Only Two Basic Organizational Functions: Innovation and Marketing

Years ago Peter Drucker wrote that "Because the purpose of business is to create a customer, the business enterprise has two--and only two--basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs." Was Drucker being overly simplistic? Was he mistaken? Was he denying pundits who for years have said that a business existed to make a profit, its function being duty or responsibility towards stockholders, customers, employees, and society? Moreover, what has this to do with you if you are a professional or first line supervisor? Like much of what Drucker wrote, his concepts don’t just apply to big business or higher management levels above us, but can and should be applied to small businesses, start-ups, governments, organizations and individual professionals in whatever their line of work. Perhaps this is not obvious because sometimes Drucker’s ideas seem about as clear as the prophesies of Michel de Nostredame, the 16th century seer we know as Nostradamus.

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Drucker and Nostradamus

The problem with Nostradamus’ predictions is that no matter how amazingly accurate, they are difficult to interpret. Detractors point out that since they are mostly interpreted after the fact of historic occurrences, people tend to analyze them in such a way to confirm their accuracy. Not so with Drucker. Among his economic and business predictions, he foresaw the rise of healthcare, the future of online executive education, and fifty years ago warned us of the terrible price society would pay as a result of the greed of both management and labor. Although hoping to become a professor at the University of Cologne, he escaped Germany not months or years, but days after Hitler took power. Regardless, there is still sometimes a touch of Nostradamus in Drucker’s observations and in trying to apply Drucker’s advice. As one reviewer pointed out years ago, "It’s not that Drucker isn’t explicit; he is very explicit in everything he writes. The problem is, Drucker frequently tells us what to do, but not how to do it."

Investigating the Essentiality of Innovation and Marketing

Struggling with Drucker’s recommendations on marketing, I decided to investigate what Drucker really meant about innovation and marketing being the two basic functions of any business. If you look innovation up in a dictionary, you will find descriptive words like "improvement," "advancement, and "originality." The implication being that an innovation is the introduction of something new and better. Drucker also justified the need for "something new and better" in about as strong as way as he could put it. He said that if any business continued to do what made it successful in the past, it would ultimately fail. This is counterintuitive. It seems logical that if you have been successful, you should keep doing what helped you to succeed. Yet, as usual Drucker was right. There are countless examples to support his thesis.

There was a time, not so distant, when every real engineer used a slide-rule for mathematical calculations. In fact, he either carried a miniature slide rule in a shirt pocket, or a full-sized device about a foot long in a holster attached to a belt much as some carry a holstered cell phone today. The slide rule device originated in 1612 when a Scottish nobleman turned mathematician named John Napier discovered the logarithm. This made it possible to perform multiplications and divisions by addition and subtraction. This basic idea was was refined by others into hardware which consisted of one or more sliding ruler-like bars held in place between other ruled bars encapsulated by a cursor. This constituted the slide rule.

By the late 17th century, the slide rule was a common instrument. Engineers for the next three hundred years carried this around to perform calculations on the spot and without paper and pen. The user manipulated bars and cursor to obtain the solution to complicated mathematical calculations in minutes or even seconds. Of course, errors could occur due to failing eyesight or cursors, which were not perfectly perpendicular to the bars. But to a couple decimal points they were usually in acceptable limits of accuracy for most purposes and no engineer was without one. The companies which manufactured them, K + E, Picket, and others were financially solid and profitable. Their products weren’t discretionary for engineers. They were essential. You would think that all they needed to do was to keep doing what made them successful in the past and with improvements these slide rule companies would be successful for another three hundred years. Not so. Within a few months in the early 1970s, these old companies no longer could sell their products when the handheld electronic calculator was suddenly introduced as a mail order product by Joe Sugarman, the same entrepreneur who later sold the BluBlocker Sun Glasses on TV.

A strange, rare, occurrence? Hardly. This sort of thing happens all the time. The vinyl record companies did hundreds of millions of dollars of business, but they all disappeared within two years when CDs came on the scene. Like the slide rules, vinyl records were not overcome by a better vinyl record, but by a totally new product based on a technology which made vinyl records obsolete. That was the innovation. But it isn’t only technology that causes such sudden and rapid change.

Beethoven’s Wig was Very Big

No 18th century gentleman would dare be seen in public without a wig. This apparel accessory was not only necessary to mask a balding head of hair. Their popularity grew in Western Europe partially to discourage head lice. However, they eventually became a requirement similar to the suit and tie for upscale knowledge workers of the era. They were invariably large and powered to give them their solid white appearance. As a result, it was not until my late teens that I learned that George Washington actually had red hair. But it was only the first five U.S. presidents who wore wigs, and the wearing of wigs to denote a higher social status died out in the early 1800s. So wig manufacturers either innovated very rapidly, or they went out of business, not because of technology, but because of cultural changes. Innovations, whether the introduction of wigs or their discontinuance, can be considered an advancement or improvement according to social notions of what is or is not acceptable or desirable at the time. Wearing the modern bikini would have resulted in the swimmer or sun bather’s arrest only a few years before French engineer Louis Reard designed and popularized this garment shortly after World War II. Yet, this innovation not only rapidly gained social acceptance, but grew into what is today a $800 mn a year industry which revolutionized swimming apparel for women. It should be noted that innovation is not only needed for an existing business, but for a start-up as well.

Going into Business without Innovation

For many years I headed up a program at a university sponsored by the US Small Business Administration in which professors formed and led teams of business students who did consulting for small local businesses without charge. I was amazed at the numbers of businesses whose owners went into business without understanding that the mere desire to open a retail store, laundry, restaurant, or barbershop did not automatically mean customers. Innovation was always needed. A large number were having difficulties because they did not consider the question as to why a prospect should buy from them rather than from an established enterprise, which was already serving the market in their area.

Drucker on Marketing

So, innovation is always needed. But why marketing? The answer to this question is bound up in both selling and marketing. If you think marketing and selling are pretty much the same, you have only part of the answer. Drucker knew that not only are they not the same, but that good selling could actually be adversarial to good marketing. How can this be? You need to remember that selling has to do with persuading a prospect to buy something that you have. But marketing has to do with already having what prospects want. Making a decision as in what innovation to invest your time, money and effort is part of marketing. You can see that marketing is much broader and more strategic.

Drucker liked to say that if marketing were done perfectly, selling would be unnecessary. Of course, it is not and selling is absolutely necessary. However good selling of a product or service that you shouldn’t be selling in the first place can encourage you to waste time, money and effort when you should really move on and seek something more valued by your prospect to have, and then to sell easier, at lower cost, and in greater quantities than would be sold in the first instance.

How Innovation and Marketing Applies to You and Your Profession?

If you simply agree from this short analysis that both innovation and marketing are important to a business, what does this have to do with you as a professional? If you are doing a competent job and are successful as an HR professional or a nuclear scientist, you better think about innovating, especially under current economic conditions. As to which innovations in which to invest your efforts, turn to marketing concepts to find out. Innovation and marketing are the ingredients of business success, and they are the essentials of personal success as well. Drucker was right again.