Business, Results, Resources, Efforts, Cost,
Making the Future,
and The New Realities
About Peter Drucker ↓
About Managing for Results
Results and resources
Efforts and cost
What makes for leadership
Making the future
The Future That Has Already Happened
The Power Of An Idea
What makes an effective executive?
Effectiveness Can Be Learned
Why We Need Effective Executives
The absence of executives in yesterday’s organizations
Today’s large knowledge organizations
Who Is An Executive?
The New Realities
Managing for Results
The book is divided into three parts.
The The first—and longest—stresses analysis and understanding.
Chapter 1 deals with the “Business Realities”. the situation most likely to be found in any business at any given time.
The next three chapters (chapters 2, 3,4) develop the analysis of the result areas of the entire business and relate them to resources and efforts on the one hand and to opportunities and expectations on the other.
Chapter 5 projects a similar analysis on the cost stream and cost structure — both of the individual business and of the economic process of which it is part.
Chapters 6 and 7 deal with the understanding of a business from the “outside” where both the results and the resources are.
These chapters ask, “What do we get paid for?” and ‘What do we earn our keep with?”
In Chapter 8: All analyzes are pulled together into an understanding of the existing business, its fundamental economic characteristics, its performance capacity, its opportunities, and its needs.
Part II focuses on opportunities and leads to decisions.
It discusses the opportunities and needs in each of the major economic dimensions of a business:
making the present business effective (Chapter 9);
finding and realizing business potential (Chapter 10);
making the future of the business today (Chapter 11).
The last-and shortest-part presents the conversion of insights and decisions into purposeful performance.
This requires that key decisions be made regarding the idea and objectives of the business, the excellences it needs, and the priorities on which it will concentrate (Chapter 12).
It requires a number of strategic choices: what opportunities to pursue and what risks to assume; how to specialize and how to diversify; whether to build or to acquire; and what organization is most appropriate to the economics of the business and to its opportunities (Chapter 13).
Chapter 14 finally embeds the entrepreneurial decisions for performance in the managerial structure of the organization-in work, in business practices, and in the spirit of the organization and its decisions on people.
The Conclusion projects the book and its thesis on the individual executive and his commitment and especially on the commitment of top management.
Any first attempt at converting folklore into knowledge, and a guessing game into a discipline, is liable to be misread as a downgrading of individual ability and its replacement by a rule book.
Any, such attempt would be nonsense, of course.
No book will ever make a wise man out of a donkey or a genius out of an incompetent.
The foundation in a discipline, however, gives to today’s competent physician a capacity to perform well beyond that of the ablest doctor of a century ago, and enables the outstanding physician of today to do what the medical genius of yesterday could hardly have dreamt of.
No discipline can lengthen a man’s arm.
But it can lengthen his reach by hoisting him on the shoulders of his predecessors.
Knowledge organized in a discipline does a good deal for the merely competent; it endows him with some effectiveness.
It does infinitely more for the truly able; it endows him with excellence.
Executives have the economic job anyhow.
Most work at it hard — too hard in many cases.
This book poses no additional work.
On the contrary, it aims to help them do their job with less effort and in less time, and yet with greater impact.
It does not tell them how to do things right.
It attempts to help them find the right things to do.
That executives give neither sufficient time nor sufficient thought to the future is a universal complaint.
Every executive voices it when he talks about his own working day and when he talks or writes to his associates.
It is a recurrent theme in the articles and in the books on management.
It is a valid complaint.
Executives should spend more time and thought on the future of their business.
They also should spend more time and thought on a good many other things, their social and community responsibilities for instance.
Both they and their businesses pay a stiff penalty for these neglects.
And yet, to complain that executives spend so little time on the work of tomorrow is futile.
The neglect of the future is only a symptom; the executive slights tomorrow because he cannot get ahead of today.
That too is a symptom.
The real disease is the absence of any foundation of knowledge and system for tackling the economic tasks in business.
Today’s job takes all the executive’s time, as a rule; yet it is seldom done well.
Few managers are greatly impressed with their own performance in the immediate tasks.
They feel themselves caught in a “rat race,” and managed by whatever the mail-boy dumps into their “in” tray.
They know that crash programs which attempt to “solve” this or that particular “urgent” problem rarely achieve right and lasting results.
And yet, they rush from one crash program to the next.
Worse still, they known that the same
Problems recur again and again, no matter how many times they are “solved.”
Before an executive can think of tackling the future, he must be able therefore to dispose of the challenges of today in less time and with greater impact and permanence.
For this he needs a systematic approach to today’s job.
There are three different dimensions to the economic task:
(1) The present business must be made effective;
(2) its potential must be identified and realized;
(3) it must be made into a different business for a different future.
Each task requires a distinct approach.
Each asks different questions.
Each comes out with different conclusions.
Yet they are inseparable.
All three have to be done at the same time: today.
All three have to be carried out with the same organization, the same resources of men, knowledge, and money, and in the same entrepreneurial process.
The future is not going to be made tomorrow;
it is being made today,
by the decisions and actions taken
with respect to the tasks of today.
Conversely, what is being done to bring about the future directly affects the present.
The tasks overlap.
They require one unified strategy.
Otherwise, they cannot really get done at all.
To tackle any one of these jobs, let alone all three together, requires an understanding of the true realities of the business as an economic system, of its capacity for economic performance, and of the relationship between available resources and possible results.
Otherwise, there is no alternative to the “rat race.”
This understanding never comes readymade; it has to be developed separately for each business.
Yet the assumptions and expectations that underlie it are largely common.
Businesses are different, but business is much the same, regardless of size and structure, of products, technology and markets, of culture and managerial competence.
There is a common business reality.
There are actually two sets of generalizations that apply to most businesses most of the time: one with respect to the results and resources of a business, one with respect to its efforts.
Together they lead to a number of conclusions regarding the nature and direction of the entrepreneurial job.
Most of these assumptions will sound plausible, perhaps even familiar, to most businessmen, but few businessmen ever pull them together into a coherent whole.
Few draw action conclusions from them, no matter how much each individual statement agrees with their experience and knowledge.
As a result, few executives base their actions on these, their own assumptions and expectations.
Results and resources
1. Neither results nor resources exist inside the business.
Both exist outside.
There are no profit centers within the business; there are only cost centers.
The only thing one can say with certainty about any business activity, whether engineering or selling, manufacturing or accounting, is that it consumes efforts and thereby incurs costs.
Whether it contributes to results remains to be seen.
Results depend not on anybody within the business nor on anything within the control of the business.
They depend on somebody outside—the customer in a market economy, the political authorities in a controlled economy.
It is always somebody outside who decides whether the efforts of a business become economic results or whether they become so much waste and scrap.
The same is true of the one and only distinct resource of any business: knowledge.
Other resources, money or physical equipment, for instance, do not confer any distinction.
What does make a business distinct and what is its peculiar resource is its ability to use knowledge of all kinds—from scientific and technical knowledge to social, economic, and managerial knowledge.
It is only in respect to knowledge that a business can be distinct, can therefore produce something that has a value in the market place.
Yet knowledge is not a business resource.
It is a universal social resource.
It cannot be kept a secret for any length of time.
“What one man has done, another man can always do again” is old and profound wisdom.
The one decisive resource of business, therefore, is as much outside of the business as are business results.
Indeed, business can be defined as a process that converts an outside resource, namely knowledge, into outside results, namely economic values.
2. Results are obtained by exploiting opportunities, not by solving problems.
All one can hope to get by solving a problem is to restore normality.
All one can hope, at best, is to eliminate a restriction on the capacity of the business to obtain results.
The results themselves must come from the exploitation of opportunities.
3. Resources, to produce results, must be allocated to opportunities rather than to problems.
Needless to say, one cannot shrug off all problems, but they can and should be minimized.
Economists talk a great deal about the maximization of profit in business.
This, as countless critics have pointed out, is so vague a concept as to be meaningless.
But “maximization of opportunities” is a meaningful, indeed a precise, definition of the entrepreneurial job.
It implies that effectiveness rather than efficiency is essential in business.
The pertinent question is not how to do things right but how to find the right things to do, and to concentrate resources and efforts on them.
4. Economic results are earned only by leadership, not by mere competence.
Profits are the rewards for making a unique, or at least a distinct, contribution in a meaningful area; and what is meaningful is decided by market and customer.
Profit can only be earned by providing something the market accepts as value and is willing to pay for as such.
And value always implies the differentiation of leadership.
The genuine monopoly, which is as mythical a beast as the unicorn (save for politically enforced, that is, governmental monopolies), is the one exception.
This does not mean that a business has to be the giant of its industry nor that it has to be first in every single product line, market, or technology in which it is engaged.
To be big is not identical with leadership.
In many industries the largest company is by no means the most profitable one, since it has to carry product lines, supply markets, or apply technologies where it cannot do a distinct, let alone a unique job.
The second spot, or even the third spot is often preferable, for it may make possible that concentration on one segment of the market, on one class of customer, on one application of the technology, in which genuine leadership often lies.
In fact, the belief of so many companies that they could—or should—have leadership in everything within their market or industry is a major obstacle to achieving it.
But a company which wants economic results has to have leadership in something of real value to a customer or market.
It may be in one narrow but important aspect of the product line, it may be in its service, it may be in its distribution, or it may be in its ability to convert ideas into salable products on the market speedily and at low cost.
Unless it has such leadership position, a business, a product, a service, becomes marginal.
It may seem to be a leader, may supply a large share of the market, may have the full weight of momentum, history, and tradition behind it But the marginal is incapable of survival in the long run, let alone of producing profits.
It lives on borrowed time.
It exists on sufferance and through the inertia of others.
Sooner or later, whenever boom conditions abate, it will be squeezed out.
The leadership requirement has serious implications for business strategy.
It makes most questionable, for instance, the common practice of trying to catch up with a competitor who has brought out a new or improved product.
All one can hope to achieve thereby is to become a little less marginal.
It also makes questionable “defensive research” which throws scarce and expensive resources of knowledge into the usually futile task of slowing down the decline of a product that is already obsolete.
5. Any leadership position is transitory and likely to be short lived.
No business is ever secure in its leadership position.
The market in which the results exist, and the knowledge which is the resource, are both generally accessible.
No leadership position is more than a temporary advantage.*1
1 * This is nothing but a restatement of Schumpeter’s famous theorem that profits result only from the innovator’s advantage and therefore disappear as soon as the innovation has become routine.
In business (as in a physical system) energy always tends toward diffusion.
Business tends to drift from leadership to mediocrity.
And the mediocre is three-quarters down the road to being marginal.
Results always drift from earning a profit toward earning, at best, a fee which is all competence is worth.
It is, then, the executive’s job to reverse the normal drift.
It is his job to focus the business on opportunity and away from problems, to re-create leadership and counteract the trend toward mediocrity, to replace inertia and its momentum by new energy and new direction.
The second set of assumptions deals with the efforts within the business and their cost.
6. What exists is getting old.
To say that most executives spend most of their time tackling the problems of today is euphemism.
They spend most of their time on the problems of yesterday.
Executives spend more of their time trying to unmake the past than on anything else.
This, to a large extent, is inevitable.
What exists today is of necessity the product of yesterday.
The business itself—its present resources, its efforts and their allocation, its organization as well as its products, its markets and its customers—expresses necessarily decisions and actions taken in the past.
Its people, in the great majority, grew up in the business of yesterday.
Their attitudes, expectations, and values were formed at an earlier time; and they tend to apply the lessons of the past to the present.
Indeed, every business regards what happened in the past as normal, with a strong inclination to reject as abnormal whatever does not fit the pattern.
No matter how wise, forward-looking, or courageous the decisions and actions were when first made, they will have been overtaken by events by the time they become normal behavior and the routine of a business.
No matter how appropriate the attitudes were when formed, by the time their holders have moved into senior, policy-making positions, the world that made them no longer exists.
Events never happen as anticipated; the future is always different.
Just as generals tend to prepare for the last war, businessmen always tend to react in terms of the last boom or of the last depression.
What exists is therefore always aging.
Any human decision or action starts to get old the moment it has been made.
It is always futile to restore normality; “normality” is only the reality of yesterday.
The job is not to impose yesterday’s normal on a changed today; but to change the business, its behavior, its attitudes, its expectations—as well as its products, its markets, and its distributive channels—to fit the new realities.
7. What exists is likely to be misallocated.
Business enterprise is not a phenomenon of nature but one of society.
In a social situation, however, events are not distributed according to the “normal distribution” of a natural universe (that is, they are not distributed according to the bell-shaped Gaussian curve).
In a social situation a very small number of events at one extreme—the first 10 per cent to 20 per cent at most—account for 90 per cent of all results; whereas the great majority of events accounts for 10 per cent or so of the results.
This is true in the market place: a handful of large customers out of many thousands produce the bulk of orders; a handful of products out of hundreds of items in the line produce the bulk of the volume; and so on.
It is true of sales efforts: a few salesmen out of several hundred a!ways produce two-thirds of all new business.
It is true in the plant: a handful of production runs account for most of the tonnage.
It is true of research: the same few men in the laboratory are apt to produce nearly all the important innovations.
It also holds true for practically all personnel problems: the bulk of the grievances always comes from a few places or from one group of employees (for example, from the older unmarried women or from the clean-up men on the night shift), as does the great, bulk of absenteeism, of turnover, of suggestions under a suggestion system, of accidents.
As studies at the New York Telephone Company have shown, this is true even in respect to sickness.
The implications of this simple statement about normal distribution are broad.
It means, first: while 90 per cent of the results are being produced by the first 10 per cent of events, 90 per cent of the costs are incurred by the remaining and resultless 90 per cent of events.
In other words, results and costs stand in inverse relationship to each other.
Economic results are, by and large, directly proportionate to revenue, while costs are directly proportionate to the number of transactions.
(The only exceptions are the purchased materials and parts that go directly into the final product.)
A second implication is that resources and efforts will normally allocate themselves to the 90 per cent of events that produce practically no results.
They will allocate themselves to the number of events rather than to the results.
In fact, the most expensive and potentially most productive resources (i. e., highly trained people) will misallocate themselves the worst.
For the pressure exerted by the bulk of transactions is fortified by the individual’s pride in doing the difficult—whether productive or not.
This has been proved by every study.
Let me give some examples:
A large engineering company prided itself on the high quality and reputation of its technical service group, which contained several hundred expensive men.
The men were indeed first-rate.
But analysis of their allocation showed clearly that while they worked hard, they contributed little.
Most of them worked on the “interesting” problems—especially those of the very small customers—problems which, even if solved, produced little business.
The automobile industry was the company’s major customer and accounted for almost one-third of all purchases.
But few technical service people had within memory set foot in the engineering department or the plant of an automobile company.
“General Motors and Ford don’t need me; they have their own people” was their reaction.
Similarly, in many companies, salesmen are misallocated.
The largest group of salesmen (and the most effective ones) are usually put on the products that are hard to sell, either because they are yesterday’s products or because they are also-rans which managerial vanity desperately is trying to make into winners.
Tomorrow’s important products rarely get the sales effort required.
And the product that has sensational success in the market, and which therefore ought to be pushed all out, tends to be slighted.
“It is doing all right without extra effort, after all” is the common conclusion.
