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Even in the depression years —82 when jobs in U. The companies span the economic spectrum. There are high-tech ones among them, to be sure. Cavenaugh and Donald K. Clifford, Jr. To make things more confusing still, the growth sector of the U. The most visi- ble of these are, of course, in the health-care field. The traditional American community hospital is in deep trouble these days.
The public schools are shrinking in almost every American com- munity. In the small California city in which I live, a neighborhood babysitting cooper- ative, founded around by a few mothers for their own children, had by grown into a school with two hundred students going on into the fourth grade.
Continuing education of all kinds, whether in the form of executive manage- ment programs for mid-career managers or refresher courses for doctors, engineers, lawyers, and physical therapists, is booming; even during the severe —83 recession, such programs suffered only a short setback.
The city of Lincoln, Nebraska, has been a pioneer in this area since Helen Boosalis was first elected mayor in —the same Lincoln, Nebraska, where a hundred years ago the Populists and William Jennings Bryan first started us on the road to municipal ownership of public services.
Control Data Corporation, a leading computer manufacturer also in Minneapolis, is building public- private partnerships in education and even in the management and reha- bilitation of prisoners. IV Is there anything at all that these growth enterprises have in common other than growth and defiance of the Kondratieff stagnation?
Once this is seen, then the astonishing job growth of the American economy during the last twenty, and especially the last ten years can be explained. It can even be reconciled with the Kondratieff theory. The first Kondratieff cycle, based on the railway boom, came to an end with the crash of the Vienna Stock Exchange in , a crash that brought down stock exchanges worldwide and ushered in a severe depression.
But this did not happen in the United States or in Germany, or indeed in Austria, despite the traumatic impact of the Viennese stock market crash from which Austrian politics never quite recovered.
These countries were severely jolted at first. Five years later they had pulled out of the slump and were growing again, fast. What explains their different economic behavior was one factor, and one factor only: the entrepreneur. In Germany, for instance, the single most important economic event in the years between and was surely the creation of the Universal Bank.
In the economic history of the United States the entrepreneurial bankers such as J. Morgan in New York played a similar role. Today, something very similar seems to be happening in the United States and perhaps also to some extent in Japan. There are, of course, plenty of exceptions, high-tech companies that know well how to manage entrepreneurship and innovation.
But then there were exceptions during the nineteenth century, too. There was the German, Werner Siemens, who founded and built the com- pany that still bears his name. There was George Westinghouse, the American, a great inventor but also a great business builder, who left behind two companies that still bear his name, one a leader in the field of transportation, the other a major force in the electrical appa- ratus industry.
His real ambition, however, was to be a business builder and to become Georg Siemens and the Universal Bank, see Chapter 9. Yet he so totally mismanaged the businesses he started that he had to be removed from every one of them to save it. Most of Silicon Valley—but most of the new biological high-tech companies as well—are still inventors rather than innovators, still speculators rather than entrepreneurs.
And this, too, perhaps explains why high tech so far conforms to the Kondratieff prediction and does not generate enough jobs to make the whole economy grow again. V Of all the major modern economists only Joseph Schumpeter con- cerned himself with the entrepreneur and his impact on the economy.
Every economist knows that the entrepreneur is important and has impact. And so too, for economists, is technology. Economists do not, in other words, have any explanation as to why entrepreneurship emerged as it did in the late nineteenth century and as it seems to be doing again today, nor why it is limited to one country or to one culture. Indeed, the events that explain why entrepreneurship becomes effective are probably not in themselves economic events.
The causes are likely to lie in changes in values, perception, and attitude, changes perhaps in demographics, in institu- tions such as the creation of entrepreneurial banks in Germany and the United States around , perhaps changes in education as well.
Something, surely, has happened to young Americans—and to fair- ly large numbers of them—to their attitudes, their values, their ambi- tions, in the last twenty to twenty-five years. Only it is clearly not what anyone looking at the young Americans of the late s could possibly have predicted. Whatever the explanation, it does not fit in with what all the soothsayers of the last thirty years—David Riesman in The Lonely Crowd, William H.
Surely the emergence of the entrepreneurial economy is as much a cultural and psychological as it is an economic or technological event. Yet whatever the causes, the effects are above all economic ones. Its early shoots came up in the mids. But management as a discipline originated during and right after World War II.
