See Attachments.

Due Date: Feb. 2nd before midnight (before 23:30 EST)

Week #1 Prompt: Due Feb. 2nd before midnight (before 23:30 EST)

For each reading, students are required to submit a very brief (5 sentences) summary of the main points of the author(s). What is the essence of their ideas? What did you learn from the reading?

· Reading 1: Berkun, Scott (2010). The Myths of Innovation. Sebastopol, CA: O’Reilly Media. ISBN: 9781449 (READ ENTIRE BOOK)

· Reding 2: Drucker, Peter “Discipline of Innovation” (available at www.hbsp.org).

SEE this link:

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ENTREPRENEURSHIP

The Discipline of Innovation
by Peter F. Drucker

From the August 2002 Issue

How much of innovation is inspiration, and how much is hard work? If it’s mainly

the former, then management’s role is limited: Hire the right people, and get out of

their way. If it’s largely the latter, management must play a more vigorous role:

Establish the right roles and processes, set clear goals and relevant measures, and

review progress at every step. Peter Drucker, with the masterly subtlety that is his

trademark, comes down somewhere in the middle. Yes, he writes in this article,

innovation is real work, and it can and should be managed like any other corporate

function. But that doesn’t mean it’s the same as other business activities. Indeed,

innovation is the work of knowing rather than doing.

Drucker argues that most innovative business ideas come from methodically

analyzing seven areas of opportunity, some of which lie within particular

companies or industries and some of which lie in broader social or demographic

trends. Astute managers will ensure that their organizations maintain a clear focus

on all seven. But analysis will take you only so far. Once you’ve identified an

attractive opportunity, you still need a leap of imagination to arrive at the right

response—call it “functional inspiration.”

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D
espite much discussion these days of the “entrepreneurial personality,”

few of the entrepreneurs with whom I have worked during the past 30

years had such personalities. But I have known many people—

salespeople, surgeons, journalists, scholars, even musicians—who did have them

without being the least bit entrepreneurial. What all the successful entrepreneurs I

have met have in common is not a certain kind of personality but a commitment to

the systematic practice of innovation.

Innovation is the specific function of entrepreneurship, whether in an existing

business, a public service institution, or a new venture started by a lone individual

in the family kitchen. It is the means by which the entrepreneur either creates new

wealth-producing resources or endows existing resources with enhanced potential

for creating wealth.

Today, much confusion exists about the proper definition of entrepreneurship.

Some observers use the term to refer to all small businesses; others, to all new

businesses. In practice, however, a great many well-established businesses engage

in highly successful entrepreneurship. The term, then, refers not to an enterprise’s

size or age but to a certain kind of activity. At the heart of that activity is

innovation: the effort to create purposeful, focused change in an enterprise’s

economic or social potential.

Sources of Innovation
There are, of course, innovations that spring from a flash of genius. Most

innovations, however, especially the successful ones, result from a conscious,

purposeful search for innovation opportunities, which are found only in a few

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situations. Four such areas of opportunity exist within a company or industry:

unexpected occurrences, incongruities, process needs, and industry and market

changes.

Three additional sources of opportunity exist outside a company in its social and

intellectual environment: demographic changes, changes in perception, and new

knowledge.

True, these sources overlap, different as they may be in the nature of their risk,

difficulty, and complexity, and the potential for innovation may well lie in more

than one area at a time. But together, they account for the great majority of all

innovation opportunities.

1. Unexpected Occurrences
Consider, first, the easiest and simplest source of innovation opportunity: the

unexpected. In the early 1930s, IBM developed the first modern accounting

machine, which was designed for banks. But banks in 1933 did not buy new

equipment. What saved the company—according to a story that Thomas Watson,

Sr., the company’s founder and long-term CEO, often told—was its exploitation of

an unexpected success: The New York Public Library wanted to buy a machine.

Unlike the banks, libraries in those early New Deal days had money, and Watson

sold more than a hundred of his otherwise unsalable machines to libraries.

Fifteen years later, when everyone believed that computers were designed for

advanced scientific work, business unexpectedly showed an interest in a machine

that could do payroll. Univac, which had the most advanced machine, spurned

business applications. But IBM immediately realized it faced a possible unexpected

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success, redesigned what was basically Univac’s machine for such mundane

applications as payroll, and within five years became a leader in the computer

industry, a position it has maintained to this day.

