematic work.
It treats innovation and entrepreneurship, in fact, as part of the
executive’s job.
This is a practical book, but it is not a “how-to” book. Instead, it deals
with the what, when, and why; with such tangibles as policies and
decisions; opportunities and risks; structures and strategies; staffing,
compensation, and rewards.
Innovation and entrepreneurship are discussed under three main
headings: The Practice of Innovation; The Practice of Entrepreneurship;
and Entrepreneurial Strategies. Each of these is an “aspect” of
innovation and entrepreneurship rather than a stage.
Part I on the Practice of Innovation presents innovation alike as
purposeful and as a discipline. It shows first where and how the
entrepreneur searches for innovative opportunities. It then discusses the
Do’s and Dont’s of developing an innovative idea into a viable business
or service.
Part II, The Practice of Entrepreneurship, focuses on the institution
that is the carrier of innovation. It deals with entrepreneurial
management in three areas: the existing business; the public-service
institution; and the new venture. What are the policies and practices that
5

enable an institution, whether business or public-service, to be a
successful entrepreneur? How does one organize and staff for
entrepreneurship? What are the obstacles, the impediments, the traps,
the common mistakes? The section concludes with a discussion of
individual entrepreneurs, their roles and their decisions.
Finally, Part III, Entrepreneurial Strategies, talks of bringing an
innovation successfully to market. The test of an innovation, after all, lies
not its novelty, its scientific content, or its cleverness. It lies in its success
in the marketplace.
These three parts are flanked by an Introduction that relates
innovation and entrepreneurship to the economy, and by a Conclusion
that relates them to society.

Entrepreneurship is neither a science nor an art. It is a practice. It
has a knowledge base, of course, which this book attempts to present in
organized fashion. But as in all practices, medicine, for instance, or
engineering, knowledge in entrepreneurship is a means to an end.
Indeed, what constitutes knowledge in a practice is largely defined by
the ends, that is, by the practice. Hence a book like this should be
backed by long years of practice.
My work on innovation and entrepreneurship began thirty years ago,
in the mid-fifties. For two years, then, a small group met under my
leadership at the Graduate Business School of New York University
every week for a long evening’s seminar on Innovation and
Entrepreneurship. The group included people who were just launching
their own new ventures, most of them successfully. It included mid-
career executives from a wide variety of established, mostly large
organizations: two big hospitals; IBM and General Electric; one or two
major banks; a brokerage house; magazine and book publishers;
pharmaceuticals; a worldwide charitable organization; the Catholic
Archdiocese of New York and the Presbyterian Church; and so on.
The concepts and ideas developed in this seminar were tested by its
members week by week during those two years in their own work and
their own institutions. Since then they have been tested, validated,
refined, and revised in more than twenty years of my own consulting
work. Again, a wide variety of institutions has been involved. Some were
businesses, including high-tech ones such as pharmaceuticals and
6

computer companies; “no-tech” ones such as casualty insurance
companies; “world-class” banks, both American and European; one-man
startup ventures; regional wholesalers of building products; and
Japanese multinationals. But a host of “nonbusinesses” also were
included: several major labor unions; major community organizations
such as the Girl Scouts of the U.S.A. or C.A.R.E., the international relief
and development cooperative; quite a few hospitals; universities and
research labs; and religious organizations from a diversity of
denominations.
Because this book distills years of observation, study, and practice, I
was able to use actual “mini-cases,” examples and illustrations both of
the right and the wrong policies and practices. Wherever the name of an
institution is mentioned in the text, it has either never been a client of
mine (e.g., IBM) and the story is in the public domain, or the institution
itself has disclosed the story. Otherwise organizations with whom I have
worked remain anonymous, as has been my practice in all my
management books. But the cases themselves report actual events and
deal with actual enterprises.

Only in the last few years have writers on management begun to pay
much attention to innovation and entrepreneurship. I have been
discussing aspects of both in all my management books for decades.
Yet this is the first work that attempts to present the subject in its entirety
and in systematic form. This is surely a first book on a major topic rather
than the last word—but I do hope it will be accepted as a seminal work.

Claremont, California
Christmas 1984
7

Introduction: The Entrepreneurial Economy
I
Since the mid-seventies, such slogans as “the no-growth economy,” the
“deindustrialization of America,” and a long-term “Kondratieff stagnation
of the economy” have become popular and are invoked as if axioms. Yet
the facts and figures belie every one of these slogans. What is
happening in the United States is something quite different: a profound
shift from a “managerial” to an “entrepreneurial” economy.
In the two decades 1965 to 1985, the number of Americans over
sixteen (thereby counted as being in the work force under the
conventions of American statistics) grew by two-fifths, from 129 to 180
million. But the number of Americans in paid jobs grew in the same
period by one-half, from 71 to 106 million. The labor force growth was
fastest in the second decade of that period, the decade from 1974 to
1984, when total jobs in the American economy grew by a full 24 million.
In no other peacetime period has the United States created as many
new jobs, whether measured in percentages or in absolute numbers.
And yet the ten years that began with the “oil shock” in the late fall of
1973 were years of extreme turbulence, of “energy crises,” of the near-
collapse of the “smokestack” industries, and of two sizable recessions.
The American development is unique. Nothing like it has happened
yet in any other country. Western Europe during the period 1970 to 1984
actually lost jobs, 3 to 4 million of them. In 1970, western Europe still had
20 million more jobs than the United States; in 1984, it had almost 10
million less. Even Japan did far less well in job creation than the United
States. During the twelve years from 1970 through 1982, jobs in Japan
grew by a mere 10 percent, that is, at less than half the U.S. rate.
But America’s performance in creating jobs during the seventies and
early eighties also ran counter to what every expert had predicted
twenty-five years ago. Then most labor force analysts expected the
economy, even at its most rapid growth, to be unable to provide jobs for
all the boys of the “baby boom” who were going to reach working age in
the seventies and early eighties—the first large cohorts of “baby boom”
babies having been born in 1949 and 1950. Actually, the American
economy had to absorb twice that number. For—something nobody
8

even dreamed of in 1970—married women began to rush into the labor
force in the mid-seventies. The result is that today, in the mid-eighties,
every other married woman with young children holds a paid job,
whereas only one out of every five did so in 1970. And the American
economy found jobs for these, too, in many cases far better jobs than
women had ever held before.
And yet “everyone knows” that the seventies and early eighties were
periods of “no growth,” of stagnation and decline, of a “deindustrializing
America,” because everyone still focuses on what were the growth areas
in the twenty-five years after World War II, the years that came to an end
around 1970.
In those earlier years, America’s economic dynamics centered in
institutions that were already big and were getting bigger: the Fortune
500, that is, the country’s largest businesses; governments, whether
federal, state, or local; the large and super-large universities; the large
consolidated high school with its six thousand or more students; and the
large and growing hospital. These institutions created practically all the
new jobs provided in the American economy in the quarter century after
World War II. And in every recession during this period, job loss and
unemployment occurred predominantly in small institutions and, of
course, mainly in small businesses.
But since the late 1960s, job creation and job growth in the United
States have shifted to a new sector. The old job creators have actually
lost jobs in these last twenty years. Permanent jobs (not counting
recession unemployment) in the Fortune 500 have been shrinking
steadily year by year since around 1970, at first slowly, but since 1977 or
1978 at a pretty fast clip. By 1984, the Fortune 500 had lost permanently
at least 4 to 6 million jobs. And governments in America, too, now
employ fewer people than they did ten or fifteen years ago, if only
because the number of schoolteachers has been falling as school
enrollment dropped in the wake of the “baby bust” of the early sixties.
Universities grew until 1980; since then, employment there has been
declining. And in the early eighties, even hospital employment stopped
increasing. In other words, we have not in fact created 35 million new
jobs; we have created 40 million or more, since we had to offset a
permanent job shrinkage of at least 5 million jobs in the traditional
employing institutions. And all these new jobs must have been created
by small and medium-sized institutions, most of them small and medium-
9

sized businesses, and a great many of them, if not the majority, new
businesses that did not even exist twenty years ago. According to The
Economist, 600,000 new businesses are being started in the United
States every year now—about seven times as many as were started in
each of the boom years of the fifties and sixties.
II
“Ah,” everybody will say immediately, “high tech.” But things are not
quite that simple. Of the 40 million-plus jobs created since 1965 in the
economy, high technology did not contribute more than 5 or 6 million.
High tech thus contributed no more than “smokestack” lost. All the
additional jobs in the economy were generated elsewhere. And only one
or two out of every hundred new businesses—a total of ten thousand a
year—are remotely “high-tech,” even in the loosest sense of the term.
We are indeed in the early stages of a major technological
transformation, one that is far more sweeping than the most ecstatic of
the “futurologists” yet realize, greater even than Megatrends or Future
Shock. Three hundred years of technology came to an end after World
War II. During those three centuries the model for technology was a
mechanical one: the events that go on inside a star such as the sun.
This period began when an otherwise almost unknown French physicist,
Denis Papin,
*
envisaged the steam engine around 1680. They ended
when we replicated in the nuclear explosion the events inside a star. For
these three centuries advance in technology meant—as it does in
mechanical processes—more speed, higher temperatures, higher
pressures. Since the end of World War II, however, the model of
technology has become the biological process, the events inside an
organism. And in an organism, processes are not organized around
energy in the physicist’s meaning of the term. They are organized
around information.
There is no doubt that high tech, whether in the form of computers or
telecommunication, robots on the factory floor or office automation,
biogenetics or bioengineering, is of immeasurable qualitative
importance. High tech provides the excitement and the headlines. It
creates the vision for entrepreneurship and innovation in the community,
and the receptivity for them. The willingness of young, highly trained
people to go to work for small and unknown employers rather than for
10

the giant bank or the worldwide electrical equipment maker is surely
rooted in the mystique of “high tech”—even though the overwhelming
majority of these young people work for employers whose technology is
prosaic and mundane. High tech also probably stimulated the
astonishing transformation of the American capital market from near-
absence of venture capital as recently as the mid-sixties to near-surplus
in the mid-eighties. High tech is thus what the logicians used to call the
ratio cognoscendi, the reason why we perceive and understand a
phenomenon rather than the explanation of its emergence and the cause
of its existence.
Quantitatively, as has already been said, high tech is quite small still,
accounting for not much more than one-eighth of the new jobs. Nor will it
become much more important in terms of new jobs within the near
future. Between now and the year 2000, no more than one-sixth of the
jobs we can expect to create in the American economy will be high-tech
jobs in all likelihood. In fact, if high tech were, as most people think, the
entrepreneurial sector of the U.S. economy, then we would indeed face
a “no-growth” period and a period of long-term stagnation in the trough
of a “Kondratieff wave.”
The Russian economist Nikolai Kondratieff was executed on Stalin’s
orders in the mid-1930s because his econometric model predicted,
accurately as it turned out, that collectivization of Russian agriculture
would lead to a sharp decline in farm production. The “fifty-year
Kondratieff cycle” was based on the inherent dynamics of technology.
Every fifty years, so Kondratieff asserted, a long technological wave
crests. For the last twenty years of this cycle, the growth industries of the
last technological advance seem to be doing exceptionally well. But what
look like record profits are actually repayments of capital which is no
longer needed in industries that have ceased to grow. This situation
never lasts longer than twenty years, then there is a sudden crisis,
usually signaled by some sort of panic. There follow twenty years of
stagnation, during which the new, emerging technologies cannot
generate enough jobs to make the economy itself grow again—and no
one, least of all government, can do much about this.
*
The industries that fueled the long economic expansion after World
War II—automobiles, steel, rubber, electrical apparatus, consumer
electronics, telephone, but also petroleum
†
—perfectly fit the Kondratieff
cycle. Technologically, all of them go back to the fourth quarter of the
11

nineteenth century or, at the very latest, to before World War I. In none
of them has there been a significant breakthrough since the 1920s,
whether in technology or in business concepts. When the economic
growth began after World War II, they were all thoroughly mature
industries. They could expand and create jobs with relatively little new
capital investment, which explains why they could pay skyrocketing
wages and workers’ benefits and simultaneously show record profits.
Yet, as Kondratieff had predicted, these signs of robust health were as
deceptive as the flush on a consumptive’s cheek. The industries were
corroding from within. They did not become stagnant or decline slowly.
Rather, they collapsed as soon as the “oil shocks” of 1973 and 1979
dealt them the first blows. Within a few years they went from record
profits to near-bankruptcy. As soon became abundantly clear, they will
not be able to return to their earlier employment levels for a long time, if
ever.
The high-tech industries, too, fit Kondratieff’s theory. As Kondratieff
had predicted, they have so far not been able to generate more jobs
than the old industries have been losing. All projections indicate that they
will not do much more for long years to come, at least for the rest of the
century. Despite the explosive growth of computers, for instance, data
processing and information handling in all their phases (design and
engineering of both hardware and software, production, sales and
service) are not expected to add as many jobs to the American economy
in the late 1980s and early 1990s as the steel and automotive industries
are almost certain to lose.
But the Kondratieff theory fails totally to account for the 40 million
jobs which the American economy actually did create. Western Europe,
to be sure, has so far been following the Kondratieff script. But not the
United States, and perhaps not Japan either. Something in the United
States offsets the Kondratieff “long wave of technology.” Something has
already happened that is incompatible with the theory of long-term
stagnation.
Nor does it appear at all likely that we have simply postponed the
Kondratieff cycle. For in the next twenty years the need to create new
jobs in the U.S. economy will be a great deal lower than it has been in
the last twenty years, so that economic growth will depend far less on
job creation. The number of new entrants into the American work force
will be up to one-third smaller for the rest of the century—and indeed
12

through the year 2010—than it was in the years when the children of the
“baby boom” reached adulthood, that is, 1965 until 1980 or so. Since the
“baby bust” of 1960–61, the birth cohorts have been 30 percent lower
than they were during the “baby boom” years. And with the labor force
participation of women under fifty already equal to that of men, additions
to the number of women available for paid jobs will from now on be
limited to natural growth, which means that they will also be down by
about 30 percent.
For the future of the traditional “smokestack” industries, the
Kondratieff theory must be accepted as a serious hypothesis, if not
indeed as the most plausible of the available explanations. And as far as
the inability of new high-tech industries to offset the stagnation of
yesterday’s growth industries is concerned, Kondratieff again deserves
to be taken seriously. For all their tremendous qualitative importance as
vision makers and pacesetters, quantitatively the high-tech industries
represent tomorrow rather than today, especially as creators of jobs.
They are the makers of the future rather than the makers of the present.
But as a theory of the American economy that can explain its
behavior and predict its direction, Kondratieff can be considered dis-
proven and discredited. The 40 million new jobs created in the U.S.
economy during a “Kondratieff long-term stagnation” cannot be
explained in Kondratieff’s terms.
I do not mean to imply that there are no economic problems or
dangers. Quite the contrary. A major shift in the technological
foundations of the economy such as we are experiencing in the closing
quarter of the twentieth century surely presents tremendous problems,
economic, social, and political. We are also in the throes of a major
political crisis, the crisis of that great twentieth-century success the
Welfare State, with the attendant danger of an uncontrolled and
seemingly uncontrollable but highly inflationary deficit. There is surely
sufficient danger in the international economy, with the world’s rapidly
industrializing nations, such as Brazil or Mexico, suspended between
rapid economic takeoff and disastrous crash, to make possible a
prolonged global depression of 1930 proportions. And then there is the
frightening specter of the runaway armaments race. But at least one of
the fears abroad these days, that of a Kondratieff stagnation, can be
considered more a figment of the imagination than reality for the United
States. There we have a new, an entrepreneurial economy.
13

It is still too early to say whether the entrepreneurial economy will
remain primarily an American phenomenon or whether it will emerge in
other industrially developed countries. In Japan, there is good reason to
believe that it is emerging, albeit in its own, Japanese form. But whether
the same shift to an entrepreneurial economy will occur in western
Europe, no one can yet say. Demographically, western Europe lags
some ten to fifteen years behind America: both the “baby boom” and the
“baby bust” came later in Europe than in the United States. Equally, the
shift to much longer years of schooling started in western Europe some
ten years later than in the United States or in Japan; and in Great Britain
it has barely started yet. If, as is quite likely, demographics has been a
factor in the emergence of the entrepreneurial economy in the United
States, we could well see a similar development in Europe by 1990 or
1995. But this is speculation. So far, the entrepreneurial economy is
purely an American phenomenon.
III
Where did all the new jobs come from? The answer is from anywhere
and nowhere; in other words, from no one single source.
The magazine Inc., published in Boston, has printed each year since
1982 a list of the one hundred fastest-growing, publicly owned American
companies more than five years and less than fifteen years old.

Being confined to publicly owned companies, the list is heavily biased
toward high tech, which has easy access to underwriters, to stock
market money, and to being traded on one of the stock exchanges or
over the counter. High tech is fashionable. Other new ventures, as a
rule, can go public only after long years of seasoning, and of showing
profits for a good deal more than five years. Yet only one-quarter of the
“Inc. 100” are high-tech; three-quarters remain most decidedly “low-
tech,” year after year.
In 1982, for instance, there were five restaurant chains, two women’s
wear manufacturers, and twenty health-care providers on the list, but
only twenty to thirty high-tech companies. And whilst America’s
newspapers in 1982 ran one article after the other bemoaning the
“deindustrialization of America,” a full half of the Inc. firms were
14

manufacturing companies; only one-third were in services. Although
word had it in 1982 that the Frost Belt was dying, with the Sun Belt the
only possible growth area, only one-third of the “inc. 100” that year were
in the Sun Belt. New York had as many of these fast-growing, young,
publicly owned companies as California or Texas. And Pennsylvania,
New Jersey, and Massachusetts—while supposedly dying, if not already
dead—also had as many as California or Texas, and as many as New
York. Snowy, Minnesota, had seven. The Inc. lists for 1983 and 1984
showed a very similar distribution, in respect both to industry and to
geography.
In 1983, the first and second companies on another Inc. list—the
“Inc. 500” list of fast-growing, young, privately held companies—were,
respectively, a building contractor in the Pacific Northwest (in a year in
which construction was supposedly at an all-time low) and a California
manufacturer of physical exercise equipment for the home.
Any inquiry among venture capitalists yields the same pattern.
Indeed, in their portfolios, high tech is usually even less prominent. The
portfolio of one of the most successful venture capital investors does
include several high-tech companies: a new computer software
producer, a new venture in medical technology, and so on. But the most
profitable investment in this portfolio, the new company that has been
growing the fastest in both revenues and profitability during the three
years 1981–83, is that most mundane and least high-tech of businesses,
a chain of barbershops. And next to it, both in sales growth and
profitability, comes a chain of dentistry offices, followed by a
manufacturer of handtools and by a finance company that leases
machinery to small businesses.
Among the businesses I know personally, the one that has created
the most jobs during the five years 1979–84, and has also grown the
fastest in revenues and profits, is a financial services firm. Within five
years this firm alone has created two thousand new jobs, most of them
exceedingly well paid. Though a member of the New York Stock
Exchange, only about one-eighth of its business is in stocks. The rest is
in annuities, tax-exempt bonds, money-market funds and mutual funds,
mortgage-trust certificates, tax-shelter partnerships, and a host of similar
investments for what the firm calls “the intelligent investor.” Such
investors are defined as the well-to-do but not rich professional, small
businessman, or farmer, in small towns or in the suburbs, who makes
15

more money than he spends and thus looks for places to put his
savings, but who is also realistic enough not to expect to become rich
through investment.
The most revealing source of information about the growth sectors of
the U.S. economy I have been able to find is a study of the one hundred
fastest-growing “mid-size” companies, that is, companies with revenues
of between $25 million and $1 billion. This study was conducted during
1981–83 for the American Business Conference by two senior partners
of McKinsey & Company, the consulting firm.
*
These mid-sized growth companies grew at three times the rate of
the Fortune 500 in sales and in profits. The Fortune 500 have been
losing jobs steadily since 1970. But these mid-sized growth companies
added jobs between 1970 and 1983 at three times the rate of job growth
in the entire U.S. economy. Even in the depression years 1981–82 when
jobs in U.S. industry declined by almost 2 percent, the hundred mid-
sized growth companies increased their employment by one full
percentage point. The companies span the economic spectrum. There
are high-tech ones among them, to be sure. But there are also financial
services companies—the New York investment and brokerage firm of
Donaldson, Lufkin & Jenrette, for instance. One of the best performers in
the group is a company making and selling living-room furniture; another
one is making and marketing doughnuts; a third, high-quality chinaware;
a fourth, writing instruments; a fifth, household paints; a sixth has
expanded from printing and publishing local newspapers into consumer
marketing services; a seventh produces yarns for the textile industry;
and so forth. And where “everybody knows” that growth in the American
economy is exclusively in services, more than half of these “mid-sized
growth” companies are in manufacturing.
To make things more confusing still, the growth sector of the U.S.
economy during the last ten to fifteen years, while entirely
nongovernmental, includes a fairly large and growing number of
enterprises that are not normally considered businesses, though quite a
few are now being organized as profit-making companies. The most
visible of these are, of course, in the health-care field. The traditional
American community hospital is in deep trouble these days. But there
are fast-growing and flourishing hospital chains, both “profit” and
(increasingly) “not-for-profit” ones. Even faster growing are the
“freestanding” health facilities, such as hospices for the terminally ill,
16

medical and diagnostic laboratories, freestanding surgery centers,
freestanding maternity homes, psychiatric “walk-in” clinics, or centers for
geriatric diagnosis and treatment.
The public schools are shrinking in almost every American
community. But despite the decline in the total number of children of
school age as a result of the “baby bust” of the 1960s, a whole new
species of non-profit but private schools is flourishing. In the small
California city in which I live, a neighborhood babysitting cooperative,
founded around 1980 by a few mothers for their own children, had by
1984 grown into a school with two hundred students going on into the
fourth grade. And a “Christian” school founded a few years ago by the
local Baptists is taking over from the city of Claremont a junior high
school built fifteen years ago and left standing vacant for lack of pupils
for the last five years. Continuing education of all kinds, whether in the
form of executive management programs for mid-career managers or
refresher courses for doctors, engineers, lawyers, and physical
therapists, is booming; even during the severe 1982–83 recession, such
programs suffered only a short setback.
One additional area of entrepreneurship, and a very important one, is
the emerging “Fourth Sector” of public-private partnerships in which
government units, either states or municipalities, determine performance
standards and provide the money. But then they contract out a service—
fire protection, garbage collection, or bus transportation—to a private
business on the basis of competitive bids, thus ensuring both better
service and substantially lower costs. The city of Lincoln, Nebraska, has
been a pioneer in this area since Helen Boosalis was first elected mayor
in 1975—the same Lincoln, Nebraska, where a hundred years ago the
Populists and William Jennings Bryan first started us on the road to
municipal ownership of public services. Pioneering work in this area is
also being done in Texas—in San Antonio and in Houston, for instance
—and especially in Minneapolis at the Hubert Humphrey’ Institute of the
University of Minnesota. Control Data Corporation, a leading computer
manufacturer also in Minneapolis, is building public-private partnerships
in education and even in the management and rehabilitation of
prisoners. And if there is one action that can save the postal service in
the long run—for surely there is a limit to the public’s willingness to pay
ever larger subsidies and ever higher rates for ever-shrinking service—it
may be the contracting out of first-class service (or what’s still left of it
17

ten years hence) to the “Fourth Sector,” through competitive bids.
IV
Is there anything at all that these growth enterprises have in common
other than growth and defiance of the Kondratieff stagnation? Actually,
they are all examples of “new technology,” all new applications of
knowledge to human work, which is, after all, the definition of
technology. Only the “technology” is not electronics or genetics or new
materials. The “new technology” is entrepreneurial management. Once
this is seen, then the astonishing job growth of the American economy
during the last twenty, and especially the last ten years can be
explained. It can even be reconciled with the Kondratieff theory. The
United States—and to some extent also Japan—is experiencing what
might be called an “atypical Kondratieff cycle.”
Since Joseph Schumpeter first pointed it out in 1939, we have known
that what actually happened in the United States and in Germany in the
fifty years between 1873 and World War I does not fit the Kondratieff
cycle. The first Kondratieff cycle, based on the railway boom, came to an
end with the crash of the Vienna Stock Exchange in 1873, a crash that
brought down stock exchanges worldwide and ushered in a severe
depression. Great Britain and France did then enter a long period of
industrial stagnation during which the new emerging technologies—
steel, chemicals, electrical apparatus, telephone, and finally,
automobiles—could not create enough jobs to offset the stagnation in
the old industries, such as railway construction, coal mining, or textiles.
But this did not happen in the United States or in Germany, or indeed
in Austria, despite the traumatic impact of the Viennese stock market
crash from which Austrian politics never quite recovered. These
countries were severely jolted at first. Five years later they had pulled
out of the slump and were growing again, fast. In terms of “technology,”
these countries were no different from stagnating Britain or France. What
explains their different economic behavior was one factor, and one factor
only: the entrepreneur. In Germany, for instance, the single most
important economic event in the years between 1870 and 1914 was
surely the creation of the Universal Bank. The first of these, the
Deutsche Bank, was founded by Georg Siemens in 1870
*
with the
specific mission of finding entrepreneurs, financing entrepreneurs, and
18

forcing upon them organized, disciplined management. In the economic
history of the United States the entrepreneurial bankers such as J. P.
Morgan in New York played a similar role.
Today, something very similar seems to be happening in the United
States and perhaps also to some extent in Japan.
Indeed, high tech is the one sector that is not part of this new
“technology,” this “entrepreneurial management.” The Silicon Valley
high-tech entrepreneurs still operate mainly in the nineteenth-century
mold. They still believe in Benjamin Franklin’s dictum: “If you invent a
better mousetrap the world will beat a path to your door.” It does not yet
occur to them to ask what makes a mousetrap “better” or for whom?
There are, of course, plenty of exceptions, high-tech companies that
know well how to manage entrepreneurship and innovation. But then
there were exceptions during the nineteenth century, too. There was the
German, Werner Siemens, who founded and built the company that still
bears his name. There was George Westinghouse, the American, a
great inventor but also a great business builder, who left behind two
companies that still bear his name, one a leader in the field of
transportation, the other a major force in the electrical apparatus
industry.
But for the “high-tech” entrepreneur, the archetype still seems to be
Thomas Edison. Edison, the nineteenth century’s most successful
inventor, converted invention into the discipline we now call research.
His real ambition, however, was to be a business builder and to become
a tycoon. Yet he so totally mismanaged the businesses he started that
he had to be removed from every one of them to save it. Much, if not
most high tech is still being managed, or more accurately mismanaged,
Edison’s way.
This explains, first, why the 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. Most of Silicon Valley—but most of the new biological high-
tech companies as well—are still inventors rather than innovators, still
speculators rather than entrepreneurs. And this, too, perhaps explains
why high tech so far conforms to the Kondratieff prediction and does not
generate enough jobs to make the whole economy grow again.
But the “low tech” of systematic, purposeful, managed
entrepreneurship does.
19

V
Of all the major modern economists only Joseph Schumpeter concerned
himself with the entrepreneur and his impact on the economy. Every
economist knows that the entrepreneur is important and has impact. But,
for economists, entrepreneurship is a “meta-economic” event, something
that profoundly influences and indeed shapes the economy without itself
being part of it. And so too, for economists, is technology. Economists do
not, in other words, have any explanation as to why entrepreneurship
emerged as it did in the late nineteenth century and as it seems to be
doing again today, nor why it is limited to one country or to one culture.
Indeed, the events that explain why entrepreneurship becomes effective
are probably not in themselves economic events. The causes are likely
to lie in changes in values, perception, and attitude, changes perhaps in
demographics, in institutions (such as the creation of entrepreneurial
banks in Germany and the United States around 1870), perhaps
changes in education as well.
Something, surely, has happened to young Americans—and to fairly
large numbers of them—to their attitudes, their values, their ambitions, in
the last twenty to twenty-five years. Only it is clearly not what anyone
looking at the young Americans of the late 1960s could possibly have
predicted. How do we explain, for instance, that all of a sudden there are
such large numbers of people willing both to work like demons for long
years and to choose grave risks rather than big organization security?
Where are the hedonists, the status seekers, the “me-tooers,” the
conformists? Conversely, where are all the young people who, we were
told fifteen years ago, were turning their backs on material values, on
money, goods, and worldly success, and were going to restore to
America a “laid-back,” if not a pastoral “greenness”? Whatever the
explanation, it does not fit in with what all the soothsayers of the last
thirty years—David Riesman in The Lonely Crowd, William H. Whyte in
The Organization Man, Charles Reich in The Greening of America, or
Herbert Marcuse—predicted about the younger generation. Surely the
emergence of the entrepreneurial economy is as much a cultural and
psychological as it is an economic or technological event. Yet whatever
the causes, the effects are above all economic ones.
And the vehicle of this profound change in attitudes, values, and
above all in behavior is a “technology.” It is called management. What
20

has made possible the emergence of the entrepreneurial economy in
America is new applications of management:
— to new enterprises, whether businesses or not, whereas
most people until now have considered management
applicable to existing enterprises only;
— to small enterprises, whereas most people were
absolutely sure only a few years ago that management
was for the “big boys” only;
— to nonbusinesses (health care, education, and so on),
whereas most people still hear “business” when they
encounter the word “management”
— to activities that were simply not considered to be
“enterprises” at all, such as local restaurants;
— and above all, to systematic innovation: to the search for
and the exploitation of new opportunities for satisfying
human wants and human needs.
As a “useful knowledge,” a techné management is the same age as
the other major areas of knowledge that underlie today’s high-tech
industries, whether electronics, solid-state physics, genetics, or
immunology. Management’s roots lie in the time around World War I. Its
early shoots came up in the mid-1920s. But management is a “useful
knowledge” like engineering or medicine, and as such it first had to
develop as a practice before it could become a discipline. By the late
1930s, there were a few major enterprises around—at that time mostly
businesses—that practiced “management” in the United States: the
DuPont Company and its half brother, General Motors, but also a large
retailer, Sears, Roebuck. On the other side of the Atlantic there was
Siemens in Germany, or the department store chain of Marks and
Spencer in Great Britain. But management as a discipline originated
during and right after World War II.
*
Beginning around 1955, the entire developed world experienced a
“management boom”
†
The social technology we call management was
first presented to the general public, including managers themselves,
some forty years ago. It then rapidly became a discipline rather than the
hit-or-miss practice of a few isolated true believers. And in these forty
21

years management has had as much impact as any of the “scientific
breakthroughs” of the period—perhaps a good deal more. It may not be
solely or even primarily responsible for the fact that society in every
single developed country has become since World War II a society of
organizations. It may not be solely or even primarily responsible for the
fact that in every developed society today the great majority of people—
and the overwhelming majority of educated people—work as employees
in organizations, including of course the bosses themselves, who
increasingly tend to be “professional managers,” that is, hired hands,
rather than owners. But surely if management had not emerged as a
systematic discipline, we could not have organized what is now a social
reality in every developed country: the society of organizations and the
“employee society.”
We still have quite a bit to learn about management, admittedly, and
above all about the management of the knowledge worker. But the
fundamentals are reasonably well known by now. Indeed, what was an
esoteric cult only forty years ago, when most executives even in large
companies did not in fact realize that they practiced management, now
has become commonplace.
But by and large management until recently was seen as being
confined to business, and within business, to “big business.” In the early
seventies, when the American Management Association invited the
heads of small business to its “Presidents’ Course” in Management, it
was told again and again: “Management? That’s not for me—that’s only
for big companies.” Up to 1970 or 1975, American hospital
administrators still rejected anything that was labeled “management.”
“We’re hospital people, not business people,” they said. (In the
universities the faculties are still saying the same thing even though they
will simultaneously complain how “badly managed” their institution is.)
And indeed for a long time, from the end of World War II until 1970,
“progress” meant building bigger institutions.
This twenty-five-year trend toward building bigger organizations in
every social sphere—business, labor union, hospital, school, university,
and so on—had many causes. But the belief that we knew how to
manage bigness and did not really know how to manage small
enterprises was surely a major factor. It had, for instance, a great deal to
do with the rush toward the very large consolidated American high
school. “Education,” it was argued, “requires professional administration,
22

and this in turn works only in large rather than small enterprises.”
During the last ten or fifteen years we have reversed this trend. In
fact, we might now have a trend toward “deinstitutionalizing” America
rather than one toward “deindustrializing” it. For almost fifty years, ever
since the 1930s, it was widely believed in the United States and in
western Europe too that the hospital was the best place for anyone not
quite well, let alone for anyone seriously sick. “The sooner the patient
gets to the hospital, the better care we can take of him,” was the
prevailing belief, shared by doctors and patients alike. In the last few
years, we have been reversing this trend. We now increasingly believe
that the longer we can keep patients away from the hospital and the
sooner we can get them out, the better. Surely this reversal has little to
do with either health care or with management. It is a reaction—whether
permanent or short-lived—against the worship of centralizalion, of
“planning,” of government which began in the 1920s and 1930s, and
which in the United States reached its peak in the Kennedy and Johnson
administrations of the 1960s. However, we could not indulge in this
“deinstitutionalization” in the health-care field if we had not acquired the
competence and the confidence to manage small institutions and “non-
businesses,” that is, health-care institutions.
All told we are learning that management may well both be more
needed and have greater impact on the small entrepreneurial
organization than it has in the big “managed” one. Above all,
management, we are learning now, has as much to contribute to the
new, the entrepreneurial enterprise, as to the existing, ongoing
“managerial” one.
To take a specific example, hamburger stands have been around in
the United States since the nineteenth century; after World War II they
sprang up on big-city street corners. But in the McDonald’s hamburger
chain—one of the success stories of the last twenty-five years—
management was being applied to what had always been a hit-and-miss,
mom-and-pop operation. McDonald’s first designed the end product;
then it redesigned the entire process of making it; then it redesigned or
in many cases invented the tools so that every piece of meat, every slice
of onion, every bun, every piece of fried potato would be identical, turned
out in a precisely timed and fully automated process. Finally, McDonald’s
studied what “value” meant to the customer, defined it as quality and
predictability of product, speed of service, absolute cleanliness, and
23

friendliness, then set standards for all of these, trained for them, and
geared compensation to them.
All of which is management, and fairly advanced management at
that.
Management is the new technology (rather than any specific new
science or invention) that is making the American economy into an
entrepreneurial economy. It is also about to make America into an
entrepreneurial society. Indeed, there may be greater scope in the
United States—and in developed societies generally—for social
innovation in education, health care, government, and politics than there
is in business and the economy. And again, entrepreneurship in society
—and it is badly needed—requires above all application of the basic
concepts, the basic techné, of management to new problems and new
opportunities.
This means that the time has now come to do for entrepreneurship
and innovation what we first did for management in general some thirty
years ago: to develop the principles, the practice, and the discipline.
24

I
THE PRACTICE OF INNOVATION
Innovation is the specific tool of entrepreneurs, the means by which they
exploit change as an opportunity for a different business or a different
service. It is capable of being presented as a discipline, capable of being
learned, capable of being practiced. Entrepreneurs need to search
purposefully for the sources of innovation, the changes and their
symptoms that indicate opportunities for successful innovation. And they
need to know and to apply the principles of successful innovation.
25

1
Systematic Entrepreneurship
I
“The entrepreneur,” said the French economist J. B. Say around 1800,
“shifts economic resources out of an area of lower and into an area of
higher productivity and greater yield.” But Say’s definition does not tell us
who this “entrepreneur” is. And since Say coined the term almost two
hundred years ago, there has been total confusion over the definitions of
“entrepreneur” and “entrepreneurship.”
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.
McDonald’s, however, was entrepreneurship. It did not invent
anything, to be sure. Its final product was what any decent American
restaurant had produced years ago. But by applying management
concepts and management techniques (asking, What is “value” to the
customer?), standardizing the “product,” designing process and tools,
and by basing training on the analysis of the work to be done and then
setting the standards it required, McDonald’s both drastically upgraded
the yield from resources, and created a new market and a new
customer. This is entrepreneurship.
26

Equally entrepreneurial is the growing foundry started by a husband
and wife team a few years ago in America’s Midwest, to heat-treat
ferrous castings to high-performance specifications—for example, the
axles for the huge bulldozers used to clear the land and dig the ditches
for a natural gas pipeline across Alaska. The science needed is well
known; indeed, the company does little that has not been done before.
But in the first place the founders systematized the technical information:
they can now punch the performance specifications into their computer
and get an immediate printout of the treatment required. Secondly, the
founders systematized the process. Few orders run to more than half a
dozen pieces of the same dimension, the same metallic composition, the
same weight, and the same performance specifications. Yet the castings
are being produced in what is, in effect, a flow process rather than in
batches, with computer-controlled machines and ovens adjusting
themselves.
Precision castings of this kind used to have a rejection rate of 30 to
40 percent; in this new foundry, 90 percent or more are flawless when
they come off the line. And the costs are less than two-thirds of those of
the cheapest competitor (a Korean shipyard), even though the
Midwestern foundry pays full American union wages and benefits. What
is “entrepreneurial” in this business is not that it is new and still small
(though growing rapidly). It is the realization that castings of this kind are
distinct and separate; that demand for them has grown so big as to
create a “market niche” and that technology, especially computer
technology, now makes possible the conversion of an art into a scientific
process.
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.
An enterprise also does not need to be small and new to be an
entrepreneur. Indeed, entrepreneurship is being practiced by large and
often old enterprises. The General Electric Company (G.E.), one of the
world’s biggest businesses and more than a hundred years old, has a
long history of starting new entrepreneurial businesses from scratch and
raising them into sizable industries. And G.E. has not confined itself to
entrepreneurship in manufacturing. Its financing arm, G.E. Credit
27

Corporation, in large measure triggered the upheaval that is transforming
the American financial system and is now spreading rapidly to Great
Britain and western Europe as well. G.E. Credit in the sixties ran around
the Maginot Line of the financial world when it discovered that
commercial paper could be used to finance industry. This broke the
banks’ traditional monopoly on commercial loans.
Marks and Spencer, the very large British retailer, has probably been
more entrepreneurial and innovative than any other company in western
Europe these last fifty years, and may have had greater impact on the
British economy and even on British society, than any other change
agent in Britain, and arguably more than government or laws.
Again, G.E. and Marks and Spencer have many things in common
with large and established businesses that are totally unentrepreneurial.
What makes them “entrepreneurial” are specific characteristics other
than size or growth.
Finally, entrepreneurship is by no means confined solely to economic
institutions.
No better text for a History of Entrepreneurship could be found than
the creation and development of the modern university, and especially
the modern American university. The modern university as we know it
started out as the invention of a German diplomat and civil servant,
Wilhelm von Humboldt, who in 1809 conceived and founded the
University of Berlin with two clear objectives: to take intellectual and
scientific leadership away from the French and give it to the Germans;
and to capture the energies released by the French Revolution and turn
them against the French themselves, especially Napoleon. Sixty years
later, around 1870, when the German university itself had peaked,
Humboldt’s idea of the university as a change agent was picked up
across the Atlantic, in the United States. There, by the end of the Civil
War, the old “colleges” of the colonial period were dying of senility. In
1870, the United States had no more than half the college students it
had had in 1830, even though the population had nearly tripled. But in
the next thirty years a galaxy of American university presidents
*
created
and built a new “American university”—both distinctly new and distinctly
American—which then, after World War I, soon gained for the United
States worldwide leadership in scholarship and research, just as
Humboldt’s university had gamed worldwide leadership in scholarship
and research for Germany a century earlier.
28

After World War II a new generation of American academic
enterpreneurs innovated once again, building new “private” and
“metropolitan” universities: Pace University, Fairleigh-Dickinson, and the
New York Institute of Technology in the New York area; Northeastern in
Boston; Santa Clara and Golden Gate on the West Coast; and so on.
They have constituted a major growth sector in American higher
education in the last thirty years. Most of these new schools seem to
differ little from the older institutions in their curriculum. But they were
deliberately designed for a new and different “market”—for people in
mid-career rather than for youngsters fresh out of high school; for big-
city students commuting to the university at all hours of the day and night
rather than for students living on campus and going to school full time,
five days a week from nine to five; and for students of widely diversified,
indeed, heterogenous backgrounds rather than for the “college kid” of
the American tradition. They were a response to a major shift in the
market, a shift in the status of the college degree from “upper-class” to
“middle-class,” and to a major shift in what “going to college” means.
They represent entrepreneurship.
One could equally write a casebook on entrepreneurship based on
the history of the hospital, from the first appearance of the modern
hospital in the late eighteenth century in Edinburgh and Vienna, to the
creation of the various forms of the “community hospital” in nineteenth-
century America, to the great specialized centers of the early twentieth
century, the Mayo Clinic or the Menninger Foundation, to the emergence
of the hospital as health-care center in the post—World War II period.
And now new entrepreneurs are busily changing the hospital again into
specialized “treatment centers”: ambulatory surgical clinics, freestanding
maternity centers or psychiatric centers where the emphasis is not, as in
the traditional hospital, on caring for the patient but on specialized
“needs.”
Again, not every nonbusiness service institution is entrepreneurial;
far from it. And the minority that is still has all the characteristics, all the
problems, all the identifying marks of the service institution.
*
What makes
these service institutions entrepreneurial is something different,
something specific.

Whereas English speakers identify entrepreneurship with the new,
29

small business, the Germans identify it with power and property, which is
even more misleading. The Unternehmer—the literal translation into
German of Say’s entrepreneur—is the person who both owns and runs a
business (the English term would be “owner-manager”). And the word is
used primarily to distinguish the “boss,” who also owns the business,
from the “professional manager” and from “hired hands” altogether.
But the first attempts to create systematic entrepreneurship—the
entrepreneurial bank founded in France in 1857 by the Brothers Pereire
in their Credit Mobilier, then perfected in 1870 across the Rhine by
Georg Siemens in his Deutsche Bank, and brought across the Atlantic to
New York at about the same time by the young J. P. Morgan—did not
aim at ownership. The task of the banker as entrepreneur was to
mobilize other people’s money for allocation to areas of higher
productivity and greater yield. The earlier bankers, the Rothschilds, for
example, became owners. Whenever they built a railroad, they financed
it with their own money. The entrepreneurial banker, by contrast, never
wanted to be an owner. He made his money by selling to the general
public the shares of the enterprises he had financed in their infancy. And
he got the money for his ventures by borrowing from the general public.
Nor are entrepreneurs capitalists, although of course they need
capital as do all economic (and most noneconomic) activities. They are
not investors, either. They take risks, of course, but so does anyone
engaged in any kind of economic activity. The essence of economic
activity is the commitment of present resources to future expectations,
and that means to uncertainty and risk. The entrepreneur is also not an
employer, but can be, and often is, an employee—or someone who
works alone and entirely by himself or herself.
Entrepreneurship is thus a distinct feature whether of an individual or
of an institution. It is not a personality trait; in thirty years I have seen
people of the most diverse personalities and temperaments perform well
in entrepreneurial challenges. To be sure, people who need certainty are
unlikely to make good entrepreneurs. But such people are unlikely to do
well in a host of other activities as well—in politics, for instance, or in
command positions in a military service, or as the captain of an ocean
liner. In all such pursuits decisions have to be made, and the essence of
any decision is uncertainty.
But everyone who can face up to decision making can learn to be an
entrepreneur and to behave entrepreneurially. Entrepreneurship, then, is
30

behavior rather than personality trait. And its foundation lies in concept
and theory rather than in intuition.
II
Every practice rests on theory, even if the practitioners themselves are
unaware of it. Entrepreneurship rests on a theory of economy and
society. The theory sees change as normal and indeed as healthy. And it
sees the major task in society—and especially in the economy—as
doing something different rather than doing better what is already being
done. This is basically what Say, two hundred years ago, meant when
he coined the term entrepreneur. It was intended as a manifesto and as
a declaration of dissent: the entrepreneur upsets and disorganizes. As
Joseph Schumpeter formulated it, his task is “creative destruclion.”
Say was an admirer of Adam Smith. He translated Smith’s Wealth of
Nations (1776) into French and tirelessly propagated throughout his life
Smith’s ideas and policies. But his own contribution to economic thought,
the concept of the entrepreneur and of entrepreneurship, is independent
of classical economics and indeed incompatible with it. Classical
economics optimizes what already exists, as does mainstream economic
theory to this day, including the Keynesians, the Friedmanites, and the
Supply-siders. It focuses on getting the most out of existing resources
and aims at establishing equilibrium. It cannot handle the entrepreneur
but consigns him to the shadowy realm of “external forces,” together with
climate and weather, government and politics, pestilence and war, but
also technology. The traditional economist, regardless of school or “ism,”
does not deny, of course, that these external forces exist or that they
matter. But they are not part of his world, not accounted for in his model,
his equations, or his predictions. And while Karl Marx had the keenest
appreciation of technology—he was the first and is still one of the best
historians of technology—he could not admit the entrepreneur and
entrepreneurship into either his system or his economics. All economic
change in Marx beyond the optimization of present resources, that is, the
establishment of equilibrium, is the result of changes in property and
power relationships, and hence “politics,” which places it outside the
economic system itself.
Joseph Schumpeter was the first major economist to go back to Say.
In his classic Die Theorie der Wirtschaftlichen Entwicklung (The Theory
31

of Economic Dynamics), published in 1911, Schumpeter broke with
traditional economics—far more radically than John Maynard Keynes
was to do twenty years later. He postulated that dynamic disequilibrium
brought on by the innovating entrepreneur, rather than equilibrium and
optimization, is the “norm” of a healthy economy and the central reality
for economic theory and economic practice.
Say was primarily concerned with the economic sphere. But his
definition only calls for the resources to be “economic.” The purpose to
which these resources are dedicated need not be what is traditionally
thought of as economic. Education is not normally considered
“economic” and certainly economic criteria are hardly appropriate to
determine the “yield” of education (though no one knows what other
criteria might pertain). But the resources of education are, of course,
economic. They are in fact identical with those used for the most
unambiguously economic purpose such as making soap for sale.
Indeed, the resources for all social activities of human beings are the
same and are “economic” resources: capital (that is, the resources
withheld from current consumption and allocated instead to future
expectations), physical resources, whether land, seed corn, copper, the
classroom, or the hospital bed; labor, management, and time. Hence
entrepreneurship is by no means limited to the economic sphere
although the term originated there. It pertains to all activities of human
beings other than those one might term “existential” rather than “social.”
And we now know that there is little difference between entrepreneurship
whatever the sphere. The entrepreneur in education and the
entrepreneur in health care—both have been fertile fields—do very much
the same things, use very much the same tools, and encounter very
much the same problems as the entrepreneur in a business or a labor
union.
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.
III
Entrepreneurship, it is commonly believed, is enormously risky. And,
indeed, in such highly visible areas of innovation as high tech—
32

microcomputers, for instance, or biogenetics—the casualty rate is high
and the chances of success or even of survival seem to be quite low.
But why should this be so? Entrepreneurs, by definition, shift
resources from areas of low productivity and yield to areas of higher
productivity and yield. Of course, there is a risk they may not succeed.
But if they are even moderately successful, the returns should be more
than adequate to offset whatever risk there might be. One should thus
expect entrepreneurship to be considerably less risky than optimization.
Indeed, nothing could be as risky as optimizing resources in areas where
the proper and profitable course is innovation, that is, where the
opportunities for innovation already exist. Theoretically, entrepreneurship
should be the least risky rather than the most risky course.
In fact, there are plenty of entrepreneurial organizations around
whose batting average is so high as to give the lie to the all but universal
belief in the high risk of entrepreneurship and innovation.
In the United States, for instance, there is Bell Lab, the innovative
arm of the Bell Telephone System. For more than seventy years—from
the design of the first automatic switchboard around 1911 until the
design of the optical fiber cable around 1980, including the invention of
transistor and semiconductor, but also basic theoretical and engineering
work on the computer—Bell Lab produced one winner after another. The
Bell Lab record would indicate that even in the high-tech field,
entrepreneurship and innovation can be low-risk.
IBM, in a fast-moving high-tech field, that of the computer, and in
competition with the “old pros” in electricity and electronics, has so far
not had one major failure. Nor, in a far more prosaic industry, has the
most entrepreneurial of the world’s major retailers, the British
department store chain Marks and Spencer. The world’s largest
producer of branded and packaged consumer goods, Procter & Gamble,
similarly has had a near-perfect record of successful innovations. And a
“middletech” company, 3M in St. Paul, Minnesota, which has created
around one hundred new businesses or new major product lines in the
last sixty years, has been successful four out of every five times in its
ventures. This is only a small sample of the entrepreneurs who
somehow innovate at low risk. Surely there are far too many of them for
low-risk entrepreneurship to be a fluke, a special dispensation of the
gods, an accident, or mere chance.
There are also enough individual entrepreneurs around whose
33

batting average in starting new ventures is so high as to disprove the
popular belief of the high risk of entrepreneurship.
Entrepreneurship is “risky” mainly because so few of the so-called
entrepreneurs know what they are doing. They lack the methodology.
They violate elementary and well-known rules. This is particularly true of
high-tech entrepreneurs. To be sure (as will be discussed in Chapter 9),
high-tech entrepreneurship and innovation are intrinsically more difficult
and more risky than innovation based on economics and market
structure, on demographics, or even on something as seemingly
nebulous and intangible as Weltanschauung—perceptions and moods.
But even high-tech entrepreneurship need not be “high-risk,” as Bell Lab
and IBM prove. It does need, however, to be systematic. It needs to be
managed. Above all, it needs to be based on purposeful innovation.
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2
Purposeful Innovation and the Seven Sources for Innovative
Opportunity
Entrepreneurs innovate. Innovation is the specific instrument of
entrepreneurship. It is the act that endows resources with a new capacity
to create wealth. Innovation, indeed, creates a resource. There is no
such thing as a “resource” until man finds a use for something in nature
and thus endows it with economic value. Until then, every plant is a
weed and every mineral just another rock. Not much more than a
century ago, neither mineral oil seeping out of the ground nor bauxite,
the ore of aluminum, were resources. They were nuisances; both render
the soil infertile. The penicillin mold was a pest, not a resource.
Bacteriologists went to great lengths to protect their bacterial cultures
against contamination by it. Then in the 1920s, a London doctor,
Alexander Fleming, realized that this “pest” was exactly the bacterial
killer bacteriologists had been looking for—and the penicillin mold
became a valuable resource.
The same holds just as true in the social and economic spheres.
There is no greater resource in an economy than “purchasing power.”
But purchasing power is the creation of the innovating entrepreneur.
The American farmer had virtually no purchasing power in the early
nineteenth century; he therefore could not buy farm machinery. There
were dozens of harvesting machines on the market, but however much
he might have wanted them, the farmer could not pay for them. Then
one of the many harvesting-machine inventors, Cyrus McCormick,
invented installment buying. This enabled the farmer to pay for a
harvesting machine out of his future earnings rather than out of past
savings—and suddenly the farmer had “purchasing power” to buy farm
equipment.
Equally, whatever changes the wealth-producing potential of already
existing resources constitutes innovation.
There was not much new technology involved in the idea of moving a
truck body off its wheels and onto a cargo vessel. This “innovation,” the
35

container, did not grow out of technology at all but out of a new
perception of the “cargo vessel” as a materials-handling device rather
than a “ship,” which meant that what really mattered was to make the
time in port as short as possible. But this humdrum innovation roughly
quadrupled the productivity of the ocean-going freighter and probably
saved shipping. Without it, the tremendous expansion of world trade in
the last forty years—the fastest growth in any major economic activity
ever recorded—could not possibly have taken place.
What really made universal schooling possible—more so than the
popular commitment to the value of education, the systematic training of
teachers in schools of education, or pedagogic theory—was that lowly
innovation, the textbook. (The textbook was probably the invention of the
great Czech educational reformer Johann Amos Comenius, who
designed and used the first Latin primers in the mid-seventeenth
century.) 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 thirty or thirty-five
students.
Innovation, as these examples show, does not have to be technical,
does not indeed have to be a “thing” altogether. Few technical
innovations can compete in terms of impact with such social innovations
as the newspaper or insurance. Installment buying literally transforms
economies. Wherever introduced, it changes the economy from supply-
driven to demand-driven, regardless almost of the productive level of the
economy (which explains why installment buying is the first practice that
any Marxist government coming to power immediately suppresses: as
the Communists did in Czechoslovakia in 1948, and again in Cuba in
1959). The hospital, in its modern form a social innovation of the
Enlightenment of the eighteenth century, has had greater impact on
health care than many advances in medicine. Management, that is, the
“useful knowledge” that enables man for the first time to render
productive people of different skills and knowledge working together in
an “organization,” is an innovation of this century. It has converted
modern society into something brand new, something, by the way, for
which we have neither political nor social theory: a society of
organizations.
Books on economic history mention August Borsig as the first man to
build steam locomotives in Germany. But surely far more important was
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his innovation—against strenuous opposition from craft guilds, teachers,
and government bureaucrats—of what to this day is the German system
of factory organization and the foundation of Germany’s industrial
strength. It was Borsig who devised the idea of the Meister (Master), the
highly skilled and highly respected senior worker who runs the shop with
considerable autonomy; and the Lehrling System (apprenticeship
system), which combines practical training (Lehre) on the job with
schooling (Ausbildung) in the classroom. And the twin inventions of
modern government by Machiavelli in The Prince (1513) and of the
modern national state by his early follower, Jean Bodin, sixty years later,
have surely had more lasting impacts than most technologies.
One of the most interesting examples of social innovation and its
importance can be seen in modern Japan.
From the time she opened her doors to the modern world in 1867,
Japan has been consistently underrated by westerners, despite her
successful defeats of China and then Russia in 1894 and 1905,
respectively; despite Pearl Harbor; and despite her sudden emergence
as an economic superpower and the toughest competitor in the world
market of the 1970s and 1980s. A major reason, perhaps the major one,
is the prevailing belief that innovation has to do with things and is based
on science or technology. And the Japanese, so the common belief has
held (in Japan as well as in the West, by the way), are not innovators but
imitators. For the Japanese have not, by and large, produced
outstanding technical or scientific innovations. Their success is based on
social innovation.
When the Japanese, in the Meiji Restoration of 1867, most
reluctantly opened their country to the world, it was to avoid the fates of
India and nineteenth-century China, both of which were conquered,
colonized, and “westernized” by the West The basic aim, in true Judo
fashion, was to use the weapons of the West to hold the West at bay;
and to remain Japanese.
This meant that social innovation was far more critical than steam
locomotives or the telegraph. And social innovation, in terms of the
development of such institutions as schools and universities, a civil
service, banks and labor relations, was far more difficult to achieve than
building locomotives and telegraphs. A locomotive that will pull a train
from London to Liverpool will equally, without adaptation or change, pull
a train from Tokyo to Osaka. But the social institutions had to be at once
37

quintessentially “Japanese” and yet “modern.” They had to be run by
Japanese and yet serve an economy that was “Western” and highly
technical. 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. The Japanese made a deliberate decision a hundred years
ago to concentrate their resources on social innovations, and to imitate,
import, and adapt technical innovations—with startling success. Indeed,
this policy may still be the right one for them. For, as will be discussed in
Chapter 17, what is sometimes half-facetiously called creative imitation
is a perfectly respectable and often very successful entrepreneurial
strategy.
Even if the Japanese now have to move beyond imitating, importing,
and adapting other people’s technology and learn to undertake genuine
technical innovation of their own, it might be prudent not to underrate
them. Scientific research is in itself a fairly recent “social innovation.”
And the Japanese, whenever they have had to do so in the past, have
always shown tremendous capacity for such innovation. Above all, they
have shown a superior grasp of entrepreneurial strategies.
“Innovation,” then, is an economic or social rather than a technical
term. It can be defined the way J. B. Say defined entrepreneurship, as
changing the yield of resources. Or, as a modern economist would tend
to do, it can be defined in demand terms rather than in supply terms, that
is, as changing the value and satisfaction obtained from resources by
the consumer.
Which of the two is more applicable depends, I would argue, on the
specific case rather than on the theoretical model. The shift from the
integrated steel mill to the “mini-mill,” which starts with steel scrap rather
than iron ore and ends with one final product (e.g., beams and rods,
rather than raw steel that then has to be fabricated), is best described
and analyzed in supply terms. The end product, the end uses, and the
customers are the same, though the costs are substantially lower. And
the same supply definition probably fits the container. But the
audiocassette or the videocassette, though equally “technical,” if not
more so, are better described or analyzed in terms of consumer values
and consumer satisfactions, as are such social innovations as the news
magazines developed by Henry Luce of Time—Life—Fortune in the
1920s, or the money-market fund of the late 1970s and early 1980s.
We cannot yet develop a theory of innovation. But we already know
38

enough to say when, where, and how one looks systematically for
innovative opportunities, and how one judges the chances for their
success or the risks of their failure. We know enough to develop, though
still only in outline form, the practice of innovation.
It has become almost a cliché for historians of technology that one of
the great achievements of the nineteenth century was the “invention of
invention.” Before 1880 or so, invention was mysterious; early
nineteenth-century books talk incessantly of the “flash of genius.” The
inventor himself was a half-romantic, half-ridiculous figure, tinkering
away in a lonely garret. By 1914, the time World War I broke out,
“invention” had become “research,” a systematic, purposeful activity,
which is planned and organized with high predictability both of the
results aimed at and likely to be achieved.
Something similar now has to be done with respect to innovation.
Entrepreneurs will have to learn to practice systematic innovation.
Successful entrepreneurs do not wait until “the Muse kisses them”
and gives them a “bright idea” they go to work. Altogether, they do not
look for the “biggie,” the innovation that will “revolutionize the industry,”
create a “billion-dollar business,” or “make one rich overnight.” Those
entrepreneurs who start out with the idea that they’ll make it big—and in
a hurry—can be guaranteed failure. They are almost bound to do the
wrong things. An innovation that looks very big may turn out to be
nothing but technical virtuosity; and innovations with modest intellectual
pretensions, a McDonald’s, for instance, may turn into gigantic, highly
profitable businesses. The same applies to nonbusiness, public-service
innovations.
Successful entrepreneurs, whatever their individual motivation—be it
money, power, curiosity, or the desire for fame and recognition—try to
create value and to make a contribution. Still, successful entrepreneurs
aim high. They are not content simply to improve on what already exists,
or to modify it. They try to create new and different values and new and
different satisfactions, to convert a “material” into a “resource,” or to
combine existing resources in a new and more productive configuration.
And it is change that always provides the opportunity for the new and
different. Systematic innovation therefore consists in the purposeful and
organized search for changes, and in the systematic analysis of the
opportunities such changes might offer for economic or social
innovation.
39

As a rule, these are changes that have already occurred or are under
way. The overwhelming majority of successful innovations exploit
change. To be sure, there are innovations that in themselves constitute a
major change; some of the major technical innovations, such as the
Wright Brothers’ airplane, are examples. But these are exceptions, and
fairly uncommon ones. Most successful innovations are far more
prosaic; they exploit change. And thus the discipline of innovation (and it
is the knowledge base of entrepreneurship) is a diagnostic discipline: a
systematic examination of the areas of change that typically offer
entrepreneurial opportunities.
Specifically, systematic innovation means monitoring seven sources
for innovative opportunity.
The first four sources lie within the enterprise, whether business or
public-service institution, or within an industry or service sector. They are
therefore visible primarily to people within that industry or service sector.
They are basically symptoms. But they are highly reliable indicators of
changes that have already happened or can be made to happen with
little effort. These four source areas are:
The unexpected—the unexpected success, the unexpected
failure, the unexpected outside event;
The incongruity—between reality as it actually is and reality
as it is assumed to be or as it “ought to be”
Innovation based on process need;
Changes in industry structure or market structure that catch
everyone unawares.
The second set of sources for innovative opportunity, a set of three,
involves changes outside the enterprise or industry:
Demographics (population changes);
Changes in perception, mood, and meaning;
New knowledge, both scientific and nonscientific.
The lines between these seven source areas of innovative
opportunities are blurred, and there is considerable overlap between
40

them. They can be likened to seven windows, each on a different side of
the same building. Each window shows some features that can also be
seen from the window on either side of it. But the view from the center of
each is distinct and different.
The seven sources require separate analysis, for each has its own
distinct characteristic. No area is, however, inherently more important or
more productive than the other. Major innovations are as likely to come
out of an analysis of symptoms of change (such as the unexpected
success of what was considered an insignificant change in product or
pricing) as they are to come out of the massive application of new
knowledge resulting from a great scientific breakthrough.
But the order in which these sources will be discussed is not
arbitrary. They are listed in descending order of reliability and
predictability. For, contrary to almost universal belief, new knowledge—
and especially new scientific knowledge—is not the most reliable or most
predictable source of successful innovations. For all the visibility,
glamour, and importance of science-based innovation, it is actually the
least reliable and least predictable one. Conversely, the mundane and
unglamorous analysis of such symptoms of underlying changes as the
unexpected success or the unexpected failure carry fairly low risk and
uncertainty. And the innovations arising therefrom have, typically, the
shortest lead time between the start of a venture and its measurable
results, whether success or failure.
41

