Theory of Innovation and Entrepreneurship

A. Proponent’s Background

Peter Drucker. ( 1909-2005)

Peter Ferdinand Drucker was born on November 19, 1909 in Vienna, Austria to a
civil servant of the Habsburg empire. He grew up in a small village called Kaasgraben
where he attended school until the defeat of Austria-Hungary during the first World War.
There was a lack of employment in the area following the defeat and Drucker moved to
Germany to work and study.

After working as a banker and journalist, Drucker began studying at the university
in order to earn his doctorate in international law. He left Germany in 1933 during the
rise of the Nazi regime and moved to London. After four years he left London in favor of
the United States to become a freelance writer and university professor. During his stay,
he also became well known as a business guru and finally earned his U.S. citizenship in
1943.
 Although Drucker's first work was published in 1939, it wasn't until later that he
began to make major contributions to the world of business. The 20th century brought
new types of mass production and large corporations that still functioned on an old
management style. Drucker, having noticed the imbalance of information and power,
began writing and giving speeches on how companies could rework their management
structures in order to become more efficient and make better use of the people and
knowledge within their company.

Peter F. Drucker died of natural causes on November 11, 2005 in California. Over
the course of his life he wrote 39 books, many of which were translated into more than
twenty languages. (http//www.woopido.com.biography/peter-drucker)

B. Major Assumptions/Hypothesis of the Theory

Peter F. Drucker opined that “an entrepreneur is one who always searches for
change, responds to it and exploits it as an opportunity.” he laid emphasis on two
important factors – innovation and resource- that led to emergence of entrepreneurship.
According to him, innovation is the real hub of entrepreneurship which creates resource.
A thing is regarded as resource when its economic value is recognized. For example,
mineral oil was considered worthless until the discovery of its use. Similarly, purchasing
power was considered an important resource by an American innovative entrepreneur
who invented installment buying. (http//www.authorstream.com)

According to Drucker, successful entrepreneurship involves value and satisfaction

obtained from resource of the consumer. New values are created material, converted into
a resource or existing resource combined in a new or more productive configuration.
Entrepreneurship is not confined to big businesses and economic institutions, it is equally
important to small business and non-economic institutions. Entrepreneurship behavior
rather than personality trait is more important to enhance entrepreneurship. The
foundation of entrepreneurship lies in concept and theory rather than in intuition.
(http//www.authorstream.com)
 In his book Innovation and Entrepreneurship , Peter F. Drucker took the ideas set
forth by Schumpeter one step further. He argued that Schumpeter's type of innovation can
be systematically undertaken by managers to revitalize business and non-business
organizations. By combining managerial practices with the acts of innovation, Drucker
argued, business can create a methodology of entrepreneurship that will result in the
institutionalization of entrepreneurial values and practice. Drucker's definition of
entrepreneurship—a systematic, professional discipline available to anyone in an
organization—brings our understanding of the topic to a new level. He demystified the
topic, contending that entrepreneurship is something that can be strategically employed
by any organization at any point in their existence, whether it be a start-up or a firm with
a long history. Drucker understood entrepreneurship as a tool to be implemented by
managers and organizational leaders as a means of growing a business.

Peter Drucker holds innovation, resources, and an entrepreneurial behavior as the

keys to entrepreneurship. According to him entrepreneurship involves
(http://www.brighthub.com/office/entrepreneurs/articles)
1. increase in value or satisfaction to the customer from the resource
2. creation of new values
3. combination of existing materials or resources
A Detailed Look at Entrepreneurship

As mentioned at the outset, most conceptions of entrepreneurship ascribe one or

more of the following attributes to it: a) creating a new business, b) introducing
innovations, and c) taking risks. While launching a new business is commonly held to be
a central element of entrepreneurship, it is not an indispensable characteristic. While
many entrepreneurs start new businesses, many others have acquired existing companies
and thereby undertaken entrepreneurial enterprises by introducing innovations and taking
risks.

Ray Kroc, for example, obtained exclusive franchising rights from the McDonald
brothers and went on to build the McDonald's franchise empire. Kroc expanded the fast-
food chain by the innovative method of franchising, or granting the rights to
independent business owners to use the McDonald's name and trademark and offer the
company's products in exchange for fees and royalties. This method enabled Kroc to
expand the company without investing a lot of his company's money or workers, since
the franchise owners provided them.