The unexpected failure may be an equally important source of innovation

opportunities. Everyone knows about the Ford Edsel as the biggest new-car failure

in automotive history. What very few people seem to know, however, is that the

Edsel’s failure was the foundation for much of the company’s later success. Ford

planned the Edsel, the most carefully designed car to that point in American

automotive history, to give the company a full product line with which to compete

with General Motors. When it bombed, despite all the planning, market research,

and design that had gone into it, Ford realized that something was happening in

the automobile market that ran counter to the basic assumptions on which GM and

everyone else had been designing and marketing cars. No longer was the market

segmented primarily by income groups; the new principle of segmentation was

what we now call “lifestyles.” Ford’s response was the Mustang, a car that gave the

company a distinct personality and reestablished it as an industry leader.

Unexpected successes and failures are such productive sources of innovation

opportunities because most businesses dismiss them, disregard them, and even

resent them. The German scientist who around 1905 synthesized novocaine, the

first nonaddictive narcotic, had intended it to be used in major surgical procedures

like amputation. Surgeons, however, preferred total anesthesia for such

procedures; they still do. Instead, novocaine found a ready appeal among dentists.

Its inventor spent the remaining years of his life traveling from dental school to

dental school making speeches that forbade dentists from “misusing” his noble

invention in applications for which he had not intended it.

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This is a caricature, to be sure, but it illustrates the attitude managers often take to

the unexpected: “It should not have happened.” Corporate reporting systems

further ingrain this reaction, for they draw attention away from unanticipated

possibilities. The typical monthly or quarterly report has on its first page a list of

problems—that is, the areas where results fall short of expectations. Such

information is needed, of course, to help prevent deterioration of performance. But

it also suppresses the recognition of new opportunities. The first acknowledgment

of a possible opportunity usually applies to an area in which a company does better

than budgeted. Thus genuinely entrepreneurial businesses have two “first pages”—

a problem page and an opportunity page—and managers spend equal time on both.

2. Incongruities
Alcon Laboratories was one of the success stories of the 1960s because Bill Conner,

the company’s cofounder, exploited an incongruity in medical technology. The

cataract operation is the world’s third or fourth most common surgical procedure.

During the past 300 years, doctors systematized it to the point that the only “old-

fashioned” step left was the cutting of a ligament. Eye surgeons had learned to cut

the ligament with complete success, but it was so different a procedure from the

rest of the operation, and so incompatible with it, that they often dreaded it. It was

incongruous.

Doctors had known for 50 years about an enzyme that could dissolve the ligament

without cutting. All Conner did was to add a preservative to this enzyme that gave

it a few months’ shelf life. Eye surgeons immediately accepted the new compound,

and Alcon found itself with a worldwide monopoly. Fifteen years later, Nestlé

bought the company for a fancy price.

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Such an incongruity within the logic or rhythm of a process is only one possibility

out of which innovation opportunities may arise. Another source is incongruity

between economic realities. For instance, whenever an industry has a steadily

growing market but falling profit margins—as, say, in the steel industries of

developed countries between 1950 and 1970—an incongruity exists. The innovative

response: minimills.

An incongruity between expectations and results can also open up possibilities for

innovation. For 50 years after the turn of the century, shipbuilders and shipping

companies worked hard both to make ships faster and to lower their fuel

consumption. Even so, the more successful they were in boosting speed and

trimming their fuel needs, the worse the economics of ocean freighters became. By

1950 or so, the ocean freighter was dying, if not already dead.

All that was wrong, however, was an incongruity between the industry’s

assumptions and its realities. The real costs did not come from doing work (that is,

being at sea) but from not doing work (that is, sitting idle in port). Once managers

understood where costs truly lay, the innovations were obvious: the roll-on and

roll-off ship and the container ship. These solutions, which involved old

technology, simply applied to the ocean freighter what railroads and truckers had

been using for 30 years. A shift in viewpoint, not in technology, totally changed the

economics of ocean shipping and turned it into one of the major growth industries

of the last 20 to 30 years.

3. Process Needs

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Anyone who has ever driven in Japan knows that the country has no modern

highway system. Its roads still follow the paths laid down for—or by—oxcarts in

the tenth century. What makes the system work for automobiles and trucks is an

adaptation of the reflector used on American highways since the early 1930s. The

reflector lets each car see which other cars are approaching from any one of a half-

dozen directions. This minor invention, which enables traffic to move smoothly

and with a minimum of accidents, exploited a process need.

