Practical Thinking ::: Patterning system of the human brain
My first class with Peter Drucker met in the fall of 1975.
I didn’t know what to expect.
Drucker was a world-famous celebrity.
I was a young man with limited business experience.
Needless to say, I was more than a little intimidated with the thought of dealing with this prominent professor face-to-face.
I was actually taking two courses with Peter that first term.
The other class had yet to meet.
It was to meet Wednesday night in the faculty club, and Peter and the dean, Paul Albrecht, were teamed as instructors.
It was open only to the ten students in the new doctoral program for practicing executives.
However, this was Monday night, and the class was entitled “Module 300: The Management Process.”
This particular course, and even the course numbering system then used, no longer exists.
Peter taught it by himself.
There were no other professors, and no graduate students assisting him.
The class was open to both master’s students and the ten doctoral students and was taught over a seven-week period.
In the Claremont system, there were three semesters a year with two seven-week modules in every semester.
This allowed students to take a variety of courses.
In later years, Drucker classes met in Albrecht Auditorium, and other ultramodern complexes built long after my own graduation.
However, since the larger and more modern facilities didn’t exist then, Module 300 met in probably the largest room available on campus in Harper Hall.
It held fifty or sixty of the old-style seats for students with a table top that folded over your lap to allow note-taking.
I arrived early
About half of the class was already there.
I didn’t know anyone.
We were all working professionals, and there were no orientation programs for new graduate students in those days.
However, I discovered that many of these students weren’t new to Claremont, and had taken classes with Drucker previously.
“What he like?”
“Oh, Peter’s fine, you’ll like him” seemed to be the most common reply.
I noticed that just about everyone called him “Peter” not “Drucker” or “Professor Drucker.”
I discovered that this was his preferred form of address.
He seemed to dislike any form of honorific or deferential treatment.
I don’t want to describe him as modest, but rather I would say that he considered himself beyond any special behavior and thought that this sort of thing was a waste of time.
This does not mean to imply that he was timid in any way or encouraged disrespect.
I never saw anyone ever treat Peter with disrespect, and he absolutely was not bashful about correcting any student.
After several minutes Peter strode confidently into the classroom.
He was in good humor and engaged several students in conversation who apparently had been his students previously.
He was of medium height, wore glasses, and was balding.
He was energetic and appeared to be in excellent health.
He had a copy of a thick book under one arm.
As the time for the class to begin approached, he removed his jacket and held a copy of Management: Tasks, Responsibilities, and Practices aloft with one hand.
“This is your textbook,” he said with a heavy Viennese accent.
“Anyone wanting me to autograph it, please line up over here to the right side of the classroom near the window”
There was a scrambling as maybe fifteen or sixteen students formed a line to get the coveted autograph.
I did not.
I didn’t know what to make of this action at the time.
Somehow it rubbed me the wrong way.
I guess I thought it egotistical.
The rest of the students continued their conversations while the autographing took place for another ten minutes or so.
Then Peter went to the front of the classroom and began to lecture without reference to notes or his book.
The Story of the Two Vice Presidents
Peter began with a story about a company he had observed.
As the president of the company grew older, he knew that he should begin thinking about succession.
Fortunately, he had two vice presidents, both equally outstanding, and of the right age, and each with a record of outstanding prior accomplishments with this firm.
He increased the responsibility of both subordinate executives and gave them each the new title of executive vice president.
He called them in together and announced that he intended to retire in five years and that one of them would be named to succeed him as president.
Both men thanked the president for the opportunity.
The president had confidence that he had picked the right candidates.
Although both were ambitious, he knew that both would put the company before themselves in whatever they undertook.
He knew that either would make an excellent replacement.
Over the five years of their apprenticeship a differing pattern began to emerge from each of the prospective presidents-to-be.
Although both men did well in every task given them and were equally successful in accomplishing their assignments, the process each followed was quite different.
One would be given a task by the president.
He would request the information needed and would ask when the job was to be accomplished.
He would go off, gather his subordinates together, and would invariably present the president with a completed job well done days, weeks, or months later.
Unless he needed some specific information or permission to do something a little out of the usual process, he would do this without ever bothering the old president.
The other executive vice president took an entirely different approach.
Given a project by the president, he too would organize his subordinates to complete it successfully.
However, there was a big difference.
The first candidate worked independently and didn’t bother the president with the details of what he was doing unless specific help was needed.
However, the second candidate met periodically with the president to discuss the project and frequently requested additional meetings, continually seeking the president’s advice.
“Now,” asked Drucker, “When the president retired, which candidate did he pick to succeed him, the executive who was always successful without bothering him or taking his time, or the one who continually seemed to seek his help and approval?”
Many hands shot up, including my own.
Drucker called on several students.
Each stated his opinion that the president picked the executive who was able to succeed on his own without having to report back until the job was done unless there was a specific problem.
This was my opinion too.
Our thinking was that the new president would need to operate on his own and would not have the old president’s counsel to fall back on.
Peter asked for a show of hands as to how many agreed that the president selected the executive who demonstrated that he was able to operate independently and without the president’s ongoing approval.
A large majority agreed with the students Peter had previously called on.
Only a few thought that the second executive who constantly bothered the former president had been the one selected.
