Entrepreneur-chic

Innovation and Entrepreneurship: Practice and Principles, by Peter F. Drucker, New York: Harper & Row, 368 pp., $19.95

Intrapreneuring: Why You Don't Have to Leave the Corporation to Become an Entrepreneur, by Gifford Pinchot III, New York: Harper & Row, 277 pp., $19.95

During the Henry Ford manufacturing age, about 40 of the world's 160 or so countries grew rich because they were temporarily able to increase productivity efficiently by organizational activity from the top: that is, executives sat at various levels in the offices of hierarchically run corporations and arranged how those below them on the assembly lines could most productively work with their hands. In the late 1960s and the 1970s, the books most assiduously fed to business students—such as John Kenneth Galbraith's New Industrial State and Jean-Jacques Servan-Schreiber's Le Defi Americain (The American Challenge)—assumed that this trend would continue forever. They suggested that the most economic size for corporations would grow bigger and bigger, that nobody except a hopeless romantic thought this could be the age of the small man, and that the mega-power of huge American multinational corporations would spread unchecked across the world.

This was embarrassing to any of us newspapermen who visited such businesses. It was clear to us that, shortly before these two books were both written in 1968 and promptly entered the bestseller lists, precisely the opposite trend had remorselessly begun to occur. We now know that since the mid-1960s large corporations have in the most important sense been growing smaller. The Fortune 1,000 big companies employ fewer people than they did in 1965. All of the huge net creation of private-sector jobs since 1965 in the United States has taken place in small and medium-sized firms. The big bureaucratic corporations have been flying into the ground, for an obvious reason. Now that much of manufacturing and most simple white-collar tasks can be automated, more workers have become brainworkers. And it is nonsense for hierarchical layers of group vice-presidents to try to arrange what the brainworker in the office below will do with his imagination.

In the mid-1970s I was therefore writing articles in The Economist arguing that the "world is probably drawing to the end of the era dominated by very big business corporations, except those corporations that manage to turn themselves into confederations of entrepreneurs." During the past 10 years of hearing other people knock this formula, first to hell, and then into shape, I have almost begun to believe in it—although the most dangerous moment for a newspaperman is when he stops being controversial and thinks he is becoming trendy.

The idea of turning corporations into "confederations of entrepreneurs"—although they call their entrepreneurs "skunk groups"—became trendy in America with Tom Peters and Bob Waterman's 1982 bestseller for the Harper & Row stable, In Search of Excellence. This book satisfied what I regard as the prerequisite for brilliant business research. First, it accorded with all my preexisting prejudices. Second, it instantly made a great deal of money. Now, two more books from Harper & Row complete the accolade.

One, Gifford Pinchot's Intrapreneuring, is embarrassingly dedicated to me, although also to another friend who holds what I thought were widely different views. Second, Peter Drucker, who has been writing the best and most books on management for the past 40 years, suddenly tells us, in his Innovation and Entrepreneurship, that he has really been writing about entrepreneurship all along.

Gifford Pinchot invented the word intrapreneurs, meaning entrepreneurs within the corporation, in 1978. Ever since, I have been wishing that I had talked of "confederations of small groups of intrapreneurs" instead of entrepreneurs. Pinchot set up a management consulting firm to try to persuade corporations to breed intrapreneurs and devised a scheme of "intracapital" that would be the best way of enabling a corporation to hold on to its most valuable staff and set them to innovating at their own pace. No corporation has adopted it, but some systems of stock options have come near it.

Pinchot, however, has persuaded some corporations to set up small intrapreneurial product teams in other ways, and his book is partly a how-to-do-it handbook. I like the story of the small product team at Bell & Howell that just goes on the factory floor, grabs a part, and figures out some way to make it cheaper. I like one of the Kohlmorgen product teams that has only one customer, a Western Electric plant; "you can be sure," says Pinchot, "that they focus a lot of intelligence and care on keeping that one customer happy."

"For years," Pinchot observes, "everybody defined corporate success as moving up the hierarchy." Now the wisest companies are creating a second career path through which innovators can win prestige and higher earnings without assuming a management role. The first rule for an intrapreneur is to get a cheap prototype to market as soon as he has made it. Intrapreneurs have advantages over entrepreneurs (who found their own businesses) because corporations can provide manufacturing facilities where intrapreneurs can run up cheap prototypes in their free time, plus some kinds of personnel resources (including friends) and supportive suppliers, plus marketing networks and marketing clout. Of these, I believe marketing networks to be the most important.

But intrapreneurs have difficulties when they do not fit with a big company's bureaucratic outlook. They have to follow such rules as "come to work each day willing to be fired," and "never bet on a race unless you are running it"; and they have to want to spend most of their time changing things, instead of keeping things as they are.

It is always nice to welcome Peter Drucker aboard the vessel of one's own prejudices, because he has both the widest historical sweep and the biggest card index of case studies in the business. Both are evident in his new book Innovation and Entrepreneurship, as also is his bad tutorial habit of trying to drill us to think in compartments that don't actually exist. We are told, Prussian drill-sergeant style, that there are seven sources of innovative opportunity: the unexpected, incongruities, process need, industry and market structures, demography, changes in perception, and new knowledge. All Drucker's interesting case studies are then crammed into those overlapping boxes. Naturally, they don't fit, so his descriptions run too verbosely in some chapters and too succinctly in others, with the result that some readers will give up.

This is a pity, because Drucker still provides more insights per paragraph than any other author of business books. Listen to this: "By the time an industry growing rapidly has doubled in volume…the ways in which its traditional leaders define and segment a market no longer reflect reality; they reflect history." It is at that stage that an entrepreneurial company often finds a niche.

When antibiotics were going through their 1950s boom, on their way to inevitable bust, the most successful innovator was a drug company that developed these products for the veterinary market (which a rival called the "misuse of a noble medicine"). When American telephones were in their biggest expansion in around 1909, Bell made forward projections showing that by 1930 every American woman aged 17 to 60 would have to be a switchboard operator. It hastened to invent the automatic switchboard.

Entrepreneurs, says Drucker, have to "practice systematic innovation." He is right to emphasize that only one-eighth of the jobs newly created in America since 1965 have been in high-tech. The successes have been searchers for niches: a California manufacturer of physical exercise equipment for the home, a finance company that leases machinery to small businesses, businesses that are taking over previous public-sector operations with competitive bids, and so on.

My own guess at the pattern for the 1990s is that most big corporations will sack their group vice presidents and have very lean corporate headquarters—which will, however, include somebody called a "controller of stock options" and several competing networks of marketing people. Outside these headquarters, most other executives in the corporation—profiting from those stock options, and using these marketing networks—will be seeking to run their own small businesses, sometimes moving those businesses closer under the corporation's umbrella, sometimes moving them further out.

This view is fortunately still controversial today. By the mid-1990s there is a danger that it will become boringly trendy. Clients of Pinchot and readers of Drucker will be better prepared for that tomorrow than will most of the sacked group vice presidents. So it is wise to buy their books.

Norman Macrae has been deputy editor of The Economist since 1965.