Posted by In his book, Innovation and Entrepreneurship (1985), Peter Drucker argued that the US was experiencing “a profound shift from a ‘managerial’ to an ‘entrepreneurial’ economy.” This had been made possible by “new applications of management…and above all, to systematic innovation.”[1]
Entrepreneurial management, Drucker wrote, requires very different managerial practices including (1) focusing managerial vision on opportunity; (2) generating an entrepreneurial spirit throughout its entire management group and (3) systematic listening to and interactions with the staff.[2]
“Today’s businesses, especially the large ones,” Drucker wrote in 1985, “simply will not survive in this period of rapid change and innovation unless they acquire entrepreneurial competence….Existing businesses will need to change, and change greatly in any event…And that they can only do if they learn to be successful entrepreneurs.”[3]
Drucker also foresaw a time when entrepreneurship and innovation would be “normal, steady, and continuous… innovation and entrepreneurship have to become an integral life-sustaining activity in our organizations, our economy, our society. 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.”[4]
Yet thirty years later, in many publicly-owned organizations, the pervasive shift to innovation and entrepreneurship that Drucker had foreseen hasn’t happened. As Larry Fink, CEO of BlackRock, the world’s largest investor, wrote in a letter to all the CEOs of Fortune 500 companies in February 2016: “Many companies continue to engage in practices that may undermine their ability to invest for the future… We continue to urge companies to adopt balanced capital plans, appropriate for their respective industries that support strategies for long-term growth.”[5]
Why are firms failing to be entrepreneurial and invest in long-term growth? The answer isn’t hard to find. Once a firm embraces maximizing shareholder value and the current stock price as its goal, and lavishly compensates top management to that end, management naturally focuses on exploiting the existing business and bolstering the stock price by increasing dividends and share buybacks, at the expense of innovation and investing in the future.[6]
Sadly, the trend is increasing. “Dividends paid out by S&P 500 companies in 2015,” Fink wrote, “amounted to the highest proportion of their earnings since 2009. As of the end of the third quarter of 2015, buybacks were up 27% over 12 months. We certainly support returning excess cash to shareholders, but not at the expense of value-creating investment.”
Even worse, shareholder value theory has joined forces with hierarchical bureaucracy. Once a firm embraces shareholder value theory, the C-suite has little choice but to deploy command-and-control management. That’s because making money for shareholders and the C-suite is inherently uninspiring to employees. The C-suite must compel employees to obey. With only one in five employees fully engaged in his or her work, and even fewer passionate, innovation and entrepreneurship are even less likely.[7]
Yet some firms have taken a different path. They have committed themselves to the kind of entrepreneurship and innovation that Drucker envisaged back in 1985. They have recognized that power in the marketplace has shifted from seller to buyer. These firms have seen that “better, cheaper, faster, smaller, more convenient, and more personalized” is the new norm, and the ability to innovate with committed employees is critical. These firms aim to generate an entrepreneurial spirit not only in the management group but throughout the entire organization.[8]
Even better news: firms that embrace entrepreneurship and innovation are handsomely rewarded by their customers and the stock market for doing so. The combined market capitalization of four firms alone—Apple, Amazon, Facebook and Google—now amounts to around $1.3 trillion.
Every aspect of business is changing. “Smartphones and tablets,” writes economist Geoffrey Moore, “are reengineering whole swaths of the consumer economy, from information access (Google) to communication (Facebook and Twitter) to media and entertainment (YouTube) to transportation (Uber) to hospitality (Airbnb) to dining (OpenTable and Yelp), and beyond.”[9]
And it’s not just firms in the digital economy. Whole Foods, Starbucks, Costco and Zara are using the same management practices in the non-digital world. Even big old firms, like Haier, Microsoft and Ericsson are also making the transition.[10]
“Traditional, MBA-style thinking,” as Eric Schmidt and Jonathan Rosenberg write in their book, How Google Works, “dictates that you build up a sustainable competitive advantage over rivals and then close the fortress and defend it with boiling oil and flaming arrows.” That doesn’t work anymore, because competitive advantages are less and less sustainable. The firm has to go on innovating, in order to be continuously successful.