Peter stated the results:
“Most of you are wrong.
The former president selected the candidate who continually consulted with him.”
The class was in an uproar.
This went against everything we knew about management and leadership.
Everyone knew that the candidate who demonstrated that he could make decisions on his own should and would be selected.
Drucker’s Lesson: Question Your Assumptions
“What everybody ‘knows’ is frequently wrong,” Peter continued.
“We are dealing with human beings.
Most top managers want to feel that their policies and legacies will be continued.
The constant contact and interaction with the second manager gave the president that confidence.
“Both executives were outstanding, but while the president felt that he knew and understood the executive who maintained contact, he was less certain about the other executive and he was less invested in his success.
After picking candidates based on accomplishment, he went with his gut instinct, a perfectly correct way in which to make such an important decision after considering all the facts.
Unless the president’s preferred style was to let those who reported to him operate independently, the first executive should have tried to adapt his preferred method to what his boss preferred, even though ‘everyone knows’ that continual consultation with a higher manager is less desirable.”
Drucker was right, and I should have known better.
I was in the process of losing the confidence of my then boss by behaving exactly like the executive who operated independently.
That in itself is an important lesson, but the idea that what everyone knows is frequently wrong proved even more important to me, and I think many other of Drucker’s students.
Over the next few years, I heard Peter say this quite a few times.
Maybe through repetition I finally began to think more deeply about what the words really meant.
This seemingly simple and self-contradicting statement is amazingly true and immensely valuable, and not only in business.
What Drucker wanted to emphasize was that we must always question our assumptions no matter from where they originate.
This is especially true regarding anything that a majority of people “know” or assume without questioning.
This “knowledge” should always be suspect and needs to be examined much more closely.
In a surprisingly high percentage of cases, the information “known to be true” will turn out to be false or inaccurate, if not generally, then in a specific instance.
This can lead to extremely poor, even disastrous management decisions.
Things Once “Known to Be True” Are Now Known to Be False
Of course there are many old “truisms” once thought by everyone to be true which we laugh at today “The world is flat.”
“The earth is the center of the universe.”
The ancient Greeks knew that everything was made up of only four elements: earth, air, fire, and water.
Of course, in modern times we learned that they were mistaken.
When I took chemistry in high school, I learned that a Periodic Table of Elements had been formulated by a fellow named Mendeleev and that it had been established that there were exactly 93 elements, no more, no less.
We got an “A” if we could name them all.
Today, there are 102 elements or so “everybody knows.”
Questions Raised by 100 Percent Agreement
Interestingly Drucker’s lesson goes back over the millennia.
In ancient Israel, the highest court was called the Sanhedrin.
It corresponded roughly to the U.S. Supreme Court today, although it had a lot more power.
The Sanhedrin tried the most important cases, and it had the power to exact capital punishment.
In this high court, there were no prosecuting or defense attorneys and no appeals.
The Sanhedrin court consisted only of judges.
Some historians say 71 judges, others 23.
The actual number is unimportant to some factual points.
The judges could examine the defendant, the accusers, and any witnesses either side brought before it.
To exonerate a defendant required a majority of one, while to find him guilty required a majority of two.
But perhaps the most interesting aspect of this ancient Jewish legal body was that if all judges found the accused guilty of a capital crime, he or she was allowed to go free!
This was because the ancient Hebrews were convinced that there is a defense to be argued for every individual accused, regardless of the gravity of the crime and the persuasiveness of the evidence.
If not a single judge thought that the defendant’s case had merit, then it was clear that no matter how heinous the crime, something was wrong in the situation and it was likely that the accused was innocent.
In other words, when every judge “knew” something to be “true,” it probably wasn’t.
In modern times, the impact of mass agreement on an issue has been addressed and confirmed in psychological research.
In one experiment, subjects were asked to rate the attractiveness of individuals depicted in selections of photographs.
However, there was only one real subject and the results were rigged.
Unknown to the subject, the other participants were part of the scientist’s team of experimenters.
These participants were to agree about the most attractive individual depicted in any particular set of photographs at random.
It was found that the subject could usually be influenced to agree with any photograph that the group selected, regardless of merit.
This experiment demonstrates the influence of social proof, while it confirms one reason why Drucker’s theory that what everyone knows is frequently wrong is correct.
Accepting what everybody knows without any examination will often result in faulty decisions.
The Tylenol Case
Is Drucker’s wisdom valid or important in business?
Back in 1982 someone laced a popular over-the-counter drug with cyanide.
A few who bought the poisoned product died.
This led to an almost instantaneous nationwide panic.
One hospital received 700 queries from people suspecting they had been poisoned with the tainted product.
People in cities across the country were admitted to hospitals on suspicion of cyanide poisoning.
The Food and Drug Administration (FDA) investigated 270 incidents of suspected product tampering.
While some of the product had been tampered with as some sort of a sick joke, in most cases this was pure hysteria with no basis at all in fact.
This panic in itself demonstrates part of Peter’s thesis, but there is more that is critical to business decision-makers.
At that time, the product, Tylenol, was almost thirty years old.
Over the years, it had built up a well-deserved trust with consumers.
Nevertheless, sales of the product plummeted overnight and Johnson & Johnson, the product’s maker, launched a recall and stopped all sales.
