Marketing and Innovation: The Two Entrepreneurial Functions

Definition

Because the purpose of business is to create customers, business has only two core functions: marketing and innovation. Marketing is the unique distinguishing function of business—the creation and satisfaction of customers. Innovation is the task of creating tomorrow's business while managing today's. Both produce results; everything else in an organization is cost.

In the Book

Drucker writes: "Because its purpose is to create a customer, the business enterprise has two—and only these two—basic functions: marketing and innovation. Marketing and innovation produce results all the rest are 'costs.'"

On marketing: "Marketing is the distinguishing, unique function of the business. A business is set apart from all other human organizations by the fact that it markets a product or a service." He credits Cyrus McCormick (1809-1884) with inventing modern marketing tools: market research, market analysis, market standing, pricing policies, service salesmen, parts supply, and installment credit—all by 1850. More surprisingly, he traces marketing back to a Mitsui founder in Japan around 1650 who created the first department store by identifying a new urban class of customers and designing products for them, 250 years before Sears formalized these practices.

Drucker emphasizes that marketing is not a separate department but "a central dimension of the entire business. It is the whole business seen from the point of view of its final result, that is, from the customer's point of view." IBM's success, he argues, came not from technological leadership but from asking "Who is the customer? What is value for him? How does he buy? What does he need?" while technological leaders like Univac and GE remained product-focused.

On innovation: Business must perform two managerial tasks simultaneously—administration (optimizing what exists) and entrepreneurship (creating what does not). "Making the business of tomorrow cannot be a flash of genius. It requires systematic analysis and hard, rigorous work today—and that means by people in today's business and operating within it." The specific job of entrepreneurship in an ongoing business is "to enable today's already existing—and especially today's already successful—business to remain existing and to remain successful in the future."

Drucker notes that the perpetuation of a successful business may be "the most trenchant and definitive test of a management"—harder than initial success because success itself breeds complacency and specialization that resist necessary change.

Why It Matters

This framework redirects attention from what the organization calls itself (our industry, our product) to what it actually does (create customers, create futures). It explains why technology companies that ignore customer needs die; why businesses that only optimize current operations decline; why marketing is not "a department" but a lens through which all work should be seen. For any organization—whether commercial or not—the principle applies: What customer or stakeholder value are we creating? What are we building for tomorrow? The distinction clarifies what requires investment (marketing and innovation) versus what should be optimized for cost (operations, administration).