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DRU 502: Innovation and Entrepreneurship Lesson 4
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The Curse of “Bigness”; Drucker’s 5 Principles of Systematic Innovation; “Do’s and Don’ts”
Objectives of This Presentation
Review: Why it is hard for large organizations to innovate
Drucker’s 5 Principles of Systematic Innovation
The “do”s
The “don’t”s
Examples
Learning Outcomes
By the time you have done the work associated with this lesson, you will be able to:
Explain why the 5 Principles of Entrepreneurship are effective
Articulate the “do’s” and “don’ts” associated with them
Assess any given business start-up in terms of these principles
Why It’s Hard for Big Organizations to Innovate (Review)
Internal politics of “credit”
Big organizations have the advantage of economies of scale
…But in time, when they pass their “primes,” their bigness becomes an impediment
Snarled in methods and procedures
And if they have “Box 3 Scenarios,” people will fear taking risks.
But if they have “Box 2 Scenarios,” people will be more likely to take risks.*
*Note: But large organizations (or for that matter, even small organizations) often lack “Box 2 Scenarios.” This requires considerable sophistication on the part of an organization’s top management.
4
For more information, go to:
Review of Outcomes of Innovation Process
Consequences for Innovation
Consequences for
Innovator
+ +
+ –
– +
– –
Here it is “safe to fail”
Why is it important for an organization to make it “safe to fail”?
Drucker’s Principles of Systematic Innovation
So far, we have considered where the innovative ideas come from (the “7 Sources of Innovation”)
In order to take them from mere “ideas” to “reality,” Drucker believed we need a set of systematic, repeatable practices…
These practices are sometimes called (by Drucker) the “5 Principles of Entrepreneurship,” and sometimes the “5 Principles of Systematic Innovation.” Whatever we choose to call them, here they are (again):
Drucker’s 5 Principles (the “Do”s)
Begin with an analysis of the opportunity
See if people will be interested in using the innovation
Make it simple, and focused on a specific need (presumably identified in the second bullet)
Start small and be parsimonious; refine as you gain market experience
Aim at leadership (See Chapter 11 and think hard about what “market leadership” means)
The “Don’t”s
“Not invented here” syndrome
“Creaming” the market
gravitate to the most profitable segments of their markets
devote less and less resources to the less profitable segments
Belief that, because they may have spent 30 years developing and producing a product, this in itself signifies “Quality”
The delusion of a “premium price”
Raise the price to increase margin rather than cutting costs
The “Don’t”s
Maximize rather than optimize
Big, established firms often try to build every possible customer need into one product.
Creates an advantage for a newcomer, who can specialize in a subset of the market
Newcomer gives customers exactly what the need, no more and no less
Newcomer charges a lower price, and, having established a beachhead, attacks other market segments, using the same strategy
Examples
Kawasaki, Honda, and Yamaha, who became major players in the motorcycle industry, started off with cheap little off-road vehicles, also known as “dirt bikes.”
These and many other examples were presented in Clayton Christensen, The Innovator’s Dilemma (1997), the source of the (now) common phrase, “disruptive innovation.”
Concluding Thoughts
The reason I have focused on the flaws of “big business”:
The ones who make one or more of the “errors” listed above create opportunities for new businesses to enter the market “from below”
And those who do this and follow Drucker’s 5 Principles of Systematic Innovation will be able to manage their costs, keep their cost advantage (for a while, at least), and use their cost advantage to encroach on the markets of large, established firms who make the errors described a couple of slides ago…
Thus, one or more of you may find an opportunity to do that, just by considering your own customer experience with large, hitherto successful firms.
So keep your eyes open…
End of Lesson 4
References
Adizes, Ichak. (1988). Corporate lifecycles: How and why corporations grow and die and what to do about it. Paramus, NJ: Prentice Hall
Christensen, Clayton M. (1997). The innovator’s dilemma. Boston: Harvard Business School Press
Drucker, Peter F. (1985). Innovation and entrepreneurship. New York: Harper and Row Publishers, Inc.
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