The company advised consumers not to buy or use the product until further notice.
Virtually everyone predicted the demise of the product.
One well-known advertising guru was quoted in The New York Times:
“I don’t think they can ever sell another product under that name .…
There may be an advertising person who thinks he can solve this [crisis] and if they find him, I want to hire him, because then I want him to turn our water cooler into a wine cooler.”
Tylenol once dominated the market.
Everyone knew that those days were gone for good.
An article in The Wall Street Journal commented sadly that the product was dead and could not be resurrected; any other notion was an executive’s pipe dream.
A survey of “the-man-in-the-street” found almost no one that would buy the product regardless of what the company did to guarantee its safety or promote its sale.
Despite what everyone knew, Johnson & Johnson retained the product Tylenol and its now famous brand name, which had become infamous through no fault of the product or its maker.
Johnson & Johnson launched one of the most effective public relations campaigns for a product in commercial history.
As a result, sales began a steady climb only a few months after the poisonings, returning Tylenol to its previous position as the number one analgesic controlling 35 percent of a two-billion-dollar market.
Where would Johnson & Johnson have been today had this established brand, built through thirty years of advertising, performance, and reliability, been allowed to disappear?
How much would it have cost Johnson & Johnson to attempt to introduce and build an entirely new brand to replace Tylenol?
Could this have even been accomplished?
We’ll never know.
Nor do we know whether Peter Drucker was called in to consult with Johnson & Johnson.
What we do know is that Johnson & Johnson did the right thing when this tragedy struck and then took the right actions to reintroduce the Tylenol product successfully.
These actions today are studied in business schools as an almost perfect example of a successful public relations strategy and execution in the face of a crisis.
However the basis of this was that Johnson & Johnson executives, knowingly or not, decided, “What everyone knows is frequently wrong.”
They went against what all the experts and even the consumers “knew” and went on to resurrect Tylenol to be even more successful than it was previously.
How can this Drucker wisdom be applied in business?
There is no question that applying this lesson requires critical analysis, because while “what everyone knows is frequently wrong” may be true, sometimes “what everyone knows” is actually true.
So the problem is in how to know when common knowledge is true and when it is not.
The first thing we need to understand is that what everyone knows, or so-called common knowledge, is simply an assumption.
An assumption is any belief, idea, hunch, or thought that you, a group of people, or any internal or external experts have about a subject.
These assumptions are crucial because we use our assumptions to guide our actions and decision-making.
This is sometimes complicated by the fact that frequently these assumptions are implicit and unstated.
Decision making can be disastrous if we accept assumptions as fact without analysis.
In the previous example, Tylenol would have been dropped as a product and Johnson & Johnson would have lost millions of dollars in revenue, plus it would have had to spend further millions of dollars to develop and market a replacement product.
So how can you analyze an assumption?
The following steps will help:
Look at the Sources Reliability.
The first step in analyzing an assumption is to look at the source’s reliability.
Reliability refers to consistency in measurement over time.
Many years ago, I was involved in the selection of one of two designs for a new aircraft from two different companies.
The companies were The Boeing Aircraft Company and McDonnell Douglas Aircraft Company.
(Those who know this industry also know that the former company eventually acquired the latter, but this has nothing to do with our story) Both companies proposed modifying one of their standard airline designs which was already in production and in use.
Periodically we would meet with each aircraft company’s design team individually to assess progress on each company’s proposals, acceptance of which would be worth hundreds of millions of dollars to the winning contractor.
On one occasion we discussed ways in which we might lower the cost of each aircraft.
The McDonnell Douglas manager stated, “You can save $10 million for each aircraft produced if you will allow us to deviate on the size of the escape hatch by two inches.
That would be the standard size of the hatch on our DC-9 airliners.
They successfully passed all FAA tests with no problems.”
I promised to look into his request, since it could save a lot of money.
Find the Ultimate Source.
In this case, the initial source was the engineer who had put this requirement into the package listing design specifications that we had sent to the two aircraft manufacturers.
However, frequently, you need to conduct a process I call “peeling the onion,” because the initial source isn’t the end of the story.
What we are looking for usually lies inside one, maybe more layers that we need to peel away to get to the center—the ultimate source.
As soon as I could, I contacted the engineer responsible for the aircraft specification that McDonnell-Douglas wanted waived.
“We can’t do it,” he told me.
‘This requirement comes directly from our aircraft design handbook with specifications that we must use for all new transport type aircraft.”
This means that the source had a sub-source.
The sub-source was the design handbook.
Not only did it produce a predictable and repeatable result, but “everybody knew” that these dimensions were the correct ones for the escape hatch and that we were required to use them.
Suppose Johnson & Johnson had investigated the sources for those who said that the demise of Tylenol was irreversible.
These sources were the advertising and business experts who wrote for the business journals.
They were usually right on the money in their judgments regarding advertising and how poor publicity could ruin a product’s reputation.
They were reliable sources based on past history.
Is the Source Valid?
Both reliability and validity are concepts that come from testing.
The validity of a test tells us how well the test measures what it is supposed to measure.
It is a judgment based on evidence about the appropriateness of inferences drawn from test scores.
But we’re not looking at test scores here, we’re looking at assumptions.
