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Chapter One

Systematic Entrepreneurship

"The entrepreneur," said the French economist J. B. Say around 1800, "shifts economic resources out of an area of lower and into an area of higher productivity and greater yield." But Say's definition does not tell us who this "entrepreneur" is. And since Say coined the term almost two hundred years ago, there has been total confusion over the definitions of "entrepreneur" and "entrepreneurship."

In the United States, for instance, the entrepreneur is often defined as one who starts his own, new and small business. Indeed, the courses in "Entrepreneurship" that have become popular of late in American business schools are the linear descendants of the course in starting one's own small business that was offered thirty years ago, and in many cases, not very different.

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.

McDonald's, however, was entrepreneurship. It did not invent anything, to be sure. Its final product was what any decent American restaurant had produced years ago. But by applying management concepts and management techniques (asking, What is "value" to the customer?), standardizing the "product," designing process and tools, and by basing training on the analysis of the work to be done and then setting the standards it required, McDonald's both drastically upgraded the yield from resources, and created a new market and a new customer. This is entrepreneurship.

Equally entrepreneurial is the growing foundry started by a husband and wife team a few years ago in America's Midwest, to heat-treat ferrous castings to high-performance specifications-for example, the axles for the huge bulldozers used to clear the land and dig the ditches for a natural gas pipeline across Alaska. 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 themselves.

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. What is "entrepreneurial" in this business is not that it is new and still small (though growing rapidly). It is the realization that castings of this kind are distinct and separate; that demand for them has grown so big as to create a "market niche"; and that technology, especially computer technology, now makes possible the conversion of an art into a scientific process.

Admittedly, all new small businesses have many factors in common. But to be entrepreneurial, an enterprise has to have special characteristics 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.E.), one of the world's biggest businesses and more than a hundred years old, has a long history of starting new entrepreneurial businesses from scratch and raising them into sizable industries. And G.E. has not confined itself to entrepreneurship in manufacturing. Its financing arm, G.E. 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. G.E. Credit in the sixties ran around the Maginot Line of the financial world when it discovered that commercial paper could be used to finance industry. This broke the banks' traditional monopoly on commercial loans.

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.E. and Marks and Spencer have many things in common with largo and established businesses that are totally unentrepreneurial. What makes them "entrepreneurial" are specific characteristics other than size or growth.

Finally, entrepreneurship is by no means confined solely to economic institutions.

No better text for a History of Entrepreneurship could be found than the creation and development of the modern university, and especially the modern American university. The modern university as we know it started out as the invention of a German diplomat and civil servant, Wilhelm von Humboldt, who in 1809 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. Sixty years later, around 1870, when the German university itself had peaked, Humboldt's idea of the university as a change agent was picked up across the Atlantic, in the United States. There, by the end of the Civil War, the old "colleges" of the colonial period were dying of senility. In 1870, the United States had no more than half the college students it had had in 1830, even though the population had nearly tripled, But in the next thirty years a galaxy of American university presidents* created and built a new "American university"-both distinctly new . . .

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Excerpted from Innovation and Entrepreneurship by Peter F. Drucker
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