It then rapidly became a discipline rather than the hit-or-miss practice of a few isolated true believers. It may not be solely or even primarily responsible for the fact that society in every single developed country has become since World War II a society of organizations.
But the fundamentals are reasonably well known by now. Indeed, what was an esoteric cult only forty years ago, when most executives even in large companies did not in fact realize that they practiced manage- ment, now has become commonplace.
This twenty-five-year trend toward building bigger organizations in every social sphere—business, labor union, hospital, school, uni- versity, and so on—had many causes. But the belief that we knew how to manage bigness and did not really know how to manage small enterprises was surely a major factor.
It had, for instance, a great deal to do with the rush toward the very large consolidated American high school. For almost fifty years, ever since the s, it was widely believed in the United States and in western Europe too that the hospital was the best place for anyone not quite well, let alone for anyone seriously sick.
In the last few years, we have been reversing this trend. We now increasingly believe that the longer we can keep patients away from the hospital and the sooner we can get them out, the better. Surely this reversal has little to do with either health care or with management.
To take a specific example, hamburger stands have been around in the United States since the nineteenth century; after World War II they sprang up on big-city street corners. All of which is management, and fairly advanced management at that.
Management is the new technology rather than any specific new science or invention that is making the American economy into an entrepreneurial economy. It is also about to make America into an entrepreneurial society. Indeed, there may be greater scope in the United States—and in developed societies generally—for social innovation in education, health care, government, and politics than there is in business and the economy.
This means that the time has now come to do for entrepreneurship and innovation what we first did for management in general some thirty years ago: to develop the principles, the practice, and the disci- pline. It is capable of being presented as a discipline, capa- ble of being learned, capable of being practiced. Entrepreneurs need to search purposefully for the sources of innovation, the changes and their symptoms that indicate opportunities for successful innovation.
And they need to know and to apply the principles of successful inno- vation. But not every new small business is entrepreneurial or represents entrepreneurship. The husband and wife who open another delicatessen store or another Mexican restaurant in the American suburb surely take a risk.
But are they entrepreneurs? All they do is what has been done many times before. They gamble on the increasing popularity of eating out in their area, but create neither a new satisfaction nor new consumer demand. Seen under this perspective they are surely not entrepreneurs even though theirs is a new venture.
It did not invent anything, to be sure. Its final product was what any decent American restaurant had produced years ago. This is entrepreneurship. The science needed is well known; indeed, the company does little that has not been done before.
But in the first place the founders systematized the technical information: they can now punch the performance specifications into their computer and get an immediate printout of the treatment required.
Secondly, the founders systematized the process. Few orders run to more than half a dozen pieces of the same dimension, the same metallic composition, the same weight, and the same performance specifications. Yet the castings are being produced in what is, in effect, a flow process rather than in batches, with computer-controlled machines and ovens adjusting them- selves.
Precision castings of this kind used to have a rejection rate of 30 to 40 percent; in this new foundry, 90 percent or more are flawless when they come off the line. And the costs are less than two-thirds of those of the cheapest competitor a Korean shipyard , even though the Midwestern foundry pays full American union wages and benefits.
Admittedly, all new small businesses have many factors in com- mon. But to be entrepreneurial, an enterprise has to have special char- acteristics over and above being new and small. Indeed, entrepreneurs are a minority among new businesses. They create something new, something different; they change or transmute values. An enterprise also does not need to be small and new to be an entrepreneur.
Indeed, entrepreneurship is being practiced by large and often old enterprises. The General Electric Company G. And G. Its financing arm, G. Credit Corporation, in large measure triggered the upheaval that is transforming the American financial system and is now spreading rapidly to Great Britain and western Europe as well.
Credit in the sixties ran around the Maginot Line of the financial world when it discovered that commercial paper could be used to finance indus- try.
Marks and Spencer, the very large British retailer, has probably been more entrepreneurial and innovative than any other company in western Europe these last fifty years, and may have had greater impact on the British economy and even on British society, than any other change agent in Britain, and arguably more than government or laws. Again, G. Finally, entrepreneurship is by no means confined solely to eco- nomic institutions. No better text for a History of Entrepreneurship could be found than the creation and development of the modern university, and espe- cially the modern American university.
