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Each member of the enterprise contributes something different, but all must contribute toward a common goal.
Their efforts must all pull in the same direction, and their contributions must fit together to produce a whole—without gaps, without friction, without unnecessary duplication of effort.
Every job in the company must be directed toward the objectives of the whole organization if the overall goals are to be achieved.
In particular, each manager's job must be focused on the success of the whole.
The performance that is expected of managers must be directed toward the performance goals of the business.
Results are measured by the contribution they make to the success of the enterprise.
Managers must know and understand what the business goals demand of them in terms of performance, and their superiors must know what contribution to demand and expect.
If these requirements are not met, managers are misdirected and their efforts are wasted.
Management by objectives requires major effort and special techniques.
In a business enterprise managers are not automatically directed toward a common goal.
On the contrary, organization, by its very nature, contains four factors that tend to misdirect:
the specialized work of most managers
the hierarchical structure of management
the differences in vision and work and the resultant isolation of various levels of management
the compensation structure of the management group
To overcome these obstacles requires more than good intentions.
It requires policy and structure.
It requires that management by objectives be purposefully organized and be made the living law of the entire management group.
The Specialized Work Of Managers
An old story tells of three stonecutters who were asked what they were doing.
The first replied, "I am making a living."
The second kept on hammering while he said, "I am doing the best job of stone-cutting in the entire country."
The third one looked up with a visionary gleam in his eyes and said, "I am building a cathedral."
The third man is, of course, the true manager.
The first man knows what he wants to get out of the work and manages to do so.
He is likely to give a "fair day's work for a fair day's pay."
But he is not a manager and will never be one.
It is the second man who is the problem.
Workmanship is essential—an organization demoralizes if it does not demand of its members the highest workmanship they are capable of.
But there is always a danger that the true workman, the true professional, will believe that he is accomplishing something when, in effect, he is just polishing stones or collecting footnotes.
Workmanship must be encouraged in the business enterprise.
But it must always be related to the needs of the whole.
Most managers and career professionals in any business enterprise are, like the second man, concerned with specialized work.
A person's habits as a manager, his vision and values, are usually formed while he does functional and specialized work.
It is essential that the functional specialist develop high standards of workmanship, that he strive to be "the best stonecutter in the country."
For work without high standards is dishonest; it corrupts the worker and those around him.
Emphasis on, and drive for, workmanship produces innovations and advances in every area of management.
That managers strive to do the best job possible—to do "professional human resource management," to run "the most up-to-date plant," to do "truly scientific market research" must be encouraged.
But this striving for professional workmanship in functional and specialized work is also a danger.
It tends to divert the manager's vision and efforts from the goals of the business.
The functional work becomes an end in itself.
In far too many instances the functional managers no longer measure their performance by its contribution to the enterprise but only by professional criteria of workmanship.
They tend to appraise subordinates by their craftsmanship and to reward and to promote them accordingly.
They resent demands made for the sake of organizational performance as interference with "good engineering," "smooth production," or "hard-hitting selling."
The functional manager's legitimate desire for workmanship can become a force that tears the enterprise apart and converts it into a loose association of working groups.
Each group is concerned only with its own craft.
Each jealously guards its own "secrets."
Each is bent on enlarging its own domain rather than on building the business.
The remedy is to counterbalance the concern for craftsmanship with concern for the common goal of the enterprise.
Without the institution, there would be no management.
But without management, there would be only a mob rather than an institution.
The institution is itself an organ of society and exists only to contribute a needed result to society, the economy, and the individual.
Organs, however, are never defined by what they do, let alone by how they do it.
They are defined by their contribution.
And it is management that enables the institution to contribute.
Management is tasks.
Management is a discipline.
But management is also people.
Every achievement of management is the achievement of a manager.
Every failure is a failure of a manager.
People manage rather than “forces” or “facts.”
The vision, dedication, and integrity of managers determine whether there is management or mismanagement.
Management and managers are the specific need of all institutions, from the smallest to the largest.
They are the specific organ of every institution.
They are what holds it together and makes it work.
None of our institutions could function without managers.
And managers do their own job—they do not do it by delegation from the owner.”
