Peter Drucker Review

“…the purpose of an organization is to make the strengths of people productive and their weaknesses irrelevant.”

• Chapter 15: The New Realities
• Chapter 16: What We Know (and Don’t Know) About Work, Working, and Worker
• Chapter 17: Making Work Productive: Work and Process
• Chapter 18: Making Work Productive: Controls and Tools
• Chapter 19: Worker and Working: Theories and Reality
• Chapter 20: Success Stories: Japan, Zeiss, IBM
• Chapter 21: The Responsible Worker
• Chapter 22: Employment, Incomes, and Benefits
• Chapter 23: “People Are Our Greatest Asset”

Drucker believed that rising economic and social expectations required productive work and achieving workers. This is the second task of management, along with business performance and social responsibility.

For work to become productive, analysis, synthesis, controls, and tools are needed. The purpose of analysis is to evaluate and define the work that needs to be accomplished. Synthesis requires ordering the work that needs to be performed into a productive process. Controls guide. Tools help workers achieve.

Chapter 17 includes a very insightful section on production systems; Drucker gives several examples. One example is flexible mass production which was used for cathedrals, by General Motors, and for transportation systems.

Chapter 19 is a fascinating overview of management theories. The traditional carrot and stick method, and modern psychological techniques that can be manipulative. The former, Drucker argues, has severe limits; the latter is problematic. The best approach (used by leaders at IBM) promotes responsibility. (265)

Chapter 21 reveals what responsible workers need: productive work, feedback, and continuous learning opportunities. Managers must build these into the job. Feedback needs to be “immediate” and continual for worker achievement.

Drucker argues in chapter 22, that workers need to see how company profit and capital affect their benefits. He gives the example of Sears pension fund, a performance motivator.

Finally, in chapter 23, Drucker explains why managers, in general, have struggled to make workers responsible and achieving. That managers should realize that responsible workers increase manager productivity and authority; managers are freed up to focus on plans, decisions, objectives, priorities, and “making the strengths of people effective.” (307)

The above paragraphs are highlights; there are many gems worth mining.

(Management, 167-311)

“The one basic difference between a service institution and a business is the way the service institution is paid.”

• Chapter 11: The Multi-Institutional Society
• Chapter 12: Why Service Institutions Do Not Perform
• Chapter 13: The Exceptions and Their Lessons
• Chapter 14: Managing Service Institutions for Performance

Drucker’s main idea is that service institutions—to perform and get results—need a clearly defined idea of what they are trying to achieve, a plan, and a method for cutting out what becomes unproductive or unnecessary.

Service institutions include nonprofits and government organizations. They depend on budgets and overhead and provide what societies need. To become effective and remain so, they need clearly defined purpose, objectives, priorities, standards, and feedback.

Case studies of top performers include: the late 19th century American universities, the mid 20th century Tennessee Valley Authority, and the Meiji Restoration. These groups defined what they were trying to do—their service—and they set clear goals that could be measured, evaluated, and achieved.

Without these elements, service institutions, drift and waste resources, and risk becoming fruitless.

(Management, chapters 11-14)

“Planning starts with the objectives of the business. In each area of objectives, the question needs to be asked, “What do we have to do now to attain our objectives tomorrow?””

Drucker calls strategic planning the entrepreneurial skill because it requires that one make decisions and take actions today that will lead to accomplishing one’s objectives.

One first decides what one’s business is and what it should be. Objectives are set. And then one must decide what needs to be stopped, what new actions need to be taken, and when the actions need to be performed.

Drucker makes clear that strategic decision making is not concerned about forecasting future decisions, it is concerned about making decisions and taking actions today that are based on the future one wants to experience.

Strategic decisions and plans must be worked, they need resources committed today, or they are merely hopes.

(Management, chapter 10)

“Archimedes…is reported to have said: “Give me a place to stand on, and I can lift the universe off its hinges.” The place to stand on is the area of concentration. It is the area which gives a business the leverage that lifts the universe off its hinges.”

Abstract: Drucker helps leaders set objectives for marketing, innovation, and productivity. He comments on the need to balance and prioritize objectives through budgeting expenditures. The importance of determining the minimum profit required and measuring profitability. Finally, turning objectives into action through assignments, goals, deadlines, and accountability.