Research departments, design staffs, market development efforts, even advertising efforts have been shown to be allocated the same way in many companies—by transactions rather than by results, by what is difficult rather than by what is productive, by yesterday’s problems rather than by today’s and tomorrow’s opportunities.
A third and important implication is that revenue money and cost money are rarely the same money stream.
Most businessmen see in their mind’s eye—and most accounting presentations assume—that the revenue stream feeds back into the cost stream, which then, in turn, feeds back into the revenue stream.
But the loop is not a closed one.
Revenue obviously produces the wherewithal for the costs.
But unless management constantly works at directing efforts into revenue-producing activities, the costs will tend to allocate themselves by drifting into nothing-producing activities, into sheer busy-ness.
In respect then to efforts and costs as well as to resources and results the business tends to drift toward diffusion of energy.
There is thus need for constant reappraisal and redirection; and the need is greatest where it is least expected: in making the present business effective.
It is the present in which a business first has to perform with effectiveness.
It is the present where both the keenest analysis and the greatest energy are required.
Yet it is dangerously tempting to keep on patching yesterday’s garment rather than work on designing tomorrow’s pattern.
A piecemeal approach will not suffice.
To have a real understanding of the business, the executive must be able to see it in its entirety.
He must be able to see its resources and efforts as a whole and to see their allocation to products and services, to markets, customers, end-uses, to distributive channels.
He must be able to see which efforts go onto problems and which onto opportunities.
He must be able to weigh alternatives of direction and allocation.
Partial analysis is likely to misinform and misdirect.
Only the over-all view of the entire business as an economic system can give real knowledge.
8. Concentration is the key to economic results.
Economic results require that managers concentrate their efforts on the smallest number of products, product lines, services, customers, markets, distributive channels, end-uses, and so on, that will produce the largest amount of revenue.
Managers must minimize the amount of attention devoted to products which produce primarily costs because, for instance, their volume is too small or too splintered.
Economic results require that staff efforts be concentrated on the few activities that are capable of producing significant business results.
Effective cost control requires a similar concentration of work and efforts on those few areas where improvement in cost performance will have significant impact on business performance and results—that is, on those areas where a relatively minor increase in efficiency will produce a major increase in economic effectiveness.
Finally, human resources must be concentrated on a few major opportunities.
This is particularly true for the high-grade human resources through which knowledge becomes effective in work.
And, above all it is true for the scarcest, most expensive, but also potentially most effective of all human resources in a business: managerial talent.
No other principle of effectiveness is violated as constantly today as the basic principle of concentration.
This, of course, is true not only of businesses.
Governments try to do a little of everything.
Today’s big university (especially in the United States) tries to be all things to all men, combining teaching and research, community services, consulting activities, and so on.
But business—especially large business—is no less diffuse.
Only a few years ago it was fashionable to attack American industry for “planned obsolescence.”
And it has long been a favorite criticism of industry, especially American industry, that it imposes “deadening standardization.”
Unfortunately industry is being attacked for doing what it should be doing and fails to do.
Large United States corporations pride themselves on being willing and able to supply any specialty, to satisfy any demand for variety, even to stimulate such demands.
Any number of businesses boast that they never of their own free will abandon a product.
As a result, most large companies end up with thousands of items in their product line—and all too frequently fewer than twenty really sell.
However, these twenty or fewer items have to contribute revenues to carry the costs of the 9,999 non-sellers.
Indeed, the basic problem of United States competitive strength in the world today may be product clutter.
If properly costed, the main lines in most of our industries prove to be fully competitive, despite our high wage rate and our high tax burden.
But we fritter away our competitive advantage in the volume products by subsidizing an enormous array of specialties, of which only a few recover their true cost.
In electronics, for instance, the competition of the Japanese portable transistor radio rests on little more than the Japanese concentration on a few models in this one line—as against the uncontrolled plethora of barely differentiated models in the United States manufacturers’ lines.
We are similarly profligate in this country with respect to staff activities.
Our motto seems to be: “Let’s do a little bit of everything”—personnel research, advanced engineering, customer analysis, international economics, operations research, public relations, and so on.
As a result, we build enormous staffs, and yet do not concentrate enough effort in any one area.
Similarly, in our attempts to control costs, we scatter our efforts rather than concentrate them where the costs are.
Typically the cost-reduction program aims at cutting a little bit—say, 5 or 10 per cent-off everything.
This across-the-board cut is at best ineffectual; at worst, it is apt to cripple the important, result-producing efforts which usually get less money than they need to begin with.
But efforts that are sheer waste are barely touched by the typical cost-reduction program; for typically they start out with a generous budget.
These are the business realities, the assumptions that are likely to be found valid by most businesses at most times, the concepts with which the approach to the entrepreneurial task has to begin.
They have only been sketched here in outline; each will be discussed in detail in the course of the book.
That these are only assumptions should be stressed.
They ‘must be tested by actual analysis; and one or the other assumption may well be found not to apply to any one particular business at any one particular time.
Yet they have sufficient probability to provide the foundation for the analysis the executive needs to understand his business.
They are the starting points for the analysis needed for all three of the entrepreneurial tasks: making effective the present business; finding business potential; and making the future of the business.
The small and apparently simple business needs this understanding just as much as does the big and highly complex company.
Understanding is needed as much for the immediate task of effectiveness today as it is for work on the future, many years hence.
It is a necessary tool for any executive who takes seriously his entrepreneurial responsibility.
And it is a tool which can neither be fashioned for him nor wielded for him.
He must take part in making it and using it.
The ability to design and develop this tool and the competence to use it should be standard equipment for the business executive.
II What Makes For Leadership?
Experienced businessmen know that the seemingly simple statements regarding position and prospects of each product in Table II represent the final summation of a great deal of hard work and prolonged discussion.
In these areas even calm men will get angry, and reasonable men will refuse to listen to facts with a curt: “I don’t believe it.”
Here, in other words, is need for thorough, painstaking work.
But the work itself—its tools and techniques—from value-analysis of the product to market research—is well known, has indeed been routine for years even in fairly small businesses.
The results, in other words, may be controversial and hard to accept; but the work itself is familiar.
Of course, presentation in a large and complex company will be far more detailed than in smaller businesses.
A good deal will be quantified, and so on.
But it is not my intention here to show how complicated one can become—nor does anyone need this lesson.
I am intent only on getting across a concept—and the concept is simple.
Leadership is not a quantitative term.
The business with the largest share of a market may have leadership in one segment only.
The monopolist, the single supplier of a product or of a market, never has leadership and cannot have it.
To have leadership a product must be best fitted for one—or more—of the genuine wants of market and customer.
It must be a genuine want.
The customer must be willing to pay for it.
No matter how desirable a certain quality in a product might appear to the manufacturer, it only gives leadership if the customer accepts the claim.
His acceptance is his willingness to honor the claim in tangible form by preferring the product to its competitors—and by being willing to pay.
The monopolist cannot have leadership because the customer cannot choose.
Customers of a monopoly always want a second supplier and flock to him when he appears.
They may have been fully satisfied with the monopolist’s goods or services.
But it is an exceptional business or product that, after having had a monopoly, retains customer preference.*1
1 * Incidentally, the sole-source supplier has lower sales, as a rule, than he would have were there competitors in the field.
Sales of a product line of any consequence do not begin to expand, let alone to reach their potential, as long as only one company supplies them.
The history of the aluminum industry in the United States is an example.
Though the Aluminum Company of America was the very model of the “enlightened monopolist” who constantly lowers price and seeks new uses for his product, the explosive expansion of aluminum consumption in this country started after the United States government, during World War II, had put two other companies into the aluminum business.
Part of the reason for this failure of monopoly to benefit even the monopolist is certainly that one company, no matter how big, is rarely big enough to develop a new market of any size by itself; it takes at least two.
There is rarely “one right way” in a new market.
Yet alternatives are unlikely to be thought of or aggressively explored unless there is the challenge of competition.
Another reason is probably that even the “enlightened monopolist” tends to neglect markets and customers that cannot go elsewhere.
But a main reason is certainly that manufacturer, wholesaler, retailer, or consumer dislikes to be dependent on a single source of supply and therefore keeps down his purchases from a supplier in control of the market.
The monopolist is therefore always in danger of becoming marginal the moment a second supplier appears.
Most businessmen know this to be true—but emotionally they find it hard to accept.
Yet, in analyzing a business, one had best consider an unchallenged product as an endangered product.
The common test of leadership by “share of the market” is also deceptive.
Examples abound of companies that have the largest share of the market but are far behind in their profitability compared to competitors of much smaller apparent stature.
This means that they do not get paid for leadership but, in effect, have to pay for it.
For while the very large company has to be active in every area, no company, as a rule, can have real distinction in everything.
In all of American industry there is only one example of a company that combines first rank in every area with first rank in profitability in every area: General Motors in the U.S. automobile market.
DuPont de Nemours, while the largest and most profitable of American chemical companies, works only in a few segments of industrial chemistry, especially in chemicals and fibers for the textile market.
There are, to be sure, few situations comparable to that of U.S. Steel, the price and volume leader in most steel markets for many years but until a few years ago the least profitable large American steel company.
Here largest share of the market seems to have been held by a producer who was marginal in the major product areas.
But in most industries the largest company has leadership in only a few areas, while its very size and prominence force it to be active in a great many others.
Only an occasional very small specialty business can be the leader with all of its products or services, in all its markets and end-uses, with all its customers, and in all its distributive channels.
But no company, no matter how large or how small, can afford to be marginal in all of them.
Above all it cannot afford to be anything but a leader in the areas which are the mainstay of its business, produce the bulk of the sales, generate the bulk of the costs, and absorb the most important and most valuable resources.
A marginal product generates inadequate returns.
It is always in danger of being squeezed out altogether.
The larger the market the more dangerous is it to be marginal, the less room is there for any but products with genuine leadership position.
Contrary to what economists have been preaching for two hundred years, the alternative to monopoly in a developed, large market is not free competition—that is, an unlimited number of participants in an industry; but oligopoly—that is, competition between a fairly small number of manufacturers or suppliers.
As the market gets bigger, it may take so much money to enter the industry that the attempt can be made only once in a great while—simply because one must either sell nationally or not sell at all (as in the American automobile industry).
The bigger the market, the more will distributive channels concentrate on just enough well-known brands to give the customer meaningful choice, but not so many as to confuse him or as to require excessive inventories.
For this reason, for instance, concentration of the American kitchen-appliance industry (refrigerators, ranges, dishwashers, automatic laundries, etc.) on no more than half a dozen or so major brands will occur sooner or later whatever the antitrust laws may say to the contrary.
Five to six major brands are all that a large appliance dealer—whether a discount house, a department store, or a shopping center—needs in order to have a full line which gives the customer all the selection he wants.
More brands, as a matter of fact, may only confuse the customer and may make him not want to buy.
More brands do not increase sales, but they do increase inventory.
They tie up money, floor space, and warehouse space.
They make repair service difficult: the repairman has to be trained on more appliances and has to carry more spare parts.
They either require additional promotion money or splinter the promotion impact, and so on.
The first reaction of the appliance dealer in this situation is to put pressure for “extras” on the manufacturers of the slower-selling lines.
During the last decade dealers have asked for and received lower prices, larger discounts, special financing, extra promotion allowances, and guarantees of repurchase of used appliances at a stipulated price well above the market.
Each demand meant a decrease in the manufacturer’s profitability.
If and when a really sharp setback in the appliance market occurs, the marginal brands will then be squeezed out altogether—simply because dealers have to curtail their inventories and therefore concentrate on the few fast-selling brands and drop the others.
The main reason why concentration increases, the larger and more highly developed the market, is that the large market makes for meaningful product differentiation.
The larger the market the less room it has for products that are “just as good,” the less room there is for marginal products and marginal producers.
This may be of particular importance today for Europe and for Japan where the mass-market is developing rapidly.
A business or product that was a leader in the restricted German or French market of yesterday may rapidly become marginal in the mass-market of the unified European continent.
This is certainly a major factor behind the rapid mergers and partnership associations between medium-sized companies—especially family-owned ones—across Common Market national boundaries.
And unless they try to establish monopolies that restrict the market, such combinations of medium-sized businesses into one large group or association are healthy—are indeed needed fully to exploit the economic potential of the Common Market or of Japan’s new mass-consumer economy.
The expansion of a market also creates opportunities for a host of products and services with special characteristics to attain leadership position in a distinct market-segment or end-use which, while significantly smaller than the national or mass market, is still larger than what passed for the big market only a while back.
Take for example the market for specially formulated polymer petrochemicals.
The manufacturers of the large, volume polymer products—e. g., the main plastics—are the principal customers; and the opportunities, sales, and profits for the accomplished polymer chemist are high.
The Cummins Engine Company of Columbus, Indiana—a medium-sized business—has enjoyed highly profitable leadership as a maker of engines for heavy trucks.
If the very large engineering companies (General Motors above all) did not offer a broad assortment of diesel engines for all uses—in buses, in ships, in locomotives—Cummins could hardly have confined itself to the specialization on one narrow line that underlies its success.
Either an engine design is used widely or it becomes so difficult to install and service that it is not used at all.
Some small manufacturers, each specializing in one or two special applications of low-horsepower electrical motors, have been doing proportionately better than General Electric or Westinghouse, whose dominant market share forces them to supply all kinds of motors to all customers and for all end-uses, and who therefore, of necessity, must be marginal or lose money on some lines.
A leadership position may be based on price or on reliability.
Easy maintenance may be crucial in one product for one purpose; a promise that no maintenance is needed may be leadership for a similar product in some other use (e. g., for a telephone cable laid on the ocean floor or for a microwave relay station for telephone and television signals built on a mountain top in Idaho, sixty miles and two blizzards from the nearest town).
Appearance, style, design—customer recognition and acceptance—lowest cost of a finished article into which a product is being converted—small or large size—service and speedy delivery—technical counsel—these and many others can be foundations for a leadership position.
But what the manufacturer considers “quality” is not one of them; it is only too often irrelevant, if not the manufacturer’s alibi for turning out a marginal product that costs more but does not contribute anything different or better.
There is no leadership if the market is not willing to recognize the claim.
And that always means willingness to buy and to pay.
Leadership position for a product or a business is an economic term rather than a moral or an esthetic one.
Low price may be no criterion at all.
(Indeed manufacturers’ complaints that “the trade” buys only by price and pays no attention to quality are often unfounded; the trade has definite value preferences and is willing to pay for them—the manufacturer just does not satisfy them.)
But customer willingness to pay and customer purchases in preference to competitors’ products are valid criteria of economic accomplishment in a competitive market economy.
If they cannot be clearly demonstrated, a product must be suspected of being—or becoming—marginal.
In analyzing products for their leadership position, the same questions should therefore always be asked:
“Is the product being bought in preference to other products on the market, or at least as eagerly?”
“Do we have to give anything to get the customer to buy?”
(e. g., the extraordinary amount of service which, as Table Ill (next page) shows, products F and 0 require).
“Do we get paid for what we deliver to him, as indicated by an at-least-average profit contribution?”
“Are we getting paid for what we think is the product distinction?”
“Or do we have a product with leadership position and with distinction without ourselves discerning it?”
(as might well be the case with products C and D in the tables).
If the main products of a company show no signs of having such distinction and of occupying leadership position—as may be the case with Universal Products—it had better do something fast, especially if sales and profits seem to be doing well.