3
Source: The Unexpected
I
THE UNEXPECTED SUCCESS
No other area offers richer opportunities for successful innovation than
the unexpected success. In no other area are innovative opportunities
less risky and their pursuit less arduous. Yet the unexpected success is
almost totally neglected; worse, managements tend actively to reject it.
Here is one example.
More than thirty years ago, I was told by the chairman of New York’s
largest department store, R. H. Macy, “We don’t know how to stop the
growth of appliance sales.”
“Why do you want to stop them?” I asked, quite mystified. “Are you
losing money on them?”
“On the contrary,” the chairman said, “profit margins are better than
on fashion goods; there are no returns, and practically no pilferage.”
“Do the appliance customers keep away the fashion customers?” I
asked.
“Oh, no,” was the answer. “Where we used to sell appliances
primarily to people who came in to buy fashions, we now sell fashions
very often to people who come in to buy appliances. But,” the chairman
continued, “in this kind of store, it is normal and healthy for fashion to
produce seventy percent of sales. Appliance sales have grown so fast
that they now account for three-fifths. And that’s abnormal. We’ve tried
everything we know to make fashion grow to restore the normal ratio, but
nothing works. The only thing left now is to push appliance sales down to
where they should be.”
For almost twenty years after this episode, Macy’s New York
continued to drift. Any number of explanations were given for Macy’s
inability to exploit its dominant position in the New York retail market: the
decay of the inner city, the poor economics of a store supposedly “too
big,” and many others. Actually, once a new management came in after
1970, reversed the emphasis, and accepted the contribution of
42

appliances to sales, Macy’s—despite inner-city decay, despite its high
labor costs, and despite its enormous size—promptly began to prosper
again.
At the same time that Macy’s rejected the unexpected success,
another New York retail store, Bloomingdale’s, used the identical
unexpected success to propel itself into the number two spot in the New
York market. Bloomingdale’s, at best a weak number four, had been
even more of a fashion store than Macy’s. But when appliance sales
began to climb in the early 1950s, Bloomingdale’s ran with the
opportunity. It realized that something unexpected was happening and
analyzed it. It then built a new position in the marketplace around its
Housewares Department. It also refocused its fashion and apparel sales
to reach a new customer: the customer of whose emergence the
explosion in appliance sales was only a symptom. Macy’s is still number
one in New York in volume. But Bloomingdale’s has become the “smart
New York store.” And the stores that were the contenders for this title
thirty years ago—the stores that were then strong number twos, the
fashion leaders of 1950 such as Best—have disappeared (for additional
examples, see Chapter 15).
The Macy’s story will be called extreme. But the only uncommon
aspect about it is that the chairman was aware of what he was doing.
Though not conscious of their folly, far too many managements act the
way Macy’s did. It is never easy for a management to accept the
unexpected success. It takes determination, specific policies, a
willingness to look at reality, and the humility to say, “We were wrong!”
One reason why it is difficult for management to accept unexpected
success is that all of us tend to believe that anything that has lasted a
fair amount of time must be “normal” and go on “forever.” Anything that
contradicts what we have come to consider a law of nature is then
rejected as unsound, unhealthy, and obviously abnormal.
This explains, for instance, why one of the major U.S. steel
companies, around 1970, rejected the “mini-mill.”
*
Management knew
that its steelworks were rapidly becoming obsolete and would need
billions of dollars of investment to be modernized. It also knew that it
could not obtain the necessary sums. A new, smaller “mini-mill” was the
solution.
Almost by accident, such a “mini-mill” was acquired. It soon began to
grow rapidly and to generate cash and profits. Some of the younger men
43

within the steel company therefore proposed that the available
investment funds be used to acquire additional “mini-mills” and to build
new ones. Within a few years, the “mini-mills” would then give the steel
company several million tons of steel capacity based on modern
technology, low labor costs, and pinpointed markets. Top management
indignantly vetoed the proposal; indeed, all the men who had been
connected with it found themselves “ex-employees” within a few years.
“The integrated steelmaking process is the only right one,” top
management argued. “Everything else is cheating—a fad, unhealthy,
and unlikely to endure.” Needless to say, ten years later the only parts of
the steel industry in America that were still healthy, growing, and
reasonably prosperous were “mini-mills.”
To a steelmaker who has spent his entire life working to perfect the
integrated steelmaking process, who is at home in the big steel mill, and
who may himself be the son of a steelworker (as a great many American
steel company executives have been), anything but “big steel” is strange
and alien, indeed a threat. It takes an effort to perceive in the “enemy”
one’s own best opportunity.
Top management people in most organizations, whether small or
large, public-service institution or business, have typically grown up in
one function or one area. To them, this is the area in which they feel
comfortable. When I sat down with the chairman of R. H. Macy, for
instance, there was only one member of top management, the personnel
vice-president, who had not started as a fashion buyer and made his
career in the fashion end of the business. Appliances, to these men,
were something that other people dealt with.
The unexpected success can be galling. Consider the company that
has worked diligently on modifying and perfecting an old product, a
product that has been the “flagship” of the company for years, the
product that represents “quality.” At the same time, most reluctantly, the
company puts through what everyone in the firm knows is a perfectly
meaningless modification of an old, obsolete, and “low-quality” product.
It is done only because one of the company’s leading salesmen lobbied
for it, or because a good customer asked for it and could not be turned
down. But nobody expects it to sell; in fact, nobody wants it to sell. And
then this “dog” runs away with the market and even takes the sales
which plans and forecasts had promised for the “prestige,” “quality” line.
No wonder that everybody is appalled and considers the success a
44

“cuckoo in the nest” (a term I have heard more than once). Everybody is
likely to react precisely the way the chairman of R. H. Macy reacted
when he saw the unwanted and unloved appliances overtake his
beloved fashions, on which he himself had spent his working life and his
energy.
The unexpected success is a challenge to management’s judgment.
“If the mini-mills were an opportunity, we surely would have seen it
ourselves,” the chairman of the big steel company is quoted as saying
when he turned the mini-mill proposal down. Managements are paid for
their judgment, but they are not being paid to be infallible. In fact, they
are being paid to realize and admit that they have been wrong—
especially when their admission opens up an opportunity. But this is by
no means common.
A Swiss pharmaceutical company today has world leadership in
veterinary medicines, yet it has not itself developed a single veterinary
drug. But the companies that developed these medicines refused to
serve the veterinary market. The medicines, mostly antibiotics, were of
course developed for treating human diseases. When the veterinarians
discovered that they were just as effective for animals and began to
send in their orders, the original manufacturers were far from pleased. In
some cases they refused to supply the veterinarians; in many others,
they disliked having to reformulate the drugs for animal use, to
repackage them, and so on. The medical director of a leading
pharmaceutical company protested around 1953 that to apply a new
antibiotic to the treatment of animals was a “misuse of a noble
medicine.” Consequently, when the Swiss approached this manufacturer
and several others, they obtained licenses for veterinary use without any
difficulty and at low cost. Some of the manufacturers were only too
happy to get rid of the embarrassing success.
Human medications have since come under price pressure and are
carefully scrutinized by regulatory authorities. This has made veterinary
medications the most profitable segment of the pharmaceutical industry.
But the companies that developed the compounds in the first place are
not the ones who get these profits.
Far more often, the unexpected success is simply not seen at all.
Nobody pays any attention to it. Hence, nobody exploits it, with the
inevitable result that the competitor runs with it and reaps the rewards.
A leading hospital supplier introduced a new line of instruments for
45

biological and clinical tests. The new products were doing quite well.
Then, suddenly, orders came in from industrial and university
laboratories. Nobody was told about them, nobody noticed them; nobody
realized that, by pure accident, the company had developed products
with more and better customers outside the market for which those
products had been developed. No salesman was being sent out to call
on these new customers, no service force was being set up. Five or
eight years later, another company had taken over these new markets.
And because of the volume of business these markets produced, the
newcomer could soon invade the hospital market offering lower prices
and better services than the original market leader.
One reason for this blindness to the unexpected success is that our
existing reporting systems do not as a rule report it, let alone clamor for
management’s attention.
Practically every company—but every public-service institution as
well—has a monthly or quarterly report. The first sheet lists the areas in
which performance is below expectations: it lists the problems and the
shortfalls. At the monthly meetings of the management group and the
board of directors, everybody therefore focuses on the problem areas.
No one even looks at the areas where the company has done better
than expected. And if the unexpected success is not quantitative but
qualitative—as in the case of the hospital instruments mentioned above,
which opened up new major markets outside the company’s traditional
ones—the figures will not even show the unexpected success as a rule.
To exploit the opportunity for innovation offered by unexpected
success requires analysis. Unexpected success is a symptom. But a
symptom of what? The underlying phenomenon may be nothing more
than a limitation on our own vision, knowledge, and understanding. That
the pharmaceutical companies, for instance, rejected the unexpected
success of their new drugs in the animal market was a symptom of their
own failure to know how big—and how important—livestock raising
throughout the world is; of their blindness to the sharp increase in
demand for animal proteins throughout the world after World War II, and
to the tremendous changes in knowledge, sophistication, and
management capacity of the world’s farmers.
The unexpected success of appliances at R. H. Macy’s was a
symptom of a fundamental change in the behavior, expectations, and
values of substantial numbers of consumers—as the people at
46

Bloomingdale’s realized. Up until World War II, department store
consumers in the United States bought primarily by socioeconomic
status, that is, by income group. After World War II, the market
increasingly segmented itself by what we now call “lifestyles.”
Bloomingdale’s was the first of the major department stores, especially
on the East Coast, to realize this, to capitalize on it, and to innovate a
new retail image.
The unexpected success of laboratory instruments designed for the
hospital in industrial and university laboratories was a symptom of the
disappearance of distinctions between the various users of scientific
instruments, which for almost a century had created sharply different
markets, with different end uses, specifications, and expectations. What
it symptomized—and the company never realized this—was not just that
a product line had uses that were not originally envisaged. It signaled the
end of the specific market niche the company had enjoyed in the hospital
market. So the company that for thirty or forty years had successfully
defined itself as a designer, maker, and marketer of hospital laboratory
equipment was forced eventually to redefine itself as a maker of
laboratory instruments, and to develop capabilities to design,
manufacture, distribute, and service way beyond its original field. By
then, however, it had lost a large part of the market for good.
Thus the unexpected success is not just an opportunity for
innovalion; it demands innovation. It forces us to ask, What basic
changes are now appropriate for this organization in the way it defines
its business? Its technology? Its markets? If these questions are faced
up to, then the unexpected success is likely to open up the most
rewarding and least risky of all innovative opportunities.
Two of the world’s biggest businesses, DuPont, the world’s largest
chemical company, and IBM, the giant of the computer industry, owe
their preeminence to their willingness to exploit the unexpected success
as an innovative opportunity.
DuPont, for 130 years, had confined itself to making munitions and
explosives. In the mid-1920s it then organized its first research efforts in
other areas, one of them the brand-new field of polymer chemistry,
which the Germans had pioneered during World War I. For several years
there were no results at all. Then, in 1928, an assistant left a burner on
over the weekend. On Monday morning, Wallace H. Carothers, the
chemist in charge, found that the stuff in the kettle had congealed into
47

fibers. It took another ten years before DuPont found out how to make
Nylon intentionally. The point of the story is, however, that the same
accident had occurred several times in the laboratories of the big
German chemical companies with the same results, and much earlier.
The Germans were, of course, looking for a polymerized fiber—and they
could have had it, along with world leadership in the chemical industry,
ten years before DuPont had Nylon. But because they had not planned
the experiment, they dismissed its results, poured out the accidentally
produced fibers, and started all over again.
The history of IBM equally shows what paying attention to the
unexpected success can do. For IBM is largely the result of the
willingness to exploit the unexpected success not once, but twice. In the
early 1930s, IBM almost went under. It had spent its available money on
designing the first electro-mechanical bookkeeping machine, meant for
banks. But American banks did not buy new equipment in the
Depression days of the early thirties. IBM even then had a policy of not
laying off people, so it continued to manufacture the machines, which it
had to put in storage.
When IBM was at its lowest point—so the story goes—Thomas
Watson, Sr., the founder, found himself at a dinner party sitting next to a
lady. When she heard his name, she said: “Are you the Mr. Watson of
IBM? Why does your sales manager refuse to demonstrate your
machine to me?” What a lady would want with an accounting machine
Thomas Watson could not possibly figure out, nor did it help him much
when she told him she was the director of the New York Public Library; it
turned out he had never been in a public library. But next morning, he
appeared there as soon as its doors opened.
In those days, libraries had fair amounts of government money.
Watson walked out two hours later with enough of an order to cover next
month’s payroll. And, as he added with a chuckle whenever he told the
story, “I invented a new policy on the spot: we get cash in advance
before we deliver.”
Fifteen years later, IBM had one of the early computers. Like the
other early American computers, the IBM computer was designed for
scientific purposes only. Indeed, IBM got into computer work largely
because of Watson’s interest in astronomy. And when first demonstrated
in IBM’s show window on Madison Avenue, where it drew enormous
crowds, IBM’s computer was programmed to calculate all past, present,
48

and future phases of the moon.
But then businesses began to buy this “scientific marvel” for the most
mundane of purposes, such as payroll. Univac, which had the most
advanced computer and the one most suitable for business uses, did not
really want to “demean” its scientific miracle by supplying business. But
IBM, though equally surprised by the business demand for computers,
responded immediately. Indeed, it was willing to sacrifice its own
computer design, which was not particularly suitable for accounting, and
instead use what its rival and competitor (Univac) had developed. Within
four years IBM had attained leadership in the computer market, even
though for another decade its own computers were technically inferior to
those produced by Univac. IBM was willing to satisfy business and to
satisfy it on business’ terms—to train programmers for business, for
instance.
Similarly, Japan’s foremost electronic company, Matsushita (better
known by its brand names Panasonic and National), owes its rise to its
willingness to run with unexpected success.
Matsushita was a fairly small and undistinguished company in the
early 1950s, outranked on every count by such older and deeply
entrenched giants as Toshiba or Hitachi. Matsushita “knew,” as did every
other Japanese manufacturer of the time, that “television would not grow
fast in Japan.” “Japan is much too poor to afford such a luxury,” the
chairman of Toshiba had said at a New York meeting around 1954 or
1955. Matsushita, however, was intelligent enough to accept that the
Japanese farmers apparently did not know that they were too poor for
television. What they knew was that television offered them, for the first
time, access to a big world. They could not afford television sets, but
they were prepared to buy them anyhow and pay for them. Toshiba and
Hitachi made better sets at the time, only they showed them on the
Ginza in Tokyo and in the big-city department stores, making it pretty
clear that farmers were not particularly welcome in such elegant
surroundings. Matsushita went to the farmers and sold its televisions
door-to-door, something no one in Japan had ever done before for
anything more expensive than cotton pants or aprons.
Of course, it is not enough to depend on accidents, nor to wait for the
lady at the dinner table to express unexpected interest in one’s
apparently failing product. The search has to be organized.
The first thing is to ensure that the unexpected is being seen; indeed,
49

that it clamors for attention. It must be properly featured in the
information management obtains and studies. (How to do this is
described in some detail in Chapter 13.)
Managements must look at every unexpected success with the
questions: (1) What would it mean to us if we exploited it? (2) Where
could it lead us? (3) What would we have to do to convert it into an
opportunity? And (4) How do we go about it? This means, first, that
managements need to set aside specific time in which to discuss
unexpected successes; and second, that someone should always be
designated to analyze an unexpected success and to think through how
it could be exploited.

But management also needs to learn what the unexpected success
demands of them. Again, this might best be explained by an example.
A major university on the eastern seaboard of the United States
started, in the early 1950s, an evening program of “continuing education”
for adults; in which the normal undergraduate curriculum leading to an
undergraduate degree was offered to adults with a high school diploma.
Nobody on the faculty really believed in the program. The only
reason it was offered at all was that a small number of returning World
War II veterans had been forced to go to work before obtaining their
undergraduate degrees and were clamoring for an opportunity to get the
credits they still lacked. To everybody’s surprise, however, the program
proved immensely successful, with qualified students applying in large
numbers. And the students in the program actually outperformed the
regular undergraduates. This, in turn, created a dilemma. To exploit the
unexpected success, the university would have had to build a fairly big
first-rate faculty. But this would have weakened its main program; at the
least, it would have diverted the university from what it saw as its main
mission, the training of undergraduates. The alternative was to close
down the new program. Either decision would have been a responsible
one. Instead, the university decided to staff the program with cheap,
temporary faculty, mostly teaching assistants working on their own
advanced degrees. As a result, it destroyed the program within a few
years; but worse, it also seriously damaged its own reputation.
The unexpected success is an opportunity, but it makes demands. It
demands to be taken seriously. It demands to be staffed with the ablest
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people available, rather than with whoever we can spare. It demands
seriousness and support on the part of management equal to the size of
the opportunity. And the opportunity is considerable.
II
THE UNEXPECTED FAILURE
Failures, unlike successes, cannot be rejected and rarely go
unnoticed. But they are seldom seen as symptoms of opportunity. A
good many failures are, of course, nothing but mistakes, the results of
greed, stupidity, thoughtless bandwagon-climbing, or incompetence
whether in design or execution. Yet if something fails despite being
carefully planned, carefully designed, and conscientiously executed, that
failure often bespeaks underlying change and, with it, opportunity.
The assumptions on which a product or service, its design or its
marketing strategy, were based may no longer fit reality. Perhaps
customers have changed their values and perceptions; while they still
buy the same “thing,” they are actually purchasing a very different
“value.” Or perhaps what has always been one market or one end use is
splitting itself into two or more, each demanding something quite
different. Any change like this is an opportunity for innovation.
I had my first experience with an unexpected failure at the very
beginning of my working life, almost sixty years ago, just out of high
school. My first job was as a trainee in an old export firm, which for more
than a century had been selling hardware to British India. Its best seller
for years had been a cheap padlock, of which it exported whole
shiploads every month. The padlock was flimsy; a pin easily opened the
lock. As incomes in India went up during the 1920s, padlock sales,
instead of going up, began to decline quite sharply. My employer
thereupon did the obvious: he redesigned the padlock to give it a sturdier
lock, that is, to make it “better quality.” The added cost was minimal and
the improvement in quality substantial. But the improved padlock turned
out to be unsalable. Four years later, the firm went into liquidation, the
decline of its Indian padlock business a major factor in its demise.
A very small competitor of this firm in the Indian export business—no
more than a tenth of the size of my employer and until then barely able
to survive—realized that this unexpected failure was a symptom of basic
51

change. For the bulk of Indians, the peasants in the villages, the padlock
was (and for all I know, still is) a magical symbol; no thief would have
dared open a padlock. The key was never used, and usually
disappeared. To get a padlock that could not easily be opened without a
key—the improved padlock my employer had worked so hard to perfect
without additional cost—was thus not a boon but a disaster.
A small but rapidly growing middle-class minority in the cities,
however, needed a real lock. That it was not sturdy enough for their
needs was the main reason why the old lock had begun to lose sales
and market. But for them the redesigned product was still inadequate.
My employer’s competitor broke down the padlock into two separate
products: one without lock and key, with only a simple trigger release,
and selling for one-third less than the old padlock but with twice its profit
margin; and the other with a good sturdy lock and three keys, selling at
twice the price of the old product and also with a substantially larger
profit margin. Both lines immediately began to sell. Within two years, the
competitor had become the largest European hardware exporter to India.
He maintained this position for ten years, until World War II put an end to
European exports to India altogether.
A quaint tale from horse and buggy days, some might say. Surely we
have become more sophisticated in this age of computers, of market
research, and of business school MBAs.
But here is another case, half a century later and from a very
“sophisticated” industry. Yet it teaches exactly the same lesson.
Just at the time when the first cohorts of the “baby boom” were
reaching their mid-twenties—that is, the age to form families and to buy
their first house—the 1973–74 recession hit. Inflation was becoming
rampant, particularly in housing prices, which rose much faster than
anything else. At the same time, interest rates on home mortgages were
skyrocketing. And so the mass builders in America began to design and
offer what they called a “basic house,” smaller, simpler, and cheaper
than the house that had become standard.
But despite its being such “good value” and well within the means of
the first-time homebuyer, the “basic house” was a thumping failure. The
builders tried to salvage it by offering low-interest financing and long
repayment terms, and by slashing prices. Still, no one bought the “basic
house.”
Most homebuilders did what businessmen do in an unexpected
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failure: they blamed that old bogeyman, the “irrational customer.” But
one builder, still very small, decided to look around. He found that there
had been a change in what the young American couple wants in its first
house. This no longer represents the family’s permanent home as it had
done for their grandparents, a house in which the couple expects to live
the rest of its life, or at least a long time. In the 1970s, young couples
were buying not one, but two separate “values” in purchasing their first
home. They bought shelter for a few short years; and they also bought
an option to buy—a few years later—their “real” house, a much bigger
and more luxurious home, in a better neighborhood, with better schools.
To make the down payment on this far more expensive permanent
home, they would, however, need the equity they had built up in the first
house. The young people knew very well that the “basic house” was not
what they and their contemporaries really wanted, even though it was all
they could afford. They feared therefore—and perfectly rationally—that
they would not be able to resell the “basic house” at a decent price. So
the “basic house,” instead of being an option to buy the “real house” later
on, would become a serious impediment to the fulfillment of their true
housing needs and wants.
The young couple of 1950 had still perceived itself as “working-
class,” by and large. And “working-class” people in the West do not
expect their incomes and their standards of living to rise materially once
they are out of their apprenticeship and into a full-time job. Seniority, for
working-class people (with Japan being the major exception), means
greater job security rather than larger incomes. But the “middle class”
traditionally can expect a steady increase in its income until the head of
the household reaches age forty-five or forty-eight. Between 1950 and
1975, both the reality and the self-image of young American adults—
their educations, their expectations, their jobs—had changed from
“working-class” to “middle-class.” And with this change had come a
sharp change in what the young people’s first home represented, and
what “value” was connected with it.
Once this was understood—and all it took was to listen to
prospective homebuyers for a few weekends—successful innovation
came about easily. Almost no change was made in the physical plant
itself; only the kitchen was redesigned and made somewhat roomier.
Otherwise, the building remained the same “basic house” the
homebuilders had not been able to sell. But instead of being offered as
53

“your house,” it was offered as “your first house,” and as a “building
block toward the house you want.” Specifically, this meant that the young
couple was shown both the house as it was standing—that is, the “basic
house”—and a model of the same house in which future additions such
as an extra bathroom, one or two more bedrooms, and a basement
“family den” had been built. Indeed, the builder had already obtained the
necessary city permits for conversion of the “basic house” to a
“permanent home.” Furthermore, the builder guaranteed the young
couple a fixed resale price for their first house, to be credited against
their purchase from his firm of a second, bigger, “permanent” home
within five to seven years. “This entailed practically no risk,” he
explained. “The demographics were such, after all, as to guarantee a
steady increase in the demand for ‘first houses’ until the late 1980s or
1990s, during which time the babies of the ‘baby bust’ of 1961 will have
become twenty-five themselves and will start forming their own families.”
Before this homebuilder transformed failure into innovation, he had
operated in only one metropolitan area and was a small factor in it. Five
years later, the firm was operating in seven metropolitan areas and was
either number one or a strong number two in each of them. Even during
the building recession of 1981–82—a recession so severe that some of
the largest American builders did not sell one single new house during
an entire season—this innovative homebuilder continued to grow. “One
reason,” the firm’s founder explained, “was something even I had not
seen when I decided to offer first-time homebuyers a repurchase
guarantee. It gave us a steady supply of well-built and still fairly new
houses that needed only a little fixing up and could then be resold at a
very decent profit to the next crop of first-home buyers.”
Faced with unexpected failure, executives, especially in large
organizations, tend to call for more study and more analysis. But as both
the padlock story and the “basic house” story show, this is the wrong
response. The unexpected failure demands that you go out, look around,
and listen. Failure should always be considered a symptom of an
innovative opportunity, and taken seriously as such.
It is equally important to watch out for the unexpected event in a
supplier’s business, and among the customers. McDonald’s, for
instance, started because the company’s founder, Ray Kroc, paid
attention to the unexpected success of one of his customers. At that time
Kroc was selling milkshake machines to hamburger joints. He noticed
54

that one of his customers, a small hamburger stand in a remote
California town, bought several times the number of milkshake machines
its location and size could justify. He investigated and found an old man
who had, in effect, reinvented the fast-food business by systematizing it.
Kroc bought his outfit and built it into a billion-dollar business based on
the original owner’s unexpected success.
A competitor’s unexpected success or failure is equally important. In
either case, one takes the event seriously as a possible symptom of
innovative opportunity. One does not just “analyze.” One goes out to
investigate.
Innovation—and this is a main thesis of this book—is organized,
systematic, rational work. But it is perceptual fully as much as
conceptual. To be sure, what the innovator sees and learns has to be
subjected to rigorous logical analysis. Intuition is not good enough;
indeed, it is no good at all if by “intuition” is meant “what I feel.” For that
usually is another way of saying “What I like it to be” rather than “What I
perceive it to be.” But the analysis, with all its rigor—its requirements for
testing, piloting, and evaluating—has to be based on a perception of
change, of opportunity, of the new realities, of the incongruity between
what most people still are quite sure is the reality and what has actually
become a new reality. This requires the willingness to say: “I don’t know
enough to analyze, but I shall find out. I’ll go out, look around, ask
questions, and listen.”
It is precisely because the unexpected jolts us out of our
preconceived notions, our assumptions, our certainties, that it is such a
fertile source of innovation.
It is not in fact even necessary for the entrepreneur to understand
why reality has changed. In the two cases above, it was easy to find out
what had happened and why. More often, we find out what is happening
without much clue as to why. And yet we can still innovate successfully.
Here is one example.
The failure of the Ford Motor Company’s Edsel in 1957 has become
American folklore. Even people who were not yet born when the Edsel
failed have heard about it, at least in the United States. But the general
belief that the Edsel was a slapdash gamble is totally mistaken.
Very few products were ever more carefully designed, more carefully
introduced, more skillfully marketed. The Edsel was intended to be the
final step in the most thoroughly planned strategy in American business
55

history: a ten-year campaign during which the Ford Motor Company
converted itself after World War II from near-bankruptcy into an
aggressive competitor, a strong number two in the United States, and a
few years later, a strong contender for the number one spot in the rapidly
growing European market.
By 1957, Ford had already successfully reestablished itself as a
strong competitor in three of the four main American automobile
markets: the “standard” one with the Ford nameplate; the “lower-middle”
one with Mercury; and the “upper” one with the Continental. The Edsel
was then designed for the only remaining segment, the upper-middle
one, the one for which Ford’s big rival, General Motors, produced the
Buick and the Oldsmobile. This “upper-middle” segment was, in the
period after World War II, the fastest-growing part of the automobile
market and yet the one for which the third automobile producer,
Chrysler, did not have a strong entry, thereby leaving the door wide open
for Ford.
Ford went to extreme lengths to plan and design the Edsel,
embodying in its design the best information from market research, the
best information about customer preferences in appearance and styling,
and the highest standards of quality control.
Yet the Edsel became a total failure right away.
The reaction of the Ford Motor Company was very revealing. Instead
of blaming the “irrational consumer,” the Ford people decided there was
something happening that did not jibe with the assumptions about reality
everyone in the automobile industry had been making about consumer
behavior—and for so long that they had become unquestioned axioms.
The result of Ford’s decision to go out and investigate was the one
genuine innovation in the American automobile industry since Alfred P.
Sloan, in the 1920s, had defined the socioeconomic segmentation of the
American market into “low,” “lower-middle,” “upper-middle,” and “upper”
segments, the insight on which he then built the General Motors
Company. When the Ford people went out, they discovered that this
segmentation was rapidly being replaced—or at least paralleled—by
another quite different one, the one we would now call “lifestyle
segmentation.” The result, within a short period after the Edsel’s failure,
was the appearance of Ford’s Thunderbird, the greatest success of any
American car since Henry Ford, Sr., had introduced his Model T in 1908.
The Thunderbird established Ford again as a major producer in its own
56

right, rather than as GM’s kid brother and a perennial imitator.
And yet to this day we really do not know what caused the change. It
occurred well before any of the events by which it is usually explained,
such as the shift of the center of demographic gravity to the teenagers
as a result of the “baby boom,” the explosive expansion of higher
education, or the change in sexual mores. Nor do we really know what is
meant by “lifestyle.” All attempts to describe it have been futile so far. All
we know is that something happened.
But that is enough to convert the unexpected, whether success or
failure, into an opportunity for effective and purposeful innovation.
III
THE UNEXPECTED OUTSIDE EVENT
Unexpected successes and unexpected failure have so far been
discussed as occurring within a business or an industry. But outside
events, that is, events that are not recorded in the information and the
figures by which a management steers its institution, are just as
important. Indeed, they often are more important.
Here are some examples showing typical unexpected outside events
and their exploitation as major opportunities for successful innovation.
One example concerns IBM and the personal computer.
However much executives and engineers at IBM may have
disagreed with each other, there apparently was total agreement within
the company on one point until well into the seventies: the future
belonged to the centralized “main-frame” computer, with an ever larger
memory and an ever larger calculating capacity. Everything else, every
IBM engineer could prove convincingly, would be far too expensive, far
too confusing, and far too limited in its performance capacity. And so
IBM concentrated its efforts and resources on maintaining its leadership
in the main-frame market.
And then around 1975 or 1976, to everybody’s total surprise, ten-and
eleven-year-old kids began to play computer games. Right away their
fathers wanted their own office computer or personal computer, that is, a
separate, small, freestanding machine with far less capacity than even
the smallest main-frame has. All the dire things the IBM people had
predicted actually did happen. The freestanding machines cost many
57

times what a plug-in “terminal” costs, and they have far less capacity;
there is such a proliferation of them and their programs, and so few of
them are truly compatible with one another, that the whole field has
become chaotic, with service and repairs in shambles. But this does not
seem to bother the customers. On the contrary, in the U.S. market the
personal computers in five short years—from 1979 to 1984—reached
the annual sales volume it had taken the “main-frames” thirty years to
reach, that is, $15–$16 billion.
IBM could have been expected to dismiss this development. Instead,
as early as 1977, when personal computer sales worldwide were still
less than $200 million (as against main-frame sales of $7 billion for the
same year), IBM set up task forces in competition with one another to
develop personal computers for the company. As a result, IBM produced
its own personal computer in 1980, just when the market was exploding.
Three years later, in 1983, IBM had become the world’s leading personal
computer producer with nearly as much of a leadership position in the
new field as it had in main-frames. Also in 1983 IBM then introduced its
own very small “home computer,” the “Peanut.”
When I discuss all this with the IBM people, I always ask the same
question: “What explains that IBM, of all people, saw this change as an
opportunity when everybody at IBM was so totally sure that it couldn’t
happen and made no sense?” And I always get the same answer:
“Precisely because we knew that this couldn’t happen, and that it would
make no sense at all, the development came as a profound shock to us.
We realized that everything we’d assumed, everything we were so
absolutely certain of, was suddenly being thrown into a cocked hat, and
that we had to go out and organize ourselves to take advantage of a
development we knew couldn’t happen, but which then did happen.”
The second example is far more mundane. But is it no less
instructive despite its lack of glamour.
The United States has never been a book-buying country, in part
because of the ubiquitous free public library. When TV appeared in the
early fifties and more and more Americans began to spend more and
more of their time in front of the tube—particularly people in their prime
book-reading years, that is, people of high school and college age
—“everyone knew” that book sales would drop drastically. Book
publishers frantically began to diversify into “high-tech media”:
educational movies, or computer programs (in most cases, with total lack
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of success). But instead of collapsing, book sales in the United States
have soared since TV first came in. They have grown several times as
fast as every indicator had predicted, whether family incomes, total
population in the “book-reading years,” or even people with higher
degrees.
No one knows why this happened. Indeed, no one quite knows what
really happened. Books are still as rare in the typical American home as
before.
*
Where, then, do all these books go? That we have no answer to
this question does not alter the fact that books are being bought and
paid for in increasing numbers.
Both the publishers and the existing bookstores knew, of course, all
along that book sales were soaring. Neither, however, did anything
about it. The unexpected event was exploited, instead, by a few mass
retailers such as department stores in Minneapolis and Los Angeles.
None of these people had ever had anything to do with books, but they
knew the retail business. They started bookstore chains that are quite
different from any earlier bookstore in America. Basically, these are
supermarkets. They do not 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, preferably near a university.
Traditionally, booksellers were themselves “literary types” and tried to
hire people who “love books.” The managers of the new bookstores are
former cosmetics salespeople. The standing joke among them is that
any salesperson who wants to read anything besides the price tag on
the book is hopelessly overqualified.
For ten years now, these new bookstore chains have been among
the most successful and fastest-growing segments in American retailing
and among the fastest-growing new businesses in this country
altogether.

Each of these cases represents genuine innovation. But not one of
them represents diversification.
IBM stayed in the computer business. And the chain bookstores are
run by people who all along have been in retailing, in shopping centers,
59

or managing “boutiques.”
It is a condition of success in exploiting the unexpected outside event
that it must fit the knowledge and expertise of one’s own business.
Companies, even large companies, that went into the new book market
or into mass merchandising without the retail expertise have uniformly
come to grief.
The unexpected outside event may thus be, above all, an opportunity
to apply already existing expertise to a new application, but to an
application that does not change the nature of the “business we are in.”
It may be extension rather than diversification. Yet as the above
examples show, it also demands innovation in product and often in
service and distribution channels.
The second point about these cases is that they all are big-company
cases. Of course, a good many of the cases in this book, as in any
management book, have to be big-company cases. They are the only
available ones, as a rule, the only ones that can be found in the
published records, the only ones discussed on the business page of
newspapers or in magazines. Small-company cases are much harder to
come by and often cannot be discussed without violating confidences.
But exploiting the unexpected outside event appears to be something
that particularly fits the existing enterprise, and a fairly sizable one at
that. I know of few small companies that have successfully exploited the
unexpected outside event; nor does any other student of
entrepreneurship and innovation whom I could consult. This may be
coincidence. But perhaps the existing large enterprise is more likely to
see the “big picture.”
It is the large retailer in the United States who is used to looking at
figures that show where and how consumers spend retail dollars. The
large retailer also knows about shopping-center locations and how to get
the good ones. And could a small company have done what IBM did and
detach four task forces of first-rate designers and engineers to work on
new product lines? Smaller high-tech companies in a rapidly growing
industry usually do not have enough of such people even for their
existing work.
It may well be that the unexpected outside event is the innovative
area that offers the large enterprise the greatest opportunity along with
the lowest risk. It may be the area that is particularly suited for innovation
by the large and established enterprise. It may be the area in which
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expertise matters the most, and in which the ability to mobilize
substantial resources fast makes the greatest difference.
But as these cases also show, being big and established does not
guarantee that an enterprise will perceive the unexpected event and
successfully organize itself to exploit it. IBM’s American competitors are
all big businesses with sales in the billions. Not one of them exploited the
personal computer—they were all too busy fighting IBM. And not one of
the old large bookstore chains in the United States, Brentano’s in New
York, for instance, exploited the new book market.
The opportunity is there, in other words. It is a major opportunity,
occurring frequently. And when it occurs, it holds out great promise,
particularly for existing and sizable enterprises. But such opportunities
require more than mere luck or intuition. They demand that the
enterprise search for innovation, be organized for it, and be managed so
as to exploit it.
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4
Source: Incongruities
An incongruity is a discrepancy, a dissonance, between what is and
what “ought” to be, or between what is and what everybody assumes it
to be. We may not understand the reason for it; indeed, we often cannot
figure it out. Still, an incongruity is a symptom of an opportunity to
innovate. It bespeaks an underlying “fault,” to use the geologist’s term.
Such a fault is an invitation to innovate. It creates an instability in which
quite minor efforts can move large masses and bring about a
restructuring of the economic or social configuration. Incongruities do
not, however, usually manifest themselves in the figures or reports
executives receive and pay attention to. They are qualitative rather than
quantitative.
Like the unexpected event, whether success or failure, incongruity is
a symptom of change, either change that has already occurred or
change that can be made to happen. Like the changes that underlie the
unexpected event, the changes that underlie incongruity are changes
within an industry, a market, a process. The incongruity is thus clearly
visible to the people within or close to the industry, market, or process; it
is directly in front of their eyes. Yet it is often overlooked by the insiders,
who tend to take it for granted—” This is the way it’s always been,” they
say, even though “always” may be a very recent development.
There are several kinds of incongruity:
— An incongruity between the economic realities of an
industry (or of a public-service area);
— An incongruity between the reality of an industry (or of a
public-service area) and the assumptions about it;
— An incongruity between the efforts of an industry (or a
public-service area) and the values and expectations of its
customers;
— An internal incongruity within the rhythm or the logic of a
process.
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I
INCONGRUOUS ECONOMIC REALITIES
If the demand for a product or a service is growing steadily, its
economic performance should steadily improve, too. It should be easy to
be profitable in an industry with steadily rising demand. The tide carries
it. A lack of profitability and results in such an industry bespeaks an
incongruity between economic realities.
Typically, these incongruities are macro-phenomena, which occur
within a whole industry or a whole service sector. The major
opportunities for innovation exist, however, normally for the small and
highly focused new enterprise, new process, or new service. And usually
the innovator who exploits this incongruity can count on being left alone
for a long time before the existing businesses or suppliers wake up to
the fact that they have new and dangerous competition. For they are so
busy trying to bridge the gap between rising demand and lagging results
that they barely even notice somebody is doing something different—
something that produces results, that exploits the rising demand.
Sometimes we understand what is going on. But sometimes it is
impossible to figure out why rising demand does not result in better
performance. The innovator, therefore, need not always try to
understand why things do not work as they should. He should ask
instead: “What would exploit this incongruity? What would convert it into
an opportunity? What can be done?” Incongruity between economic
realities is a call to action. Sometimes the action to be taken is rather
obvious, even though the problem itself is quite obscure. And sometimes
we understand the problem thoroughly and yet cannot figure out what to
do about it.
The steel “mini-mill” is a good example of an innovation that
successfully exploited incongruity.
For more than fifty years, since the end of World War I, the large,
integrated steel mill in developed countries did well only in wartime. In
times of peace its results were consistently disappointing, even though
the demand for steel appeared to be going up steadily, at least until
1973.
The explanation of this incongruity has long been known. The
minimum incremental unit needed to satisfy additional demand in an
integrated steel mill is a very big investment and adds substantially to
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capacity. Any expansion to an existing steel mill is thus likely to operate
for a good many years at a low utilization rate, until demand—which
always goes up in small, incremental steps except in wartime—reaches
the new capacity level. But not to expand when demand creeps up
means losing market share, and permanently. No company can afford to
take that risk. The industry can therefore only be profitable for a few
short years: between the time when everybody begins to build new
capacity and the time when all this new capacity comes on stream.
Further, the steelmaking process invented in the 1870s is
fundamentally uneconomical, as also has been known for many years. It
tries to defy the laws of physics—and that means violating the laws of
economics. Nothing in physics requires as much work as the creation of
temperatures, whether hot or cold, unless it is working against the laws
of gravity and of inertia. The integrated steel process creates very high
temperatures four times, only to quench them again. And it lifts heavy
masses of hot materials and then moves them over considerable
distances.
It had been clear for many years that the first innovation in process
that would assuage these inherent weaknesses would substantially
lower costs. This is exactly what the “mini-mill” does. A mini-mill is not a
“small” plant; the minimum economical size produces around $100
million of sales. But that is still about one-sixth to one-tenth the minimum
economic size of an integrated steel mill. A mini-mill can thus be built to
provide, economically, a fairly small additional increment of steel
production for which the market already exists. The mini-mill creates
heat only once, and does not quench it, but uses it for the rest of the
process. It starts with steel scrap instead of iron ore, and then
concentrates on one end product: sheet, for instance, or beams, or rods.
And while the integrated steel mill is highly labor-intensive, the mini-mill
can be automated. Its costs thus come to less than half those of the
traditional steel process.
Governments, labor unions, and the integrated steel companies have
been fighting the mini-mill every step of the way. But it is steadily
encroaching. By the year 2000, fifty percent or more of the steel used in
the United States is likely to come out of mini-mills, while the large,
integrated steel mills will be in irreversible decline.
There is a catch, however, and it is an important one. A similar
incongruity between the economic reality of demand and the economic
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reality of the process exists in the paper industry. Only in this case, we
do not know how to convert it into innovation and opportunity.
Despite the constant efforts of the governments of all developed and
most developing countries to increase the demand for paper—perhaps
the only objective on which the governments of all countries agree—the
paper industry has not been doing well. Three years of “record profits”
are invariably followed by five years of “excess capacity” and losses. Yet
we do not, so far, have anything like a “mini-mill” process for paper. For
eighty or ninety years, it has been known that wood fiber is a monomer;
and it should not be too difficult, one would say, to find a plasticizer that
converts it into a polymer. This would convert paper-making from an
inherently inefficient and wasteful mechanical process into an inherently
efficient chemical process. Indeed, almost a hundred years ago this was
achieved as far as making textile fibers out of wood pulp is concerned—
in the rayon process, which dates back to the 1880s. But despite millions
spent in research, nobody has so far found a technique to produce paper
that way.
In an incongruity, as these cases exemplify, the innovative solution
has to be clearly definable. It has to be feasible with the existing, known
technology, and with easily available resources. It requires hard
developmental work, of course. But if a great deal of research and new
knowledge is still needed, it is not yet ready for the entrepreneur, not yet
“ripe.” The innovation that successfully exploits an incongruity between
economic realities has to be simple rather than complicated, “obvious”
rather than grandiose.
In public-service areas, too, major incongruities between economic
realities can be found.
Health care in developed countries offers one example. As recently
as 1929, health care represented an insignificant portion of national
expenditure in all developed countries, taking up a good deal less than 1
percent of gross national product or of consumer expenditures. Now, half
a century later, health care, and especially the hospital, accounts in all
developed countries for 7 to 11 percent of a much larger gross national
product. Yet economic performance has been going down rather than
up. Costs have risen much faster than services—perhaps three or four
times as fast. The demand will continue to rise with the steady growth in
the number of older people in all developed countries over the next thirty
years. And so will the costs, which are closely tied to the age of the
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population.
We do not understand the phenomenon.
*
But successful innovations,
simple, targeted and focused on specific objectives, have emerged in
Great Britain and the United States. These innovations are quite different
simply because the two countries have such radically different systems.
But each exploits the specific vulnerability of its country’s system and
converts it into an opportunity.
In Britain, the “radical innovation” is private health insurance, which
has become the fastest-growing and most popular employee benefit. All
it does is to enable policyholders to be seen immediately by a specialist
and to jump to the head of the queue and avoid having to wait should
they need “elective surgery.”
†
For the British system has attempted to
keep health-care costs down by “triage” which, in effect, reserves
immediate attention and treatment to routine illnesses on the one hand
and to “life-threatening” ailments on the other, but puts everything else,
and especially elective surgery, on hold with waiting periods now running
into years (e.g., for replacing a hip destroyed by arthritis). Health
insurance policyholders, however, are operated on right away.
In contrast to Great Britain, the United States has so far tried to
satisfy all demands of health care regardless of cost. As a result,
hospital costs in America have exploded. This created a different
innovative opportunity: to “unbundle,” that is, to move out of the hospital
into separate locations a host of services that do not require such high-
cost hospital facilities as a body scanner or cobalt X-Ray to treat
cancers, the highly instrumented and automated medical laboratory, or
physical rehabilitation. Each of these innovative responses is small and
specific: a freestanding maternity center, which basically offers motel
facilities for mother and new baby; a freestanding “ambulatory” surgical
center for surgery that does not require a hospital stay and post-
operative care; a psychiatric diagnostic and referral center; geriatric
centers of a similar nature; and so on.
These new facilities do not substitute for the hospital. What they do
in effect is to push the American hospital toward the same role the
British have assigned to their hospitals: as a place for emergencies, for
life-threatening diseases, and for intensive and acute sickness care. But
these innovations which, as in Britain, are embodied primarily in profit-
making “businesses,” convert the incongruity between the economic
reality of rising health-care demand and the economic reality of falling
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health-care performance into an opportunity for innovation.
These are “big” examples, taken from major industries and public
services. It is this fact, however, that makes them accessible, visible,
and understandable. Above all, these examples show why the
incongruity between economic realities offers such great innovative
opportunities. The people who work within these industries or public
services know that there are basic flaws. But they are almost forced to
ignore them and to concentrate instead on patching here, improving
there, fighting this fire or caulking that crack. They are thus unable to
take the innovation seriously, let alone to try to compete with it. They do
not, as a rule, even notice it until it has grown so big as to encroach on
their industry or service, by which time it has become irreversible. In the
meantime, the innovators have the field to themselves.
II
THE INCONGRUITY BETWEEN REALITY AND THE ASSUMPTIONS ABOUT IT
Whenever the people in an industry or a service misconceive reality,
whenever they therefore make erroneous assumptions about it, their
efforts will be misdirected. They will concentrate on the area where
results do not exist. Then there is an incongruity between reality and
behavior, an incongruity that once again offers opportunity for successful
innovation to whoever can perceive and exploit it.
A simple example is that old workhorse of world trade, the ocean-
going general cargo vessel.
Thirty-five years ago, in the early 1950s, the ocean-going freighter
was believed to be dying. The general forecast was that it would be
replaced by air freight, except for bulk commodities. Costs of ocean
freight were rising at a fast clip, and it took longer and longer to get
merchandise delivered by freighter as one port after another became
badly congested. This, in turn, increased pilferage at the docks as more
and more merchandise piled up waiting to be loaded while vessels could
not make it to the pier.
The basic reason was that the shipping industry had misdirected its
efforts toward nonresults for many years. It had tried to design and build
faster ships, and ships that required less fuel and a smaller crew. It
concentrated on the economics of the ship while at sea and in transit
from one port to another.
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But a ship is capital equipment; and for all capital equipment the
biggest cost is the cost of not working, during which interest has to be
paid while the equipment does not earn. Everybody in the industry knew,
of course, that the main expense of a ship is interest on the investment.
Yet the industry kept on concentrating its efforts on costs that were
already quite low—the costs of the ship while at sea and doing work.
The solution was simple: Uncouple loading from stowing. Do the
loading on land, where there is ample space and where it can be
performed before the ship is in port, so that all that has to be done is to
put on and take off pre-loaded freight. Concentrate, in other words, on
the costs of not working rather than on those of working. The answer
was the roll-on, roll-off ship and the container ship.
The results of these simple innovations have been startling. Freighter
traffic in the last thirty years has increased up to fivefold. Costs, overall,
are down by 60 percent. Port time has been cut by three-quarters in
many cases, and with it congestion and pilferage.