Conclusion: Business is splitting two distinct groups: firms that are exploiting their existing business and firms that are continuously innovating. It is only the latter group that will survive: Peter Drucker’s message becomes even more urgent: innovate or die!
About the author:
Stephen Denning is the author of The Leader’s Guide to Radical Management (Jossey-Bass, 2010), which describes management principles and practices for reinventing management to promote continuous innovation and adaptation. Over 600 of his essays on these themes are available at: http://blogs.forbes.com/stevedenning/.
[1] Drucker, P. Innovation and Entrepreneurship, (1985) HarperCollins, pages 1, 14. Drucker also saw management as “about to make America into an entrepreneurial society,” with “social innovation in education, health care, government, and politics.”
[2] Ibid, pages 155- 157.
[3] Ibid. page 144. Drucker saw the needed entrepreneurship coming mainly from existing businesses, because they have the financial, human and managerial competence for effective entrepreneurial management.
[4] Ibid. Conclusion.
[5] Turner, M. “Here is the letter the world’s largest investor, BlackRock CEO Larry Fink, just sent to CEOs everywhere.” February 2, 2016. http://www.businessinsider.com/blackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2
[6] Denning, S. “Maximizing Shareholder Value: The Dumbest Idea In the World,” Forbes.com, November 28, 2011. http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/
[7] Hagel, J. Brown, J.S., Ranjan, A. & Byler, D. “Passion at Work.” October 7, 2014. http://dupress.com/articles/worker-passion-employee-behavior/
[8] Drucker, op. cit. page 157. In 1985, Drucker saw the entrepreneurial side of the organization being kept separate from operations: “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.” Today, firms like Apple, Amazon, Google and Facebook make innovation and entrepreneurship an integral part of every part of the organization.
[9] Moore, G. “The Nature of the Firm—75 Years Later,” (2014); https://www.bbvaopenmind.com/en/article/the-nature-of-the-firm-75-years-later/?fullscreen=true
[10] Denning, S. “A Learning Consortium for the Creative Economy,” Forbes.com, November 20, 2015. http://www.forbes.com/sites/stevedenning/2014/11/20/exploring-innovations-in-management-through-a-learning-consortium/; Denning, S. “Surprise! Microsoft Is Agile.” Forbes.com, October 27, 2015. http://www.forbes.com/sites/stevedenning/2015/10/27/surprise-microsoft-is-agile/; Denning, S. “Microsoft: 16 Keys to Being Agile At Scale,” Forbes.com, October 29, 2015. http://www.forbes.com/sites/stevedenning/2015/10/29/microsofts-sixteen-keys-to-becoming-agile-at-scale/ Denning, S. “Can Industrial Giatts Reinvent Themselves?” May 13, 2013, http://www.forbes.com/sites/stevedenning/2013/05/13/the-creative-economy-can-industrial-giants-reinvent-themselves/; “Large Scale Agile At Ericsson” January 20, 2016, https://www.scrumalliance.org/why-scrum/learning-consortium/learning-consortium-webinars/large-scale-agile-at-ericsson
Fine post Steve, thanks!
Innovate or die, clearly true of all things in Nature as well as in the socio-economy.
But there seem to be rising concerns about the relative size of the second group, how one can enter it, and the overall implications.
Two lines of argument. One from Robert Gordon – http://www.c-span.org/video/?406230-1/qa-robert-gordon – about whether the kind of economic innovation we consider ‘normal’ is possible or likely any more.
Second, whether innovation is actually ‘costless’, alternatively put, where does new economic value come from. The debates about the ‘costs’ of new energy are raging. Subtler may be the debates about the intellectual and emotional ‘costs’ of the digitization of everyday life, and how the Internet of Everything will extend that. There are many other dimensions – healthcare, agriculture, transportation, surveillance, and so on – wherein innovations seem to have costs that eventually come home to roost, even as we ignore them in the early days.
Perhaps we have to get used to a way of thinking about innovation that does not ignore the many dimensioned ‘costs’ of the new goods and services we applaud?