A key point is that a business must decide where it will concentrate its attention and efforts. For example, IBM decided in the mid-twentieth century that it would concentrate on business computation. This decision became its policy and the bedrock of its strategy.

Once a business knows where it will concentrate, once it has a policy, it should decide what its market standing will be. It must pick and focus on a market segment, the product or service, and the value it will provide. Thinking through this is necessary for setting objectives, becoming what the business is in business for, and becoming a market leader.

A business must also determine what innovation it needs for becoming what it should be in the future. To this end, innovation should take place in the product, market behavior, or the activity of making value. Moreover, innovation needs objectives, and the objectives should be determined by marketing requirements as well as what is expected to emerge from advances in technology, both now and in the future. (107)

Productivity objectives and measurements for land, capital, and labor resources are needed. Drucker argues that these resources must become productive together, not one at the cost of the others. Yet, Drucker emphasizes that productive capital is preeminent.

For achieving and measuring productivity, managers must see how the parts contribute to the whole. Drucker calls this contributed value. This concept and what businesses must do to apply it for understanding where to use resources is discussed in the first section of Managing for Results.

(Management, chapter 9)

“The basic definition of the business and of its purpose and mission have to be translated into objectives. Otherwise, they remain insight, good intentions, and brilliant epigrams which never become achievement.”

Marks & Spencer, the famous British retail chain, rose to greatness after WWI with a decision to revolutionize society by providing the lower working class with high-class goods at affordable prices.

Critical to their success was their decision to concentrate, in particular, on clothing. This led to objectives in all areas they needed and expected growth and performance.

Drucker says that a business must decide what its business is and should be. That business purpose and mission flow from these decisions. And that objectives must be derived from these otherwise ideas will not be turned into action and accomplishment.

According to Drucker, objectives need to be set for marketing, innovation, and any other area where results are expected. This is what Marks & Spencer did. He lists the core areas where objectives need to be set in this chapter.

Regarding Marks & Spencer Drucker writes: There was probably no master plan. But the young key executives who were brought into the firm…were fully aware that their company had committed itself to a definition of what its business was—and they knew what the definition entailed…”

They knew what the business was and should be, they knew its purpose and mission, they concentrated on something in particular (clothing), and they set objectives that became their strategy for performance.

(Management, chapter 8)

“Only a clear definition of the mission and purpose of the business makes possible clear and realistic business objectives. It is the foundation for priorities, strategies, plans, and work assignments. It is the starting point for the design of managerial jobs and, above all, for the design of managerial structures. Structure follows strategy. Strategy determines what the key activities are in a given business. And strategy requires knowing “what our business is and what it should be.”

For a business to perform, achieve results, and stand the test of time it must be governed by an idea. The idea must include its purpose and mission. All of this requires a business to ask: what is our business? and what should it be?

The first question—what is our business?—must be answered through an analysis of the customer, which is a marketing function. Drucker recommends four questions: Who is the customer? Where is the customer? What does the customer buy? What does the customer consider value?

Drucker provides case studies of businesses like Sears and IBM that became market leaders by asking these questions. For example, as automobiles became prevalent, Sears realized that farmers were shopping in suburbs, motivating the decision to open department stores.

Though these questions have been asked successfully when businesses were struggling, Drucker recommends asking them when a business starts up and whenever objectives have been achieved.

The second question what should our business be? is intended to help businesses change to meet new demands. Businesses should look for changes in population and demographics. They should look for unsatisfied desires. And for changes of perception.

Drucker helps business leaders apply these questions in his business strategy book Managing for Results. He shows what to do to understand the state of a business and what a business should do to see and meet changing demand.

(Management, chapter 7)

“To know what a business is we have to start with its purpose…There is only one valid definition of business purpose: to create a customer.“

This is a brilliant chapter on the essence of a business and what must be done for a business to succeed. An almost word-for-word treatment can be found in Drucker’s earlier book, The Practice of Management, What Is A Business? (pp. 34-48). Though this chapter includes a section on the origin of American and Japanese marketing.