Both sales and profits may suddenly collapse—yet no one is prepared, no one is forewarned, no one is working at restoring the leadership position of the products or developing new ones to replace what has become marginal.
Turning now to the prospects, Table II (page 39) summarized a lot of hard work—and even more internal disagreement.
Judgments on prospects—on what can reasonably be expected of a product within the next few years—are of course fully as controversial as leadership position.
One look at the table and every experienced executive knows that the prospect appraisal for product A will be bitterly disputed, especially by the engineering department, and that the dismal appraisal for product B is probably still too optimistic.
He knows that the comptroller will challenge the high appraisal of the prospect for product D; whereas sales may want to push the estimate even higher.
The expectation of continued sales for product I, even though on a very low level, is probably wishful thinking.
The old-timers who made their careers designing, making, and selling it still hope it will come back.
But what the analysis tries to do—and why it should be made—hardly needs explanation.
The amazing thing is that it is done so rarely.
Individual products are frequently studied and their prospects assayed.
Major markets too—e. g., the market for construction materials—may be studied, especially by the larger companies.
But a searching look at the prospects of all the products at the same time, let alone of all result areas of a business, is still uncommon—even in companies that profess to believe in long-range planning.
Yet it is both an easy thing to do—though not so easy to do well—and a most revealing, question—raising approach to the business and its capacity to perform and to produce results.
All this is hardly news for businessmen any more.
For a decade now the “marketing view” has been widely publicized.
It has even acquired a fancy name: The Total Marketing Approach.
Not everything that goes by that name deserves it.
“Marketing” has become a fashionable term.
But a gravedigger remains a gravedigger even when called a “mortician”—only the cost of the burial goes up.
Many a sales manager has been renamed “marketing vice president”—and all that happened was that costs and salaries went up.
A good deal of what is called “marketing” today is at best organized, systematic selling in which the major jobs—from sales forecasting to warehousing and advertising—are brought together and coordinated.
This is all to the good.
But its starting point is still our products, our customers, our technology.
The starting point is still the inside.
Yet there have been enough serious efforts for us to know what we mean by the marketing analysis of a business, and how one goes about it.
Here, first, are the marketing realities that are most likely to be encountered:
1. What the people in the business think they know about customer and market is more likely to be wrong than right.
There is only one person who really knows: the customer.
Only by asking the customer, by watching him, by trying to understand his behavior can one find out who he is, what he does, how he buys, how he uses what he buys, what he expects, what he values, and so on.
2. The customer rarely buys what the business thinks it sells him.
One reason for this is, of course, that nobody pays for a “product.”
What is paid for is satisfactions.
But nobody can make or supply satisfactions as such—at best, only the means to attaining them can be sold and delivered.
Every few years this axiom is rediscovered by a newcomer to the advertising business who becomes an overnight sensation on Madison Avenue.
For a few months he brushes aside what the company’s executives tell him about the product and its virtues, and instead turns to the customer and, in effect, asks him: “And what do you look for?
Maybe this product has it.”
The formula has never failed—not since it was used, many years ago, to promote an automobile with the slogan, “Ask the Man Who Owns One”; that is, with the promise of customer satisfaction.
But it is so difficult for the people who make a product to accept that what they make and sell is the vehicle for customer satisfaction, rather than customer satisfaction itself, that the lesson is always immediately forgotten, until the next Madison Avenue sensation rediscovers it.
3. A corollary is that the goods or services which the manufacturer sees as direct competitors rarely adequately define what and whom he is really competing with.
They cover both too much and too little.
Luxury cars—the Rolls Royce and the Cadillac, for instance—are obviously not in real competition with low-priced automobiles.
However excellent Rolls Royce and Cadillac may be as transportation, they are mainly being bought for the prestige satisfaction they give.
Because the customer buys satisfaction, all goods and services compete intensively with goods and services that look quite different, seem to serve entirely different functions, are made, distributed, sold differently—but are alternative means for the customer to obtain the same satisfaction.
That the Cadillac competes for the customer’s money with mink coats, jewelry, the skiing vacation in the luxury resort, and other prestige satisfactions, is an example—and one of the few both the general public and the businessman understand.
But the manufacturer of bowling equipment also does not, primarily, compete with the other manufacturers of bowling equipment.
He makes physical equipment.
But the customer buys an activity.
He buys something to do rather than something to have.
The competition is therefore all the other activities that compete for the rapidly growing “discretionary time” of an affluent, urban population—boating and lawn care, for instance, but also the continuing postgraduate education of already highly schooled adults (which has been the true growth industry in the United States these last twenty years).
That the bowling equipment makers were first in realizing the potential and growth of the discretionary-time market, first to promote a new family activity, explains their tremendous success in the fifties.
That they, apparently, defined competition as other bowling equipment makers rather than as all suppliers of activity—satisfactions is in large part responsible for the abrupt decline of their fortunes in the sixties.
They apparently had not even realized that other activities were invading the discretionary—time market; and they had not given thought to developing a successor-activity to a product that, in the activities market, was clearly becoming yesterday’s product.
Even the direct competitors are, however, often overlooked.
The big chemical companies, for instance, despite their careful industry intelligence, are capable of acting as if there were no competitors to worry about.
When in the early fifties the first of the volume plastics, polyethylene, established itself in the market, every major chemical company in America saw its tremendous growth potential.
Everyone, it seems, arrived at about the same, almost unbelievable, growth forecast.
But no one, it seems, realized that what was so obvious to him might not be totally invisible to the other chemical companies.
Every major chemical company seems to have based its expansion plans in polyethylene on the assumption that no one else would expand capacity.
Demand for polyethylene actually grew faster than even the almost incredible forecasts of that time anticipated.
But because everybody expanded on the assumption that his new plants would get the entire new business, there is such over-capacity now that the price has collapsed and the plants are half-empty.
4. Another important corollary is that what the producer or supplier thinks the most important feature of a product to be—what they mean when they speak of its “quality”—may well be relatively unimportant to the customer.
It is likely to be what is hard, difficult, and expensive to make.
But the customer is not moved in the least by the manufacturer’s troubles.
His only question is—and should be: “What does this do for me?”
How difficult this is for businessmen to grasp, let alone to accept, the advertisements prove.
One after the other stresses how complicated, how laborious, it is to make this or that product.
“Our engineers had to suspend the Laws of Nature to make this possible” is a constant theme.
If this makes any impression on the customer, it is likely to be the opposite of the intended one: “If this is so hard to make right,” he will say, “it probably doesn’t work.”
5. The customers have to be assumed to be rational.
But their rationality is not necessarily that of the manufacturer; it is that of their own situation.
To assume—as has lately become fashionable—that customers are irrational is as dangerous a mistake as it is to assume that the customer’s rationality is the same as that of the manufacturer or supplier—or that it should be.
A lot of pseudo-psychological nonsense has been spouted because the American housewife behaves as a different person when buying her groceries and when buying her lipstick.
As the weekly food-buyer for the family, she tends to be highly price-conscious; she deserts the most familiar brand as soon as another offers a “five-cents-off” special.
She buys food as a “professional,” as the general home manager.
But who would want to be married to a woman who buys lipstick the same way?
Not to use the same criterion in what are two entirely different roles—and yet both real, rather than make-believe—is the only possible behavior for a rational person.
It is the manufacturer’s or supplier’s job to find out why the customer behaves in what seems to be an irrational manner.
It is his job either to adapt himself to the customer’s rationality or to try to change it.
But he must first understand and respect it.
6. No single product or company is very important to the market.
Even the most expensive and most wanted product is just a small part of a whole array of available products, services, satisfactions.
It is at most of minor interest to the customer, if he thinks of it at all.
And the customer cares just as little for any one company or any one industry.
There is no social security in the market, no seniority, no old-age disability pensions.
The market is a harsh employer who will dismiss even the most faithful servant without a penny of severance pay.
The sudden disintegration of a big company would greatly upset employees and suppliers, banks, labor unions, plant-cities, and governments.
But it would hardly cause a ripple in the market.
For the businessman this is hard to swallow.
What one does and produces is inevitably important to oneself.
The businessman must see his company and its products as the center.
The customer does not, as a rule, see them at all.
How many housewives have ever discussed the whiteness of their laundry over the back fence?
Of all possible topics of housewifely conversation, this surely ranks close to the bottom.
Yet not only do advertisements play that theme over and over again, but soap company executives all believe that how well their soap washes is a matter of major concern, continuing interest, and constant comparison to housewives—for the simple reason that it is, of course, a matter of real concern and interest to them (and should be).
7. All the statements so far imply that we know who the customer is.
However, a marketing analysis has to be based on the assumption that a business normally does not know but needs to find out.
Not “who pays” but “who determines the buying decision” is the “customer.”
The customer for the pharmaceutical industry used to be the druggist who compounded medicines either according to a doctor’s prescription or according to his own formula.
Today the determining buying decision for prescription drugs clearly lies with the physician.
But is the patient purely passive—just the man who pays the bill for whatever the physician buys for him?
Or is the patient—or at least the public—a major customer, what with all the interest in, and publicity for, the wonder drugs?
Has the druggist lost completely his former customer status?
The drug companies clearly do not agree in their answers to these questions; yet a different answer leads to very different measures.
The minimum number of customers with decisive impact on the buying decision is always two: the ultimate buyer and the distributive channel.
A manufacturer of processed canned foods, for instance, has two main customers: the housewife and the grocery store.
Unless the grocer gives his products adequate shelf space, they cannot be bought by the housewife.
It is self-deception on the part of the manufacturer to believe that the housewife will be so loyal to his brand that she would rather shop elsewhere than buy another well-known brand she finds prominently displayed on the shelves.
Which of these two, ultimate buyer or distributive channel, is the more important customer is often impossible to determine.
There is, for instance, a good deal of evidence that national advertising, though ostensibly directed at the consumer, is most effective with the retailer, is indeed the best way to move him to promote a brand.
But there is also plenty of evidence—contrary to all that is said about “hidden persuaders”—that distributors, no matter how powerfully supported by advertising, cannot sell a product that the consumer for whatever reason does not accept.
Who is the customer tends to be more complex and more difficult to determine for industrial than for consumer goods.
Who is the ultimate consumer and who is the distributive channel for the manufacturer of power equipment for machinery: the purchasing agent of the machinery manufacturer who lets the contract; or the engineer who sets the specifications?
The buyer of the completed machine?
While the latter is usually without power to decide from which maker the parts of the machine (e. g., the motor starter and the motor controls) should come, he almost always has power to veto any given supplier.
All three—if not many more—are customers.
Each class of customers has different needs, wants, habits, expectations, value concepts, and so on.
Yet each has to be sufficiently satisfied at least not to veto a purchase.
8. But what if no identifiable customer can be found for a business or an industry?
A great many businesses have no one person or group of persons who could be called their customer.
Who, for example, is the customer of a major glass company which makes everything as long as it is glass?
It may sell to everybody—from the buyer of automobile instrument-board lights to the collector of expensive hand-blown vases.
It has no one customer, no one particular want to satisfy, no one particular value expectation to meet.
Similarly, in buying paper for a package, the printer, the packaging designer, the packaging converter, the customer’s advertising agency, and the customer’s sales and design people, all can—and do—decide what paper not to buy.
And yet none of them makes the buying decision itself.
None of these people buys paper as such.
The decision is made indirectly, through deciding on shape, cost, carrying capacity of the package, graphic appearance, and so on.
Who is actually the customer?
There are two large and important groups of industries in which it is difficult and sometimes impossible to identify the customer: materials industries and end-use supply (or equipment) makers.
Materials industries are organized around the exploitation of one raw material, such as petroleum or copper; or around one process, such as the glassmaker, the steel mill, or the paper mill.
Their products are of necessity material—determined rather than market—determined.
The end-use industries, such as a manufacturer of adhesives-starches, bonding materials, glues, and so on—have no one process or material to exploit.
Adhesives can be made from vegetable matter such as corn or potatoes, from animal fats, and from synthetic polymers furnished by the petrochemical industry.
But there is still no easily identifiable, no distinct customer.
Adhesives are used in almost every industrial process.
But to say—as one would have to say about the steel mill or the adhesives plant—that everyone is his customer, is to say that no one is an identifiable customer.
The answer is not, however, that these businesses cannot be subjected to a marketing analysis.
Rather, markets or end-uses, instead of customers, are the starting point for this analysis in materials and end-use industries.
Materials businesses—steel or copper, for instance—can usually be understood best in terms of markets.
It is meaningful to say, for instance, that a certain percentage of all copper products go into the construction market—though they go to such a multitude of different customers and for such a variety of end-uses that these two dimensions may well defy analysis.
It is meaningful to say that the adhesives all serve one end-use: to hold together the surfaces of different materials, though neither customer analysis nor market analysis may make much sense.
The view from outside has three dimensions rather than one.
It asks not only “Who buys?” but “Where it is bought?” and “What it is being bought for?”
Every business can thus be defined as serving either customers, or markets, or end-uses.
Which of the three, however, is the appropriate dimension for a given business cannot be answered without study.
Every marketing analysis of a business therefore should work through all three dimensions to find the one that fits best.
This, by the way, is why the phrase “customers, markets, end-uses” has appeared so often in the preceding chapters.
Again and again one finds
(1) that a dimension the people in the business consider quite inappropriate—customers or end-uses in a paper company, for instance—is actually highly important; and
(2) that superimposing the findings from the analysis of one of these dimensions on another on g., analysis of a paper company in terms of paper end-uses, paper markets, and paper customers—yields powerful and productive insights.
Even where there is a clearly identifiable customer, one does well to examine the business also in relation to its markets or the end-uses of its products or services.
This is the only way one can be sure of defining adequately what satisfaction it serves, for whom and how.
It is often the only way to determine on what developments and factors its future will depend.
These market realities lead to one conclusion: the most important questions about a business are those that try to penetrate the real world of the consumer, the world in which the manufacturer and his products barely exist.
These examples convey five fundamentals:
1. A valid definition of the specific knowledge of a business sounds simple—deceptively so.
One always excels at doing something one considers so obvious that everybody else must be able to do it too.
The old saying that the erudition a man is conscious of is not learning but pedantry applies also to the specific knowledge of a business.
2. It takes practice to do a knowledge analysis well.
The first analysis may come up with embarrassing generalities such as: our business is communications, or transportation, or energy.
But of course every business is communications or transportation or energy.
These general terms may make good slogans for a salesmen’s convention; but to convert them to operational meaning—that is, to do anything with them (except to repeat them)—is impossible.
On the other extreme, one may come up with a twenty-four volume encyclopedia of the physical sciences as a knowledge-definition plus a complete set of handbooks on all business functions.
It is perfectly true that everyone in a managerial job should know the fundamentals of each business function and of every business discipline.
Every manager should understand the fundamentals of those areas of human inquiry—whether electrical engineering, pharmacology or, in a publishing house, the craft of the novelist—that are relevant to his business.
But no one can excel at universal knowledge—one probably cannot even do moderately well at universal information.
But with repetition the attempt to define the knowledge ‘of one’s own business soon becomes easy and rewarding.
Few questions force a management into as objective, as searching, as productive a look at itself as the question: What is our specific knowledge?
3. Few answers moreover are as important as the answer to this question.
Knowledge is a perishable commodity.
It has to be reaffirmed, relearned, re-practiced all the time.