What we now call the media had its origin in two innovations developed around

1890 in response to process needs. One was Ottmar Mergenthaler’s Linotype,

which made it possible to produce newspapers quickly and in large volume. The

other was a social innovation, modern advertising, invented by the first true

newspaper publishers, Adolph Ochs of the New York Times, Joseph Pulitzer of the

New York World, and William Randolph Hearst. Advertising made it possible for

them to distribute news practically free of charge, with the profit coming from

marketing.

4. Industry and Market Changes
Managers may believe that industry structures are ordained by the good Lord, but

these structures can—and often do—change overnight. Such change creates

tremendous opportunity for innovation.

One of American business’s great success stories in recent decades is the brokerage

firm of Donaldson, Lufkin & Jenrette, recently acquired by the Equitable Life

Assurance Society. DL&J was founded in 1960 by three young men, all graduates of

the Harvard Business School, who realized that the structure of the financial

industry was changing as institutional investors became dominant. These young

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men had practically no capital and no connections. Still, within a few years, their

firm had become a leader in the move to negotiated commissions and one of Wall

Street’s stellar performers. It was the first to be incorporated and go public.

In a similar fashion, changes in industry structure have created massive innovation

opportunities for American health care providers. During the past ten or 15 years,

independent surgical and psychiatric clinics, emergency centers, and HMOs have

opened throughout the country. Comparable opportunities in telecommunications

followed industry upheavals—in transmission (with the emergence of MCI and

Sprint in long-distance service) and in equipment (with the emergence of such

companies as Rolm in the manufacturing of private branch exchanges).

When an industry grows quickly—the critical figure seems to be in the

neighborhood of 40% growth in ten years or less—its structure changes.

Established companies, concentrating on defending what they already have, tend

not to counterattack when a newcomer challenges them. Indeed, when market or

industry structures change, traditional industry leaders again and again neglect the

fastest growing market segments. New opportunities rarely fit the way the

industry has always approached the market, defined it, or organized to serve it.

Innovators therefore have a good chance of being left alone for a long time.

5. Demographic Changes
Of the outside sources of innovation opportunities, demographics are the most

reliable. Demographic events have known lead times; for instance, every person

who will be in the American labor force by the year 2000 has already been born.

Yet because policy makers often neglect demographics, those who watch them and

exploit them can reap great rewards.

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The Japanese are ahead in robotics because they paid attention to demographics.

Everyone in the developed countries around 1970 or so knew that there was both a

baby bust and an education explosion going on; about half or more of the young

people were staying in school beyond high school. Consequently, the number of

people available for traditional blue-collar work in manufacturing was bound to

decrease and become inadequate by 1990. Everyone knew this, but only the

Japanese acted on it, and they now have a ten-year lead in robotics.

Much the same is true of Club Mediterranee’s success in the travel and resort

business. By 1970, thoughtful observers could have seen the emergence of large

numbers of affluent and educated young adults in Europe and the United States.

Not comfortable with the kind of vacations their working-class parents had

enjoyed—the summer weeks at Brighton or Atlantic City—these young people were

ideal customers for a new and exotic version of the “hangout” of their teen years.

Managers have known for a long time that demographics matter, but they have

always believed that population statistics change slowly. In this century, however,

they don’t. Indeed, the innovation opportunities made possible by changes in the

numbers of people—and in their age distribution, education, occupations, and

geographic location—are among the most rewarding and least risky of

entrepreneurial pursuits.

6. Changes in Perception
“The glass is half full” and “The glass is half empty” are descriptions of the same

phenomenon but have vastly different meanings. Changing a manager’s perception

of a glass from half full to half empty opens up big innovation opportunities.

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All factual evidence indicates, for instance, that in the last 20 years, Americans’

health has improved with unprecedented speed—whether measured by mortality

rates for the newborn, survival rates for the very old, the incidence of cancers

(other than lung cancer), cancer cure rates, or other factors. Even so, collective

hypochondria grips the nation. Never before has there been so much concern with

or fear about health. Suddenly, everything seems to cause cancer or degenerative

heart disease or premature loss of memory. The glass is clearly half empty.