The need for management does not arise just because the job has become too big for any one person to do alone.
Managing a business enterprise or a public-service institution is inherently different from managing one's own property or from running a practice of medicine or a solo law or consulting practice.
Of course, many a large and complex enterprise started from a one-man shop. (think organization evolution)
But beyond the first steps, growth soon entails more than a change in size.
At some point (and long before the organization becomes even “fair-sized”), size turns into complexity.
At this point “owners” no longer run “their own” businesses even if they are the sole proprietors.
They are then in charge of a business enterprise—and if they do not rapidly become managers, they will soon cease to be “owners” and be replaced, or the business will go under and disappear.
For at this point, the business turns into an organization and requires for its survival different structure, different principles, different behavior, and different work.
It requires managers and management.
Legally, management in the business enterprise is still seen as a delegation of ownership.
But the doctrine that already determines practice, even though it is still only evolving in law, is that management precedes and even outranks ownership.
The owner has to subordinate himself to the enterprise’s need for management and managers.
There are, of course, many owners who successfully combine both roles, that of owner-investor and that of top management.
But if the enterprise does not have the management it needs, ownership itself is worthless.
And in enterprises that are big or that play such a crucial role as to make their survival and performance matters of national concern, public pressure or governmental action will take control away from an owner who stands in the way of management.
Thus the late Howard Hughes was forced by the United States government in the 1950s to give up control of his wholly owned Hughes Aircraft Company, which produced electronics crucial to U.S. defense.
Managers were brought in because he insisted on running the company as “owner.”
Similarly the German government in the 1960s put the faltering Krupp company under autonomous management, even though the Krupp family owned 100 percent of the stock.
The change from a business that the owner-entrepreneur can run with “helpers” to a business that requires management is a sweeping change.
It requires the application of basic concepts, basic principles, and individual vision to the enterprise.
One can compare the two kinds of business to two different kinds of organism: the insect, which is held together by a tough, hard skin, and the vertebrate animal, which has a skeleton.
Land animals that are supported by a hard skin cannot grow beyond a few inches in size.
To be larger, animals must have a skeleton.
Yet the skeleton has not evolved out of the hard skin of the insect; for it is a different organ with different antecedents.
Similarly, management becomes necessary when an organization reaches a certain size and complexity.
But management, while it replaces the “hard-skin” structure of the owner-entrepreneur, is not its successor.
It is, rather, its replacement.
When does a business reach the stage at which it has to shift from “hard skin” to “skeleton"?
The line lies somewhere between 300 and 1,000 employees in size.
More important, perhaps, is the increase in complexity.
When a variety of tasks all have to be performed in cooperation, synchronization, and communication, an organization needs managers and management.
One example would be a small research lab in which twenty to twenty-five scientists from a number of disciplines work together.
Without management, things go out of control.
Plans fail to turn into action.
Or worse, different parts of the plans get going at different speeds, different times, and with different objectives and goals.
The favor of the “boss” becomes more important than performance.
At this point the product may be excellent, the people able and dedicated.
The boss may be—and often is—a person of great ability and personal power.
But the enterprise will begin to flounder, stagnate, and soon go downhill unless it shifts to the “skeleton” of managers and management structure. (calendarize this?)
The word “management” is centuries old.
Its application to the governing organ of an institution and particularly to a business enterprise is American in origin.
“Management” denotes both a function and the people who discharge it.
It denotes a social position and authority, but also a discipline and a field of study.
Even in American usage, “management” is not an easy term, for institutions other than business do not always speak of management or managers.
Universities or government agencies have administrators, as have hospitals.
Armed services have commanders.
Other institutions speak of executives, and so on.
Yet all these institutions have in common the management function, the management task, and the management work.
All of them require management.
And in all of them, management is the effective, the active organ.
What is a business?
To know what a business is, we have to start with its purpose.
Its purpose must lie outside of the business itself.
In fact, it must lie in society, since business enterprise is an organ of society.
There is only one valid definition of business purpose: to create a customer.
Markets are not created by God, nature, or economic forces but by executives.
The want a business satisfies may have been felt by the customer before he was offered the means of satisfying it.