Incongruity between perceived reality and actual reality often
declares itself. But whenever serious, concentrated efforts do not make
things better but, on the contrary, make things worse—where faster
ships only mean more port congestion and longer delivery times—it is
highly probable that efforts are being misdirected. In all likelihood,
refocusing on where the results are will yield substantial returns easily
and fast.
Indeed, the incongruity between perceived and actual reality rarely
requires “heroic” innovations. Uncoupling the loading of freight from the
stowing thereof required little but adapting to the ocean-going freighter
methods which, much earlier, had been developed for trucks and
railroads.
The incongruity between perceived and actual reality typically
characterizes a whole industry or a whole service area. The solution,
however, should again be small and simple, focused and highly specific.
III
THE INCONGRUITY BETWEEN PERCEIVED AND ACTUAL CUSTOMER VALUES AND
EXPECTATIONS
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In Chapter 3, I mentioned the case of television in Japan as an
example of the unexpected success. It is also a good example of the
incongruity between actual and perceived customer values and
customer expectations. Long before the Japanese industrialist told his
American audience that the poor in his country would not buy a TV set
because they could not afford it, the poor in the United States and in
Europe had already shown that TV satisfies expectations which have
little to do with traditional economics. But this highly intelligent Japanese
simply could not conceive that for customers—and especially for poor
customers—the TV set is not just a “thing.” It represents access to a new
world; access, perhaps, to a whole new life.
Similarly, Khrushchev could not conceive that the automobile is not a
“thing” when he said on his visit to the United States in 1956 that
“Russians will never want to own automobiles; cheap taxis make much
more sense.” Any teenager could have told him that “wheels” are not
mere transportation but freedom, mobility, power, romance. And
Khrushchev’s misperception created one of the wildest entrepreneurial
opportunities: the shortage of automobiles in Russia has brought forth
the biggest and liveliest black market.
These, it will be said, are again “cosmic” examples, not much use to
a businessman or to an executive in a hospital, a university, or a trade
association. But they are examples of a common phenomenon. What
follows is a different case, in its own way equally “cosmic” but very
definitely of operational significance.
One of the fastest-growing American financial institutions for the last
several years has been a securities firm located not in New York but in a
suburb of a Midwestern city. It now has two thousand branch offices all
over the United States. And it owes its success and growth to having
exploited an incongruity.
The large financial institutions, the Merrill Lynches and Dean Witters
and E. F. Huttons, assume that their customers have the same values
they have. To them it is obvious, if not axiomatic, that people invest in
order to get rich. This is, after all, what motivates the members of the
New York Stock Exchange, and determines what they consider
“success.” However, this assumption holds true only for a part of the
investing public, and surely not even for the majority. They are not
“financial people.” They know that in order to “get rich” by investing, one
has to work full time at managing money and be pretty knowledgeable
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about it. The local professional men, the local small businessmen, the
local substantial farmers, however, have neither such time nor such
knowledge; they are much too busy earning their money to have time to
manage it.
This is the incongruity which the Midwestern securities firm exploits.
Outwardly, it looks just like any other securities firm. It is a member of
the New York Stock Exchange. But only a very small portion of its
business, around one-eighth, is Stock Exchange business. It stays away
from the items the big trading houses on Wall Street push the hardest:
options, commodity futures, and so on, appealing instead to what it calls
“the intelligent investor.” It does not promise—and this is a genuine
innovation among American financial service institutions—that its
customers will make a fortune. It does not even want customers who
trade. It wants customers who earn more money than they spend, which
is typical for the successful professional, the substantial farmer, or the
small-town businessman, less because their incomes are high than
because their spending habits are modest. And then it appeals to their
psychological need to protect their money. What this firm sells is a
chance to maintain one’s savings—through investment in bonds and
stocks, to be sure, but also in deferred annuities, tax-sheltered
partnerships, real estate trust, and so on. The “product” the firm delivers
is a different one and one that no Wall Street house has ever sold
before: peace of mind. And this is what really represents “value” for the
“intelligent investor.”
The big Wall Street houses cannot even imagine that such
customers exist since they defy everything the houses believe in and
hold true. This successful firm has now been widely publicized. It is on
every list of large and growing Stock Exchange firms. Yet the senior
people in the big firms have not yet accepted that their competitor exists,
let alone that it is successful.
Behind the incongruity between actual and perceived reality, there
always lies an element of intellectual arrogance, of intellectual rigor and
dogmatism. “It is I, not they, who know what poor people can afford,” the
Japanese industrialist in effect asserted. “People behave according to
economic rationality, as every good Marxist knows,” as Khrushchev
implied. This explains why the incongruity is so easily exploited by
innovators: they are left alone and undisturbed.
Of all incongruities, that between perceived and actual reality may be
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the most common. Producers and suppliers almost always misconceive
what it is the customer actually buys. They must assume that what
represents “value” to the producer and supplier is equally “value” to the
customer. To succeed in doing a job, any job, one has to believe in it
and take it seriously. People who make cosmetics must believe in them;
otherwise, they turn out shoddy products and soon lose their customers.
People who run a hospital must believe in health care as an absolute
good, or the quality of medical and patient care will deteriorate fast. And
yet, no customer ever perceives himself as buying what the producer or
supplier delivers. Their expectations and values are always different.
The reaction of the typical producer and supplier is then to complain
that customers are “irrational” or “unwilling to pay for quality.” Whenever
such a complaint is heard, there is reason to assume that the values and
expectations the producer or supplier holds to be real are incongruous
with the actual values and expectations of customers and clients. Then
there is reason to look for an opportunity for innovation that is highly
specific, and carries a good chance of success.
IV
INCONGRUITY WITHIN THE RHYTHM OR LOGIC OF A PROCESS
Twenty-five years or so ago, during the late 1950s, a pharmaceutical
company salesman decided that he wanted to go into business for
himself. He therefore looked for an incongruity within a process in
medical practice. He found one almost immediately. One of the most
common surgical operations is the operation for senile cataract in the
eye. Over the years the procedure had become refined, routinized and
instrumented to the point where it was conducted with the rhythm of a
perfectly rehearsed dance—and with total control. But there was one
point in this operation that was out of character and out of rhythm: at one
phase the eye surgeon had to cut a ligament, to tie blood vessels and so
risk bleeding, which then endangered the eye. This procedure was done
successfully in more than 99 percent of all operations; indeed, it was not
very difficult. But it greatly bothered the surgeons. It forced them to
change their rhythm and induced anxiety in them. Eye surgeons, no
matter how often they had done the operation, dreaded this one, quick
procedure.
The pharmaceutical company salesman—his name is William
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Connor—found out without much research that an enzyme had been
isolated in the 1890s which almost instantaneously dissolves this
particular ligament. Only nobody then, sixty years earlier, had been able
to store this enzyme even under refrigeration for more than a few short
hours. Preservation techniques have, however, made quite a bit of
progress since 1890. And so Connor, within a few months, was able by
trial and error to find a preservative that gives the enzyme substantial
shelf life without destroying its potency. Within a few years, every eye
surgeon in the world was using Connor’s patented compound. Twenty
years later he sold his company, Alcon Laboratories, to one of the
multinationals for a very large amount.
And another telling example:
O. M. Scott & Co. is the leader among American producers of lawn-
care products: grass seed, fertilizer, pesticides, and so on. Though it is
now a subsidiary of a large corporation (ITT), it attained leadership while
a small independent company in fierce competition with firms many
times its size, ranging from Sears, Roebuck to Dow Chemicals. Its
products are good but so are those of the competition. Its leadership
rests on a simple, mechanical gadget called a Spreader, a small,
lightweight wheelbarrow with holes that can be set to allow the proper
quantities of Scott’s products to pass through in an even flow. Products
for the lawn all claim to be “scientific” and are compounded on the basis
of extensive tests. All prescribe in meticulous detail how much of the
stuff should be applied, given soil conditions and temperatures. All try to
convey to the consumer that growing a lawn is “precise,” “controlled,” if
not “scientific.” But before the Scott Spreader, no supplier of lawn-care
products gave the customer a tool to control the process.
And without such a tool, there was an internal incongruity in the logic
of the process that upset and frustrated customers.
Does the identification of such internal incongruity within a process
rest on “intuition” and on accident? Or can it be organized and
systematized?
William Connor is said to have started out by asking surgeons where
they felt uncomfortable about their work. O. M. Scott grew from a tiny
local seed retailer into a fair-sized national company because it asked
dealers and customers what they missed in available products. Then it
designed its product line around the Spreader.
The incongruity within a process, its rhythm or its logic, is not a very
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subtle matter. Users are always aware of it. Every eye surgeon knew
about the discomfort he felt when he had to cut eye muscle—and talked
about it. Every hardware-store clerk knew about the frustration of his
lawn customers—and talked about it. What was lacking, however, was
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.
There is, however, one serious limitation. The 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.
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5
Source: Process Need
“Opportunity is the source of innovation” has been the leitmotif of the
preceding chapters. But an old proverb says, “Necessity is the mother of
invention.” This chapter looks at need as a source of innovation, and
indeed as a major innovative opportunity.
The need we shall discuss as a source of innovative opportunity is a
very specific one: I call it “process need.” It is not vague or general but
quite concrete. Like the unexpected, or the incongruities, it exists within
the process of a business, an industry, or a service. Some innovations
based on process need exploit incongruities, others demographics.
Indeed, process need, unlike the other sources of innovation, does not
start out with an event in the environment, whether internal or external. It
starts out with the job to be done. It is task-focused rather than situation-
focused. It perfects a process that already exists, replaces a link that is
weak, redesigns an existing old process around newly available
knowledge. Sometimes it makes possible a process by supplying the
“missing link.”
In innovations that are based on process need, everybody in the
organization always knows that the need exists. Yet usually no one does
anything about it. However, when the innovation appears, it is
immediately accepted as “obvious” and soon becomes “standard.”
One example has been mentioned earlier in Chapter 4. It is William
Connor’s conversion of the enzyme that dissolves a ligament in cataract
surgery of the eye from a textbook curiosity into an indispensable
product. The process of cataract surgery itself was a very old one. The
enzyme to perfect the process had been known for decades. The
innovation was the preservative to keep the enzyme fresh under
refrigeration. Once that process need had been satisfied, no eye
surgeon could possibly imagine doing without Connor’s compound.
Very few innovations based on process need are so sharply focused
as this one, in which formulating the need right away produced the
required solution. But in their essentials, most, if not all, innovations
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based on process need have the same elements.
Here is another example of a similar process-need innovation.
Ottmar Mergenthaler designed the linotype for typesetting in 1885.
During the preceding decades, printed materials of all kinds—
magazines, newspapers, books—had all been growing at an exponential
rate with the spread of literacy and the development of transportation
and communication. All the other elements of the printing process had
already changed. There were high-speed printing presses, for instance,
and paper was being made on high-speed paper machines. Only
typesetting had gone unchanged from the days of Gutenberg four
hundred years earlier. It remained slow and expensive manual work,
requiring high skill and long years of apprenticeship. Mergenthaler, like
Connor, defined what was needed: a keyboard that would make possible
the mechanical selection of the right letter from the typefont; a
mechanism to assemble the letters and to adjust them in a line; and—
the most difficult, by the way—a mechanism to return each letter to its
proper receptacle for future use. Each of these required several years of
hard work and considerable ingenuity. But none required new
knowledge, let alone new science. Mergenthaler’s linotype became the
“standard” in less than five years, despite vigorous resistance from the
old craftsmen-typesetters.
In both these cases—William Connor’s enzyme and the linotype
machine—the process need was based on an incongruity in the process.
Demographics, however, are very often an equally powerful source of
process need and an opportunity for process innovation.
In 1909 or thereabouts a statistician at the Bell Telephone System
projected two curves fifteen years ahead: the curve for American
population growth and the curve for the number of people required as
central-station operators to handle the growing volume of telephone
calls. These projections showed that every American woman between
age seventeen and sixty would have to work as a switchboard operator
by the year 1925 or 1930 if the manual system of handling calls were to
be continued. Two years later, Bell engineers had designed and put into
service the first automatic switchboard.
Similarly, the present rush into robotics is largely the result of a
process need caused by demographics. Most of the knowledge has
been around for years. But until the consequences of the “baby bust”
became apparent to major manufacturers in the industrial countries,
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especially in Japan and the United States, the need to replace semi-
skilled assembly-line labor with machines was not felt. The Japanese are
not ahead in robotics because of technical superiority; their designs have
mostly come from the United States. But the Japanese had their “baby
bust” four or five years earlier than America and almost ten years earlier
than West Germany. It took the Japanese just as long as it did the
Americans or the Germans—ten years—to realize that they were facing
a labor shortage. But these ten years started in Japan a good deal
sooner than in the United States, and in West Germany the ten years
are still not quite over as these lines are being written.
Mergenthaler’s linotype was also in large measure the result of
demographic pressures. With the demand for printed materials
exploding, the supply of typesetters requiring an apprenticeship of six to
eight years was fast becoming inadequate, and wages for typesetters
were skyrocketing. As a result, printers became conscious of the “weak
link” but also willing to pay good money for a machine that replaced five
very expensive craftsmen with one semi-skilled machine operator.
Incongruities and demographics may be the most common causes of
a process need. But there is another category, far more difficult and risky
yet in many cases of even greater importance: what is now being called
program research (as contrasted with the traditional “pure research” of
scientists). There is a “weak link” and it is definable, indeed, clearly seen
and acutely felt. But to satisfy the process need, considerable new
knowledge has to be produced.
Very few inventions have succeeded faster than photography. Within
twenty years after its invention, it had become popular worldwide. Within
twenty years or so, there were great photographers in every country;
Mathew Brady’s photographs of the American Civil War are still
unsurpassed. By 1860, every bride had to have her photograph taken.
Photography was the first Western technology to invade Japan, well
before the Meiji Restoration and at a time when Japan otherwise was
still firmly closed to foreigners and foreign ideas.
Amateur photographers were fully established by 1870. But the
available technology made things difficult for them. Photography
required heavy and fragile glass plates, which had to be lugged around
and treated with extreme care. It required an equally heavy camera, long
preparations before a picture could be taken, elaborate settings, and so
on. Everybody knew this. Indeed, the photography magazines of the
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time—and photography magazines were among the first specialty mass
magazines—are full of complaints about the extreme difficulty of taking
photographs and of suggestions what to do. But the problems could not
be solved with the science and technology available in 1870.
By the mid-1880s, however, new knowledge had become available
which then enabled George Eastman, the founder of Kodak, to replace
the heavy glass plates with a cellulose film weighing practically nothing
and impervious even to very rough handling, and to design a lightweight
camera around his film. Within ten years, Eastman Kodak had taken
world leadership in photography, which it still retains.
“Program research” is often needed to convert a process from
potential into reality. Again, the need must be felt, and it must be
possible to identify what is needed. Then the new knowledge has to be
produced. The prototype innovator for this kind of process-need
innovation was Edison (see also Chapter 9). For twenty-odd years,
everybody had known that there was going to be an “electric power
industry.” For the last five or six years of that period, it had become
abundantly clear what the “missing link” was: the light bulb. Without it,
there could be no electric power industry. Edison defined the new
knowledge needed to convert this potential electric power industry into
an actual one, went to work, and had a light bulb within two years.
Program research to convert a potential into reality has become the
central methodology of the first-rate industrial research laboratory and, of
course, of research for defense, for agriculture, for medicine, and for
environmental protection.
Program research sounds big. To many people it means “putting a
man on the moon” or finding a vaccine against polio. But its most
successful applications are in small and clearly defined projects-the
smaller and the more sharply focused the better. Indeed, the best
example—and perhaps the best single example of successful process
need—based innovation—is a very small one, the highway reflector that
cut the Japanese automobile accident rate by almost two-thirds.
As late as 1965, Japan had almost no paved roads outside of the big
cities. But the country was rapidly shifting to the automobile, so the
government frantically paved the roads. Now automobiles could—and
did—travel at high speed. But the roads were the same old ones that
had been laid down by the oxcarts of the tenth century—barely wide
enough for two cars to pass, full of blind corners and hidden entrances,
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and with junctions every few kilometers at which half a dozen roads
meet at every conceivable angle. Accidents began to mount at an
alarming rate, especially at night. Press, radio and TV, and the
opposition parties in Parliament soon began to clamor for the
government to “do something.” But, of course, rebuilding the roads was
out of the question; it would have taken twenty years anyhow. And a
massive publicity campaign to make automobilists “drive carefully” had
the result such campaigns generally have, namely, none at all.
A young Japanese, Tamon Iwasa, seized on this crisis as an
innovative opportunity. He redesigned the traditional highway reflector so
that the little glass beads that serve as its mirrors could be adjusted to
reflect the headlights of oncoming cars from any direction onto any
direction. The government rushed to install Iwasa reflectors by the
hundreds of thousands. And the accident rate plummeted.
To take another example.
World War I had created a public in the United States for national
and international news. Everybody was aware of this. Indeed, the
newspapers and magazines of those early post—World War I years are
full of discussions as to how this need could be satisfied. But the local
newspaper could not do the job. Several leading publishers tried, among
them The New York Times; none of them succeeded. Then Henry Luce
identified the process need and defined what was required to satisfy it. It
could not be a local publication, it had to be a national one, otherwise,
there would be neither enough readers nor enough advertisers. And it
could not be a daily—there was not enough news of interest to a large
public. The development of the editorial format was then practically
dictated by these specifications. When Time magazine came out as the
first news magazine in the world, it was an immediate success.
These examples, and especially the Iwasa story, show that
successful innovations based on process needs require five basic
criteria:
— A self-contained process;
— One “weak” or “missing” link;
— A clear definition of the objective;
— That the specifications for the solution can be defined
clearly;
— Widespread realization that “there ought to be a better
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way,” that is, high receptivity.
There are, however, some important caveats.
1. The need must be understood. It is not enough for it to be “felt.”
Otherwise one cannot define the specifications for the solution.
We have known, for instance, for several hundred years that
mathematics is a problem subject in school. A small minority of students,
certainly no more than one-fifth, seem to have no difficulty with
mathematics and learn it easily. The rest never really learn it. It is
possible, of course, to drill a very much larger percentage to pass
mathematics tests. The Japanese do this through heavy emphasis on
the subject. But that does not mean that Japanese children learn
mathematics. They learn to pass the tests and then immediately forget
mathematics. Ten years later, by the time they are in their late twenties,
Japanese do just as poorly on mathematics tests as do westerners. In
every generation there is a mathematics teacher of genius who
somehow can make even the untalented learn, or at least learn a good
deal better. But nobody has ever been able, then, 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.
2. We may even understand a process and still not have the
knowledge to do the job. The preceding chapter told of the clear and
understood incongruity in paper making: to find a process that is less
wasteful and less uneconomical than the existing one. For a century,
able people have worked on the problem. We know exactly what is
needed: polymerization of the lignin molecule. It should be easy—we
have polymerized many molecules that are similar. But we lack the
knowledge to do it, despite a hundred years of assiduous work by well-
trained people. One can only say, “Let’s try something else.”
3. The solution must fit the way people do the work and want to do it.
Amateur photographers had no psychological investment in the
complicated technology of the early photographic process. All they
wanted was to get a decent photograph, as easily as possible. They
were receptive, therefore, to a process that took the labor and skill out of
taking pictures. Similarly, eye surgeons were interested only in an
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elegant, logical, bloodless process. An enzyme that gave this to them
therefore satisfied their expectations and values.
But here is an example of an innovation based on a clear and
substantial process need that apparently does not quite fit, and therefore
has not been readily accepted.
For many years the information required by a number of
professionals such as lawyers, accountants, engineers, and physicians
has grown much faster than the capacity to find it. Professionals have
been complaining that they have to spend more and more time hunting
for information in the law library, in handbooks and textbooks, in
looseleaf services, and so on. One would therefore expect a “databank”
to be an immediate success. It gives the professionals immediate
information through a computer program and a display terminal: court
decisions for the lawyers, tax rulings for the accountants, information on
drugs and poisons for the physicians. Yet these services have found it
very hard to gather enough subscribers to break even. In some cases,
such as Lexis, a service for lawyers, it has taken more than ten years
and huge sums of money to get subscribers. The reason is probably that
the databanks make it too easy. Professionals pride themselves on their
“memory,” that is, on their ability either to remember the information they
need or to know where to find it. “You have to remember the court
decisions you need and where to find them,” is still the injunction the
beginning lawyer gets from the seniors. So the databank, however
helpful in the work and however much time and money it saves, goes
against the very values of the professional. “What would you need me
for if it can be looked up?” an eminent physician once said when asked
by one of his patients why he did not use the service that would give him
the information to check and confirm his diagnosis, and then decide
which alternative method of treatment might be the best in a given case.
Opportunities for innovation based on process need can be found
systematically. This is what Edison did for electricity and electronics.
This is what Henry Luce did while still an undergraduate at Yale. This is
what William Connor did. In fact, the area lends itself to systematic
search and analysis.
But once a process need has been found, it has to be tested against
the five basic criteria given above. Then, finally, the process need
opportunity has to be tested also against the three constraints. Do we
understand what is needed? Is the knowledge available or can it be
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procured within the “state of the art”? And does the solution fit, or does it
violate the mores and values of the intended users?
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6
Source: Industry and Market Structures
Industry and market structures sometimes last for many, many years
and seem completely stable. The world aluminum industry, for instance,
after one century is still led by the Pittsburgh-based Aluminum Company
of America which held the original patents, and by its Canadian
offspring, Alcan of Montreal. There has only been one major newcomer
in the world’s cigarette industry since the 1920s, the South African
Rembrandt group. And in an entire century only two newcomers have
emerged as leading electrical apparatus manufacturers in the world:
Philips in Holland and Hitachi in Japan. Similarly no major new retail
chain emerged in the United States for forty years, between the early
twenties when Sears, Roebuck began to move from mail order into retail
stores, and the mid-sixties when an old dime-store chain, Kresge,
launched the K-Mart discount stores. Indeed, industry and market
structures appear so solid that the people in an industry are likely to
consider them foreordained, part of the order of nature, and certain to
endure forever.
Actually, market and industry structures are quite brittle. One small
scratch and they disintegrate, often fast. When this happens, every
member of the industry has to act. To continue to do business as before
is almost a guarantee of disaster and might well condemn a company to
extinction. At the very least the company will lose its leadership position;
and once lost, such leadership is almost never regained. But a change in
market or industry structure is also a major opportunity for innovation.
In industry structure, a change requires entrepreneurship from every
member of the industry. It requires that each one ask anew:
“What is our business?” And each of the members will have to give a
different, but above all a new, answer to that question.
I
THE AUTOMOBILE STORY
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The automobile industry in the early years of this century grew so
fast that its markets changed drastically. There were four different
responses to this change, all of them successful. The early industry
through 1900 had basically been a provider of a luxury product for the
very rich. By then, however, it was outgrowing this narrow market with a
rate of growth that doubled the industry’s sales volume every three
years. Yet the existing companies all still concentrated on the “carriage
trade.”
One response to this was the British company, Rolls-Royce, founded
in 1904. The founders realized that automobiles were growing so
plentiful as to become “common,” and set out to build and sell an
automobile which, as an early Rolls-Royce prospectus put it, would have
“the cachet of royalty.” They deliberately went back to earlier, already
obsolete, manufacturing methods in which each car was machined by a
skilled mechanic and assembled individually with hand tools. And then
they promised that the car would never wear out. They designed it to be
driven by a professional chauffeur trained by Rolls-Royce for the job.
They restricted sales to customers of whom they approved—preferably
titled ones, of course. And to make sure that no “riff-raff” bought their
car, they priced the Rolls-Royce as high as a small yacht, at about forty
times the annual income of a skilled mechanic or prosperous tradesman.
A few years later in Detroit, the young Henry Ford also saw that the
market structure was changing and that automobiles in America were no
longer a rich man’s toy. His response was to design a car that could be
totally mass-produced, largely by semi-skilled labor, and that could be
driven by the owner and repaired by him. Contrary to legend, the 1908
Model T was not “cheap”: it was priced at a little over what the world’s
highest-priced skilled mechanic, the American one, earned in a full year.
(These days, the cheapest new car on the American market costs about
one-tenth of what an unskilled assembly-line worker gets in wages and
benefits in a year.) But the Model T cost one-fifth of the cheapest model
then on the market and was infinitely easier to drive and to maintain.
Another American, William Crapo Durant, saw the change in market
structure as an opportunity to put together a professionally managed
large automobile company that would satisfy all segments of what he
foresaw would be a huge “universal” market. He founded General
Motors in 1905, began to buy existing automobile companies, and
integrated them into a large modern business.
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A little earlier, in 1899, the young Italian Giovanni Agnelli had seen
that the automobile would become a military necessity, especially as a
staff car for officers. He founded FIAT in Turin, which within a few years
became the leading supplier of staff cars to the Italian, Russian, and
Austro-Hungarian armies.
Market structures in the world automobile industry changed once
again between 1960 and 1980. For forty years after World War I, the
automobile industry had consisted of national suppliers dominating
national markets. All one saw on Italy’s roads and parking lots were Fiats
and a few Alfa Romeos and Lancias; outside of Italy, these makes were
fairly rare. In France, there were Renaults, Peugeots, and Citroens; in
Germany, Mercedes, Opels, and the German Fords; in the United
States, GM cars, Fords, and Chryslers. Then around 1960 the
automobile industry all of a sudden became a “global” industry.
Different companies reacted quite differently. The Japanese, who
had remained the most insular and had barely exported their cars,
decided to become world exporters. Their first attempt at the U.S. market
in the late sixties was a fiasco. They regrouped, thought through again
what their policy should be, and redefined it as offering an American-
type car with American styling, American comfort, and American
performance characteristics, but smaller, with better fuel consumption,
much more rigorous quality control and, above all, better customer
service. And when they got a second chance with the petroleum panic of
1979, they succeeded brilliantly. The Ford Motor Company, too, decided
to go “global” through a “European” strategy. Ten years later, in the mid-
seventies, Ford had become a strong contender for the number one spot
in Europe.
Fiat decided to become a European rather than merely an Italian
company, aiming to be a strong number two in every important
European country while retaining its primary position in Italy. General
Motors at first decided to remain American and to retain its traditional 50
percent share of the American market, but in such a way as to reap
something like 70 percent of all profits from automobile sales in North
America. And it succeeded. Ten years later, in the mid-seventies, GM
shifted gears and decided to contend with Ford and Fiat for leadership in
Europe—and again it succeeded. In 1983—84, GM, it would seem,
decided finally to become a truly global company and to link up with a
number of Japanese; first with two smaller companies, and in the end
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with Toyota. And Mercedes in West Germany decided on yet another
strategy—again a global one—where it limited itself to narrow segments
of the world market, to luxury cars, taxicabs, and buses.
All these strategies worked reasonably well. Indeed, it is impossible
to say which one worked better than another. But the companies that
refused to make hard choices, or refused to admit that anything much
was happening, fared badly. If they survive, it is only because their
respective governments will not let them go under.
One example is, of course, Chrysler. The people at Chrysler knew
what was happening—everybody in the industry did. But they ducked
instead of deciding. Chrysler might have chosen an “American” strategy
and put all its resources into strengthening its position within the United
States, still the world’s largest automobile market. Or it might have
merged with a strong European firm and aimed at taking third place in
the world’s most important automobile markets, the United States and
Europe. It is known that Mercedes was seriously interested—but
Chrysler was not. Instead, Chrysler frittered away its resources on make-
believe. It acquired defeated “also-rans” in Europe to make itself look
multinational. But this, while giving Chrysler no additional strength,
drained its resources and left no money for the investment needed to
give Chrysler a chance in the American market. When the day of
reckoning came after the petroleum shock of 1979, Chrysler had nothing
in Europe and not much more in the United States. Only the U.S.
government saved it.
The story is not much different for British Leyland, once Britain’s
largest automobile company and a strong contender for leadership in
Europe; nor for the big French automobile company, Peugeot. Both
refused to face up to the fact that a decision was needed. As a result,
they rapidly lost both market position and profitability. Today all three—
Chrysler, British Leyland, and Peugeot—have become more or less
marginal.
But the most interesting and important examples are those of much
smaller companies. Every one of the world’s automobile manufacturers,
large or small, has had to act or face permanent eclipse. However, three
small and quite marginal companies saw in this a major opportunity to
innovate: Volvo, BMW, and Porsche.
Around 1960, when the automobile industry market suddenly
changed, the informed betting was heavily on the disappearance of
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these three companies during the coming “shakeout.” Instead, all three
have done well and have created for themselves market niches in which
they are the leaders. They have done so through an innovative strategy
which, in effect, has reshaped them into different businesses. Volvo in
1965 was small, struggling and barely breaking even. For a few critical
years, it did lose large amounts of money. But Volvo went to work
reinventing itself, so to speak. It became an aggressive worldwide
marketer—especially strong in the United States—of what one might call
the “sensible” car; not very luxurious, far from low-priced, not at all
fashionable, but sturdy and radiating common sense and “better value.”
Volvo has marketed itself as the car for professionals who do not need to
demonstrate how successful they are through the car they drive, but who
value being known for their “good judgment.”
BMW, equally marginal in 1960 if not more so, has been equally
successful, especially in countries like Italy and France. It has marketed
itself as the car for “young corners,” for people who want to be taken as
young but who already have attained substantial success in their work
and profession, people who want to demonstrate that they “know the
difference” and are willing to pay for it. BMW is unashamedly a luxury
car for the well-to-do, but it appeals to those among the affluent who
want to appear “nonestablishment.” Whereas Mercedes and Cadillac are
the cars for company presidents and for heads of state, BMW is muy
macho, and bills itself as the “ultimate driving machine.”
Finally Porsche (originally a Volkswagen with extra styling)
repositioned itself as the sports car, the one and only car for those who
still do not want transportation but excitement in an automobile.
But those smaller automobile manufacturers who did not innovate
and present themselves differently in what is, in effect, a different
business—those who continued their established ways—have become
casualties. The British MG, for instance, was thirty years ago what
Porsche has now become, the sports car par excellence. It is almost
extinct by now. And where is Citroen? Thirty years ago it was the car
that had the solid innovative engineering, the sturdy construction, the
middle-class reliability. Citroen would have seemed to be ideally
positioned for the market niche Volvo has taken over. But Citroen failed
to think through its business and to innovate; as a result, it has neither
product nor strategy.
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II
THE OPPORTUNITY
A change in industry structure offers exceptional opportunities, highly
visible and quite predictable to outsiders. But the insiders perceive these
same changes primarily as threats. The outsiders who innovate can thus
become a major factor in an important industry or area quite fast, and at
relatively low risk.
Here are some examples.
In the late 1950s three young men met, almost by accident, in New
York City. Each of them worked for financial institutions, mostly Wall
Street houses. They found themselves in agreement on one point: the
securities business—unchanged since the Depression twenty years
earlier—was poised for rapid structural change. They decided that this
change had to offer opportunities. So they systematically studied the
financial industry and the financial markets to find an opportunity for
newcomers with limited capital resources and practically no connections.
The result was a new firm: Donaldson, Lufkin & Jenrette. Five years after
it had been started in 1959, it had become a major force on Wall Street.
What these three young men found was that a whole new group of
customers was emerging fast: the pension fund administrators. These
new customers did not need anything that was particularly difficult to
supply, but they needed something different. And no existing firm had
organized itself to give it to them. Donaldson, Lufkin & Jenrette
established a brokerage firm to focus on these new customers and to
give them the “research” they needed.
About the same time, another young man in the securities business
also realized that the industry was in the throes of structural change and
that this could offer him an opportunity to build a different securities
business of his own. The opportunity he found was “the intelligent
investor” mentioned earlier. On this, he then built what is now a big and
still fast-growing firm.
During the early or mid-sixties, the structure of American health care
began to change very fast. Three young people, the oldest not quite
thirty, then working as junior managers in a large Midwestern hospital,
decided that this offered them an opportunity to start their own innovative
business. They concluded that hospitals would increasingly need
expertise in running such housekeeping services as kitchen, laundry,
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maintenance, and so on. They systematized the work to be done. Then
they offered contracts to hospitals under which their new firm would put
in its own trained people to run these services, with the fee a portion of
the resultant savings. Twenty years later, this company billed almost a
billion dollars of services.
The final case is that of the discounters like MCI and Sprint in the
American long-distance telephone market. They were total outsiders;
Sprint, for instance, was started by a railroad, the Southern Pacific.
These outsiders began to look for the chink in Bell System’s armor. They
found it in the pricing structure of long-distance services. Until World War
II, long-distance calls had been a luxury confined to government and
large businesses, or to emergencies such as a death in the family. After
World War II, they became commonplace. Indeed, they became the
growth sector of telecommunications. But under pressure from the
regulatory authorities for the various states which control telephone
rates, the Bell System continued to price long-distance as a luxury, way
above costs, with the profits being used to subsidize local service. To
sweeten the pill, however, the Bell System gave substantial discounts to
large buyers of long-distance service.
By 1970, revenues from long-distance service had come to equal
those from local service and were fast outgrowing them. Still, the original
price structure was maintained. And this is what the newcomers
exploited. They signed up for volume service at the discount and then
retailed it to smaller users, splitting the discount with them. This gave
them a substantial profit while also giving their subscribers long-distance
service at substantially lower cost. Ten years later, in the early eighties,
the long-distance discounters handled a larger volume of calls than the
entire Bell System had handled when the discounters first started.
These cases would just be anecdotes except for one fact: each of
the innovators concerned knew that there was a major innovative
opportunity in the industry. Each was reasonably sure that an innovation
would succeed, and succeed with minimal risk. How could they be so
sure?
III
WHEN INDUSTRY STRUCTURE CHANGES
Four near-certain, highly visible indicators of impending change in
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industry structure can be pinpointed.
1. The most reliable and the most easily spotted of these indicators is
rapid growth of an industry. This is, in effect, what each of the above
examples (but also the automobile industry examples) have in common.
If an industry grows significantly faster than economy or population, it
can be predicted with high probability that its structure will change
drastically—at the very latest by the time it has doubled in volume.
Existing practices are still highly successful, so nobody is inclined to
tamper with them. Yet they are becoming obsolete. Neither the people at
Citroen nor those at Bell Telephone were willing to accept this, however
—which explains why “newcomers,” “outsiders,” or former “second-
raters” could beat them in their own markets.
2. By the time an industry growing rapidly has doubled in volume, the
way it perceives and services its market is likely to have become
inappropriate. In particular, the ways in which the traditional leaders
define and segment the market no longer reflect reality, they reflect
history. Yet reports and figures still represent the traditional view of the
market. This is the explanation for the success of two such different
innovators as Donaldson, Luflun & Jenrette and the Midwestern
“intelligent investor” brokerage house. Each found a segment that the
existing financial services institutions had not perceived and therefore
did not serve adequately; the pension funds because they were too new,
the “intelligent investor” because he did not fit the Wall Street stereotype.
But the hospital management story is also one of traditional
aggregates no longer being adequate after a period of rapid growth.
What grew in the years after World War II were the “paramedics,” that is,
the hospital professions: X-Ray, pathology, the medical lab, therapists of
all kinds, and so on. Before World War II these had barely existed. And
hospital administration itself became a profession. The traditional
“housekeeping” services, which had dominated hospital operations in
earlier times, thus steadily became a problem for the administrator,
proving increasingly difficult and costly as hospital employees, especially
the low-paid ones, began to unionize.
And the case of the book chains reported earlier (in Chapter 3) is
also a story of structural change because of rapid growth. What neither
the publishers nor the traditional American bookstores realized was that
new customers, the “shoppers,” were emerging side by side with the old
customers, the traditional readers. The traditional bookstore simply did
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not perceive these new customers and never attempted to serve them.
But there is also the tendency if an industry grows very fast to
become complacent and, above all, to try to “skim the cream.” This is
what the Bell System did with respect to long-distance calls. The sole
result is to invite competition (on this see also Chapter 17).
Yet another example is to be found in the American art field. Before
World War II, museums were considered “upper-class.” After World War
II, going to museums became a middle-class habit; in city after city new
museums were founded. Before World War II, collecting art was
something a few very rich people did. After World War II, collecting all
kinds of art became increasingly popular, with thousands of people
getting into the act, some of them people of fairly limited means.
One young man working in a museum saw this as an opportunity for
innovation. He found it in the most unexpected place—in fact, in a place
he had never heard of before, insurance. He established himself as an
insurance broker specializing in art and insuring both museums and
collectors. Because of his art expertise, the underwriters in the major
insurance companies, who had been reluctant to insure art collections,
became willing to take the risk, and at premiums up to 70 percent below
those charged before. This young man now has a large insurance
brokerage firm.
3. Another development that will predictably lead to sudden changes
in industry structure is the convergence of technologies that hitherto
were seen as distinctly separate.
One example is that of the private branch exchange (PBX), that is,
the switchboard for offices and other large telephone users. Basically, all
the scientific and technical work on this in the United States has been
done by Bell Labs, the research arm of the Bell System. But the main
beneficiaries have been a few newcomers such as ROLM Corporation.
In the new PBX, two different technologies converge: telephone
technology and computer technology. The PBX can be seen as a
telecommunications instrument that uses a computer, or as a computer
that is being used in telecommunications. Technically, the Bell System
would have been perfectly capable of handling this—in fact, it has all
along been a computer pioneer. In its view of the market, however, and
of the user, Bell System saw the computer as something totally different
and far away. While it designed and actually introduced a computer-type
PBX, it never pushed it. As a result, a total newcomer has become a
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major competitor. In fact, ROLM, started by four young engineers, was
founded to build a small computer for fighter aircraft, and only stumbled
by accident into the telephone business. The Bell System now has not
much more than one-third of that market, despite its technical
leadership.
4. An industry is ripe for basic structural change if the way in which it
does business is changing rapidly.
Thirty years ago, the overwhelming majority of American physicians
practiced on their own. By 1980, only 60 percent were doing so. Now, 40
percent (and 75 percent of the younger ones) practice in a group, either
in a partnership or as employees of a Health Maintenance Organization
or a hospital. A few people who saw what was happening early on,
around 1970, realized that it offered an opportunity for innovation. A
service company could design the group’s office, tell the physicians what
equipment they needed, and either manage their group practice for them
or train their managers.

Innovations that exploit changes in industry structure are particularly
effective if the industry and its markets are dominated by one very large
manufacturer or supplier, or by a very few. Even if there is no true
monopoly, these 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, indeed, amateurish. But
even when the newcomer takes a larger and larger share of their
business, they find it hard to mobilize themselves for counteraction. It
took the Bell System almost ten years before it first responded to the
long-distance discounters and to the challenge from the PBX
manufacturers.
Equally sluggish, however, was the response of the American
producers of aspirin when the “non-aspirin aspirins”—Tylenol and Datril
—first appeared (on this see also Chapter 17). Again, the innovators
diagnosed an opportunity because of an impending change in industry
structure, based very largely on rapid growth. There was no reason
whatever why the existing aspirin manufacturers, a very small number of
very large companies, could not have brought out “non-aspirin aspirin”
and sold it effectively. After all, the dangers and limitations of aspirin
were no secret; medical literature was full of them. Yet, for the first five
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or eight years, the newcomers had the market to themselves.
Similarly, the United States Postal Service did not react for many
years to innovators who took away larger and larger chunks of the most
profitable services. First, United Parcel Service took away ordinary
parcel post; then Emery Air Freight and Federal Express took away the
even more profitable delivery of urgent or high-value merchandise and
letters. What made the Postal Service so vulnerable was its rapid
growth. Volume grew so fast that it neglected what seemed to be minor
categories, and thus practically delivered an invitation to the innovators.
Again and again when market or industry structure changes, the
producers or suppliers who are today’s industry leaders will be found
neglecting the fastest-growing market segments. They will cling to
practices that are rapidly becoming dysfunctional and obsolete. The new
growth opportunities rarely fit the way the industry has “always”
approached the market, been organized for it, and defines it. The
innovator in this area therefore has a good chance of being left alone.
For some time, the old businesses or services in the field will still be
doing well serving the old market the old way. They are likely to pay little
attention to the new challenge, either treating it with condescension or
ignoring it altogether.
But there is one important caveat. It is absolutely essential to keep
the innovation in this area simple. Complicated innovations do not work.
Here is one example, the most intelligent business strategy I know of
and one of the most dismal failures.
Volkswagen triggered the change which converted the automobile
industry around 1960 into a global market. The Volkswagen Beetle was
the first car since the Model T forty years earlier that became a truly
international car. It was as ubiquitous in the United States as it was in its
native Germany, and as familiar in Tanganyika as it was in the Solomon
Islands. And yet Volkswagen missed the opportunity it had created itself
—primarily by being too clever.
By 1970, ten years after its breakthrough into the world market, the
Beetle was becoming obsolete in Europe. In the United States, the
Beetle’s second-best market, it still sold moderately well. And in Brazil,
the Beetle’s third-largest market, it apparently still had substantial growth
ahead. Obviously, new strategy was called for.
The chief executive officer of Volkswagen proposed switching the
German plants entirely to the new model, the successor to the Beetle,
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which the German plants would also supply to the United States market.
But the continuing demand for Beetles in the United States would be
satisfied out of Brazil, which would then give Volkswagen do Brasil the
needed capacity to enlarge its plants and to maintain for another ten
years the Beetle’s leadership in the growing Brazilian market. To assure
the American customers of the “German quality” that was one of the
Beetle’s main attractions, the critical parts such as engines and
transmissions for all cars sold in North America would, however, still be
made in Germany, with the finished car for the North American market
then assembled in the United States.
In its way, this was the first genuinely global strategy, with different
parts to be made in different countries and assembled in different places
according to the needs of different markets. Had it worked, it would have
been the right strategy, and a highly innovative one at that. It was killed
primarily by the German labor unions. “Assembling Beetles in the United
States means exporting German jobs,” they said, “and we won’t stand
for it.” But the American dealers were also doubtful about a car that was
“made in Brazil,” even though the critical parts would still be “made in
Germany.” And so Volkswagen had to give up its brilliant plan.
The result has been the loss of Volkswagen’s second market, the
United States. Volkswagen, and not the Japanese, should have had the
small car market when small cars became all the rage after the fall of the
Shah of Iran triggered the second petroleum panic. Only the Germans
had no product. And when, a few years later, Brazil went into a severe
economic crisis and automobile sales dropped, Volkswagen do Brasil
got into difficulties. There were no export customers for the capacity it
had had to build there during the seventies.
The specific reasons why Volkswagen’s brilliant strategy failed—to
the point where the long-term future of the company may have become
problematical—are secondary. The moral of the story is that a “clever”
innovative strategy always fails, particularly if it is aimed at exploiting an
opportunity created by a change in industry structure. Then only the very
simple, specific strategy has a chance of succeeding.
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7
Source: Demographics
The unexpected; incongruities; changes in market and industry structure;
and process needs—the sources of innovative opportunity discussed so
far in Chapters 3 through 6—manifest themselves within a business, an
industry, or a market. They may actually be symptoms of changes
outside, in the economy, in society, and in knowledge. But they show up
internally.
The remaining sources of innovative opportunity:
— Demographics;
— Changes in perception, meaning, and mood;
— New knowledge
are external. They are changes in the social, philosophical, political, and
intellectual environment.
I
Of all external changes, demographics—defined as changes in
population, its size, age structure, composition, employment, educational
status, and income—are the clearest. They are unambiguous. They
have the most predictable consequences.
They also have known and almost certain lead times. Anyone in the
American labor force in the year 2000 is alive by now (though not
necessarily living in the United States; a good many of America’s
workers fifteen years hence may now be children in a Mexican pueblo,
for example). All people reaching retirement age in 2030 in the
developed countries are already in the labor force, and in most cases in
the occupational group in which they will stay until they retire or die. And
the educational attainment of the people now in their early or mid-
twenties will largely determine their career paths for another forty years.
Demographics have major impact on what will be bought, by whom,
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and in what quantities. American teenagers, for instance, buy a good
many pairs of cheap shoes a year; they buy for fashion, not durability,
and their purses are limited. The same people, ten years later, will buy
very few pairs of shoes a year—a sixth as many as they bought when
they were seventeen—but they will buy them for comfort and durability
first and for fashion second. People in their sixties and seventies in the
developed countries—that is, people in their early retirement years—
form the prime travel and vacation market. Ten years later the same
people are customers for retirement communities, nursing homes, and
extended (and expensive) medical care. Two-earner families have more
money than they have time, and spend accordingly. People who have
acquired extensive schooling in their younger years, especially
professional or technical schooling, will, ten to twenty years later,
become customers for advanced professional training.
But people with extensive schooling are also available primarily for
employment as knowledge workers. Even without competition from low-
wage countries with tremendous surpluses of young people trained only
for unskilled or semi-skilled manual jobs—the surge of young people in
the Third World countries resulting from the drop in infant mortality after
1955—the industrially developed countries of the West and of Japan
would have had to automate. Demographics alone, the combined effects
of the sharp drop in birth rates and of the “educational explosion”—
makes it near-certain that traditional manual blue-collar employment in
manufacturing in developed countries, by the year 2010, cannot be more
than one-third or less than what it was in 1970. (Though manufacturing
production, as a result of automation, may be three to four times what it
was then.)
All this is so obvious that no one, one should think, needs to be
reminded of the importance of demographics. And indeed businessmen,
economists, and politicians have always acknowledged the critical
importance of population trends, movements, and dynamics. But they
also believed that they did not have to pay attention to demographics in
their day-to-day decisions. Population changes—whether in birth rates or
mortality rates, in educational attainment, in labor force composition and
participation, or in the location and movement of people—were thought
to occur so slowly and over such long time spans as to be of little
practical concern. Great demographic catastrophes such as the Black
Death in Europe in the fourteenth century were admitted to have
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immediate impacts on society and economy. But otherwise,
demographic changes were “secular” changes, of interest to the
historian and the statistician rather than to the businessman or the
administrator.
This was always a dangerous error. The massive nineteenth-century
migration from Europe to the Americas, both North and South, and to
Australia and New Zealand, changed the economic and political
geography of the world beyond recognition. It created an abundance of
entrepreneurial opportunities. It made obsolete the geopolitical concepts
on which European politics and military strategies had been based for
several centuries. Yet it took place in a mere fifty years, from the mid-
1860s to 1914. Whoever disregarded it was likely to be left behind, and
fast.
Until 1860, for instance, the House of Rothschild was the world’s
dominant financial power. The Rothschilds failed, however, to recognize
the meaning of the transatlantic migration; only “riff-raff,” they thought,
would leave Europe. As a result, the Rothschilds ceased to be important
around 1870. They had become merely rich individuals. It was J. P.
Morgan who took over. His “secret” was to spot the transatlantic
migration at its very onset, to understand immediately its significance,
and to exploit it as an opportunity by establishing a worldwide bank in
New York rather than in Europe, and as the medium for financing the
American industries that immigrant labor was making possible. It also
took only thirty years, from 1830 to 1860, to transform both western
Europe and the eastern United States from rural and farm-based
societies into industry-dominated big-city civilizations.
Demographic changes tended to be just as fast, just as abrupt, and
to have fully as much impact, in earlier times. The belief that populations
changed slowly in times past is pure myth. Or rather, static populations
staying in one place for long periods of time have been the exception
historically rather than the rule.
*
In the twentieth century it is sheer folly to disregard demographics.
The basic assumption for our time must be that populations are
inherently unstable and subject to sudden sharp changes—and that they
are the first environmental factor that a decision maker, whether
businessman or politician, analyzes and thinks through. Few issues in
this century, for instance, will be as critical to both domestic and
international politics as the aging of the population in the developed
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countries on the one hand and the tidal wave of young adults in the Third
World on the other hand. Whatever the reasons, twentieth-century
societies, both developed and developing ones, have become prone to
extremely rapid and radical demographic changes, which occur without
advance warning.
The most prominent American population experts called together by
Franklin 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. The American population—with a minimum of
immigration—now stands at 240 million. For in 1949, without the
slightest advance warning, the United States kicked off a “baby boom”
that for twelve years produced unprecedentedly large families, only to
turn just as suddenly in 1960 into a “baby bust,” producing equally
unprecedented small families. The demographers of 1938 were not
incompetents or fools; there was just no indication then of a “baby
boom.”
Twenty years later another American President, John F. Kennedy,
called together a group of eminent experts to work out his Latin-Amen-
can aid and development program, the “Alliance for Progress.” Not one
of the experts paid attention in 1961 to the precipitous drop in infant
mortality which, within another fifteen years, totally changed Latin
America’s society and economy. The experts also all assumed, without
reservation, a rural Latin America. They, too, were neither incompetents
nor fools. But the drop in infant mortality in Latin America and the
urbanization of society had barely begun at the time.
In 1972 and 1973, the most experienced labor force analysts in the
United States still accepted without question that the participation of
women would continue to decline as it had done for many years. When
the “baby boomers” came on the labor market in record numbers, they
worried (quite unnecessarily, as it turned out) where all the jobs for the
young males would be coming from. No one asked where jobs would
come from for young females—they were not supposed to need any.
Ten years later the labor force participation of American women under
fifty stood at 64 per cent, the highest rate ever. And there is little
difference in labor force participation in this group between married and
unmarried women, or between women with and without children.
These shifts are not only dazzlingly sudden. They are often
mysterious and defy explanation. The drop in infant mortality in the Third
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World can be explained in retrospect. It was caused by a convergence of
old technologies: the public-health nurse; placing the latrine below the
well; vaccination; the wire screen outside the window; and, of very new
technologies, antibiotics and pesticides such as DDT. Yet it was totally
unpredictable. And what explains the “baby boom” or the “baby bust”?
What explains the sudden rush of American women (and of European
women as well, though with a lag of a few years) into the labor force?
And what explains the rush into the slums of Latin-American cities?
Demographic shifts in this century may be inherently unpredictable,
yet they do have long lead times before impact, and lead times,
moreover, which are predictable. It will be five years before newborn
babies become kindergarten pupils and need classrooms, playgrounds,
and teachers. It will be fifteen years before they become important as
customers, and nineteen to twenty years before they join the labor force
as adults. Populations in Latin America began to grow quite rapidly as
soon as infant mortality began to drop. Still the babies who did not die
did not become schoolchildren for five or six years, nor adolescents
looking for work for fifteen or sixteen years. And it takes at least ten
years—usually fifteen—before any change in educational attainments
translates itself into labor force composition and available skills.
What makes demographics such a rewarding opportunity for the
entrepreneur is precisely its neglect by decision makers, whether
businessmen, public-service staffs, or governmental policymakers. They
still cling to the assumption that demographics do not change—or do not
change fast. Indeed, they reject even the plainest evidence of
demographic changes. Here are some fairly typical examples.
By 1970, it had become crystal clear that the number of children in
America’s schools was going to be 25 to 30 percent lower than it had
been in the 1960s, for ten or fifteen years at least. After all, children
entering kindergarten in 1970 have to be alive no later than 1965, and
the “baby bust” was well established beyond possibility of rapid reversal
by that year. Yet the schools of education in American universities flatly
refused to accept this. They considered it a law of nature, it seems, that
the number of children of school age must go up year after year. And so
they stepped up their efforts to recruit students, causing substantial
unemployment for graduates a few years later, severe pressure on
teachers’ salaries, and massive closings of schools of education.
And here are two examples from my own experience. In 1957, I
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published a forecast that there would be ten to twelve million college
students in the United States twenty-five years later, that is, by the mid-
seventies. The figure was derived simply by putting together two
demographic events that had already happened: the increase in the
number of births and the increase in the percentage of young adults
going to college. The forecast was absolutely correct. Yet practically
every established university pooh-poohed it. Twenty years later, in 1976,
I looked at the age figures and predicted that retirement age in the
United States would have to be raised to seventy or eliminated
altogether within ten years. The change came even faster: compulsory
retirement at any age was abolished in California a year later, in 1977,
and retirement before seventy for the rest of the country two years later,
in 1978. The demographic figures that made this prediction practically
certain were well known and published. Yet most so-called experts—
government economists, labor-union economists, business economists,
statisticians—dismissed the forecast as utterly absurd. “It will never
happen” was the all but unanimous response. The labor unions actually
proposed at the time lowering the mandatory retirement age to sixty or
below.
This unwillingness, or inability, of the experts to accept demographic
realities which do not conform to what they take for granted gives the
entrepreneur his opportunity. The lead times are known. The events
themselves have already happened. But no one accepts them as reality,
let alone as opportunity. Those who defy the conventional wisdom and
accept the facts—indeed, those who go actively looking for them—can
therefore expect to be left alone for quite a long time. The competitors
will accept demographic reality, as a rule, only when it is already about
to be replaced by a new demographic change and a new demographic
reality.
II
Here are some examples of successful exploitation of demographic
changes.
Most of the large American universities dismissed my forecast of 10
to 12 million college students by the 1970s as preposterous. But the
entrepreneurial universities took it seriously: Pace University, in New
York, was one, and Golden Gate University in San Francisco another.
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They were just as incredulous at first, but they checked the forecast and
found that it was valid, and in fact the only rational prediction. They then
organized themselves for the additional student enrollment; the
traditional, and especially the “prestige” universities, on the other hand,
did nothing. As a result, twenty years later these brash newcomers had
the students, and when enrollments decreased nationwide as a result of
the “baby bust,” they still kept on growing.
One American retailer who accepted the “baby boom” was then a
small and undistinguished shoe chain, Melville. In the early 1960s just
before the first cohorts of the “baby boom” reached adolescence,
Melville directed itself to this new market. It created new and different
stores specifically for teenagers. It redesigned its merchandise. It
advertised and promoted to the sixteen-and seventeen-year-olds. And it
went beyond footwear into clothing for teenagers, both female and male.
As a result, Melville became one of the fastest-growing and most
profitable retailers in America. Ten years later other retailers caught on
and began to cater to teenagers—just as the center of demographic
gravity started to shift away from them and toward “young adults,” twenty
to twenty-five years old. By then Melville was already shifting its own
focus to that new dominant age cohort.
The scholars on Latin America whom President Kennedy brought
together to advise him on the Alliance for Progress in 1961 did not see
Latin America’s urbanization. But one business, the American retail
chain Sears, Roebuck, had seen it several years earlier—not by poring
over statistics but by going out and looking at customers in Mexico City
and Lima, São Paulo and Bogotá. As a result, Sears in the mid-fifties
began to build American-type department stores in major Latin-American
cities, designed for a new urban middle class which, while not “rich,” was
part of the money economy and had middle-class aspirations. Sears
became the leading retailer in Latin America within a few years.
And here are two examples of exploiting demographics to innovate in
building a highly productive labor force. The expansion of New York’s
Citibank is largely based on its early realization of the movement of
young, highly educated and highly ambitious women into the work force.
Most large American employers considered these women a “problem” as
late as 1980; many still do. Citibank, almost alone among large
employers, saw in them an opportunity. It aggressively recruited them
during the 1970s, trained them, and sent them out all over the country as
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lending officers. These ambitious young women very largely made
Citibank into the nation’s leading, and its first truly “national” bank. At the
same time, a few savings and loan associations (not an industry noted
for innovation or venturing) realized that older married women who had
earlier dropped out of the labor force when their children were small
make high-grade employees when brought back as permanent part-time
workers. “Everybody knew” that part-timers are “temporary,” and that
women who have once left the labor force never come back into it; both
were perfectly sensible rules in earlier times. But demographics made
them obsolete. The willingness to accept this fact—and again such
willingness stemmed not from reading statistics but from going out and
looking—has given the savings and loan associations an exceptionally
loyal, exceptionally productive work force, particularly in California.
The success of Club Mediterranée in the travel and resort business
is squarely the result of exploiting demographic changes: the emergence
of large numbers of young adults in Europe and the United States who
are affluent and educated but only one generation away from working-
class origins. Still quite unsure of themselves, still not self-confident as
tourists, they are eager to have somebody with the know-how to
organize their vacations, their travel, their fun—and yet they are not
really comfortable either with their working-class parents or with older,
middle-class people. Thus, they are ready-made customers for a new
and “exotic” version of the old teenage hangout.
III
Analysis of demographic changes begins with population figures. But
absolute population is the least significant number. Age distribution is far
more important, for instance. In the 1960s, it was the rapid increase in
the number of young people in most non-Communist developed
countries that proved significant (the one notable exception was Great
Britain, where the “baby boom” was short-lived). In the 1980s and even
more in the 1990s, it will be the drop in the number of young people, the
steady increase in the number of early middle-age people (up to forty)
and the very rapid increase in the number of old people (seventy and
over). What opportunities do these developments offer? What are the
values and the expectations, the needs and wants of these various age
groups?
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The number of traditional college students cannot increase. The
most one can hope for is that it will not fall, that the percentage of
eighteen-and nineteen-year-olds who stay in school beyond secondary
education will increase sufficiently to offset the decline in the total
number. But with the increase in the number of people in their mid-
thirties and forties who have received a college degree earlier, there are
going to be large numbers of highly schooled people who want
advanced professional training and retraining, whether as doctors,
lawyers, architects, engineers, executives, or teachers. What do these
people look for? What do they need? How can they pay? What does the
traditional university have to do to attract and satisfy such very different
students? And, finally, what are the wants, needs, values of the elderly?
Is there indeed any one “older group,” or are there rather several, each
with different expectations, needs, values, satisfactions?
Particularly important in age distribution—and with the highest
predictive value—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.
At the end of the Eisenhower presidency, in the late fifties, the center
of population gravity in the United States was at its highest point in
history. But a violent shift within a few years was bound to take place. As
a result of the “baby boom,” the center of American population gravity
was going to drop so sharply by 1965 as to bring it to the lowest point
since the early days of the Republic, to around sixteen or seventeen. It
was predictable—and indeed predicted by anyone who took
demographics seriously and looked at the figures—that there would be a
drastic change in mood and values. The “youth rebellion” of the sixties
was mainly a shift of the spotlight to what has always been typical
adolescent behavior. In earlier days, with the center of population gravity
in the late twenties or early thirties, age groups that are notoriously ultra-
conservative, adolescent behavior was dismissed as “Boys will be boys”
(and “Girls will be girls”). In the sixties it suddenly became the
representative behavior.
But when everybody was talking of a “permanent shift in values” or of
a “greening of America,” the age pendulum had already swung back,
and violently so. By 1969, the first effects of the “baby bust” were already
discernible, and not only in the statistics. 1974 or 1975 would be the last
year in which the sixteen-and seventeen-year-olds would constitute the
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center of population gravity. After that, the center would rapidly move up:
by the early 1980s it would be in the high twenties again. And with this
shift would come a change in what would be considered “representative”
behavior. The teenagers would, of course, continue to behave like
teenagers. But that would again be dismissed as the way teenagers
behave rather than as the constitutive values and behavior of society.
And so one could predict with near-certainty, for instance (and some of
us did predict it), that by the mid-seventies the college campuses would
cease to be “activist” and “rebellious,” and college students would again
be concerned with grades and jobs; but also that the overwhelming
majority of the “dropouts” of 1968 would, ten years later, have become
the “upward-mobile professionals” concerned with careers,
advancement, tax shelters, and stock options.
Segmentation by educational attainment may be equally important;
indeed, for some purposes, it may be more important (e.g., selling
encyclopedias, continuing professional education, but also vacation
travel). Then there is labor force participation and occupational
segmentation. Finally there is income distribution, and especially
distribution of disposable and discretionary income. What happens, for
instance, to the propensity to save in the two-earner family?
Actually, most of the answers are available. They are the stuff of
market research. All that is needed is the willingness to ask the
questions.
But more than poring over statistics is involved. To be sure, statistics
are the starting point. They were what got Melville to ask what
opportunities the jump in teenagers offered a fashion retailer, or what got
the top management at Sears, Roebuck to look upon Latin America as a
potential market. But then the managements of these companies—or the
administrators of metropolitan big-city universities such as Pace in New
York and Golden Gate in San Francisco—went out into the field to look
and listen.
This is literally how Sears, Roebuck decided to go into Latin America.
Sears’s chairman, Robert E. Wood, read in the early 1950s that Mexico
City and São Paulo were expected to outgrow all U.S. cities by the year
1975. This so intrigued him that he went himself to look at the major
cities in Latin America. He spent a week in each of them—Mexico City,
Guadalajara, Bogota, Lima, Santiago, Rio, São Paulo—walking around,
looking at stores (he was appalled by what he saw), and studying traffic
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patterns. Then he knew what customers to aim at, what kind of stores to
build, where to put the stores, and what merchandise to stock them with.
Similarly, the founders of Club Mediterranée looked at the customers
of package tours, talked to them and listened to them, before they built
their first vacation resort. And the two young men who turned Melville
Shoe from a dowdy, undistinguished shoe chain (one among many) into
the fastest-growing popular fashion retailer in America similarly spent
weeks and months in shopping centers, looking at customers, listening
to them, exploring their values. They studied the way young people
shopped, what kind of environment they liked (do teenage boys and
girls, for instance, shop in the same place for shoes or do they want to
have separate stores?), and what they considered “value” in the
merchandise they bought.
Thus, for those genuinely willing to go out into the field, to look and to
listen, changing demographics is both a highly productive and a highly
dependable innovative opportunity.
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8
Source: Changes in Perception
I
“THE GLASS IS HALF FULL”
In mathematics there is no difference between “The glass is half full” and
“The glass is half empty.” But the meaning of these two statements is
totally different, and so are their consequences. If general perception
changes from seeing the glass as “half full” to seeing it as “half empty,”
there are major innovative opportunities.
Here are a few examples of such changes in perception and of the
innovative opportunities they opened up—in business, in politics, in
education, and elsewhere.
1. All factual evidence shows that the last twenty years, the years
since the early 1960s, have been years of unprecedented advance and
improvement in the health of Americans. Whether we look at mortality
rates for newborn babies or survival rates for the very old, at occurrence
of cancers (other than lung cancer) or cure rates for cancer, and so on,
all indicators of physical health and functioning have been moving
upward at a good clip. 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.” What we see now are not the great improvements in
health and functioning, but that we are as far away from immortality as
ever before and have made no progress toward it. In fact, it can be
argued that if there is any real deterioration in American health during
the last twenty years it lies precisely in the extreme concern with health
and fitness, and the obsession with getting old, with losing fitness, with
degenerating into long-term illness or senility. Twenty-five years ago,
even minor improvements in the nation’s health were seen as major
steps forward. Now, even major improvements are barely paid attention
to.
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Whatever the causes for this change in perception, it has created
substantial innovative opportunities. 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. It created the opportunity for a
substantial number of new and innovative businesses to exploit the fear
of traditional foods causing irreparable damage. A firm in Boulder,
Colorado, named Celestial Seasonings was started by one of the “flower
children” of the late sixties picking herbs in the mountains, packaging
them, and peddling them on the street. Fifteen years later, Celestial
Seasonings was taking in several hundred million dollars in sales each
year and was sold for more than $20 million to a very large food-
processing company. And there are highly profitable chains of health-
food stores. Jogging equipment has also become big business, and the
fastest-growing new business in 1983 in the United States was a
company making indoor exercise equipment.
2. Traditionally, the way people feed themselves was very largely a
matter of income group and class. Ordinary people “ate” the rich “dined.”
This perception has changed within the last twenty years. Now the same
people both “eat” and “dine.” One trend is toward “feeding,” which means
getting down the necessary means of sustenance, in the easiest and
simplest possible way: convenience foods, TV dinners, McDonald’s
hamburgers or Kentucky Fried Chicken, and so on. But then the same
consumers have also become gourmet cooks. TV programs on gourmet
cooking are highly popular and achieve high ratings; gourmet cookbooks
have become mass-market best-sellers; whole new chains of gourmet
food stores have opened. Finally, traditional supermarkets, while doing
90 percent of their business in foods for “feeding,” have opened
“gourmet boutiques” which in many cases are far more profitable than
their ordinary processed-food business. This new perception is by no
means confined to the United States. In West Germany, a young woman
physician said to me recently: “Wir essen sechs Tage in der Woche,
aber einen Tag wollen wir doch richtig speisen (We feed six days, but
one day a week we like to dine).” Not so long ago, “essen” was what
ordinary people did seven days a week, and “speisen” what the elite, the
rich and the aristocracy, did, seven days a week.
3. If anyone around 1960, in the waning days of the Eisenhower
administration and the beginning of the Kennedy presidency, had
predicted the gains the American black would make in the next ten or
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fifteen years, he would have been dismissed as an unrealistic visionary,
if not insane. Even predicting half the gains that those ten or fifteen
years actually registered for the American black would have been
considered hopelessly optimistic. Never in recorded history has there
been a greater change in the status of a social group within a shorter
time. At the beginning of those years, black participation in higher
education beyond high school was around one-fifth that of whites. By the
early seventies, it was equal to that of whites and ahead of that of a
good many white ethnic groups. The same rate of advance occurred in
employment, in incomes, and especially in entrance to professional and
managerial occupations. Anyone granted twelve or fifteen years ago an
advance look would have considered the “negro problem” in America to
be solved, or at least pretty far along the way toward solution.
But what a large part of the American black population actually sees
today in the mid-eighties is not that the glass has become “half full” but
that it is still “half empty.” In fact, frustration, anger, and alienation have
increased rather than decreased for a substantial fraction of the
American blacks. They do not see the achievements of two-thirds of the
blacks who have moved into the middle class, economically and socially,
but the failure of the remaining one-third to advance. What they see is
not how fast things have been moving, but how much still remains to be
done—how slow and how difficult the going still is. The old allies of the
American blacks, the white liberals—the labor unions, the Jewish
community, or academia—see the advances. They see that the glass
has become “half full.” This then has led to a basic split between the
blacks and the liberal groups which, of course, only makes the blacks
feel even more certain that the glass is “half empty.”
The white liberal, however, has come to feel that the blacks
increasingly are no longer “deprived,” no longer entitled to special
treatment such as reverse discrimination, no longer in need of special
allowances and priority in employment, in promotion, and so on. This
became the opportunity for a new kind of black leader, the Reverend
Jesse Jackson. Historically, for almost a hundred years—from Booker T.
Washington around the turn of the century through Walter White in the
New Deal days until Martin Luther King, Jr., during the presidencies of
John Kennedy and Lyndon Johnson—a black could become leader of
his community only by proving his ability to get the support of white
liberals. It was the one way to obtain enough political strength to make
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significant gains for American blacks. Jesse Jackson saw that the
change in perception that now divides American blacks from their old
allies and comrades-in-arms, white liberals, is an innovative opportunity
to create a totally different kind of black leadership, one based on vocal
enmity to the white liberals and even all-out attack on them. In the past,
to have sounded as anti-liberal, anti-union, and anti-Jewish as Jackson
has done would have been political suicide. Within a few short weeks in
1984, it made Jackson the undisputed leader of the American black
community.
4. American feminists today consider the 1930s and 1940s the
darkest of dark ages, with women denied any role in society. Factually,
nothing could be more absurd. The America of the 1930s and 1940s was
dominated by female stars of the first magnitude. There was Eleanor
Roosevelt, the first wife of an American President to establish for herself
a major role as a conscience, and as the voice of principle and of
compassion which no American male in our history has equaled. Her
friend, Frances Perkins, was the first woman in an American cabinet as
Secretary of Labor, and the strongest, most effective member of
President Roosevelt’s cabinet altogether. Anna Rosenberg was the first
woman to become a senior executive of a very big corporation as
personnel vice-president of R. H. Macy, then the country’s biggest
retailer; and later on, during the Korean War, she became Assistant
Secretary of Defense for manpower and the “boss” of the generals.
There were any number of prominent and strong women as university
and college presidents, each a national figure. The leading playwrights,
Clare Booth Luce and Lillian Heliman, were both women—and Clare
Luce then became a major political figure, a member of Congress from
Connecticut, and ambassador to Italy. The most publicized medical
advance of the period was the work of a woman. Helen Taussig
developed the first successful surgery of the living heart, the “blue baby”
operation, which saved countless children all over the world and ushered
in the age of cardiac surgery, leading directly to the heart transplant and
the by-pass operation. And there was Marian Anderson, the black singer
and the first black to enter every American living room through the radio,
touching the hearts and consciences of millions of Americans as no
black before her had done and none would do again until Martin Luther
King, Jr., a quarter century later. The list could be continued indefinitely.
These were very proud women, conscious of their achievements,
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their prominence, their importance. Yet they did not see themselves as
“role models.” They saw themselves not as women but as individuals.
They did not consider themselves as “representative” but as exceptional.
How the change occurred, and why, I leave to future historians to
explain. But when it happened around 1970, these great women leaders
became in effect “non-persons” for their feminist successors. Now the
woman who is not in the labor force, and not working in an occupation
traditionally considered “male,” is seen as unrepresentative and as the
exception.
This was noted as an opportunity by a few businesses, in particular,
Citibank (cf. Chapter 7). It was not seen at all, however, by the very
industries in which women had long been accepted as professionals and
executives, such as department stores, advertising agencies, magazine
or book publishers. These traditional employers of professional and
managerial women actually today have fewer women in major positions
than they had thirty or forty years ago. Citibank, by contrast, was
exceedingly macho—which may be one reason why it realized there had
been a change. It saw in the new perception women had of themselves
a major opportunity to court exceptionally able, exceptionally ambitious,
exceptionally striving women; to recruit them; and to hold them. And it
could do so without competition from the traditional recruiters of career
women. In exploiting a change in perception, innovators, as we have
seen, can usually count on having the field to themselves for quite a long
time.
5. A much older case, one from the early 1950s, shows a similar
exploitation of a change in perception. Around 1950, the American
population began to describe itself overwhelmingly as being “middle-
class,” and to do so regardless, almost, of income or occupation. Clearly,
Americans had changed their perception of their own social position. But
what did the change mean? One advertising executive, William Benton
(later senator from Connecticut), went out and asked people what the
words “middle class” meant to them. The results were unambiguous:
“middle class” in contrast to “working class” means believing in the ability
of one’s children to rise through performance in school. Benton
thereupon bought up the Encyclopedia Britannica company and started
peddling the Encyclopedia, 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,” the salesman said in
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effect, “your child has to have the Encyclopedia Britannica to do well in
school.” Within three years Benton had turned the almost-dying
company around. And ten years later the company began to apply
exactly the same strategy in Japan for the same reasons and with the
same success.
6. Unexpected success or unexpected failure is often an indication of
a change in perception and meaning. Chapter 3 told how the phoenix of
the Thunderbird rose from the ashes of the Edsel. What the Ford Motor
Company found when it searched for an explanation of the failure of the
Edsel was a change in perception. The automobile market, which only a
few short years earlier had been segmented by income groups, was now
seen by the customers as segmented by “lifestyles.”

