Peter Drucker Review

“The first question in discussing organization structure must be: What is our business and what should it be?”

Organizational structure is the theme of this chapter. Drucker argues that organizational structure should not be the focus. The focus should be on the needs of the business. To determine business needs, executives should analyze the business activities, decisions, and relationships. Business activities include marketing and engineering. Top managers need to define the priority of business activities. The priority determines the distribution of time and resources. Second, decisions need to be thought through in a strategic way. Who will make them? when? and under what circumstances? Some decisions have a great effect and thus need to be carefully managed. Lastly, managerial relationships need to be given proper focus. What are the duties and opportunities that managers have to support their superiors in the achievement of business goals? Regarding subordinates, managing to get the job done should be replaced with managing to fulfill the objectives of the boss.

Executives can use this chapter to determine the viability of their management structures through an analysis of their business activities, decisions, and relationships. The section on the kinds of decisions that are made and how they should be made is the most useful part.

One idea to remember is that a decision does not merely affect one thing, it affects many things. Decisions have unintended and long-term consequences and thus should be made at the right organizational level. Top management must take this into account when considering how to optimize or reorganize a company’s structure.

(The Practice of Management, chapter 16)

“Increasingly it is to business that our citizen looks for the fulfillment of the basic beliefs and promises of society, especially the promise of “equal opportunity.” Manager development from this point of view is little but a technical name for the means through which we carry out a central and basic part of our social beliefs and political heritage.”

Drucker explained what manager development is not, then what is necessary to have it. His main argument is that managers should be trained in accordance with the company’s future needs. They should also be given opportunities to understand the business in its entirety. Manager training that does not provide an understanding of the whole is not what it is cracked up to be.

To understand future needs, top management must assess present business realities, past and present events (e.g. population growth), innovations, and trends. Drucker believed this analysis enables companies to define requirements 5-10 years into the future.

Manager training is mostly done on the job. Management on every level needs to be encouraged to accept responsibility for the development of subordinate managers. This behavior contributes to the achievement of business goals. It also elevates company spirit.

(The Practice of Management, chapter 15)

“The problem is one of systematic conception and organization of the job. Without it even the ablest, most intelligent and best intentioned of chief executives will not succeed in doing his job, and will be forced to manage according to pressures and emergencies.”

Drucker believed that the chief executive job was too big for one person to do. A single executive is not able to think and plan sufficiently to make the company successful. There are too many demands and urgencies. The role of the executive should be done by an executive team. Massive results are achieved by executive teams that divide and conquer. Each member plays a role and takes responsibility for a result area. Drucker said that General Electric and General Motors were run by two or three men.

One idea in the chapter is a metric of effectiveness for executive teams. Executive team members’ responsibilities, salaries, and prestige should be comparable. They should discuss issues regularly. If these things are not happening, they are not a team. And if the executives are not a team it is likely that the most important work is not getting done.

(The Practice of Management, chapter 14)

“Management by objectives tells a manager what he ought to do. The proper organization of his job enables him to do it. But it is the spirit of the organization that determines whether he will do it.”

Drucker argued that practices or behaviors lead to top-performing organizations. The practices develop a culture that motivates and rewards performance and results. Employees and customers are proud of their relationship with these companies.

Top-performing organizations are exciting places. They motivate performance and results. They have high standards, tolerate mistakes, and judge and reward performance.

(The Practice of Management, chapter 13)

“If a manager, however, is controlled by the objective requirements of his job and measured by his results, there is no need for the kind of supervision that consists of telling a subordinate what to do and then making sure that he does it. There is no span of control. A superior could theoretically have any number of subordinates reporting to him.”

Business results arise from a union of top-down and bottom-up responsibility. Top management defines business goals that function to direct the activities of lower management. Lower management–fighting in the trenches–determine what needs to be done to achieve the goals.

Both top-down and bottom-up management practice forms of deduction, induction, and abduction. They define reality and test whether or not they defined reality well. They practice careful observation. And they make decisions with incomplete information, testing along the way. They cannot afford to under-define, under-test, or under-observe.

Drucker believed that top management’s authority should be enumerated and specific. He believed that top management should not make decisions that are more wisely and effectively made at lower levels. He believed that lower managers should have the freedom to set objectives and work out solutions to achieve the objectives of their superiors.