The modern university as we know it started out as the invention of a German diplomat and civil ser- vant, Wilhelm von Humboldt, who in conceived and founded the University of Berlin with two clear objectives: to take intellectual and scientific leadership away from the French and give it to the Germans; and to capture the energies released by the French Revolution and turn them against the French themselves, especially Napoleon.
In , the United States had no more than half the college students it had had in , even though the population had nearly tripled. They have constituted a major growth sector in American higher education in the last thirty years. Most of these new schools seem to differ little from the older institutions in their curriculum. They represent entrepreneurship.
And the minority that is still has all the characteristics, all the problems, all the identifying marks of the service institution. Whereas English speakers identify entrepreneurship with the new, small business, the Germans identify it with power and property, which is even more misleading.
But the first attempts to create systematic entrepreneurship— the entrepreneurial bank founded in France in by the Brothers Pereire in their Credit Mobilier, then perfected in across the Rhine by Georg Siemens in his Deutsche Bank, and brought across the Atlantic to New York at about the same time by the young J. Morgan—did not aim at ownership. The earlier bankers, the Rothschilds, for example, became own- ers.
Whenever they built a railroad, they financed it with their own money. The entrepreneurial banker, by contrast, never want- ed to be an owner. He made his money by selling to the general public the shares of the enterprises he had financed in their infan- cy.
And he got the money for his ventures by borrowing from the general public. Nor are entrepreneurs capitalists, although of course they need capital as do all economic and most noneconomic activities. They are not investors, either. They take risks, of course, but so does anyone engaged in any kind of economic activity. The essence of economic activity is the commitment of present resources to future expectations, and that means to uncertainty and risk. The entrepreneur is also not an employer, but can be, and often is, an employee—or someone who works alone and entirely by himself or herself.
Entrepreneurship is thus a distinct feature whether of an individual or of an institution. It is not a personality trait; in thirty years I have seen people of the most diverse personalities and temperaments perform Management Tasks, Responsibilities, Practices, but also Chapter 14 of this book, Entrepreneurship in the Service Institution. To be sure, people who need certain- ty are unlikely to make good entrepreneurs. But such people are unlike- ly to do well in a host of other activities as well—in politics, for instance, or in command positions in a military service, or as the captain of an ocean liner.
In all such pursuits decisions have to be made, and the essence of any decision is uncertainty. But everyone who can face up to decision making can learn to be an entrepreneur and to behave entrepreneurially. Entrepreneurship, then, is behavior rather than personality trait.
And its foundation lies in concept and theory rather than in intuition. II Every practice rests on theory, even if the practitioners themselves are unaware of it. Entrepreneurship rests on a theory of economy and society.
The theory sees change as normal and indeed as healthy. And it sees the major task in society—and especially in the econo- my—as doing something different rather than doing better what is already being done.
This is basically what Say, two hundred years ago, meant when he coined the term entrepreneur. It was intended as a manifesto and as a declaration of dissent: the entrepreneur upsets and disorganizes. But his own contribution to eco- nomic thought, the concept of the entrepreneur and of entrepreneur- ship, is independent of classical economics and indeed incompatible with it.
Classical economics optimizes what already exists, as does mainstream economic theory to this day, including the Keynesians, the Friedmanites, and the Supply-siders. It focuses on getting the most out of existing resources and aims at establishing equilibrium.
But they are not part of his world, not accounted for in his model, his equa- tions, or his predictions. Joseph Schumpeter was the first major economist to go back to Say.
In his classic Die Theorie der Wirtschaftlichen Entwicklung The Theory of Economic Dynamics , published in , Schumpeter broke with traditional economics—far more radically than John Maynard Keynes was to do twenty years later. Say was primarily concerned with the economic sphere. But the resources of education are, of course, economic. They are in fact identical with those used for the most unambiguously economic purpose such as making soap for sale.
Hence entrepreneurship is by no means limited to the economic sphere although the term originated there. The entrepreneur in education and the entrepreneur in health care—both have been fertile fields—do very much the same things, use very much the same tools, and encounter very much the same problems as the entrepreneur in a business or a labor union.