One has to work constantly at regaining one’s specific excellence.
But how can one work at maintaining one’s excellence unless one knows what it is?
4. Every knowledge eventually becomes the wrong knowledge.
It becomes obsolete.
The question should always arise: What else do we need?
Or do we need something different?
“Have our recent experiences borne out our previous conclusions that this particular ability gives us leadership?” the president of a successful Japanese chemical company asks each of his top men once every six months.
He himself analyzes the performance of each product, in each market and with each important customer, to see whether actual experience is in line with the expectations and predictions of his knowledge analysis.
He asks each of his top men—from research director to controller and personnel man—to do the same analysis.
And he spends one of his quarterly three-day management meetings on knowledge analysis.
He credits his growth—within a decade this formerly limited and fairly small company has become one of the world’s leading producers in a major field—to reviewing knowledge effectiveness and knowledge needs.
5. Finally, no company can excel in many knowledge areas.
Most companies—like most people—find it hard enough to be merely competent in a single area.
This, of course, means that most businesses remain marginal and just manage to hang on.
The figures amply confirm this.
Out of each hundred businesses started, seventy-five or so die before their fifth birthday with management failure as the leading cause of death.
A business may be able to excel in more than one area.
A successful business has to be at least competent in a good many knowledge areas in addition to being excellent in one.
And many businesses have to achieve beyond the ordinary in more than one area.
But to have real knowledge of the kind for which the market offers economic rewards requires concentration on doing a few things superbly well.
Making the Future Today
We know only two things about the future:
It cannot be known.
It will be different from what exists now and from what we now expect.
These assertions are not particularly new or particularly striking.
But they have far-reaching implications.
1. Any attempt to base today’s actions and commitments on predictions of future events is futile.
The best we can hope to do is to anticipate future effects of events which have already irrevocably happened.
2. But precisely because the future is going to be different and cannot be predicted, it is possible to make the unexpected and unpredicted come to pass.
To try to make the future happen is risky; but it is a rational activity.
And it is less risky than coasting along on the comfortable assumption that nothing is going to change, less risky than following a prediction as to what “must” happen or what is “most probable.”
Business these last ten or twenty years has accepted the need to work systematically on making the future.
But long-range planning does not—and cannot—aim at the elimination of risks and uncertainties.
That is not given to mortal man.
The one thing he can try is to find, and occasionally to create, the right risk and to exploit uncertainty.
The purpose of the work on making the future is not to decide what should be done tomorrow, but what should be done today to have a tomorrow.
The deliberate commitment of present resources to an unknown and unknowable future is the specific function of the entrepreneur in the term’s original meaning.
J. B. Say, the great French economist who coined the word around the year 1800, used it to describe the man who attracts capital locked up in the unproductive past (e. g., in marginal land) and commits it to the risk of making a different future.
English economists such as Adam Smith with their focus on the trader saw efficiency as the central economic function.
Say, however, rightly stressed the creation of risk and the exploitation of the discontinuity between today and tomorrow as the wealth-producing economic activities.
Now we are learning slowly how to do this work systematically and with direction and control.
The starting point is the realization that there are two different—though complementary approaches:
• Finding and exploiting the time lag between the appearance of a discontinuity in economy and society and its full impact—one might call this anticipation of a future that has already happened.
• Imposing on the as yet unborn future a new idea which tries to give direction and shape to what is to come.
This one might call making the future happen.
The Future That Has Already Happened
There is a time lag between a major social, economic, or cultural event and its full impact.
A sharp rise or a sharp drop in the birthrate will not have an effect on the size of the available labor force for fifteen to twenty years.
But the change has already happened.
Only catastrophe—destructive war, famine, or pandemic—could prevent its impact tomorrow.
These are the opportunities of the future that has already happened.
They might therefore be called a potential.
But unlike the potential discussed in the last chapter, the future that has already happened is not within the present business; it is outside: a change in society, knowledge, culture, industry, or economic structure.
It is, moreover, a major change rather than a trend, a break in the pattern rather than a variation within it.
There is, of course, considerable uncertainty and risk in committing resources to anticipation.
But the risk is limited.
We cannot really know how fast the impact will occur.
But that it will occur we can say with a high degree of assurance; and we can, to a useful extent, describe it.
There is a lot we cannot anticipate regarding the impact of a change in birthrate on the labor force: how large a proportion of the women will be in the labor force, for instance; how many of today’s young children will stay in school well beyond age fourteen or sixteen; where the future jobs will be, and how many; and so forth.
But one can say with assurance: “This is the largest the labor force can be a decade or two hence—for to be in it a person has to have been born by now.”
One can equally say: “That Latin America in the last generation has changed from a rural to an urban society is a fact—and it is bound to have long-range impact.”
Fundamental knowledge has to be available today to be able to serve us ten or fifteen years hence.
In the mid-nineteenth century one could only speculate about the consequences for the economy of Michael Faraday’s discoveries in electricity.
A good many of the speculations were undoubtedly wide of the mark.
But that this breakthrough into an entirely new field of energy would have major impact could be said with some certainty.
Major cultural changes too operate over a fairly long period.
This is particularly true of the subtlest but most pervasive cultural change: a change in people’s awareness.
It is by no means certain that the underdeveloped countries will succeed in rapidly developing themselves.
On the contrary, it is probable that only a few will succeed, and that even these few will go through difficult times and suffer severe crises.
But that the peoples of Latin America, Asia, and Africa have become aware of the possibility of development and that they have committed themselves to it and to its consequences is a fact.
It creates a momentum that only disaster could reverse.
These countries may not succeed in industrializing themselves.
But they will, for a historical period at least, give priority to industrial development—and hard times may only accentuate their new awareness of the possibility of, and need for, industrial development.
Similarly, it would take a bold man to predict how fast the Negro will gain complete equality in American society.
But that, as a result of the events of 1962 and 1963, there is a new awareness of race relations in the United States on the part of Negro and white alike; above all, that the “submissive Negro” has become a thing of the past, at least as far as the young people are concerned, is a fact that already happened.
It is the kind of fact that is irreversible.
It will have impact; the only question is how soon.
Industry and marketing structures too are areas where the future may have already happened—but where impacts are not yet accomplished.
The Free World economy may collapse again into economic nationalism and protectionism.
The tremendous scope and impact of the movement toward a truly international economy in the nineteen fifties and nineteen sixties may have created so much stress and strain (e. g., political pressure from over-protected farmers) that a severe reaction will set in.
But the businessman’s awareness of the existence and extent of the international economy should persist.
It is unlikely, barring catastrophe, that we shall within the next generation fall back into such easy illusions of the nineteen forties as that this or that industrial region can have something like an unchallengeable economic hegemony, or that a domestic industrial economy can be sealed off from the developments in the world economy.
It is unlikely that the many businesses that have gone international these last fifteen years will move back to confining themselves, their operations, and their vision to one national economy and market.
These are—intentionally—big examples.
But much smaller changes may also create opportunities to anticipate the future of the business today.
One example of a rather small shift in social and cultural habits that created such an opportunity was the change in the telephone habits of the younger Americans during World War II.
Till then long-distance calls were not within the normal behavior of the great mass of the population; they were for emergencies only.
During the war, however, the men in uniform were encouraged to keep in touch with their families through long-distance calls.
As a result the long distance call became normal for the younger war-time generation.
It would still be quite a few years before these young people of 1944 would become the heads of families and translate their new telephone behavior into the normal behavior of the population.
The time could therefore be utilized by the telephone company to carry through a program of building long-distance facilities and equipment.
The changes that generate the future that has already happened can be found through systematic search.
The first area to examine is always population.
Population changes are the most fundamental—for the labor force, for the market, for social pressures, and economic opportunities.
They are the least reversible in the normal course of events.
They have a known minimum lead-time between change and impact: before a rise in the birthrate puts pressure on school facilities, at least five or six years will elapse—but then the pressure will come.
And their consequences are most nearly predictable.
By the early 1960’s it had become clear that the American population had undergone a drastic change in age structure, in basic cultural habits, and in expectations.
While the events that brought this change about had already happened—for by 1961 everybody was already born who would be twenty by 1980—the impact had not yet begun to make itself felt.
It would only begin to be felt in the late 1960’s, and would reach its peak in the late 1970’s.
By 1977 the American population will be the youngest it has been for 150 years, with at least two-thirds of the population under thirty-five years of age.
The median age will be in the middle twenties.
But unlike other countries of low average age, life expectancy in the United States is high, with an expected life-span of over seventy for both sexes.
Never in history has there been such a relationship between average age and average life expectancy.
Whenever in the past we had a young population, life expectancy was also short—and vice versa.
What matters is, therefore, not only that people of fairly low chronological age will be the great majority in the American population of the late 1970’s.
They will also be people of very low relative or social age; that is, people who by the time they reach median life-span have lived no more than one-third of their life expectancy.
This alone should mean tremendous changes in the behavior and expectations of the American people.
In addition, these young families will have an unprecedented degree of formal schooling.
Half of them will contain at least one member, whether man or wile, who has had more than twelve years of schooling.
This will mean different expectations on the part of the dominant groups in the labor force.
As regards consumer behavior, we know, for instance that these couples (the young engineer employed in an electronics company and his wife, for instance) do not buy according to income.
They buy according to expectations in respect to their future income and social position.
Present income is a restraint on purchases rather than the motivating force.
Few changes in American economic history have been so striking or so fast as this change ahead.
It is a change that has already happened.
Yet to my knowledge few if any American businesses have asked themselves: What does this change mean for us?
What does it mean for employment and labor force?
What does it mean in terms of new markets?
How does it change the basic structure of the American market?
What does it mean for our customers?
Our entire business posture?
The two fastest-growing markets in the American economy are being created by this population change.
But they are not yet to be found in economics books.
First there is an “activities market” which includes many goods and services hitherto not considered as belonging together: bowling, camping, and lawn care but also paperback books and adult higher education.
All these activities are in competition with each other.
All of them require something scarcer than money: discretionary time.
The young engineer or manager who spends his evenings trying to acquire an advanced degree has no time to go bowling or to take care of his lawn.
In the activities market, people do not buy to own but to do—in other words, they make no distinction between goods and services.
The only distinction they can make is between time they have and time they do not have.
The discretionary time market will therefore be both fast growing and rewarding and also competitive and difficult.
The other growth market ahead is the “office consumption market,” i. e., the market for goods and services which, while not going to the individual family (and therefore not traditionally considered consumer goods), also are not used up in the process of production and are, therefore, not traditional producer goods—things like typewriters, computers, and all kinds of goods and services to make knowledge workers productive.
Again, while rewarding, this is also likely to be a highly competitive and rapidly changing market.
Another field that always should be searched for a future that has already happened is that of knowledge.
This search should not, however, be confined to the present knowledge areas of the business.
We assume, in looking for the future, that the business will be different.
And one of the major areas in which we may be able to anticipate a different business is that of the knowledge resource on which the specific excellence of a business is founded.
We must therefore look at major knowledge areas, whether they have a direct relation to the present business or not.
And wherever we find a fundamental change which has not yet had major impact, we should ask: “Are there opportunities here which we should and could anticipate?”
The behavioral sciences provide an example of a major change in a knowledge area although few businesses would consider it directly relevant to them.
Learning theory is one area in psychology where really new knowledge has been developed these last thirty years.
Although this may seem rather remote to businessmen, the new knowledge is likely to have impact not only on the form and content of education but on teaching and learning materials, school equipment and school design, and even on research organization and research management.
A wide range of industries—from publishing to construction—might be affected significantly, with great opportunities for those who first convert the potential of the new knowledge into actual goods and services.
One also looks at other industries, other countries, other markets, with the question: Has anything happened there that might establish a pattern for our industry, our country, our market?
In the early nineteen fifties every Japanese electronics manufacturer assumed—quite rationally—that incomes in Japan were too low for television and that the Japanese farmer, in particular, could not possibly afford anything so expensive as a TV set.
Most Japanese companies therefore planned for limited production of cheap sets.
Only one small and almost unknown company tried to validate the assumption by looking at what had happened in other countries such as the United States, Great Britain, or Germany.
It found that a television set apparently is not considered an ordinary article by the lower-income groups, but offers a satisfaction to them out of all proportion to its cost.
In all countries the poor had been the most enthusiastic television customers; they had tended to buy more expensive sets than they could possibly justify by their income status.
This one Japanese manufacturer therefore brought out larger and more expensive sets than his competitors.
And he aimed a concentrated sales campaign at the Japanese farmer.
Ten years later, two-thirds of the low-income households in the Japanese cities and more than half of the farm homes, had television, with the larger and more expensive sets in the lead.
The formerly small and almost unknown company is now one of the largest Japanese electronics concerns.
Next, one always asks: Is anything happening in the structure of an industry that indicates a major change?
Such a change—now in progress throughout the entire industrial world—is the materials revolution, which erases or blurs the lines that traditionally separated different materials streams.
Only a generation ago materials streams were separate from beginning to end.
Paper was, for instance, the main manufactured material into which wood could be converted.
Paper, in turn, had to be made from a tree.
The same situation held for other major materials, aluminum and petroleum, steel and zinc.
Most of the finished products coming out of these material streams had specific and unique end-uses.
In other words, most substances determined end-uses, and most end-uses determined substances.
Today, however, almost all materials streams are open-ended, first and last.
The tree can go into a good many end-products other than paper.
Substances that give the same performance as paper can be made from many starting materials other than trees.
In respect to end-uses, materials have also become alternatives rather than complements.
Paper is on the point of becoming an important material for clothing.
There is a wide area of overlap within which products derived from different starting materials can be used to do the same job.
Even the process is no longer unique.
The paper people increasingly incorporate into their processes techniques developed by the plastics manufacturers and converters; and the textile people increasingly adapt paper industry processes.
Every materials company is aware that its business is changing.
A good many companies have done something about the change; the major American can companies have, for instance, bought container manufacturers using glass, paper, and plastics.
But too few companies have, to my knowledge, realized that the fundamental change is not in their business, or even in business at all, but outside.
Where we formerly saw individual substances, we now see materials.
The change is so recent that no one can yet define what we mean by “materials.”
But it has already made obsolescent any business that defines itself in terms of one material stream.
Inside the business too there can usually be found clues to events which, while basic and irreversible, have not yet had their full impact.
One indication is often internal friction within the company.
Something is being introduced—and it becomes a source of dissension.
Unwittingly one has touched a sensitive spot—sensitive often, because the new activity is in anticipation of future changes and therefore in contradiction to the accepted pattern.
Wherever, in an American company, product planning is introduced as a new function and as a specific kind of work, it creates friction.
Usually this manifests itself in a long wrangle as to where the new activity belongs.
Does it belong in marketing?
Or does it belong in research and engineering?
Actually, this is much less a dispute over the new function than it is a dim first awareness that the marketing approach tends to make all functions secondary and that all functions are cost centers rather than producers of results.
This, however, must lead to fundamental changes in organization.
It is the anticipation of these changes that makes people react violently to the symptom, product planning.
Top management in the Bell Telephone System set up a new merchandising function ten years or so ago.
Very few people in the telephone companies of the systems were affected by it; yet Bell Telephone managers were greatly upset.
What had really happened was that the Bell System had attained its major goal of the previous seventy-five years: to equip practically every American home and business with a telephone.
Its primary market, the market for the telephone installation, had become saturated.