So where did this particular specification in the aircraft design handbook come from?
Knowing that source could help me decide whether this particular specification was valid for the aircraft we now wanted to build.
So, I peeled the onion again.
I knew that every specification in the aircraft design handbook was referenced as to where it came from and what it was based on.
I asked the engineer to do the necessary research to find out what tests this particular design specification was based on.
Surprise, surprise, this specification was based on an aircraft test done with propeller-driven aircraft almost thirty years earlier.
That aircraft traveled at about 120 miles per hour.
The aircraft we were working on traveled at about 500 miles per hour.
Obviously, in this instance, the design specification was not valid.
We turned it over to one of our aeronautical designers.
He advised us to forget what everyone knew (the design handbook) and that the two inches would make no difference at the air speeds we were anticipating for an emergency bailout.
We took his advice.
In the same way, the Johnson & Johnson decision makers probably evaluated the sources advising them to drop Tylenol and find something else.
They probably asked what the success rate was for a product that was reintroduced in this way and under similar circumstance.
That would have been peeling the onion.
They probably discovered that there wasn’t much of a data base to go on because no one had even attempted something like this before.
They had taken the high road all the way, and felt that despite what everybody knew, it was worthwhile trying.
The results, as they say, are history.
Drucker’s wisdom reminds me of Roger Bannister’s stunning achievement.
Bannister, an Englishman and a medical doctor, broke a record in running once thought to be impossible.
This was the famous “four minute mile.”
No one had ever run a mile in four minutes.
The world record of 4:01.4, had been set in 1945 by Sweden’s Gunder Haegg.
The experts knew that it could not be done, and some said it was dangerous for an athlete to even attempt.
Today, the fastest mile record is 3 minutes, 43.13 seconds.
Some high school runners even break the 4 minute mile.
However, the fact is that when Bannister achieved this on May 6th of 1954, many, if not most, knew that it was an impossible dream.
He was knighted for his achievement.
I was in high school at the time and I remember a radio interview with an doctor of kinesiology shortly before Bannister broke the record.
He stated that the human body just wasn’t built to run this fast and that it couldn’t be done.
He predicted that Bannister would never succeed.
Bannister knew better.
What most “knew” was wrong, and Bannister understood this.
Drucker Lesson Summary
What everyone knows is frequently wrong.
It is wrong because people make one or more erroneous assumptions and then everybody else buys in.
To use this wisdom effectively, a decision maker needs to look at the source and determine its reliability and validity.
Usually this involves “peeling the onion” to get to the very core source.
One of the students, a senior executive in an aerospace company, was holding forth.
“Once we learn how to do something,” he proclaimed, “we don’t let it slip away.
In my company, we institutionalize it and we make it permanent.
We call it ‘modeling success.”
I perked up.
I was interested.
I was always happy to pick up a new technique which worked.
“Do you do this in all instances?” Peter asked.
“Absolutely,” the student responded.
“I think it is the main secret of our success in this industry”
“What if the success you are modeling is a product?
Do you continue to optimize that product without planning for eventual withdrawal?”
“That is exactly what we do,” the student said.
“When we get a successful product, we just continue to improve it.
We keep doing that no matter what.
In this way we continually stay ahead of our competition.
Of course, at some point the next generation of the product is introduced.
We plan for withdrawal of the product in that sense.
But as far as the general type of product goes, when we find a winning horse we continue to ride it.
We have a major product that we sell to NASA which has gone through more than a dozen generations and improvements.
It’s still going strong,” he said proudly, “But we don’t just do that with successful products; we institutionalize our successful policies and procedures, too.
In that sense we’re like ‘Big Blue’ (IBM).
Those guys know what works so they keep doing it, and so do we.
As I said, we model success.”
In those days IBM was considered the master corporation of the business world.
Its own success formula seemed to include a uniform of white shirts, dark ties, and blue suits, a dress code which hadn’t been changed in years, although since that time, it has.
“That’s very interesting,” said Drucker.
“But what do you do when your environment changes?”
“I’m not sure what you are getting at,” said my classmate, a little testily.
“If the environment changes, we make the changes necessary in the product or procedures to accommodate changes in the environment.
We just keep making it better.
Once we find a success, we concentrate on making it better and staying ahead of our competition,” he repeated.
“That way our competition never catches up.”
Peter put down his knife and fork and thought for a moment.
Then he spoke.
“I congratulate you on your and your company’s success.
However, I must tell you that your modeling strategy will work in the short term only.
In the longer term, unless you have thought ahead to create your own future, any organization which continues to do what brought it success in the past will eventually fail.
Moreover, when a significant change occurs, unless management is willing to quickly readjust to the new situation in which it finds itself and does not try to optimize the old model, it will fail even faster.”
The student blanched slightly, but said nothing.
The rest of us waited to hear a fuller explanation.
“Look,” Peter continued, “every environment changes.
Eventually that change is sufficiently severe that you cannot adapt either a product or a procedure, no matter what you do.
Sometimes this change is technological.
Someone invents a mass-produced automobile.
Think what this invention did to the buggy whip or the carriage industries—it destroyed them completely, and in a very short period of time.
“However, the change in the environment can be cultural, political, or something else.