When a change in perception takes place, the facts do not change.
Their meaning does. The meaning changes from “The glass is half full”
to “The glass is half empty.” The meaning changes from seeing oneself
as “working-class” and therefore born into one’s “station in life,” to seeing
oneself as “middle-class” and therefore very much in command of one’s
social position and economic opportunities. This change can come very
fast. It probably did not take much longer than a decade for the majority
of the American population to change from considering themselves
“working-class” to considering themselves “middle-class.”
Economics do not necessarily dictate such changes; in fact, they
may be irrelevant. In terms of income distribution, Great Britain is a more
egalitarian country than the United States. And yet almost 70 percent of
the British population still consider themselves “working-class,” even
though at least two-thirds of the British population are above “working-
class” income by economic criteria alone, and close to half are above the
“lower middle class” as well. 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.” That the American blacks feel “The
glass is half empty” has as much to do with unhealed wounds of past
centuries as with anything in present American society. That a majority
of the English feel themselves to be “working-class” is still largely a
legacy of the nineteenth-century chasm between “church” and “chapel.”
And the American health hypochondria expresses far more American
values, such as the worship of youth, than anything in the health
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statistics.
Whether sociologists or economists can explain the perceptional
phenomenon is irrelevant. It remains a fact. Very often it cannot be
quantified; or rather, by the time it can be quantified, it is too late to serve
as an opportunity for innovation. But it is not exotic or intangible. It is
concrete: it can be defined, tested, and above all exploited.
II
THE PROBLEM OF TIMING
Executives and administrators admit the potency of perception-based
innovation. But they tend to shy away from it as “not practical.” They
consider the perception-based innovator as weird or just a crackpot. But
there is nothing weird about the Encyclopedia Britannica, about the Ford
Thunderbird or Celestial Seasonings. Of course, successful innovators in
any field tend to be close to the field in which they innovate. But the only
thing that sets them apart is their being alert to opportunity.
One of the foremost of today’s gourmet magazines was launched by
a young man who started out as food editor of an airlines magazine. He
became alert to the change in perception when he read in the same
issue of a Sunday paper three contradictory stories. The first said that
prepared meals such as frozen dinners, TV dinners, and Kentucky Fried
Chicken accounted for more than half of all meals consumed in the
United States and were expected to account for three-quarters within a
few years. The second said that a TV program on gourmet cooking was
receiving one of the highest audience ratings. And the third that a
gourmet cookbook in its paperback edition, that is, an edition for the
masses, had mounted to the top of the bestseller lists. These apparent
contradictions made him ask, What’s going on here? A year later he
started a gourmet magazine quite different from any that had been on
the market before.
Citibank became conscious of the opportunity offered by the moving
of women into the work force when its college recruiters reported that
they could no longer carry out their instructions, which were to hire the
best male business school students in finance and marketing. The best
students in these fields, they reported, were increasingly women.
College recruiters in many other companies, including quite a few banks,
told their managements the same story at that time. In response, most of
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them were urged, “Just try harder to get the top-flight men.” At Citibank,
top management saw the change as an opportunity and acted on it.
All these examples, however, also show the critical problem in
perception-based innovation: timing. If Ford had waited only one year
after the fiasco of the Edsel, it might have lost the “lifestyle” market to
GM’s Pontiac. If Citibank had not been the first one to recruit women
MBAs, it would not have become the preferred employer for the best and
most ambitious of the young women aiming to make a career in
business.
Yet there is nothing more dangerous than to be premature in
exploiting a change in perception. In the first place, a good many of what
look like changes in perception turn out to be short-lived fads. They are
gone within a year or two. And it is not always apparent which is fad and
which is true change. The kids playing computer games were a fad.
Companies which, like Atari, saw in them a change in perception lasted
one or two years—and then became casualties. Their fathers going in for
home computers represented a genuine change, however. It is,
furthermore, almost impossible to predict what the consequences of
such a change in perception will be. One good example are the
consequences of the student rebellions in France, Japan, West
Germany, and the United States. Everyone in the late 1960s was quite
sure that these would have permanent and profound consequences. But
what are they? As far as the universities are concerned, the student
rebellions seem to have had absolutely no lasting impact. And who
would have expected that, fifteen years later, the rebellious students of
1968 would have become the “Yuppies” to whom Senator Hart appealed
in the 1984 American primaries, the young, upward-mobile
professionals, ultra-materialistic, job conscious, and maneuvering for
their next promotion? There are actually far fewer “dropouts” around
these days than there used to be—the only difference is that the media
pay attention to them. Can the emergence of homosexuals and lesbians
into the limelight be explained by the student rebellion? These were
certainly not the results the students themselves in 1968, nor any of the
observers and pundits of those days, could possibly have predicted.
And yet, timing is of the essence. In exploiting changes in perception,
“creative imitation” (described in Chapter 17) does not work. One has to
be first. But precisely because it is so uncertain whether a change in
perception is a fad or permanent, and what the consequences really are,
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perception-based innovation has to start small and be very specific.
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9
Source: New Knowledge
Knowledge-based innovation is the “super-star” of entrepreneurship. It
gets the publicity. It gets the money. It is what people normally mean
when they talk of innovation. Of course, not all knowledge-based
innovations are important. Some are truly trivial. But amongst the
history-making innovations, knowledge-based innovations rank high. The
knowledge, however, is not necessarily scientific or technical. Social
innovations based on knowledge can have equal or even greater impact.
Knowledge-based innovation differs from all other innovations in its
basic characteristics: time span, casualty rate, predictability, and in the
challenges it poses to the entrepreneur. And like most “superstars,”
knowledge-based innovation is temperamental, capricious, and hard to
manage.
I
THE CHARACTERISTICS OF KNOWLEDGE-BASED INNOVATION
Knowledge-based innovation has the longest lead time of all
innovations. There is, first, a long time span between the emergence of
new knowledge and its becoming applicable to technology. And then
there is another long period before the new technology turns into
products, processes, or services in the marketplace.
Between 1907 and 1910, the biochemist Paul Ehrlich developed the
theory of chemotherapy, the control of bacterial microorganisms through
chemical compounds. He himself developed the first antibacterial drug,
Salvarsan, for the control of syphilis. The sulfa drugs which are the
application of Ehrlich’s chemotherapy to the control of a broad spectrum
of bacterial diseases came on the market after 1936, twenty-five years
later.
Rudolph Diesel designed the engine which bears his name in 1897.
Everyone at once realized that it was a major innovation. Yet for many
years there were few practical applications. Then in 1935 an American,
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Charles Kettering, totally redesigned Diesel’s engine, rendering it
capable of being used as the propulsion unit in a wide variety of ships, in
locomotives, in trucks, buses, and passenger cars.
A number of knowledges came together to make possible the
computer. The earliest was the binary theorem, a mathematical theory
going back to the seventeenth century that enables all numbers to be
expressed by two numbers only: one and zero. It was applied to a
calculating machine by Charles Babbage in the first half of the
nineteenth century. In 1890, Hermann Hollerith invented the punchcard,
going back to an invention by the early nineteenth-century Frenchman J-
M. Jacquard. The punchcard makes it possible to convert numbers into
“instructions.” In 1906 an American, Lee de Forest, invented the audion
tube, and with it created electronics. Then, between 1910 and 1913,
Bertrand Russell and Alfred North Whitehead, in their Principia
Mathematica, created symbolic logic, which enables us to express all
logical concepts as numbers. Finally, during World War I, the concepts
of programming and feedback were developed, primarily for the
purposes of antiaircraft gunnery. By 1918, in other words, all the
knowledge needed to develop the computer was available. The first
computer became operational in 1946.
A Ford Motor Company manufacturing executive coined the word
“automation” in 1951 and described in detail the entire manufacturing
process automation would require. “Robotics” and factory automation
were widely talked about for twenty-five years, but nothing really
happened for a long time. Nissan and Toyota in Japan did not introduce
robots into their plants until 1978. In the early eighties, General Electric
built an automated locomotive plant in Erie, Pennsylvania. General
Motors then began to automate several of its engine and accessory
plants. Early in 1985, Volkswagen began to operate its “Hall 54” as an
almost completely automated manufacturing installation.
Buckminster Fuller, who called himself a geometer and who was part
mathematician and part philosopher, applied the mathematics of
topology to the design of what he called the “Dymaxion House,” a term
he chose because he liked the sound of it. The Dymaxion House
combines the greatest possible living space with the smallest possible
surface. It therefore has optimal insulation, optimal heating and cooling,
and superb acoustics. It also can be built with lightweight materials,
requires no foundation and a minimum of suspension, and can still
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withstand an earthquake or the fiercest gale. Around 1940, Fuller put a
Dymaxion House on the campus of a small New England college. And
there it stayed. Very few Dymaxion Houses have been built—Americans,
it seems, do not like to live in circular homes. But around 1965,
Dymaxion structures began to be put up in the Arctic and Antarctic
where conventional buildings are impractical, expensive, and difficult to
erect. Since then they have increasingly been used for large structures
such as auditoriums, concert tents, sports arenas, and so on.
Only major external crises can shorten this lead time. De Forest’s
audion tube, invented in 1906, would have made radio possible almost
immediately, but it would still not have been on the market until the late
1930s or so had not World War I forced governments, and especially the
American government, to push the development of wireless transmission
of sounds. Field telephones connected by wires were simply too
unreliable, and wireless telegraphy was confined to dots and dashes.
And so, radio came on the market early in the 1920s, only fifteen years
after the emergence of the knowledge on which it is based.
Similarly, penicillin would probably not have been developed until the
1950s or so but for World War II. Alexander Fleming found the bacteria-
killing mold, penicillium, in the mid-twenties. Howard Florey, an English
biochemist, began to work on it ten years later. But it was World War II
that forced the early introduction of penicillin. The need to have a potent
drug to fight infections led the British government to push Florey’s
research: English soldiers were made available to him as guinea pigs
wherever they fought. The computer, too, would probably have waited
for the discovery of the transistor by Bell Lab physicists in 1947 had not
World War II led the American government to push computer research
and to invest large resources of men and money in the work.
The long lead time for knowledge-based innovations is by no means
confined to science or technology. It applies equally to innovations that
are based on nonscientific and nontechnological knowledge.
The comte de Saint-Simon developed the theory of the
entrepreneurial bank, the purposeful use of capital to generate economic
development, right after the Napoleonic wars. Until then bankers were
moneylenders who lent against “security” (e.g., the taxing power of a
prince). Saint-Simon’s banker was to “invest,” that is, to create new
wealth-producing capacity. Saint-Simon had extraordinary influence in
his time, and a popular cult developed around his memory and his ideas
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after his death in 1826. Yet it was not until 1852 that two disciples, the
brothers Jacob and Isaac Pereire, established the first entrepreneurial
bank, the Credit Mobilier, and with it ushered in what we now call finance
capitalism.
Similarly, many of the elements needed for what we now call
management were available right after World War I. Indeed, in 1923,
Herbert Hoover, soon to be President of the United States, and Thomas
Masaryk, founder and president of Czechoslovakia, convened the first
International Management Congress in Prague. At the same time a few
large companies here and there, especially DuPont and General Motors
in the United States, began to reorganize themselves around the new
management concepts. In the next decade a few “true believers,”
especially an Englishman, Lyndall Urwick, the founder of the first
management consulting firm which still bears his name, began to write
on management. Yet it was not until my Concept of the Corporation
(1946) and Practice of Management (1954) were published that
management become a discipline accessible to managers all over the
world. Until then each student or practitioner of “management” focused
on a separate area; Urwick on organization, others on the management
of people, and so on. My books codified it, organized it, systematized it.
Within a few years, management became a worldwide force.
Today, we experience a similar lead time in respect to learning
theory. The scientific study of learning began around 1890 with Wilhelm
Wundt in Germany and William James in the United States. After World
War II, two Americans—B. F. Skinner and Jerome Bruner, both at
Harvard—developed and tested basic theories of learning, Skinner
specializing in behavior and Bruner in cognition. Yet only now is learning
theory beginning to become a factor in our schools. Perhaps the time
has come for an entrepreneur to start schools based on what we know
about learning, rather than on the old wives’ tales about it that have been
handed down through the ages.
In other words, the lead time for knowledge to become applicable
technology and begin to be accepted on the market is between twenty-
five and thirty-five years.
This has not changed much throughout recorded history. It is widely
believed that scientific discoveries turn much faster in our day than ever
before into technology, products, and processes. But this is largely
illusion. Around 1250 the Englishman Roger Bacon, a Franciscan monk,
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showed that refraction defects of the eye could be corrected with
eyeglasses. This was incompatible with what everybody then knew: the
“infallible” authority of the Middle Ages Galen, the great medical
scientist, had “proven conclusively” that it could not be done. Roger
Bacon lived and worked on the extreme edges of the civilized world, in
the wilds of northern Yorkshire. Yet a mural, painted thirty years later in
the Palace of the Popes in Avignon (where it can still be seen), shows
elderly cardinals wearing reading glasses; and ten years later,
miniatures show elderly courtiers in the Sultan’s Palace in Cairo also in
glasses. The mill race, which was the first true “automation,” was
developed to grind grain by the Benedictine monks in northern Europe
around the year 1000; within thirty years it had spread all over Europe.
Gutenberg’s invention of movable type and the woodcut both followed
within thirty years of the West’s learning of Chinese printing.
The lead time for knowledge to become knowledge-based innovation
seems to be inherent in the nature of knowledge. We do not know why.
But perhaps it is not pure coincidence that the same lead time applies to
new scientific theory. Thomas Kuhn, in his path-breaking book The
Structure of Scientific Revolutions (1962), showed that it takes about
thirty years before a new scientific theory becomes a new paradigm—a
new statement that scientists pay attention to and use in their own work.
CONVERGENCES
The second characteristic of knowledge-based innovations—and a
truly unique one—is that they are almost never based on one factor but
on the convergence of several different kinds of knowledge, not all of
them scientific or technological.
Few knowledge-based innovations in this century have benefited
humanity more than the hybridization of seeds and livestock. It enables
the earth to feed a much larger population than anyone would have
thought possible fifty years ago. The first successful new seed was
hybrid corn. It was produced after twenty years of hard work by Henry C.
Wallace, the publisher of a farm newspaper in Iowa, and later U.S.
Secretary of Agriculture under Harding and Coolidge—the only holder of
this office, perhaps, who deserves to be remembered for anything other
than giving away money. Hybrid corn has two knowledge roots. One was
the work of the Michigan plant breeder William J. Beal, who around 1880
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discovered hybrid vigor. The other was the rediscovery of Mendel’s
genetics by the Dutch biologist Hugo de Vries. The two men did not
know of one another. Their work was totally different both in intent and
content. But only by pulling it together could hybrid corn be developed.
The Wright Brothers’ airplane also had two knowledge roots. One
was the gasoline engine, designed in the mid-1880s to power the first
automobiles built by Karl Benz and Gottfried Daimler, respectively. The
other one was 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.
The computer, as already noted, required the convergence of no less
than five 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. Charles Babbage, the English mathematician, is often called the
“father of the computer.” What kept Babbage from building a computer, it
is argued, was only the unavailability of the proper metals and of electric
power at his time. But this is a misunderstanding. Even if Babbage had
had the proper materials, he could at best have built the mechanical
calculator that we now call a cash register. Without the logic, the design
concept of the punchcard, and the concept of program and feedback,
none of which Babbage possessed, he could only imagine a computer.
The Brothers Pereire founded the first entrepreneurial bank in 1852.
It failed within a few years because they had only one knowledge base
and the entrepreneurial bank needs two. They had a theory of creative
finance that enabled them to be brilliant venture capitalists. But they
lacked the systematic knowledge of banking which was developed at
exactly the same time across the Channel by the British, and codified in
Walter Bagehot’s classic, Lombard Street.
After their failure in the early 1860s, three young men independently
picked up where the Brothers Pereire had left off, added the knowledge
base of banking to the venture capital concept, and succeeded. The first
was J. P. Morgan, who had been trained in London but had also
carefully studied the Pereires’ Crédit Mobilier. He founded the most
successful entrepreneurial bank of the nineteenth century in New York in
1865. The second one, across the Rhine, was the young German Georg
Siemens, who founded what he called the “Universal Bank,” by which he
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meant a bank that was both a deposit bank on the British model and an
entrepreneurial bank on the Pereires’ model. And in remote Tokyo,
another young man, Shibusawa Eichii, who had been one of the first
Japanese to travel to Europe to study banking first-hand, and had spent
time both in Paris and in London’s Lombard Street, became one of the
founders of the modern Japanese economy by establishing a Japanese
version of the Universal Bank. Both Siemens’s Deutsche Bank and
Shibusawa’s Daichi Bank are still the largest banks of their respective
countries.
The first man to envisage the modern newspaper was an American,
James Gordon Bennett, who founded the New York Herald. Bennett fully
understood the problems: A newspaper had to have enough income to
be editorially independent and yet be cheap enough to have mass
circulation. Earlier newspapers either got their income by selling their
independence and becoming the lackeys and paid propagandists of a
political faction—as did most American and practically all European
papers of his time. Or, like the great aristocrat of those days, The Times
of London, they were “written by gentlemen for gentlemen,” but so
expensive that only a small elite could afford them.
Bennett brilliantly exploited the twin technological knowledge bases
on which a modern newspaper rests: the telegraph and high-speed
printing. They enabled him to produce a paper at a fraction of the
traditional cost. He knew that he needed high-speed typesetting, though
it was not invented until after his death. He also saw one of the two
nonscientific bases, mass literacy, which made possible mass circulation
for a cheap newspaper. But he failed to grasp the fifth base: mass
advertising as the source of the income that makes possible editorial
independence. Bennett personally enjoyed a spectacular success; he
was the first of the press lords. But his newspaper achieved neither
leadership nor financial security. These goals were only attained two
decades later, around 1890, by three men who understood and exploited
advertising: Joseph Pulitzer, first in St. Louis and then in New York;
Adolph Ochs, who took over a moribund New York Times and made it
into America’s leading paper; and William Randolph Hearst, who
invented the modern newspaper chain.
The invention of plastics, beginning with Nylon, also rested on the
convergence of a number of different new knowledges each emerging
around 1910. Organic chemistry, pioneered by the Germans and
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perfected by Leo Baekeland, a Belgian working in New York, was one;
X-Ray diffraction and with it an understanding of the structure of crystals
was another; and high-vacuum technology. The final factor was the
pressure of World War I shortages, which made the German government
willing to invest heavily in polymerization research to obtain a substitute
for rubber. It took a further twenty years, though, before Nylon was ready
for the market.

Until all the needed knowledges can be provided, knowledge-based
innovation is premature and will fail. In most cases, the innovation
occurs only when these various factors are already known, already
available, already in use someplace. This was the case with the
Universal Bank of 1865–75. It was the case with the computer after
World War II. Sometimes the innovator can identify the missing pieces
and then work at producing them. Joseph Pulitzer, Adolph Ochs, and
William Randolph Hearst largely created modern advertising. This then
created what we today call media, that is, the merger of information and
advertising in “mass communications.” The Wright Brothers identified the
pieces of knowledge that were missing—mostly mathematics—and then
themselves developed them by building a wind tunnel and actually
testing mathematical theories. But until all the knowledges needed for a
given knowledge-based innovation have come together, the innovation
will not take off. It will remain stillborn.
Samuel Langley, for instance, whom his contemporaries expected to
become the inventor of the airplane, was a much better trained scientist
than the Wright Brothers. As secretary of what was then America’s
leading scientific institution, the Smithsonian in Washington, he also had
all the nation’s scientific resources at his disposal. But even though the
gasoline engine had been invented by Langley’s time, he preferred to
ignore it. He believed in the steam engine. As a result his airplane could
fly; but because of the steam engine’s weight, it could not carry any load,
let alone a pilot. It needed the convergence of mathematics and the
gasoline engine to produce the airplane.
Indeed, until all the knowledges converge, the lead time of a
knowledge-based innovation usually does not even begin.
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II
WHAT KNOWLEDGE-BASED INNOVATION REQUIRES
Its characteristics give knowledge-based innovation specific
requirements. And these requirements differ from those of any other kind
of innovation.
1. In the first place, knowledge-based innovation 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 the entrepreneur can decide whether these
missing factors can be produced—as the Wright Brothers decided in
respect to the missing mathematics—or whether the innovation had
better be postponed as not yet feasible.
The Wright Brothers exemplify the method at its best. They thought
through carefully what knowledge was necessary to build an airplane for
manned, motored flight. Next they set about to develop the pieces of
knowledge that were needed, taking the available information, testing it
first theoretically, then in the wind tunnel, and then in actual flight
experiments, until they had the mathematics they needed to construct
ailerons, to shape the wings, and so on.
The same analysis is needed for nontechnical knowledge-based
innovation. Neither J. P. Morgan nor Georg Siemens published their
papers; but Shibusawa in Japan did. And so we know that he based his
decision to forsake a brilliant government career and to start a bank on a
careful analysis of the knowledge available and the knowledge needed.
Similarly, Joseph Pulitzer analyzed carefully the knowledge needed
when he launched what became the first modern newspaper, and
decided that advertising had to be invented and could be invented.
If I may inject a personal note, my own success as an innovator in
the management field was based on a similar analysis in the early
1940s. Many of the required pieces of knowledge were already
available: organization theory, for instance, but also quite a bit of
knowledge about managing work and worker. My analysis also showed,
however, that these pieces were scattered and lodged in half a dozen
different disciplines. Then it found which key knowledges were missing:
purpose of a business; any knowledge of the work and structure of top
management; what we now term “business policy” and “strategy”
objectives; and so on. All of the missing knowledges, I decided, could be
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produced. But without such analysis, I could never have known what
they were or that they were missing.
Failure to make such an analysis is an almost sure-fire prescription
for disaster. Either the knowledge-based innovation is not achieved,
which is what happened to Samuel Langley. Or the innovator loses the
fruits of his innovation and only succeeds in creating an opportunity for
somebody else.
Particularly instructive is the failure of the British to reap the harvest
from their own knowledge-based innovations.
The British discovered and developed penicillin, but it was the
Americans who took it over. The British scientists did a magnificent
technical job. They came out with the right substances and the right
uses. Yet they failed to identify the ability to manufacture the stuff as a
critical knowledge factor. They could have developed the necessary
knowledge of fermentation technology; they did not even try. As a result,
a small American company, Pfizer, went to work on developing the
knowledge of fermentation and became the world’s foremost
manufacturer of penicillin.
Similarly, the British conceived, designed, and built the first
passenger jet plane. But de Havilland, the British company, did not
analyze what was needed and therefore did not identify two key factors.
One was configuration, that is, the right size with the right payload for the
routes on which the jet would give an airline the greatest advantage. The
other was equally mundane: how to finance the purchase of such an
expensive plane by the airlines. As a result of de Havilland’s failure to do
the analysis, two American companies, Boeing and Douglas, took over
the jet plane. And de Havilland has long since disappeared.
Such analysis would appear to be fairly obvious, yet it is rarely done
by the scientific or technical innovator. Scientists and technologists are
reluctant to make these analyses precisely because they think they
already know. This explains why, in so many cases, the great
knowledge-based innovations have had a layman rather than a scientist
or a technologist for their father, or at least their godfather. The
(American) General Electric Company is largely the brainchild of a
financial man. He conceived the strategy (described in Chapter 19) that
made G.E. the world’s leading supplier of large steam turbines and,
therewith, the world’s leading supplier to electric power producers.
Similarly, two laymen, Thomas Watson, Sr., and his son Thomas
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Watson, Jr., made IBM the leader in computers. At DuPont, the analysis
of what was needed to make the knowledge-based innovation of Nylon
effective and successful was not done by the chemist who developed the
technology, but by business people on the executive committee. And
Boeing became the world’s leading producer of jet planes under the
leadership of marketing people who understood what the airlines and the
public needed.
This is not a law of nature, however. Mostly it is a matter of will and
self-discipline. There have been plenty of scientists and technologists—
Edison is a good example—who forced themselves to think through what
their knowledge-based innovation required.
2. The second requirement of knowledge-based innovation is a clear
focus on the strategic position. It cannot be introduced tentatively. The
fact that the introduction of the innovation creates excitement, and
attracts a host of others, means that the innovator has to be right the first
time. He is unlikely to get a second chance. In all the other innovations
discussed so far, the innovator, once he has been successful with his
innovation, can expect to be left alone for quite some time. This is not
true of knowledge-based innovation. Here the innovators almost
immediately have far more company than they want. They need only
stumble once to be overrun.
There are basically only three major focuses for knowledge-based
innovation. First, there is the focus Edwin Land took with Polaroid: To
develop a complete system that would then dominate the field. This is
exactly what IBM did in its early years when it chose not to sell
computers but to lease them to its customers. It supplied them with such
software as was available, with programming, with instruction in
computer language for programmers, with instruction in computer use for
a customer’s executives, and with service. This was also what G.E. did
when it established itself as the leader in the knowledge-based
innovation of large steam turbines in the early years of this century.
The second clear focus is a market focus. Knowledge-based
innovation can aim at creating the market for its products. This is what
DuPont did with Nylon. It did not “sell” Nylon; it created a consumer
market for women’s hosiery and women’s underwear using Nylon, a
market for automobile tires using Nylon, and so on. It then delivered
Nylon to the fabricators to make the articles for which DuPont had
already created a demand and which, in effect, it had already sold.
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Similarly, aluminum from the very beginning, right after the invention of
the aluminum reduction process by Charles M. Hall in 1888, began to
create a market for pots and pans, for rods and other aluminum
extrusions. The aluminum company actually went into making these end
products and selling them. It created the market which, in turn,
discouraged (if it did not keep out altogether) potential competitors.
The third focus is to occupy a strategic position, concentrating on a
key function (the strategy is discussed in Chapter 18 under Ecological
Niches). What position would enable the knowledge innovator to be
largely immune to the extreme convolutions of a knowledge-based
industry in its early stages? It was thinking this through and deciding to
concentrate on mastering the fermentation process that gave Pfizer in
the United States the early lead in penicillin it has maintained ever since.
Focusing on marketing—on mastery of the requirements of airlines and
of the public in respect to configuration and finance—gave Boeing the
leadership in passenger planes, which it has held ever since. And
despite the turbulence of the computer industry today, a few leading
manufacturers of the computer’s key component, semiconductors, can
maintain their leadership position almost irrespective of the fate of
individual computer manufacturers themselves. Intel is one example.
Within the same industry, individual knowledge-based innovators can
sometimes choose between these alternatives. Where DuPont, for
instance, has chosen to create markets, its closest American competitor,
Dow Chemical, tries to occupy a key spot in each market segment. A
hundred years ago, J. P. Morgan opted for the key function approach.
He established his bank as the conduit for European investment capital
in American industry, and furthermore in a capital-short country. At the
same time, Georg Siemens in Germany and Shibusawa Eichii in Japan
both went for the systems approach.
The power of a clear focus is demonstrated by Edison’s success.
Edison was not the only one who identified the inventions that had to be
made to produce a light bulb. An English physicist, Joseph Swan, did so
too. 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; he thought
through his focus. Before he even began the technical work on the glass
envelope, the vacuum, the closure, and the glowing fiber, he had already
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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. So Edison could sell and install electric power
while Swan was still trying to figure out who might be interested in his
technical achievement.
The knowledge-based innovator has to decide on a clear focus. Each
of the three described here is admittedly very risky. But not to decide on
a clear focus, let alone to try to be in between or to attempt more than
one focus, is riskier by far. It is likely to prove fatal.
3. Finally, the knowledge-based innovator—and especially the one
whose innovation is based on scientific or technological knowledge—
needs to learn and to practice entrepreneurial management (see
Chapter 15, The New Venture). In fact, entrepreneurial management is
more crucial to knowledge-based innovation than to any other kind. Its
risks are high, thus putting a much higher premium on foresight, both
financial and managerial, and on being market-focused and market-
driven. Yet knowledge-based, and especially high-tech, innovation tends
to have little entrepreneurial management. In large measure the high
casualty rate of knowledge-based industry is the fault of the knowledge-
based, and especially the high-tech, entrepreneurs themselves. They
tend to be contemptuous of anything that is not “advanced knowledge,”
and particularly of anyone who is not a specialist in their own area. They
tend to be infatuated with their own technology, often believing that
“quality” means what is technically sophisticated rather than what gives
value to the user. In this respect they are still, by and large, nineteenth-
century inventors rather than twentieth-century entrepreneurs.
In fact, there are enough companies around today to show that the
risk in knowledge-based innovation, including high tech, can be
substantially reduced if entrepreneurial management is conscientiously
applied. Hoffmann-LaRoche, the Swiss pharmaceutical company, is one
example; Hewlett-Packard is another, and so is Intel. Precisely because
the inherent risks of knowledge-based innovation are so high,
entrepreneurial management is both particularly necessary and
particularly effective.
III
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THE UNIQUE RISKS
Even when it is based on meticulous analysis, endowed with clear
focus, and conscientiously managed, knowledge-based innovation still
suffers from unique risks and, worse, an innate unpredictability.
First, by its very nature, it is turbulent.
The combination of the two characteristics of knowledge-based
innovations—long lead times and convergences—gives knowledge-
based innovations their peculiar rhythm. 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, tremendous startup activity, tremendous
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 (twenty-five years earlier)
to the design of the ancestor of the first electrical motor, the first
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 twenty-two years. The knowledge was missing: Maxwell’s
development of Faraday’s theories.
After it had become available, 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:
Siemens in Germany bought up a small electrical apparatus
manufacturer, Schuckert. The (German) General Electric Company,
AEG, was formed on the basis of Edison’s work. In the United States
there arose what are now G.E. and Westinghouse; in Switzerland, there
was Brown Boveri; in Sweden, ASEA was founded in 1884. But these
few are the survivors of a hundred such companies—American, British,
French, German, Italian, Spanish, Dutch, Belgian, Swiss, Austrian,
Czech, Hungarian, and so on—all eagerly financed by the investors of
their time and all expecting to be “billion-dollar companies.” It was this
upsurge of the electrical apparatus industry that gave rise to the first
great science-fiction boom and made Jules Verne and H. C. Wells best-
selling authors all over the world. But by 1895—1900, most of these
companies had already disappeared, whether out of business, bankrupt,
or absorbed by the few survivors.
Around 1910, there were up to two hundred automobile companies in
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the United States alone. By the early 1930s, their number had shrunk to
twenty, and by 1960 to four.
In the 1920s, literally hundreds of companies were making radio sets
and hundreds more were going into radio stations. By 1935, the control
of broadcasting had moved into the hands of three “networks” and there
were only a dozen manufacturers of radio sets left. Again, there was an
explosion in the number of newspapers founded between 1880 and
1900. In fact, newspapers were among the major “growth industries” of
the time. Since World War I, the number of newspapers in every major
country has been going downhill steadily. And the same is true of
banking. After the founders—the Morgans, the Siemenses, the
Shibusawas—there was an almost explosive growth of new banks in the
United States as well as in Europe. But around 1890, only twenty years
later, consolidation set in. Banking firms began to go out of business or
to merge. By the end of World War II in every major country only a
handful of banks were left that had more than local importance, whether
as commercial or private banks.
But each time without exception 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.
It is commonly believed today that that “window” has become
narrower. But this is as much a misconception as the common belief that
the lead time between the emergence of new knowledge and its
conversion into technology, products, and processes has become much
shorter.
Within a few years after George Stephenson’s “Rocket” had pulled
the first train on a commercial railroad in 1830, over a hundred railroad
companies were started in England. For ten years railroads were “high-
tech” and railroad entrepreneurs “media events.” The speculative fever
of these years is bitingly satirized in one of Dickens’s novels, Little Dorrit
(published in 1855–57); it was not very different from today’s speculative
fever in Silicon Valley. But around 1845, the “window” slammed shut.
From then on there was no money in England any more for new
railroads. Fifty years later, the hundred-or-so English railroad companies
of 1845 had shrunk to five or six. And the same rhythm characterized the
electrical apparatus industry, the telephone industry, the automobile
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industry, the chemical industry, household appliances, and consumer
electronics. The “window” has never been very wide nor open very long.
But there can be little doubt that today the “window” is becoming
more and more crowded. The railroad boom of the 1830s was confined
to England; later, every country had its own local boom quite separate
from the preceding one in the neighboring country. The electrical
apparatus boom already extended across national frontiers, as did the
automobile boom twenty-five years later. Yet both were confined to the
countries that were industrially developed at the time. The term
“industrially developed” encompasses a great deal more territory today,
however. It takes in Japan, for instance. It takes in Brazil. It may soon
take in the non-Communist Chinese territories: Hong Kong, Taiwan, and
Singapore. Communication today is practically instantaneous, travel
easy and fast. And a great many countries have today what only very
few small places had a hundred years ago: large cadres of trained
people who can immediately go to work in any area of knowledge-based
innovation, and especially of science-based or technology-based
innovation.
These facts have two important implications.
1. First, science-based and technology-based innovators alike find
time working against them. 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 so in knowledge-based
innovation, and especially in those innovations based on scientific and
technological knowledge. Here there is only a short time—the
“window”—during which entry is possible at all. Here innovators do not
get a second chance; they have to be right the first time. The
environment is harsh and unforgiving. And once the “window” closes, the
opportunity is gone forever.
In some knowledge-based industries, however, a second “window”
does in fact open some twenty to thirty years or so after the first one has
shut down. Computers are an example.
The first “window” in computers lasted from 1949 until 1955 or so.
During this period, every single electrical apparatus company in the
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world went into computers—G.E., Westinghouse, and RCA in the United
States; the British General Electric Company, Plessey, and Ferranti in
Great Britain; Siemens and AEG in Germany; Philips in Holland; and so
on. By 1970, every single one of the “biggies” was out of computers,
ignominiously. The field was occupied by companies that had either not
existed at all in 1949 or had been small and marginal: IBM, of course,
and the “Seven Dwarfs,” the seven smaller computer companies in the
United States; ICL, the remnant of the computer businesses of the
General Electric Company, of Plessey, and of Ferranti in Great Britain;
some fragments sustained by heavy government subsidies in France;
and a total newcomer, Nixdorf, in Germany. The Japanese companies
were sustained for a long time through government support.
Then, in the late seventies, a second “window” opened with the
invention of micro-chips, which led to word processors, minicomputers,
personal computers, and the merging of computer and telephone
switchboard.
But the companies that had failed in the first round did not come
back in the second one. Even those that survived the first round stayed
out of the second, or came in late and reluctantly. Neither Univac nor
Control Data, nor Honeywell nor Burroughs, nor Fujitsu nor Hitachi took
leadership in minicomputers or personal computers. The one exception
was IBM, the undisputed champion of the first round. And this has been
the pattern too in earlier knowledge-based innovations.
2. Because the “window” is much more crowded, any one
knowledge-based innovator has far less chance of survival.
The number of entrants during the “window” period is likely to be
much larger. But the structure of the industries, once they stabilize and
mature, seems to have remained remarkably unchanged, at least for a
century now. Of course there are great differences in structure between
various industries, depending on technology, capital requirements, and
ease of entry, on whether the product can be shipped or distributed only
locally, and so on. But at any one time any given industry has a typical
structure: in any given market there are so many companies altogether,
so many big ones, so many medium-sized ones, so many small ones, so
many specialists. And increasingly there is only one “market” for any
new knowledge-based industry, whether computers or modern banking
—the world market.
The number of knowledge-based innovators that will survive when an
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industry matures and stabilizes is therefore no larger than it has
traditionally been. But largely because of the emergence of a world
market and of global communications, the number of entrants during the
“window” period has greatly increased. When the shakeout comes, the
casualty rate is therefore much higher than it used to be. And the
shakeout always comes; it is inevitable.
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, as has already been shown for such high-tech industries
of yesterday as railroads, electrical apparatus makers, and automobiles.
As these lines are being written, the shakeout has begun among
microprocessor, minicomputer, and personal computer companies—only
five or six years after the “window” opened. Today, there are perhaps a
hundred companies in the industry in the United States alone. Ten years
hence, by 1995, there are unlikely to be more than a dozen left of any
size or significance.
But which ones will survive, which ones will die, and which ones will
become permanently crippled—able neither to live nor to die—is
unpredictable. In fact, it is futile to speculate. Sheer size may ensure
survival. But it does not guarantee success in the shakeout, otherwise
Allied Chemical rather than DuPont would today be the world’s biggest
and most successful chemical company. In 1920, when the “window”
opened for the chemical industry in the United States, Allied Chemical-
looked invincible, if only because it had obtained the German chemical
patents which the U.S. government had confiscated during World War I.
Seven years later, after the shakeout, Allied Chemical had become a
weak also-ran. It has never been able to regain momentum.
No one in 1949 could have predicted that IBM would emerge as the
computer giant, let alone that such big, experienced leaders as G.E. or
Siemens would fail completely. No one in 1910 or 1914 when automobile
stocks were the favorites of the New York Stock Exchange could have
predicted that General Motors and Ford would survive and prosper and
that such universal favorites as Packard or Hupmobile would disappear.
No one in the 1870s and 1880s, the period in which the modern banks
were born, could have predicted that Deutsche Bank would swallow up
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dozens of the old commercial banks of Germany and emerge as the
leading bank of the country.
That a certain industry will become important is fairly easy to predict.
There is no case on record where an industry that reached the explosive
phase, the “window” phase, as I called it, has then failed to become a
major industry. The question is, Which of the specific units in this
industry will be its leaders and so survive?

This rhythm—a period of great excitement during which there is also
great speculative ferment, followed by a severe “shakeout”—is
particularly pronounced in the high-tech industries.
In the first place, such industries are in the limelight and thus attract
far more entrants and far more capital than more mundane areas. Also
the expectations are much greater. More people have probably become
rich building such prosaic businesses as a shoe-polish or a watchmaking
company than have become rich through high-tech businesses. Yet no
one expects shoe-polish makers to build a “billion-dollar business,” nor
considers them a failure if all they build is a sound but modest family
company. High tech, by contrast, is a “high—low game,” in which a
middle hand is considered worthless. And this makes high-tech
innovation inherently risky.
But also, high tech is not profitable for a very long time. The world’s
computer industry began in 1947–48. Not until the early 1980s, more
than thirty years later, did the industry as a whole reach break-even
point. To be sure, a few companies (practically all of them American, by
the way) began to make money much earlier. And one, IBM, the leader,
began to make a great deal of money earlier still. But across the industry
the profits of those few successful computer makers were more than
offset by the horrendous losses of the rest; the enormous losses, for
instance, which the big international electrical companies took in their
abortive attempts to become computer manufacturers.
And exactly the same thing happened in every earlier “high-tech”
boom—in the railroad booms of the early nineteenth century, in the
electrical apparatus and the automobile booms between 1880 and 1914,
in the electric appliance and the radio booms of the 1920s, and so on.
One major reason for this is the need to plow more and more money
back into research, technical development, and technical services to
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stay in the race. High tech does indeed have to run faster and faster in
order to stand still.
This is, of course, part of its fascination. But it also means that when
the shakeout comes, very few businesses in the industry have the
financial resources to outlast even a short storm. This is the reason why
high-tech ventures need financial foresight even more than other new
ventures, but also the reason why financial foresight is even scarcer
among high-tech new ventures than it is among new ventures in general.
There is only one prescription for survival during the shakeout:
entrepreneurial management (described in Chapters 12–15). What
distinguished Deutsche Bank from the other “hot” financial institutions of
its time was that Georg Siemens thought through and built the world’s
first top management team. What distinguished DuPont from Allied
Chemical was that DuPont in the early twenties created the world’s first
systematic organization structure, the world’s first long-range planning,
and the world’s first system of management information and control.
Allied Chemical, by contrast, was run arbitrarily by one brilliant
egomaniac. But this is not the whole story. Most of the large companies
that failed to survive the more recent computer shakeout—G.E. and
Siemens, for instance—are usually considered to have first-rate
management. And the Ford Motor Company survived, though only by
the skin of its teeth, even though it was grotesquely mismanaged during
the shakeout years.
Entrepreneurial management is thus probably a precondition of
survival, but not a guarantee thereof. And at the time of the shakeout,
only insiders (and perhaps not even they) can really know whether a
knowledge-based innovator that has grown rapidly for a few boom years
is well managed, as DuPont was, or basically unmanaged, as Allied
Chemical was. By the time we do know, it is likely to be too late.
THE RECEPTIVITY GAMBLE
To be successful, a knowledge-based innovation has to be “ripe”
there has to be receptivity to it. This risk is inherent in knowledge based
innovation and is indeed a function of its unique power. All other
innovations exploit a change that has already occurred. They satisfy a
need that already exists. But in knowledge-based innovation, the
innovation brings about the change. It aims at creating a want. And no
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one can tell in advance whether the user is going to be receptive,
indifferent, or actively resistant.
There are exceptions, to be sure. Whoever produces a cure for
cancer need not worry about “receptivity.” But such exceptions are few.
Inmost knowledge-based innovations, receptivity is a gamble. And the
odds are unknown, are indeed mysterious. 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.
Stories of the obtuseness of the high and mighty in the face of a
knowledge-based innovation abound. Typical is the anecdote which has
a king of Prussia predicting the certain failure of that new-fangled
contraption, the railroad, because “No one will pay good money to get
from Berlin to Potsdam in one hour when he can ride his horse in one
day for free.” But the king of Prussia was not alone in his misreading of
the receptivity to the railroad; the majority of the “experts” of his day
inclined to his opinion. And when the computer appeared there was not
one single “expert” who could imagine that businesses would ever want
such a contraption.
The opposite error is, however, just as common. “Everybody knows”
that there is a real need, a real demand, when in reality there is total
indifference or resistance. The same authorities who, in 1948, could not
imagine that a business would ever want a computer, a few years later,
around 1955, predicted that the computer would “revolutionize the
schools” within a decade.
The Germans consider Philip Reis rather than Alexander Graham
Bell to be the inventor of the telephone. Reis did indeed build an
instrument in 1861 that could transmit music and was very close to
transmitting speech. But then he gave up, totally discouraged. There
was no receptivity for a telephone, no interest in it, no desire for it. “The
telegraph is good enough for us,” was the prevailing attitude. Yet when
Bell, fifteen years later, patented his telephone, there was an immediate
enthusiastic response. And nowhere was it greater than in Germany.
The change in receptivity in these fifteen years is not too difficult to
explain. Two major wars, the American Civil War and the Franco-
Prussian War, had shown that the telegraph was by no means “good
enough.” But the real point is not why receptivity changed. It is that every
authority in 1861 enthusiastically predicted overwhelming receptivity
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when Reis demonstrated his instrument at a scientific meeting. And
every authority was wrong.
But, of course, the authorities can also be right, and often are. In
1876–77, for instance, they all knew that there was receptivity for both a
light bulb and a telephone—and they were right. Similarly, Edison, in the
1880s, was supported by the expert opinion of his time when he
embarked on the invention of the phonograph, and again the experts
were right in assuming high receptivity for the new device.
But only hindsight can tell us whether the experts are right or wrong
in their assessment of the receptivity for this or that knowledge-based
innovation.
Nor do we necessarily perceive, even by hindsight, why a particular
knowledge-based innovation has receptivity or fails to find it. No one, for
instance, can explain why phonetic spelling has been so strenuously
resisted. Everyone agrees that nonphonetic spelling is a major obstacle
in learning to read and write, forces schools to devote inordinate time to
the reading skill, and is responsible for a disproportionate number of
reading disabilities and emotional traumas among children. The
knowledge of phonetics is a century old at least. Means to achieve
phonetic spelling are available in the two languages where the problem
is most acute: any number of phonetic alphabets for English, and the
much older, forty-eight-syllable Kana scripts in Japanese. For both
countries there are examples next door of a successful shift to a
phonetic script. The English have the successful model of German
spelling reform of the mid-nineteenth century; the Japanese, the equally
successful—and much earlier—phonetic reform of the Korean script. Yet
in neither country is there the slightest receptivity for an innovation that,
one would say, is badly needed, eminently rational, and proven by
example to be safe, fairly easy, and efficacious. Why? Explanations
abound, but no one really knows.
There is no way to eliminate the element of risk, no way even to
reduce it. Market research does not work—one cannot do market
research on something that does not exist. Opinion research is probably
not just useless but likely to do damage. At least this is what the
experience with “expert opinion” on the receptivity to knowledge-based
innovation would indicate.
Yet there is no choice. If we want knowledge-based innovation, we
must gamble on receptivity to it.
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The risks are highest in innovations based on new knowledge in
science and technology. They are particularly high, of course, in
innovations in areas that are currently “hot”—personal computers, at the
present time, or biotechnology. By contrast, areas that are not in the
public eye have far lower risks, if only because there is more time. And
in innovations where the knowledge base is not science or technology—
social innovations, for instance—the risks are lower still. But high risk is
inherent in knowledge-based innovation. It is the price we have to pay
for its impact and above all for its capacity to bring about change, not
only in products and services but in how we see the world, our place in
it, and eventually ourselves.
Yet the risks even of high-tech innovation can be substantially
reduced by integrating new knowledge as the source of innovation with
one of the other sources defined earlier, the unexpected, incongruities,
and especially process need. In these areas receptivity has either
already been established or can be tested fairly easily and with good
reliability. And in these areas, too, the knowledge or knowledges that
have to be produced to complete an innovation can usually be defined
with considerable precision. This is the reason why “program research”
is becoming so popular. But even program research requires a great
deal of system and self-discipline, and has to be organized and
purposeful.
The demands on knowledge-based innovators are thus very great.
They are also different from those in other areas of innovation. The risks
they face are different, too; time, for instance, is not on their side. But if
the risks are greater, so are the potential rewards. The other innovators
may reap a fortune. The knowledge-based innovator can hope for fame
as well.
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10
The Bright Idea
Innovations based on a bright idea probably outnumber all other
categories taken together. Seven or eight out of every ten patents
belong here, for example. A very large proportion of the new businesses
that are described in the books on entrepreneurs and entrepreneurships
are built around “bright ideas”: the zipper, the ballpoint pen, the aerosol
spray can, the tab to open soft drink or beer cans, and many more. And
what is called research in many businesses aims at finding and
exploiting bright ideas, whether for a new flavor in breakfast cereals or
soft drinks, for a better running shoe, or for yet one more nonscorching
clothes iron.
Yet bright ideas are the riskiest and least successful source of
innovative opportunities. The casualty rate is enormous. No more than
one out of every hundred patents for an innovation of this kind earns
enough to pay back development costs and patent fees. A far smaller
proportion, perhaps as low as one in five hundred, makes any money
above its out-of-pocket costs.
And 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. Why did
the aerosol can succeed, for instance? And why did a dozen or more
similar inventions for the uniform delivery of particles fail dismally? Why
does one universal wrench sell and most of the many others disappear?
Why did the zipper find acceptance and practically displace buttons,
even though it tends to jam? (After all, a jammed zipper on a dress,
jacket, or pair of trousers can be quite embarrassing.)
Attempts to improve the predictability of innovations based on bright
ideas have not been particularly successful.
Equally unsuccessful have been attempts to identify the personal
traits, behavior, or habits that make for a successful innovator.
“Successful inventors,” an old adage says, “keep on inventing. They play
the odds. If they try often enough, they will succeed.”
This belief that you’ll win if only you keep on trying out bright ideas is,
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however, no more rational than the popular fallacy that to win the jackpot
at Las Vegas one only has to keep on pulling the lever. Alas, the
machine is rigged to have the house win 70 percent of the time. The
more often you pull, the more often you lose.
There is actually no empirical evidence at all for the belief that
persistence pays off in pursuing the “brilliant idea,” just as there is no
evidence of any “system” to beat the slot machines. Some successful
inventors have had only one brilliant idea and then quit: the inventor of
the zipper, for instance, or of the ballpoint pen. And there are hundreds
of inventors around who have forty patents to their name, and not one
winner. Innovators do, of course, improve with practice. But only if they
practice the right method, that is, if they base their work on a systematic
analysis of the sources of innovative opportunity.
The reasons for both the unpredictability and the high casualty rate
are fairly obvious. Bright ideas are vague and elusive. I doubt that
anyone except the inventor of the zipper ever thought that buttons or
hooks-and-eyes were inadequate to fasten clothing, or that anyone but
the inventor of the ballpoint pen could have defined what, if anything,
was unsatisfactory about that nineteenth-century invention, the fountain
pen. What need was satisfied by the electric toothbrush, one of the
market successes of the 1960s? It still has to be hand-held, after all.
And even if the need can be defined, the solution cannot usually be
specified. That people sitting in their cars in a traffic jam would like some
diversion was perhaps not so difficult to figure out. But why did the small
TV set which Sony developed around 1965 to satisfy this need fail in the
marketplace, whereas the far more expensive car stereo succeeded? In
retrospect, it is easy to answer this. But could it possibly have been
answered in prospect?
The entrepreneur is therefore well advised to forgo innovations
based on bright ideas, however enticing the success stories. After all,
somebody wins a jackpot on the Las Vegas slot machines every week,
yet the best any one slot-machine player can do is try not lose more than
he or she can afford. Systematic, purposeful entrepreneurs analyze the
systematic areas, the seven sources that I’ve discussed in Chapters 3
through 9.
There is enough in these areas to keep busy any one individual
entrepreneur and any one entrepreneurial business or public-service
institution. In fact, there is far more than anyone could possibly fully
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exploit. And in these areas we know how to look, what to look for, and
what to do.
All one can do for innovators who go in for bright ideas is to tell them
what to do should their innovation, against all odds, be successful. Then
the rules for a new venture apply (see Chapter 15). And this is, of
course, the reason why so much of the literature on entrepreneurship
deals with starting and running the new venture rather than with
innovation itself.
And yet an entrepreneurial economy cannot dismiss cavalierly the
innovation based on a bright idea. The individual innovation of this kind
is not predictable, cannot be organized, cannot be systematized, and
fails in the overwhelming majority of cases. Also many, very many, are
trivial from the start. There are always more patent applications for new
can openers, for new wig stands, and for new belt buckles than for
anything else. And in any list of new patents there is always at least one
foot warmer than can double as a dish towel. Yet the volume of such
bright-idea innovation is so large that the tiny percentage of successes
represents a substantial source of new businesses, new jobs, and new
performance capacity for the economy.
In the theory and practice of innovation and entrepreneurship, the
bright-idea innovation belongs in the appendix. But it should be
appreciated and rewarded. It represents qualities that society needs:
initiative, ambition, and ingenuity. There is little society can do, perhaps,
to promote such innovation. One cannot promote what one does not
understand. But at least society should not discourage, penalize, or
make difficult such innovations. Seen in this perspective, the recent
trend in developed countries, and especially in the United States, to
discourage the individual who tries to come up with a bright-idea
innovation (by raising patent fees, for instance) and generally to
discourage patents as “anticompetitive” is short-sighted and deleterious.
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11
Principles of Innovation
I
All experienced physicians have seen “miracle cures.” Patients suffering
from terminal illnesses recover suddenly—sometimes spontaneously,
sometimes by going to faith healers, by switching to some absurd diet, or
by sleeping during the day and being up and about all night. Only a bigot
denies that such cures happen and dismisses them as “unscientific.”
They are real enough. Yet 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. They are also
extremely rare; the overwhelming majority of terminal cases do die, after
all.
Similarly, there are innovations that do not proceed from the sources
described in the preceding chapters, innovations that are not developed
in any organized, purposeful, systematic manner. There are innovators
who are “kissed by the Muses,” and whose innovations are the result of
a “flash of genius” rather than of hard, organized, purposeful work. But
such innovations cannot be replicated. They cannot be taught and they
cannot be learned. There is no known way to teach someone how to be
a genius. But also, contrary to popular belief in the romance of invention
and innovation, “flashes of genius” are uncommonly rare. What is worse,
I know of not one such “flash of genius” that turned into an innovation.
They all remained brilliant ideas.
The greatest inventive genius in recorded history was surely
Leonardo da Vinci. There is a breathtaking idea—submarine or
helicopter or automatic forge—on every single page of his notebooks.
But not one of these could have been converted into an innovation with
the technology and the materials of 1500. Indeed, for none of them
would there have been any receptivity in the society and economy of the
time. Every schoolboy knows of James Watt as the “inventor” of the
steam engine, which he was not. Historians of technology know that
Thomas Newcomen in 1712 built the first steam engine which actually
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performed useful work: it pumped the water out of an English coal mine.
Both men were organized, systematic, purposeful innovators. Watt’s
steam engine in particular is the very model of an innovation in which
newly available knowledge (how to ream a smooth cylinder) and the
design of a “missing link” (the condenser) were combined into a process
need—based innovation, the receptivity for which had been created by
Newcomen’s engine (several thousand were by then in use). But the true
“inventor” of the combustion engine, and with it of what we call modern
technology, was neither Watt nor Newcomen. It was the great Anglo-
Irish chemist Robert Boyle, who did so in a “flash of genius.” Only
Boyle’s engine did not work and could not have worked. For Boyle used
the explosion of gun-power to drive the piston, and this so fouled the
cylinder that it had to be taken apart and cleaned after each stroke.
Boyle’s idea enabled first Denis Papin (who had been Boyle’s assistant
in building the gunpowder engine), then Newcomen, and finally Watt, to
develop a working combustion engine. All Boyle, the genius, had was a
brilliant idea. It belongs in the history of ideas and not in the history of
technology or of innovation.
The purposeful innovation resulting from analysis, system, and hard
work is all that can be discussed and presented as the practice of
innovation. But this is all that need be presented since it surely covers at
least 90 percent of all effective innovations. And the extraordinary
performer in innovation, as in every other area, will be effective only if
grounded in the discipline and master of it.
What, then, are the principles of innovation, representing the hard
core of the discipline? There are a number of “do’s”—things that have to
be done. There are also a few “dont’s”—things that had better not be
done. And then there are what I would call “conditions.”
II
THE DO’S
1. Purposeful, systematic innovation begins with the analysis of the
opportunities. It begins with thinking through what I have called the
sources of innovative opportunities. In different areas, different sources
will have different importance at different times. Demographics, for
instance, may be of very little concern to innovators in fundamental
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industrial processes, to someone looking, say, for the “missing link” in a
process such as papermaking, where there is a clear incongruity
between economic realities. New knowledge, by the same token, may be
of very little relevance to someone innovating a new social instrument to
satisfy a need created by changing demographics. But all the sources of
innovative opportunity should be systematically analyzed and
systematically studied. It is not enough to be alerted to them. The search
has to be organized, and must be done on a regular, systematic basis.
2. Innovation is both conceptual and perceptual. The second
imperative of innovation is therefore to go out to look, to ask, to listen.
This cannot be stressed too often. Successful innovators use both the
right side and the left side of their brains. They look at figures, and they
look at people. They work out analytically what the innovation has to be
to satisfy an opportunity. And then they go out and look at the
customers, the users, to see what their expectations, their values, their
needs are.
Receptivity can be perceived, as can values. One can perceive that
this or that approach will not fit in with the expectations or the habits of
the people who have to use it. And then one can ask: “What does this
innovation have to reflect so that the people who have to use it will want
to use it, and see in it their opportunity?” Otherwise one runs the risk of
having the right innovation in the wrong form—as happened to the
leading producer of computer programs for learning in American
schools, whose excellent and effective programs were not used by
teachers scared stiff of the computer, who perceived the machine as
something that, far from being helpful, threatened them.
3. An innovation, to be effective, has to be simple and it has to be
focused. It should do only one thing, otherwise, it confuses. If it is not
simple, it won’t work. Everything new runs into trouble; if complicated, it
cannot be repaired or fixed. All effective innovations are breathtakingly
simple. Indeed, the greatest praise an innovation can receive is for
people to say: “This is obvious. Why didn’t I think of it?”
Even the innovation that creates new uses and new markets should
be directed toward a specific, clear, designed application. It should be
focused on a specific need that it satisfies, on a specific end result that it
produces.
4. Effective innovations start small. They are not grandiose. They try
to do one specific thing. It may be to enable a moving vehicle to draw
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electric power while it runs along rails—the innovation that made
possible the electric streetcar. Or it may be as elementary as putting the
same number of matches into a matchbox (it used to be fifty), which
made possible the automatic filling of matchboxes and gave the Swedish
originators of the idea a world monopoly on matches for almost half a
century. Grandiose ideas, plans that aim at “revolutionizing an industry,”
are unlikely to work.
Innovations had better be capable of being started small, requiring at
first little money, few people, and only a small and limited market.
Otherwise, there is not enough time to make the adjustments and
changes that are almost always needed for an innovation to succeed.
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.
5. But—and this is the final “do”—a successful innovation aims at
leadership. It does not aim necessarily at becoming eventually a “big
business” in fact, no one can foretell whether a given innovation will end
up as a big business or a modest achievement. But if an innovation does
not aim at leadership from the beginning, it is unlikely to be innovative
enough, and therefore unlikely to be capable of establishing itself.
Strategies (to be discussed in Chapters 16 through 19) vary greatly, from
those that aim at dominance in an industry or a market to those that aim
at finding and occupying a small “ecological niche” in a process or
market. But all entrepreneurial strategies, that is, all strategies aimed at
exploiting an innovation, must achieve leadership within a given
environment. Otherwise they will simply create an opportunity for the
competition.
III
THE DONT’S
And now the few important “dont’s.” 1. The first is simply not to try to
be clever. Innovations have to be handled by ordinary human beings,
and if they are to attain any size and importance at all, by morons or
near-morons. Incompetence, after all, is the only thing in abundant and
never-failing supply. Anything too clever, whether in design or execution,
is almost bound to fail.
2. Don’t diversify, don’t splinter, don’t try to do too many things at
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once. This is, of course, the corollary to the “do”: be focused! Innovations
that stray from a core are likely to become diffuse. They remain ideas
and do not become innovations. The core does not have to be
technology or knowledge. In fact, market knowledge supplies a better
core of unity in any enterprise, whether business or public-service
institution, than knowledge or technology do. But there has to be a core
of unity to innovative efforts or they are likely to fly apart. An innovation
needs the concentrated energy of a unified effort behind it. It also
requires that the people who put it into effect understand each other, and
this, too, requires a unity, a common core. This, too, is imperiled by
diversity and splintering.
3. Finally, don’t try to innovate for the future. Innovate for the present!
An innovation may have long-range impact; it may not reach its full
maturity until twenty years later. The computer, as we have seen, did not
really begin to have any sizable impact on the way business was being
done until the early 1970s, twenty-five years after the first working
models were introduced. But from the first day the computer had some
specific current applications, whether scientific calculation, making
payroll, or simulation to train pilots to fly airplanes. It is not good enough
to be able to say, “In twenty-five years there will be so many very old
people that they will need this.” One has to be able to say, “There are
enough old people around today for this to make a difference to them. Of
course, time is with us—in twenty-five years there will be many more.”
But unless there is an immediate application in the present, an
innovation is like the drawings in Leonardo da Vinci’s notebook—a
“brilliant idea.” Very few of us have Leonardo’s genius and can expect
that our notebooks alone will assure immortality.
The first innovator who fully understood this third caveat was
probably Edison. Every other electrical inventor of the time began to
work around 1860 or 1865 on what eventually became the light bulb.
Edison waited for ten years until the knowledge became available; up to
that point, work on the light bulb was “of the future.” But when the
knowledge became available—when, in other words, a light bulb could
become “the present”—Edison organized his tremendous energies and
an extraordinarily capable staff and concentrated for a couple of years
on that one innovative opportunity.
Innovative opportunities sometimes have long lead times. In
pharmaceutical research, ten years of research and development work
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are by no means uncommon or particularly long. And yet no
pharmaceutical company would dream of starting a research project for
something which does not, if successful, have immediate application as
a drug for health-care needs that already exist.
THREE CONDITIONS
Finally, there are three conditions. All three are obvious but often go
disregarded.
1. Innovation is work. It requires knowledge. It often requires great
ingenuity. There are clearly people who are more talented innovators
than the rest of us. Also, innovators rarely work in more than one area.
For all his tremendous innovative capacity, Edison worked only in the
electrical field. And an innovator in financial areas, Citibank in New York,
for instance, is unlikely to embark on innovations in retailing or health
care. In innovation as in any other work there is talent, there is ingenuity,
there is predisposition. But when all is said and done, innovation
becomes hard, focused, purposeful work making very great demands on
diligence, on persistence, and on commitment. If these are lacking, no
amount of talent, ingenuity, or knowledge will avail.
2. To succeed, innovators must build on their strengths. Successful
innovators look at opportunities over a wide range. But then they ask,
“Which of these opportunities fits me, fits this company, puts to work
what we (or I) are good at and have shown capacity for in performance?”
In this respect, of course, innovation is no different from other work. But
it may be more important in innovation to build on one’s strengths
because of the risks of innovation and the resulting premium on
knowledge and performance capacity. And in innovation, as in any other
venture, there must also be a temperamental “fit.” Businesses do not do
well in something they do not really respect. No pharmaceutical
company—run as it has to be by scientifically minded people who see
themselves as “serious”—has done well in anything so “frivolous” as
lipsticks or perfumes. Innovators similarly need to be temperamentally
attuned to the innovative opportunity. It must be important to them and
make sense to them. Otherwise they will not be willing to put in the
persistent, hard, frustrating work that successful innovation always
requires.
3. And finally, innovation is an effect in economy and society, a
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change in the behavior of customers, of teachers, of farmers, of eye
surgeons—of people in general. Or it is a change in a process—that is,
in how people work and produce something. Innovation therefore always
has to be close to the market, focused on the market, indeed market-
driven.
THE CONSERVATIVE INNOVATOR
A year or two ago I attended a university symposium on
entrepreneurship at which a number of psychologists spoke. Although
their papers disagreed on everything else, they all talked of an
“entrepreneurial personality,” which was characterized by a “propensity
for risk-taking.”
A well-known and successful innovator and entrepreneur who had
built a process-based innovation into a substantial worldwide business in
the space of twenty-five years was then asked to comment. He said: “I
find myself baffled by your papers. I think I know as many successful
innovators and entrepreneurs as anyone, beginning with myself. I have
never come across an ‘entrepreneurial personality.’ The successful ones
I know all have, however, one thing—and only one thing—in common:
they are not ‘risk-takers.’ They try to define the risks they have to take
and to minimize them as much as possible. Otherwise none of us could
have succeeded. As for myself, if I had wanted to be a risk-taker, I would
have gone into real estate or commodity trading, or I would have
become the professional painter my mother wanted me to be.”
This jibes with my own experience. I, too, know a good many
successful innovators and entrepreneurs. Not one of them has a
“propensity for risk-taking.”
The popular picture of innovators—half pop-psychology, half
Hollywood—makes them look like a cross between Superman and the
Knights of the Round Table. Alas, most of them in real life are
unromantic figures, and much more likely to spend hours on a cash-flow
projection than to dash off looking for “risks.” 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 I know are successful to the extent to which
they define risks and confine them. They are successful to the extent to
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which they systematically analyze the sources of innovative opportunity,
then pinpoint the opportunity and exploit it. Whether opportunities of
small and clearly definable risk, such as exploiting the unexpected or a
process need, or opportunities of much greater but still definable risk, as
in knowledge-based innovation.
Successful innovators are conservative. They have to be. They are
not “risk-focused” they are “opportunity-focused.”
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II
THE PRACTICE OF ENTREPRENEURSHIP
The entrepreneurial requires different management from the existing.
But like the existing it requires systematic, organized, purposeful
management. And while the ground rules are the same for every
entrepreneurial organization, the existing business, the public-service
institution, and the new venture present different challenges, have
different problems, and have to guard against different degenerative
tendencies. There is need also for individual entrepreneurs to face up to
decisions regarding their own roles and their own commitments.
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12
Entrepreneurial Management
Entrepreneurship is based on the same principles, whether the
entrepreneur is an existing large institution or an individual starting his or
her new venture singlehanded. It makes little or no difference whether
the entrepreneur is a business or a nonbusiness public-service
organization, nor even whether the entrepreneur is a governmental or
nongovernmental institution. The rules are pretty much the same, the
things that work and those that don’t are pretty much the same, and so
are the kinds of innovation and where to look for them. In every case
there is a discipline we might call Entrepreneurial Management.
Yet the existing business faces different problems, limitations, and
constraints from the solo entrepreneur, and it needs to learn different
things. The existing business, to oversimplify, knows how to manage but
needs to learn how to be an entrepreneur and how to innovate. The
nonbusiness public-service institution, too, faces different problems, has
different learning needs, and is prone to making different mistakes. And
the new venture needs to learn how to be an entrepreneur and how to
innovate, but above all, it needs to learn how to manage.
For each of these three:
the existing business
the public-service institution
the new venture
a specific guide to the practice of entrepreneurship must be developed.
What does each have to do? What does each have to watch for? And
what had each better avoid doing?
Logically, the discussion might start with the new venture, just as,
logically, the study of medicine might start with the embryo and newborn
baby. But the medical student starts out by studying the anatomy and
pathology of the adult, and the practice of entrepreneurship is likewise
best started by discussing the “adult,” the existing business and the
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policies, practices and problems that are pertinent in managing it for
entrepreneurship.
Today’s businesses, especially the large ones, simply will not survive
in this period of rapid change and innovation unless they acquire
entrepreneurial competence. In this respect the late twentieth century is
totally different from the last great entrepreneurial period in economic
history, the fifty or sixty years that came to an end with the outbreak of
World War I. There were not many big businesses around in those
years, and not even many middle-sized ones. Today, it is not only in the
self-interest of the many existing big businesses to learn to manage
themselves for entrepreneurship; they have a social responsibility to do
so. In sharp contrast to the situation a century ago, rapid destruction of
the existing businesses—especially the big ones—by innovation, the
“creative destruction” by the innovator, in Joseph Schumpeter’s famous
phrase, poses a genuine social threat today to employment, to financial
stability, to social order, and to governmental responsibility.
Existing businesses will need to change, and change greatly in any
event. Within twenty-five years (see Chapter 7) every industrially
developed non-Communist country will see the blue-collar labor force
engaged in manufacturing shrink to one-third of what it is now, while
manufacturing output should go up three-or four-fold—a development
that will parallel the development in agriculture in the industrialized non-
Communist countries during the twenty-five years following World War II.
In order to impart stability and leadership in a transition of this
magnitude, existing businesses will have to learn how to survive, indeed,
how to propser. And that they can only do if they learn to be successful
entrepreneurs.
In many cases, the entrepreneurship needed can only come from
existing businesses. Some of the giants of today may well not survive
the next twenty-five years. But we now know that the medium-sized
business is particularly well positioned to be a successful entrepreneur
and innovator, provided only that it organize itself for entrepreneurial
management. It is the existing business—and the fair-sized rather than
the small one—that has the best capability for entrepreneurial
leadership. It has the necessary resources, especially the human
resources. It has already acquired managerial competence and built a
management team. It has both the opportunity and the responsibility for
effective entrepreneurial management.
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The same holds true for the public-service institutions, and especially
for those discharging nonpolitical functions, whether owned by
government and financed by tax money or not; for hospitals, schools,
and universities; for the public services of local governments; for
community agencies and volunteer organizations such as the Red
Cross, the Boy Scouts, and the Girl Scouts; for churches and church-
related organizations; but also for professional and trade associations,
and many more. A period of rapid change makes obsolete a good many
of the old concerns, or at least makes ineffectual a good many of the
ways in which they have been addressed. At the same time, such a
period creates opportunities for tackling new tasks, for experimentation,
and for social innovation.
Above all, there has been a major change in perception and mood in
the public domain (cf. Chapter 8). A hundred years ago, the “panic” of
1873 brought to an end the century of laissez faire that had begun with
Adam Smith’s Wealth of Nations in 1776. For a hundred years from 1873
on, being “modern,” “progressive,” or “forward-looking” meant looking to
government as the agent of social change and betterment. For better or
worse, that period has come to an end in all non-Communist developed
countries (and probably in the developed Communist countries as well).
We do not yet know what the next wave of “progressivism” will be. But
we do know that anyone who still preaches the “liberal” or “progressive”
gospel of 1930—or even of 1960, of the Kennedy and Johnson years—is
not a “progressive” but a “reactionary.” We do not know whether
privatization,
*
that is, turning activities back from government to
nongovernmental operation (albeit not necessarily to operation by a
business enterprise, as most people have interpreted the term) will work
or will go very far. But we do know that no non-Communist developed
country will move further toward nationalization and governmental
control out of hope, expectation, and belief in the traditional promises. It
will do so only out of frustration and with a sense of failure. And this is a
situation in which public-service institutions have both an opportunity and
a responsibility to be entrepreneurial and to innovate.
But precisely because they are public-service institutions, they face
specific different obstacles and challenges, and are prone to making
different mistakes. Entrepreneurship in the public-service institution thus
needs to be discussed separately.
Finally, there is the new venture. This will continue to be a main
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vehicle for innovation, as it has been in all major entrepreneurial periods
and is again today in the new entrepreneurial economy of the United
States. There is indeed no lack of would-be entrepreneurs in the United
States, no shortage of new ventures. But most of them, especially the
high-tech ones, have a great deal to learn about entrepreneurial
management and will have to learn it if they are to survive.
The gap between the performance of the average practitioner and
that of the leaders in entrepreneurship and innovation is enormous in all
three categories. Fortunately, there are enough examples around of the
successful practice of entrepreneurship to make possible a systematic
presentation of entrepreneurial management that is both practice and
theory, both description and prescription.
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13
The Entrepreneurial Business
I
“Big businesses don’t innovate,” says the conventional wisdom. This
sounds plausible enough. True, the new, major innovations of this
century did not come out of the old, large businesses of their time. The
railroads did not spawn the automobile or the truck; they did not even try.
And though the automobile companies did try (Ford and General Motors
both pioneered in aviation and aerospace), all of today’s large aircraft
and aviation companies have evolved out of separate new ventures.
Similarly, today’s giants of the pharmaceutical industry are, in the main,
companies that were small or nonexistent fifty years ago when the first
modern drugs were developed. Every one of the giants of the electrical
industry—General Electric, Westinghouse, and RCA in the United
States; Siemens and Philips on the Continent; Toshiba in Japan—
rushed into computers in the 1950s. Not one was successful. The field is
dominated by IBM, a company that was barely middle-sized and most
definitely not high-tech forty years ago.
And yet the all but universal belief that large businesses do not and
cannot innovate is not even a half-truth; rather, it is a misunderstanding.
In the first place, there are plenty of exceptions, plenty of large
companies that have done well as entrepreneurs and innovators. In the
United States, there is Johnson & Johnson in hygiene and health care,
and 3M in highly engineered products for both industrial and consumer
markets. Citibank, America’s and the world’s largest nongovernmental
financial institution, well over a century old, has been a major innovator
in many areas of banking and finance. In Germany, Hoechst—one of the
world’s largest chemical companies, and more than 125 years old by
now—has become a successful innovator in the pharmaceutical
industry. In Sweden, ASEA, founded in 1884 and for the last sixty or
seventy years a very big company, is a true innovator in both long-
distance transmission of electrical power and robotics for factory
automation.
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To confuse things even more there are quite a few big, older
businesses that have succeeded as entrepreneurs and innovators in
some fields while failing dismally in others. The (American) General
Electric Company failed in computers, but has been a successful
innovator in three totally different fields: aircraft engines, engineered
inorganic plastics, and medical electronics. RCA also failed in computers
but succeeded in color television. Surely things are not quite as simple
as the conventional wisdom has it.
Secondly, it is not true that “bigness” is an obstacle to
entrepreneurship and innovation. In discussions of entrepreneurship one
hears a great deal about the “bureaucracy” of big organizations and of
their “conservatism.” Both exist, of course, and they are serious
impediments to entrepreneurship and innovation—but to all other
performance just as much. And yet the record shows unambiguously
that among existing enterprises, whether business or public-sector
institutions, the small ones are least entrepreneurial and least innovative.
Among existing entrepreneurial businesses there are a great many very
big ones; the list above could have been enlarged without difficulty to
one hundred companies from all over the world, and a list of innovative
public-service institutions would also include a good many large ones.
And perhaps the most entrepreneurial business of them all is the
large middle-sized one, such as the American company with $500 million
in sales in the mid-1980s.
*
But small existing enterprises would be
conspicuously absent from any list of entrepreneurial businesses.
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—a manufacturing plant, a technology, a product line, a
distribution system—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.
The new always looks so small, so puny, so unpromising next to the
size and performance of maturity. Anything truly new that looks big is
indeed to be distrusted. The odds are heavily against its succeeding.
And yet successful innovators, as was argued earlier, start small and,
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above all, simple.
The claim of so many businesses, “Ten years from now, ninety
percent of our revenues will come from products that do not even exist
today,” is largely boasting. Modifications of existing products, yes;
variations, yes; even extensions of existing products into new markets
and new end uses—with or without modifications. But the truly new
venture tends to have a longer lead time. Successful businesses,
businesses that are today in the right markets with the right products or
services, are likely ten years hence to get three-quarters of their
revenues from products and services that exist today, or from their linear
descendants. In fact, if today’s products or services do not generate a
continuing and large revenue stream, the enterprise will not be able to
make the substantial investment in tomorrow that innovation requires.
It thus takes special effort for the existing business to become
entrepreneurial and innovative. The “normal” reaction is to allocate
productive resources to the existing business, to the daily crisis, and to
getting a little more out of what we already have. The temptation in the
existing business is always to feed yesterday and to starve tomorrow.
It is, of course, a deadly temptation. 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.
Once an enterprise or an industry has started to look back, turning it
around is exceedingly difficult, if it can be done at all. But the obstacle to
entrepreneurship and innovation which the success of the present
business constitutes is a real one. The problem is precisely that the
enterprise is so successful, that it is “healthy” rather than degeneratively
diseased by bureaucracy, red tape, or complacency.
This is what makes the examples of existing businesses that do
manage successfully to innovate so important, and especially the
examples of existing large and fair-sized businesses that are also
successful entrepreneurs and innovators. These businesses show that
the obstacle of success, the obstacle of the existing, can be overcome.
And it can be overcome in such a way that both the existing and the
new, the mature and the infant, benefit and prosper. The large
companies that are successful entrepreneurs and innovators—Johnson
& Johnson, Hoechst, ASEA, 3M, or the one hundred middle-sized
“growth” companies—clearly know how to do it.
Where the conventional wisdom goes wrong is in its assumption that
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entrepreneurship and innovation are natural, creative, or spontaneous. If
entrepreneurship and innovation do not well up in an organization,
something must be stifling them. That only a minority of existing
successful businesses are entrepreneurial and innovative is thus seen
as conclusive evidence that existing businesses quench the
entrepreneurial spirit.
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. That a substantial number of existing
businesses, and among them a goodly number of fair-sized, big, and
very big ones, succeed as entrepreneurs and innovators indicates that
entrepreneurship and innovation can be achieved by any business. But
they must be consciously striven for. They can be learned, but it requires
effort. Entrepreneurial businesses treat entrepreneurship as a duty. They
are disciplined about it…they work at it…they practice it.