Like food in a famine, it may have dominated the customer's life and filled all his waking moments, but it remained a potential want until the action of businessmen converted it into effective demand.
Only then is there a customer and a market.
The want may have been unfelt by the potential customer; no one knew that he wanted a photocopier or a computer until these became available.
There may have been no want at all until business action created it—by innovation, by credit, by advertising, or by salesmanship.
In every case, it is business action that creates the customer.
It is the customer who determines what a business is.
It is the customer alone whose willingness to pay for a good or for a service converts economic resources into wealth, things into goods.
What the customer buys and considers value is never a product.
It is always utility, that is, what a product or a service does for him.
Because its purpose is to create a customer, the business enterprise has two—and only these two—basic functions: marketing and innovation. (calendarize this?)
Despite the emphasis on marketing and the marketing approach, marketing is still rhetoric rather than reality in far too many businesses.
Consumerism proves this.
When managers speak of marketing, they usually mean the organized performance of all selling functions.
This is still selling.
It still starts out with “our products.”
It still looks for “our market.”
True marketing starts out the way Marks & Spencer starts out, with the customer, his demographics, his realities, his needs, his values.
It does not ask, “What do we want to sell?”
It asks, “What does the customer want to buy?”
It does not say, “This is what our product or service does.”
It says, “These are the satisfactions the customer looks for, values and needs.
Marketing alone does not make a business enterprise.
In a static economy, there are no business enterprises.
There are not even executives.
The middleman of a static society is a broker who receives his compensation in the form of a fee, or a speculator who creates no value.
A business enterprise can exist only in an expanding economy, or at least in one that considers change both natural and acceptable.
And business is the specific organ of growth, expansion, and change.
The second function of a business is, therefore, innovation—the provision of different economic satisfactions.
It is not enough for the business to provide just any economic goods and services; it must provide better and more economic ones.
It is not necessary for a business to grow bigger; but it is necessary that it constantly grow better.
… Social problems, such as a deteriorating educational system, by contrast, are dysfunctions of society rather than impacts of the organization and its activities.
Since the institution can exist only within the social environment and is indeed an organ of society, such social problems affect the institution.
They are of concern to it even if … the company had no role in producing the decline in the education system.
A healthy business, a healthy university, a healthy hospital cannot exist in a sick society.
Management has a self-interest in a healthy society, even though the cause of society's sickness is not of management's making. (calendarize this?)
Management, Revised Edition
More on management
An institution exists for a specific purpose and mission, a specific social function.
In the business enterprise, this means economic performance.
With respect to this first task, the task of specific performance, business and nonbusiness institutions differ.
In respect to every other task, they are similar.
But only business has economic performance as its specific mission.
It is the definition of a business that it exists for the sake of economic performance.
In all other institutions—hospital, church, university, or armed services—economics is a restraint.
In those institutions, the budget sets limits to what the institution and the manager can do.
In business enterprise, economic performance is the rationale and purpose.
Business management must always, in every decision and action, put economic performance first.
It can justify its existence and its authority only by the economic results it produces.
A business management has failed if it fails to produce economic results.
It has failed if it does not supply goods and services desired by the consumer at a price the consumer is willing to pay.
It has failed if it does not improve, or at least maintain, the wealth-producing capacity of the economic resources entrusted to it.
And this, whatever the economic or political structure or ideology of a society, means responsibility for profitability.
But business management is no different from the management of other institutions in one crucial respect: it has to manage.
And managing is not just passive, adaptive behavior; it means taking action to make the desired results come to pass.
The early economist conceived of the businessman’s behavior as purely passive; success in business meant rapid and intelligent adaptation to events occurring outside, in an economy shaped by impersonal, objective forces that were neither controlled by the businessman nor influenced by his reaction to them.
We may call this the concept of the “trader.”
Even if he was not considered a parasite, his contributions were seen as purely mechanical: the shifting of resources to more productive use.
Today’s economist sees the businessman as choosing rationally between alternatives of action.
This is no longer a mechanistic concept; obviously the choice has a real impact on the economy.
But still, the economist’s “businessman”—the picture that underlies the prevailing economic “theory of the firm” and the theorem of the “maximization of profits”—reacts to economic developments.