You mentioned NASA, so my guess is that this may be your only customer in this market for this particular product.
What if NASA as a customer disappears or its funding is severely curtailed?
Such changes do not cause incremental results.
They are revolutionary.
“So long as your environment is fairly stable,” he explained, “your company’s actions are correct, and I am not suggesting that they should be discarded.
However, you must be prepared for major change in the future, and you must start now.
If someone else’s revolutionary innovation catches you unawares, you must abandon what made you successful and take an entirely different course immediately.
If you are not prepared to do this and do not drop the product or the procedure, you will certainly fail as an organization.”
Then he added, “Of course, the best procedure is to obsolete your past successes yourself to stay ahead of your competition.
And not just by incremental improvement, either.
That way, you will maintain control and create your own future.”
Peter gave us several other examples of companies, even whole industries, which disappeared even though they optimized past successes, sometimes to an extraordinary degree.
I do not recall them now, but I immediately understood what he meant.
In the military we were constantly warned that we should avoid fighting the next war based on the methods, weapons, and tactics of the most recent successful one.
Peter’s lesson was clearly one that applied in many aspects of human behavior.
All of us were mesmerized to such an extent that time ran out before we completed our meals, and the discussion continued around the points Drucker had made.
Before we knew it, it was time to return to the classroom, where Peter took up an entirely different subject.
But before he started to lecture on the new subject, I scribbled some quick notes to myself on what he had said during the dinner break.
I have emphasized them many times in my own writing and teaching.
Here are what I consider the important implications of Drucker’s lesson:
• Continuing what led to past success will invariably lead to eventual future failure.
• If caught unawares, organizations must be willing to instantly abandon what was formerly successful.
• Better yet, an organization should assume an eventual revolutionary change is inevitable.
Therefore, an organization should take actions to create its own future by making the revolutionary change itself, even though it means obsolescing the products or methods of its current and past success.
Classic business cautionary tales of those ignoring this concept include the demise of the buggy whip industry and everything having to do with equestrian transportation (which Peter mentioned in his comments), but changes within the automobile industry itself.
After the automobile industry was well established, a very successful Ford Motor Company dominated the market due to its development of mass production and its implementation of the production line.
However, it lost its market leadership to General Motors for fifty years when founder Henry Ford failed to acknowledge that customers wanted variety.
They were prepared to ignore the mighty Model T in black with a single set of features and pay more for a variety of colors and options.
General Motors successfully challenged Ford by offering customers a choice.
Ford, who had built the Model T on the premise of no options and the lowest price possible, did not respond to GM until it was too late.
There are numerous examples in every industry.
The railroad, that great invention of the 19th century which helped win the American west and, in the process, created “railroad barons,” “robber barons,” and some of the wealthiest men in America, was relegated to a greatly diminished role in the late 20th century by the introduction of superior technology by the airline transportation companies.
The legendary and mighty railroad companies shrank to mere shadows of their former eminence.
In the mid-1980’s, the entire billion-dollar vinyl record industry vanished almost overnight and vinyl record manufacturers lost millions when they failed to prepare for the growing threat from compact disc technology.
Slide rules, once carried by every engineer worldwide, are no more except for very specialized roles and in museums.
Handheld slide rules were manually manipulated, non-electronic, analog computers.
The basic models had two stationary rules with a central sliding rule.
A clear sliding piece with a crosshair, called a cursor, completed the basic model.
With this device, engineers could accomplish a variety of complex mathematical and algebraic computations.
Every single engineer in the world owned at least one.
Major companies like Pickett and K + E dominated the industry.
They introduced improvements in their product every year.
They optimized the slide rule.
Yet, their markets disappeared within two years of the introduction of the handheld electronic calculator.
Because these companies failed to anticipate such an innovation and could not respond fast enough, these companies disappeared, too.
I could go on, but you get the idea.
Like a light bulb which burns its brightest just prior to complete failure, many of these companies and industries were at their best just a few years or, in some cases, just a few months prior to their demise.
They optimized their success and it led directly to failure, exactly as Drucker stated.
Although now recovered, IBM suffered the largest single-year corporate loss (almost $5 billion) in U.S. history in the late 1980’s and early 1990’s by continuing to do precisely what had won its reputation and made it so successful previously in marketing policy.
As a result, the rise of PCs and changes in how customers viewed, used, and bought technology took the purchasing decision out of the hands of IBM’s traditional customers.
Moreover, IBM missed out on both the rise of the personal computer and the market power of Microsoft’s operating system.
According to one source, IBM had just 100 days left before cash ran out.
Fortunately for IBM, Lou Gerstner took over the company and turned things around.’
Why does this occur?
Why can’t a company or an organization continue to do what has made it successful in the past?
What happens is, as Drucker explained, the environment changes in some critical way that invalidates all the old rules.
In IBM’s case, it was the personal computer.
Sometime in 1977, I took Peter’s class in “Policy”—an academic misnomer which I still don’t like.
To me, policy is a rule an organization has as a guide for decision making.
So a retailer has a policy of “no returns after thirty days,” or a company has a policy of an annual salary review, or another that “the customer is job number one.”
What academics generally term “policy” is really “strategy.”
Strategy is what a company plans to do to reach a goal or objective.