Specifically, entrepreneurial management requires policies and
practices in four major areas.
First, the organization must be made receptive to innovation and
willing to perceive change as an opportunity rather than a threat. It must
be organized to do the hard work of the entrepreneur. Policies and
practices are needed to create the entrepreneurial climate.
Second, 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.
Third, entrepreneurial management requires specilic practices
pertaming to organizational structure, to stalling and managing, and to
compensation, incentives, and rewards.
Fourth, there are some “dont’s”: things not to do in entrepreneurial
management.
II
ENTREPRENEURIAL POLICIES
A Latin poet called the human being “rerum novarum cupidus
(greedy for new things).” Entrepreneurial management must make each
manager of the existing business “rerum novarum cupidus.”
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“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. There must be clear understanding throughout the
organization that innovation is the best means to preserve and
perpetuate that organization, and that it is the foundation for the
individual manager’s job security and success.
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.
1. 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. Every three years or so, the enterprise must put every single
product, process, technology, market, distributive channel, not to
mention every single internal staff activity, on trial for its life. It must ask:
Would we now go into this product, this market, this distributive channel,
this technology today? If the answer is “No,” one does not respond with,
“Let’s make another study.” One asks, “What do we have to do to stop
wasting resources on this product, this market, this distributive channel,
this staff activity?”
Sometimes abandonment is not the answer, and may not even be
possible. But then at least one limits further efforts and makes sure that
productive resources of men and money are no longer devoured by
yesterday. This is the right thing to do in any event to maintain the health
of the organization: every organism needs to eliminate its waste
products or else it poisons itself. It is, however, an absolute necessity, if
an enterprise is to be capable of innovation and is to be receptive to it.
“Nothing so powerfully concentrates a man’s mind as to know that he will
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be hung on the morning,” Dr. Johnson was fond of saying. Nothing so
powerfully concentrates a manager’s mind on innovation as the
knowledge that the present product or service will be abandoned within
the foreseeable future.
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.
But if it is known throughout the organization that the dead will be left
to bury their dead, then the living will be willing—indeed, eager—to go to
work on innovation.
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. It will not be able to do either
unless it organizes itself to slough off alike the successes of the past, the
failures, and especially the “near-misses,” the things that “should have
worked” but didn’t. If executives know that it is company policy to
abandon, then they will be motivated to look for the new, to encourage
entrepreneurship, and will accept the need to become entrepreneurial
themselves. This is the first step—a form of organizational hygiene.
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.
An analysis of the life cycle of existing products, services, and so on
has become popular since the 1970s. Some examples are the strategy
concepts advocated by the Boston Consulting group; the books on
strategy by the Harvard Business School professor Michael Porter; and
so-called portfolio management.
*
In the strategies that have been widely advertised these last ten
years, especially portfolio management, the findings of such analysis
constitute an action program by themselves. This is a misunderstanding
and bound to lead to disappointing results, as a good many companies
found out when they rushed into such strategies in the late 1970s and
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early 1980s. The findings should lead to a diagnosis. This in turn
requires judgment. It requires knowledge of the business, of its products,
its markets, its customers, its technologies. It requires experience rather
than analysis alone. The idea that bright young people straight from
business school and equipped only with sharp analytical tools could
crunch out of their computer life-and-death decisions about businesses,
products, and markets is pure quackery, to be blunt.
This analysis (in Managing for Results, I called it a “Business X-Ray”)
is intended as a tool to find the right questions rather than a way
automatically to come up with the right answers. It is a challenge to all
the knowledge that can be found in a given company, and all the
experience. It will—and should—provoke dissent. The action that follows
from classifying this or that product as “today’s breadwinner” is a risk-
taking decision. And so is what to do with the product that is on the point
of becoming “yesterday’s breadwinner,” or with an “unjustified specialty,”
or with an “investment in managerial ego.”
†
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. The best and simplest approach to this was
developed by Michael J. Kami as a member of the Entrepreneurship
Seminar at the New York University Graduate Business School in the
1950s. Kami first applied his approach to IBM, where he served as head
of business planning; and then, in the early 1960s, to Xerox, where he
served for several years in a similar capacity.
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. And this then
shows the gap between what can be expected realistically, and what a
company still needs to do to achieve its objectives, whether in sales, in
market standing, or in profitability.
The gap is the minimum that must be filled if the company is not to
go downhill. In fact, the gap has to be filled or the company will soon
start to die. The entrepreneurial achievement must be large enough to fill
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the gap, and timely enough to fill it before the old becomes obsolescent.
But innovative efforts do not carry certainty; they have a high
probability of failure and an even higher one of delay. A company
therefore should have under way at least three times the innovative
efforts which, if successful, would fill the gap.
Most executives consider this excessively high. Yet experience has
proved that it errs on the low side, if it errs at all. To be sure, some
innovative efforts will do better than anyone expects, but others will do
much less well. And everything takes longer than we hope or estimate;
everything also requires more effort. Finally, the one thing certain about
any major innovative effort is that there are going to be last-minute
hitches and last-minute delays. To demand innovative efforts which, if
everything goes according to plan, yield three times the minimum results
needed is only elementary precaution.
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.
Such a plan ensures that the innovation budget is adequate. And—
the most important result of all—it determines how many people are
needed, with what abilities and capacities. Only when people with
proven performance capacity have been assigned to a project, supplied
with the tools, the money, and the information they need to do the work,
and given clear and unambiguous deadlines—only then do we have a
plan. Until then, we have “good intentions,” and what those are good for,
everybody knows.

These are the fundamental policies needed to endow a business with
entrepreneurial management; to make a business and its management
greedy for new things; to make it perceive innovation as the healthy,
normal, necessary course of action. Because it is based on a “Business
X-Ray”—that is, on an analysis and diagnosis of the current business, its
products, services, and markets—this approach also ensures that the
existing business will not be neglected in the search for the new, and
that the opportunities inherent in the existing products, services, and
markets will not be sacrificed to the fascination with novelty.
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The Business X-Ray is a tool for decision making. It enables us,
indeed forces us, to allocate resources to results in the existing
business. But it also makes it possible for us to determine how much is
needed to create the business of tomorrow and its new products, new
services, and new markets. It enables us to turn innovative intentions
into innovative performance.
To render an existing business entrepreneurial, management must
take the lead in making obsolete its own products and services rather
than waiting for a competitor to do so. The business must be managed
so 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.
III
ENTREPRENEURIAL PRACTICES
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.
Management, even in small companies, usually get a report on
operating performance once a month. The first page of this report always
lists the areas in which performance has fallen below budget, in which
there is a “shortfall,” in which there is a “problem.” At the monthly
management meeting, everyone then goes to work on the so-called
problems. By the time the meeting adjourns for lunch, the whole morning
has been taken up with the discussion of those problems.
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 (cf. Chapter 3 on the unexpected
success).
In these companies, the operating report has two “first pages”: the
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traditional one lists the problems; the other one lists all the areas in
which performance is better than expected, budgeted, or planned for.
For, as was stressed earlier, the unexpected success in one’s own
business is an important symptom of innovative opportunity. If it is not
seen as such, the business is altogether unlikely to be entrepreneurial.
In fact the business and its managers, in focusing on the “problems,” are
likely to brush aside the unexpected success as an intrusion on their
time and attention. They will say, “Why should we do anything about it?
It’s going well without our messing around with it.” But this only creates
an opening for the competitor who is a little more alert and a little less
arrogant.
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.
One medium-sized supplier of health-care products to physicians
and hospitals, a company that has gained leadership in a number of new
and promising fields, holds an “operations meeting” the second and the
last Monday of each month. The first meeting is devoted to problems—to
all the things which, in the last month, have done less well than expected
or are still doing less well than expected six months later. This meeting
does not differ one whit from any other operating meeting. But the
second meeting—the one on the last Monday—discusses the areas
where the company is doing better than expected: the sales of a given
product that have grown faster than projected, or the orders for a new
product that are coming in from markets for which it was not designed.
The top management of the company (which has grown ten-fold in
twenty years) believes that its success is primarily the result of building
this opportunity focus into its monthly management meetings. “The
opportunities we spot in there,” the chief executive officer has said many
times, “are not nearly as important as the entrepreneurial attitude which
the habit of looking for opportunities creates throughout the entire
management group.”
2. This company follows a second practice to generate an
entrepreneurial spirit throughout its entire management group. Every six
months it holds a two-day management meeting for all executives in
charge of divisions, markets, and major product lines—a group of about
forty or fifty people. The first morning is set aside for reports to the entire
group from three or four executives whose units have done exceptionally
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well as entrepreneurs and innovators during the past year. They are
expected to report on what explains their success: “What did we do that
turned out to be successful?” “How did we find the opportunity?” “What
have we learned, and what entrepreneurial and innovative plans do we
have in hand now?”
Again, what actually is reported in these sessions is less important
than the impact on attitudes and values. But the operating managers in
the company also stress how much they learn in each of these sessions,
how many new ideas they get, and how they return back home from
these sessions full of plans and eager to try them.
Entrepreneurial companies always look for the people and units that
do better and do differently. They single them out, feature them, and
constantly ask them: “What are you doing that explains your success?”
“What are you doing that the rest of us aren’t doing, and what are you
not doing that the rest of us are?”
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?”
These sessions should not be held too often; they are a substantial
time-burden on senior people. No senior executive should therefore be
expected to sit down more than three times a year for a long afternoon
or evening with a group of perhaps twenty-five or thirty juniors. But the
sessions should be maintained systematically. They are an excellent
vehicle for upward communications, the best means to enable juniors,
and especially professionals, to look up from their narrow specialties and
see the whole enterprise. They enable juniors to understand what top
management is concerned with, and why. In turn, they give the seniors
badly needed insight into the values, vision, and concerns of their
younger colleagues. Above all, these sessions are one of the most
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effective ways to instill entrepreneurial vision throughout the company.
This practice has one built-in requirement. Those who suggest
anything new, or even a change in the way things are being done,
whether in respect to product or process, to market or service, should be
expected to go to work. They should be asked to submit, within a
reasonable period, a working paper to the presiding senior and to their
colleagues in the session, in which they try to develop their idea. What
would it look like if converted into reality? What in turn does reality have
to look like for the idea to make sense? What are the assumptions
regarding customers and markets, and so on. How much work is needed
how much money and how many people…and how much time? And
what results might be expected?
Again, the yield of entrepreneurial ideas from all this may not be its
most important product—though in many organizations the yield has
been consistently high. The most valuable achievement may well be
entrepreneurial vision, receptivity to innovation, and “greed for new
things” throughout the entire organization.
IV
MEASURING INNOVATIVE PERFORMANCE
For a business to be receptive to entrepreneurship, innovative
performance must be included among the measures by which that
business controls itself. Only if we assess the entrepreneurial
performance of a business will entrepreneurship become action. Human
beings tend to behave as they are expected to.
In the normal assessments of a business, innovative performance is
conspicuous by its absence. Yet it is not particularly difficult to build
measurement, or at least judgment, of entrepreneurial and innovative
performance into the controls of the business.
1. The first step builds into each innovative project feedback from
results to expectations. This indicates the quality and reliability of both
our innovative plans and our innovative efforts.
Research managers long ago learned to ask at the beginning of any
research project: “What results do we expect from this project? When do
we expect those results? When do we appraise the progress of the
project so that we have control?” They have also learned to check
whether their expectations are borne out by the actual course of events.
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This shows them whether they are tending to be too optimistic or too
pessimistic, whether they expect results too soon or are willing to wait
too long, whether they are inclined either to overestimate the impact of a
successfully concluded research project or to underestimate it. And this
in turn enables them to correct said tendencies, and to identify both the
areas in which they do well and the ones in which they tend to do poorly.
Such feedback is, of course, needed for all innovative efforts, not merely
for technical research and development.
The first aim is to find out what we are doing well, for one can always
go ahead and do more of the same, even if we usually do not have the
slightest idea why we are doing well in a given area. Next, one finds out
the limitations on one’s strengths: for instance, a tendency either to
underestimate the amount of time needed or to overestimate it; or a
tendency to overestimate the amount of research required in a given
area while underestimating the resources required for developing the
results of research into a product or a process. Or one finds a tendency,
very common and very damaging, to slow down marketing or promotion
efforts for the new venture just when it is about to take off.
One of the most successful of the world’s major banks attributes its
achievements to the feedback it builds into all new efforts, whether it is
going into a new market such as South Korea, into equipment leasing, or
into issuing credit cards. By building feedback from results to
expectations for all new endeavors, the bank and its top management
have also learned what they can expect from new ventures: How soon a
new effort can be expected to produce results and when it should be
supported by greater efforts and greater resources.
Such feedback is needed for all innovative efforts, the development
and introduction of a new safety program, say, or a new compensation
plan. What are the first indications that the new effort is likely to get into
trouble and needs to be reconsidered? And what are the indications that
enable us to say that this effort, even though it looks as if it were headed
for trouble, is actually doing all right, but also that it may take more time
than we originally anticipated?
2. The next step is to develop a systematic review of innovative
efforts all together. Every few years an entrepreneurial management
looks at all the innovative efforts of the business. Which ones should
receive more support at this stage and should be pushed? Which ones
have opened up new opportunities? Which ones, on the other hand, are
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not doing what we expected them to do, and what action should we
take? Has the time come to abandon them, or, on the contrary, has the
time come to redouble our efforts—but with what expectations and what
deadline?
The top management people at one of the world’s largest and most
successful pharmaceutical companies sit down once a year to review its
innovative efforts. First, they review every new drug development,
asking: “Is this development going in the right direction and at the right
speed? Is it leading to something we want to put into our own line, or is it
going to be something that won’t fit our markets so we’d better license it
to another pharmaceutical manufacturer? Or ought we perhaps abandon
it?” And then the same people look at all the other innovative efforts,
especially in marketing, asking exactly the same questions. Finally, they
review, equally carefully, the innovative performance of their major
competitors. In terms of its research budget and its total expenditures for
innovation, this company ranks only in the middle level. Its record as an
innovator and entrepreneur is, however, outstanding.
3. Finally, entrepreneurial management entails judging the
company’s total innovative performance against the company’s
innovative objectives, against its performance and standing in the
market, and against its performance as a business all together.
Every five years, perhaps, top management sits down with its
associates in each major area and asks: “What have you contributed to
this company in the past five years that really made a difference? And
what do you plan to contribute in the next five years?”
But are not innovative efforts by their nature intangible? How can one
measure them?
It is indeed true that there are some areas in which no one can, or
should, decide the degree of relative importance. Which is more
significant, a breakthrough in basic research, which years later may lead
to an effective cure for certain cancers, or a new formulation that
enables patients to administer an old but effective medication
themselves instead of having to visit a physician or a hospital three times
a week? It is impossible to decide. Equally, a company must choose
between a new way to service customers, which enables the company to
retain an important account it would otherwise have lost, and a new
product, which gives the company leadership in markets that, while still
small, may within a few years become big and important ones. These
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are judgments rather than measurements. But they are not arbitrary;
they are not even subjective. And they are quite rigorous even though
not capable of quantification. Above all, they do what a “measurement” is
meant to enable us to do: to take purposeful action based on knowledge
rather than on opinion or guesswork.
The most important question for the typical business in this review is
probably: Have we gained innovative leadership, or at least maintained
it? Leadership does not necessarily equate with size. It means to be
accepted as the leader, recognized as the standard-setter; above all, it
means having the freedom to lead rather than being obliged to follow.
This is the acid test of successful entrepreneurship in the existing
business.
V
STRUCTURES
Policies, practices, and measurements make possible
entrepreneurship and innovation. They remove or reduce possible
impediments. They create the proper attitude and provide the proper
tools. But innovation is done by people. And people work within a
structure.
For the existing business to be capable of innovation, it has to create
a structure that allows people to be entrepreneurial. It has to devise
relationships that center on entrepreneurship. It has to make sure that its
rewards and incentives, its compensation, personnel decisions, and
policies, all reward the right entrepreneurial behavior and do not penalize
it.
1. This means, first, that the entrepreneurial, the new, has to be
organized separately from the old and existing. Whenever we have tried
to make an existing unit the carrier of the entrepreneurial project, we
have failed. This is particularly true, of course, in the large business, but
it is true in medium-sized businesses as well, and even in small
businesses.
One reason is that (as said earlier) the existing business always
requires time and effort on the part of the people responsible for it, and
deserves the priority they give it. The new always looks so puny—so
unpromising—next to the reality of the massive, ongoing business. The
existing business, after all, has to nourish the struggling innovation. But
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the “crisis” in today’s business has to be attended to as well. The people
responsible for an existing business will therefore always be tempted to
postpone action on anything new, entrepreneurial, or innovative until it is
too late. No matter what has been tried—and we have now been trying
every conceivable mechanism for thirty or forty years—existing units
have been found to be capable mainly of extending, modifying, and
adapting what already is in existence. The new belongs elsewhere.
2. This means also that 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.
This need not be a full-time job; in the smaller business, it very often
cannot be a full-time job. But it needs to be a clearly defined job and one
for which somebody with authority and prestige is fully accountable.
These people will normally also be responsible for the policies necessary
to build entrepreneurship into the existing business, for the
abandonment analysis, for the Business X-Ray, and for developing the
innovation objectives to plug the gap between what can be expected of
the existing products and services and what is needed for survival and
growth of the company. They are also normally charged with the
systematic analysis of innovative opportunities—the analysis of the
innovative opportunities presented in the preceding section of this book,
the Practice of Innovation. They should be further charged with
responsibility for the analysis of the innovative and entrepreneurial ideas
that come up from the organization, for example, in the recommended
“informal” session with the juniors.
And innovative efforts, especially those aimed at developing new
businesses, products, or services, should normally report directly to this
“executive in charge of innovation” rather than to managers further down
the hierarchy. They should never report to line managers charged with
responsibility for ongoing operations.
This will be considered heresy in most companies, particularly “well-
managed” ones. But the new project is an infant and will remain one for
the foreseeable future, and infants belong in the nursery. The “adults,”
that is, the executives in charge of existing businesses or products, will
have neither time nor understanding for the infant project. They cannot
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afford to be bothered.
Disregard of this rule cost a major machine-tool manufacturer its
leadership in robotics.
The company had the basic patents on machine tools for automated
mass production. It had excellent engineering, an excellent reputation,
and first-rate manufacturing. Everyone in the early years of factory
automation—around 1975—expected it to emerge as the leader. Ten
years later it had dropped out of the race entirely. The company had
placed the unit charged with the development of machine tools for
automated production three or four levels down in the organization, and
had it report to people charged with designing, making, and selling the
company’s traditional machine-tool lines. These people were supportive;
in fact, the work on robotics had been mainly their idea. But they were
far too busy defending their traditional lines against a lot of new
competitors such as the Japanese, redesigning them to fit new
specifications, demonstrating, marketing, financing, and servicing them.
Whenever the people in charge of the “infant” went to their bosses for a
decision, they were told, “I have no time now, come back next week.”
Robotics were, after all, only a promise; the existing machine-tool lines
produced millions of dollars each year.
Unfortunately, this is a common error.
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.
The best known practitioners of this approach are three American
companies: Procter & Gamble, the soap, detergent, edible oil, and food
producer—a very large and aggressively entrepreneurial company;
Johnson & Johnson, the hygiene and health-care supplier; and 3M, a
major manufacturer of industrial and consumer products. These three
companies differ in the details of practice but essentially all three have
the same policy. They set up the new venture as a separate business
from the beginning and put a project manager in charge. The project
manager remains in charge until the project is either abandoned or has
achieved its objective and become a full-fledged business. And until
then, the project manager can mobilize all the skills as they are needed
—research, manufacturing, finance, marketing—and put them to work on
the project team.
A company that engages in more than one innovative effort at a time
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(and bigger companies usually do) might have all the “infants” report
directly to the same member of the top management group. It does not
greatly matter that the ventures have different technologies, markets, or
product characteristics. They all are new, small, and entrepreneurial.
They are all exposed to the same “childhood diseases.” The problems
from which the entrepreneurial venture suffers, and the decisions it
requires, tend to be pretty much the same regardless of technology, of
market, or of product line. Somebody has to have time for them, to give
them the attention they need, to take the trouble to understand what the
problems are, the crucial decisions, the things that really matter in a
given innovative effort. And this person has to have sufficient stature in
the business to be able to represent the infant project—and to make the
decision to stop an effort if it is going nowhere.
3. There is another reason why a new, innovative effort is best set up
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; neither will get very far. And yet the existing
business has requirements with respect to accounting, to personnel
policy, to reporting of all kinds, which it cannot easily waive.
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 area in which separation of the new, innovative unit from the
ongoing business is most important is compensation and rewards of key
people. What works best in a going, established business would kill the
“infant”—and yet not be adequate compensation for its key people.
Indeed, the compensation scheme that is most popular in large
businesses, one based on return on assets or on investment, is a near-
complete bar to innovation.
I learned this many years ago in a major chemical company.
Everybody knew that one of its central divisions had to produce new
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materials to stay in business. The plans for these materials were there,
the scientific work had been done…but nothing happened. Year after
year there was another excuse. Finally, the division’s general manager
spoke up at a review meeting, “My management group and I are
compensated primarily on the basis of return-on-investment. The
moment we spend money on developing the new materials, our return
will go down by half for at least four years. Even if I am still here in four
years time when we should show the first returns on these investments
—and I doubt that the company will put up with me that long if profits are
that much lower—I’m taking bread out of the mouths of all my associates
in the meantime. Is it reasonable to expect us to do this?” The formula
was changed and the developmental expenses for the new project were
taken out of the return-on-investment figures. Within eighteen months
the new materials were on the market. Two years later they had given
the division leadership in its field which it has retained to this day. Four
years later the division doubled its profits.
In terms of compensation and rewards for innovative efforts,
however, it is far easier to define what should not be done than it is to
spell out what should. The requirements are conflicting: the new project
must not be burdened with a compensation load it cannot carry, yet the
people involved must be adequately motivated by rewards appropriate to
their efforts.
Specifically, this means that the people in charge of the new project
should be kept at a moderate salary. It is, however, quite unrealistic to
ask them to work for less money than they received in their old jobs.
People put in charge of a new area within an existing business are likely
to make good money. They are also the people who could easily move
to other jobs, either within or outside the company, in which they would
make more money. One therefore has to start out with their existing
compensation and benefits.
One method that both 3M and Johnson & Johnson use effectively is
to promise that the person who successfully develops a new product, a
new market, or a new service and then builds a business on it will
become the head of that business: general manager, vice-president, or
division president, with the rank, compensation, bonuses, and stock
options appropriate to the level. This can be a sizable reward, and yet it
does not commit the company to anything except in case of success.
Another method—and which one is preferable will depend largely on
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the tax laws at the time—is to give the people who take on the new
development a share in future profits. The venture might, for instance, be
treated as if it were a separate company in which the entrepreneurial
managers in charge have a stake, say 25 percent. When the venture
reaches maturity, they are bought out at a pre-set formula based on
sales and profits.
One thing more is needed: the people who take on the innovating
task in an existing business also “venture.” It is only fair that their
employer share the risk. They should have the option of returning to their
old job at their old compensation rate if the innovation fails. They should
not be rewarded for failure, but they should certainly not be penalized for
trying.
4. As implied in discussing individual compensation, 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. It
should result in a new major business rather than in just another
“specialty” or a “respectable” addition to the product line.
Only by analyzing a company’s own innovative experience, the
feedback from its performance on its expectations, can the company
determine what the appropriate expectations are for innovations in its
industry and its markets. What are the appropriate time spans? And
what is the optimal distribution of effort? Should there be a heavy
investment of men and money at the beginning, or should the effort at
the start be confined to one person, with a helper or two, working alone?
When should the effort then be scaled up? And when should
“development” become “business,” producing large but conventional
returns?
These are key questions. The answers to them are not to be found in
books. Yet they cannot be answered arbitrarily, by hunch, or by fighting it
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out. Entrepreneurial companies do know what patterns, rhythms, and
time spans pertain to innovations in their specific industry, technology,
and market.
The innovative major bank mentioned earlier knows, for instance,
that a new subsidiary established in a new country will require
investment for at least three years. It should break even in the fourth
year, and should have repaid the total investment by the middle of the
sixth year. If it still requires investment by the end of the sixth year, it is a
disappointment and should probably be shut down.
A new major service—leasing, for example—has a similar though
somewhat shorter cycle. Procter & Gamble—or so it looks from the
outside—knows that its new products should be on the market and
selling two to three years after work on them has begun. They should
have established themselves as market leaders eighteen months later.
IBM, it seems, figures on a five-year lead time for a new major product
before market introduction. Within another year the new product should
then start to grow fast. It should attain market leadership and profitability
fairly early in its second year on the market, have repaid the full
investment by the early months of the third year, and peak and level out
in its fifth year on the market. By then, a new IBM product should already
have begun to make it obsolescent.
The only way, however, to know these things is through the
systematic analysis of the performance of the company and of its
competitors, that is, by systematic feedback from innovation results to
innovation expectations and by regular appraisal of the company’s
performance as entrepreneur.
And once a company understands what results should and could be
expected from its innovative efforts, it can then design the appropriate
controls. These will both measure how well units and their managers
perform in innovation and determine which innovative efforts to push,
which to reconsider, and which to abandon.
5. The final structural requirement for entrepreneurship in the existing
business is that a person or a component group should be held clearly
accountable.
In the “middle-sized growth companies” mentioned earlier, this is
usually the primary responsibility of the chief executive officer (CEO). In
large companies, it probably is more likely a designated and very senior
member of the top management group. In smaller businesses, this
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executive in charge of entrepreneurship and innovation may well carry
other responsibilities as well.
The cleanest organizational structure for entrepreneurship, though
suitable only in the very large company, is a totally separate innovating
operation or development company.
The earliest example of this was set up more than one hundred
years ago, in 1872, by Hefner-Alteneck, the first college-trained engineer
hired by a manufacturing company anywhere, the German Siemens
Company. Hefner started the first “research lab” in industry. Its members
were charged with inventing new and different products and processes.
But they were also responsible for identifying new and different end uses
and new and different markets. And they not only did the technical work;
they were responsible for development of the manufacturing process, for
the introduction of the new product into the marketplace, and for its
profitability.
Fifty years later, in the 1920s, the American DuPont Company
independently set up a similar unit and called it a Development
Department. This department gathers innovative ideas from all over the
company, studies them, thinks them through, analyzes them. Then it
proposes to top management which ones should be tackled as major
innovative projects. From the beginning, it brings to bear on the
innovation all the resources needed: research, development,
manufacturing, marketing, finance, and so on. It is in charge until the
new product or service has been on the market for a few years.
Whether the responsibility for innovation rests with the chief
executive officer, with another member of top management, or with a
separate component, whether it is a full-time assignment or part of an
executive’s responsibilities, it should always be set up and recognized
both as a separate responsibility and as a responsibility of top
management. And it should always include the systematic and
purposeful search for innovative opportunities.

It might be asked, Are all these policies and practices necessary?
Don’t they interfere with the entrepreneurial spirit and stifle creativity?
And cannot a business be entrepreneurial without such policies and
practices? The answer is, Perhaps, but neither very successfully nor for
very long.
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Discussions of entrepreneurship tend to focus on the personalities
and attitudes of top management people, and especially of the chief
executive.
*
Of course, any top management can damage and stifle
entrepreneurship within its company. It’s easy enough. All it takes is to
say “No” to every new idea and to keep on saying it for a few years—and
then make sure that those who came up with the new ideas never get a
reward or a promotion and become ex-employees fairly swiftly. It is far
less certain, however, that top management personalities and attitudes
can by themselves—without the proper policies and practices—create
an entrepreneurial business, which is what most of the books on
entrepreneurship assert, at least by implication. In the few short-lived
cases I know of, the companies were built and still run by the founder.
Even then, when it gets to be successful the company soon ceases to be
entrepreneurial unless it adopts the policies and practices of
entrepreneurial management. The reason why top management
personalities and attitudes do not suffice in any but the very young or
very small business is, of course, that even a medium-sized enterprise is
a pretty large organization. It requires a good many people who know
what they are supposed to do, want to do it, are motivated toward doing
it, and are supplied with both the tools and continuous reaffirmation.
Otherwise there is only lip service; entrepreneurship soon becomes
confined to the CEO’s speeches.
And I know of no business that continued to remain entrepreneurial
beyond the founder’s departure, unless the founder had built into the
organization the policies and practices of entrepreneurial management.
If these are lacking, the business becomes timid and backward-looking
within a few years at the very latest. And these companies do not even
realize, as a rule, that they have lost their essential quality, the one
element that had made them stand out, until it is perhaps too late. For
this realization one needs a measurement of entrepreneurial
performance.
Two companies that were entrepreneurial businesses par excellence
under their founders’ management are good examples: Walt Disney
Productions and McDonald’s. The respective founders, Walt Disney and
Ray Kroc, were men of tremendous imagination and drive, each the very
embodiment of creative, entrepreneurial, and innovative thinking. Both
built into their companies strong operating day-to-day management. But
both kept to themselves the entrepreneurial responsibility within their
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companies. Both depended on the “entrepreneurial personality” and did
not embed the entrepreneurial spirit in specific policies and practices.
Within a few years after the death of these men, their companies had
become stodgy, backward-looking, timid, and defensive.
Companies that have built entrepreneurial management into their
structure—Procter & Gamble, Johnson & Johnson, Marks and Spencer
—continue to be innovators and entrepreneurial leaders decade after
decade, irrespective of changes in chief executives or economic
conditions.
VI
STAFFING
How should the existing business staff for entrepreneurship and
innovation? Are there such people as “entrepreneurs”? Are they a
special breed?
The literature is full of discussions of these questions; full of stories
of the “entrepreneurial personality” and of people who will never do
anything but innovate. In the light of our experience—and it is
considerable—these discussions are pointless. By and large, people
who do not feel comfortable as innovators or as entrepreneurs will not
volunteer for such jobs; the gross misfits eliminate themselves. The
others can learn the practice of innovation. Our experience shows that
an executive who has performed in other assignments will do a decent
job as an entrepreneur. In successful entrepreneurial businesses,
nobody seems to worry whether a given person is likely to do a good job
of development or not. People of all kinds of temperaments and
backgrounds apparently do equally well. Any young engineer in 3M who
comes to top management with an idea that makes sense is expected to
take on its development.
Equally, there is no reason to worry where the successful
entrepreneur will end up. To be sure, there are some people who only
want to work on new projects and never want to run anything. When
most English families still had nannies, many did not want to stay after
“their” baby got to the stage when it began to walk and talk—in other
words, when it was no longer a baby. But many were perfectly content to
stay on and did not find it difficult to look after a much older child. The
people who do not want to be anything but entrepreneurs are unlikely to
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be in the employ of an existing business to begin with, and even more
unlikely to have been successful in it. And the people who do well as
entrepreneurs in an existing business have, as a rule, proved
themselves earlier as managers in the same organization. It is thus
reasonable to assume that they can both innovate and manage what
already exists. There are some people at Procter & Gamble and at 3M
who make a career of being project managers and who take on a new
project as soon as they have successfully finished an old one. But most
people at the higher levels of these companies have made their careers
out of “project management,” into “product management,” into “market
management,” and finally into a senior companywide position. And the
same is true of Johnson & Johnson and of Citibank.
The best proof that entrepreneurship is a question of behavior,
policies, and practices rather than personality is the growing number of
older large-company people in the United States who make
entrepreneurship their second career. Increasingly, middle-and upper-
level executives and senior professionals who have spent their entire
working lives in large companies—more often than not with the same
employer—take early retirement after twenty-five or thirty years of
service when they have reached what they realize is their terminal job.
At fifty or fifty-five, these middle-aged people then become
entrepreneurs. Some start their own business. Some, especially
technical specialists, set up shop as consultants to new and small
ventures. Some join a new small company in a senior position. And the
great majority are both successful and happy in their new assignment.
Modern Maturity, the magazine of the American Association of
Retired Persons, is full of stories of such people, and of advertisements
by new small companies looking for them. In a management seminar for
chief executive officers that I ran in 1983, there were fifteen such
second-career entrepreneurs (fourteen men and one woman) among the
forty-eight participants. During a special session for these people, I
asked them whether they had been frustrated or stifled while working all
those years for big companies, as “entrepreneurial personalities” are
supposed to be. They thought the question totally absurd. I then asked
whether they had much difficulty changing their roles; they thought this
equally absurd. As one of them said—and all the others nodded assent
—” Good management is good management, whether you run a $180
million department at General Electric, with its billions of sales as I used
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to do, or a new, growing diagnostic-instrument innovator with $6 million
in sales, as I do now. Of course I do different things and do things
differently. But I apply the concepts I learned at G.E. and do exactly the
same analysis. The transition was easier, in fact, than when I moved, ten
years earlier, from being a bench engineer into my first management
job.”
Public-service institutions teach the same lesson. Among the most
successful innovators in recent American history are two men in higher
education, Alexander Schure and Ernest Boyer. Schure started out as a
successful inventor in the electronics field, with a good many patents to
his name. But in 1955, when he was in his early thirties, he founded the
New York Institute of Technology as a private university without support
from government, foundation, or big company, and with brand-new ideas
regarding the kind of students to be recruited and what they were to be
taught as well as how. Thirty years later, his institute has become a
leading technical university with four campuses, one of them a medical
school, and almost twelve thousand students. Schure still works as a
successful electronics inventor. But he has also been for these thirty
years the full-time chancellor of his university, and has, by all accounts,
built up a professional and effective management team.
In contrast to Schure, Boyer started out as an administrator, first in
the University of California system, then in the State University of New
York, which with 350,000 student and 64 campuses is the biggest and
most bureaucratic of American university systems. By 1970, Boyer, at
forty-two, had worked his way to the top and was appointed chancellor.
He immediately founded the Empire State College—actually not a
college at all but an unconventional solution to one of the oldest and
most frustrating failures of American higher education, the degree
program for adults who do not have full academic credentials.
Although tried many times, this had never worked before. If these
adults were admitted to college programs together with the “regular”
younger students, no attention was usually paid to their aims, their
needs, and least of all to their experience. They were treated as if they
were eighteen years old, got discouraged, and soon dropped out. But if,
as was tried repeatedly, they were put into special “continuing education
programs,” they were likely to be considered a nuisance and shoved
aside, with programs staffed by whatever faculty the university could
most easily spare. In Boyer’s Empire State College, the adults attend
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regular university courses in one of the colleges or universities of the
state university. But first the adult students are assigned a “mentor,”
usually a member of a nearby state university faculty. The mentor helps
them work out their programs and decide whether they need special
preparation, and where, conversely, their experience qualifies them for
advanced standing and work. And then the mentor acts as broker,
negotiating admission, standing, and program for each applicant with the
appropriate institution.
All this may sound like common sense—and so it is. Yet it was quite
a break with the habits and mores of American academia and was
fought hard by the state university establishment. But Boyer persisted.
His Empire State College program has now become the first successful
program of this kind in American higher education, with more than six
thousand students, a negligible dropout rate, and a master’s program.
Boyer, the arch-innovator, did not cease to be an “administrator.” From
chancellor of the State University of New York he went on to become,
first, President Carter’s Commissioner of Education, and then president
of the Carnegie Foundation for the Advancement of Teaching—
respectively, the most “bureaucratic” and the most “establishment” job in
American academia.
These examples do not prove that anyone can excel at being both a
bureaucrat and an innovator. Schure and Boyer are surely exceptional
people. But their experiences do show that there is no specific
“personality” for either task. What is needed is willingness to learn,
willingness to work hard and persistently, willingness to exercise self-
discipline, willingness to adapt and to apply the right policies and
practices. Which is exactly what any enterprise that adopted
entrepreneurial management has found out with respect to people and
staffing.