Rather than rejoicing in great improvements in health, Americans seem to be

emphasizing how far away they still are from immortality. This view of things has

created many opportunities for innovations: markets for new health care

magazines, for exercise classes and jogging equipment, and for all kinds of health

foods. The fastest growing new U.S. business in 1983 was a company that makes

indoor exercise equipment.

A change in perception does not alter facts. It changes their meaning, though—and

very quickly. It took less than two years for the computer to change from being

perceived as a threat and as something only big businesses would use to something

one buys for doing income tax. Economics do not necessarily dictate such a

change; in fact, they may be irrelevant. What determines whether people see a

glass as half full or half empty is mood rather than fact, and a change in mood often

defies quantification. But it is not exotic. It is concrete. It can be defined. It can be

tested. And it can be exploited for innovation opportunity.

7. New Knowledge

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Among history-making innovations, those that are based on new knowledge—

whether scientific, technical, or social—rank high. They are the super-stars of

entrepreneurship; they get the publicity and the money. They are what people

usually mean when they talk of innovation, although not all innovations based on

knowledge are important.

Knowledge-based innovations differ from all others in the time they take, in their

casualty rates, and in their predictability, as well as in the challenges they pose to

entrepreneurs. Like most superstars, they can be temperamental, capricious, and

hard to direct. They have, for instance, the longest lead time of all innovations.

There is a protracted span between the emergence of new knowledge and its

distillation into usable technology. Then there is another long period before this

new technology appears in the marketplace in products, processes, o r services.

Overall, the lead time involved is something like 50 years, a figure that has not

shortened appreciably throughout history.

To become effective, innovation of this sort usually demands not one kind of

knowledge but many. Consider one of the most potent knowledge-based

innovations: modern banking. The theory of the entrepreneurial bank—that is, of

the purposeful use of capital to generate economic development—was formulated

by the Comte de Saint-Simon during the era of Napoleon. Despite Saint-Simon’s

extraordinary prominence, it was not until 30 years after his death in 1825 that two

Knowledge-based innovations can be
temperamental, capricious, and hard to
direct.

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of his disciples, t he brothers Jacob and Isaac Pereire, established the first

entrepreneurial bank, the Credit Mobilier, and ushered in what we now call finance

capitalism.

The Pereires, however, did not know modern commercial banking, which

developed at about the same time across the channel in England. The Credit

Mobilier failed ignominiously. A few years later, two young men—one an

American, J.P. Morgan, and one a German, Georg Siemens—put together the

French theory of entrepreneurial banking and the English theory of commercial

banking to create the first successful modern banks: J.P. Morgan & Company in

New York, and the Deutsche Bank in Berlin. Ten years later, a young Japanese,

Shibusawa Eiichi, adapted Siemens’s concept to his country and thereby laid the

foundation of Japan’s modern economy. This is how knowledge-based innovation

always works.

The computer, to cite another example, required no fewer than six separate strands

of knowledge:

binary arithmetic;

Charles Babbage’s conception of a calculating machine, in the first half of the

nineteenth century;

the punch card, invented by Herman Hollerith for the U.S. census of 1890;

the audion tube, an electronic switch invented in 1906;

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symbolic logic, which was developed between 1910 and 1913 by Bertrand Russell

and Alfred North Whitehead;

and concepts of programming and feedback that came out of abortive attempts

during World War I to develop effective antiaircraft guns.

Although all the necessary knowledge was available by 1918, the first operational

digital computer did not appear until 1946.

Long lead times and the need for convergence among different kinds of knowledge

explain the peculiar rhythm of knowledge-based innovation, its attractions, and its

dangers. During a long gestation period, there is a lot of talk and little action. Then,

when all the elements suddenly converge, there is tremendous excitement and

activity and an enormous amount of speculation. Between 1880 and 1890, for

example, almost 1,000 electric-apparatus companies were founded in developed

countries. Then, as always, there was a crash and a shakeout. By 1914, only 25

were still alive. In the early 1920s, 300 to 500 automobile companies existed in the

United States; by 1960, only four of them remained.

It may be difficult, but knowledge-based innovation can be managed. Success

requires careful analysis of the various kinds of knowledge needed to make an

innovation possible. Both J.P. Morgan and Georg Siemens did this when they

established their banking ventures. The Wright brothers did this when they

developed the first operational airplane.