Drucker actually taught strategy, not policy, and I believe that most of the academic courses of this type would be better described as strategy, which is what they are really about.
In Drucker’s classroom, during one of the first sessions in the course, Peter began to cite various historical examples of strategy that worked or did not work.
None of them had to do with him.
This was how Peter normally taught.
He rarely talked about his own successes, even when we pressed him for personal examples.
Occasionally, he would cite an example of success in a company he had consulted for.
However, he never took credit.
He would just say the XYZ company was faced with such and such situation, and here’s what the executive in charge did.
He was never trying to convince us of how brilliant or what a great consultant he was.
Without being arrogant or intentionally modest, Peter was very comfortable with himself.
On this particular evening, Peter went through a number of companies and industries, giving us the situations they faced and how they responded to them.
I don’t recall whether he used the phrase “captains of industry,” or whether one of my classmates used it in asking a question.
However, I made the immediate connection to a course on “great captains” I had taken when I was a cadet at West Point, where of course, we had studied strategy.
The phrase “great captains” meant the great military thinkers on strategy It too, by the way, went under a misnomer.
The course was called “Military Art.”
I suspect that someone reviewing our academic transcripts probably thought it was the military version of a course in the humanities having to do with paintings of battles.
However, the fact was I had been studying strategy, albeit in a different form, for a long time.
Strategy is Strategy
The origin of the word “strategy” is the Greek word, “strategos,” which means the art of the general.
Maybe so, but as I heard Peter’s presentation, in a flash it came to me that strategy was strategy, whether in warfare or business.
I listened more closely as Drucker told of a particularly well done strategic action where, with limited resources, a company had challenged a much larger competitor.
It was a small company called ICS, Inc., which in the early days of computers and with ninety-six employees, successfully outdid industry giant IBM.
The strategy is one we call niching today.
That is, ICS, Inc. did not try to be everything to everybody, but concentrated its resources in a small segment of the market, computers for education, and for that market it was the best—with the better product, better service, and better marketing.
In that niche, IBM suffered a significant decline in sales due to ICS, Inc.’s efforts.
After a couple of years IBM waved the white flag and pulled out of that market completely.
It wasn’t that IBM couldn’t have chased the small company out of this niche had it wanted to do so.
But IBM had other fish to fry and places to put its resources, and so it left this particular market to its tiny competitor.
Hearing the ICS story, my mind went to one of the “great captains” I had studied some years earlier at West Point:
This was the Carthaginian general, Hannibal.
With inferior forces and cut off from his homeland, he had come close to nipping the Roman Empire in the bud while it was still relatively small, before it had grown into the colossus it eventually became.
At the Battle of Cannae in 216 B. C., Hannibal faced a well-trained, well-equipped Roman opponent named Varro who had between two to four times Hannibal’s men and resources.
Moreover, Varro had “the home team advantage” as he was fighting on Roman soil.
Rather than retreat or surrender, Hannibal fought, employing a strategy which not only created victory, but resulted in the most decisive battle in the history of warfare.
He annihilated the Roman force of 72,000 and left 80 percent dead on the field of battle.
It sounded like an ICS, Inc.—type action to me, although of course ICS didn’t leave anyone lying dead in the marketplace.
But to those from IBM that had directly opposed ICS in that niche, it probably felt like a crushing defeat on the scale of a Cannae.
Don’t Develop Strategy by Formula
Like Hannibal, Peter Drucker did not believe in developing strategy by formula.
At least I never saw him teach such a method.
Other professors might teach strategy by what is now termed “portfolio management.”
This included Bruce Henderson and the Boston Consulting Group’s well-known four-celled matrix with their division into “problem children,” “stars,” “cash cows” and “dogs,” or the nine-celled matrix developed by the General Electric Company with the McKinsey Consulting Company.
Both of these rote methods of strategy development and modifications based on quantitative analysis were taught in almost every class on strategy in every graduate school at the time.
Even in marketing, a student spent time analyzing the product life cycle of products, with certain specific strategies recommended at each stage.
Though modified over the years, Bruce Henderson’s methodology was a detailed numerical analysis of all businesses, with a resultant grouping of them into categories by a common factor or factors causing these businesses to perform similarly.
A grouping based on customers might be one example.
These groupings were called Strategic Business Units, or SBUs.
The strategist then placed each SBU in the matrix.
The matrix was defined by two axes denoting quantitative measurements of business strength and market growth rate.
Each axis was divided equally by a line either vertical or horizontal.
So the matrix outlined by the two axes had one horizontal and one vertical line which divided it into four quadrants or cells.
From then on, the strategist simply followed standard actions according to their place in the matrix.
Those businesses in the dog quadrant you sold or closed down.
You used those falling in the cash cow quadrant to fund your stars.
You paid particular attention to the question marks, also called problem children, taking actions to turn them into stars, doing some watchful waiting, or withdrawing resources and considering them dogs to be dumped.
This system of strategy development by formula became extremely popular in the 1960’s.
Many companies found a quick way to dramatically change SBUs from problem children to stars, or even dogs into cash cows, without having to increase sales in individual businesses.
All you had to do was to acquire a company in the same group as represented by the troubled SBU.
