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A Guide to Drucker's Systematic Innovation

Burton B. (Buck) Goldstein, UNC at Chapel Hill

"Entrepreneurship is risky because so few of the so-called entrepreneurs know what they are doing." This is the basic thesis on page twenty nine of Peter Drucker&rsquo's seminal book, Innovation and Entrepreneurship, now over twenty years old. No business-oriented book written since is more relevant or useful to those seeking to understand the next great entrepreneurial opportunity.

Like the discipline of management which he helped found, Drucker believes that innovation can be undertaken in a systematic way and, when it is, the results are consistently positive. He suggests a number of sources that are "low risk" but are often overlooked by aspiring entrepreneurs. Among them are the following:

Demographics

Changes in demographics are unambiguous, according to Drucker, and they have the most predictable consequences (p.88). There is no better example of this opportunity than the aging of the baby boomers. This cohort represents eighty-two million people in the United States with over one trillion dollars in buying power.

As they get older, boomers require more medical services, and their expectations in terms of personal attention and rapid response are legendary. A high percentage of them conduct much of their daily life via e-mail.

A small company in Raleigh, North Carolina whose motto is "online instead of inline" has taken advantage of this obvious demographic trend. Medfusion has developed a sophisticated and secure e-mail based system that connects patients with their doctors over the Internet. It provides online appointment scheduling, completion of medical histories, referrals, prescription fulfillment, and bill payment. It even offers virtual office visits for some patients and symptoms. Medfusion seeks to take advantage of the demographic inevitability that huge numbers of patients will be connected electronically to their customers - a phenomenon that dramatically increases the company's likelihood of success.

Process Need

Innovation based on a process need starts out with the job to be done. According to Drucker, the need "perfects a process that already exists, replaces a link that is weak, (or) redesigns an existing old process by supplying the 'missing link' . . . (e)verybody in the organization always knows the need exists. Yet usually no one does anything about it" (p. 69).

RichFx, based in New York City, identified such an opportunity as a matter of survival after the Internet bubble burst. The company began as a "bright idea" employing cutting edge computer technology to create three-dimensional online shopping environments. Its pilot sites were aesthetically superb illustrating use of new technology in ways that its potential customers had never envisioned.

This kind of cutting edge innovation is, according to Drucker, the most risky. In the case of RichFx, he was correct. Customers loved the product but couldn't justify the required expenditures. Most of them had already invested a large portion of their marketing budget in photographs and written descriptions for their mail order catalogues. RichFx quickly adapted its technology to cost-efficiently convert these hard-copy assets into digital form so that they could be repurposed as an online catalogue.

The disconnect between print format and online was bridged and once converted digital assets lent themselves to a variety of other products and services that RichFx could provide. As Drucker predicted, all of the potential customers the company targeted knew this problem existed but no one was doing anything about it. Taking advantage of such an opportunity is another example of low-risk innovation.

Changes in Perception

"If general perception changes from seeing the glass as 'half full' to seeing it as 'half empty' there are major innovative opportunities," writes Drucker (p. 99). A good example is the rise of the micro-breweries. Twenty-five years ago it appeared that obtaining huge scale was the only way to survive in the beer business as the industry underwent massive consolidation. Although this made perfect sense as a means of reducing costs, the beer consumer apparently had a different view. This change in perception was identified by pioneers such as Jim Koch, the founder of the Samuel Adams brewery and, in what seemed to be an instant, hundreds of micro-breweries sprung up all over the country. Today, there are 1,368 different breweries in the United States.

Understanding that the consolidation of the beer industry had either caused or exacerbated a change in perception among beer drinkers presented another one of Drucker's low-risk opportunities. A similar example took place recently in Chapel Hill, North Carolina. In response to the large number of fast-food chains that had recently inundated this legendary college town, restaurateurs from Brooklyn teamed with a veteran of the upscale grocery business to form Sandwhich, a handmade, upscale sandwich shop that features old favorites such as BLT's, hearty home-made soups and a killer breakfast sandwich featuring hand-made grilled bread and a special sauce to go with a perfectly fried, organically grown egg. After only a few months, the place is packed at lunch and is now open for dinner. The founders understood that a significant portion of the population of Chapel Hill found "cookie cutter" lunches unattractive and that a "hand made"alternative was a low-risk source of innovation.

Opting for low-risk sources of opportunity is, of course, no guarantee of success. There is still the matter of execution. Drucker is quick to add that emerging enterprises require sound principles of management as well as a promising idea. However, it is demonstrable that some sources of opportunity will more likely produce a good result than others. Entrepreneurs should pay attention. The first step is to go back to basics and revisit the wisdom of Peter Drucker.

© 2006 Burton B. Goldstein. All rights reserved.

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