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Careful analysis of the needs—and, above all, the capabilities—of the intended user

is also essential. It may seem paradoxical, but knowledge-based innovation is more

market dependent than any other kind of innovation. De Havilland, a British

company, designed and built the first passenger jet, but it did not analyze what the

market 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

a jet would give an airline the greatest advantage. The other was equally mundane:

How could the airlines finance the purchase of such an expensive plane? Because

de Havilland failed to do an adequate user analysis, two American companies,

Boeing and Douglas, took over the commercial jet-aircraft industry.

Principles of Innovation
Purposeful, systematic innovation begins with the analysis of the sources of new

opportunities. Depending on the context, sources will have different importance at

different times. Demographics, for instance, may be of little concern to innovators

of fundamental industrial processes like steelmaking, although the Linotype

machine became successful primarily because there were not enough skilled

typesetters available to satisfy a mass market. By the same token, new knowledge

may be of little relevance to someone innovating a social instrument to satisfy a

need that changing demographics or tax laws have created. But whatever the

situation, innovators must analyze all opportunity sources.

Because innovation is both conceptual and perceptual, would-be innovators must

also go out and look, ask, and listen. Successful innovators use both the right and

left sides of their brains. They work out analytically what the innovation has to be

to satisfy an opportunity. Then they go out and look at potential users to study

their expectations, their values, and their needs.

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THIS ARTICLE ALSO APPEARS IN:

To be effective, an innovation has to be simple, and it has to be focused. It should

do only one thing; otherwise it confuses people. Indeed, the greatest praise an

innovation can receive is for people to say, “This is obvious! Why didn’t I think of

it? It’s so simple!” Even the innovation that creates new users and new markets

should be directed toward a specific, clear, and carefully designed application.

Effective innovations start small. They are not grandiose. It may be to enable a

moving vehicle to draw electric power while it runs along rails, the innovation that

made possible the electric streetcar. Or it may be the elementary idea of putting the

same number of matches into a matchbox (it used to be 50). This simple notion

made possible the automatic filling of matchboxes and gave the Swedes a world

monopoly on matches for half a century. By contrast, grandiose ideas for things

that will “revolutionize an industry” are unlikely to work.

In fact, no one can foretell whether a

given innovation will end up a big

business or a modest achievement. But

even if the results are modest, the

successful innovation aims from the

beginning to become the standard setter,

to determine the direction of a new

technology or a new industry, to create

the business that is—and remains—ahead of the pack. If an innovation does not aim

at leadership from the beginning, it is unlikely to be innovative enough.

HBR’s 10 Must Reads on
Innovation
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$24.95

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Above all, innovation is work rather than genius. It requires knowledge. It often

requires ingenuity. And it requires focus. There are clearly people who are more

talented innovators than others, but their talents lie in well-defined areas. Indeed,

innovators rarely work in more than one area. For all his systematic innovative

accomplishments, Thomas Edison worked only in the electrical field. An innovator

in financial areas, Citibank for example, is not likely to embark on innovations in

health care.

In innovation, as in any other endeavor, there is talent, there is ingenuity, and

there is knowledge. But when all is said and done, what innovation requires is

hard, focused, purposeful work. If diligence, persistence, and commitment are

lacking, talent, ingenuity, and knowledge are of no avail.

There is, of course, far more to entrepreneurship than systematic innovation—

distinct entrepreneurial strategies, for example, and the principles of

entrepreneurial management, which are needed equally in the established

enterprise, the public service organization, and the new venture. But the very

foundation of entrepreneurship is the practice of systematic innovation.

A version of this article appeared in the August 2002 issue of Harvard Business Review.

Innovation requires knowledge, ingenuity,
and, above all else, focus.

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Peter F. Drucker (November 19, 1909 – November 11, 2005) was an Austrian-born American
management consultant, educator, and author whose writings contributed to the philosophical and

practical foundations of the modern business corporation. He was also a leader in the development of

management education, he invented the concept known as management by objectives, and he has been

described as “the founder of modern management.”

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2 COMMENTS

Rob Carr 5 years ago

Really good article. Innovation also requires a lot of passion. Many of the startups we
(http://www.MyProgrammer.com) work with are bringing products and services to the market, and the
one trait I see that separates the winners from the losers is passion. And the energy they have for their
ideas is what carries them through the rough times. Innovating is not easy.

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