Further growth, therefore, could only be obtained by promoting the maximum use of the telephone rather than by promoting subscriptions to telephone service on a minimum basis.
This change that had already happened foreshadowed a radically altered situation in respect to opportunities as well as to risks for the telephone business in the United States; the internal friction over merchandising was only a first symptom.
Any business or activity which has reached its objective is heading into a period of major change.
But most people in the business or the activity will continue for a long time to try to achieve the objective that has already been gained.
During that period there is a future that has already happened, an opportunity to anticipate.
In the industrially developed countries, for instance, the goal of universal general education has been substantially accomplished.
But most educators still think and act on the assumption—valid for the last two hundred years—that the task is to obtain more years of compulsory education.
It usually takes a complete generation-shift for the new reality to become widely accepted.
But those educational institutions that understand the situation and think through what it makes possible or what it requires will have educational leadership tomorrow.
In business, too, the company that sees that an objective has been reached and acts to redirect its efforts—while its competitors still strain to get to where they already are—will emerge as tomorrow’s leader.
Two additional and related questions should be asked: “What do the generally approved forecasts assert is likely to happen ten, fifteen, twenty years hence?
Has it actually happened already?”
Most people can imagine only what they have already seen.
If, therefore, a forecast meets with widespread acceptance, it is quite likely that it does not forecast the future, but in effect, reports on the recent past.
There is in American business history one famous illustration of the productivity of this approach.
Around 1910, in the early years of Henry Ford’s success, the first forecasts appeared that predicted the growth of the automobile into mass transportation.
Most people at that time still considered this unlikely to happen before another thirty years or so.
But William C. Durant—then a small manufacturer—asked: “Has this not already happened?”
As soon as he asked the question, the answer was obvious: It had happened, though the main impact was yet to come.
The public’s awareness had changed from regarding the car as a toy of the rich to demanding a car for mass transportation.
And this would require large automobile companies.
On this insight Durant imagined General Motors and began to pull together a number of small automobile manufacturers and small accessory companies into the kind of business that would be able to take advantage of this new market and its opportunity.
The final question should therefore be: “What are our own assumptions regarding society and economy, market and customer, knowledge and technology?
Are they still valid?”
The English middle- and lower-class housewife was well known to be inflexibly conservative in her food buying and eating habits.
The two companies in Great Britain that have emerged in the last ten or fifteen years as leading food distributors, however, raised the question in the late 1940’s: Is this assumption still valid?
It immediately became clear that the answer was: No. As a result of the food shortages of the war and postwar periods, the formerly conservative English housewife had become used to new foods and new food distribution methods, and was willing to experiment.
Looking for the future that has already happened and anticipating its impacts introduces new perception in the beholder.
The new event is easily visible as the illustrations should have made clear.
The need is to make oneself see it.
What then could or might be done is usually not too difficult to discover.
The opportunities, in other words, are neither remote nor obscure.
The pattern, however, has to be recognized first.
As the examples should also have demonstrated, this is an approach of great power.
But there is also major danger: the temptation to see as a change what we believe to be happening, or worse, what we believe should happen.
This is so great a danger that, as a general rule, any finding should be distrusted for which there is enthusiasm within the company.
If everybody shouts, “This is what we wanted all along,” it is likely that wishes rather than facts are being reported.
For the power of this approach is that it questions and ultimately overturns deeply entrenched assumptions, practices, and habits.
It leads to decisions to work toward change in the entire conduct, if not in the structure, of the business.
It leads to the decision to make the business different.
The Power Of An Idea
It is futile to try to guess what products and processes the future will want.
But it is possible to make up one’s mind what idea one wants to make a reality in the future, and to build a different business on such an idea.
Making the future happen also means creating a different business.
But what makes the future happen is always the embodiment in a business of an idea of a different economy, a different technology, a different society.
It need not be a big idea; but it must be one that differs from the norm of today.
The idea has to be an entrepreneurial one—an idea of wealth-producing potential and capacity, expressed in a going, working, producing business, and effective through business actions and behavior.
It does not emerge from the question: “What should future society look like?”—the question of social reformer, revolutionary, or philosopher.
Underlying the entrepreneurial idea that makes the future is always the question: “What major change in economy, market, or knowledge would enable us to conduct business the way we really would like to do it, the way we would really obtain the best economic results?”
Because this seems so limited and self-centered an approach, historians tend to overlook it and to be blind to its impact.
The great philosophical idea has, of course, more profound effects.
But few philosophical ideas have any effect at all.
While each business idea is more limited, a large proportion of them are effective.
Innovating businessmen have therefore had a good deal more impact as a group than the historians realize.
The very fact that an entrepreneurial idea does not encompass all of society or all of knowledge but just one narrow area makes it more viable.
The people who have this idea may be wrong about everything else in the future economy or society.
But that does not matter as long as they are approximately right in respect to their own business focus.
All that they need to be successful is one small, specific development.
Thomas Watson who founded and built IBM did not see at all the development of technology.
But he had the idea of data processing as a unifying concept on which to build a business.
The business was, for a long time, fairly small and confined itself to such mundane work as keeping accounting ledgers and time records.
But it was ready to jump when the technology came in—out of totally unrelated wartime work—which made data processing actually possible, the technology of the electronic computer.
While Watson built a small and unspectacular business in the twenties, designing, selling, and installing punch-card equipment, the mathematicians and logicians of Logical Positivism (e. g., Bridgman in the United States and Carnap in Austria) talked and wrote a systematic methodology of quantification and universal measurements.
It is most unlikely that they ever heard of the young, struggling IBM Company, and certain that they did not connect their ideas with it.
Yet it was Watson’s IBM and not their philosophical ideas that became operational when the new technology emerged in World War II.
The men who built Sears Roebuck—Richard Sears, Julius Rosenwald, Albert Loeb, and, finally, General Robert E. Wood—had active social concerns and a lively social imagination.
Yet not one of them thought of remaking the economy.
I doubt even that the idea of a mass market—as opposed to the traditional class markets—occurred to them until long after the event.
Yet from its early beginnings, Sears Roebuck had the idea that the poor man’s money could be made to have the same purchasing power as the rich man’s.
This was not a particularly new idea.
Social reformers and economists had bandied it around for decades.
The cooperative movement in Europe largely grew out of it.
But Sears was the first business built on the idea in the United States.
It started out with the question: “What would make the farmer a customer for a retail business?”
The answer was simply: “He needs to be sure of getting goods of the same dependable quality as do city people at the same low price.”
At the time this was an innovating idea of considerable audacity.
Great entrepreneurial innovations have been achieved by converting an existing theoretical proposition into an effective business.
The entrepreneurial innovation that has had the greatest impact converted the theoretical proposition of the French social philosopher Saint Simon into a bank.
Saint Simon starting from Say’s concept of the entrepreneur, developed a philosophical system around the creative role of capital.
The idea became effective, however, through a banking business: the famous Credit Mobilier, which his disciples, the Brothers Pereire, founded in Paris in the middle of the nineteenth century.
The Credit Mobilier was to be the conscious developer of industry through the direction of the liquid resources of the community.
It became the prototype for the entire banking system of the then underdeveloped continent of Europe—beginning with the France, Holland, and Belgium of the Pereires’ day.
The Pereires’ imitators then founded the “business banks” of Germany, Switzerland, Austria, Scandinavia, and Italy which became the main agents for the industrial development of their countries.
After the Civil War the idea crossed the Atlantic.
The American bankers who developed American industry—from Jay Cooke and the American Credit Mobilier that financed the transcontinental railroad, to J. P. Morgan—were all imitators of the Perches, whether they knew it or, not.
So were the Japanese Zaibatsu, the great banker-industrialists who built the economy of modem Japan.
The most faithful disciple of the Pereires, however, has been Soviet Russia.
The idea of planning through the controlled allocation of capital comes directly from the Pereires; all the Russians did was to substitute the State for the individual banker.
(A step taken by an Austrian, Rudolf Hilferding, who started out in Vienna as a banker in the “business bank” tradition and ended as the leading theoretician of German democratic socialism.
His book, Finance Capital (1910) was acknowledged by Lenin to have been the source of his planning and industrialization concepts.)
There is nothing of this in Marx, above all no “planning.”
Every single development bank started today in an underdeveloped country is still a direct descendant of the original Credit Mobilier.
Yet the Brothers Pereire did not start out to remake the economy.
They started a business with the idea of making a profit.
Similarly, the modern chemical industry grew out of the conversion of an already existing idea into a business.
By all odds the modem chemical industry should have arisen in England.
In the mid-nineteenth century, England with her highly developed textile industry was the major market for chemicals.
It also had the scientific leadership at the time—the time of Faraday as well as of Darwin.
The modem chemical industry did actually start with an English discovery: Perkin’s discovery of aniline dyes (1856).
Yet, twenty years after Perkin—that is, around 1875—leadership in the new industry had passed to Germany.
German businessmen contributed the entrepreneurial idea that was lacking in England: the results of scientific enquiry—organic chemistry in this case—can be directly converted into marketable applications.
The idea on which a business might grow to greatness can be a much simpler one, of course.
The most powerful private business in history was probably the Japanese House of Mitsui, which before its dissolution after Japan’s defeat in World War II is said to have employed a million people all over the world.
(This at least was the official estimate of the American occupation authorities who decreed the dissolution of the Mitsui concern.)
Its origin was the world’s first department store, developed in Tokyo in the mid-seventeenth century by an early Mitsui.
The entrepreneurial idea underlying this business was that of the merchant as a principal of ‘economic life, rather than as mere middleman.
This meant on the one hand fixed prices to the customer.
On the other hand, Mitsui no longer acted the agent dealing with craftsman and manufacturer.
He would buy for his own account and give firm orders for standardized merchandise to be made according to his specifications.
In overseas trade the merchant had acted as a principal all along.
Around 1650 however, overseas trade had just been suppressed in Japan—whereupon Mitsui took the overseas-trade concepts and built a domestic merchant-business on them.
The basic entrepreneurial idea may be merely imitation of something that works well in another country or in another industry.
When Thomas Bata, the Slovak shoemaker, returned to Europe from the United States after World War I, he had the idea that everybody in Slovakia and the Balkans could have shoes to wear as everybody had in the United States.
“The peasant goes barefoot,” he is reported to have said, “not because he is too poor, but because there are no shoes.”
What was needed to make this vision of a shod peasant come true was a supply of cheap and standardized, but well-designed and durable footwear, as there was in America.
On this analogy Bata built in a few years Europe’s largest shoe business and one of Europe’s most successful companies.
To make the future happen one need not, in other words, have a creative imagination.
It is work rather than genius—and therefore accessible in some measure to everybody.
The man of creative imagination will have more imaginative ideas, to be sure.
But that the more imaginative idea will actually be more successful is by no means certain.
Pedestrian ideas have at times been successful; Bata’s idea of applying American methods to making shoes was not very original in the Europe of 1920, with its tremendous interest in Ford and his assembly line.
What mattered was his courage rather than his genius.
To make the future happen one has to be willing to do something new.
One has to be willing to ask: What do we really want to see happen that is quite different from today?
One has to be willing to say: “This is the right thing to happen as the future of the business.
We will work on making it happen.”
“Creativity,” which looms so large in present discussions of innovation, is not the real problem.
There are more ideas in any organization, including businesses, than can possibly be put to use.
What is lacking, as a rule, is the willingness to look beyond products to ideas.
Products and processes are only the vehicle through which an idea becomes effective.
And, as the illustrations should have shown, the specific future products and processes can usually not even be imagined.
When DuPont started the work on polymer chemistry out of which Nylon eventually evolved, it did not know that manmade fibers would be the end-product.
DuPont acted on the assumption that any gain in man’s ability to manipulate the structure of large, organic molecules—at that time in its infancy—would lead to commercially important results of some kind.
Only after six or seven years of research work did manmade fibers first appear as a possible major result area.
Indeed, as the IBM experience shows, the specific products and processes that make an idea successful often come out of entirely different and unrelated work.
But the willingness to think in terms of the general rather than the specific, in terms of a business, the contributions it makes, the satisfactions it supplies, the market and economy it serves, comes hard to the average businessman.
Moreover, the businessman often lacks the courage to commit resources to such an idea.
The resources that should be invested in making the future happen should be small, but they must be of the best.
Otherwise nothing happens.
The greatest lack of the businessman is, however, a touchstone of validity and practicality.
An idea has to meet rigorous tests if it is to be capable of making the future of a business.
It has to have operational validity.
Can we take action on this idea?
Or can we only talk about it?
Can we really do something right away to bring about the kind of future we want to make happen?
Sears Roebuck with its idea of bringing the market to the isolated American farmer could show immediate results.
But DuPont with its idea of polymer chemistry could only organize research work on a small scale; all it could do was to underwrite the research of one first-rate man.
Both, however, could do something right away.
To be able to spend money on research is not enough.
It must be research directed toward the realization of the idea.
The knowledge sought may be general—as was that of DuPont’s project.
But it must be reasonably clear at least that if available, it would be applicable knowledge.
The idea must also have economic validity.
If it could be put to work right away in practice, it should be able to produce economic results.
We may not be able to do what we would like to see done—not for a long time, perhaps never.
But if we could do it now, the resulting products, processes, or services would find a customer, a market, an end-use, should be capable of being sold profitably, should satisfy a want and a need.
The idea itself might aim at social reform.
But unless a business can be built on it, it is not a valid entrepreneurial idea.
The test of the idea is not the votes it gets or—the acclaim of the philosophers.
It is economic performance and economic results.
Even if the rationale of the business is social reform rather than business success, the touchstone must be ability to perform and to survive as a business.
Businesses started to bring about social rather than economic results are not numerous—though some of the most successful entrepreneurs were primarily reformers in their outlook and approach (Robert Owen, for instance, or the young Henry Ford).
But wherever an attempt succeeds in attaining a social goal through a business, it is because the test of economic validity is applied ruthlessly.
This is being done today, for instance, by Murray Lincoln of the Nationwide Insurance Companies.
Describing himself as “Vice President in Charge of Revolution,” Lincoln has dedicated his life to the advancement of the cooperative movement.
He has little good to say of profit-making enterprise.
Yet he has tried to promote cooperation through businesses—insurance companies and financial businesses by and large—and he demands of them better business performance than their more orthodox competitors among profit-seeking companies demand of themselves.
Finally, the idea must meet the test of personal commitment.
Do we really believe in the idea?
Do we really want to be that kind of people, do that kind of work, run that kind of business?
To make the future demands courage.
It demands work.
But it also demands faith.
To commit ourselves to the expedient is simply not practical.
It will not suffice for the tests ahead.
For no such idea is foolproof—nor should it be.
The one idea regarding the future that must inevitably fail is the apparently “sure thing,” the “riskless” idea, the one “that cannot fall.”
The idea on which tomorrow’s business is to be built must be uncertain; no one can really say as yet what it will look like if and when it becomes reality.
It must be risky: it has a probability of success but also of failure.
If it is not both uncertain and risky, it is simply not a practical idea for the future.
For the future itself is both uncertain and risky.
Unless there is personal commitment to the values of the idea and faith in them, the necessary efforts will therefore not be sustained.
The businessman should not become an enthusiast, let alone a fanatic.
He should realize that things do not happen just because he wants them to happen—not even if he works very hard at making them happen.