The secret was acquisition, and the logical outcome was for a corporation to grow larger and larger.
Peter would have none of this formulaic nonsense, and, of course, he was proven right.
Drucker was all for a logical approach to arriving at a strategy.
His famous technique of asking questions which led respondents towards powerful strategic approaches was based on a system of applied logic.
However, he avoided precise quantifying inputs to arrive at precise quantified outputs which were intended to direct the manager in exactly what to do and how it was to be done.
Such was the four-celled matrix approach.
According to the matrix, bigness was supposed to lead to profitability through economies of size.
In fact, there were plenty of smaller companies making fortunes, while some giant corporations stumbled and choked on too much acquisition, their size and their loss of efficiency, and their inability to best satisfy the customer.
Some failed in the marketplace before they could recover.
Peter was not against acquiring as much information as you could prior to making a strategic decision.
He was certainly not against analyzing this information in whatever way brought clarity.
He just didn’t think that you could develop a successful business strategy by formula after doing this analysis, regardless of what method of categorization was used.
This was a theme that continued throughout Peter’s teaching.
The manager was supposed to think each different situation through, not to allow a formula or a system to make decisions for him.
It is interesting to compare the formula methodologies with one of Peter’s best-known successes in strategy, which I noted in an earlier chapter.
This success is known only because Jack Welch, the CEO of General Electric, went public with it.
Peter had asked Welch only two questions.
“If you weren’t already in a business, would you enter it today?” and “if the answer is no, what are you going to do about it?”
This was Peter’s way.
He would ask questions.
Some executives in companies he consulted with talked about being frustrated by his methods.
He didn’t tell them what to do.
He analyzed a company’s situation and then asked the questions which caused them to think through and articulate their own successful strategies.
This made it a little more difficult for me to understand what he was telling us as his students.
It was clear that he was definitely against some sort of formula for developing strategy.
But how in the world does one analyze the situation and then begin asking the right questions?
The Search for Drucker’s Methodology
Once I started teaching I used Hannibal and the Battle of Cannae as an example in teaching business strategy.
Like ICS, Inc., it proved that with the right strategy, a smaller organization could overcome a much stronger competitor.
I wanted my students to understand that managing a business was not simply reaction to environmental conditions, but formulation of unique strategies to reach the intended objectives.
Although Peter’s injunction not to adopt a strategy based on formula was clear, and I understood that he had a certain way of looking at things, I did not understand his method.
What was it, exactly?
I know that the simplest thing would have been to ask him.
However, many of us had done just that in the classroom.
In reviewing his comments and explanations, he told us what to do, but not how to do it.
I concluded that he himself might not recognize what he was doing to result in his successful advice based on his analysis.
But I knew it was significant that he invariably posed questions which clients themselves had to think through.
Why not simply provide the solution?
How Peter Analyzed Things
I went back over what Peter had taught in the classroom and also reread articles that he had written on the subject.
It seemed to me that certain common characteristics emerged.
He believed that general principles didn’t change, but that they might need to be applied differently depending on the situation.
I believe that, as a consultant, Peter first looked at a company’s overall objectives to see if they matched his basic injunction, which was to determine what business the company was in, who the customer was, what the customer wanted, and what the customer termed “successful” in fulfilling this want.
Presumably if an organization had not first done this, he would have insisted that it be done before he would proceed to an analysis.
In his analysis, Peter would look at two classes of variables in any situation.
One set of variables he considered “fixed” or “certain,” or at least relatively fixed.
Demographics might change, and company executives could probably recognize a trend for the future.
But for the period in which the strategy was to be implemented they could assume the demographics to be fixed, meaning, in this state, they were also certain.
Such “certainties” had to be faced, whether or not they were unpleasant.
For example, demographics might be a negative factor that must be considered by industry Or they could be a very positive factor leading to an opportunity.
In any case, the strategist had little control over them.
The other set of variables were those over which the strategist might exercise more control.
These might include the product or service and its quality pricing, and means of distribution, etc.
Increasing global competition was a real challenge.
Here was an issue Peter was very much aware of, due to his consulting work, especially in Japan.
He frequently cautioned us to consider the global competition factor.
Even before the oil crises of the 1970’s, he felt this “certain” variable had simply been ignored by most American industries.
He pointed out that as early as the late 1950’s, Detroit automobile manufacturers knew that overseas competitors were acquiring the capability of producing high-quality low-cost cars.
As quality increased, and with the right marketing, this development would invariably lead to their capturing a dominant share of the American market.
They would do so unless a new strategy was implemented in what was then the present.
Despite this, little or nothing was done.
The oil crises, and the fact that foreign cars, especially Japanese cars, were more fuel efficient than American cars, was simply the luck of the draw, which speeded an inevitable process.
They would have still taken giant shares from the American companies without this unpredicted occurrence, although even the importance of fuel efficiency might have been predicted from an analysis of our dependency on foreign oil over which we had little control.
Drucker knew that risk could not be avoided.
Risk was certain.
There were unknowns in every situation, and the precise future was a mystery.
He felt that these unknowns could best be dealt with and minimized by first deciding what a corporation wanted to do and then setting out to do it—that is, creating one’s future (see Chapter 11).
Therefore, one had to plan ahead and then take the actions necessary to achieve the desired goals.