The businessperson is still passive, still adaptive—though with a choice among various ways to adapt.
Basically, this is a concept of the “investor” or the “financier” rather than of the manager.
Of course, it is always important to adapt to economic changes rapidly, intelligently, and rationally.
But managing implies responsibility
for attempting to shape the economic environment;
for planning, initiating, and carrying through changes in that economic environment;
for constantly pushing back the limitations of economic circumstances on the enterprise’s ability to contribute.
What is possible—the economist’s “economic conditions”—is therefore only one pole in managing a business.
What is desirable in the interest of economy and enterprise is the other.
And while humanity can never really “master” the environment, while we are always held within a tight vise of possibilities, it is management’s specific job to make what is desirable first possible and then actual.
Management is not just a creature of the economy; it is a creator as well.
And only to the extent to which it masters the economic circumstances, and alters them by consciously directed action, does it really manage.
To manage a business means, therefore, to manage by objectives
Chapter 3, Management, Revised Edition
Changing Values and Characteristics
From chapter 19 of Innovation and Entrepreneurship by Peter Drucker
Amazon link: Innovation and Entrepreneurship
In the entrepreneurial strategies discussed so far, the aim is to introduce an innovation.
In the entrepreneurial strategy discussed in this chapter, the strategy itself is the innovation.
The product or service it carries may well have been around a long time—in our first example, the postal service, it was almost two thousand years old.
But the strategy converts this old, established product or service into something new.
It changes its utility, its value, its economic characteristics.
While physically there is no change, economically there is something different and new.
All the strategies to be discussed in this chapter have one thing in common.
They create a customer — and that is the ultimate purpose of a business, indeed, of economic activity.
As was first said more than thirty years ago in my The Practice of Management (New York: Harper & Row, 1954).
But they do so in four different ways:
by creating utility
by adaptation to the customer’s social and economic reality
by delivering what represents true value to the customer
... snip, snip ...
These examples are likely to be considered obvious.
Surely, anybody applying a little intelligence would have come up with these and similar strategies?
But the father of systematic economics, David Ricardo, is believed to have said once, “Profits are not made by differential cleverness, but by differential stupidity.”
The strategies work, not because they are clever, but because most suppliers—of goods as well as of services, businesses as well as public-service institutions—do not think.
They work precisely because they are so “obvious.”
Why, then, are they so rare?
For, as these examples show, anyone who asks the question, What does the customer really buy? will win the race.
In fact, it is not even a race since nobody else is running.
What explains this?
One reason is the economists and their concept of “value.”
Every economics book points out that customers do not buy a “product,” but what the product does for them.
And then, every economics book promptly drops consideration of everything except the “price” for the product, a “price” defined as what the customer pays to take possession or ownership of a thing or a service.
What the product does for the customer is never mentioned again.
Unfortunately, suppliers, whether of products or of services, tend to follow the economists.
It is meaningful to say that “product A costs X dollars.”
It is meaningful to say that “we have to get Y dollars for the product to cover our own costs of production and have enough left over to cover the cost of capital, and thereby to show an adequate profit.”
But it makes no sense at all to conclude and therefore the customer has to pay the lump sum of Y dollars in cash for each piece of product A he buys.”
Rather, the argument should go as follows: “What the customer pays for each piece of the product has to work out as Y dollars for us.
But how the customer pays depends on what makes the most sense to him.
It depends on what the product does for the customer.
It depends on what fits his reality.
It depends on what the customer sees as ‘value.’”
Price in itself is not “pricing,” and it is not “value.”
It was this insight that gave King Gillette a virtual monopoly on the shaving market for almost forty years; it also enabled the tiny Haloid Company to become the multibillion-dollar Xerox Company in ten years, and it gave General Electric world leadership in steam turbines.
In every single case, these companies became exceedingly profitable.
But they earned their profitability.
They were paid for giving their customers satisfaction, for giving their customers what the customers wanted to buy, in other words, for giving their customers their money’s worth.
“But this is nothing but elementary marketing,” most readers will protest, and they are right.
It is nothing but elementary marketing.
To start out with the customer’s utility, with what the customer buys, with what the realities of the customer are and what the customer’s values are—this is what marketing is all about.