While profit is nothing to be ashamed of, providing feedback, covering risk, and making society possible, profit is not the purpose of business. Creating customers is and must be the purpose of business.

To this end, Drucker summarizes the two main functions of business: marketing and innovation.

A business that is concerned about what it wants to do, about its products and services, cannot market well. A business that is concerned about its customers, what they value, and what they need and buy, understands marketing (64). Drucker believes that marketing was the key to IBM’s rise. IBM had stronger competitors in the commutation business, but IBM adopted the perspective of the customer, it saw things through the customer’s eyes (63). As a result, they offered what their customers loved.

About marketing, Drucker wrote: “There will always, one can assume, be need for some selling. But the aim of marketing is to know and understand the customer so well that the product or service fits him and sells itself.” (65)

Innovation is not merely optimizing or inventing something new, it is making something better and more valuable. It can involve adapting something old for a new purpose and customer, or it can provide something new such as bank credit and insurance (66).

Toward the end of the chapter Drucker provides an overview of productive resources that often go unseen, such as product mix, process mix, management structure, and knowledge–all of which can be areas of innovation and measurement.

Profit makes serving the customer through marketing, innovation, and productivity continually possible and it enables society to afford goods. To this end, making a profit is the responsibility of business and management (73).

(Management, chapter 6)

“The right answers are the result of asking the right questions.”

Drucker provides a case study of Sears Roebuck to illustrate managing business performance. He covers the decisions and innovations of the 20th century’s greatest retail company, showing what leaders did to strategically reinvent the company three times in fifty years to become the preeminent leader of mass-market goods.

Key to Sears’s performance was its knowledge of the population and mass market. Realizing that farmers were under-serviced due to their distance from towns but that they desired quality goods, Sears developed merchandise sources, invented the mail-order catalog, and offered a money-back guarantee, gaining them the trust and business of farmers. Eventually, automobiles and suburbs altered demands, and Sears transitioned to retail stores, providing high-quality, affordable goods. Finally, after World War II, Sears became the primary retail choice for the American middle class.

Interestingly, by the 1970s, the rise of knowledge workers required a fundamental change to Sears’s business, but Drucker understood that this would prove difficult for Sears as knowledge workers wanted information, education, and leisure over goods.

Overall, Sears’s brilliant history and business success came down to asking the right questions about the market.

(Management, chapter 5)

“Without understanding the mission, the objectives, and the strategy of the enterprise, managers cannot be managed, organizations cannot be designed, managerial jobs cannot be made productive.”

Drucker did not see management as an end in and of itself. He saw management as a means to a greater end. Thus, he believed that management must be understood in terms of its tasks or functions.

The first task of management is performance to achieve results. For a business, the results must be economic. Business exists to serve customers to make money. Without money and economic progress, no society can afford its government, military, nonprofits, hospitals, and its religious organizations.

The second task is to organize work and workers for results and fulfillment. Work must be oriented for productivity. Workers must be oriented for success and given opportunities to fulfill their functions and desires. They need to be given opportunities to contribute, grow, achieve, and fulfill their purpose.

The third task is to manage the contribution of business to society. A business that makes money in a way that degrades society will do damage to the body that makes business and free markets possible. Therefore, management needs to understand what it owes society.

There are two other functions or dimensions of management: time and managing change. In regard to time, managers have to manage the needs of the present and the future. Both the present and the future make demands, and these have to be balanced.

Managing change requires administration and entrepreneurship. Administrative tasks include modifying the work and processes so that results are optimized. But for the business to have a future, the manager must also innovate so that the business fulfills the demands of the changing future.

Drucker makes the point that all of these tasks must be integrated by top managers.

(Management, chapter 4)

Managers will have to become entrepreneurs, will have to learn to build and manage innovative organizations.”

After the management boom in about 1970, the need arose for new knowledge, greater productivity, and better management to address new challenges. The old ways of doing things like decentralizing business, containing people, and optimizing processes and products were no longer sufficient for results.

For results, managers needed to become entrepreneurs (31), workers needed to understand how they perform and plan accordingly for results (33), and societies needed to make their traditions and institutions productive (34).

(Management, chapter 3)