Like any other effort, the work on making the future happen should be reviewed periodically to see whether continuation can still be justified both by the results of the work to date and by the prospects ahead.
Ideas regarding the future can become investments in managerial ego, too, and need to be carefully tested for their capacity to perform and to give results.
But the people who work on making the future also need to be able to say with conviction: “This is what we really want our business to be.”
It is perhaps not absolutely necessary for every business to search for the idea that will make the future.
A good many businesses and their managements do not even make their present business effective—and yet the companies somehow survive for a while.
The big business, in particular, seems to be able to coast a long time on the courage, work, and vision of earlier executives.
But tomorrow always arrives.
It is always different.
And then even the mightiest company is in trouble if it has not worked on the future.
It will have lost distinction and leadership—all that will remain is big-company overhead.
It will neither control nor understand what is happening.
Not having dared to take the risk of making the new happen, it perforce took the much greater risk of being surprised by what did happen.
And this is a risk that even the largest and richest company cannot afford and that even the smallest business need not run.
To be more than a slothful steward of the talents given in his keeping, the executive has to accept responsibility for making the future happen.
It is the willingness to tackle purposefully this, the last of the economic tasks in business enterprise, that distinguishes the great business from the merely competent one, and the business builder from the executive-suite custodian.
usually deal with
managing other people.
The subject of this book is
That one can truly manage other people
is by no means
But one can always
executives who do not
manage themselves for effectiveness
cannot possibly expect
to manage their associates and subordinates.
Management is largely by example.
Executives who do not know
how to make themselves effective
in their own job and work
set the wrong example.
To be reasonably effective
it is not enough
for the individual
to be intelligent,
to work hard
or to be knowledgeable.
But to be effective also does not require
or special training.
Effectiveness as an executive
demands doing certain—
and fairly simple—things.
It consists of
a small number of practices,
that are presented
and discussed in this book.
But these practices
are not “inborn.”
In forty-five years of work
as a consultant with a large number of executives
in a wide variety of organizations—
large and small;
businesses, government agencies, labor unions, hospitals, universities, community services;
American, European, Latin American and Japanese.
I have not come across
a single “natural”:
an executive who was born effective.
All the effective ones
have had to learn
to be effective.
And all of them then
had to practice effectiveness
until it became habit.
But all the ones
who worked on
making themselves effective executives
succeeded in doing so.
Effectiveness can be learned—
and it also has to be learned.
Effectiveness is what executives are being paid for,
they work as managers
who are responsible for
the performance of others
as well as their own,
or as individual professional contributors
their own performance only.
there is no “performance,”
no matter how much intelligence and knowledge goes into the work,
no matter how many hours it takes.
Yet it is perhaps not too surprising
that we have so far paid little attention
to the effective executive.
whether business enterprises, large government agencies, labor unions, large hospitals or large universities—
are, after all, brand new.
A century ago
almost no one had even much contact
with such organizations
beyond an occasional trip
to the local post office to mail a letter.
And effectiveness as an executive
in and through an organization.
there was little reason
to pay much attention to
the effective executive
or to worry about
the low effectiveness
of so many of them.
Now, however, most people
especially those with even a fair amount of schooling—
can expect to spend all their working lives
in an organization of some kind.
Society has become
a society of organizations
in all developed countries.
Now the effectiveness of the individual
depends increasingly on
his or her ability
to be effective in an organization,
to be effective as an executive.
And the effectiveness of a modern society
and its ability to perform—
perhaps even its ability to survive—
depend increasingly on
the effectiveness of the people
who work as executives in the organizations.
The effective executive
is fast becoming
a key resource for society,
and effectiveness as an executive
a prime requirement
for individual accomplishment and achievement—
for young people at the beginning of their working lives
fully as much as for people in mid-career.
Introduction: What Makes An Effective Executive?
… by Peter F. Drucker
Characteristics of Real World Effective Executives
An effective executive
does not need to be a leader
in the sense
that the term
is now most commonly used.
did not have one ounce of charisma, for example, yet he was among the most effective chief executives in US. history.
Similarly, some of the best business and nonprofit CEOs
I’ve worked with over a 65-year consulting career were not stereotypical leaders.
They were all over the map
in terms of their
strengths, and weaknesses.
to nearly reclusive,
[Overview of Eight Practices]
What made them all effective
is that they followed
the same eight practices:
- They asked, “What needs to be done?”
- They asked, “What is right for the enterprise?”
- They developed action plans.
- They took responsibility for decisions.
- They took responsibility for communicating.
- They were focused on opportunities rather than problems.
- They ran productive meetings.
- They thought and said “we” rather than “I.”
The first two practices
gave them the knowledge they needed.
The next four
helped them convert this knowledge
into effective action.
The last two
ensured that the whole organization
felt responsible and accountable.
Get The Knowledge You Need
What needs to be done
The first practice
is to ask
what needs to be done.
Note that the question is not
“What do I want to do?”
Asking what has to be done,
and taking the question seriously,
is crucial for managerial success.
Failure to ask this question
will render even the ablest executive
When Truman became president in 1945,
he knew exactly what he wanted to do:
complete the economic and social reforms
of Roosevelt’s New Deal,
which had been deferred
by World War II.
As soon as he asked
what needed to be done,
though, Truman realized
that foreign affairs
had absolute priority.
his working day
so that it began
with tutorials on foreign policy
by the secretaries of state and defense.
As a result,
the most effective president
in foreign affairs
the United States has ever known.
in both Europe and Asia and, with the Marshall Plan,
triggered 50 years of worldwide economic growth.
Similarly, Jack Welch
realized that what needed to be done at General Electric
when he took over as chief executive
was not the overseas expansion
he wanted to launch.
getting rid of GE businesses
that, no matter how profitable,
could not be number one or number two in their industries.
The answer to the question
“What needs to be done?”
almost always contains
more than one urgent task.
But effective executives
do not splinter themselves.
They concentrate on one task
if at all possible.
If they are among those people—
a sizable minority—
who work best
with a change of pace
in their working day,
they pick two tasks.
I have never encountered
an executive who remains effective
more than two tasks at a time.
Hence, after asking what needs to be done,
the effective executive
and sticks to them.
For a CEO,
the priority task might be
redefining the company’s mission.
For a unit head,
it might be redefining
the unit’s relationship
no matter how
important or appealing,
after completing the original top-priority task,
the executive resets priorities
rather than moving on
to number two from the original list.
He asks, “What must be done now?”
new and different priorities.
To refer again to America’s best-known CEO:
Every five years,
according to his autobiography,
Jack Welch asked himself,
“What needs to be done now?
And every time,
he came up with
a new and different priority.
But Welch also
thought through another issue
where to concentrate his efforts
for the next five years.
He asked himself
which of the two or three tasks
at the top of the list
he himself was best suited to undertake.
Then he concentrated on that task;
the others he delegated.
try to focus on jobs
they’ll do especially well.
They know that enterprises perform
if top management performs—
and don’t if it doesn’t.
What is right for the organization
Effective executives’ second practice—
fully as important as the first—
is to ask,
“Is this the right thing for the enterprise?”
They do not ask if it’s right for
the stock price,
or the executives.
Of course they know that
are important constituencies
who have to
support a decision,
or at least acquiesce in it,
if the choice is to be effective.
They know that
the share price is important
not only for the shareholders
but also for the enterprise,
since the price/earnings ratio
sets the cost of capital.
But they also know that
that isn’t right for the enterprise
will ultimately not be right
for any of the stakeholders.
This second practice
is especially important
for executives at
family owned or family run businesses—
the majority of businesses in every country—
particularly when they’re making decisions
In the successful family company,
only if he or she is measurably superior
to all non-relatives
on the same level.
At DuPont, for instance,
all top managers (except the controller and lawyer)
were family members
in the early years
when the firm was run
as a family business.
All male descendants of the founders
were entitled to
entry-level jobs at the company.
Beyond the entrance level,
a family member got a promotion
only if a panel
composed primarily of non-family managers
judged the person to be superior in ability
to all other employees at the same level.
The same rule
was observed for a century
in the highly successful
British family business J. Lyons & Company (now part of a major conglomerate)
when it dominated
and hotel industries.
“What is right for the enterprise?”
does not guarantee
that the right decision
will be made.
Even the most brilliant executive
and thus prone
to ask the question
the wrong decision.
Convert this knowledge into effective action
Write An Action Plan
Executives are doers;
is useless to executives
until it has been translated
But before springing into action,
the executive needs
to plan his course.
He needs to think about
and implications for how he’ll spend his time.
First, the executive defines desired results by asking:
should the enterprise expect from me
over the next 18 months to two years?
What results will I commit to?
With what deadlines?”
Then he considers the restraints on action:
“Is this course of action ethical?
Is it acceptable within the organization?
Is it legal?
Is it compatible with the mission, values, and policies of the organization?”
that the action
will be effective.
But violating these restraints
to make it both
The action plan
is a statement of intentions
rather than a commitment.
It must not become a straitjacket.
It should be revised often,
because every success
creates new opportunities.
So does every failure.
The same is true for changes
in the business environment,
in the market,
within the enterprise
— all these changes
that the plan be revised.
A written plan should anticipate the need for flexibility.
In addition, the action plan
needs to create a system for
checking the results
against the expectations.
two such checks
into their action plans.
The first check
comes halfway through
the plan’s time period;
for example, at nine months.
The second occurs
at the end,
before the next action plan
is drawn up.
Finally, the action plan
has to become the basis
for the executive’s time management.
Time is an executive’s
scarcest and most precious
—are inherently time wasters.
The action plan
will prove useless
unless it’s allowed
how the executive spends his or her time.
Napoleon allegedly said
that no successful battle
ever followed its plan.
also planned every one of his battles,
far more meticulously
than any earlier general had done.
Without an action plan,
the executive becomes
a prisoner of events.
And without check-ins
as events unfold,
the executive has no way
which events really matter
and which are only noise.
When they translate plans
executives need to pay particular attention to
opportunities (as opposed to problems),
I’ll consider these one at a time.
Take responsibility for decisions
A decision has not been made until people know:
the name of the person accountable for carrying it out;
the names of the people who will be affected by the decision
and therefore have to know about,
and approve it —
or at least not be strongly opposed to it — and
the names of the people who have to be informed of the decision,
even if they are not directly affected by it.
An extraordinary number of organizational decisions
run into trouble
because these bases aren’t covered.
One of my clients, 30 years ago,
lost its leadership position in the fast-growing Japanese market
because the company,
after deciding to enter into a joint venture with a new Japanese partner,
never made clear who was to inform the purchasing agents
that the partner defined its specifications in meters and kilograms
rather than feet and pounds—
and nobody ever did relay that information.
It’s just as important
to review decisions periodically—
at a time that’s been agreed on in advance—
as it is to make them carefully in the first place.
a poor decision
can be corrected
before it does real damage.
These reviews can cover anything
from the results
to the assumptions
underlying the decision.
Such a review
is especially important
for the most crucial
and most difficult of all decisions,
the ones about hiring or promoting people.
Studies of decisions about people
show that only one-third of such choices
turn out to be truly successful.
are likely to be draws—
neither successes nor outright failures.
And one-third are failures,
pure and simple.
Effective executives know this
and check up (six to nine months later)
on the results of their people decisions.
If they find
that a decision
has not had the desired results,
they don’t conclude
that the person has not performed.
that they themselves
made a mistake.
In a well-managed enterprise,
it is understood
that people who fail in a new job,
especially after a promotion,
may not be the ones to blame.
Executives also owe it to the organization
and to their fellow workers
not to tolerate non-performing individuals
in important jobs.
It may not be the employees’ fault
that they are under-performing,
but even so, they have to be removed.
People who have failed in a new job
should be given the choice
to go back to a job at their former level and salary.
This option is rarely exercised;
as a rule,
at least when their employers are US firms.
But the very existence of the option
can have a powerful effect,
safe, comfortable jobs
and take risky new assignments.
The organization’s performance
depends on employees’ willingness
to take such chances.
A systematic decision review
can be a powerful tool
for self-development, too.
Checking the results of a decision
against its expectations
what their strengths are,
where they need to improve,
and where they lack
knowledge or information.
It shows them their biases.
it shows them
that their decisions
didn’t produce results
they didn’t put the right people on the job.
Allocating the best people
to the right positions
is a crucial, tough job
that many executives slight,
in part because
the best people
are already too busy.
Systematic decision review
also shows executives
their own weaknesses,
particularly the areas
in which they are simply incompetent.
In these areas,
make decisions or take actions.
Everyone has such areas;
there’s no such thing
as a universal executive genius.
Most discussions of decision making
assume that only senior executives
or that only senior executives’ decisions matter.
This is a dangerous mistake.
are made at every level of the organization,
individual professional contributors
and front-line supervisors.
These apparently low-level decisions
are extremely important
in a knowledge-based organization.
are supposed to
know more about their areas of specialization—
for example, tax accounting—
than anybody else,
so their decisions
are likely to have an impact throughout the company.
Making good decisions
is a crucial skill
at every level.
It needs to be taught explicitly
to everyone in organizations
that are based on knowledge.
Take responsibility for communicating
Effective executives make sure
their action plans
and their information needs
Specifically, this means
that they share their plans with
and ask for comments
from all their colleagues—superiors, subordinates, and peers.
At the same time,
they let each person know
what information they’ll need
to get the job done.
The information flow
from subordinate to boss
what gets the most attention.
need to pay equal attention
to peers’ and superiors’
We all know,
thanks to Chester Barnard’s 1938 classic
The Functions of the Executive,
are held together by information
by ownership or command.
Still, far too many executives
behave as if
information and its flow
were the job
of the information specialist—
for example, the accountant.
As a result,
they get an enormous amount
they do not need
and cannot use,
but little of the information they do need.
The best way around this problem
is for each executive
to identify the information he needs,
ask for it,
and keep pushing until he gets it.
Focus on opportunities
focus on opportunities
rather than problems.
have to be taken care of, of course;
they must not be swept under the rug.
But problem solving,
does not produce results.
It prevents damage.
as an opportunity
rather than a threat.
They systematically look at changes,
inside and outside the corporation,
“How can we exploit this change as an opportunity for our enterprise?”
Specifically, executives scan these seven situations for opportunities:
an unexpected success or failure
in their own enterprise,
in a competing enterprise,
or in the industry;
a gap between
what is and what could be
in a market, process, product, or service
(for example, in the nineteenth century, the paper industry concentrated on the 10% of each tree that became wood pulp and totally neglected the possibilities in the remaining 90%, which became waste);
innovation in a process, product, or service, whether
inside or outside the enterprise
or its industry;
changes in industry structure and market structure;
changes in mind-set, values, perception, mood, or meaning; and
new knowledge or a new technology.
Effective executives also make sure
do not overwhelm opportunities.
In most companies,
the first page
of the monthly management report
lists key problems.
It’s far wiser
to list opportunities
on the first page
and leave problems for the second page.
Unless there is a true catastrophe,
problems are not discussed in management meetings
have been analyzed
and properly dealt with.
is another important aspect
of being opportunity focused.
put their best people
rather than on problems.
One way to staff for opportunities
is to ask each member of the management group
to prepare two lists every six months—
a list of opportunities for the entire enterprise
and a list of the best-performing people throughout the enterprise.