Of course, major threats should be identified, along with some alternative strategies should any of these threats occur.
That might have been done by American companies in planning for stiffer competition from all foreign cars, those coming from Japan and elsewhere.
Of course, it was not.
So, Peter’s method must have started with an analysis of the situation in the marketplace and identifying what he called certainties, or factors that we could not control that would be faced.
In addition to analyzing the environment as one class of “certainty” variables, Peter also looked at the company and its resources on hand or those it could obtain at the particular time needed.
Since this was only partly under control of the strategist, this would actually be considered a “certainty” and consideration would have been necessary as a reality check.
Could the company reasonably attain its objectives given the resources it had at its disposal?
How did Drucker come up with highly creative strategic solutions which were so simple, yet so powerful?
By his own admission, he brought not his specific knowledge of a company or industry to bear, but his ignorance.
So he must have had some means of quickly determining the strategy to employ to achieve the objectives desired.
Many observers noticed his ability to cut through an unbelievably complicated strategic situation to get right to the heart of the matter and drive listening executives, through questions, to what the organization should do to reach its objectives.
I believe that he could only have been able to do this with basic principles which he employed in every strategic situation he encountered.
Drucker never articulated strategic principles in the classroom, and he may not have been aware of exactly what he was doing himself, but there is no other explanation.
As I indicated earlier, Peter felt that there were certain basic principles in all management that were unchanging.
I recall a successful executive who had a reputation of being extraordinarily successful in having a strong strategic sense under great pressure and limited time.
When asked his secret, he stated something to the effect that he had immersed himself in studying his profession to such an extent that even under pressure, this knowledge and his experience was somehow integrated without his having to consciously weigh the various factors.
As a result, he was able to make the correct decision; without suffering delay or introspection, he was able to articulate a successful strategy I believe it was the same with Drucker.
Through his study and work, he had unconsciously evolved certain principles of strategy such that he was able to look at a situation and immediately understand how to achieve the objective desired.
The question was, could I discover these principles without Peter’s direct help?
I believe that Peter showed me that they existed, but I had to uncover them on my own.
This was a typical Drucker scenario which sometimes frustrated his clients.
Almost like an oracle, he would give strong hints and point a student in the right direction.
But it was up to the student to go the rest of the way I succeeded, but this process took me much longer than I thought it would.
My Search for Drucker’s Strategic Principles
To determine the essential principles of strategy that Drucker used, I researched not only his work, but strategists and strategic thinkers spanning more than 7,000 years of recorded history, from both east and west, and representing a wide variety of fields.
I studied the writings of ancient Chinese strategists like Sun Tzu, T’ai Kung Chiang Shang, and Sun Pin, as well as Epaminondas of Thebes, who at Leuctra in 371 B.C., defeated the “unbeatable” Spartans, although they outnumbered his forces, two to one.
My research included the well-known German military writer Karl von Clausewitz, but also his contemporary and, some say the superior strategist, the Swiss general Antoine-Henri Jomini.
Then there were more modern strategists such as the Englishman B. H. Liddell Hart and the Italian economist—strategist Vilfredo Paredo.
In 1897, Paredo found he could statistically prove the value of economizing to concentrate resources.
He developed the 80/20 principle:
80 percent of results are derived from only 20 percent of the effort—a crucial comment on the proper allocation of always-limited resources.
I tried to relate what resulted in these successes to what might prove successful in modern business.
I wish I had been able to conduct my research on an ongoing basis, but other projects kept cropping up which forced me to drop this work temporarily and to do something else.
At first I identified several hundred principles of strategy.
However, many were repetitive.
I finally whittled this list to only fourteen principles of the original group which I thought were completely non-repetitive.
I extended the results of my research to other endeavors.
I actually did some research including office politics, sports, and even romance.
I was surprised, but the principles endured in many different areas of human endeavor.
I didn’t share this research with Peter at the time.
I thought that I’d better get it all together before approaching him.
Also it looked like I had a way to go.
Some of my fourteen principles were too specific to certain situations.
Others needed to be reworked for clarity and emphasis.
Eventually, I refined my original list again, this time to ten essential principles.
I was pretty proud of myself.
They were the distillation from the thinking of the greatest strategists who have ever lived in many areas of human activity, and in my opinion, they were applicable across the board to all areas on human endeavor, including, of course, business.
I saw Peter at Claremont after concluding this research at a conference held there in the spring of 2004.
I had told him about my work sometime previously.
I had hoped to speak with him at the conference as it was almost done, but I did not get the opportunity.
He had stopped teaching, and his colleagues told me that he was clearing out his garage and getting his papers in order and turning them over to the university.
For various reasons, including both of our schedules and his declining health, I did not get an opportunity to share these strategy principles with him before publication of them as The Art of the Strategist (AMACOM, 2004).
So I cannot say whether he would have agreed with them or whether he would have recognized them as those principles that had been drivers in his thinking.
I did have a number of CEOs and others review them and comment.
I believe they are the essential principles of strategy, but I cannot claim them to be Drucker’s principles of strategy.
Still, as was pointed out at his memorial service after his death, we, his former students, are all Peter’s “apprentices.”
So, from one of many apprentices, here is what I came up with …