But why, after forty years of preaching Marketing, teaching Marketing, professing Marketing, so few suppliers are willing to follow, I cannot explain.
The fact remains that so far, anyone who is willing to use marketing as the basis for strategy is likely to acquire leadership in an industry or a market fast and almost without risk.
Entrepreneurial strategies are as important as purposeful innovation and entrepreneurial management.
Together, the three make up innovation and entrepreneurship.
The available strategies are reasonably clear, and there are only a few of them.
But it is far less easy to be specific about entrepreneurial strategies than it is about purposeful innovation and entrepreneurial management.
We know what the areas are in which innovative opportunities are to be found and how they are to be analyzed.
There are correct policies and practices and wrong policies and practices to make an existing business or public-service institution capable of entrepreneurship; right things to do and wrong things to do in a new venture.
But the entrepreneurial strategy that fits a certain innovation is a high-risk decision.
Some entrepreneurial strategies are better fits in a given situation, for example, the strategy that I called entrepreneurial judo, which is the strategy of choice where the leading businesses in an industry persist year in and year out in the same habits of arrogance and false superiority.
We can describe the typical advantages and the typical limitations of certain entrepreneurial strategies.
Above all, we know that an entrepreneurial strategy has more chance of success the more it starts out with the users—their utilities, their values, their realities.
An innovation is a change in market or society.
It produces a greater yield for the user, greater wealth-producing capacity for society, higher value or greater satisfaction.
The test of an innovation is always what it does for the user.
Hence, entrepreneurship always needs to be market-focused, indeed, market-driven.
Still, entrepreneurial strategy remains the decision-making area of entrepreneurship and therefore the risk-taking one.
It is by no means hunch or gamble.
But it also is not precisely science.
Rather, it is judgment.
What do customers value?
The question, What do customers value?—what satisfies their needs, wants, and aspirations—is so complicated that it can only be answered by customers themselves.
And the first rule is that there are no irrational customers.
Almost without exception, customers behave rationally in terms of their own realities and their own situation. (Their logic bubble — see below)
Leadership should not even try to guess at the answers but should always go to the customers in a systematic quest for those answers.
I practice this.
Each year I personally telephone a random sample of fifty or sixty students who graduated ten years earlier.
I ask, “Looking back, what did we contribute in this school?
What is still important to you?
What should we do better?
What should we stop doing?”
And believe me, the knowledge I have gained has had a profound influence.
What does the customer value? may be the most important question.
Yet it is the one least often asked.
Nonprofit leaders tend to answer it for themselves.
“It’s the quality of our programs.
It’s the way we improve the community.”
People are so convinced they are doing the right things and so committed to their cause that they come to see the institution as an end in itself.
But that’s a bureaucracy.
Instead of asking, “Does it deliver value to our customers?” they ask, “Does it fit our rules?”
And that not only inhibits performance but also destroys vision and dedication.
— Peter Drucker,
The Five Most Important Questions …
Quality in a product or service is not what the supplier puts in.
It is what the customer gets out and is willing to pay for.
A product is not quality because it is hard to make and costs a lot of money, as manufacturers typically believe.
This is incompetence.
Customers pay only for what is of use to them and gives them value.
Nothing else constitutes quality.
— Peter Drucker
The Logic Bubble
I (Edward de Bono) created the term ‘logic bubble’ in a previous book.
When someone does something you do not like or with which you do not agree, it is easy to label that person as stupid, ignorant or malevolent.
But that person may be acting ‘logically’ within his or her ‘logic bubble’.
That bubble is made up of the perceptions, values, needs and experience of that person.
If you make a real effort to see inside that bubble and to see where that person is ‘coming from’, you usually see the logic of that person’s position.
In the school programme for teaching thinking (CoRT (Cognitive Research Trust) programme) there are tools which broaden perception so the thinker sees a wider picture and acts accordingly.
One of these tools is OPV, which encourages the thinker to ‘see the Other Person’s Point of View’.
We have numerous examples where a serious fight came to a sudden end when the combatants (who had learned the methods) decided to do an OPV on each other, a very similar process to understanding the ‘logic bubble’ of the other party.
— Edward de Bono
Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (P.S.)