Furthermore, Kroc applied other innovations to his hamburger restaurants. He

standardized production and training, and focused on high quality and consistency in his
products. Because of Kroc's innovations, none of his competitors were able to completely
match McDonald's prices and quality. He introduced a new way of doing business that
laid the groundwork for vast expansion and growth for his company. In addition, he
provided an example of a new way of doing an old business, opening up opportunities
for competitors interested in trying to match his success.

Entrepreneurs also face risks with their business ventures—whether they start a
business from scratch or buy an existing one. Entrepreneurs assume the risks because
they make significant investments in their ventures; hence, they experience gains or
losses depending on the outcome of their endeavors. The risks stem from the
unpredictability or variability of running a business. These risks include market
uncertainties (whether customers will actually buy a new product or service), production
uncertainties, and resource uncertainties. Entrepreneurs make assumptions about the
business environment or market, usually based on market research and other market
evidence, and they must make decisions based on these assumptions. For example, Kroc
made assumptions about customer demand for standardized fast-food restaurants, which
paid off, which other competitors might not have.

In addition, entrepreneurship depends on an economic and business structure that

allows businesspeople to launch start-up ventures and to be creative and innovative with
these ventures. Furthermore, entrepreneurship needs positive economic conditions in
order for entrepreneurial ventures to grow and produce profits. As Marc J. Dollinger
points out in Entrepreneurship: Strategies and Resources, restrictive economies inhibit
entrepreneurship, because businesspeople must negotiate layers of bureaucracy and red
tape in order to launch a business.

C. Merits/Demerits of the Theory

Drucker argued that, "innovation is the specific instrument of entrepreneurship. It

is the act that endows resources with a new capacity to create wealth." An entrepreneur
adds wealth (or at least the potential for gain) to the economy when he or she presents the
economy with new ways to use the resource as a means of gaining some kind of value.
By discovering and exploiting a resource's previously hidden capacity for wealth
creation, entrepreneurs are catalysts for economic growth

Even a small change in entrepreneurial assumptions yields powerful

breakthroughs in the ways entrepreneurs and entrepreneurial managers think about the
growth of their business. Re-conceiving the new business as a new theory –as a set of
assumptions about the future –is a powerful new tool in the new/small business planning
and advisory contexts. It is possible to see a ‘theory of business’ as it forms –Drucker’s
insight is empirically valid (http//www.druckersociety.at//repository)

Entrepreneurship is a catalyst for economic growth. Drucker suggested that the

work of entrepreneurs drives free-market economies.. As creators of new organizations,
entrepreneurs are giving others jobs and a chance to become part of growing
organizations. With major companies restructuring and downsizing their organizations
and with governments reducing their staffs to cut spending, entrepreneurship represents a
growing source of new jobs and a method for absorbing displaced workers.

Entrepreneurship benefits the economy by facilitating the spread of innovation so

that it benefits not only the original entrepreneurs but also their competitors. As
suggested in the example above, McDonald's innovation acted as a catalyst for the
explosive growth of the fast-food industry, which has become a significant part of the
American economy. Kroc's innovation led to more innovations and more profit
opportunities. The drive-through window, value meals, and a slew of new food products
were introduced in the wake of his initial innovations. After seeing that Kroc and
McDonald's profited from their innovations, competitors spent money trying to copy his
techniques. The first improvement, the first creative step led to more profits and growth
not only for his organization but also for a host of imitators.

To appreciate the enormous contributions made by entrepreneurs and their

companies to national growth, one must look at how entrepreneurship and innovation
positively influence the economy. Entrepreneurs drive the economy because they create
wealth through innovation. In addition to natural resources such as plants, animals, and
minerals, the resource could be a physical thing, such as a new polymer or a piece of
computer hardware. A resource could also be an intellectual concept such as a
technological breakthrough, a patent for a drug, a trademark, or special expertise in a
certain area such as marketing or advertising. Furthermore, the resources that can be
leveraged in an entrepreneurial endeavor may include selling processes, distribution
networks, or manufacturing techniques.