Entrepreneurs see change as the norm and as healthy. Usually, they do not bring about the change themselves. III Entrepreneurship, it is commonly believed, is enormously risky. And, indeed, in such highly visible areas of innovation as high tech—micro- computers, for instance, or biogenetics—the casualty rate is high and the chances of success or even of survival seem to be quite low.
But why should this be so? Entrepreneurs, by definition, shift resources from areas of low productivity and yield to areas of higher productivity and yield. Of course, there is a risk they may not suc- ceed. But if they are even moderately successful, the returns should be more than adequate to offset whatever risk there might be.
One should thus expect entrepreneurship to be considerably less risky than optimization. Indeed, nothing could be as risky as optimizing resources in areas where the proper and profitable course is innova- tion, that is, where the opportunities for innovation already exist.
Theoretically, entrepreneurship should be the least risky rather than the most risky course. In fact, there are plenty of entrepreneurial organizations around whose batting average is so high as to give the lie to the all but uni- versal belief in the high risk of entrepreneurship and innovation. For more than seventy years— from the design of the first automatic switchboard around until the design of the optical fiber cable around , including the inven- tion of transistor and semiconductor, but also basic theoretical and engineering work on the computer—Bell Lab produced one winner after another.
The Bell Lab record would indicate that even in the high-tech field, entrepreneurship and innovation can be low-risk. This is only a small sample of the entrepreneurs who somehow innovate at low risk.
Surely there are far too many of them for low-risk entrepre- neurship to be a fluke, a special dispensation of the gods, an accident, or mere chance. There are also enough individual entrepreneurs around whose bat- ting average in starting new ventures is so high as to disprove the pop- ular belief of the high risk of entrepreneurship. They lack the methodology. They violate elementary and well-known rules. This is particularly true of high-tech entrepreneurs. To be sure as will be discussed in Chapter 9 , high-tech entrepreneurship and innovation are intrinsical- ly more difficult and more risky than innovation based on economics and market structure, on demographics, or even on something as seemingly nebulous and intangible as Weltanschauung—perceptions and moods.
It does need, however, to be sys- tematic. It needs to be managed. Above all, it needs to be based on purposeful innovation. Innovation is the specific instrument of entrepreneurship. It is the act that endows resources with a new capacity to create wealth.
Innovation, indeed, creates a resource. Until then, every plant is a weed and every mineral just another rock. Not much more than a century ago, neither mineral oil seeping out of the ground nor bauxite, the ore of aluminum, were resources. They were nui- sances; both render the soil infertile. The penicillin mold was a pest, not a resource. Bacteriologists went to great lengths to protect their bacterial cultures against contamination by it.
The same holds just as true in the social and economic spheres. The American farmer had virtually no purchasing power in the early nineteenth century; he therefore could not buy farm machinery. There were dozens of harvesting machines on the market, but how- ever much he might have wanted them, the farmer could not pay for them.
Then one of the many harvesting-machine inventors, Cyrus McCormick, invented installment buying. There was not much new technology involved in the idea of mov- ing a truck body off its wheels and onto a cargo vessel. But this humdrum innova- tion roughly quadrupled the productivity of the ocean-going freighter and probably saved shipping. Without it, the tremendous expansion of world trade in the last forty years—the fastest growth in any major economic activity ever recorded—could not possibly have taken place.
What really made universal schooling possible—more so than the popular commitment to the value of education, the systematic train- ing of teachers in schools of education, or pedagogic theory—was that lowly innovation, the textbook.
The textbook was probably the invention of the great Czech educational reformer Johann Amos Comenius, who designed and used the first Latin primers in the mid- seventeenth century. Without the textbook, even a very good teacher cannot teach more than one or two children at a time; with it, even a pretty poor teacher can get a little learning into the heads of thirty or thirty-five students.
Few technical innovations can compete in terms of impact with such social inno- vations as the newspaper or insurance. Installment buying literally transforms economies. Wherever introduced, it changes the econo- my from supply-driven to demand-driven, regardless almost of the productive level of the economy which explains why installment buying is the first practice that any Marxist government coming to power immediately suppresses: as the Communists did in Czechoslovakia in , and again in Cuba in The hospital, in its modern form a social innovation of the Enlightenment of the eighteenth century, has had greater impact on health care than many advances in medicine.