(The Practice of Management, chapter 12)

“…each manager’s job must be focused on the success of the whole. The performance that is expected of the manager must be derived from the performance goals of the business, his results must be measured by the contribution they make to the success of the enterprise. The manager must know and understand what the business goals demand of him in terms of performance, and his superior must know what contribution to demand and expect of him—and must judge him accordingly.”

Drucker recognized that managers often lose sight of their organization’s mission. They focus too much on the work or their personal fiefdoms, squabbling over procedures and processes. This creates divisions and paralysis.

When the mission is in view, teams become motivated and unified, and they perform. Mission spurs self-control and results.

Executives should evaluate, define, and communicate the mission of their organization. This has downstream effects. When managers and employees understand the mission—if it is simple, clear, and significant—they are encouraged to set objectives, take responsibility, and help each other perform.

(The Practice of Management, Chapter 11)

“The first requirement in managing managers is therefore that the vision of the individual managers be directed toward the goals of the business, and that their wills and efforts be bent toward reaching these goals. The first requirement in managing managers is management by objectives and self-control.”

Chapter 10 shifts from business to management requirements. From laying a foundation for results to building on the foundation.

Strong, competent managers, who take responsibility and possess the authority to achieve goals make businesses flourish. Drucker tells the story of The Ford Motor Company’s near collapse under Henry Ford’s centralized managerial approach. When the managers were given the liberty to deal with problems and achieve objectives they triumphed.

Drucker’s management by objectives approach decentralizes responsibility and authority and accomplishes business performance.

(The Practice of Management, chapter 10)

“What management needs are tools that enable it to free its thinking and planning from dependence on the business cycle.”

Strategic, long-term decisions should not be based on temporary market conditions or projections. Instead, they should be based on events and patterns that “shape” economies and societies such as population change, migration patterns, war, innovation, and worldview.

(The Practice of Management, Chapter 8)

“There are few things that distinguish competent from incompetent management quite as sharply as the performance in balancing objectives.”

“The late Nicholas Dreystadt, head of Cadillac and one of the wisest managers I have ever met, said to me once: “Any fool can learn to stay within his budget. But I have seen only a handful of managers in my life who can draw up a budget that is worth staying within.””

According to Drucker, objectives need to be set in eight business areas, including marketing and innovation. The chapter describes how to set objectives in these areas. The marketing and innovation sections are particularly detailed and useful.

Any area that requires performance and results needs objectives, measures, and standards. Drucker emphasizes the need to pick the right “yardstick” or measuring rod.

Objectives and measures enable a business to focus on its mission. Moreover, when objectives are prioritized, a business allocates its resources effectively.

The future should guide the setting of objectives. Drucker recommends evaluating past and current events that will create and shape future demand.

(The Practice of Management, Chapter 7)

“It is, then, the first responsibility of top management to ask the question “what is our business?” and to make sure that it is carefully studied and correctly answered.”

In this valuable chapter, Drucker explains two foundational questions businesses should ask, especially large ones: first, what is our business? Second, what should it be?

To answer the first question, a business must understand its customer. This requires understanding why the customer buys a particular product or service. Does a customer buy a lawnmower because he enjoys yard work or as an affordable way to make his wife happy? Is a customer buying a pair of shoes or prestige?

Prestige, fear, safety, and making a difference are ultimate reasons why customers buy particular products. If a business knows the ultimate reason why its customers purchase its products and services, it will tend to focus on the right things.

By understanding what its customer wants, a business can define what its business is in terms of service, knowledge, and leadership.

The second question is about the future. Major events and innovations change future demand. Therefore, businesses should evaluate and define the effects of major events and decide how they will change to fulfill the demands of the future.

The transistor, a major innovation, enabled and led to digital photography which was a change in demand; film companies that did not act upon the transistor innovation, changing to satisfy future demand, faded away.

But it is not enough to accept and incorporate new technologies into a business. One must look for how events and innovations create new opportunities and markets.

Drucker gives a fascinating example of a large copper mining business. One would think that the demand for copper never changes. That selling copper is a stable, nearly static, enterprise. However, the copper business, no different from any other business, needed to evaluate opportunities for additional markets. The changing economy–events and innovations–spurred new opportunities and markets that it could not afford to ignore.

Evaluating events and asking what the business should be is not guess work or predicting the future. It is an exercise in analysis and executive judgment. It requires thinking through the consequences of occurrences that have happened before.

Executives can use the chapter’s questions and examples to think through these fundamental questions. Above all, asking what our business is and should be requires careful thinking and courage.

(The Practice of Management, Chapter 6)