These are discussed,
then melded into two master lists,
and the best people
are matched with the best opportunities.
In Japan, by the way,
this matchup is considered a major HR task
in a big corporation or government department;
that practice is one of the key strengths of Japanese business.
The whole organization feels
responsible and accountable
Make meetings productive
The most visible,
effective nongovernmental executive
in the America of World War II
and the years thereafter
was not a businessman.
It was Francis Cardinal Spellman,
the head of
the Roman Catholic Archdiocese of New York
to several US presidents.
When Spellman took over, the diocese was bankrupt and totally demoralized.
His successor inherited the leadership position in the American Catholic church.
Spellman often said that during his waking hours he was alone only twice each day, for 25 minutes each time: when he said Mass in his private chapel after getting up in the morning and when he said his evening prayers before going to bed.
Otherwise he was always with people in a meeting, starting at breakfast with one Catholic organization and ending at dinner with another.
Top executives aren’t quite as imprisoned as the archbishop of a major Catholic diocese.
But every study
of the executive workday
has found that
even junior executives
are with other people
in a meeting of some sort
—more than half of every business day.
The only exceptions are a few senior researchers.
Even a conversation
with only one other person
is a meeting.
if they are to be effective,
make meetings productive.
They must make sure
are work sessions
rather than bull sessions.
to running an effective meeting
is to decide in advance
what kind of meeting it will be.
Different kinds of meetings
different forms of preparation
and different results:
A meeting to prepare a statement,
or a press release.
For this to be productive,
At the meeting’s end,
a pre-appointed member
has to take responsibility for
disseminating the final text.
A meeting to make an announcement—
an organizational change.
should be confined to
and a discussion about it.
one member reports.
but the report
should be discussed.
several or all members report.
there should be no discussion at all
or the discussion
should be limited
to questions for clarification.
for each report
there could be a short discussion
in which all participants
may ask questions.
If this is the format,
should be distributed
to all participants
well before the meeting.
At this kind of meeting,
should be limited to
a present time—for example, 15 minutes.
the convening executive.
The executive should
and ask questions.
He or she should
make a presentation.
whose only function is to
allow the participants
to be in the executive’s presence.
breakfast and dinner meetings
were of that kind.
There is no way
to make these meetings
the penalties of rank.
Senior executives are effective
to the extent to which
they can prevent
from encroaching on their workdays.
Spellman, for instance,
was effective in large part
because he confined such meetings
to breakfast and dinner
and kept the rest of his working day
free of them.
Making a meeting productive
takes a good deal of
It requires that
what kind of meeting is appropriate
and then stick to that format.
It’s also necessary
as soon as its specific purpose
has been accomplished.
don’t raise another
matter for discussion.
They sum up
is just as important
as the meeting itself.
The great master of follow-up
was Alfred Sloan,
the most effective business executive
I have ever known.
who headed General Motors from the 1920s until the 1950s,
spent most of his six working days a week
in meetings—three days a week in formal committee meetings
with a set membership,
the other three days in ad hoc meetings
with individual GM executives
or with a small group of executives.
At the beginning of a formal meeting,
the meeting’s purpose.
He then listened.
He never took notes
and he rarely spoke
except to clarify’ a confusing point.
At the end
he summed up,
thanked the participants,
Then he immediately
wrote a short memo
addressed to one attendee
of the meeting.
In that note,
he summarized the discussion
and its conclusions
and spelled out any work assignment
decided upon in the meeting
(including a decision
to hold another meeting
on the subject
or to study an issue).
and the executive
who was to be accountable for the assignment.
He sent a copy of the memo
who’d been present at the meeting.
It was through these memos—
each a small masterpiece—
that Sloan made himself
into an outstandingly effective executive.
Effective executives know that any given meeting is either productive or a total waste of time.
Think And Say “We”
The final practice is this:
Don’t think or say “I.”
Think and say “we.”
Effective executives know
that they have ultimate responsibility,
which can be neither
shared nor delegated.
But they have authority
only because they have
the trust of the organization.
that they think of
the needs and the opportunities of the organization
before they think
of their own needs and opportunities.
This one may sound simple;
but it needs to be strictly observed.
Bonus Rule: Listen first, speak last
We’ve just reviewed eight practices of effective executives.
I’m going to throw in one final, bonus practice.
This one’s so important that I’ll elevate it to the level of a rule:
Listen first, speak last.
[Effectiveness can be learned and must be earned]
Effective executives differ widely in their
All they have in common is
that they get the right things done.
Some are born effective.
But the demand
is much too great
to be satisfied by extraordinary talent.
Effectiveness is a discipline.
And, like every discipline,
effectiveness can be learned
and must be earned.
Effectiveness Can Be Learned
To be effective is the job of the executive.
“To effect” and “to execute” are, after all, near-synonyms.
Whether he works in a business or in a hospital, in a government agency or in a labor union, in a university or in the army, the executive is, first of all, expected to get the right things done.
And this is simply that he is expected to be effective.
Yet men of high effectiveness are conspicuous by their absence in executive jobs.
High intelligence is common enough among executives.
Imagination is far from rare.
The level of knowledge tends to be high.
But there seems to be little correlation between a man’s effectiveness and his intelligence, his imagination or his knowledge.
Brilliant men are often strikingly ineffectual; they fail to realize that the brilliant insight is not by itself achievement.
They never have learned that insights become effectiveness only through hard systematic work.
Conversely, in every organization there are some highly effective plodders.
While others rush around in the frenzy and busyness which very bright people so often confuse with “creativity,” the plodder puts one foot in front of the other and gets there first, like the tortoise in the old fable.
Intelligence, imagination, and knowledge are essential resources, but only effectiveness converts them into results.
By themselves, they only set limits to what can be attained.
Why We Need Effective Executives
All this should be obvious.
But why then has so little attention been paid to effectiveness, in an age in which there are mountains of books and articles on every other aspect of the executive’s tasks?
One reason for this neglect is that effectiveness is the specific technology of the knowledge worker within an organization.
Until recently, there was no more than a handful of these around.
For manual work, we need only efficiency; that is, the ability to do things right rather than the ability to get the right things done.
The manual worker can always be judged in terms of the quantity and quality of a definable and discrete output, such as a pair of shoes.
We have learned how to measure efficiency and how to define quality in manual work during the last hundred years — to the point where we have been able to multiply the output of the individual worker tremendously.
Formerly, the manual worker — whether machine operator or front-line soldier — predominated in all organizations.
Few people of effectiveness were needed: those at the top who gave the orders that others carried out.
They were so small a fraction of the total work population that we could, rightly or wrongly, take their effectiveness for granted.
We could depend on the supply of “naturals,” the few people in any area of human endeavor who somehow know what the rest of us have to learn the hard way.
[The absence of executives in yesterday’s organizations]
➤ This was true not only of business and the army.
It is hard to realize today that “government” during the American Civil War a hundred years ago meant the merest handful of people.
Lincoln’s Secretary of War had fewer than fifty civilian subordinates, most of them not “executives” and policy-makers but telegraph clerks.
The entire Washington establishment of the U.S.government in Theodore Roosevelt’s time, around 1900, could be comfortably housed in any one of the government buildings along the Mall today.
The hospital of yesterday did not know any of the “health-service professionals,” the X-ray and lab technicians, the dietitians and therapists, the social workers, and so on, of whom it now employs as many as two hundred and fifty for every one hundred patients.
Apart from a few nurses, there were only cleaning women, cooks and maids.
The physician was the knowledge worker, with the nurse as his aide.
In other words, up to recent times, the major problem of organization was efficiency in the performance of the manual worker who did what he had been told to do.
Knowledge workers were not predominant in organization.
In fact, only a small fraction of the knowledge workers of earlier days were part of an organization.
Most of them worked by themselves as professionals, at best with a clerk.
Their effectiveness or lack of effectiveness concerned only themselves and affected only themselves.
[Today’s large knowledge organizations]
Today, however, the large knowledge organization is the central reality.
Modern society is a society of large organized institutions.
In every one of them, including the armed services, the center of gravity has shifted to the knowledge worker, the man who puts to work what he has between his ears rather than the brawn of his muscles or the skill of his hands.
Increasingly, the majority of people who have been schooled to use knowledge, theory, and concept rather than physical force or manual skill work in an organization and are effective insofar as they can make a contribution to the organization.
Now effectiveness can no longer be taken for granted.
Now it can no longer be neglected.
The imposing system of measurements and tests which we have developed for manual work — from industrial engineering to quality control — is not applicable to knowledge work.
There are few things less pleasing to the Lord, and less productive, than an engineering department that rapidly turns out beautiful blueprints for the wrong product.
Working on the right things is what makes knowledge work effective.
This is not capable of being measured by any of the yardsticks for manual work.
The knowledge worker cannot be supervised closely or in detail.
He can only be helped.
But he must direct himself, and he must direct himself toward performance and contribution, that is, toward effectiveness.
➤ A cartoon in The New Yorker magazine some time ago showed an office on the door of which was the legend: CHAS. SMITH, GENERAL SALES MANAGER, AJAX SOAP COMPANY.
The walls were bare except for a big sign saying THINK.
The man in the office had his feet propped up on his desk and was blowing smoke rings at the ceiling.
Outside two older men went by, the one saying to the other: “But how can we be sure that Smith thinks soap?”
One can indeed never be sure what the knowledge worker thinks—and yet thinking is his specific work; it is his “doing.”
The motivation of the knowledge worker depends on his being effective, on his being able to achieve. *1
1 This is brought out in all studies, especially in three empirical works: Frederick Herzberg (with B. Mauser and B. Snyderman), The Motivation to Work (New York, Wiley, 1959); David C. McClellan, The Achieving Society (Princeton, N.J., Van Nostrand, 1961); and Frederick Herzberg, Work and the Nature of Man (Cleveland, World. 1966)
If effectiveness is lacking in his work, his commitment to work and to contribution will soon wither, and he will become a time-server going through the motions from 9 to 5.
The knowledge worker does not produce something that is effective by itself.
He does not produce a physical product — a ditch, a pair of shoes, a machine part.
He produces knowledge, ideas, information.
By themselves these “products” are useless.
Somebody else, another man of knowledge, has to take them as his input and convert them into his output before they have any reality.
The greatest wisdom not applied to action and behavior is meaningless data.
The knowledge worker, therefore, must do something which a manual worker need not do.
He must provide effectiveness.
He cannot depend on the utility his output carries with it as does a well-made pair of shoes.
The knowledge worker is the one “factor of production” through which the highly developed societies and economies of today — the United States, Western Europe, Japan, and also increasingly, the Soviet Union — become and remain competitive.
➤ This is particularly true of the United States.
The only resource in respect to which America can possibly have a competitive advantage is education.
American education may leave a good deal to be desired, but it is massive beyond anything poorer societies can afford.
For education is the most expensive capital investment we have ever known.
A Ph.D. in the natural sciences represents $100,000 to $200,000 of social capital investment.
Even the boy who graduates from college without any specific professional competence represents an investment of $50,000 or more.
This only a very rich society can afford.
[Written in 1967.]
Education is the one area, therefore, in which the richest of all societies, the United States, has a genuine advantage—provided it can make the knowledge worker productive.
And productivity for the knowledge worker means the ability to get the right things done.
It means effectiveness.
Who Is An Executive?
Every knowledge worker
in modern organization
is an “executive”
by virtue of his
position or knowledge,
he is responsible
for a contribution
that materially affects
the capacity of the organization
and to obtain results.
This may be
the capacity of a business
to bring out a new product
or to obtain a larger share of a given market.
It may be the capacity of a hospital
to provide bedside care to its patients, and so on.
Such a man (or woman) must make decisions;
he cannot just carry out orders.
He must take responsibility
for his contribution.
And he is supposed,
by virtue of his knowledge,
to be better equipped
to make the right decision than anyone else.
He may be overridden; he may be demoted or fired.
But so long as he has the job the goals,
and the contribution
are in his keeping.
Most managers are executives — though not all.
But many nonmanagers
are also becoming executives
in modern society.
For the knowledge organization,
as we have been learning
these last few years,
“managers” and “individual professional contributors”
in positions of
responsibility, decision-making, and authority.
This fact is perhaps best illustrated
by a recent newspaper interview
with a young American infantry captain
in the Vietnam jungle.
➤ Asked by the reporter,
“How in this confused situation
can you retain command?”
the young captain said:
“Around here, I am only the guy who is responsible.
If these men don’t know what to do when they run into an enemy in the jungle,
I’m too far away to tell them.
My job is to make sure they know.
What they do depends on the situation which only they can judge.
The responsibility is always mine, but the decision lies with whoever is on the spot.”
In a guerrilla war, every man is an “executive.”
There are many managers who are not executives.
Many people, in other words, are superiors of other people—and often of fairly large numbers of other people—and still do not seriously affect the ability of the organization to perform.
Most foremen in a manufacturing plant belong here.
They are “overseers” in the literal sense of the word.
They are “managers” in that they manage the work of others.
But they have neither the responsibility for, nor authority over, the direction, the content, and the quality of the work or the methods of its performance.
They can still be measured and appraised very largely in terms of efficiency and quality, and by the yardsticks we have developed to measure and appraise the work and performance of the manual worker.
Conversely, whether a knowledge worker is an executive does not depend on whether he manages people or not.
In one business, the market research man may have a staff of two hundred people, whereas the market research man of the closest competitor is all by himself and has only a secretary for his staff.
This should make little difference in the contribution expected of the two men.
It is an administrative detail.
Two hundred people, of course, can do a great deal more work than one man.
But it does not follow that they produce and contribute more.
Knowledge work is not defined by quantity.
Neither is knowledge work defined by its costs.
Knowledge work is defined by its results.
And for these,
the size of the group
and the magnitude
of the managerial job
are not even symptoms.
Having many people working
in market research
may endow the results
with that increment of insight, imagination, and quality
that gives a company
the potential of rapid growth and success.
two hundred men
But it is just as likely
that the manager
will be overwhelmed
by all the problems two hundred men
bring to their work and cause
through their interactions.
He may be so busy “managing”
as to have no time
for market research
and for fundamental decisions.
He may be so busy checking figures
that he never asks the question:
‘What do we really mean when we say “our market”?
And as a result,
be may fail to notice
significant changes in the market
which eventually may cause
the downfall of his company.
But the individual market researcher
without a staff
may be equally
productive or unproductive.
He may be
the source of
that make his company prosper.
Or he may spend so much of his time
hunting down details—
the footnotes academicians so often mistake for research—
as to see and hear nothing and to think even less.
every one of our knowledge organizations,
we have people
who manage no one
and yet are executives.
do we find a situation
such as that in the Vietnam jungle,
where at any moment,
any member of the entire group may be called upon to make decisions
with life-and-death impact for the whole.
But the chemist in the research laboratory
who decides to follow one line of inquiry
rather than another one
may make the entrepreneurial decision
that determines the future of his company.
He may be the research director.
But he also may be—
and often is—
a chemist with no managerial responsibilities,
if not even a fairly junior man.
what to consider one “product”
in the account books
may be made by
a senior vice-president in the company.*1
It may also be made by a junior.
And this holds true
in all areas
of today’s large organization.
I have called “executives”
those knowledge workers, managers, or individual professionals
who are expected by virtue of
their position or their knowledge
to make decisions
in the normal course of their work
that have significant impact
and results of the whole.