Books on economic history mention August Borsig as the first man to build steam locomotives in Germany. It was Borsig who devised the idea of the Meister Master , the highly skilled and highly respected sen- ior worker who runs the shop with considerable autonomy; and the Lehrling System apprenticeship system , which combines practical training Lehre on the job with schooling Ausbildung in the class- room. And the twin inventions of modern government by Machiavelli in The Prince and of the modern national state by his early fol- lower, Jean Bodin, sixty years later, have surely had more lasting impacts than most technologies.
One of the most interesting examples of social innovation and its importance can be seen in modern Japan. From the time she opened her doors to the modern world in , Japan has been consistently underrated by westerners, despite her successful defeats of China and then Russia in and , respectively; despite Pearl Harbor; and despite her sud- den emergence as an economic superpower and the toughest com- petitor in the world market of the s and s.
A major rea- son, perhaps the major one, is the prevailing belief that innovation has to do with things and is based on science or technology. And the Japanese, so the common belief has held in Japan as well as in the West, by the way , are not innovators but imitators. For the Japanese have not, by and large, produced outstanding technical or scientific innovations.
Their success is based on social innova- tion. This meant that social innovation was far more critical than steam locomotives or the telegraph. A locomotive that will pull a train from London to Liverpool will equally, without adaptation or change, pull a train from Tokyo to Osaka.
Technology can be imported at low cost and with a minimum of cultural risk. Institutions, by contrast, need cultural roots to grow and to prosper. The Japanese made a deliberate decision a hundred years ago to concentrate their resources on social innovations, and to imitate, import, and adapt technical innovations—with startling success.
Indeed, this policy may still be the right one for them. For, as will be discussed in Chapter 17, what is sometimes half-facetiously called creative imitation is a perfectly respectable and often very successful entrepreneurial strategy. Above all, they have shown a superior grasp of entrepreneurial strategies. It can be defined the way J. Say defined entrepreneurship, as changing the yield of resources.
Or, as a modern economist would tend to do, it can be defined in demand terms rather than in supply terms, that is, as changing the value and satisfaction obtained from resources by the consumer. Which of the two is more applicable depends, I would argue, on the specific case rather than on the theoretical model.
The end product, the end uses, and the customers are the same, though the costs are substantially lower.
And the same supply definition probably fits the container. We cannot yet develop a theory of innovation. But we already know enough to say when, where, and how one looks systematically for innovative opportunities, and how one judges the chances for their success or the risks of their failure. We know enough to develop, though still only in outline form, the practice of innovation. Something similar now has to be done with respect to innovation. Entrepreneurs will have to learn to practice systematic innovation.
They are almost bound to do the wrong things. The same applies to nonbusiness, public-service innovations. Successful entrepreneurs, whatever their individual motivation— be it money, power, curiosity, or the desire for fame and recogni- tion—try to create value and to make a contribution. Still, successful entrepreneurs aim high. They are not content simply to improve on what already exists, or to modify it.
Systematic innovation therefore consists in the pur- poseful and organized search for changes, and in the systematic analysis of the opportunities such changes might offer for economic or social innovation. As a rule, these are changes that have already occurred or are under way. The overwhelming majority of successful innovations exploit change. But these are exceptions, and fairly uncommon ones. Most successful innovations are far more prosaic; they exploit change.
And thus the discipline of innovation and it is the knowledge base of entrepre- neurship is a diagnostic discipline: a systematic examination of the areas of change that typically offer entrepreneurial opportunities. Specifically, systematic innovation means monitoring seven sources for innovative opportunity.
The first four sources lie within the enterprise, whether business or public-service institution, or within an industry or service sector. They are therefore visible primarily to people within that industry or service sector. They are basically symptoms. But they are highly reli- able indicators of changes that have already happened or can be made to happen with little effort.
The lines between these seven source areas of innovative opportuni- ties are blurred, and there is considerable overlap between them.
Each window shows some features that can also be seen from the window on either side of it. But the view from the center of each is distinct and different.
The seven sources require separate analysis, for each has its own distinct characteristic. No area is, however, inherently more important or more productive than the other.
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