To enable the entrepreneurial project to be run successfully, as
something new, the structure and organization have to be right;
relationships have to be appropriate; and compensation and rewards
have to fit. But when all this has been done, the question of who is to run
the unit, and what should be done with them when they have succeeded
in building up the new project, must be decided on an individual basis for
this person or that person, rather than according to this or that
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psychological theory for none of which there is much empirical evidence.
Staffing decisions in the entrepreneurial business are made like any
other decision about people and jobs. Of course, they are risk-taking
decisions: decisions about people always are. Of course, they have to
be made carefully and conscientiously. And they have to be made the
correct way. First, the assignment must be thought through; then one
considers a number of people; then one checks carefully their
performance records; and finally one checks out each of the candidates
with a few people for whom he or she has worked. But all this applies to
every decision that puts a person into a job. And in the entrepreneurial
company, the batting average in people-decisions is the same for
entrepreneurs as it is for other managerial and professional people.
VII
THE DONT’S
There are some things the entrepreneurial management of an
existing business should not do.
1. 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.
But it is also inadvisable—in fact, almost a guarantee of failure—for a
business to try to become entrepreneurial without changing its basic
policies and practices. To be an entrepreneur on the side rarely works.
In the last ten or fifteen years a great many large American
companies have tried to go into joint ventures with entrepreneurs. Not
one of these attempts has succeeded; the entrepreneurs found
themselves stymied by policies, by basic rules, by a “climate” they felt
was bureaucratic, stodgy, reactionary. But at the same time their
partners, the people from the big company, could not figure out what the
entrepreneurs were trying to do and thought them undisciplined, wild,
visionary.
By and large, big companies have been successful as entrepreneurs
only if they use their own people to build the venture. They have been
successful only when they use people whom they understand and who
understand them, people whom they trust and who in turn know how to
get things done in the existing business; people, in other words, with
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whom one can work as partners. But this presupposes that the entire
company is imbued with the entrepreneurial spirit, that it wants
innovation and is reaching out for it, considering it both a necessity and
an opportunity. It presupposes that the entire organization has been
made “greedy for new things.”
2. 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. Diversification itself
rarely works unless it, too, is built on commonality with the existing
business, whether commonality of the market or commonality of the
technology. Even then, as I have discussed elsewhere,
*
diversification
has its problems. But if one adds to the difficulties and demands of
diversification the difficulties and demands of entrepreneurship, the
result is predictable disaster. So one innovates only where one
understands.
3. Finally, it is almost always futile to avoid making one’s own
business entrepreneurial by “buying in,” that is, by acquiring small
entrepreneurial ventures. Acquisitions rarely work unless the company
that does the acquiring is willing and able within a fairly short time to
furnish management to the acquisition. The managers that have come
with the acquired company rarely stay around very long. If they were
owners, they have now become wealthy; if they were professional
managers, they are likely to stay around only if given much bigger
opportunities in the new, acquiring company. So, within a year or two,
the acquirer has to furnish management to run the business that has
been bought. This is particularly true when a non-entrepreneurial
company buys an entrepreneurial one. The management people in the
new acquired venture soon find that they cannot work with the people in
their new parent company, and vice versa. I myself know of no case
where “buying in” has worked.
A business that wants to be able to innovate, wants to have a chance
to succeed and prosper in a time of rapid change, has to build
entrepreneurial management into its own system. It has to adopt policies
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that create throughout the entire organization the desire to innovate and
the habits of entrepreneurship and innovation. To be a successful
entrepreneur, the existing business, large or small, has to be managed
as an entrepreneurial business.
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14
Entrepreneurship in the Service Institution
I
Public-service institutions such as government agencies, labor unions,
churches, universities, and schools, hospitals, community and charitable
organizations, professional and trade associations and the like, need to
be entrepreneurial and innovative fully as much as any business does.
Indeed, they may need it more. The rapid changes in today’s society,
technology, and economy are simultaneously an even greater threat to
them and an even greater opportunity.
Yet public-service institutions find it far more difficult to innovate than
even the most “bureaucratic” company. The “existing” seems to be even
more of an obstacle. To be sure, every service institution likes to get
bigger. In the absence of a profit test, size is the one criterion of success
for a service institution, and growth a goal in itself. And then, of course,
there is always so much more that needs to be done. But stopping what
has “always been done” and doing something new are equally anathema
to service institutions, or at least excruciatingly painful to them.
Most innovations in public-service institutions are imposed on them
either by outsiders or by catastrophe. The modern university, for
instance, was created by a total outsider, the Prussian diplomat Wilhelm
von Humboldt. He founded the University of Berlin in 1809 when the
traditional university of the seventeenth and eighteenth century had been
all but completely destroyed by the French Revolution and the
Napoleonic wars. Sixty years later, the modern American university
came into being when the country’s traditional colleges and universities
were dying and could no longer attract students.
Similarly, all basic innovations in the military in this century, whether
in structure or in strategy, have followed on ignominious malfunction or
crushing defeat: the organization of the American Army and of its
strategy by a New York lawyer, Elihu Root, Teddy Roosevelt’s Secretary
of War, after its disgraceful performance in the Spanish-American War;
the reorganization, a few years later, of the British Army and its strategy
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by Secretary of War Lord Haldane, another civilian, after the equally
disgraceful performance of the British in the Boer War; and the
rethinking of the German Army’s structure and strategy after the defeat
of World War I.
And in government, the greatest innovative thinking in recent political
history, America’s New Deal of 1933—36, was triggered by a
Depression so severe as almost to unravel the country’s social fabric.
Critics of bureaucracy blame the resistance of public-service
institutions to entrepreneurship and innovation on “timid bureaucrats,” on
time-servers who “have never met a payroll,” or on “power-hungry
politicians.” It is a very old litany—in fact, it was already hoary when
Machiavelli chanted it almost five hundred years ago. The only thing that
changes is who intones it. At the beginning of this century, it was the
slogan of the so-called liberals and now it is the slogan of the so-called
neo-conservatives. Alas, things are not that simple, and “better
people”—that perennial panacea of reformists—are a mirage. The most
entrepreneurial, innovative people behave like the worst time-serving
bureaucrat or power-hungry politician six months after they have taken
over the management of a public-service institution, particularly if it is a
government agency.
The forces that impede entrepreneurship and innovation in a public-
service institution are inherent in it, integral to it, inseparable from it.
*
The
best proof of this are the internal staff services in businesses, which are,
in effect, the “public-service institutions” within business corporations.
These are typically headed by people who have come out of operations
and have proven their capacity to perform in competitive markets. And
yet the internal staff services are not notorious as innovators. They are
good at building empires—and they always want to do more of the
same. They resist abandoning anything they are doing. But they rarely
innovate once they have been established.
There are three main reasons why the existing enterprise presents
so much more of an obstacle to innovation in the public-service
institution than it does in the typical business enterprise.
1. First, the public-service institution is based on a “budget” rather
than being paid out of its results. It is paid for its efforts and out of funds
somebody else has earned, whether the taxpayer, the donors of a
charitable organization, or the company for which a personnel
department or the marketing services staff work. The more efforts the
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public service institution engages in, the greater its budget will be. And
“success” in the public-service institution is defined by getting a larger
budget rather than obtaining results. Any attempt to slough off activities
and efforts therefore diminishes the public-service institution. It causes it
to lose stature and prestige. Failure cannot be acknowledged. Worse
still, the fact that an objective has been attained cannot be admitted.
2. Second, a service institution is dependent on a multitude of
constituents. In a business that sells its products on the market, one
constituent, the consumer, eventually overrides all the others. A
business needs only a very small share of a small market to be
successful. Then it can satisfy the other constituents, whether
shareholders, workers, the community, and so on. But precisely because
public-service institutions—and that includes the staff activities within a
business corporation—have no “results” out of which they are being
paid, any constituent, no matter how marginal, has in effect a veto
power. A public-service institution has to satisfy everyone; certainly, it
cannot afford to alienate anyone.
The moment a service institution starts an activity, it acquires a
“constituency,” which then refuses to have the program abolished or
even significantly modified. But anything new is always controversial.
This means that it is opposed by existing constituencies without having
formed, as yet, a constituency of its own to support it.
3. The most important reason, however, is that public-service
institutions exist after all to “do good.” This means that they tend to see
their mission as a moral absolute rather than as economic and subject to
a cost/benefit calculus. Economics always seeks a different allocation of
the same resources to obtain a higher yield. Everything economic is
therefore relative. In the public-service institution, there is no such thing
as a higher yield. If one is “doing good,” then there is no “better.” Indeed,
failure to attain objectives in the quest for a “good” only means that
efforts need to be redoubled. The forces of evil must be far more
powerful than expected and need to be fought even harder.
For thousands of years the preachers of all sorts of religions have
held forth against the “sins of the flesh.” Their success has been limited,
to say the least. But this is no argument as far as the preachers are
concerned. It does not persuade them to devote their considerable
talents to pursuits in which results may be more easily attainable. On the
contrary, it only proves that their efforts need to be redoubled. Avoiding
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the “sins of the flesh” is clearly a “moral good,” and thus an absolute,
which does not admit of any cost/benefit calculation.
Few public-service institutions define their objectives in such
absolute terms. But even company personnel departments and
manufacturing service staffs tend to see their mission as “doing good,”
and therefore as being moral and absolute instead of being economic
and relative.
This means that public-service institutions are out to maximize rather
than to optimize. “Our mission will not be completed,” asserts the head
of the Crusade Against Hunger, “as long as there is one child on the
earth going to bed hungry.” If he were to say, “Our mission will be
completed if the largest possible number of children that can be reached
through existing distribution channels get enough to eat not to be
stunted,” he would be booted out of office. But if the goal is
maximization, it can never be attained. Indeed, the closer one comes
toward attaining one’s objective, the more efforts are called for. For,
once optimization has been reached (and the optimum in most efforts
lies between 75 and 80 percent of theoretical maximum), additional
costs go up exponentially while additional results fall off exponentially.
The closer a public-service institution comes to attaining its objectives,
therefore, the more frustrated it will be and the harder it will work on what
it is already doing.
It will, however, behave exactly the same way the less it achieves.
Whether it succeeds or fails, the demand to innovate and to do
something else will be resented as an attack on its basic commitment,
on the very reason for its existence, and on its beliefs and values.
These are serious obstacles to innovation. They explain why, by and
large, innovation in public services tends to come from new ventures
rather than from existing institutions.
The most extreme example around these days may well be the labor
union. It is probably the most successful institution of the century in the
developed countries. It has clearly attained its original objectives. There
can be no more “more” when the labor share of gross national product in
Western developed countries is around 90 percent—and in some
countries, such as Holland, close to 100 percent. Yet the labor union is
incapable of even thinking about new challenges, new objectives, new
contributions. All it can do is repeat the old slogans and fight the old
battles. For the “cause of labor” is an absolute good. Clearly, it must not
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be questioned, let alone redefined.
The university, however, may not be too different from the labor
union, and in part for the same reason—a level of growth and success
second in this century only to that of the labor union.
Still there are enough exceptions among public-service institutions
(although, I have to admit, not many among government agencies) to
show that public-service institutions, even old and big ones, can
innovate.
One Roman Catholic archdiocese in the United States, for instance,
has brought in lay people to run the diocese, including a married lay
woman, the former personnel vice-president of a department store chain,
as the general manager. Everything that does not involve dispensing
sacraments and ministering to congregations is done by lay
professionals and managers. Although there is a shortage of priests
throughout the American Catholic Church, this archdiocese has priests
to spare and has been able to move forward aggressively to build
congregations and expand religious services.
One of the oldest of scientific societies, the American Association for
the Advancement of Science, redirected itself between 1960 and 1980 to
become a “mass organization” without losing its character as a leader. It
totally changed its weekly magazine, Science, to become the
spokesman for science to public and government, and to be the
authoritative reporter on science policy. And it created a scientifically
solid yet popular mass circulation magazine for lay readers.
A large hospital on the West Coast recognized, as early as 1965 or
so, that health care was changing as a result of its success. Where other
large city hospitals tried to fight such trends as those toward hospital
chains or freestanding ambulatory treatment centers, this institution has
been an innovator and a leader in these developments. Indeed, it was
the first to build a freestanding maternity center in which the expectant
mother is given a motel room at fairly low cost, yet with all the medical
services available should they be needed 1 It was the first to go into
freestanding surgical centers for ambulatory care. But it also started to
build its own voluntary hospital chain, in which it offers management
contracts to smaller hospitals throughout the region.
Beginning around 1975, the Girl Scouts of the U.S.A., a large
organization dating back to the early years of the century with several
million young women enrolled, introduced innovations affecting
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membership, programs, and volunteers—the three basic dimensions of
the organization. It began actively to recruit girls from the new urban
middle classes, that is, blacks, Asians, Latins; these minorities now
account for one-fifth of the members. It recognized that with the
movement of women into professions and managerial positions, girls
need new programs and role models that stress professional and
business careers rather than the traditional careers as homemaker or
nurse. The Girl Scouts management people realized that the traditional
sources for volunteers to run local activities were drying up because
young mothers no longer were sitting at home searching for things to do.
But they recognized, too, that the new professional, the new working
mother represents an opportunity and that the Girl Scouts have
something to offer her; and for any community organization, volunteers
are the critical constraint. They therefore set out to make work as a
volunteer for the Girl Scouts attractive to the working mother as a good
way to have time and fun with her child while also contributing to her
child’s development. Finally, the Girl Scouts realized that the working
mother who does not have enough time for her child represents another
opportunity: they started Girl Scouting for preschool children. Thus, the
Girl Scouts reversed the downward trend in enrollment of both children
and volunteers, while the Boy Scouts—a bigger, older, and infinitely
richer organization—is still adrift.
II
ENTREPRENEURIAL POLICIES
These are all American examples, I fully realize. Doubtless, similar
examples are to be found in Europe or Japan. But I hope that these
cases, despite their limitations, will suffice to demonstrate the
entrepreneurial policies needed in the public-service institution to make it
capable of innovation.
1. First, the public-service institution needs a clear definition of its
mission. What is it trying to do? Why does it exist? It needs to focus on
objectives rather than on programs and projects. Programs and projects
are means to an end. They should always be considered as temporary
and, in fact, short-lived.
2. The public-service institution needs a realistic statement of goals.
It should say, “Our job is to assuage famine,” rather than, “Our job is to
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eliminate hunger.” It needs something that is genuinely attainable and
therefore a commitment to a realistic goal, so that it can say eventually,
“Our job is finished.”
There are, of course, objectives that can never be attained. To
administer justice in any human society is clearly an unending task, one
that can never be fully accomplished even to modest standards. But
most objectives can and should be phrased in optimal rather than in
maximal terms. Then it is possible to say: “We have attained what we
were trying to do.”
Surely, this should be said with respect to the traditional goals of the
schoolmaster: to get everyone to sit in school for long years. This goal
has long been attained in developed countries. What does education
have to do now, that is, what is the meaning of “education” as against
mere schooling?
3. Failure to achieve objectives should be considered an indication
that the objective is wrong, or at least defined wrongly. The assumption
has then to be that the objective should be economic rather than moral.
If an objective has not been attained after repeated tries, one has to
assume that it is the wrong one. It is not rational to consider failure a
good reason for trying again and again. The probability of success, as
mathematicians have known for three hundred years, diminishes with
each successive try; in fact, the probability of success in any succeeding
try is never more than one-half the probability of the preceding one.
Thus, failure to attain objectives is a prima facie reason to question the
validity of the objective—the exact opposite of what most public-service
institutions believe.
4. Finally, public-service institutions need to build into their policies
and practices the constant search for innovative opportunity. They need
to view change as an opportunity rather than a threat.
The innovating public-service institutions mentioned in the preceding
pages succeeded because they applied these basic rules.
In the years after World War II, the Roman Catholic Church in the
United States was confronted for the first time with the rapid emergence
of a well-educated Catholic laity. Most Catholic dioceses, and indeed
most institutions of the Roman Catholic Church, perceived in this a
threat, or at least a problem. With an educated Catholic laity,
unquestioned acceptance of bishop and priest could no longer be taken
for granted. And yet there was no place for Catholic lay people in the
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structure and governance of the Church. Similarly, all Roman Catholic
dioceses in the United States, beginning around 1965 or 1970, faced a
sharp drop in the number of young men entering the priesthood—and
perceived this as a major threat. Only one Catholic archdiocese saw
both as opportunities. (As a result, it has a different problem. Young
priests from all over the United States want to enter it; for in this one
archdiocese, the priest gets to do the things he trained for, the things
which he entered the priesthood to do.)
All American hospitals, beginning in 1970 or 1975, saw changes
coming in the delivery of health care. Most of them organized
themselves to fight these changes. Most of them told everybody that
“these changes will be catastrophic.” Only the one hospital saw in them
opportunities.
The American Association for the Advancement of Science saw in
the expansion of people with scientific backgrounds and working in
scientific pursuits a tremendous opportunity to establish itself as a
leader, both within the scientific community and outside.
And the Girl Scouts looked at demographics and said: “How can we
convert population trends into new opportunities for us?”
Even in government, innovation is possible if simple rules are
obeyed. Here is one example.
Lincoln, Nebraska, 120 years ago, was the first city in the Western
world to take into municipal ownership public services such as public
transportation, electric power, gas, water, and so on. In the last ten
years, under a woman mayor, Helen Boosalis, it has begun to privatize
such services as garbage pickup, school transportation, and a host of
others. The city provides the money, with private businesses bidding for
the contracts; there are substantial savings in cost and even greater
improvements in service.
What Helen Boosalis has seen in Lincoln is the opportunity to
separate the “provider” of public services, that is, government, and the
“supplier.” This makes possible both high service standards and the
efficiency, reliability, and low cost which competition can provide.
The four rules outlined above constitute the specific policies and
practices the public-service institution requires if it is to make itself
entrepreneurial and capable of innovation. In addition, however, it also
needs to adopt those policies and practices that any existing
organization requires in order to be entrepreneurial, the policies and
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practices discussed in the preceding chapter, The Entrepreneurial
Business.
III
THE NEED TO INNOVATE
Why is innovation in the public-service institution so important? Why
cannot we leave existing public-service institutions the way they are, and
depend for the innovations we need in the public-service sector on new
institutions, as historically we have always done?
The answer is that public-service institutions have become too
important in developed countries, and too big. The public-service sector,
both the governmental one and the nongovernmental but not-for-profit
one, has grown faster during this century than the private sector—maybe
three to five times as fast. The growth has been especially fast since
World War II.
To some extent, this growth has been excessive. Wherever public-
service activities can be converted into profit-making enterprises, they
should be so converted. This applies not only to the kind of municipal
services the city of Lincoln, Nebraska, now “privatizes.” The move from
non-profit to profit has already gone very far in the American hospital. I
expect it to become a stampede in professional and graduate education.
To subsidize the highest earners in developed society, the holders of
advanced professional degrees, can hardly be justified.
A central economic problem of developed societies during the next
twenty or thirty years is surely going to be capital formation; only in
Japan is it still adequate for the economy’s needs. We therefore can ill
afford to have activities conducted as “non-profit,” that is, as activities
that devour capital rather than form it, if they can be organized as
activities that form capital, as activities that make a profit.
But still the great bulk of the activities that are being discharged in
and by public-service institutions will remain public-service activities, and
will neither disappear nor be transformed. Consequently, they have to be
made producing and productive. Public-service institutions will have to
learn to be innovators, to manage themselves entrepreneurially. To
achieve this, public-service institutions will have to learn to look upon
social, technological, economic, and demographic shifts as opportunities
in a period of rapid change in all these areas. Otherwise, they will
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become obstacles. The public-service institutions will increasingly
become unable to discharge their mission as they adhere to programs
and projects that cannot work in a changed environment, and yet they
will not be able or willing to abandon the missions they can no longer
discharge. Increasingly, they will come to look the way the feudal barons
came to look after they had lost all social function around 1300: as
parasites, functionless, with nothing left but the power to obstruct and to
exploit. They will become self-righteous while increasingly losing their
legitimacy. Clearly, this is already happening to the apparently most
powerful among them, the labor union. Yet a society in rapid change,
with new challenges, new requirements and opportunities, needs public-
service institutions.
The public school in the United States exemplifies both the
opportunity and the dangers. Unless it takes the lead in innovation it is
unlikely to survive this century, except as a school for the minorities in
the slums. For the first time in its history, the United States faces the
threat of a class structure in education in which all but the very poor
remain outside of the public school system—at least in the cities and
suburbs where most of the population lives. And this will squarely be the
fault of the public school itself because what is needed to reform the
public school is already known (see Chapter 9).
Many other public-service institutions face a similar situation. The
knowledge is there. The need to innovate is clear. They now have to
learn how to build entrepreneurship and innovation into their own
system. Otherwise, they will find themselves superseded by outsiders
who will create competing entrepreneurial public-service institutions and
so render the existing ones obsolete.
The late nineteenth century and early twentieth century was a period
of tremendous creativity and innovation in the public-service field. Social
innovation during the seventy-five years until the 1930s was surely as
much alive, as productive, and as rapid as technological innovation if not
more so. But in these periods the innovation took the form of creating
new public-service institutions. Most of the ones we have around now go
back no more than sixty or seventy years in their present form and with
their present mission. The next twenty or thirty years will be very
different. The need for social innovation may be even greater, but it will
very largely have to be social innovation within the existing public-
service institution. To build entrepreneurial management into the existing
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public-service institution may thus be the foremost political task of this
generation.
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15
The New Venture
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.
The new venture has an idea. It may have a product or a service. It
may even have sales, and sometimes quite a substantial volume of
them. It surely has costs. And it may have revenues and even profits.
What it does not have is a “business,” a viable, operating, organized
“present” in which people know where they are going, what they are
supposed to do, and what the results are or should be. But unless a new
venture develops into a new business and makes sure of being
“managed,” it will not survive no matter how brilliant the entrepreneurial
idea, how much money it attracts, how good its products, nor even how
great the demand for them.
Refusal to accept these facts destroyed every single venture started
by the nineteenth century’s greatest inventor, Thomas Edison. Edison’s
ambition was to be a successful businessman and the head of a big
company. He should have succeeded, for he was a superb business
planner. He knew exactly how an electric power company had to be set
up to exploit his invention of the light bulb. He knew exactly how to get
all the money he could possibly need for his ventures. His products were
immediate successes and the demand for them practically insatiable.
But Edison remained an entrepreneur; or rather, he thought that
“managing” meant being the boss. He refused to build a management
team. And so every one of his four or five companies collapsed
ignominiously once it got to middle size, and was saved only by booting
Edison himself out and replacing him with professional management.
Entrepreneurial management in the new venture has four
requirements:
It requires, first, a focus on the market.
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It requires, second, financial foresight, and especially planning for
cash flow and capital needs ahead.
It requires, third, building a top management team long before the
new venture actually needs one and long before it can actually afford
one.
And finally, it requires of the founding entrepreneur a decision in
respect to his or her own role, area of work, and relationships.
I
THE NEED FOR MARKET FOCUS
A common explanation for the failure of a new venture to live up to its
promise or even to survive at all is: “We were doing fine until these other
people came and took our market away from us. We don’t really
understand it. What they offered wasn’t so very different from what we
had.” Or one hears: “We were doing all right, but these other people
started selling to customers we’d never even heard of and all of a
sudden they had the market.”
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.
There are exceptions, to be sure. A product designed for one specific
use, especially if scientific or technical, often stays with the market and
the end use for which it was designed. But not always. Even a
prescription drug designed for a specific ailment and tested for it
sometimes ends up being used for some other quite different ailment.
One example is a compound that is effectively used in the treatment of
stomach ulcers. Or a drug designed primarily for the treatment of human
beings may find its major market in veterinary medicine.
Anything genuinely new creates markets that nobody before even
imagined. No one knew that he needed an office copier before the first
Xerox machine came out around 1960; five years later no business
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could imagine doing without a copier. When the first jet planes started to
fly, the best market research pointed out that there were not even
enough passengers for all the transatlantic liners then in service or being
built. Five years later the transatlantic jets were carrying fifty to one
hundred times as many passengers each year as had ever before
crossed the Atlantic.
The innovator has limited vision, in fact, he has tunnel-vision. He
sees the area with which he is familiar—to the exclusion of all other
areas.
An example is DDT. Designed during World War II to protect
American soldiers against tropical insects and parasites, it eventually
found its greatest application in agriculture to protect livestock and crops
against insects—to the point where it had to be banned for being too
effective. Yet not one of the distinguished scientists who designed DDT
during World War II envisaged these uses of DDT. Of course they knew
that babies die from fly-borne “summer” diarrhea. Of course they knew
that livestock and crops are infested by insect parasites. But these things
they knew as laymen. As experts, they were concerned with the tropical
diseases of humans. It was the ordinary American soldier who then
applied DDT to the areas in which he was the “expert,” that is, to his
home, his cows, his cotton patch.
Similarly, the 3M Company did not see that an adhesive tape it had
developed for industry would find myriad uses in the household and in
the office—becoming Scotch Tape. 3M had for many years been a
supplier of abrasives and adhesives to industry, and moderately
successful in industrial markets. It had never even thought of consumer
markets. It was pure accident which led the engineer who had designed
an industrial product no industrial user wanted to the realization that the
stuff might be salable in the consumer market. As the story goes, he
took some samples home when the company had already decided to
abandon the product. To his surprise, his teenage daughters began to
use it to hold their curls overnight. The only unusual thing about this
story is that he and his bosses at 3M recognized that they had stumbled
upon a new market.
A German chemist developed Novocain as the first local anesthetic
in 1905. But he could not get the doctors to use it; they preferred total
anesthesia (they only accepted Novocain during World War I). But totally
unexpectedly, dentists began to use the stuff. Whereupon—or so the
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story goes—the chemist began to travel up and down Germany making
speeches against Novocain’s use in dentistry. He had not designed it for
that purpose!
That reaction was somewhat extreme, I admit. Still, entrepreneurs
know what their innovation is meant to do. And if some other use for it
appears, they tend to resent it. They may not actually refuse to serve
customers they have not “planned” for, but they are likely to make it clear
that these customers are not welcome.
This is what happened with the computer. The company that had the
first computer, Univac, knew that its magnificent machine was designed
for scientific work. And so it did not even send a salesman out when a
business showed interest in it; surely, it argued, these people could not
possibly know what a computer was all about. IBM was equally
convinced that the computer was an instrument for scientific work: their
own computer had been designed specifically for astronomical
calculations. But IBM was willing to take orders from businesses and to
serve them. Ten years later, around 1960, Univac still had by far the
most advanced and best machine. IBM had the computer market.
The textbook prescription for this problem is “market research.” But it
is the wrong prescription.
One cannot do market research for something genuinely new. One
cannot do market research for something that is not yet on the market.
Around 1950, Univac’s market research concluded that, by the year
2000, about one thousand computers would be sold; the actual figure in
1984 was about one million. And yet this was the most “scientific,”
careful, rigorous market research ever done. There was only one thing
wrong with it: it started out with the assumption, then shared by
everyone, that computers were going to be used for advanced scientific
work—and for that use, the number is indeed quite limited. Similarly,
several companies who turned down the Xerox patents did so on the
basis of thorough market research which showed that printers had no
use at all for a copier. Nobody had any inkling that businesses, schools,
universities, colleges, and a host of private individuals would want to buy
a copier.
The new venture therefore needs to start out with the assumption
that its product or service may find customers in markets no one thought
of, for uses no one envisaged when the product or service was
designed, and that it will be bought by customers outside its field of
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vision and even unknown to the new venture.
If the new venture does not have such a market focus from the very
beginning, all it is likely to create is the market for a competitor. A few
years later “those people” will come in and take away “our market,” or
“those other people” who started “selling to customers we’d never even
heard of” all of a sudden will indeed have preempted the market.
To build market focus into a new venture is not in fact particularly
difficult. But what is required runs counter to the inclinations of the typical
entrepreneur. It requires, first, that the new venture systematically hunt
out both the unexpected success and the unexpected failure (cf. Chapter
3). Rather than dismiss the unexpected as an “exception,” as
entrepreneurs are inclined to do, they need to go out and look at it
carefully and as a distinct opportunity.
Shortly after World War II, a small Indian engineering firm bought the
license to produce a European-designed bicycle with an auxiliary light
engine. It looked like an ideal product for India; yet it never did well. The
owner of this small firm noticed, however, that substantial orders came in
for the engines alone. At first he wanted to turn down those orders; what
could anyone possibly do with such a small engine? It was curiosity
alone that made him go to the actual area the orders came from. There
he found farmers were taking the engines off the bicycles and using
them to power irrigation pumps that hitherto had been hand-operated.
This manufacturer is now the world’s largest maker of small irrigation
pumps, selling them by the millions. His pumps have revolutionized
farming all over Southeast Asia.
To be market-driven also requires that the new venture be willing to
experiment. If there is any interest in the new venture’s product or
service on the part of consumers or markets that were not in the original
plan, one tries to find somebody in that new and unexpected area who
might be willing to test the new product or service and find out what, if
any, application it might have. One provides free samples to people in
the “improbable” market to see what they can do with it, whether they
can use the stuff at all, or what it would have to be like for them to
become customers for it. One advertises in the trade papers of the
industry whence indications of interest came, and so on.
The DuPont Company never thought of automobile tires as a major
application for the new Nylon fiber it had developed. But when one of the
Akron tire manufacturers showed interest in trying out Nylon, DuPont set
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up a plant. A few years later, tires had become Nylon’s biggest and.
most profitable market.
It does not require a great deal of money to find out whether an
unexpected interest from an unexpected market is an indication of
genuine potential or a fluke. It requires sensitivity and a little systematic
work.
Above all, the people who are running a new venture need to spend
time outside: in the marketplace, with customers and with their own
salesmen, looking and listening. The new venture needs to build in
systematic practices to remind itself that a “product” or a “service” is
defined by the customer, not by the producer. It needs to work
continuously on challenging itself in respect to the utility and value that
its products or services contribute to customers.
The greatest danger for the new venture is to “know better” than the
customer what the product or service is or should be, how it should be
bought, and what it should be used for. Above all, the new venture
needs willingness to see the unexpected success as an opportunity
rather than as an affront to its expertise. And it needs to accept that
elementary axiom of marketing: Businesses are not paid to reform
customers. They are paid to satisfy customers.
II
FINANCIAL FORESIGHT
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
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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.
Once this financial crisis has erupted, it can be cured only with great
difficulty and considerable suffering. But it is eminently preventable.
Entrepreneurs starting new ventures are rarely unmindful of money;
on the contrary, they tend to be greedy. They therefore focus on profits.
But this is the wrong focus for a new venture, or rather, it comes last
rather than first. Cash flow, capital, and controls come much earlier.
Without them, the profit figures are fiction—good for twelve to eighteen
months, perhaps, after which they evaporate.
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. Growth needs more cash and more capital. If the growing new
venture shows a “profit” it is a fiction: a bookkeeping entry put in only to
balance the accounts. And since taxes are payable on this fiction in most
countries, it creates a liability and a cash drain rather than “surplus.” The
healthier a new venture and the faster it grows, the more financial
feeding it requires. 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.
The new venture needs cash flow analysis, cash flow forecasts, and
cash management. The fact that America’s new ventures of the last few
years (with the significant exception of high-tech companies) have been
doing so much better than new ventures used to do is largely because
the new entrepreneurs in the United States have learned that
entrepreneurship demands financial management.
Cash management is fairly easy if there are reliable cash flow
forecasts, with “reliable” meaning “worst case” assumptions rather than
hopes. There is an old banker’s rule of thumb, according to which in
forecasting cash income and cash outlays one assumes that bills will
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have to be paid sixty days earlier than expected and receivables will
come in sixty days later. If the forecast is overly conservative, the worst
that can happen—it rarely does in a growing new venture—is a
temporary cash surplus.
A growing new venture should know twelve months ahead of time
how much cash it will need, when, and for what purposes. With a year’s
lead time, it is almost always possible to finance cash needs. But even if
a new venture is doing well, raising cash in a hurry and in a “crisis” is
never easy and always prohibitively expensive. Above all, it always
sidetracks the key people in the company at the most critical time. For
several months they then spend their time and energy running from one
financial institution to another and cranking out one set of questionable
financial projections after another. In the end, they usually have to
mortgage the long-range future of the business to get through a ninety-
day cash bind. When they finally are able again to devote time and
thought to the business, they have irrevocably missed the major
opportunities. For the new venture, almost by definition, is under cash
pressure when the opportunities are greatest.

The successful new venture will also outgrow its capital structure. A
rule of thumb with a good deal of empirical evidence to support it says
that a new venture outgrows its capital base with every increase in sales
(or billings) of the order of 40 to 50 percent. After such growth, a new
venture also needs a new and different capital structure, as a rule. As
the venture grows, private sources of funds, whether from the owners
and their families or from outsiders, become inadequate. The company
has to find access to much larger pools of money by going “public,” by
finding a partner or partners among established companies, or by raising
money from insurance companies and pension funds. A new venture
that had been financed by equity money now needs to shift to long-term
debt, or vice versa. As the venture grows, the existing capital structure
always becomes the wrong structure and an obstacle.
In some new ventures, capital planning is comparatively easy. When
the business consists of uniform and entirely local units—restaurants in
a chain, freestanding surgical centers or individual hospitals in different
cities, homebuilders with separate operations in a number of different
metropolitan areas, specialty stores and the like—each unit can be
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financed as a separate business. One solution is franchising (which is, in
essence, a way to finance rapid expansion). Another is setting up each
local unit as a company, with separate and often local investors as
“limited” partners. The capital needed for growth and expansion can thus
be raised step by step, and the success of the preceding unit furnishes
documentation and the incentive for the investors in the succeeding
ones. But it only works when: (a) each unit breaks even fairly soon, at
most perhaps within two or three years; (b) when the operation can be
made routine, so that people of limited managerial competence—the
typical franchise holder, or the business manager of a local freestanding
surgical center—can do a decent job without much supervision; and (c)
when the individual unit itself reaches fairly swiftly the optimum size
beyond which it does not require further capital but produces cash
surplus to help finance the startup of additional units.
For new ventures other than those capable of being financed as
separate units, capital planning is a survival necessity. If a growing new
venture plans realistically—and that again means assuming the
maximum rather than the minimum need—for its capital requirement and
its capital structure three years ahead, it should normally have little
difficulty in obtaining the kind of money it needs, when it needs it, and in
the form in which it needs it. If it waits until it outgrows its capital base
and its capital structure, it is putting its survival—and most assuredly its
independence—on the block. At the very least, the founders will find that
they have taken all the entrepreneurial risk and worked hard only to
make other people the rich owners. From being owners, they will have
become employees, with the new investors taking control.

Finally, the new venture needs to plan the financial system it requires
to manage growth. Again and again, a growing new venture starts off
with an excellent product, excellent standing in its market, and excellent
growth prospects. Then suddenly everything goes out of control:
receivables, inventory, manufacturing costs, administrative costs,
service, distribution, everything. Once one area gets out of control, all of
them do. The enterprise has outgrown its control structure. By the time
control has been reestablished, markets have been lost, customers have
become disgruntled if not hostile, distributors have lost their confidence
in the company. Worst of all, employees have lost trust in management,
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and with good reason.
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.)
To live up to its growth expectations, a new venture must establish
today the controls in these critical areas it will need three years hence.
Elaborate controls are not necessary nor does it matter that the figures
are only approximate. What matters is that the management of the new
venture is aware of these critical areas, is being reminded of them, and
can thus act fast if the need arises. Disarray normally does not appear if
there is adequate attention to the key areas. Then the new venture will
have the controls it needs when it needs them.
Financial foresight does not require a great deal of time. It does
require a good deal of thought, however. The technical tools to do the
job are easily available; they are spelled out in most texts on managerial
accounting. But the work will have to be done by the enterprise itself.
III
BUILDING A TOP MANAGEMENT TEAM
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, going concern—it gets
into trouble nobody seems to understand. The products are first-rate, the
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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. But it
is likely to be permanently crippled or to suffer scars that will bleed for
many years to come. Morale has been shattered and employees
throughout the company are disillusioned and cynical. And the people
who founded the business and built it almost always end up on the
outside, embittered and disenchanted.
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.
Whenever the objective economic indicators of a new venture—
market surveys, for instance, or demographic analysis—indicate that the
business may double within three or five years, then it is the duty of the
founder or founders to build the management team the new venture will
very soon require. ‘This is preventive medicine, so to speak.
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? Most of the areas will be on everyone’s list. But if
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there are divergencies and dissents—and there should be on a question
as important as this—they should be taken seriously. Every activity
which any member of the group thinks belongs there should go down on
the list.
The key activities are not to be found in books. They emerge from
analysis of the specific enterprise. Two enterprises that to an outsider
appear to be in an identical line of business may well end up defining
their key activities quite differently. One, for instance, may put production
in the center; the other, customer service. Only two key activities are
always present in any organization: there is always the management of
people and there is always the management of money. The rest has to
be determined by the people within looking at the enterprise and at their
own jobs, values, and goals.
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. But, again, any disagreement
should be taken seriously.
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. Perhaps this individual’s key
strength is new products and new technology. Perhaps this individual’s
key activity is operations, manufacturing, physical distribution, service.
Or perhaps it is money and finance and someone else had better handle
people. But all key activities need to be covered by someone who has
proven ability in performance.
There is no rule that says “A chief executive has to be in charge of
this or that.” Of course a chief executive is the court of last resort and
has ultimate accountability. And the chief executive also has to make
sure of getting the information necessary to discharge this ultimate
accountability. The chief executive’s own work, however, depends on
what the enterprise requires and on who the individual is. As long as the
CEO’s work program consists of key activities, he or she does a CEO’s
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job. But the CEO also is responsible for making sure that all the other
key activities are adequately covered.
Finally, goals and objectives for each area need to be set. Everyone
who takes on the primary responsibility for a key activity, whether
product development or people, or money, must be asked: “What can
this enterprise expect of you? What should we hold you accountable for?
What are you trying to accomplish and by what time?” But this is
elementary management, of course.
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. In the
meantime, all the members of the team have much to learn: their job;
how they work together; and what they have to do to enable the CEO
and their colleagues to do their jobs. Two or three years later, when the
growing venture needs a top management, it has one.
However, should it fail to provide for a top management before it
actually needs one, it will lose the capacity to manage itself long before it
actually needs a top management team. The founder will have become
so overloaded that important tasks will not get done. At this point the
company can go one of two ways. The first possibility is that the founder
concentrates on the one or two areas that fit his or her abilities and
interests. These are key areas indeed, but they are not the only crucial
ones, and no one is then left to look after the others. Two years later,
important areas have been slighted and the business is in dire straits.
The other, worse, possibility is that the founder is conscientious. He
knows that people and money are key activities and need to be taken
care of. His own abilities and interests, which actually built the business,
are in the design and development of new products. But being
conscientious, the founder forces himself to take care of people and
finance. Since he is not very gifted in either area, he does poorly in both.
It also takes him forever to reach decisions or to do any work in these
areas, so that he is forced, by lack of time, to neglect what he is really
good at and what the company depends on him for, the development of
new technology and new products. Three years later the company will
have become an empty shell without the products it needs, but also
without the management of people and the management of money it
needs.
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In the first example, it may be possible to save the company. After
all, it has the products. But the founder will inevitably be removed by
whoever comes in to salvage the company. In the second case, the
company usually cannot be saved at all and has to be sold or liquidated.
Long before it has reached the point where it needs the balance of a
top management team, the new venture has to create one. Long before
the time has come at which management by one person no longer works
and becomes mismanagement, that one person also has to start
learning how to work with colleagues, has to learn to trust people, yet
also how to hold them accountable. The founder has to learn to become
the leader of a team rather than a “star” with “helpers.”
IV
“WHERE CAN I CONTRIBUTE?”
Building a top management team may be the single most important
step toward entrepreneurial management in the new venture. It is only
the first step, however, for the founders themselves, who then have to
think through what their own future is to be.
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.
Every founder-entrepreneur nods to this and says, “Amen.” Everyone
has horror stories of other founder-entrepreneurs who did not change as
the venture changed, and who then destroyed both the business and
themselves. But even among the founders who can accept that they
themselves need to do something, few know how to tackle changing
their own roles and relationships. They tend to begin by asking: “What
do I like to do?” Or at best, “Where do I fit in?” The right question to start
with is: “What will the venture need objectively by way of management
from here on out?” And in a growing new venture, the founder has to ask
this question whenever the business (or the public-service institution)
grows significantly or changes direction or character, that is, changes its
products, services, markets, or the kind of people it needs.
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
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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?”
One example is that of the successful American post—World War II
metropolitan university, Pace, in New York City. Dr. Edward Mortola built
up the institution from nothing in 1947 into New York City’s third-largest
and fastest-growing university, with 25,000 students and well-regarded
graduate schools. In the university’s early years he was a radical
innovator. But when Pace was still very small (around 1950), Mortola
built a strong top management team. All members were given a major,
clearly defined responsibility, for which they were expected to take full
accountability and give leadership. A few years later, Mortola then
decided what his own role was to be and converted himself into a
traditional university president, while at the same time building a strong
independent board of trustees to advise and support him.
But the questions of what a venture needs, what the strengths of the
founder-entrepreneur are, and what he or she wants to do, might be
answered quite differently.
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
thereupon 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 three McDonald’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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Similarly, in a much smaller new venture, a building supply company
in the Pacific Northwest of the United States, the young man who built
the company decided that his role was not to run the company but to
develop its critical resource, the managers who are responsible for its
two hundred branches in small towns and suburbs. These managers are
in effect running their own local business. They are supported by strong
services in headquarters: central buying, quality control, control of credit
and receivables, and so on. But the selling is done by each manager,
locally and with very little help—maybe one salesman and a couple of
truck drivers.
The business depends on the motivation, drive, ability, and
enthusiasm of these isolated, fairly unsophisticated individuals. None of
them has a college degree and few have even finished high school. So
the founder of this company makes it his business to spend twelve to
fifteen days each month in the field visiting branch managers, spending
half a day with them, discussing their business, their plans, their
aspirations. This may well be the only distinction the company has—
otherwise, every other building materials wholesaler does the same
things. But this performance of the one key activity by the chief executive
has enabled the company to grow three to four times as fast as any
competitor, even in recession times.
Yet another quite different answer to the same question was given by
the three scientists who, together, founded what has become one of the
largest and most successful companies in the semiconductor industry.
When they asked themselves, “What are the needs of the business?” the
answer was that there were three: “One for basic business strategy, one
for scientific research and development, and one for the development of
people—especially scientific and technical people.” They decided which
of the three was most suited for each of these assignments, and then
divided them according to their strengths. The person who took the
human relations and human development job had actually been a prolific
scientific innovator and had high standing in scientific circles. But he
decided, and his colleagues concurred, that he was superbly fitted for
the managerial, the people task, so he took it. “It was not,” he once said
in a speech, “what I really wanted to do, but it was where I could make
the greatest contribution.”
These questions may not always lead to such happy endings. They
may even lead to the decision to leave the company.
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In one of the most successful new financial services ventures in the
United States, this is what the founder concluded. He did establish a top
management team. He asked what the company needed. He looked at
himself and his strengths; and he found no match between the needs of
the company and his own abilities, let alone between the needs of the
company and the things he wanted to do. “I trained my own successor
for about eighteen months, then turned the company over to him and
resigned,” he said. Since then he has started three new businesses, not
one of them in finance, has developed them successfully to medium-
size, and then quit again. He wants to develop new businesses but does
not enjoy running them. He accepts that both the businesses and he are
better off divorced from one another.
Other entrepreneurs in this same situation might reach different
conclusions. The founder of a well-known medical clinic, a leader in its
particular field, faced a similar dilemma. The needs of the institution
were for an administrator and money-raiser. His own inclinations were to
be a researcher and a clinician. But he realized that he was good at
raising money and capable of learning to be the chief executive officer of
a fairly large health-care organization. “And so,” he says, “I felt it my duty
to the venture I had created, and to my associates in it, to suppress my
own desires and to take on the job of chief administrator and money-
raiser. But I would never have done so had I not known that I had the
abilities to do the job, and if my advisors and my board had not all
assured me that I had these abilities.”
The question, “Where do I belong?” needs to be faced up to and
thought through by the founder-entrepreneur as soon as the venture
shows the first signs of success. But the question can be faced up to
much earlier. Indeed, it might be best thought through before the new
venture is even started.
This is what Soichiro Honda, the founder and builder of Honda Motor
Company in Japan, did when he decided to open a small business in the
darkest days after Japan’s defeat in World War II. He did not start his
venture until he had found the right man to be his partner and to run
administration, finance, distribution, marketing, sales, and personnel. For
Honda had decided from the outset that he belonged in engineering and
production and would not run anything else. This decision made the
Honda Motor Company.
There is an earlier and even more instructive example, that of Henry
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Ford. When Ford decided in 1903 to go into business for himself, he did
exactly what Honda did forty years later: before starting, he found the
right man to be his partner and to run the areas where Ford knew he did
not belong—administration, finance, distribution, marketing, sales, and
personnel. Like Honda, Henry Ford knew that he belonged in
engineering and manufacturing and was going to confine himself to
these two areas. The man he found, James Couzens,
*
contributed as
much as Ford to the success of the company. Many of the best known
policies and practices of the Ford Motor Company for which Henry Ford
is often given credit—the famous $5-a-day wage of 1913, or the
pioneering distribution and service policies, for example—were
Couzens’s ideas and at first resisted by Ford. So effective did Couzens
become that Ford grew increasingly jealous of him and forced him out in
1917. The last straw was Couzens’s insistence that the Model T was
obsolescent and his proposal to use some of the huge profits of the
company to start work on a successor.
The Ford Motor Company grew and prospered to the very day of
Couzens’s resignation. Within a few short months thereafter, as soon as
Henry Ford had taken every single top management function into his
own hands, forgetting that he had known earlier where he belonged, the
Ford Motor Company began its long decline. Henry Ford clung to the
Model T for a full ten years, until it had become literally unsalable. And
the company’s decline was not reversed for thirty years after Couzens’s
dismissal until, with his grandfather dying, a very young Henry Ford II
took over the practically bankrupt business.
THE NEED FOR OUTSIDE ADVICE
These last cases point up an important factor for the entrepreneur in
the new and growing venture, the need for independent, objective
outside advice.
The growing new venture may not need a formal board of directors.
Moreover, the typical board of directors very often does not provide the
advice and counsel the founder needs. But the founder does need
people with whom he can discuss basic decisions and to whom he
listens. Such people are rarely to be found within the enterprise.
Somebody has to challenge the founder’s appraisal of the needs of the
venture, and of his own personal strengths. Someone who is not a part
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of the problem has to ask questions, to review decisions and, above all,
to push constantly to have the long-term survival needs of the new
venture satisfied by building in the market focus, supplying financial
foresight, and creating a functioning top management team. This is the
final requirement of entrepreneurial management in the new venture.

The new venture that builds such entrepreneurial management into
its policies and practices will become a flourishing large business.
*
In so many new ventures, especially high-tech ventures, the
techniques discussed in this chapter are spurned and even despised.
The argument is that they constitute “management” and “We are
entrepreneurs.” But this is not informality; it is irresponsibility. It confuses
manners and substance. It is old wisdom that there is no freedom except
under the law. Freedom without law is license, which soon degenerates
into anarchy, and shortly thereafter into tyranny. It is precisely because
the new venture has to maintain and strengthen the entrepreneurial spirit
that it needs foresight and discipline. It needs to prepare itself for the
demands its own success will make of it. Above all, it needs
responsibility—and this, in the last analysis, is what entrepreneurial
management supplies to the new venture.
There is much more that could be said about managing the new
venture, about financing, staffing, marketing its products, and so on. But
these specifics are adequately covered in a number of publications.
†
What this chapter has tried to do is to identify and discuss the few fairly
simple policies that are crucial to the survival and success of any new
venture, whether a business or a public-service institution, whether
“high-tech,” “low-tech,” or “no-tech,” whether started by one man or
woman or by a group, and whether intended to remain a small business
or to become “another IBM.”
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III
ENTREPRENEURIAL STRATEGIES
Just as entrepreneurship requires entrepreneurial management, that is,
practices and policies within the enterprise, so it requires practices and
policies outside, in the marketplace. It requires entrepreneurial
strategies.
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16
“Fustest with the Mostest”
Of late, “strategy in business”
*
has become the “in” word, with any
number of books written about it.
†
However, I have not come across any
discussion of entrepreneurial strategies. Yet they are important; they are
distinct; and they are different.
There are four specifically entrepreneurial strategies:

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 are not mutually exclusive. One and the same
entrepreneur often combines two, sometimes even elements of three, in
one strategy. They are also not always sharply differentiated; the same
strategy might, for instance, be classified as “Hitting Them Where They
Ain’t” or as “Finding and occupying a specialized ‘ecological niche.’” Still,
each of these four has its prerequisites. Each fits certain kinds of
innovation and does not fit others. Each requires specific behavior on the
part of the entrepreneur. Finally, each has its own limitations and carries
its own risks.
I

BEING “FUSTEST WITH THE MOSTEST”
Being “Fustest with the Mostest” was how a Confederate cavalry
general in America’s Civil War explained consistently winning his battles.
In this strategy the entrepreneur aims at leadership, if not at dominance
of a new market or a new industry. Being “Fustest with the Mostest”
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does not necessarily aim at creating a big business right away, though
often this is indeed the aim. But it aims from the start at a permanent
leadership position.
Being “Fustest with the Mostest” is the approach that many people
consider the entrepreneurial strategy par excellence. Indeed, if one were
to go by the popular books on entrepreneurs,
*
one would conclude that
being “Fustest with the Mostest” is the only entrepreneurial strategy—
and a good many entrepreneurs, especially the high-tech ones, seem to
be of the same opinion.
They are wrong, however. To be sure, a good many entrepreneurs
have indeed chosen this strategy. Yet being “Fustest with the Mostest” is
not even the dominant entrepreneurial strategy, let alone the one with
the lowest risk or the highest success ratio. On the contrary, of all
entrepreneurial strategies it is the greatest gamble. And it is unforgiving,
making no allowances for mistakes and permitting no second chance.
But if successful, being “Fustest with the Mostest” is highly
rewarding.
Here are some examples to show what this strategy consists of and
what it requires.
Hoffmann-LaRoche of Basel, Switzerland, has for many years been
the world’s largest and in all probability its most profitable
pharmaceutical company. But its origins were quite humble: until the
mid1920s, Hoffmann-LaRoche was a small and struggling manufacturing
chemist, making a few textile dyes. It was totally overshadowed by the
huge German dye-stuff makers and two or three much bigger chemical
firms in its own country. Then it gambled on the newly discovered
vitamins at a time when the scientific world still could not quite accept
that such substances existed. It acquired the vitamin patents—nobody
else wanted them. It hired the discoverers away from Zurich University at
several times the salaries they could hope to get as professors, salaries
even industry had never paid before. And it invested all the money it had
and all it could borrow in manufacturing and marketing these new
substances.
Sixty years later, long after all vitamin patents have expired,
Hoffmann-LaRoche has nearly half the world’s vitamin market, now
amounting to billions of dollars a year. The company followed the same
strategy twice more: in the 1930s, when it went into the new sulfa drugs
even though most scientists of the time “knew” that systemic drugs could
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not be effective against infections; and twenty years later, in the mid-
fifties, when it went into the muscle-relaxing tranquilizers, Librium and
Valium—at that time considered equally heretical and incompatible with
what “every scientist knew.”
DuPont followed the same strategy. When it came up with Nylon, the
first truly synthetic fiber, after fifteen years of hard, frustrating research,
DuPont at once mounted massive efforts, built huge plants, went into
mass advertising—the company had never before had consumer
products to advertise—and created the industry we now call plastics.
These are “big-company” stories, it will be said. But Hoffmann-
LaRoche was not a big company when it started. And here are some
more recent examples of companies that started from nothing with a
strategy of getting there “Fustest with the Mostest.”
The word processor is not much of a “scientific” invention. It hooks
up three existing instruments: a typewriter, a display screen, and a fairly
elementary computer. But this combination of existing elements has
resulted in a genuine innovation that is radically changing office work.
Dr. An Wang was a lone entrepreneur when he conceived of the
combination some time in the mid-fifties. He had no track record as an
entrepreneur and a minimum of financial backing. Yet he clearly aimed
from the beginning at creating a new industry and at changing office
work—and Wang Laboratories has, of course, become a very big
company.
Similarly, the two young engineers who started the Apple computer
in the proverbial garage, without financial backers or previous business
experience, aimed from the beginning at creating an industry and
dominating it.
Not every “Fustest with the Mostest” strategy needs to aim at
creating a big business, though it must always aim at creating a
business that dominates its market. The 3M Company in St. Paul,
Minnesota, does not—as a matter of deliberate policy, it seems—attempt
an innovation that might result in a big business by itself. Nor does
Johnson & Johnson, the health-care and hygiene producer. Both
companies are among the most fertile and most successful innovators.
Both look for innovations that will lead to medium-sized rather than to
giant enterprises, which are, however, dominant in their markets.
Being “Fustest with the Mostest” is not confined to businesses. It is
also available to public-service institutions. When Wilhclm von Humboldt
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founded the University of Berlin in 1809—an event mentioned before in
this book—he clearly aimed at being “Fustest with the Mostest.” Prussia
had just been defeated by Napoleon and had barely escaped total
dismemberment. It was bankrupt, politically, militarily, and, above all,
financially. It looked very much the way Germany was to look after
Hitler’s defeat in 1945. Yet Humboldt went out to build the largest
university the Western world had ever seen or heard of—three to four
times as large as anything then in existence. He went out to hire the
leading scholars in every single discipline, beginning with the foremost
philosopher of the time, Georg W.F. Hegel. And he paid his professors
up to ten times as much as professors had ever been paid before, at a
period when first-class scholars were going begging since the
Napoleonic wars had forced many old and famous universities to
disband.
A hundred years later, in the early years of this century, two
surgeons in Rochester, an obscure Minnesota town far from population
centers or medical schools, decided to establish a medical center based
on totally new—and totally heretical—concepts of medical practice, and
especially on building teams in which outstanding specialists would work
together under a coordinating team leader. Frederick William Taylor, the
so-called father of scientific management, had never met the Mayo
Brothers. But in his well-known testimony before the Congress in 1911,
he called the Mayo Clinic the “only complete and successful scientific
management” he knew. These unknown provincial surgeons aimed from
the beginning at dominance of the field, at attracting outstanding
practitioners in every branch of medicine and the most gifted of the
younger men, and at attracting also patients able and willing to pay what
were then outrageous fees.
And twenty-five years later, the strategy of being “Fustest with the
Mostest” was used by the March of Dimes to organize research into
infantile paralysis (polio). Instead of aiming at gathering new knowledge
step by step, as all earlier medical research had done, the March of
Dimes aimed from the beginning at total victory over a completely
mysterious disease. No one before had ever organized a “research lab
without walls,” in which a large number of scientists in a multitude of
research institutions were commissioned to work on specific stages of a
planned and managed research program. The March of Dimes
established the pattern on which the United States, a little later,
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organized the first great research projects of World War II: the atom
bomb, the radar lab, the proximity fuse, and then another fifteen years
later, “Putting a Man on the Moon”—all innovative efforts using the
“Fustest with the Mostest” strategy.
These examples show, first, that being “Fustest with the Mostest”
requires an ambitious aim; otherwise it is bound to fail. It always aims at
creating a new industry or a new market. At the least, as in the case of
the Mayo Clinic or the March of Dimes, being “Fustest with the Mostest”
aims at creating a quite different and highly unconventional process. The
DuPonts surely did not say to themselves in the mid-twenties when they
brought in Carothers: “We will establish the plastics industry” (indeed,
the term was rarely used until the 1950s). But enough of the internal
DuPont documents of the time have been published to show that the top
management people did aim at creating a new industry. They were far
from convinced that Carothers and his research would succeed. But they
knew that they would have founded something big and brand new in the
event of success, and something that would go far beyond a single
product or even beyond a single major product line. Dr. Wang did not
coin the term “the Office of the Future,” as far as I know. But in his first
advertisements, he announced a new office environment and new
concepts of office work. Both the DuPonts and Wang from the beginning
clearly aimed at dominating the industry they hoped they would succeed
in creating.
The best example of what is implied in the strategy of being “Fustest
with the Mostest” is not a business case but Humboldt’s University of
Berlin. Humboldt was actually not a bit interested in a university, as
such. It was for him the means to create a new and different political
order, which would be neither the absolute monarchy of the eighteenth
century nor the democracy of the French Revolution in which the
bourgeoisie ruled. Rather, it would be a balanced system, in which a
totally apolitical professional civil service and an equally apolitical
professional officer corps, recruited and promoted strictly by merit, would
be autonomous in their very narrow spheres. These people—today we
would call them technocrats—would have limited tasks and would be
under the strict supervision of an independent professional judiciary. But
within these limits they would be the masters. There would then be two
spheres of individual freedom for the bourgeoisie, a moral and cultural
one, and an economic one.
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Humboldt had presented this concept earlier in book form.
*
After the
total defeat of the Prussian monarchy by Napoleon in 1806, the collapse
paralyzed all the forces that would otherwise have stopped Humboldt—
the king, the aristocracy, the military. He ran with the opportunity and
founded the University of Berlin as the main carrier of his political
concepts, with brilliant success. The University of Berlin did indeed
create the peculiar political structure the Germans in the nineteenth
century called the “Rechtsstaat” (the Lawful State), in which an
autonomous and self-governing elite of civil servants and general staff
officers was in full control of the political and military sphere; an
autonomous and self-governing elite of educated people (“die
Gebildeten Staende”) organized around self-governing universities
provided a “liberal” cultural sphere; and in which there was an
autonomous and largely unrestricted economy. This structure first gave
Prussia the moral and cultural, and soon thereafter the political and
economic ascendancy in Germany. Both leadership in Europe and
admiration outside of it followed in short order, especially on the part of
the British and the Americans for whom the Germans, until 1890 or so,
were the cultural and intellectual models. All this was exactly what
Humboldt in the hour of darkest defeat and total despair had envisaged
and aimed at. Indeed, he spelled out his aims clearly in the prospectus
and the charter of his university.
Perhaps because “Fustest with the Mostest” must aim at creating
something truly new, something truly different, nonexperts and outsiders
seem to do as well as the experts, in fact, often better.
HoffmannLaRoche, for instance, did not owe its strategy to chemists, but
to a musician who had married the granddaughter of the company’s
founder and needed more money to support his orchestra than the
company then provided through its meager dividends. To this day the
company has never been managed by chemists, but always by financial
men who have made their career in a major Swiss bank. Wilhelm von
Humboldt himself was a diplomat with no earlier ties to academia or
experience in it. The DuPont top management people were
businessmen rather than chemists and researchers. And while the
Brothers Mayo were well-trained surgeons, they were totally outside the
medical establishment of the time and isolated from it.
Of course, there are also the true “insiders,” Dr. Wang or the people
at 3M or the young computer engineers who designed the Apple
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computer. But when it comes to being “Fustest with the Mostest,” the
outsider may have an advantage. He does not know what everybody
within the field knows, and therefore does not know what cannot be
done.
II
The strategy of being “Fustest with the Mostest” has to hit right on target
or it misses altogether. Or, to vary the metaphor, being “Fustest with the
Mostest” is very much like a moon shot: a deviation of a fraction of a
minute of the arc and the missile disappears into outer space. And 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. The entrepreneur of so much of the popular literature or of
Hollywood movies, the person who suddenly has a “brilliant idea” and
rushes off to put it into effect, is not going to succeed with it. 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 that were discussed in Chapters 3 to 9.
There is, for instance, no better example of exploiting a change in
perception than Humboldt’s University of Berlin. The French Revolution
with its Terror, followed by Napoleon’s ruthless wars of conquest, had
left the educated bourgeoisie disillusioned with politics; and yet they also
quite clearly would have rejected any attempt to move the clock back
and return to the absolute monarchy of the eighteenth century, let alone
to feudalism. They needed a “liberal” but apolitical sphere, coupled with
an apolitical government based on the same principles of law and
education in which they themselves believed. And all of them at the time
were followers of Adam Smith, whose Wealth of Nations was probably
the most widely read and most highly respected political book of the
period. It was this which Humboldt’s political structure exploited and
which his plan for the University of Berlin translated into institutional
reality.
Wang’s word processor brilliantly exploited a process need. By the
1970s the fear of the computer that had been rampant in offices only a
little while earlier was beginning to be replaced by the question, “And
what will the computer do for me?” By that time, office workers had
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become familiar with the computer in such activities as making payroll or
controlling inventories; they also by that time had acquired office copiers
so that the paperload in every office was going up very sharply. Wang’s
word processor then addressed itself to the one remaining
nonautomated chore, a chore every office worker hated: rewriting letters,
speeches, reports, manuscripts to embody minor changes, and having to
do so again and again.
Hoffmann-LaRoche, in picking the vitamins in the early twenties,
exploited new knowledge. The musician who laid down its strategy
understood the “structure of scientific revolutions” a full thirty years
before a philosopher, Thomas Kuhn, wrote the celebrated book by that
title. He understood that a new basic theorem in science, even though
buttressed by enough evidence to make it impossible to reject, will still
not be accepted by a majority of scientists should it conflict with basic
theorems they have grown up with and hold as articles of faith. They pay
no attention to it for a long time, until the old “paradigm,” the old basic
theory, becomes totally untenable. And during that time those who
accept the new theorem and run with it have the field all to themselves.
Only with such a base in careful analysis can the strategy of being
“Fustest with the Mostest” possibly succeed.
Even then, it requires extreme concentration of effort. There has to
be one clear-cut goal and all efforts have to be focused on it. And when
this effort begins to produce results, the innovator has to be ready to
mobilize resources massively. As soon as DuPont had a usable
synthetic fiber—long before the market had begun to respond to it—the
company built large factories and bombarded both textile manufacturers
and the general public with advertisements, trial presentations, and
samples.
Then, after the innovation has become a successful business, the
work really begins. Then the strategy of “Fustest with the Mostest”
demands substantial and continuing efforts to retain a leadership
position; otherwise, all one has done is create a market for a competitor.
The innovator has to run even harder now that he has leadership than
he ran before and to continue his innovative efforts on a very large scale.
The research budget must be higher after the innovation has
successfully been accomplished than it was before. New uses have to
be found; new customers must be identified, and persuaded to try the
new materials. Above all, the entrepreneur who has succeeded in being
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“Fustest with the Mostest” has to make his product or his process
obsolete before a competitor can do it. Work on the successor to the
successful product or process has to start immediately, with the same
concentration of effort and the same investment of resources that led to
the initial success.
Finally, the entrepreneur who has attained leadership by being
“Fustest with the Mostest” has to be the one who systematically cuts the
price of his own product or process. To keep prices high simply holds an
umbrella over potential competitors and encourages them (on this, see
the next chapter, “Hit Them Where They Ain’t”).
This was established by the longest-lived private monopoly in
economic history, the Dynamite Cartel, founded by Alfred Nobel after his
invention of dynamite. The Dynamite Cartel maintained a worldwide
monopoly until World War I and even beyond, long after the Nobel
patents had expired. It did this by cutting price every time demand rose
by 10 to 20 percent. By that time, the companies in the cartel had fully
depreciated the investment they had had to make to get the additional
production. This made it unattractive for any potential competitor to build
new dynamite factories, while the cartel itself maintained its profitability.
It is no accident that DuPont has consistently followed this policy in the
United States, for the DuPont Company was the American member of
the Dynamite Cartel. But Wang has done the same with respect to the
word processor, Apple with respect to its computers, and 3M with
respect to all its products.
III
These are all success stories. They do not show how risky the strategy
of being “Fustest with the Mostest” actually is. The failures disappeared.
Yet we know that for everyone who succeeds with this strategy, many
more fail. There is only one chance with the “Fustest with the Mostest”
strategy. If it does not work right away, it is a total failure.
Everyone knows the old Swiss story of Wilhelm Tell the archer,
whom the tyrant promised to pardon if he succeeded in shooting an
apple off his son’s head on the first try. If he failed, he would either kill
the child or be killed himself. This is exactly the situation of the
entrepreneur in the “Fustest with the Mostest” strategy. There can be no
“almost-success” or “near-miss.” There is only success or failure.
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Even the successes may be perceived only by hindsight. At least we
know that in two of the examples failure was very close; a combination of
luck and chance saved them.
Nylon only succeeded because of a fluke. There was no market for a
synthetic fiber in the mid-thirties. It was far too expensive to compete
with cotton and rayon, the cheap fibers of the time, and was actually
even more expensive than silk, the luxury fiber which the Japanese in
the severe depression of the late thirties had to sell for whatever price
they could get What saved Nylon was the outbreak of World War II,
which stopped Japanese silk exports. By the time the Japanese could
start up their silk industry again, around 1950 or so, Nylon was firmly
entrenched, with its cost and price down to a fraction of what both had
been in the late thirties. The story of 3M’s best known product, Scotch
Tape, was told earlier. Again, but for pure accident, Scotch Tape would
have been a failure.
The strategy of being “Fustest with the Mostest” is indeed so risky
that an entire major strategy—the one that will be discussed in the next
chapter under the heading Creative Imitation—is based on the
assumption that being “Fustest with the Mostest” will fail far more often
than it can possibly succeed. It will fail because the will is lacking. It will
fail because efforts are inadequate. It will fail because, despite
successful innovation, not enough resources are deployed, are
available, or are being put to work to exploit success, and so on. While
the strategy is indeed highly rewarding when successful, it is much too
risky and much too difficult to be used for anything but major
innovations, for creating a new political order as Humboldt successfully
did, or a whole new field of therapy as Hoffmann-LaRoche did with the
vitamins, or a new approach to medical diagnosis and practice as the
Mayo Brothers set out to do. In effect, it fits a fairly small minority of
innovations. It requires profound analysis and a genuine understanding
of the sources of innovation and of their dynamics. It requires an
extreme concentration of effort and substantial resources. In most cases
alternative strategies are available and preferable—not primarily
because they carry less risk, but because for most innovations the
opportunity is not great enough to justify the cost, the effort, and the
investment of resources required for the “Fustest with the Mostest”
strategy.
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17
“Hit Them Where They Ain’t”
Two completely different entrepreneurial strategies were summed up by
another battle-winning Confederate general in America’s Civil War, who
said: “Hit Them Where They Ain’t.” They might be called creative
imitation and entrepreneurial judo, respectively.
I
CREATIVE IMITATION
Creative imitation
*
is clearly a contradiction in terms. What is creative
must surely be original. And if there is one thing imitation is not, it is
“original.” Yet the term fits. It describes a strategy that is “imitation” in its
substance. What the entrepreneur does is something somebody else
has already done. But it is “creative” because the entrepreneur applying
the strategy of “creative imitation” understands what the innovation
represents better than the people who made it and who innovated.
The foremost practitioner of this strategy and the most brilliant one is
IBM. But it is also very largely the strategy that Procter & Gamble has
been using to obtain and maintain leadership in the soap, detergent, and
toiletries markets. And the Japanese Hattori Company, whose Seiko
watches have become the world’s leader, also owes its domination of
the market to creative imitation.
In the early thirties IBM built a high-speed calculating machine to do
calculations for the astronomers at New York’s Columbia University. A
few years later it built a machine that was already designed as a
computer—again, to do astronomical calculations, this time at Harvard.
And by the end of World War II, IBM had built a real computer—the first
one, by the way, that had the features of the true computer: a “memory”
and the capacity to be “programmed.” And yet there are good reasons
why the history books pay scant attention to IBM as a computer
innovator. For as soon as it had finished its advanced 1945 computer—
the first computer to be shown to a lay public in its showroom in midtown
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New York, where it drew immense crowds—IBM abandoned its own
design and switched to the design of its rival, the ENIAC developed at
the University of Pennsylvania. The ENIAC was far better suited to
business applications such as payroll, only its designers did not see this.
IBM structured the ENIAC so that it could be manufactured and serviced
and could do mundane “numbers crunching.” When IBM’s version of the
ENIAC came out in 1953, it at once set the standard for commercial,
multipurpose, mainframe computers.
This is the strategy of “creative imitation.” It waits until somebody
else has established the new, but only “approximately.” Then it goes to
work. And within a short time it comes out with what the new really
should be to satisfy the customer, to do the work customers want and
pay for. The creative imitation has then set the standard and takes over
the market.
IBM practiced creative imitation again with the personal computer.
The idea was Apple’s. As described earlier (in Chapter 3), everybody at
IBM “knew” that a small, freestanding computer was a mistake—
uneconomical, far from optimal, and expensive. And yet it succeeded.
IBM immediately went to work to design a machine that would become
the standard in the personal computer field and dominate or at least lead
the entire field. The result was the PC. Within two years it had taken over
from Apple leadership in the personal computer field, becoming the
fastest-selling brand and the standard in the field.
Procter & Gamble acts very much the same way in the market for
detergents, soaps, toiletries, and processed foods.
When semiconductors became available, everyone in the watch
industry knew that they could be used to power a watch much more
accurately, much more reliably, and much more cheaply than traditional
watch movements. The Swiss soon brought out a quartz-powered digital
watch. But they had so much investment in traditional watchmaking that
they decided on a gradual introduction of quartz-powered digital watches
over a long period of time, during which these new timepieces would
remain expensive luxuries.
Meanwhile, the Hattori Company in Japan had long been making
conventional watches for the Japanese market. It saw the opportunity
and went in for creative imitation, developing the quartz-powered digital
watch as the standard timepiece. By the time the Swiss had woken up, it
was too late. Seiko watches had become the world’s bestsellers, with the
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Swiss almost pushed out of the market.
Like being “Fustest with the Mostest,” creative imitation is a strategy
aimed at market or industry leadership, if not at market or industry
dominance. But it is much less risky. By the time the creative imitator
moves, the market has been established and the new venture has been
accepted. Indeed, there is usually more demand for it than the original
innovator can easily supply. The market segmentations are known or at
least knowable. By then, too, market research can find out what
customers buy, how they buy, what constitutes value for them, and so
on. Most of the uncertainties that abound when the first innovator
appears have been dispelled or can at least be analyzed and studied.
No one has to explain any more what a personal computer or a digital
watch are and what they can do.
Of course, the original innovator may do it right the first time, thus
closing the door to creative imitation. There is the risk of an innovator
bringing out and doing the right job with vitamins as Hoffmann-LaRoche
did, or with Nylon as did DuPont, or as Wang did with the word
processor. But the number of entrepreneurs engaging in creative
imitation, and their substantial success, indicates that perhaps the risk of
the first innovator’s preempting the market by getting it right is not an
overwhelming one.
Another good example of creative imitation is Tylenol, the “non-
aspirin aspirin.” This case shows more clearly than any other I know
what the strategy consists of, what its requirements are, and how it
works.
Acetaminophen (the substance that is sold under the Tylenol brand
name in the U.S.) had been used for many years as a painkiller, but until
recently it was available in the United States only by prescription. Until
recently also, aspirin, the much older pain-killing substance, was
considered perfectly safe and had the pain-relief market to itself.
Acetaminophen is a less potent drug than aspirin. It is effective as a
painkiller but has no anti-inflammatory effect and also no effect on blood
coagulation. Because of this it is free from the side effects, especially
gastric upsets and stomach bleeding, which aspirin can cause,
particularly if used in large doses and over long periods of time for an
illness like arthritis.
When acetaminophen became available without prescription, the first
brand on the market was presented and promoted as a drug for those
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who suffered side effects from aspirin. It was eminently successful,
indeed, far more successful than its makers had anticipated. But it was
this very success that created the opportunity for creative imitation.
Johnson & Johnson realized that there was a market for a drug that
replaced aspirin as the painkiller of choice, with aspirin confined to the
fairly small market where anti-inflammatory and blood coagulation
effects were needed. From the start Tylenol was promoted as the safe,
universal painkiller. Within a year or two it had the market.
Creative imitation, these cases show, does not exploit the failure of
the pioneers as failure is commonly understood. On the contrary, the
pioneer must be successful. The Apple computer was a great success
story, and so was the acetaminophen brand that Tylenol ultimately
pushed out of market leadership. But the original innovators failed to
understand their success. The makers of the Apple were product-
focused rather than user-focused, and therefore offered additional
hardware where the user needed programs and software. In the Tylenol
case, the original innovators failed to realize what their own success
meant.
The creative innovator exploits the success of others. Creative
imitation is not “innovation” in the sense in which the term is most
commonly understood. The creative imitator does not invent a product or
service; he perfects and positions it. In the form in which it has been
introduced, it lacks something. It may be additional product features. It
may be segmentation of product or services so that slightly different
versions fit slightly different markets. It might be proper positioning of the
product in the market. Or creative imitation supplies something that is
still lacking.
The creative imitator looks at products or services from the viewpoint
of the customer. IBM’s personal computer is practically indistinguishable
from the Apple in its technical features, but IBM from the beginning
offered the customer programs and software. Apple maintained
traditional computer distribution through specialty stores. IBM—in a
radical break with its own traditions—developed all kinds of distribution
channels, specialty stores, major retailers like Sears, Roebuck, its own
retail stores, and so on. It made it easy for the consumer to buy and it
made it easy for the consumer to use the product. These, rather than
hardware features, were the “innovations” that gave IBM the personal
computer market.
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All told, 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.
These cases show what the strategy of creative imitation requires:
It requires a rapidly growing market. Creative imitators do not
succeed by taking away customers from the pioneers who have first
introduced a new product or service; they serve markets the pioneers
have created but do not adequately service. Creative imitation satisfies a
demand that already exists rather than creating one.
The strategy has its own risks, and they are considerable. Creative
imitators are easily tempted to splinter their efforts in the attempt to
hedge their bets. Another danger is to misread the trend and imitate
creatively what then turns out not to be the winning development in the
marketplace.
IBM, the world’s foremost creative imitator, exemplifies these
dangers. It has successfully imitated every major development in the
office-automation field. As a result, it has the leading product in every
single area. But because they originated in imitation, the products are so
diverse and so little compatible with one another that it is all but
impossible to build an integrated, automated office out of IBM building
blocks. It is thus still doubtful that IBM can maintain leadership in the
automated office and provide the integrated system for it. Yet this is
where the main market of the future is going to be in all probability. And
this risk, the risk of being too clever, is inherent in the creative imitation
strategy.
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. But as acetaminophen and
the Seiko watch show, they are by no means the only ones to do so.
Because creative imitation aims at market dominance, it is best
suited to a major product, process, or service: the personal computer,
the worldwide watch market, or a market as large as that for pain relief.
But the strategy requires less of a market than being “Fustest with the
Mostest.” 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. What it lacks in risk, however, creative imitation makes up
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for in its requirements for alertness, for flexibility, for willingness to
accept the verdict of the market, and above all, for hard work and
massive efforts.
II
ENTREPRENEURIAL JUDO
In 1947, Bell Laboratories invented the transistor. It was at once
realized that the transistor was going to replace the vacuum tube,
especially in consumer electronics such as the radio and the brand-new
television set. Everybody knew this; but nobody did anything about it.
The leading manufacturers—at that time they were all Americans—
began to study the transistor and to make plans for conversion to the
transistor “sometime around 1970.” Till then, they proclaimed, the
transistor “would not be ready.” Sony was practically unknown outside of
Japan and was not even in consumer electronics at the time. But Akio
Morita, Sony’s president, read about the transistor in the newspapers. As
a result, he went to the United States and bought a license for the new
transistor from Bell Labs for a ridiculous sum, all of $25,000. Two years
later, Sony brought out the first portable transistor radio, which weighed
less than one-fifth of comparable vacuum tube radios on the market, and
cost less than one-third. Three years later, Sony had the market for
cheap radios in the United States; and live years later, the Japanese had
captured the radio market all over the world.
Of course, this is a classic case of the rejection of the unexpected
success. The Americans rejected the transistor because it was “not
invented here,” that is, not invented by the electrical and electronic
leaders, RCA and G.E. It is a typical example of pride in doing things the
hard way. The Americans were so proud of the wonderful radios of those
days, the great Super Heterodyne sets that were such marvels of
craftsmanship. Compared to them, they thought silicon chips low grade,
if not indeed beneath their dignity.
But Sony’s success is not the real story. How do we explain that the
Japanese repeated this same strategy again and again, and always with
success, always surprising the Americans? They repeated it with
television sets and digital watches and hand-held calculators. They
repeated it with copiers when they moved in and took away a large
share of the market from the original inventor, the Xerox Company. The
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Japanese, in other words, have been successful again and again in
practicing “entrepreneurial judo” against the Americans.
But so did MCI and Sprint when they used the Bell Telephone
System’s (AT&T) own pricing to take away from the Bell System a very
large part of the long-distance business (see Chapter 6). So did ROLM
when it used Bell System’s policies against it to take away a large part of
the private branch exchange (PBX) market. And so did Citibank when it
started a consumer bank in Germany, the “Familienbank” (Family Bank),
which within a few short years came to dominate German consumer
finance.
The German banks knew that ordinary consumers had obtained
purchasing power and had become desirable clients. They went through
the motions of offering consumers banking services. But they really did
not want them. Consumers, they felt, were beneath the dignity of a major
bank, with its business customers and its rich investment clients. If
consumers needed an account at all, they should have it with the postal
savings bank. Whatever their advertisements said to the contrary, the
banks made it abundantly clear when consumers came into the august
offices of the local branch that they had little use for them.
This was the opening Citibank exploited when it founded its German
Familienbank, which catered to none but individual consumers, designed
the services consumers needed, and made it easy for consumers to do
business with a bank. Despite the tremendous strength of the German
banks and their pervasive presence in a country where there is a branch
of a major bank on the corner of every downtown street, Citibank’s
Familienbank attained dominance in the German consumer banking
business within five years or so.
All these newcomers—the Japanese, MCI, ROLM, Citibank—
practiced “entrepreneurial judo.” Of the entrepreneurial strategies,
especially the strategies aimed at obtaining leadership and dominance in
an industry or a market, entrepreneurial judo is by all odds the least risky
and the most likely to succeed.
Every policeman knows that a habitual criminal will always commit
his crime the same way—whether it is cracking a safe or entering a
building he wants to loot. He leaves behind a “signature,” which is as
individual and as distinct as a fingerprint. And he will not change that
signature even though it leads to his being caught time and again.
But it is not only the criminal who is set in his habits. All of us are.
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And so are businesses and industries. The habit will be persisted in
even though it leads again and again to loss of leadership and loss of
market. The American manufacturers persisted in the habits that
enabled the Japanese to take over their market again and again.
If the criminal is caught, he rarely accepts that his habit has betrayed
him. On the contrary, he will find all kinds of excuses—and continue the
habit that led to his being captured. Similarly, businesses that are being
betrayed by their habits will not admit it and will find all kinds of excuses.
The American electronics manufacturers, for instance, attribute the
Japanese successes to “low labor costs” in Japan. Yet the few American
manufacturers that have faced up to reality, for example, RCA and
Magnavox in television sets, are able to turn out in the United States
products at prices competitive with those of the Japanese, and
competitive also in quality, despite their paying American wages and
union benefits. The German banks uniformly explain the success of
Citibank’s Familienbank by its taking risks they themselves would not
touch. But Familienbank has lower credit losses with consumer loans
than the German banks, and its lending requirements are as strict as
those of the Germans. The German banks know this, of course. Yet they
keep on explaining away their failure and Familienbank ‘s success. This
is typical. And it explains why the same strategy—the same
entrepreneurial judo—can be used over and over again.
There are in particular five fairly common bad habits that enable
newcomers to use entrepreneurial judo and to catapult themselves into a
leadership position in an industry against the entrenched, established
companies.
1. The first is what American slang calls “NIH” (“Not Invented Here”),
the arrogance that leads a company or an industry to believe that
something new cannot be any good unless they themselves thought of it.
And so the new invention is spurned, as was the transistor by the
American electronics manufacturers.
2. The second is the tendency to “cream” a market, that is, to get the
high-profit part of it.
This is basically what Xerox did and what made it an easy target for
the Japanese imitators of its copying machines. Xerox focused its
strategy on the big users, the buyers of large numbers of machines or of
expensive, high-performance machines. It did not reject the others; but it
did not go after them. In particular, it did not see fit to give them service.
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In the end it was dissatisfaction with the service—or rather, with the lack
of service—Xerox provided for its smaller customers that made them
receptive to competitors’ machines.
“Creaming” is a violation of elementary managerial and economic
precepts. It is always punished by loss of market.
Xerox was resting on its laurels. They were indeed substantial and
well earned, but no business ever gets paid for what it did in the past.
“Creaming” attempts to get paid for past contributions. Once a business
gets into that habit, it is likely to continue in it and thus continue to be
vulnerable to entrepreneurial judo.
3. Even more debilitating is the third bad habit: the belief in “quality.”
“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, as manufacturers
typically believe. That is incompetence. Customers pay only for what is
of use to them and gives them value. Nothing else constitutes “quality.”
The American electronics manufacturers in the 1950s believed that
their products with all those wonderful vacuum tubes were “quality”
because they had put in thirty years of effort making radio sets more
complicated, bigger, and more expensive. They considered the product
to be “quality” because it needed a great deal of skill to turn out, whereas
a transistor radio is simple and can be made by unskilled labor on the
assembly line. But in consumer terms, the transistor radio is clearly far
superior “quality.” It weighs much less so that it can be taken on a trip to
the beach or to a picnic. It rarely goes wrong; there are no tubes to
replace. It costs a great deal less. And in range and fidelity it very soon
surpassed even the most magnificent Super Heterodyne with sixteen
vacuum tubes, one of which always burned out just when needed.
4. Closely related to both “creaming” and “quality” is the fourth bad
habit, the delusion of the “premium” price. A “premium” price is always
an invitation to the competitor.
For two hundred years, since the time of J. B. Say in France and of
David Ricardo in England in the early years of the nineteenth century,
economists have known that the only way to get a higher profit margin,
except through a monopoly, is through lower costs. The attempt to
achieve a higher profit margin through a higher price is always self-
defeating. It holds an umbrella over the competitor. What looks like
higher profits for the established leader is in effect a subsidy to the
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newcomer who, in a very few years, will unseat the leader and claim the
throne for himself. “Premium” prices, instead of being an occasion for joy
—and a reason for a higher stock price or a higher price/earnings
multiple—should always be considered a threat and dangerous
vulnerability.
Yet the delusion of higher profits to be achieved through “premium”
prices is almost universal, even though it always opens the door to
entrepreneurial judo.
5. Finally, there is a fifth bad habit that is typical of established
businesses and leads to their downfall—Xerox is a good example. They
maximize rather than optimize. As the market grows and develops, they
try to satisfy every single user through the same product or service.
A new analytical instrument to test chemical reaction is being
introduced, for instance. At first its market is quite limited, let’s say to
industrial laboratories. But then university laboratories, research
institutes, and hospitals all begin to buy the instrument, but each wants
something slightly different. And so the manufacturer puts in one feature
to satisfy this customer, then another one to satisfy that customer, and
so on, until what started out as a simple instrument has become
complicated. The manufacturer has maximized what the instrument can
do. As a result, the instrument no longer satisfies anyone. For, by trying
to satisfy everybody, one always ends up satisfying nobody. The
instrument also has become expensive, as well as being hard to use and
hard to maintain. But the manufacturer is proud of the instrument;
indeed, his full-page advertisement lists sixty-four different things it can
do.
This manufacturer will almost certainly become the victim of
entrepreneurial judo. What he thinks is his very strength will be turned
against him. The newcomer will come in with an instrument designed to
satisfy one of the markets, the hospital, for instance. It will not contain a
single feature the hospital people do not need, and do not need every
day. But everything the hospital needs will be there and with higher
performance capacity than the multipurpose instrument can possibly
offer. The same manufacturer will then bring out a model for the
research laboratory, for the government laboratory, for industry—and in
no time at all the newcomer will have taken away the markets with
instruments that are specifically designed for their users, instruments
that optimize rather than maximize.
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Similarly, when the Japanese came in with their copiers in
competition with Xerox, they designed machines that fitted specific
groups of users—for example, the small office, whether that of the
dentist, the doctor, or the school principal. They did not try to match the
features of which the Xerox people themselves were the proudest, such
as the speed of the machine or the clarity of the copy. They gave the
small office what the small office needed most, a simple machine at a
low cost. And once they had established themselves in that market, they
then moved in on the other markets, each with a product designed to
serve optimally a specific market segment.
Sony similarly first moved into the low end of the radio market, the
market for cheap portables with limited range. Once it had established
itself there, it moved in on the other market segments.