They are by no means
of the knowledge workers.
For in knowledge work too,
as in all other areas,
there is unskilled work and routine.
But they are a much larger proportion
of the total knowledge work force
than any organization chart ever reveals.
This is beginning to be realized—
as witness the many attempts
to provide parallel ladders of recognition
and reward for managers
and for individual professional contributors. Ŧ2
What few yet realize,
is how many people there are
even in the most humdrum organization of today,
whether business or government agency, research lab or hospital,
who have to make
decisions of significant and irreversible impact.
For the authority of knowledge
is surely as legitimate
as the authority of position.
are of the same kind
as the decisions of top management.
(This was the main point Mr. Kappel
in the statement referred to above.)
The most subordinate manager,
we now know,
may do the same kind of work
as the president of the company
or the administrator of the government agency;
plan, organize, integrate, motivate, and measure.
may be quite limited,
but within his sphere,
he is an executive.
does the same kind of work
the company president or the administrator.
His scope may be quite limited.
But he is an executive
or his name
on the organization chart
nor in the internal telephone directory.
And whether chief executive or beginner,
he needs to be effective.
Many of the examples
used in this book
are taken from
the work and experience of chief executives—
in government, army, hospitals, business, and so on.
The main reason
is that these are accessible,
are indeed often on the public record.
Also big things
easily analyzed and seen
than small ones.
But this book itself
is not a book
on what people
at the top do or should do.
It is addressed to everyone who,
as a knowledge worker,
is responsible for actions and decisions
which are meant to contribute
to the performance capacity of his organization.
It is meant for every one of the men
I call “executives.”
1 * On this see my Managing for Results (New York, Harper & Row, 1964)—especially chap. 2.
2 ŧ The best statement I know was made by Frederick R. Kappel, the head of the American Telephone & Telegraph Company (The Bell Telephone System) at the XLIIIth International Management Congress in New York, September 1963. Mr. Kappel’s main points are quoted in chap. 14 of Managing for Results.
The realities of the executive’s situation both demand effectiveness from him and make effectiveness exceedingly difficult to achieve.
Indeed, unless executives work at becoming effective, the realities of their situation will push them into futility.
Take a quick look at the realities of a knowledge worker outside an organization to see the problem.
A physician has by and large no problem of effectiveness.
The patient who walks into his office brings with him everything to make the physician’s knowledge effective.
During the time he is with the patient, the doctor can, as a rule, devote himself to the patient.
He can keep interruptions to a minimum.
The contribution the physician is expected to make is clear.
What is important, and what is not, is determined by whatever ails the patient.
The patient’s complaints establish the doctor’s priorities.
And the goal, the objective, is given: It is to restore the patient to health or at least to make him more comfortable.
Physicians are not noted for their capacity to organize themselves and their work.
But few of them have much trouble being effective.
The executive in organization is in an entirely different position.
In his situation there are four major realities over which he has essentially no control.
Every one of them is built into organization and into the executive’s day and work.
He has no choice but to “cooperate with the inevitable.”
But every one of these realities exerts pressure toward nonresults and nonperformance.
1. The executive’s time tends to belong to everybody else.
If one attempted to define an “executive” operationally (that is, through his activities) one would have to define him as a captive of the organization.
Everybody can move in on his time, and everybody does.
There seems to be very little any one executive can do about it.
He cannot, as a rule, like the physician, stick his head out the door and say to the nurse, “I won’t see anybody for the next half hour.”
Just at this moment, the executive’s telephone rings, and he has to speak to the company’s best customer or to a high official in the city administration or to his boss—and the next half hour is already gone. *1
This comes out clearly in Sune Carlson’s Executive Behavior (Stockholm, Strombergs. 1951), the one study of top management in large corporations which actually recorded the time-use of senior executives. Even the most effective executives in Professor Carlson’s study found most of their time taken up with the demands of others and for purposes which added little if anything to their effectiveness. In fact, executives might well be defined as people who normally have no time of their own, because their time is always pre-empted by matters of importance to somebody else.
2. Executives are forced to keep on “operating” unless they take positive action to change the reality in which they live and work.
In the United States, the complaint is common that the company president—or any other senior officer—still continues to run marketing or the plant, even though he is now in charge of the whole business and should be giving his time to its direction.
This is sometimes blamed on the fact that American executives graduate, as a rule, out of functional work and operations, and cannot slough off the habits of a lifetime when they get into general management.
But exactly the same complaint can be heard in countries where the career ladder is quite different.
In the Germanic countries, for instance, a common route into top management has been from a central secretariat, where one works all along as a “generalist.”
Yet in German, Swedish, or Dutch companies top management people are criticized just as much for “operating” as in the United States.
Nor, when one looks at organizations, is this tendency confined to the top; it pervades the entire executive group.
There must be a reason for this tendency to “operate” other than career ladders or even the general perversity of human nature.
The fundamental problem is the reality around the executive.
Unless he changes it by deliberate action, the flow of events will determine what he is concerned with and what he does.
Depending on the flow of events is appropriate for the physician.
The doctor who looks up when a patient comes in and says: “Why are you here today?” expects the patient to tell him what is relevant.
When the patient says, “Doctor, I can’t sleep.
I haven’t been able to go to sleep the last three weeks,” he is telling the doctor what the priority area is.
Even if the doctor decides, upon closer examination, that the sleeplessness is a fairly minor symptom of a much more fundamental condition he will do something to help the patient to get a few good nights’ rest.
But events rarely tell the executive anything, let alone the real problem.
For the doctor, the patient’s complaint is central because it is central to the patient.
The executive is concerned with a much more complex universe.
What events are important and relevant and what events are merely distractions the events themselves do not indicate.
They are not even symptoms in the sense in which the patient’s narrative is a clue for the physician.
If the executive lets the flow of events determine what he does, what he works on, and what he takes seriously, he will fritter himself away “operating.”
He may be an excellent man.
But he is certain to waste his knowledge and ability and to throw away what little effectiveness he might have achieved.
What the executive needs are criteria which enable him to work on the truly important, that is, on contributions and results, even though the criteria are not found in the flow of events.
3. The third reality pushing the executive toward ineffectiveness is that he is within an organization.
This means that he is effective only if and when other people make use of what he contributes.
Organization is a means of multiplying the strength of an individual.
It takes his knowledge and uses it as the resource, the motivation, and the vision of other knowledge workers.
Knowledge workers are rarely in phase with each other, precisely because they are knowledge workers.
Each has his own skill and his own concerns.
One man may be interested in tax accounting or in bacteriology, or in training and developing tomorrow’s key administrators in the city government.
But the fellow next door is interested in the finer points of cost accounting, in hospital economics, or in the legalities of the city charter.
Each has to be able to use what the other produces.
Usually the people who are most important to the effectiveness of an executive are not people over whom he has direct control.
They are people in other areas, people who in terms of organization, are “sideways.”
Or they are his superiors.
Unless the executive can reach these people, can make his contribution effective for them and in their work, he has no effectiveness at all.
4. Finally, the executive is within an organization.
Every executive, whether his organization is a business or a research laboratory, a government agency, a large university, or the air force, sees the inside—the organization—as close and immediate reality.
He sees the outside only through thick and distorting lenses, if at all.
What goes on outside is usually not even known firsthand.
It is received through an organizational filter of reports, that is, in an already predigested and highly abstract form that imposes organizational criteria of relevance on the outside reality.
But the organization is an abstraction.
Mathematically, it would have to be represented as a point—that is, as having neither size nor extension.
Even the largest organization is unreal compared to the reality of the environment in which it exists.
Specifically, there are no results within the organization.
All the results are on the outside.
The only business results, for instance, are produced by a customer who converts the costs and efforts of the business into revenues and profits through his willingness to exchange his purchasing power for the products or services of the business.
The customer may make his decisions as a consumer on the basis of market considerations of supply and demand, or as a socialist government which regulates supply and demand on the basis of essentially noneconomic value preferences.
In either case the decision-maker is outside rather than inside the business.
Similarly, a hospital has results only in respect to the patient.
But the patient is not a member of the hospital organization.
For the patient, the hospital is “real” only while he stays there.
His greatest desire is to go back to the “nonhospital” world as fast as possible.
What happens inside any organization is effort and cost.
To speak of “profit centers” in a business as we are wont to do is polite euphemism.
There are only effort centers.
The less an organization has to do to produce results, the better it does its job.
That it takes 100,000 employees to produce the automobiles or the steel the market wants is essentially a gross engineering imperfection.
The fewer people, the smaller, the less activity inside, the more nearly perfect is the organization in terms of its only reason for existence: the service to the environment.
This outside, this environment which is the true reality, is well beyond effective control from the inside.
At the most, results are codetermined, as for instance in warfare, where the outcome is the result of the actions and decisions of both armies.
In a business, there can be attempts to mold the customers’ preferences and values through promotion and advertising.
Except in an extreme shortage situation such as a war economy, the customer still has the final word and the effective veto power (which explains why every Communist economy has run into trouble as soon as it moved beyond extreme shortages and long before it reached a position of adequate market supply in which the customer, rather than the political authorities, makes the real and final decisions).
But it is the inside of the organization that is most visible to the executive.
It is the inside that has immediacy for him.
Its relations and contacts, its problems and challenges, its crosscurrents and gossip reach him and touch him at every point.
Unless he makes special efforts to gain direct access to outside reality, he will become increasingly inside-focused.
The higher up in the organization he goes, the more will his attention be drawn to problems and challenges of the inside rather than to events on the outside.
➤ An organization, a social artifact, is very different from a biological organism.
Yet it stands under the law that governs the structure and size of animals and plants: The surface goes up with the square of the radius, but the mass grows with the cube.
The larger the animal becomes, the more resources have to be devoted to the mass and to the internal tasks, to circulation and information, to the nervous system, and so on.
Every part of an amoeba is in constant, direct contact with the environment.
It therefore needs no special organs to perceive its environment or to hold it together.
But a large and complex animal such as man needs a skeleton to hold it together.
It needs all kinds of specialized organs for ingestion and digestion, for respiration and exhalation, for carrying oxygen to the tissues, for reproduction, and so on.
Above all, a man needs a brain and a number of complex nervous systems.
Most of the mass of the amoeba is directly concerned with survival and procreation.
Most of the mass of the higher animal—its resources, its food, its energy supply, its tissues—serve to overcome and offset the complexity of the structure and the isolation from the outside.
An organization is not, like an animal, an end in itself, and successful by the mere act of perpetuating the species.
An organization is an organ of society and fulfills itself by the contribution it makes to the outside environment.
And yet the bigger and apparently more successful an organization gets to be, the more will inside events tend to engage the interests, the energies, and the abilities of the executive to the exclusion of his real tasks and his real effectiveness in the outside.
This danger is being aggravated today by the advent of the computer and of the new information technology.
The computer—being a mechanical moron, can handle only quantifiable data.
These it can handle with speed, accuracy, and precision.
It will, therefore, grind out hitherto unobtainable quantified information in large volume.
One can, however, by and large quantify only what goes on inside an organization—costs and production figures, patient statistics in the hospital, or training reports.
The relevant outside events are rarely available in quantifiable form until it is much too late to do anything about them.
This is not because our information-gathering capacity in respect to the outside events lags behind the technical abilities of the computer.
If this were the only thing to worry about, we would just have to increase statistical efforts—and the computer itself could greatly help us to overcome this mechanical limitation.
The problem is rather that the important and relevant outside events are often qualitative and not capable of quantification.
They are not yet “facts.”
For a fact, after all, is an event which somebody has defined, has classified and, above all, has endowed with relevance.
To be able to quantify one has to have a concept first.
One first has to abstract from the infinite welter of phenomena a specific aspect which one then can name and finally count.
➤ The thalidomide tragedy which led to the birth of so many deformed babies is a case in point.
By the time doctors on the European continent had enough statistics to realize that the number of deformed babies born was significantly larger than normal—so much larger that there had to be a specific and new cause—the damage had been done.
In the United States, the damage was prevented because one public health physician perceived a qualitative change—a minor and by itself meaningless skin tingling caused by the drug—related it to a totally different event that had happened many years earlier, and sounded the alarm before thalidomide actually came into use.
The Ford Edsel holds a similar lesson.
All the quantitative figures that could possibly be obtained were gathered before the Edsel was launched.
All of them pointed to its being the right car for the right market.
The qualitative change—the shifting of American consumer-buying of automobiles from income-determined to taste-determined market-segmentation—no statistical study could possibly have shown.
By the time this could be captured in numbers, it was too late—the Edsel had been brought out and had failed.
The truly important events on the outside are not the trends.
They are changes in the trends.
These determine ultimately success or failure of an organization and its efforts.
Such changes, however, have to be perceived; they cannot be counted, defined, or classified.
The classifications still produce the expected figures—as they did for Edsel.
But the figures no longer correspond to actual behavior.
The computer is a logic machine, and that is its strength—but also its limitation.
The important events on the outside cannot be reported in the kind of form a computer (or any other logic system) could possibly handle.
Man, however, while not particularly logical is perceptive—and that is his strength.
The danger is that executives will become contemptuous of information and stimulus that cannot be reduced to computer logic and computer language.
Executives may become blind to everything that is perception (i. e., event) rather than fact (i. e., after the event).
The tremendous amount of computer information may thus shut out access to reality.
Eventually the computer—potentially by far the most useful management tool—should make executives aware of their insulation and free them for more time on the outside.
In the short run, however, there is danger of acute “computeritis.”
It is a serious affliction.
The computer only makes visible a condition that existed before it.
Executives of necessity live and work within an organization.
Unless they make conscious efforts to perceive the outside, the inside may blind them to the true reality.
These four realities the executive cannot change.
They are necessary conditions of his existence.
But he must therefore assume that he will be ineffectual unless he makes special efforts to learn to be effective.
The Effective Executive
What executives should remember
Ted Levitt : Marketing
Requisites of competitive success
Purpose of a business is to create & keep a customer.
To Do that you have to
produce & deliver goods & services that
people want & value
at prices & under conditions
that are reasonably attractive relative to competition
To a proportion of customers large enough to make those prices & conditions possible.
To Continue to do that the enterprise must
produce revenues in excess of costs to attract & hold investors in the enterprise
in sufficient quantity
with sufficient regularity
Stay abreast and sometimes ahead of competitive offerings.
In large organizations:
Frequently reviewed by senior members of the enterprise.
Appropriate system of rewards, audits, and controls,
To assure that what's intended gets done & rectified when not.
This also requires knowing what attracts and drives customers
Peter Drucker: Conceptual Resources
The Über Mentor
A political / social ecologist
a different way of seeing and thinking about
the big picture
— lead to his top-of-the-food-chain reputation
about Management (a shock to the system)
“I am not a ‘theoretician’; through my consulting practice I am in daily touch with the concrete opportunities and problems of a fairly large number of institutions, foremost among them businesses but also hospitals, government agencies and public-service institutions such as museums and universities.
And I am working with such institutions on several continents: North America, including Canada and Mexico; Latin America; Europe; Japan and South East Asia.” — PFD
List of his books
Large combined outline of Drucker’s books — useful for topic searching.
“High tech is living in the nineteenth century,
the pre-management world.
They believe that people pay for technology.
They have a romance with technology.
But people don't pay for technology:
they pay for what they get out of technology.” —
The Frontiers of Management