Posted on

Lessons from Innovation and Entrepreneurship by Peter F. Drucker

Book Summary by Brian Nwokedi: Innovation and Entrepreneurship By Peter Drucker 
"A business that wants to be able to innovate, wants to have a chance to succeed and prosper in a time of rapid change, must build entrepreneurial management into its own system!"
--- Peter F. Drucker, Innovation and Entrepreneurship (1985)

Introduction

The book on Innovation and Entrepreneurship by Peter F. Drucker was written in 1985 and is still very relevant in 2023. At the heart of his argument lies two very simple beliefs:

  • Management is the new technology (rather than any specific new science or invention) that is making the American economy into an entrepreneurial economy.
  • Innovation and Entrepreneurship are capable of being presented as a discipline, capable of being learned, and capable of being practiced.

Drucker posits that innovation and entrepreneurship are “risky” mainly because so few of the so-called entrepreneurs know what they are doing. In order to reduce the risk of innovation and entrepreneurship and increase your likelihood of success, you need to establish purposeful innovation across the following 7 sources of innovative opportunity:

  • The unexpected – the unexpected success, the unexpected failure, the unexpected outside event.

  • The incongruity – between reality as it actually is and reality as it is assumed to be or as it “ought to be”

  • Innovation based on process need

  • Changes in industry structure or market structure – that catch everyone unawares

  • Demographics (population changes)

  • Changes in perception, mood, and meaning

  • New knowledge, both scientific and nonscientific

    • Therefore, innovation should be systematic and consist of a purposeful and organized search for changes. It should also consist of a systematic analysis of the opportunities such changes might offer for economic or social innovation.

    The System: Establish Entrepreneurial Management

    Peter F. Drucker is the father of modern business management and in this book, he puts forth a pathway for entrepreneurs to follow. Successful entrepreneurship and innovation are based on luck or genius. It’s based on the systematic and purposeful search for opportunities within the seven sources discussed in this book.

    The System of Success is establishing Entrepreneurial Management!

    Entrepreneurial management of most new ventures has 4 main requirements:

  • It requires, first, a focus on the market

  • It requires, second, financial foresight, and especially planning for cash flow and capital needs ahead

  • It requires, third, building a top management team long before the new venture actually needs one and long before it can actually afford one

  • Finally, it requires the founding entrepreneur a decision with respect to his or her own role, area of work, and relationships

    • If you can establish this framework in your organization or new venture, you will get purposeful innovation at low risk. Drucker makes sure to state unequivocally that innovation and entrepreneurship should not take unnecessary risks. Successful innovators and entrepreneurs are not “risk-takers.” They try to define the risks they have to take and minimize them as much as possible, and entrepreneurial management helps them do that.

    What I Will Do Differently?

  • Invest more time employing “Creative Imitation” and “Entrepreneurial Judo.” As Chapter 17 discusses, the Japanese made the deliberate decision 100 years ago to concentrate their resources on social innovations, and to imitate, import, and adapt technical innovations with fantastic success. Using entrepreneurial judo, one first secures a beachhead in the market leader’s backyard. Once the beachhead is secured with adequate market and revenue streams, you then move in on the rest of the beach.

  • Pay more attention to the changes in Global Demographics. In Chapter 7, Drucker discusses how Demographics are doing some funky but predictable things right now. The developed countries are seeing a rise in the
    • aging population as birth rates fall and people live longer, while Third World Counties are seeing a tidal wave of young adults. Aging populations historically have caused labor shortages in places like Japan and put outsized pressure on government pension plans like in Italy. Consequently, there are huge innovation and entrepreneurial opportunities.

  • It’s cliche but Keep It Simple Stupid. In Chapter 11, Drucker discusses his principles for innovation. In order for an innovation to be effective, it must be simple and focused. It should do only one thing and that one thing well. Throughout the history of mankind, all effective innovations are breathtakingly simple!

    • Downloadable Content

    The book on Innovation and Entrepreneurship was written by Peter F. Drucker in 1985. The year is 2023 and his principles are still relevant. As stated above, a business that wants to be able to innovate, wants to have a chance to succeed and prosper in a time of rapid change, must build entrepreneurial management into its own system. The following raw notes were created by me to help streamline a deeper understanding of Peter F. Drucker’s concepts in Innovation and Entrepreneurship. Hope you enjoy it!

    Innovation and Entrepreneurship – Raw Notes by Brian NwokediDownload
    Posted on

    Choose an LLC as your business structure

    Purpose of this article: to explain why the Limited Liability Company (LLC) business format is the best for most small business owners

    Overview:

    By default, most businesses end up getting set up as a sole proprietorship. And while the benefits of a sole proprietorship like ease of formation are there, the disadvantages far outweigh these benefits. Specifically, as a sole proprietorship, you bear significant liability risk to your personal assets and from a tax perspective, you are not optimized. The rest of this document will walk you through my recommendation to set your business up as an LLC.