Entrepreneurial judo aims first at securing a beachhead, and one
which the established leaders either do not defend at all or defend only
halfheartedly—the way the Germans did not counterattack when
Citibank established its Familienbank. Once that beachhead has been
secured, that is, once the newcomers have an adequate market and an
adequate revenue stream, they then move on to the rest of the “beach”
and finally to the whole “island.” In each case, they repeat the strategy.
They design a product or a service which is specific to a given market
segment and optimal for it. And the established leaders hardly ever beat
them to this game. Hardly ever do the established leaders manage to
change their own behavior 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 particularly successful.
The first is the common situation in which the established leaders
refuse to act on the unexpected, whether success or failure, and either
overlook it altogether or try to brush it aside. This is what Sony exploited.
The second situation is the Xerox situation. A new technology
emerges and grows fast. But the innovators who have brought to the
market the new technology (or the new service) behave like the classical
“monopolists”: they use their leadership position to “cream” the market
and to get “premium” prices. They either do not know or refuse to
acknowledge what has been amply proven: that a leadership position, let
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alone any kind of monopoly, can only be maintained if the leader
behaves as a “benevolent monopolist” (the term is Joseph
Schumpeter’s).
A benevolent monopolist cuts his prices before a competitor can cut
them. And he makes his product obsolete and introduces new product
before a competitor can do so. There are enough examples of this
around to prove the validity of the thesis. It is the way in which the
DuPont Company has acted for many years and in which the American
Bell Telephone System (AT&T) used to act before it was overcome by
the inflationary problems of the 1970s. 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.
Similarly, 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.
Finally, entrepreneurial judo works as a strategy when market or
industry structure changes fast—which is the Familienbank story. As
Germany became prosperous in the fifties and sixties, ordinary people
became customers for financial services beyond the traditional savings
account or the traditional mortgage. But the German banks stuck to their
old markets.

Entrepreneurial judo is always market-focused and market-driven.
The starting point may be technology, as it was when Akio Morita
traveled to the United States from a Japan that had barely emerged from
the destruction of World War II to acquire a transistor license. Morita
looked at the market segment which the existing technology satisfied the
least, simply because of the weight and fragility of vacuum tubes: the
market for portables. He then designed the right radio for that market, a
market of young people with little money but also fairly simple demands
with respect to range of the instrument and to quality of sound, a market,
in other words, that the old technology simply could not adequately
serve.
Similarly, the long-distance discounters in the United States who saw
the opportunity to buy from the Bell Telephone System wholesale and to
resell retail, designed a service first for the fairly modest number of
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substantial businesses that were too small to build their own
longdistance system but large enough to have heavy long-distance bills.
Only after they had secured a substantial share of that market did they
move out and try to go after both the very big and the small users.
To use the entrepreneurial judo strategy, one starts out with an
analysis of the industry, the producers and the suppliers, their habits,
especially their bad habits, and their policies. But then one looks at the
markets and tries 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, as a rule, not good enough to offer the same product or the same
service at lower cost. There has to be something that distinguishes it
from what already exists. When the ROLM Company offered a private
branch exchange—a switchboard for business and office users—in
competition with AT&T, it built in additional features designed around a
small computer. These were not high-tech, let alone new inventions.
Indeed, AT&T itself had designed similar features. But AT&T did not
push them—and ROLM did. Similarly, when Citibank went into Germany
with the Familienbank, it put in some innovative services which German
banks as a rule did not offer to small depositors, such as travelers
checks or tax advice.
It is not enough, in other words, for the newcomer simply to do as
good a job as the established leader at a lower cost or with better
service. The newcomers have to make themselves distinct.
Like being “Fustest with the Mostest” and creative imitation,
entrepreneurial judo aims at obtaining leadership position and eventually
dominance. But it does not do so by competing with the leaders—or at
least not where the leaders are aware of competitive challenge or
worried about it. Entrepreneurial judo “Hits Them Where They Ain’t.”
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18
Ecological Niches
The entrepreneurial strategies discussed so far, being “Fustest with the
Mostest,” creative imitation, and entrepreneurial judo, all aim at market
or industry leadership, if not at dominance. The “ecological niche”
strategy aims at control. The strategies discussed earlier aim at
positioning an enterprise in a large market or a major industry. The
ecological niche strategy aims at obtaining a practical monopoly in a
small area. The first three strategies are competitive strategies. The
ecological niche strategy aims at making its successful practitioners
immune to competition and unlikely to be challenged. Successful
practitioners of “Fustest with the Mostest,” creative imitation, and
entrepreneurial judo become big companies, highly visible if not
household words. Successful practitioners of the ecological niche take
the cash and let the credit go. They wallow in their anonymity. Indeed, in
the most successful of the ecological niche strategies, the whole point is
to be so inconspicuous, despite the product’s being essential to a
process, that no one is likely to try to compete.
There are three distinct niche strategies, each with its own
requirements, its own limitations, and its own risks:
the toll-gate strategy;
the specialty skill strategy; and
the specialty market strategy.
I
THE TOLL-GATE STRATEGY
Earlier, in Chapter 4, I discussed the strategy of the Alcon Company,
which developed an enzyme to eliminate the one feature of the standard
surgical operation for senile cataracts that went counter to the rhythm
and the logic of the process. Once this enzyme had been developed and
patented, it had a “toll-gate” position. No eye surgeon would do without
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it. No matter what Alcon charged for the teaspoonful of enzyme that was
needed for each cataract operation, the cost was insignificant in relation
to the total cost of the operation. I doubt that any eye surgeon or any
hospital ever even inquired what the stuff cost. The total market for this
particular preparation was so small—maybe $50 million dollars a year
worldwide—that it clearly would not have been worth anybody’s while to
try to develop a competing product. There would not have been one
additional cataract operation in the world just because this particular
enzyme had become cheaper. All that potential competitors could
possibly do, therefore, would have been to knock down the price for
everybody, without deriving much benefit for themselves.
A very similar toll-gate position has been occupied for many years by
a medium-sized company which, fifty or sixty years ago, developed a
blowout protector for oil wells. The cost of drilling an oil well may run into
many millions. One blowout will destroy the entire well and everything
that has been invested in it. The blowout protector, which safeguards the
well while being drilled, is thus cheap insurance, no matter what its price.
Again, the total market is so limited as to make it unattractive for any
would-be competitor. Lowering the price of blowout protectors, which
constitute maybe 1 percent of the total cost of a deep well, could not
possibly stimulate anyone to drill more wells. Competition could only
degrade the price without increasing the demand.
Another example of a toll-gate strategy is Dewey & Almy—now a
division of W. R. Grace. This company developed a compound to seal tin
cans in the 1930s. The seal is an essential ingredient of the can: if a can
goes bad, it can cause catastrophic damage. One death from one case
of botulism in a can can easily destroy a food packer. A can-sealing
compound that offers protection against spoilage is therefore cheap at
any price. And yet the cost of sealing—a fraction of a cent at best—is so
insignificant to both the cost of the total can and the risk of spoilage that
nobody is much concerned about it. What matters is performance, not
cost. Again, the total market, while larger than that for enzymes in
cataract operations or for blowout protectors, is still a limited one. And
lowering the price for can-sealing compound is quite unlikely to increase
the demand by a single can.
The toll-gate position is thus in many ways the most desirable
position a company can occupy. But it has stringent requirements. The
product has to be essential to a process. The risk of not using it—the risk
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of losing an eye, losing an oil well, or spoilage in a tin can—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 are not easily found. Normally they occur
only in an incongruity situation (cf. Chapter 4). The incongruity, as in the
case of Alcon’s enzyme, might be an incongruity in the rhythm or the
logic of a process. Or, as in the case of the blowout protector or the can-
sealing compound, 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 basically a static position. Once the ecological niche has been
occupied, 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.
This may not be too important for Alcon. Cataracts can be assumed
to be impervious to economic fluctuations, whether boom or depression.
But the company making blowout protectors had to invest enormous
amounts of money in new plants when oil drilling skyrocketed in 1973,
and again after the 1979 petroleum panic. It suspected that the boom
could not last; yet it had to make the investments even though it was
reasonably sure it could never earn them back. Not to have done so
would have meant losing its market irretrievably. Equally, it was
powerless when, a few years later, the oil boom collapsed and oil drilling
shrank by 80 percent within twelve months, and with it orders for oil-
drilling equipment.
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. Dewey & Almy, for
instance, has no defense against the replacement of tin cans by other
container materials such as glass, paper, or plastics, or by other
methods of preserving food such as freezing and irradiation.
And the toll-gate strategist must never exploit his monopoly. He must
not become what the Germans call a Raubritter (the English “robber
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baron” does not mean quite the same thing) who robbed and raped the
hapless travelers as they passed through the mountain defiles and river
gorges atop of which perched his castle. He must not abuse his
monopoly to exploit, to extort, to maltreat his customers. If he does, the
users will put another supplier into business, or they will switch to less
effective substitutes which they can then control.
The right strategy is the one Dewey & Almy has successfully pursued
for more than forty years now. It offers its users, especially those in the
Third World, extensive technical service, teaches their people, and
designs new and better canning and can-sealing machinery for them to
use with the Dewey & Almy sealing compounds. Yet it also constantly
upgrades the compounds.
The toll-gate position might be impregnable—or nearly so. But it can
only control within a narrow radius. Alcon tried to overcome this limitation
by diversifying into all kinds of consumer products for the eye: artificial
tears, contact lens fluids, anti-allergic eyedrops, and so on. This was
successful insofar as it made the company attractive to one of the
leading consumer goods multinationals, the Swiss Nestlé Company,
which bought out Alcon for a very substantial sum. To the best of my
knowledge, Alcon is the only toll-gate company of this kind that
succeeded in establishing itself in markets outside its original position
and with products that were different in their economic characteristics.
But whether this diversification into highly competitive consumer markets
of which the company knew very little was profitable, is not known.
II
THE SPECIALTY SKILL
Everybody knows the major automobile nameplates. But few people
know the names of the companies that supply the electrical and lighting
systems for these cars, and yet there are far fewer such systems than
there are automobile nameplates: in the United States, the Delco group
of GM; in Germany, Robert Bosch; in Great Britain, Lucas; and so on.
Practically no one outside of the automobile industry knows that one
firm, A. 0. Smith of Milwaukee, has for decades been making every
single frame used in an American passenger car, nor that for decades
another firm, Bendix, has made every single set of automotive brakes
used by the American automobile industry.
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By now these are all old and well-established firms, of course, but
only because the automobile is itself an old industry. These companies
established their controlling position when the industry was in its infancy,
well before World War I. Robert Bosch, for instance, was a
contemporary and friend of the two German auto pioneers, Carl Benz
and Gottfried Daimler, and started his firm in the 1880s.
But once these companies had attained their controlling position in
their specialty skill niche, they retained it. Unlike the toll-gate companies,
theirs is a fairly large niche, yet it is still unique. It was obtained by
developing high skill at a very early time. A. O. Smith developed what
today would be called “automation” in making automobile frames during
and shortly after World War I. The electrical system which Bosch in
Germany designed for Mercedes staff cars around 1911 was so far
advanced that it was put into general use even in luxury automobiles
only after World War II. Delco in Dayton, Ohio, developed the self-starter
before becoming a part of General Motors, that is, before 1914. 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.”
Specialty skill niches are by no means confined to manufacturing.
Within the last ten years a few private trading firms, most of them in
Vienna, Austria, have built a similar niche in what used to be called
“barter” and is now called “counter-trade”: taking goods from a
developing importing country, Bulgarian tobacco or Brazilian-made
irrigation pumps, in payment for locomotives, machinery, or
pharmaceuticals exported by a company in a developed country. And
much earlier, an enterprising German attained such a hold on one
specialty skill niche that guidebooks for tourists are still called by his
name, “Baedeker.”
As these cases show, timing is of the essence in establishing a
specialty skill niche. It has to be done at the very beginning of a new
industry, a new custom, a new market, a new trend. Karl Baedeker
published his first guidebook in 1828, as soon as the first steamships on
the Rhine opened tourist travel to the middle classes. He then had the
field virtually to himself until World War I made German books
unacceptable in Western countries. The counter-traders of Vienna
started around 1960, when such trade was still the rare exception,
largely confined to the smaller countries of the Soviet Bloc (which
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explains why they are concentrated in Austria). Ten years later, when
hard currencies had become scarce all through the Third World, they
had honed their skills and become the “specialists.”
To attain a specialty niche always requires something new,
something added, something that is genuine innovation. There were
guidebooks for travelers before Baedeker, but they confined themselves
to the cultural scene—churches, sights, and so on. For practical details
—the hotels, the tariff of the horse-drawn cabs, the distances, and the
proper amount to tip—the traveling English milord relied on a
professional, the courier. But the middle class had no courier, and that
was Baedeker’s opportunity. Once he had learned what information the
traveler needed, how to get at it and to present it (the format he
established is still the one many guidebooks follow), it would not have
paid anyone to duplicate Baedeker’s investment and build a competing
organization.
In the early stages of a major new development, the specialty skill
niche offers an exceptional opportunity. Examples abound. For many,
many years there were only two companies in the United States making
airplane propellers, for instance. Both had been started before World
War I.
A specialty skill niche is rarely found by accident. In every single
case, it results from a systematic survey of innovative opportunities. In
every single case, the entrepreneur looks for the place where a specialty
skill can be developed and can give a new enterprise a unique
controlling position. Robert Bosch spent years studying the new
automotive field to position his new company where it could immediately
establish itself as the leader. Hamilton Propeller, for many years the
leading airplane propeller manufacturer in the United States, was the
result of a systematic search by its founder in the early days of powered
flight. Baedeker made several attempts to start a service for the tourist
before he decided on the guidebook that then bore his name and made
him famous.
The first point, therefore, is that in the early stages of a new industry,
a new market, or a new major trend, there is the opportunity to search
systematically for the specialty skill opportunity—and then there is
usually time to develop a unique skill.
The second point is that the specialty skill niche does require a skill
that is both unique and different. The early automobile pioneers were,
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without exception, mechanics. They knew a great deal about machinery,
about metals and about engines. But electricity was alien to them. It
required theoretical knowledge which they neither possessed nor knew
how to acquire. There were other publishers in Baedeker’s time, but a
guidebook that required on-the-spot gathering of an enormous amount of
detailed information, constant inspection, and a staff of traveling auditors
was not within their purview. “Counter-trade” is neither trading nor
banking.
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 really wants to get into something that is so alien in skill
and in temperament.
Thirdly, a business occupying a specialty skill niche must constantly
work on improving its own skill. It has to stay ahead. Indeed, it has to
make itself constantly obsolete. The automobile companies in the early
days used to complain that Delco in Dayton, and Bosch in Stuttgart,
were pushing them. They turned out lighting systems that were far
ahead of the ordinary automobile, ahead of what the automobile
manufacturers of the times thought the customer needed, wanted, or
could pay for, ahead very often of what the automobile manufacturer
knew how to assemble.
While the specialty skill niche has unique advantages, it also has
severe limitations. One is that it inflicts tunnel-vision on its occupants. In
order to maintain themselves in their controlling position, they have to
learn to look neither right nor left, but directly ahead at their narrow area,
their specialized field. Airplane electronics were not too different from
automobile electronics in the early stages. Yet the automobile
electricians—Delco, Bosch, and Lucas—are not leaders in airplane
electronics. They did not even see the field and made no attempt to get
into it.
A 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. The strength of the
automobile electrical firms is that the customer does not know that they
exist. But this is of course also their weakness. If the British automobile
industry goes down, so does Lucas. A. O. Smith prospered making
automotive frames until the energy crisis. Then American automobile
manufacturers began to switch to cars without frames. These cars are
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substantially more expensive than cars with frames, but they weigh less
and therefore burn less fuel. A. O. Smith could do nothing to reverse the
adverse trend.
Finally, the greatest danger to the specialty niche manufacturer is for
the specialty to cease being a specialty and to become universal. The
niche that the Viennese counter-traders now occupy was occupied in the
1920s and 1930s by foreign exchange traders who were mostly Swiss.
Bankers of those days, having grown up before World War I, still
believed that currencies ought to be stable. And when currencies
became unstable, when there were blocked currencies around,
currencies with different exchange rates for different purposes, and other
such monstrosities, the bankers did not even want to handle the
business. They were only too happy to let the specialists in Switzerland
do what they thought was a dirty job. So a fairly small number of Swiss
foreign exchange traders occupied a highly profitable specialty skill
niche. After World War II, with the tremendous expansion of world trade,
foreign exchange trading became routine. By now every bank, at least in
the major money centers, has its own foreign exchange traders.
The specialty skill niche, like all ecological niches, is therefore limited
—in scope as well as 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 rapidly expanding new technology, industry,
or market, it is perhaps the most advantageous strategy. Very few of the
automobile makers of 1920 are still around; every single one of the
electrical and lighting systems makers is. Once attained and properly
maintained, the specialty skill niche protects against competition,
precisely because no automobile buyer knows or cares who makes the
headlights or the brakes. No automobile buyer is therefore likely to shop
around for either. Once the name “Baedeker” had become synonymous
with tourist guidebooks, there was little danger that anybody else would
try to muscle in, at least not until the market changed drastically. In a
new technology, a new industry, or a new market, the specialty skill
strategy offers an optimal ratio between opportunity and risk of failure.
III
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THE SPECIALTY MARKET
The major difference between the specialty skill niche and the
specialty market niche is that the former is built around a product or
service and the latter around specialized knowledge of a market.
Otherwise, they are similar.
Two medium-sized companies, one in northern England and one in
Denmark, supply the great majority of the automated baking ovens for
cookies and crackers bought in the non-Communist world. For many
decades, two companies—the two earliest travel agents, Thomas Cook
in Europe and American Express in the United States—had a Dractical
monopoly on travelers checks.

There is, I am told, nothing very difficult or particularly technical
about baking ovens. There are literally dozens of companies around that
could make them just as well as those two firms in England and
Denmark. But these two know the market: they know every single major
baker, and every single major baker knows them. The market is just not
big enough or attractive enough to try to compete with these two, as long
as they remain satisfactory. Similarly, travelers checks were a backwater
until the post—World War II period of mass travel. They were highly
profitable since the issuer, whether Cook or American Express, has the
use of the money and keeps the interest earned on it until the purchaser
cashes the check—sometimes months after the checks were purchased.
But the market was not large enough to tempt anyone else. Furthermore,
travelers checks required a worldwide organization, which Cook and
American Express had to maintain anyhow to service their travel
customers, and which nobody else in those days had any reason to
build.
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 travelers check is no great “invention.” It is basically nothing
more than a letter of credit, and that has been around for hundreds of
years. What was new was that travelers checks were offered—at first to
the customers of Cook and American Express, and then to the general
public—in standard denominations. And they could be cashed wherever
Cook or American Express had an office or an agent. That made them
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uniquely attractive to the tourist who did not want to carry a great deal of
cash and did not have the established banking connections to make
them eligible for a letter of credit.
There was nothing particularly advanced in the early baking ovens,
nor is there any high technology in the baking ovens installed today.
What the two leading firms did was to realize that the act of baking
cookies and crackers was moving out of the home and into the factory.
They then studied what commercial bakers needed so that they could
manufacture the product their own customers, grocers and
supermarkets, could in turn sell and the housewife would buy. The
baking ovens were not based on engineering but on market research:
the engineering would have been available to anyone.
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, if only a “twist” like the one
that converted the traditional letter of credit into the modern travelers
check; and continuous work to improve the product and especially the
service, so that leadership, once obtained, will be retained.
And it has the same limitations. The greatest threat to the specialty
market position is success. The greatest threat is when the specialty
market becomes a mass market.
Travelers checks have now become a commodity and highly
competitive because travel has become a mass market.
So have perfumes. A French firm, Coty, created the modern perfume
industry. It realized that World War I had changed the attitude toward
cosmetics. Whereas before the war only “fast women” used cosmetics—
or dared admit to their use—cosmetics had become accepted and
respectable. By the mid-twenties Coty had established itself in what was
almost a monopoly position on both sides of the Atlantic. Until 1929 the
cosmetics market was a “specialty market,” a market of the upper middle
class. But then during the Depression it exploded into a genuine mass
market. It also split into two segments: a prestige segment, with high
prices, specialty distribution, and specialty packaging; and popular-
priced, mass brands sold in every outlet including the supermarket, the
variety store, and the drugstore. Within a few short years, the specialty
market dominated by Coty had disappeared. But Coty could not make up
its mind whether to try to become one of the mass marketers in
cosmetics or one of the luxury producers. It tried to stay in a market that
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no longer existed, and has been drifting ever since.
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19
Changing Values and Characteristics
In the entrepreneurial strategies discussed so far, the aim is to introduce
an innovation. In the entrepreneurial strategy discussed in this chapter,
the strategy itself is the innovation. The product or service it carries may
well have been around a long time—in our first example, the postal
service, it was almost two thousand years old. But the strategy converts
this old, established product or service into something new. It changes
its utility, its value, its economic characteristics. While physically there is
no change, economically there is something different and new.
All the strategies to be discussed in this chapter have one thing in
common. They create a customer—and that is the ultimate purpose of a
business, indeed, of economic activity.
*
But they do so in four different ways:
by creating utility;
by pricing;
by adaptation to the customer’s social and economic
reality;
by delivering what represents true value to the customer.
CREATING CUSTOMER UTILITY
English schoolboys used to be taught that Rowland Hill “invented”
the postal service in 1836. That is nonsense, of course. The Rome of the
Caesars had an excellent service, with fast couriers carrying mail on
regular schedules to the furthest corners of the Empire. A thousand
years later, in 1521, the German emperor Charles V, in true
Renaissance fashion, went back to Classical Rome and gave a
monopoly on carrying mail in the imperial domains to the princely family
of Thurn and Taxis. Their generous campaign contributions had enabled
him to bribe enough German Electors to win the imperial crown—and the
princes of Thurn and Taxis still provided the postal service in many parts
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of Germany as late as 1866, as stamp collectors know. By the middle of
the seventeenth century, every European country had organized a postal
service on the German model and so had, a hundred years later, the
American colonies. Indeed, all the great letter-writers of the Western
tradition, from Cicero to Madame de Sévigné, Lord Chesterfield, and
Voltaire, wrote and posted their letters long before Rowland Hill
“invented” the postal service.
Yet Hill did indeed create what we would now call “mail.” He
contributed no new technology and not one new “thing,” nothing that
could conceivably have been patented. But mail had always been paid
for by the addressee, with the fee computed according to distance and
weight. This made it both expensive and slow. Every letter had to be
brought to a post office to be weighed. Hill proposed that postage should
be uniform within Great Britain regardless of distance; that it be prepaid;
and that the fee be paid by affixing the kind of stamp that had been used
for many years to pay other fees and taxes. Overnight, mail became
easy and convenient; indeed, letters could now be dropped into a
collection box. Immediately, also, mail became absurdly cheap. The
letter that had earlier cost a shilling or more—and a shilling was as much
as a craftsman earned in a day—now cost only a penny. The volume
was no longer limited. In short, “mail” was born.
Hill created utility. He asked: What do the customers need for a
postal service to be truly a service to them? This is always the first
question in the entrepreneurial strategy of changing utility, values, and
economic characteristics. In fact, the reduction in the cost of mailing a
letter, although 80 percent or more, was secondary. The main effect was
to make using the mails convenient for everybody and available to
everybody. Letters no longer had to be confined to “epistles.” The tailor
could now use the mail to send a bill. The resulting explosion in volume,
which doubled in the first four years and quadrupled again in the next
ten, then brought the cost down to where mailing a letter cost practically
nothing for long years.
Price is usually almost irrelevant in the strategy of creating utility. The
strategy works by enabling customers to do what serves their purpose. It
works because it asks: What is truly a “service,” truly a “utility” to the
customer?
Every American bride wants to get one set of “good china.” A whole
set is, however, far too expensive a present, and the people giving her a
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wedding present do not know what pattern the bride wants or what
pieces she already has. So they end up giving something else. The
demand was there, in other words, but the utility was lacking. A medium-
sized dinnerware manufacturer, the Lenox China Company, saw this as
an innovative opportunity. Lenox adapted an old idea, the “bridal
register,” so that it only “registers” Lenox china. The bride-to-be then
picks one merchant whom she tells what pattern of Lenox china she
wants, and to whom she refers potential donors of wedding gifts. The
merchant then asks the donor: “How much do you want to spend?” and
explains: “That will get you two coffee cups with saucers.” Or the
merchant can say, “She already has all the coffee cups; what she needs
now is dessert plates.” The result is a happy bride, a happy wedding-gift
donor, and a very happy Lenox China Company.
Again, there is no high technology here, nothing patentable, nothing
but a focus on the needs of the customer. Yet the bridal register, for all
its simplicity—or perhaps because of it—has made Lenox the favorite
“good china” manufacturer and one of the most rapidly growing of
medium-sized American manufacturing companies.
Creating utility enables people to satisfy their wants and their needs
in their own way. The tailor could not send the bill to his customer
through the mails if it first took three hours to get the letter accepted by a
postal clerk and if the addressee then had to pay a large sum—perhaps
even as much as the bill itself. Rowland Hill did not add anything to the
service. It was performed by the same postal clerks using the same mail
coaches and the same letter carriers. And yet Rowland Hill’s postal
service was a totally different “service.” It served a different function.
II
PRICING
For many years, the best known American face in the world was that
of King Gillette, which graced the wrapper of every Gillette razor blade
sold anyplace in the world. And millions of men all over the world used a
Gillette razor blade every morning.
King Gillette did not invent the safety razor; dozens of them were
patented in the closing decades of the nineteenth century. Until 1860 or
1870, only a very small number of men, the aristocracy and a few
professionals and merchants, had to take care of their facial hair, and
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they could well afford a barber. Then, suddenly, large numbers of men,
tradesmen, shopkeepers, clerks, had to look “respectable.” Few of them
could handle a straight razor or felt comfortable with so dangerous a
tool, but visits to the barber were expensive, and worse, time-
consuming. Many inventors designed a “do-it-yourself” safety razor, yet
none could sell it. A visit to the barber cost ten cents and the cheapest
safety razor cost five dollars—an enormous sum in those days when a
dollar a day was a good wage.
Gillette’s safety razor was no better than many others, and it was a
good deal more expensive to produce. But Gillette did not “sell” the
razor. He practically gave it away by pricing it at fifty-five cents retail or
twenty cents wholesale, not much more than one-fifth of its
manufacturing cost. But he designed it so that it could use only his
patented blades. These cost him less than one cent apiece to make: he
sold them for five cents. And since the blades could be used six or seven
times, they delivered a shave at less than one cent apiece—or at less
than one-tenth the cost of a visit to a barber.
What Gillette did was to price what the customer buys, namely, the
shave, rather than what the manufacturer sells. In the end, the captive
Gillette customer may have paid more than he would have paid had he
bought a competitor’s safety razor for five dollars, and then bought the
competitor’s blades selling at one cent or two. Gillette’s customers surely
knew this; customers are more intelligent than either advertising
agencies or Ralph Nader believe. But Gillette’s pricing made sense to
them. They were paying for what they bought, that is, for a shave, rather
than for a “thing.” And the shave they got from the Gillette razor and the
Gillette razor blade was much more pleasant than any shave they could
have given themselves with that dangerous weapon, the straight-edge
razor, and far cheaper than they could have gotten at the neighborhood
barber’s.
One reason why the patents on a copying machine ended up at a
small, obscure company in Rochester, New York, then known as the
Haloid Company, rather than at one of the big printing-machine
manufacturers, was that none of the large established manufacturers
saw any possibility of selling a copying machine. Their calculations
showed that such a machine would have to sell for at least $4,000.
Nobody was going to pay such a sum for a copying machine when
carbon paper cost practically nothing. Also, of course, to spend $4,000
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on a machine meant a capital-appropriations request, which had to go all
the way up to the board of directors accompanied by a calculation
showing the return on investment, both of which seemed unimaginable
for a gadget to help the secretary. The Haloid Company—the present
Xerox—did a good deal of technical work to design the final machine.
But its major contribution was in pricing. It did not sell the machine; it
sold what the machine produced, copies. At five or ten cents a copy,
there is no need for a capital-appropriations request. This is “petty cash,”
which the secretary can disburse without going upstairs. Pricing the
Xerox machine at five cents a copy was the true innovation.
Most suppliers, including public-service institutions, never think of
pricing as a strategy. Yet pricing enables the customer to pay for what
he buys—a shave, a copy of a document—rather than for what the
supplier makes. What is being paid in the end is, of course, the same
amount. But how it is being paid is structured to the needs and the
realities of the consumer. It is structured in accordance with what the
consumer actually buys. And it charges for what represents “value” to
the customer rather than what represents “cost” to the supplier.
III
THE CUSTOMER’S REALITY
The worldwide leadership of the American General Electric Company
(G.E.) in large steam turbines is based on G.E.’s having thought through,
in the years before World War I, what its customers’ realities were.
Steam turbines, unlike the piston-driven steam engines which they
replaced in the generation of electric power, are complex, requiring a
high degree of engineering in their design, and skill in building and fitting
them. This the individual electric power company simply cannot supply. It
buys a major steam turbine maybe every five or ten years when it builds
a new power station. Yet the skill has to be kept in being all the time.
The manufacturer, therefore, has to set up and maintain a massive
consulting organization.
But, as G.E. soon found out, the customer cannot pay for consulting
services. Under American law, the state public utility commissions would
have to allow such an expenditure. In the opinion of the commissions,
however, the companies should have been able to do this work
themselves. G.E. also found that it could not add to the price of the
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steam turbine the cost of the consulting services which its customers
needed. Again, the public utility commissions would not have accepted
it. But while a steam turbine has a very long life, it needs a new set of
blades fairly often, maybe every five to seven years, and these blades
have to come from the maker of the original turbine. G.E. built up the
world’s foremost consulting engineering organization on electric power
stations—though it was careful not to call this consulting engineering but
“apparatus sales”—for which it did not charge. Its steam turbines were
no more expensive than those of its competitors. But it put the added
cost of the consulting organization plus a substantial profit into the price
it charged for replacement blades. Within ten years all the other
manufacturers of steam turbines had caught on and switched to the
same system. But by then G.E. had world market leadership.
Much earlier, during the 1840s, a similar design of product and
process to fit customer realities led to the invention of installment buying.
Cyrus McCormick was one of many Americans who built a harvesting
machine—the need was obvious. And he found, as had the other
inventors of similar machines, that he could not sell his product. The
farmer did not have the purchasing power. That the machine would earn
back what it cost within two or three seasons, everybody knew and
accepted, but there was no banker then who would have lent the
American farmer the money to buy a machine. McCormick offered
installments, to be paid out of the savings the harvester produced over
the ensuing three years. The farmer could now afford to buy the machine
—and he did so.
Manufacturers are wont to talk of the “irrational customer” (as do
economists, psychologists, and moralists). But there are no “irrational
customers.” As an old saying has it, “There are only lazy manufacturers.”
The customer has to be assumed to be rational. His or her reality,
however, is usually quite different from that of the manufacturer. The
rules and regulations of public utility commissions may appear to make
no sense and be purely arbitrary. For the power companies that have to
operate under them, they are realities nonetheless. The American farmer
may have been a better credit risk than American bankers of 1840
thought. But it was a fact that American banks of that period did not
advance money to farmers to purchase equipment. The innovative
strategy consists in accepting that these realities are not extraneous to
the product, but are, in fact, the product as far as the customer is
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concerned. Whatever customers buy has to fit their realities, or it is of no
use to them.
IV
DELIVERING VALUE TO THE CUSTOMER
The last of these innovative strategies delivers what is “value” to the
customer rather than what is “product” to the manufacturer. It is actually
only one step beyond the strategy of accepting the customer’s reality as
part of the product and part of what the customer buys and pays for.
A medium-sized company in America’s Midwest supplies more than
half of all the special lubricant needed for very large earth-moving and
hauling machines: the bulldozers and draglines used by contractors
building highways; the heavy equipment used to remove the overlay
from strip mines; the heavy trucks used to haul coal out of coal mines;
and so on. This company is in competition with some of the largest oil
companies, which can mobilize whole battalions of lubrication
specialists. It competes by not selling lubricating oil at all. Instead, it sells
what is, in effect, insurance. What is “value” to the contractor is not
lubrication: it is operating the equipment. Every hour the contractor loses
because this or that piece of heavy equipment cannot operate costs him
infinitely more than he spends on lubricants during an entire year. In all
these activities there is a heavy penalty for contractors who miss their
deadlines—and they can only get the contract by calculating the
deadline as finely as possible and racing against the clock. What the
Midwestern lubricant maker does is to offer contractors an analysis of
the maintenance needs of their equipment. Then it offers them a
maintenance program with an annual subscription price, and guarantees
the subscribers that their heavy equipment will not be shut down for
more than a given number of hours per year because of lubrication
problems. Needless to say, the program always prescribes the
manufacturer’s lubricant. But this is not what contractors buy. They are
buying trouble-free operations, which are extremely valuable to them.
The final example—one that might be called “moving from product to
system”—is that of Herman Miller, the American furniture maker in
Zeeland, Michigan. The company first became well known as the
manufacturer of one of the early modern designs, the Eames chair.
Then, when every other manufacturer began to turn out designer chairs,
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Herman Miller moved into making and selling whole offices and work
stations for hospitals, both with considerable success. Finally, when the
“office of the future” began to come in, Herman Miller founded a
Facilities Management Institute that does not even sell furniture or
equipment, but advises companies on office layout and equipment
needed for the best work flow, high productivity, high employee morale,
all at low cost. What Herman Miller is doing is defining “value” for the
customer. It is telling the customer, “You may pay for furniture, but you
are buying work, morale, productivity. And this is what you should
therefore be paying for.”

These examples are likely to be considered obvious. Surely,
anybody applying a little intelligence would have come up with these and
similar strategies? But the father of systematic economics, David
Ricardo, is believed to have said once, “Profits are not made by
differential cleverness, but by differential stupidity.” The strategies work,
not because they are clever, but because most suppliers—of goods as
well as of services, businesses as well as public-service institutions—do
not think. They work precisely because they are so “obvious.” Why, then,
are they so rare? For, as these examples show, anyone who asks the
question, What does the customer really buy? will win the race. In fact, it
is not even a race since nobody else is running. What explains this?
One reason is the economists and their concept of “value.” Every
economics book points out that customers do not buy a “product,” but
what the product does for them. And then, every economics book
promptly drops consideration of everything except the “price” for the
product, a “price” defined as what the customer pays to take possession
or ownership of a thing or a service. What the product does for the
customer is never mentioned again. Unfortunately, suppliers, whether of
products or of services, tend to follow the economists.
It is meaningful to say that “product A costs X dollars.” It is
meaningful to say that “we have to get Y dollars for the product to cover
our own costs of production and have enough left over to cover the cost
of capital, and thereby to show an adequate profit.” But it makes no
sense at all to conclude, “…and therefore the customer has to pay the
lump sum of Y dollars in cash for each piece of product A he buys.”
Rather, the argument should go as follows: “What the customer pays for
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each piece of the product has to work out as Y dollars for us. But how
the customer pays depends on what makes the most sense to him. It
depends on what the product does for the customer. It depends on what
fits his reality. It depends on what the customer sees as ‘value.’”
Price in itself is not “pricing,” and it is not “value.” It was this insight
that gave King Gillette a virtual monopoly on the shaving market for
almost forty years; it also enabled the tiny Haloid Company to become
the multibillion-dollar Xerox Company in ten years, and it gave General
Electric world leadership in steam turbines. In every single case, these
companies became exceedingly profitable. But they earned their
profitability. They were paid for giving their customers satisfaction, for
giving their customers what the customers wanted to buy, in other
words, for giving their customers their money’s worth.
“But this is nothing but elementary marketing,” most readers will
protest, and they are right. It is nothing but elementary marketing. To
start out with the customer’s utility, with what the customer buys, with
what the realities of the customer are and what the customer’s values
are—this is what marketing is all about. But why, after forty years of
preaching Marketing, teaching Marketing, professing Marketing, so few
suppliers are willing to follow, I cannot explain. The fact remains that so
far, anyone who is willing to use marketing as the basis for strategy is
likely to acquire leadership in an industry or a market fast and almost
without risk.

Entrepreneurial strategies are as important as purposeful innovation
and entrepreneurial management. Together, the three make up
innovation and entrepreneurship.
The available strategies are reasonably clear, and there are only a
few of them. But it is far less easy to be specific about entrepreneurial
strategies than it is about purposeful innovation and entrepreneurial
management. We know what the areas are in which innovative
opportunities are to be found and how they are to be analyzed. There
are correct policies and practices and wrong policies and practices to
make an existing business or public-service institution capable of
entrepreneurship; right things to do and wrong things to do in a new
venture. But the entrepreneurial strategy that fits a certain innovation is a
high-risk decision. Some entrepreneurial strategies are better fits in a
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given situation, for example, the strategy that I called entrepreneurial
judo, which is the strategy of choice where the leading businesses in an
industry persist year in and year out in the same habits of arrogance and
false superiority. We can describe the typical advantages and the typical
limitations of certain entrepreneurial strategies.
Above all, we know that an entrepreneurial strategy has more
chance of success the more it starts out with the users—their utilities,
their values, their realities. An innovation is a change in market or
society. It produces a greater yield for the user, greater wealth-producing
capacity for society, higher value or greater satisfaction. The test of an
innovation is always what it does for the user. Hence, entrepreneurship
always needs to be market-focused, indeed, market-driven.
Still, entrepreneurial strategy remains the decision-making area of
entrepreneurship and therefore the risk-taking one. It is by no means
hunch or gamble. But it also is not precisely science. Rather, it is
judgment.
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Conclusion
The Entrepreneurial Society
I
“Every generation needs a new revolution,” was Thomas Jefferson’s
conclusion toward the end of his long life. His contemporary, Goethe, the
great German poet, though an arch-conservative, voiced the same
sentiment when he sang in his old age:
Vernunft wird Unsinn
Wohitat, Plage.
*
Both Jefferson and Goethe were expressing their generation’s
disenchantment with the legacy of Enlightenment and French
Revolution. But they might just as well have reflected on our present-day
legacy, 150 years later, of that great shining promise, the Welfare State,
begun in Imperial Germany for the truly indigent and disabled, which has
now become “everybody’s entitlement” and an increasing burden on
those who produce. Institutions, systems, policies eventually outlive
themselves, as do products, processes, and services. They do it when
they accomplish their objectives and they do it when they fail to
accomplish their objectives. The mechanisms may still tick. But the
assumptions on which they were designed have become invalid—as, for
example, have the demographic assumptions on which health-care
plans and retirement schemes were designed in all developed countries
over the last hundred years. Then, indeed, reason becomes nonsense
and boons afflictions.
Yet “revolutions,” as we have learned since Jefferson’s days, are not
the remedy. They cannot be predicted, directed, or controlled. They
bring to power the wrong people. Worst of all, their results—predictably
—are the exact opposite of their promises. Only a few years after
Jefferson’s death in 1826, that great anatomist of government and
politics, Alexis de Tocqueville, pointed out that revolutions do not
demolish the prisons of the old regime, they enlarge them. The most
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lasting legacy of the French Revolution, Tocqueville proved, was the
tightening of the very fetters of pre-Revolutionary France: the subjection
of the whole country to an uncontrolled and uncontrollable bureaucracy,
and the centralization in Paris of all political, intellectual, artistic, and
economic life. The main consequences of the Russian Revolution were
new serfdom for the tillers of the land, an omnipotent secret police, and a
rigid, corrupt, stifling bureaucracy—the very features of the czarist
regime against which Russian liberals and revolutionaries had protested
most loudly and with most justification. And the same must be said of
Mao’s macabre “Great Cultural Revolution.”
Indeed, we now know that “revolution” is a delusion, the pervasive
delusion of the nineteenth century, but today perhaps the most
discredited of its myths. We now know that “revolution” is not
achievement and the new dawn. It results from senile decay, from the
bankruptcy of ideas and institutions, from failure of self-renewal.
And yet we also know that theories, values, and all the artifacts of
human minds and human hands do age and rigidify, becoming obsolete,
becoming “afflictions.”
Innovation and entrepreneurship are thus needed in society as much
as in the economy, in public-service institutions as much as in
businesses. It is precisely because innovation and entrepreneurship are
not “root and branch” but “one step at a time,” a product here, a policy
there, a public service yonder; because they are not planned but focused
on this opportunity and that need; because they are tentative and will
disappear if they do not produce the expected and needed results;
because, in other words, they are pragmatic rather than dogmatic and
modest rather than grandiose—that they promise to keep any society,
economy, industry, public service, or business flexible and self-renewing.
They achieve what Jefferson hoped to achieve through revolution in
every generation, and they do so without bloodshed, civil war, or
concentration camps, without economic catastrophe, but with purpose,
with direction, and under control.
What we need is an entrepreneurial society in which innovation and
entrepreneurship are normal, steady, and continuous. Just as
management has become the specific organ of all contemporary
institutions, and the integrating organ of our society of organizations, so
innovation and entrepreneurship have to become an integral life-
sustaining activity in our organizations, our economy, our society.
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This requires of executives in all institutions that they make
innovation and entrepreneurship a normal, ongoing, everyday activity, a
practice in their own work and in that of their organization. To provide
concepts and tools for this task is the purpose of this book.
II
WHAT WILL NOT WORK
The first priority in talking about the public policies and governmental
measures needed in the entrepreneurial society is to define what will not
work—especially as the policies that will not work are so popular today.
“Planning” as the term is commonly understood is actually
incompatible with an entrepreneurial society and economy. Innovation
does indeed need to be purposeful and entrepreneurship has to be
managed. But innovation, almost by definition, has to be decentralized,
ad hoc, autonomous, specific, and micro-economic. It had better start
small, tentative, flexible. Indeed, the opportunities for innovation are
found, on the whole, only way down and close to events. They are not to
be found in the massive aggregates with which the planner deals of
necessity, but in the deviations therefrom—in the unexpected, in the
incongruity, in the difference between “The glass is half full” and “The
glass is half empty,” in the weak link in a process. By the time the
deviation becomes “statistically significant” and thereby visible to the
planner, it is too late. Innovative opportunities do not come with the
tempest but with the rustling of the breeze.
It is popular today, especially in Europe, to believe that a country can
have “high-tech entrepreneurship” by itself. France, West Germany,
even England are basing national policies on this premise. But it is a
delusion. Indeed, a policy that promotes high tech and high tech alone—
and that otherwise is as hostile to entrepreneurship as France, West
Germany, and even England still are—will not even produce high tech.
All it can come up with is another expensive flop, another supersonic
Concorde; a little gloire, oceans of red ink, but neither jobs nor
technological leadership.
High tech in the first place—and this is, of course, one of the major
premises of this book—is only one area of innovation and
entrepreneurship. The great bulk of innovations lies in other areas. But
also, a high-tech policy will run into political obstacles that will defeat it in
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short order. In terms of job creation, high tech is the maker of tomorrow
rather than the maker of today. As we saw initially (in the Introduction),
“high tech” in the United States created no more jobs in the period 1970–
85 than “smokestack” lost: about five to six million. All the additional jobs
in the American economy during that period—a total of 35 million—were
created by new ventures that were not “high-tech” but “middle-tech,”
“low-tech,” or “no-tech.” The European countries, however, will be under
increasing pressure to find additional jobs for a growing work force. And
if then the focus in innovation and entrepreneurship is high-tech, the
demand that governments abandon the high-tech policies which sacrifice
the needs of today—the bolstering of the ailing industrial giants—to the
uncertain promise of a high-tech future will become irresistible. In France
this has been the issue over which the Communists pulled out of
President Mitterand’s cabinet in 1984, and the left wing of Mitterand’s
own Socialist Party is also increasingly unhappy and restless.
Above all, to have “high-tech” entrepreneurship alone without its
being embedded in a broad entrepreneurial economy of “no-tech,” “low-
tech,” and “middle-tech,” is like having a mountaintop without the
mountain. Even high-tech people in such a situation will not take jobs in
new, risky, high-tech ventures. They will prefer the security of a job in the
large, established, “safe” company or in a government agency. Of
course, high-tech ventures need a great many people who are not
themselves high-tech: accountants, salespeople, managers, and so on.
In an economy that spurns entrepreneurship and innovation except for
that tiny extravaganza, the “glamorous high-tech venture,” those people
will keep on looking for jobs and career opportunities where society and
economy (i.e., their classmates, their parents, and their teachers)
encourage them to look: in the large, “safe,” established institution.
Neither will distributors be willing to take on the products of the new
venture, nor investors be willing to back it.
But the other innovative ventures are also needed to supply the
capital that high tech requires. Knowledge-based innovation, and in
particular high-tech innovation, has the longest lead time between
investment and profitability. The world’s computer industry did not break
even until the late seventies, that is, after thirty loss years. To be sure,
IBM made very good money quite early. And one after another of the
“Seven Dwarfs,” the smaller American computer makers, moved into the
black during the late sixties. But these profits were offset several times
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over by the tremendous losses of all the others, and especially of the big
old companies who failed totally in computers: General Electric,
Westinghouse, ITT, and RCA in America; the (British) General Electric
Company, Ferranti, and Plessey in Great Britain; Thomson-Houston in
France; Siemens and Telefunken in Germany; Philips in Holland; and
many others. History is repeating itself now in minicomputers and
personal computers: it will be many years before the industry worldwide
moves into the black. And the same thing is happening in biotechnology.
This was also the pattern a hundred years ago in the electrical apparatus
industry of the 1880s, for instance, or in the automobile industry of 1900
or 1910.
And during this long gestation period, non-high-tech ventures have to
produce the profits to offset the losses of high tech and provide the
needed capital.
The French are right, of course: economic and political strength
these days requires a high-tech position, whether in information
technology, in biology, or in automation. The French surely have the
scientific and technical capacity. And yet it is most unlikely (I am tempted
to say impossible) for any country to be innovative and entrepreneurial in
high tech without having an entrepreneurial economy. High tech is
indeed the leading edge, but there cannot be an edge without a knife.
There cannot be a viable high-tech sector by itself any more than there
can be a healthy brain in a dead body. There must be an economy full of
innovators and entrepreneurs, with entrepreneurial vision and
entrepreneurial values, with access to venture capital, and filled with
entrepreneurial vigor.
III
THE SOCIAL INNOVATIONS NEEDED
There are two areas in which an entrepreneurial society requires
substantial social innovation.
1. The first is a policy to take care of redundant workers. The
numbers are not large. But blue-collar workers in “smokestack
industries” are concentrated in a very few places; three-quarters of all
American automobile workers live in twenty counties, for instance. They
are therefore highly visible, and they are highly organized. More
important, they are ill equipped to place themselves, to redirect
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themselves, to move. They have neither education nor skill nor social
competence—and above all not much self-confidence. They never
applied for a job throughout their life; when they were ready to go to
work, a relative already working in the automobile plant introduced them
to the supervisor. Or the parish priest gave them a letter to one of his
parishioners who was already working in the mill. And the “smokestack”
workers in Great Britain—or the Welsh coal miners—are no different, nor
are the blue-collar workers in Germany’s Ruhr, in Lorraine, or in the
Belgian Borinage. These workers are the one group in developed
societies that have not experienced in this century a tremendous growth
in education and horizon. In respect to competence, experience, skill,
and schooling they are pretty much where the unskilled laborer of 1900
was. The one thing that has happened to them is an explosive rise in
their incomes—on balance they are the highest-paid group in industrial
society if wages and benefits are added together—and in political power
as well. They therefore do not have enough capacity, whether as
individuals or as a group, to help themselves, but more than enough
power to oppose, to veto, to impede. Unless society takes care of
placing them—if only in lower-paying jobs—they must become a purely
negative force.
The problem is soluble if an economy becomes entrepreneurial. For
then the new businesses of the entrepreneurial economy create new
jobs, as has been happening in the United States during the last ten
years (which explains why the massive unemployment in the old
“smokestack industries” has caused so little political trouble so far in the
United States and has not even triggered a massive protectionist
reaction). But even if an entrepreneurial economy creates the new jobs,
there is need for organized efforts to train and place the redundant
former “smokestack” workers—they cannot do it by themselves.
Otherwise redundant “smokestack” labor will increasingly oppose
anything new, including even the means of their own salvation. The
“mini-mill” offers jobs to redundant steel workers. The automated
automobile plant is the most appropriate work place for displaced
automobile workers. And yet both the “mini-mill” and automation in the
car factory are bitterly fought by the present workers—even though they
know that their own jobs will not last. Unless we can make innovation an
opportunity for redundant workers in the “smokestack” industries their
feeling of impotence, their fears, their sense of being caught will lead
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them to resist all innovation—as is already the case in Great Britain (or
in the U.S. Postal Service). The job has been done before—by the Mitsui
Zaibatsu of Japan in the sharp Japanese Depression after the
RussoJapanese war of 1906, by the Swedes after World War II in the
deliberate policy which converted a country of subsistence farmers and
forest workers into an industrialized and highly prosperous nation. And
the numbers are, as already said, not very large—especially as we need
not concern ourselves overmuch with the one-third of the group that is
fifty-five years old and older and has available adequate early-retirement
provisions, and with another third that is under thirty years of age and
capable of moving and of placing themselves. But the policy to train and
place the remaining one-third—a small but hard core—of displaced
“smokestack” workers has yet to be worked out.
2. The other social innovation needed is both more radical and more
difficult and unprecedented: to organize the systematic abandonment of
outworn social policies and obsolete public-service institutions. This was
not a problem in the last great entrepreneurial era; a hundred years ago
there were few such policies and institutions. Now we have them in
abundance. But by now we also know that few if any are for ever. Few of
them even perform more than a fairly short time.
One of the fundamental changes in world view and perception of the
last twenty years—a truly monumental turn—is the realization that
governmental policies and agencies are of human rather than of divine
origin, and that therefore the one thing certain about them is that they
will become obsolete fairly fast. Yet politics is still based on the age-old
assumption that whatever government does is grounded in the nature of
human society and therefore “forever.” As a result there is no political
mechanism so far to slough off the old, the outworn, the no-longer-
productive in government.
Or rather what we have is not working yet. In the United States there
has lately been a rash of “sunset laws,” which prescribe that a
governmental agency or a public law lapse after a certain period of time
unless specifically re-enacted. These laws have not worked, however—
in part because there are no objective criteria as to when an agency or a
law becomes dysfunctional; in part because there is so far no organized
process of abandonment; but perhaps mostly because we have not yet
learned to develop new or alternative methods for achieving what an
ineffectual law or agency was originally supposed to achieve. To develop
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both the principles and the process for making “sunset laws” meaningful
and effective is one of the important social innovations ahead of us—and
one that needs to be made soon. Our societies are ready for it.
IV
THE NEW TASKS
These two social policies needed are, however, only examples.
Underlying them is the need for a massive reorientation in policies and
attitudes, and above all, in priorities. We need to encourage habits of
flexibility, of continuous learning, and of acceptance of change as normal
and as opportunity—for institutions as well as for individuals.
Tax policy is one area—important both for its impact on behavior and
as a symbol of society’s values and priorities. In developed countries,
sloughing off yesterday is at present severely penalized by the tax
system. In the United States, for instance, the tax collector treats monies
realized by selling or liquidating a business or a product line as income.
Actually the amounts are, of course, repayments of capital. But under
the present tax system the company pays corporation income tax on
them. And if it distributes the proceeds to its shareholders, they pay full
personal income tax on them as if they were ordinary “dividends”—that
is, distribution of “profits.” As a result businesses prefer not to abandon
the old, the obsolescent, the no-longer-productive; they’d rather hang on
to it and keep on pouring money into it. Worse still, they then assign their
most capable people to “defending” the outworn in a massive
misallocation of the scarcest and most valuable resource—the human
resource that needs to be allocated to making tomorrow, if the company
is to have a tomorrow. And when the company then finally liquidates or
sells the old, obsolescent, no-longer-productive business or product line,
it does not distribute the proceeds to the shareholders and does not
therefore return them to the capital market where they become available
for investment in innovative entrepreneurial opportunities. Rather the
company keeps these funds and commonly invests them in its old,
traditional, declining business or products—that is, into those parts of its
operations and activities for which it could not easily raise money on the
capital market—again resulting in a massive misallocation of scarce
resources.
What is needed in an entrepreneurial society is a tax system that
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encourages moving capital from yesterday into tomorrow rather than one
that, like our present one, prevents and penalizes it.
But we also should be able in and through the tax system to assuage
the most pressing financial problem of the new and growing business:
cash shortage. One way might be acceptance of economic reality: during
the first five or six years of the life of a new, and particularly of a growing,
business, “profits” are an accounting fiction. During these years the costs
of staying in business are always—and almost by definition—larger for a
new venture than the surplus from yesterday’s operations (that is, the
excess of current income over yesterday’s costs). This means in effect
that a new and growing venture always has to invest every penny of
operating surplus to stay alive; usually, especially if growing fast, it has
to invest a good deal more than it can possibly hope to produce as
“current surplus” (that is, as “profit”) in its current accounts. For the first
few years of its life the new and growing venture—whether standing by
itself or part of an existing enterprise—should therefore be exempt from
income taxes, for the same reason for which we do not expect a small
and rapidly growing child to produce a “surplus” that supports a grown-
up. And taxes are the means by which a producer supports somebody
else—namely, a nonproducer. By the way, exempting the new venture
from taxation until it has “grown up” would almost certainly in the end
produce a substantially higher tax yield.
If this, however, is deemed too “radical,” the new venture should at
least be able to postpone paying taxes on the so-called profits of its
infant years. It should be able to retain the cash until it is past the period
of acute cash-flow pressure, and to do so without penalty or interest
charges.
All together, an entrepreneurial society and economy require tax
policies that encourage the formation of capital.
Surely one “secret” of the Japanese is their officially encouraged “tax
evasion” on capital formation. Legally a Japanese adult is allowed one
medium-sized savings account the interest on which is tax-exempt.
Actually Japan has five times as many such accounts as there are
people in the country, children and minors included. This is, of course, a
“scandal” against which newspapers and politicians rail regularly. But the
Japanese are very careful not to do anything to “stop the abuse.” As a
result they have the world’s highest rate of capital formation. This may
be considered too circuitous a way to escape the dilemma of modern
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society: the conflict between the need for capital formation at a high rate
and the popular condemnation of interest and dividends as “unearned
income” and “capitalist,” if not as sinful and wicked. But one way or
another any country that wants to remain competitive in an
entrepreneurial era will have to develop tax policies which do what the
Japanese do by means of semi-official hypocrisy: encourage capital
formation.