D. Relevant Application to Rural Development

Dr. Peter F. Drucker had made outstanding contributions to the world. He is

widely acknowledged to be "the father of modern management,” and turned modern
management theory into a serious discipline. He created nearly every facet of its
application, including empowerment, decentralization, and privatization, and coined the
terms "management by objectives" and "knowledge workers."
 Dr. Drucker cared not just about how businesses manage their resources, but also
how private and public organizations operate ethically and morally within the society. He
respected the values of education, businesses’ accountability and personal responsibility
to society. Dr. Drucker’s true legacy is his insistence on this value system, and its effect
on individual lives business, and society.

a. Dr. Drucker’s influences in business circle (http//www.druckersociety.at)

China is a developing country that has been and is undergoing dramatic changes
from traditional planning economy into modern market economy. The changes are
unprecedented because of the external and internal conditions. During the changing
process, modern managerial philosophies are urgently needed by Chinese entrepreneurs
and managers as the guide to go through the complex environment.

Dr. Drucker was ranked the 3rd of top 12 managerial masters who had made
biggest influence on Chinese enterprises in the past 30 years (Wang, 2009). Since his
works were introduced in China in 1980s, many entrepreneurs and managers have
absorbed lessons from them. Some of them regard Dr. Drucker’s thought as the direction
of the “lighthouse”.

Dr. Drucker expressed his concerns on Chinese managers . He initiated the

ideology that China should rely on the managers of their own culture since they are
deeply rooted in Chinese culture and be familiar with and understand their own countries
and peoples. Dr. Drucker noted, "A developing country can easily import technology, it
can easily import capital. But technology and capital are simply tools. They only become
effective if properly used by competent and effective management. The creation of such a
pool of managerial talent is both China's greatest need and China's greatest opportunity."

Mr. Li Dongsheng, chairman of the board and president of TCL Corporation,

learnt a lot from Dr. Drucker. Established in 1981, TCL Corporation is a global leader
and technology innovator in consumer electronics, mobile communications and home
appliances. TCL employs more than 50,000 people in over 80 operations, including 18
R&D centers, 20 manufacturing bases, and more than 40 sales offices around the world.
With 2008 global sales of USD 5.63 billion.

TCL is one of the world's leading producers of flat panel TVs, DVD players, air
conditioners, and GSM, CDMA mobile phones. By the end of 2008, the brand value of
TCL had exceeded USD 5.95 billion, rising from 60th in 1995 to the No. 1 TV brand in
China today. The overall strategy of TCL is strengthening foundation and continuously
innovating. “Strengthening foundation” refers to managing the basics better to improve
organizational efficiency and capacity. “Continuously innovating” means upgrading
technological processes and operation management to a new level which meets the
requirements of globalization.

Mr. Li said, “Dr Drucker’s thought represents the accumulation of modern

management philosophies since the Western industrial revolution and is the foundation
and driving force of modern society. It is necessary for Chinese entrepreneurs to study Dr
Drucker's management philosophy to make their businesses competitive in the global
market.

The role of entrepreneurship in the development of an economy involves more

than just increasing per capita output income other than initiating and constituting change
in the structure of business and society. The study of entrepreneurship has relevance
today, not only because it helps entrepreneurs better fulfill their personal needs but
because of the economic contribution of the new ventures. More than just increasing
national income by creating new jobs, entrepreneurship acts as a positive force in
economic growth by serving as the bridge between innovation and the marketplace
(Ducker 1994).

References

http//www.woopido.com.biography/peter-drucker. Retrieved August 28, 2010

http//www.authorstream.com. Retrieved August 28, 2010

http//www.druckersociety.at. Retrieved August 28, 2010

http://www.brighthub.com/office/entrepreneurs/articles. Retrieved August 28, 2010

Atuahene-Gima Kwaku. An exploratory analysis of the impact of market orientation on

new product performance: a contingency approach. J Prod Innov Manag 1995;12:275–93

Drucker Peter F. The practice of management. New York: Harper and Row, Publishers;
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Drucker, P. F.: 1973, Management: Tasks Responsibilities, Practices (Harper and Row).
Klein S., Drucker as Business Moralist, Journal of Business Ethics, 2000(28): 121-128

Schwartz, M., Peter Drucker and the Denial of Business Ethics, Journal of Business
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Na G., Decipherment of Drucker, World Books Press, Beijing, 2004

Wang S., Top managerial masters who had made biggest influenceon Chinese enterprises
in the past 3o years, Business School BMR, June, 2009 (in Chinese): 84-87

Wang Y., Zhang S., Drucker 's Theory of Social Responsibilities to Organizations,
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