    Why You Should Avoid Sole Proprietorship

    The main disadvantage of a sole proprietorship as a business format is in regards to liability. As the owner of the sole proprietorship you are PERSONALLY LIABLE for all debts and actions of your business. No matter what you do, this business form links all personal wealth to the business. And this liability is unlimited in nature which means creditors can come after all of your personal assets to satisfy your outstanding debts

    On top of this unlimited personal liability, the sole proprietorship isn’t as tax advantaged as some of the other business forms. Specifically, at net income generated by your business is subjected to the 15.3% SECA tax (self-employment tax). You then list your remaining net income on your personal income tax on Form 1040 Schedule C and this net income is subjected to your personal income tax rate.

    Lastly, because of this business form, it is very difficult for you to raise longer-term capital since you are unable to sell interests or shares in your business. Investors like tax advantaged investment vehicles, and the sole proprietorship isn’t one of them

    Benefits of the LLC Structure

    Given the disadvantages of the sole proprietorship, my recommendation would be for you to consider an single-member managed LLC for your business format. An LLC business format is sort of a hybrid between the partnership and the corporate business forms. The LLC allows the liability protection of a corporation with the tax advantages of a partnership. Once you set up your LLC, it is considered a separate business entity that is owned by investors known as members. In your case, your LLC would be a single-member owned (which is you), and is managed by you as well.

    Especially when compared to the sole proprietorship, the LLC limits the liability of the member to the amount of their investment in the LLC. Therefore, a member of an LLC is not personally liable for the debts of the LLC. Under the sole proprietorship business format as I mentioned before, the sole proprietor is liable for all debts incurred by the business. In essence, creditors can go after your home, car, and other personal property to satisfy debts. Hence it’s imperative as a small business owner to at least form an LLC in the minimum. In general, the biggest reason you want to go with an LLC is the tax benefit you get due to the pass through nature of the income generated in the business with the liability protection of the business form.

    Longer Term… LLC Filing as an S-Corporation

    As mentioned before, the biggest tax benefit of forming an LLC is the pass through nature of the income generated in your business. When structured properly, the income from your LLC is taxed direction to the members at their own personal tax rates.

    But there is an even more optimal way to streamline and potentially reduce your business tax liability even further as an LLC. The IRS allows LLC that have been formed to be treated as an S-Corporation for tax filing purposes.
    The reason an LLC would want to file as an S-Corporation would be to avoid the 15.3% Self-Employment Tax that is charged on LLC for all income generated. Put another way, the S-Corporation is the only business form that makes it possible for you as the owner of your business to save on Social Security and Medicare taxes.

    Below, I give you a tangible business example:

     

    Under this hypothetical scenario where you drive $100,000 in net income and pay yourself a $50,000 wage you would be better off by 24% under the S-Corporation. Please note that there are some major assumptions regarding your wage and effective tax rate, but the argument is the same regardless of the actual numbers.

    Filing as an S-Corporation will allow you to avoid the additional tax that is levied on LLC for Social Security and Medicare. But before we get here, let’s get you set up as an LLC first!

    How to Get Your LLC Set Up

    In order to get your LLC off the group, you will need to complete the following:

    – Talk with Blue Elephant Financial Services.

    – Decide on a name for your business.

    – Find a business address. Typically I recommend to my clients to go to the UPS store and rent a PO Box. Most states will allow you to use this as your business address. This can run you anywhere from $100 to $200 annually.

    – Double check that your business name isn’t already registered with another person and is available in your state. Note that your name will need to contain LLC at the end. Click here for South Carolina and here for North Carolina.

    – Verify that the URL and domain name of your company is available. Even if you don’t plan on making a website right this moment, you will want to buy the domain name in order to prevent others from acquiring it. Personally, NorthLake Digital LLC is one of my favorite companies for this task.

    – Find a registered agent. I typically advise using a digital option like MyLLC.com. This will cost you around $99 annually. Click here for a direct link to this company.

    – File the Articles of Incorporation with your state. North Carolina will cost $125 and South Carolina will cost $110.

    – Draft an LLC Operating Agreement. In some states this is required and in others it is option. Regardless this is good practice because this document outlines the ownership and operating procedures of your LLC.

    – Register your business with the IRS to get an EIN tax ID number which will be used for tax filling needs. Click here for direct link.

    – Apply for a new business bank account that is separate from your personal account. This will force you to separate personal assets from the LLC.

    – Consider getting a business credit card. This too will force you to separate personal expenses from the LLC.

    – Apply for any pertinent business licenses or permits (depends on your services)

    – Complete your annual report (necessary in North Carolina and not necessary in South Carolina) and report your LLC business income on Form 1065 Partnership Return.

    Closing

    In closing, establishing your business as an LLC will help reduce any personal liabilities and will give you the longer-term potential tax benefit (if we file your tax returns as an LLC filing as S-Corporation). My hope in writing this article is that after reading this, you will take the steps to create your own business using the LLC format. I wish you the best of luck in getting your business off the ground and look forward to hopefully serving your needs in a much deeper capacity than just this article.