Just as important as tax and fiscal policies that encourage
entrepreneurship—or at least do not penalize it—is protection of the new
venture against the growing burden of governmental regulations,
restrictions, reports, and paperwork. My own prescription, though I have
no illusion of its ever being accepted, would be to allow the new venture,
whether an independent enterprise or part of an existing one, to charge
the government for the costs of regulations, reports, and paperwork that
exceed a certain proportion (say 5 percent) of the new venture’s gross
revenues. This would be particularly helpful to new ventures in the
public-service sector—for example, a freestanding clinic for ambulatory
surgery. In developed countries public-service institutions are even more
heavily burdened by governmental red tape, and even more loaded
down with doing chores for the government than are businesses. And
they are even less able, as a rule, to shoulder the burden whether in
money or in people.
Such a policy, by the way, would be the best—perhaps the only—
remedy for that dangerous and insidious disease of developed countries:
the steady growth in the invisible cost of government. It is a real cost in
money and, even more, in capable people, their time, and their efforts.
The cost is invisible, however, since it does not show in governmental
budgets but is hidden in the accounts of the physician whose nurse
spends half her time filling out governmental forms and reports, in the
budget of the university where sixteen high-level administrators work on
“compliance” with governmental mandates and regulations, or in the
profit-and-loss statement of the small business nineteen of whose 275
employees, while being paid by the company, actually work as tax
collectors for the government, deducting taxes and Social Security
contributions from the pay of their fellow workers, collecting tax-
identification numbers of suppliers and customers and reporting them to
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the government, or, as in Europe, collecting value-added-tax (VAT). And
these invisible governmental overheads are totally unproductive. Does
anyone, for instance, believe that tax accountants contribute to national
wealth or to productivity, and altogether add to society’s well-being,
whether material, physical or spiritual? And yet in every developed
country government mandates misallocation of a steadily growing
portion of our scarcest resource, able, diligent, trained people, to such
essentially sterile pursuits.
It may be too much to hope that we can arrest—let alone excise—the
cancer of government’s invisible costs. But at least we should be able to
protect the new entrepreneurial venture against it.
We need to learn to ask in respect to any proposed new
governmental policy or measure: Does it further society’s ability to
innovate? Does it promote social and economic flexibility? Or does it
impede and penalize innovation and entrepreneurship? To be sure,
impact on society’s ability to innovate cannot and should not be the
determining, let alone the sole criterion. But it needs to be taken into
consideration before a new policy or a new measure is enacted—and
today it is not taken into account in any country (except perhaps in
Japan) or by any policy maker.
V
THE INDIVIDUAL IN ENTREPRENEURIAL SOCIETY
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 could be assumed—and was assumed—that
learning came to an end with adolescence or, at the latest, with
adulthood. What one had not learned by age twenty-one or so, one
would never learn. But also what one had learned by age twenty-one or
so one 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, by and large, based on these assumptions. There were, of course,
always exceptions, some groups that practiced continuous learning and
relearning: the great artists and the great scholars, Zen monks, mystics,
268

the Jesuits. But these exceptions were so few that they could safely be
ignored.
In an entrepreneurial society, however, these “exceptions” become
the exemplars. The correct assumption in an entrepreneurial society is
that individuals will have to learn new things well after they have become
adults—and maybe more than once. The correct assumption is that what
individuals have learned by age twenty-one will begin to become
obsolete five to ten years later and will have to be replaced—or at least
refurbished—by new learning, new skills, new knowledge.
One implication of this is that individuals will increasingly have to
take responsibility for their own continuous learning and relearning, for
their own self-development and for their own careers. They can no
longer assume that what they have learned as children and youngsters
will be the “foundation” for the rest of their lives. It will be the “launching
pad”—the place to take off from rather than the place to build on and to
rest on. They can no longer assume that they “enter upon a career”
which then proceeds along a pre-determined, well-mapped and well-
lighted “career path” to a known destination—what the American military
calls “progressing in grade.” The assumption from now on has to be that
individuals on their own will have to find, determine, and develop a
number of “careers” during their working lives.
And the more highly schooled the individuals, the more
entrepreneurial their careers and the more demanding their learning
challenges. The carpenter can still assume, perhaps, that the skills he
acquired as apprentice and journeyman will serve him forty years later.
Physicians, engineers, metallurgists, chemists, accountants, lawyers,
teachers, managers had better assume that the skills, knowledges, and
tools they will have to master and apply fifteen years hence are going to
be different and new. Indeed they better assume that fifteen years hence
they will be doing new and quite different things, will have new and
different goals and, indeed, in many cases, different “careers.” And only
they themselves can take responsibility for the necessary learning and
relearning, and for directing themselves. Tradition, convention, and
“corporate policy” will be a hindrance rather than a help.
This also means that an entrepreneurial society challenges habits
and assumptions of schooling and learning. The educational systems the
world over are in the main extensions of what Europe developed in the
seventeenth-century. There have been substantial additions and
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modifications. But the basic architectural plan on which our schools and
universities are built goes back three hundred years and more. Now
new, in some cases radically new, thinking and new, in some cases
radically new, approaches are required, and on all levels. Using
computers in preschool may turn out to be a passing fad. But four-year-
olds exposed to television expect, demand, and respond to very different
pedagogy than four-year-olds did fifty years ago. Young people headed
for a “profession”—that is, four-fifths of today’s college students—do
need a “liberal education.” But that clearly means something quite
different from the nineteenth-century version of the seventeenth-century
curriculum that passed for a “liberal education” in the English-speaking
world or for “Aligemeine Bildung” in Germany. If this challenge is not
faced up to, we risk losing the fundamental concept of a “liberal
education” altogether and will descend into the purely vocational, purely
specialized, which would endanger the educational foundation of the
community and, in the end, community itself. But also educators will
have to accept that schooling is not for the young only and that the
greatest challenge—but also the greatest opportunity—for the school is
the continuing relearning of already highly schooled adults.
So far we have no educational theory for these tasks. So far we have
no one who does what, in the seventeenth century, the great Czech
educational reformer Johann Comenius did or what the Jesuit educators
did when they developed what to this day is the “modern” school and the
“modern” university. But in the United States, at least, practice is far
ahead of theory. To me the most positive development in the last twenty
years, and the most encouraging one, is the ferment of educational
experimentation in the United States—a happy byproduct of the absence
of a “Ministry of Education”—in respect to the continuing learning and
relearning of adults, and especially of highly schooled professionals.
Without a “master plan,” without “educational philosophy,” and, indeed,
without much support from the educational establishment, the continuing
education and professional development of already highly educated and
highly achieving adults has become the true “growth industry” in the
United States in the last twenty years.

The emergence of the entrepreneurial society may be a major
turning point in history.
270

A hundred years ago, the worldwide panic of 1873 terminated the
Century of Laissez-Faire that had begun with the publication of Adam
Smith’s The Wealth of Nations in 1776. In the Panic of 1873 the modern
welfare state was born. A hundred years later it had run its course,
almost everyone now knows. It may survive despite the demographic
challenges of an aging population and a shrinking birthrate. But it will
survive only if the entrepreneurial economy succeeds in greatly raising
productivities. We may even still make a few minor additions to the
welfare edifice, put on a room here or a new benefit there. But the
welfare state is past rather than future—as even the old liberals now
know.
Will its successor be the Entrepreneurial Society?
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Suggested Readings
Most of the literature on entrepreneurship is anecdotal and of the “Look,
Ma, no hands” variety. The best of that genre may be the book by
George Gilder: The Spirit of Enterprise (New York: Simon & Schuster,
1984). It consists mainly of stories of individuals who have founded new
businesses; there is little discussion of what one can learn from their
example. The book limits itself to new small businesses and omits
discussion of entrepreneurship in both the existing business and the
public-service institution. But at least Gilder does not make the mistake
of confining entrepreneurship to high tech.
Far more useful to the entrepreneur—and to those who want to
understand entrepreneurship—are the studies by Karl H. Vesper of the
University of Washington in Seattle, Washington, especially his New
Venture Strategy (Englewood Cliffs, N.J.: Prentice-Hall, 1980), and his
annual publication, Frontiers of Entrepreneurship Research (Babson
Park, Mass.: Babson College). Vesper, too, confines himself to the new
and especially to the small business. But within these limits, his
stimulating works are full of insights and practical wisdom.
The Center for Entrepreneurial Management (83 Spring Street, New
York, N.Y. 10012), founded and directed by Joseph R. Mancuso,
focuses entirely on “How to Do It” in the small business, as does
Mancuso’s well-known text How to Start, Finance and Manage Your
Own Small Business (Englewood Cliffs, N.J.: Prentice-Hall, 1978).
Entrepreneurial management in the existing and especially in the
large business is the subject of two very different books that complement
each other. Andrew S. Grove, one of the founders and now the president
of Intel Corporation, discusses the policies and practices needed to
maintain entrepreneurship in the business that has grown fast and to
large size in his High-Output Management (New York: Random House,
1983). Rosabeth M. Canter, an organizational psychologist at Yale
University, discusses the attitudes and behavior of corporate leaders in
entrepreneurial companies in her book The Change Masters (New York:
Simon & Schuster, 1983). By far the most penetrating discussion of
entrepreneurship in existing businesses is the almost inaccessible article
by two members of the consulting firm of McKinsey & Company, Richard
272

E. Cavenaugh and Donald K. Clifford, Jr.: “Lessons from America’s Mid-
Sized Growth Companies,” McKinsey Quarterly (Autumn 1983).
Publication of a book by the same authors, based on the article and the
study on which it reports, is expected in 1985 or 1986.
Of the many books on strategy, the most useful may be Michael
Porter’s Competitive Strategies (New York: Free Press, 1980).
In my own earlier works, entrepreneurship and entrepreneurial
management are discussed in Managing for Results (New York: Harper
& Row, 1964), especially Chapters 1—5, and in Management: Tasks,
Responsibilities, Practices (New York: Harper & Row, 1973), Chapters
11–14 (The Service Institution) and Chapters 53–61 (Strategies and
Structures).
273

Searchable Terms
The pagination of this electronic edition does not match the edition from
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search feature of your e-book reader.

accounting machines, 43
acetaminophen, 222–223, 224
adhesive tape, 190
advertising, 113–114, 115, 192
aerosol cans, 130
Age of Discontinuity, The (Drucker), 145n
Agnelli, Giovanni (1866–1945), 78
air freight, 62–63
airplanes:
development of, 35, 112, 114, 238, 239
jet, 116, 117, 190
Alcan, 76
Alcon Laboratories, 67, 233–234, 236
Ailgemeine Bildung, 265
Alliance for Progress, 91, 94
Allied Chemical, 124, 126
Aluminum Company of America, 76
aluminum industry, 76, 118
ambulatory clinics, 61, 181–182, 196, 262
American Association for the Advancement of Science, 181, 184
American Business Conference, 9
American Express, 241
American Health, 100
American Management Association, 16
Anderson, Marian (1902–), 102
anesthesia, 190–191
antibacterial drugs, 107
antibiotics, 40
Apple computer, 211, 215, 217, 221, 223
274

appliance sales, 37–38, 39, 40, 42
art collecting, 84
arthritis, 223
ASEA, 120, 148
aspirin, 85–86, 222–223
assembly lines, 71, 77
AT&T, 231, 232
Atari, 106
audiocassettes, 33–34
audion tube, 108, 109, 112
automation, 59, 89, 108, 111, 163, 224, 237, 257, 258
automobile industry, 50–52, 64, 108, 121, 147, 192–193, 236–239, 257–
258
industry and market structures of, 77-81, 83, 124–125
in Japan, 72–73, 78, 79, 87

Babbage, Charles (1801–1841), 108, 112
“baby boom,” 2, 6, 47, 52, 91, 92, 94, 95, 96
“baby bust,” 3, 6, 10, 49, 70–71, 91, 92, 94, 96
Bacon, Roger (1214?–1294), 111
Baedeker, Karl (1801–1859), 237–238, 239, 240
Baekeland, Leo (1863–1944), 114
Bagehot, Walter (1826–1877), 112
baking ovens, automated, 241–242
ballpoint pens, 131
banks, 23, 248–249
entrepreneurial, 12, 13, 25, 109–110, 112–113, 121, 226, 227
“basic house,” 47–49
Beal, William J. (1833–1924), 112
Bell, Alexander Graham (1847–1922), 127
Bell Labs, 28, 29, 84, 109, 225
Bell Telephone System, 70, 82, 83, 84–85, 226, 231–232
Bendix, 237
“benevolent monopolist,” 230–231
Bennett, James Gordon (1795–1872), 113
Benton, William (1900–1973), 103–104
Benz, Carl (1844–1929), 112, 237
275

binary theorem, 108, 112
Black Death, 89–90
blacks, political strength of, 100–102, 104
Bloomingdale’s, 38, 42
blowout protector for oil wells, 234, 235
“blue baby” operation, 102
BMW, 80
Bodin, Jean (1530?-1596), 32
Boeing, 116, 117, 118
bookstore chains, 53–54, 56, 84
Boosalis, Helen (1919–), 11, 184–185
Borsig, August (1804–1854), 32
Bosch (company), 238, 239
Bosch, Robert (1861–1942), 236, 237, 238
Boston Consulting group, 152
Boyer, Ernest (1928–), 72–173
Boyle, Robert (1627–1691), 34
Boy Scouts, 145, 182
Brady, Matthew (1823?–1896), 71
Brentano’s, 56
“bridal register,” 245
British Leyland, 79
Brown Boveri, 120
Bruner, Jerome (1915–), 110
Bryan, William Jennings (1860-1925), 11
building recession (1981–1982), 49
building supply companies, 202–203
Business Cycles (Schumpeter), 5n
businesses:
diversification of, 54–55
“infant,” 163–165
‘mid-size,” 9–10, 144, 148, 150, 160, 162, 167
businesses, entrepreneurial, 143, 147–176
daily operation of, 148–149, 162
dont’s of, 150, 174–176
executives in, 157–158, 162–163, 167–168, 169, 170, 199–200
as “greedy for new things,” 151, 152, 155, 158, 175
health of, 149, 152
276

management of, 155–158, 174
measuring innovative performance of, 150, 158–161
organizational structure of, 150, 161–170
policies of, 150–155, 169
practices of, 155–158, 169
as receptive to innovation, 150, 151, 152, 154, 156–157, 158, 162
staffing of, 154, 164–165, 170–174, 178
strategies for, 147–150, 154–155
systematic abandonment in, 151–152, 154–155, 162
see also new ventures
Business X-Ray, 153–154, 155

Cadillac, 80
cancer research, 99, 127
capital:
as economic resource, 5, 27, 110, 260–261
formation of, 185, 257, 261–262
for new ventures, 189, 194, 195–196, 261
venture, 4, 113, 257
cargo vessels, 31, 62–64
Carnegie Foundation for the Advancement of Teaching, 173
Carothers, Wallace H. (1896–1937), 43, 213
carriage trade, 77
Carter, Jimmy (1924–), 173
cataracts, senile, 66–67, 68, 69, 233–234, 235
Catholic Church, 181, 183–184
Cavenaugh, Richard E., 9n, 148n, 268
Celestial Seasonings, 100, 105
Change Masters, The (Kanter), 169n, 267–268
Charles V, Holy Roman Emperor (1500-1558), 243–244
chemical industry, 42–43, 60, 74, 114, 124, 165
chemotherapy, 107–108
Chesterfield, Lord (1694–1773), 244
chief executive officers (CEOs), 167, 168, 169, 199–200
Chrysler, 51, 79
Cicero, Marcus Tullius (106–43 B.C.), 244
Citibank, 94–95, 103, 105–106, 138, 147, 171, 226, 230, 231, 232
277

Citroen, 80–81, 83
Clifford, Donald K., Jr., 9n, 148n, 268
Club Mediterranée, 95, 97–98
Columbia University, 220
Comenius, Johann Amos (1592-1670), 31, 265
Competitive Strategies (Porter), 209n, 268
computers, 74–75, 84–85, 135
development of, 43-44, 52–56, 108, 109, 112, 114, 118, 127, 137,
147, 191, 220–221, 223, 256–257
main-frame, 52, 53, 221
personal, 52–53, 56, 106, 129, 221, 223–224, 257
“window” on market in, 122–123
Concept of the Corporation (Drucker), 15n, 110
Concise Oxford Dictionary, 209n
Concorde, 255
Connor, William (1907–), 67, 68, 69, 70, 75
Control Data, 11
Thomas Cook, 241
Coolidge, Calvin (1872–1933), 112
corn, hybrid, 111–112
cosmetics, 66, 242
Coty, 242
counter-trade, 237, 239, 240
Couzens, James (1872–1936), 204–205
“creative destruction,” 26, 144
“creative imitation,” 33, 106, 218, 220–225, 233
Credit Mobilier, 25, 110, 113
Crusade Against Hunger, 180
crystals, structure of, 114
customers:
social and economic reality of, 243, 245, 247–249
values of, 17, 21, 34, 46, 48, 51, 57-58, 64–68, 75, 96–98, 135, 193,
228, 243, 249–251

Daichi Bank, 113
Daimler, Gottfried (1834–1900), 112, 237
databanks, 74–75
278

Datril, 85
da Vinci, Leonardo (1452-1519), 133–134, 137
DDT, 190
de Forest, Lee (1873–1961), 108, 109
de Havilland, 116
Delco, 236, 237, 239
demography:
analysis of, 95–98, 184
as economic factor, 7, 13, 49, 135
of education, 24, 45, 92–94, 95–96, 97, 106
exploitation of, 93–95
forecasts of, 91, 92–93
innovation and, 35, 49, 52, 69, 70–71, 88–98
of Japan, 7, 71, 89
of population, 89–90, 92, 95–98, 266
as “secular,” 89–90
shifts in, 88–93, 96, 253, 266
Deutsche Bank, 12, 25, 125, 126
de Yries, Hugo (1848–1935), 112
Dewey & Almy, 234, 235–236
Dickens, Charles (1812–1870), 121
Diesel, Rudolph (1858–1913), 108
Disney, Walt (1901–1966), 169–170
Donaldson, Luflun & Jenrette, 9, 81, 83
Douglas, 116
Dow Chemical, 118
Drucker, Peter F. (1909–), 15n, 23n, 25n, 110, 115–116, 145n, 153,
175n, 178n, 209, 243, 268
DuPont, 15, 42–43, 110, 117–118, 124, 126, 192–193, 213, 215, 216,
217, 222, 231
Durant, William Crapo (1861–1947), 78
Dymaxion House, 108
Dynamite Cartel, 217
dynamo, 120

earth-moving equipment, 249
Eastman, George (1854–1932), 72
279

ecological niches, 22, 42, 80, 136, 209, 233–242
in specialty markets, 233, 240–242
specialty skills and, 233, 236–240
toll-gate strategy for, 233–236, 237
economics, schools of, 26–27, 250
economies:
demand-driven vs. supply-driven, 31, 33, 58, 60
entrepreneurial, 1–17, 132
equilibrium in, 26, 27
growth sectors of, 7–11, 24
Kondratieff stagnation of, 1, 4–7, 11–12
no-growth, 1, 2, 4
resources of, 27, 28, 30, 33, 34
technological foundation of, 7, 11, 26–27
Economist, 3, 61n
Edison, Thomas Alva (1847-1930), 12–13, 72, 75, 117, 118–119, 120,
128, 137, 138, 188
education:
continuing, 10, 45, 172–173
demographics of, 24, 45, 92–94, 95–96, 97, 106
employment in, 2–3
higher, 52, 92–94
innovations in, 16, 27, 89, 110, 128, 172–173, 178, 183, 201–202
in Japan, 74, 104, 128
mass, 31, 74, 92, 113, 186
of professionals, 88, 96, 263–265
see also universities
Ehrlich, Paul (1854–1915), 107
Eisenhower, Dwight D. (1896-1969), 96, 100–101
electric power industry, 72, 118–122, 125, 148, 188, 247–248
electronics, 122, 125, 147, 225, 257
Emery Air Freight, 86
Empire State College, 172–173
Encyclopedia Britannica, 103–104, 105
engines:
gasoline, 112, 114
steam, 3, 114, 117, 134, 247
ENIAC, 221
280

Enterprise Management Agency, 15n
“entrepreneurial judo,” 220, 225–232, 233, 252
entrepreneurial society, 145, 253–266
individuals in, 263–265
planning of, 255–257
priorities in, 260–263
social innovations for, 257–260
entrepreneurs:
as capitalists, 12, 13–14, 25
change as important to, 27–28, 34–35, 36, 46, 129
personalities of, 25–26, 130–132, 139–140, 170–173, 178
role of, 189, 199, 200, 201–205
entrepreneurship:
areas of growth in, 7–11
in big vs. small businesses, 16–17, 21, 22–23, 49, 55–56, 85, 144,
147–150, 162, 163-168, 174–175, 211
as “creative destruction,” 26, 144
definition of, 21, 25, 33
as “dynamic disequilibrium,” 27
as “fustest with the mostest,” 209–219, 222, 224, 233
as “hitting them where they ain’t,” 209, 217, 220–232, 233
management vs., 155–158, 174–175, 254–255
as meta-economic event, 13, 26, 58
resources for, 28–29, 216–217, 219
risks of, 28–29, 55, 82, 125, 126–129, 130, 139–140, 239
strategies of, 33, 86–87, 171, 209–252
theories of, 21-29
exercise equipment, 100
eyeglasses, 111

Facilities Management Institute, 250
Familienbank, 226, 227, 230, 231, 232
Faraday, Michael (1791–1867), 120
fashion goods, 37–38, 39, 40
fast-food industry, 49-50
Federal Express, 86
“feeding,” 100
281

feminist movement, 102–103
fermentation technology, 116, 118
Fiat, 78, 79
financial services, 9, 23, 64-66, 81, 203
Fleming, Alexander (1881–1955), 30, 109
Florey, Howard (1898–1968), 109
Ford, Henry, II (1917–), 205
Ford, Henry, Sr. (1863–1947), 51, 77, 204–205
Ford Edsel, 50–51, 104, 106
Ford Model T, 51, 77, 86, 205
Ford Motor Company, 50–52, 78, 79, 104, 106, log, 1-4, 126, 147, 204–
205
Ford Thunderbird, 51, 104, 105
foreign exchange traders, 240, 241
Forrester, Jay W. (1918–), 5n
Fortune 500, 2, 9
fountain pens, 131
Franklin, Benjamin (1706–1790), 12
Friedman, Milton (1912–), 26
Frontiers of Entrepreneurship Research, 267
Fuller, R. Buckminster (1905-1983), 108–109

Galen (A.D. 130?-200?), 111
Gebildeten Staende, die, 214
G.E. Credit Corporation, 23
General Electric, 22–23, 108, 116–117, 120, 124, 126, 148, 171–172,
225, 247–248, 251
General Electric Company, AEG, 120
General Motors, 15, 51, 78–79, 108, 110, 124, 147, 236, 237
General Motors Pontiac, 106
Germany, West, economic conditions in, 12, 87, 226, 227
Gilder, George, 210n, 267
Gillette, King (1855–1932), 245–246, 251
Girl Scouts, 145, 182, 184
Goethe, Johann Wolfgang von (1749–1832), 253
Golden Gate University, 93–94, 97
gourmet food, 100, 105
282

governmental regulations, 262–263
W. B. Grace, 234
Great Britain, economic conditions in, 7, 11, 12, 95, 104, 258, 259
Greening of America, The (Reich), 14
Grove, Andrew S., 205n–206n, 267
Gutenberg, Johann (1400?–1468?), 70, 111

Haldane, Lord (1856-1928), 178
Hall, Charles M. (1863–1914), 118
“Hall 54,” 108
Haloid Company, 246–247, 251
Hamilton Propeller, 238
Harding, Warren G. (1865–1923), 112
Hart, Gary (1937–), 106
harvesting machines, 30, 248
Hattori Company, 220, 222
health care:
cost of, 60–61, 66
as growth sector, 10, 82, 83, 99–100, 104
innovations in, 31, 40-42, 60-62, 85, 99–100, 107–108, 156–157,
181–182, 184, 190–191, 204
see also hospitals
health-food stores, 100
Health Maintenance Organizations, 85
Hearst, William Randolph (1863–1951), 114
Hefner-Alteneck, Friedrich von (1845–1904), 168
Hegel, Georg Wilhelm Friednch (1770–1831), 212
Heilman, Lillian (1905–1984), 102
Hewlett-Packard, 119
High-Output Management (Grove), 205n–206n, 267
high-tech industries, 3, 5-6, 8, 12–13, 125–126, 224, 255-257
new ventures in, 146, 206
see also computers
highway reflectors, 72–73
Hill, Rowland (1795–1879), 243-244, 245
Hitachi, 44, 76
Hitler, Adolf (1889–1945), 212
283

Hoechst, 147–148
Hoffmann-LaRoche, 119, 210-211, 214–215, 216, 218, 222
Hollerith, Hermann (1860-1929), 108
Honda, Soichiro (1906–), 204
Honda Motor Company, 204
Hoover, Herbert (1874–1964), 110
hospitals, 3, 10, 31
“housekeeping” services in, 82, 83
management of, 16, 66, 82, 83
specialized needs of, 24, 60-62
as “treatment centers,” 24, 181–182, 184
housing, market for, 47–49
How to Start, Finance and Manage Your Own Small Business
(Mancuso), 267
Hubert Humphrey Institute, 11
Humboldt, Wilhelm von (1767–1835), 23, 24, 177, 212, 213–214, 215,
216, 218
hybridization, 111–112

IBM:
computers developed by, 52–53, 55–56, 147, 191, 220–221, 223
success of, 28, 29, 42, 43–44, 117, 123, 124, 125, 153, 220, 223–
224, 257
IBM PC, 221, 223
IBM Peanut, 53
ICL, 123
Inc., 7–8
income distribution, 97, 104
income tax, 260, 261
incongruities, 35, 57–68, 69, 129, 255
assumptions vs. reality as, 57, 62–64
customer values as, 57–58, 64–68
economic realities as, 57, 58–62, 66, 135, 235
in logic of process, 58, 66–68
India, hardware exports to, 46–47
“industrially developed” countries, 122
industry and market structures, 35, 76–87, 122–124
284

analysis of, 83–87, 162
of automobile industry, 77–81, 83, 124–125
changes in, 76, 77, 78, 85, 86
opportunities for innovation in, 76, 81–82
infant mortality rate, 89, 91–92
inflation, 47
innovation:
analysis of, 41, 45, 49, 150, 158–161, 166, 218
as based on “bright ideas,” 130–132, 137, 215
complicated vs. simple, 86–87, 135–136
as conceptual and perceptual, 135
conditions for, 138–139
as conservative activity, 139–140
creative imitation vs., 223–224
definition of, 33
demography and, 35, 49, 52, 69, 70–71, 88–98
diversification vs., 175
do’s and dont’s of, 134–138
in education, 16, 27, 89, 110, 128, 172–173, 178, 183, 201–202
as effect of economy and society, 138–139
by extension vs. optimization, 28–29, 149, 180, 229, 231
financial compensation for, 164–166, 173
as “flashes of genius,” 133-134
in health care, 31, 40–42, 60–62, 85, 99–100, 107–108, 156–157,
181–182, 184, 190–191, 204
“heroic,” 63
industry leadership as aim of, 85, 86–87, 136, 161
opportunities for, 41-46, 49, 50, 55, 57, 58, 61, 62, 68, 69, 75, 76,
81–82, 134–135, 138, 139–140, 156, 186, 196, 238, 239, 254
perception of, 35, 99–106
principles of, 133–140
in public service institutions, 177, 183, 185–187
purposeful, 29, 30–36, 134–135, 251
radical, 61
reception of, 150, 151, 152, 154, 156–157, 158, 162
responsibility for, 157–158, 162–163, 167–168
social, 31, 33–34, 99–104, 187, 257–260
sources of, 30–129, 131, 149–150, 218–219
285

systematic, 30–36, 50–52, 134–135
as work, 138, 150
installment buying, 30, 31, 248
integrated steelmaking process, 39, 58–60
Intel, 118, 119, 206n
“intelligent investor,” 9, 64–66, 81, 83
International Management Congress (1923), 110
invention:
“invention” of, 34
as research, 12–13, 34, 71, 72, 159
see also individual inventions
investment, strategies for, 9, 64–66, 81, 83, 110
irrigation pumps, 192
ITI’, 67
Iwasa, Tamon (1933–), 73

Jackson, Jesse (1941–), 101–102
Jacquard, Joseph Marie (1752–1834), 108
James, William (1842–1910), 110
Japan:
automobile industry in, 72–73, 78, 79, 87
demography of, 7, 71, 89
economy of, 1–2, 6, 11, 12, 48, 122, 185, 261–262, 263
education in, 74, 104, 128
“entrepreneurial judo” practiced in, 225–226, 227, 230
technology developed in, 33, 44, 123
Jefferson, Thomas (1743–1826), 253, 254
job creation, 1–7, 11, 256, 258
jogging equipment, 100
Johnson, Lyndon B. (1908–1973), 101, 145, 152
Johnson, Samuel (1709–1784), 152
Johnson & Johnson, 147, 163, 165, 170, 171, 212, 223

Kami, Michael J. (1922–), 153
Kana scripts, 128
Kanter, Rosabeth M., 169n, 267–268
286

Kennedy, John F. (1917–1963), 91, 94, 101, 145
Kettering, Charles (1876–1959), 108
Keynes, John Maynard (1883-1946), 26, 27
Khrushchev, Nikita (1894–1971), 64, 66
King, Martin Luther, Jr. (1929–1968), 101, 102
K-Mart, 76
knowledge,
new, 35, 71, 72, 107–129, 140
analysis of, 115–117
characteristics of, 107–111
convergences of, 111–115, 120
lead time for, 110–111, 114, 115, 120, 121, 137–138, 149, 167, 256–
257
nontechnical vs. technical, 115–117, 119
receptivity of, 126–129, 133–134, 135
requirements of, 115–119
risks of, 120–124
“shakeout” and, 120–122, 124-126
specialized, 240–242
strategic position and, 117–119
Kodak, 72
Kondratieff, Nikolai, 4
Kondratieff cycles, 1, 4–7, 11–12
Kroc, Ray (1902–1983), 49–50, 169–170, 202
Kuhn, Thomas S. (1922-), 111, 216
labor force:
blue-collar, 144
changes in, 88, 89, 91
growth of, 1–7, 97, 256
shortages in, 71
women in, 2, 6, 91, 92, 94–95, 103, 105–106, 182

laissez faire, 145, 265–266
Land, Edwin H. (1909-), 117, 202
Langley, Samuel P. (1834–1906), 114, 116
Latin America, population shifts in, 91–92, 94
lawncare products, 67-68
287

leadership, entrepreneurial, 209–219
examples of, 210–215
methods of, 215–217, 221
risks of, 217–219, 222, 224
learning theory, 110
Lehrling System, 32
Lenox China Company, 245
“Lessons from America’s Mid-Sized Growth Companies” (Cavenaugh
and Clifford), 9n, 148n, 268
Levitt, Theodore (1925–), 220n
Lexis, 75
Librium, 211
light bulb, 72, 118–119, 120, 128, 188
lignin molecule, 60, 74
“limited” partners, 195–196
Limits on the Effectiveness of Government, The (Humboldt), 214n
Lincoln, Nebr., public services in, 184–185
linotype, 70
Little Dorrit (Dickens), 121
Lombard Street (Bagehot), 112
Lonely Crowd, The (Riesman), 14
Lucas, 236, 239
Luce, Clare Booth (1903–), 102
Luce, Henry (1898–1967), 34, 73, 75

McCormick, Cyrus (1809–1884), 30, 248
McDonald’s, 17, 21–22, 34, 49–50, 169–170, 202
Machiavelli, Niccolô (1469–1527), 32, 178
McKinsey & Company, 9
McKinsey Quarterly, 9n
R. H. Macy, 37–38, 39, 40, 42, 102
magazines, mass, 34, 72, 100, 105, 114, 181
Magnavox, 227
management:
as discipline, 14–17, 21–22, 31–32, 110, 115–116, 126
entrepreneurial, 11, 13–17, 119, 126, 143–146, 168–169, 187, 188,
251
288

entrepreneurship vs., 155–158, 174–175, 254–255
of new ventures, 189, 197–201, 205, 206
of projects, 163–164, 171
of research, 44–45, 159
top, 157–158, 162–163, 171
Management: Tasks, Responsibilities, Practices (Drucker), 23n, 25n,
175n, 178n, 268
Managing for Results (Drucker), 153, 209, 268
Mancuso, Joseph R., 267
Mao Tse-tung (1893–1976), 254
March of Dimes, 213
Marcuse, Herbert (1898–1979), 14
markets:
“creaming” of, 227–229, 230
dominance of, 223–225, 233
ecological niches in, 22, 42, 80, 136, 209, 233–242
focus on, 117–119, 135, 136–137, 139, 189–193, 224, 231, 252
globa1, 78, 87, 124
‘key function” vs. “systems” approach to, 118
“lifestyles” as basis of, 42, 51–52, 104, 106
mass, 34, 72, 100, 105, 114, 181, 242
occupational segmentation of, 97
research of, 128, 191, 222, 242, 251
share of, 59, 83–84, 160
socioeconomic levels of, 42, 51, 103–104
specialty, 233, 240–242
“window” on, 121–124, 125
see also industry and market structures
Marks and Spencer, 15, 23, 28, 170
Marx, Karl (1818–1883), 26–27
Masaryk, Thomas (1850-1937), 110
Matsushita, 44
Maxwell, James Clerk (1831–1879), 120
Mayo, Charles Horace (1865–1939), 212, 215, 218
Mayo, William James (1861–1939), 212, 215, 218
Mayo Clinic, 24, 212, 213
MCI, 82, 226
medical practices, group, 85, 212
289

Meiji Restoration (1867), 32, 71
Meister, 32
Melville Shoe, 94, 97, 98
Mendel, Gregor (1822–1884), 112
Menninger Foundation, 24
Mercedes, 79, 80, 237
Mergenthaler, Ottmar (1854–1899), MG, 80
Miller, Herman, 250
mini-mills, 33, 38–39, 40, 58-60, 258
“miracle cures,” 133
Mitsui Zaibatsu, 259
Mitterand, Francois (1916–), 256
Modern Maturity, 171
monomers, 60
Morgan, J. P. (1837–1913), 12, 25, 90, 113, 115, 118
Morita, Akio (1921–), 225, 231
mortality rate, 89–90, 91–92
Mortola, Edward J. (1917–), 201–202
museums, 84

Nader, Ralph (1934–), 246
Napoleon I, Emperor of France (1769–1821), 23, 212, 214, 215
Nestlé Company, 236
Newcomen, Thomas (1663-1729), 134
New Deal, 178
news magazines, 34, 73
newspapers, 73, 113–114, 115, 121
new ventures, 143, 166, 188–206
acquisition of, 175
capital needs of, 189, 194, 195–196, 261
cash flow of, 189, 194–195, 261
competition with, 189, 192, 217
control structures in, 196–197
employees of, 196, 198
financial foresight of, 189, 193–197, 205, 206
franchising of, 195–196
growth of, 194, 196–197
290

in high-tech industries, 146, 206
key activities of, 198–199, 200
management of, 189, 197–201, 205, 206
market focus in, 189–193
outside advice for, 205–206
role of founder-entrepreneur in, 189, 199, 200, 201–205
New Venture Strategy (Vesper), 267
New York Herald, 113
New York Institute of Technology, 172
New York Stock Exchange, 65–66, 124
New York Times, 73, 114
New York University, 153n
NIH (Not Invented Here), 225, 227
Nissan, 108
Nixdorf, 123
Nobel, Alfred (1833-1896), 217
Novocain, 190-191
Nylon, 43, 114, 117–118, 192–193, 218, 222

Ochs, Adolph (1858-1935), 114
Office of the Future, 213, 250
oil-drilling equipment, 234, 235
“oil shock” (1979), 1, 5, 78, 79, 87
“oil shock” (1973), 1, 5
Organization Man, The (Whyte), 14
organization theory, 115–116
“owner-manager,” 25

Pace University, 93–94, 97, 201–202
padlocks, 46–47, 49
Panic of 1873, 266
paper industry, 60, 74, 135
Papin, Denis (1647–1712), 3, 134
patents, 132
PBX (private branch exchange), 84-85, 226, 232
penicillin, 30, 109, 116, 118
291

pension funds, 81, 83, 164
Pereire, Isaac (1806–1880), 25, 110, 112–113
Pereire, Jacob Emile (1800–1875), 25, 110, 112–113
perfumes, 242
Perkins, Frances (1882–1965), 102
Peugeot, 79
Pfizer, 116, 118
pharmaceutical industry, 40–42, 66–67, 107–108,–116, 118, 137–138,
147–148, 160, 189, 210–211
Philips, 76
phonetic spelling, 128
phonograph, 128
photocopiers, 190, 216, 227–228, 230, 246–247
photography, 71–72, 74, 117
plastics, 43, 114, 211, 213
Polaroid, 117, 202
polio, 213
polymer chemistry, 42–43, 60, 74, 114
population, aging of, 89–90, 92, 95–98,
Porsche, 80
Porter, Michael (1947–), 153, 209n, 268
postal service, 11, 86, 243–244, 245, 259
Postal Service, U.S., 86, 259
Practice of Management, The (Drucker), 15n, 110, 243
prices:
premium, 228–229, 230
of products, 243, 244, 245–247, 250-251
Prince, The (Machiavelli), 32
Principia Mathematica (Russell and Whitehead), 108
printing presses, 70, 111, 113
“privatization,” 145, 184–185
process needs, 35, 69–75, 138–139, 140, 235
criteria of, 73–75
as “missing link,” 69, 71, 72, 73, 255
Procter & Gamble, 28, 163, 167, 170, 171, 220, 221
products:
development of, 37–40, 41, 55, 149
focus on, 223–224
292

life cycle of, 152–153, 154
lines of, 39–40, 55, 164, 260
pricing of, 243, 244, 245–247, 250–251
quality, 228–229
utility of, 243–245, 251
profits, 228–229, 231, 261
public libraries, 53
public-private partnerships, 10–11
public schools, 10, 186
public service institutions, 143, 145–146, 172, 177–187, 254, 259, 262
as bureaucracies, 177, 178
economics of, 179, 183
innovations in, 177, 183, 185–187
moral objectives of, 179–180, 183, 186
obstacles faced by, 177–182
policies of, 23–25, 182–185
public utility commissions, 248
Pulitzer, Joseph (1847–1911), 113–114, 115
punchcards, 112

radios, 109, 121
transistor, 225–226, 228, 231
railroads, 32, 121–122, 125, 147
ratio cognoscendi, 4
Raubritter, 236
rayon, 60, 218
razor blades, 245–246
RCA, 148, 225, 227
Rechtsstaat, 214
Reich, Charles (1928–), 14
Reis, Philip (1834–1874), 127, 128
Rembrandt group, 76
retail sales, 55, 76
retirement, 88, 93
return-on-investment analysis, 164–165
revolutions, 253–254
Ricardo, David (1772–1823), 228, 250
293

Riesman, David (1909–), 14
robotics, 70–71, 108, 163
“Rocket,” 121
“roll-on, roll-off” ships, 63
Rolls-Royce, 77
ROLM, 84–85, 226, 232
Roosevelt, Eleanor (1884–1962), 102
Roosevelt, Franklin D. (1882–1945), 91
Roosevelt, Theodore (1858–1919), 178
Root, Elihu (1845–1937), 178
Rosenberg, Anna Marie (1902–), 102
Rothschild family, 25, 90
Russell, Bertrand (1872–1970), 108

Saint-Simon, Count Claude Henri de (1760–1826), 109–110
Salvarsan, 107
savings and loan associations, 95
Say, J. B. (1767–1832), 21, 25, 26, 27, 33, 228
Schuckert, 120
Schumpeter, Joseph (1883–1950), 5n, 11, 13, 26, 27, 144, 231
Schure, Alexander (1921–), 172
Science, 181
science fiction, 120
Scotch tape, 190, 218
O. M. Scott & Co., 67–68
Scott Spreader, 67–68
Sears, Roebuck, 15, 76, 94, 97, 223
Seiko watches, 220, 222, 224
semiconductor industry, 203, 221
Sévigné, Madame de (1626–1696), 244
Shibusawa, Eichii (1840–1932), 113, 115, 118
shipping, 31, 62–64
shoe sales, 89, 94, 97, 98
Siemens Company, 15, 120, 124, 126, 168
Siemens, Georg (1840–1906), 12, 25, 113, 115, 118, 126
Siemens, Werner (1816–1892), 12, 120
silk, 218
294

Skinner, B. F. (1904.-), 110
Sloan, Alfred P., Jr. (1875–1966), 51
A.O. Smith (company), 236, 237, 239
Smith, Adam (1723–1790), 26, 145, 216, 265–266
“smokestack” industries, 1, 3, 6, 257–259
Sony, 225, 230
Southern Pacific, 82
Spirit of Enterprise (Gilder), 210n, 267
Sprint, 82, 226
Stalin, Josef V. (1879–1953), 4
steel industry, 33, 38–39, 40
Stephenson, George (1781–1848), 121
Strategy and Structure (Chandler), 209n
streetcars, electric, 136
Structure of Scientific Revolutions, The (Kuhn), 111
sulfa drugs, 107–108, 211
sunset laws, 259–260
Super Heterodyne radios, 225
surgery:
cardiac, 102
elective, 61
eye, 66-67, 68, 69, 74, 233–234, 235
Swan, Joseph W. (1828–1914), 118, 119
switchboard, automatic, 70
symbolic logic, 108

Taussig, Helen (1898-), 102
taxation, 166, 194, 260–263
Taylor, Frederic W. (1856–1915), 212
techné, 14, 17
technology, 28–29, 33, 129
biological vs. mechanical models for, 3–4
convergence of, 84–85, 114, 122, 124
in Japan, 33, 44, 123
telecommunications industry:
long-distance market for, 82, 83, 84, 85, 226, 231–232
technology of, 84–85, 122, 124
295

telegraph, 32, 109, 113, 127–128
telephone, 127–128
television, 44, 53, 64, 131
textbooks, 31
Theorie der Wirtschaftlichen Entwicklung, Die (Schumpeter), 27 3M, 28–
29, 147, 163, 165, 170, 171, 190, 212, 217, 218
Thurn and Taxis, 244
Time, 73
Times (London), 113
tin cans, sealing of, 234, 235
tires, automobile, 192–193
Tocqueville, Alexis de (1805–1859), 254
Toshiba, 44
Toyota, 79, 108
tranquilizers, 211
transistors, 109, 225, 231
travelers checks, 241
“triage,” 61
turbines, steam, 247–248
Tylenol, 85, 222–223
typesetting, 70, 71, 113

unexpected factors, 35, 37–56, 140, 230, 255
failures as, 46–52
outside events as, 52–56
successes as, 37–46, 156
unions, labor, 87, 93, 180–181
United Parcel Service, 86
United States:
deindustrialization of, 1, 2, 8, 16
economic cycles in, 11, 12
middle vs. working classes in, 48, 103–104
as society of organizations, 15, 31–32
Univac, 44, 191
Universal Bank, 12, 113, 114
universities:
modern development of, 23–24, 177, 212–218, 262, 264-265
296

student enrollment in, 24, 45, 92–96, 97, 106
University of Berlin, 177, 212, 213–214, 216
Unternehmer, 25
Urwick, Lyndall (1891–1983), 110

vacuum tube, 225, 228
Valium, 211
value-added tax (VAT), 262–263
venture capital, 4, 113, 257
Verne, Jules (1828–1905), 120
Vesper, Karl H. (1932–), 267
veterinary medicine, 40–42, 189
videocassettes, 33–34
Vienna Stock Exchange, crash of (1873), 11, 12
Vinci, Leonardo de (1452–1519), 133–134, 137
vitamins, 210–211, 216, 218, 222
Volkswagen, 86-87, 108
Volkswagen Beetle, 86–87
Volkswagen do Brasil, 87
Voltaire, François Arouet de (1694–1778), 244
Volvo, 80, 81

Wallace, Henry C. (1866–1924), 111–112
Walt Disney Productions, 169
Wang, An (1920-), 211, 213, 215, 216
Wang Laboratories, 211, 217, 222
Washington, Booker T. (1856–1915), 101
watches, digital, 221–222, 224
Watson, Thomas, Jr. (1914–), 117
Watson, Thomas, Sr. (1874–1956), 43, 117
Watt, James (1736–1819), 134
Wealth of Nations (Smith), 26, 145, 216, 265–266
Welfare State, 7, 253
Wells, H. C. (1866–1946), 120
Weltanschauung, 29
Westinghouse, 120
297

Westinghouse, George (1846–1914), 12
White, Walter (1893–1955), 101
Whitehead, Alfred North (1861–1947), 108
Whyte, William H. (1917–), 14
Wood, Robert E. (1879–1969), 97
word processors, 211, 216, 222
wrenches, universal, 130
Wright, Orville (1871–1948), 35, 112, 114, 115
Wright, Wilbur (1867–1912), 35, 112, 114, 115
Wundt, Wilhelm (1832-1920), 110

Xerox, 153, 191, 226, 227–228, 229, 230, 246–247, 251
X-Ray diffraction, 114
youth rebellion, 96–97, 106
“Yuppies,” 106

zippers, 130, 131
298

About the Author
A prolific writer on subjects relating to society, economics, politics, and
management, PETER F. DRUCKER has published thirty books that
have been translated into more than twenty languages. He has also
written an autobiographical book entitled Adventures of a Bystander. A
former editorial columnist for the Wall Street Journal, he currently serves
as a frequent contributor to magazines and lives with his wife, Doris, in
Claremont, California.
Visit www.AuthorTracker.com for exclusive information on your favorite
HarperCollins author.
299

Praise
From the reviews
“A remarkable book about the economic future of the United States.”
—National Review
“By far the most trenchant analysis of a phenomenon that, if the author is
correct, may be the key to our economic growth and continued
prosperity.”
—New Times
“The first book that looks at entrepreneurship as a practice and as such
should be necessary reading for practicing executives.”
—Dallas Morning News
“Our most enduring commentator on the practice of management and
the economic institutions of society.”
—Business Week
“…contains a wealth of worthwhile ideas that challenge common
assumptions about how businesses and organizations succeed or fail.
Perhaps no one is more eminently qualified to do the job of challenging
than Drucker, whose pioneering management books four decades ago
have endured as classics to this day.”
—Los Angeles Times
“Drucker believes entrepreneurship is not only possible in all institutions,
it is essential to their survival. Just how to manage entrepreneurship is
what this new book is all about.”
—Venture
300

Books by Peter F. Drucker
MANAGEMENT
Managing the Non-Profit Organization
The Frontiers of Management
Innovation and Entrepreneurship
The Changing World of the Executive
Managing in Turbulent Times
Management: Tasks, Responsibilities, Practices
Technology, Management and Society
The Effective Executive
Managing for Results
The Practice of Management
Concept of the Corporation
ECONOMICS, POLITICS, SOCIETY
Post Capitalist Society
The New Realities
Toward the Next Economics
The Unseen Revolution
Men, Ideas and Politics
The Age of Discontinuity
Landmarks of Tomorrow
America’s Next Twenty Years
The New Society
The Future of Industrial Man
The End of Economic Man
FICTION
The Temptation to Do Good
The Last of All Possible Worlds
AUTOBIOGRAPHY
301

Adventures of a Bystander
302

Credits
Cover design by Marc Cohen
303

Copyright
INNOVATION AND ENTREPRENEURSHIP. Copyright © 1985 by Peter F. Drucker.
All rights reserved under International and Pan-American Copyright
Conventions. By payment of the required fees, you have been granted
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hereinafter invented, without the express written permission of
HarperCollins e-books.
First Perennial Library edition published 1986.
First HarperBusiness edition published 1993
EPub Edition © May 2010 ISBN: 978-0-06-180979-8
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304

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305

* The dates of all persons mentioned in the test will be found in the index
306

* Kondratjeff’s long-wave cycle was popularized in the West by the Austro-American economist Joseph
Schumpeter, in his monumental book Business Cycles (1939). Kondratieff’s best known, most serious, and most
important disciple today—and also the most serious and most knowledgeable of the prophets of “long-term
stagnation”—is the MIT scientist Jay Forrester.
307

† Which, contrary to common belief, was the first one to start declining. In fact, petroleum ceased to be a growth
industry around 1950. Since then the incremental unit of petroleum needed for an additional unit of output,
whether in manufacturing, in transportation, or in heating and air conditioning, has been falling—slowly at first
but rapidly since 1973.
308

* It was published under the title “Lessons from America’s Mid-sized Growth Companies,” by Richard E.
Cavenaugh and Donald K. Clifford, Jr., in the Autumn 1983 issue of the McKinsey Quarterly.
309

* Georg Siemens and the Universal Bank, see Chapter 9.
310

* My first two management books, Concept of the Corporation (1946; a study of General Motors), and The
Practice of Management (1954) were indeed the original attempts to organize and present management as a
systematic body of knowledge, that is, as a discipline.
311

† This by now has even reached Communist China. One of the first actions of the Chinese government after the
fall of the “Gang of Four” was to establish an Enterprise Management Agency directly responsible to the prime
minister, and to import a Graduate Business School from the United States.
312

* See the section on The American University in my book Management: Tasks, Responsibilities, Practices (New
York: Harper & Row, 1973), pages 150–152.
313

* On this, see the section Performance in the Service Institution (Chapters 11–14) in Management Tasks,
Responsibilities, Practices, but also Chapter 14 of this book, Entrepreneurship in the Service Institution.
314

* On the “mini-mill,” see Chapter 4
315

* This is also true of Japan, the country, that per capita, buys more books than any other and twice as many as
the United States.
316

* This is brought out clearly in the best discussion of the health-care problem that has appeared so far, and the
only one that looks at health care across national boundaries, in all developed countries. It is given in The
Economist of April 29, 1984.
317

† Surgery for complaints that yield to surgery, will not improve without it, but are not “life-threatening.” Examples
are cataracts, hip replacements and orthopedic surgery generally, or a prolapsed uterus.
318

* Here the work of the modern French historians of civilization is definitive.
319

* A word that I coined in 1969 in The Age of Discontinuity (New York: Harper & Row; London: William
Heinemann).
320

* This has long been suspected. Now, however, conclusive evidence is available in the study of one hundred
medium-sized “growth” companies by Richard E. Cavenaugh and Donald K. Clifford, Jr., “Lessons from
America’s Mid-Sized Growth Companies,” McKinsey Quarterly (Autumn 1983).
321

* All these approaches have their origin in a book of mine published twenty years ago, Managing for Results
(New York: Harper & Row, 1964), the first systematic work on business strategy, to my knowledge. This in turn
grew out of the Entrepreneurship Seminar I ran in the late fifties at New York University. The analysis presented
in Managing for Results (Chapters 1—5), with its ranking of all products and services into a small number of
categories according to their performance, characteristics, and life expectancies, is still a useful tool for the
analysis of product-life and product-health.
322

† For a definition of these terms, see Managing for Results, especially Chapter 4, How Are We Doing?, pp. 51-
68.
323

* The best presentation of this viewpoint is in Rosabeth M. Kanter’s The Change Masters (New York: Simon &
Schuster, 1983).
324

* In Management: Tasks, Responsibilities, Practices, especially Chapters 56 & 57
325

* On the public-service institution and its characteristics, see the section on Performance in the Service
Institution, Chapters 11—14, in Management: Tasks, Responsibilities, Practices.
326

* Who later became mayor of Detroit and senator for Michigan, and might as well have become President of the
United States had he not been in Canada.
327

* A fine description of this process is to be found in High-Output Management (New York: Random House,
1983), by Andrew S. Grove, co-founder and president of Intel, one of the largest manufacturers of
semiconductors.
328

† For some of these, see the Suggested Readings at the back of this book.
329

* The 1952 edition of the Concise Oxford Dictionary still defined strategy as: “Generalship; the art of war;
management of an army or armies in a campaign.” Alfred D. Chandler, Jr., first applied the term to the conduct
of a business in 1962 in his pioneering Strategy and Structure (Cambridge, Mass.: M.I.T. Press), which studied
the evolution of management in the big corporation. But shortly thereafter, in 1963, when I wrote the first
analysis of business strategy, the publisher and I found that the word could not be used in the title without risk of
serious misunderstanding. Booksellers, magazine editors, and senior business executives all assured us that
“strategy” for them meant the conduct of military or election campaigns. The book discussed most that is now
considered “strategy.” It uses the word in the text. But the title we chose was Managing for Results.
330

† Of which I have found Michael Porter’s Competitive Strategies (New York: Free Press, 1980) the most useful.
331

* E.g., George Gilder’s The Spirit of Enterprise (New York: Simon & Schuster, 1984), perhaps the most readable
recent example of the genre.
332

* Under the title The Limits on the Effectiveness of Government (Die Grenzen der Wirksamkeit des Staates),
one of the very few original books on political philosophy ever written by a German.
333

* The term was coined by Theodore Levitt of the Harvard Business School.
334

* As was first said more than thirty years ago in my The Practice of Management (New York: Harper & Row,
1954).
335

* Reason becomes nonsense, / Boons afflictions.
336

Title Page
Contents
Preface
Introduction
I
1
2
3
4
5
6
7
8
9
10
11
II
12
13
14
15
III
16
17
18
19
Conclusion
Suggested Readings
Searchable Terms
About the Author
Praise
Other Books by Peter F. Drucker
Credits
Copyright
About the Publisher