12/28/21, 3:25 PM The Best Of Peter Drucker 1/8

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The Best Of Peter Drucker

Jul 29, 2014, 08:33pm EDT

Steve Denning Senior Contributor

Everyone knows that Peter Drucker was the founder of modern management. But how do we come to terms with the writings of a man who wrote 39 books? Even to read his 811-page classic, Management: Tasks, Responsibilities, Practices (1973) or the revised edition of 572 pages (2008),is more than most readers get round to. Inevitably most of us pick and choose.

An excellent introduction to Drucker’s thinking and one of the real “raisinsin the cake” which was recently flagged by Jim Hays, is Peter Drucker nine-page paper for The Economist in November 2001: “Will The Corporation Survive?” Drucker’s answer to his own question was: “Yes, butnot in the form that we know it.” The paper was incorporated into the 2008edition of Drucker’s Management, but it is also available here.

Five basic assumptions of the 20 Century

The paper, written 13 years ago,  is almost as fresh as if it was writtenyesterday. It argues that for “most of the time since the corporation wasinvented around 1870, the following five basic points have been assumed toapply:”

1. “The corporation is the master, the employee is the servant,because the corporation owns the means of production “

2. “The great majority of employees work full-time for the corporation“

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3. “The most efficient way to produce anything is to bring togetherunder one management as many as possible of the activities neededto turn out the product,” because, as Ronald Coase argued, this lowerstransaction costs.

4. “Suppliers and especially manufacturers have market power becausethey have information about a product or a service that the customerdoes not and cannot have “

5. “To any one particular technology pertains one and only one industry,and conversely, to any one particular industry pertains one and onlyone technology.”

Competition was very orderly with “everything in its place.” Thus “everybodytook it for granted that every product or service had a specific application,and that for every application there was a specific product or material…Competition therefore took place mainly within an industry. By and large, itwas obvious what the business of a given company was and what its marketswere.”

The assumptions upended

Now, each of those assumptions has been turned upside down:

1. The corporation is no longer the master of the employee because “themeans of production is knowledge, which is owned by knowledgeworkers and is highly portable.”

2. “A growing number of people who work for an organisation will notbe full-time employees but part-timers, temporaries, consultants orcontractors or employees of, an outsourcing contractor.”

3. It no longer makes sense to bring everything under one management, because (a) “the knowledge needed for any activity has become highly specialised. It is therefore increasingly expensive, and also increasingly difficult, to maintain.” (b) Transaction costs are drastically reduced, particularly the cost communications.

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4. “The customer now has the information. the manufacturer willcease to be a seller and instead become a buyer for the customer.”

5. “There are few unique technologies. Increasingly, the knowledgeneeded in a given industry comes out of some totally differenttechnology.”

“One thing is almost certain: in future,” Drucker wrote, “there will be notone kind of corporation but several different ones.” In the 20 Century,banks everywhere were very much alike and so were hospitals and retailers.In future, “different banks may be quite different from one another,depending on how each of them responds to the changes in its workforce,technology and markets. A number of different models is likely to emerge”Confederations of different kinds of organizations will emerge.

Top management is powerful but failing

Drucker saw that the importance of top management would increase in thisemerging world:

“As the corporation moves towards a confederation or a syndicate, it willincreasingly need a top management that is separate, powerful andaccountable. This top management’s responsibilities will cover the entireorganisation’s direction, planning, strategy, values and principles; itsstructure and its relationship between its various members; its alliances,partnerships and joint ventures; and its research, design andinnovation.”

Yet while the demands on top management were increasing, Drucker sawthat top management was not getting the job done.

“The recent failure rate of chief executives in big American companiespoints in the same direction. A large proportion of CEOs of suchcompanies appointed in the past ten years were fired as failures within ayear or two… This suggests that the jobs they took on had become

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undoable. The American record suggests not human failure but systemsfailure. Top management in big organisations needs a new concept.”

Drucker cites a few possible examples of rearranging managerialresponsibilities at the top. With the wisdom of hindsight, none of them lookparticularly plausible or sustainable, e.g. GE under Jack Welch.

The failure of top management relates less to any particular configuration ofmanagement responsibilities and more to another of Druckers centralthemes: the role of the corporation in society.

The role of the corporation in society

Drucker had a clear vision of the corporation as an agent of society:

“An equally important task for top management in the next society’scorporation will be to balance the three dimensions of the corporation:as an economic organisation, as a human organisation and as anincreasingly important social organisation. Each of the three models ofthe corporation developed in the past half-century stressed one of thesedimensions and subordinated the other two. The German model of the“social market economy” put the emphasis on the social dimension, theJapanese one on the human dimension and the American one(“shareholder sovereignty”) on the economic dimension.”

“None of the three is adequate on its own. The German model achievedboth economic success and social stability, but at the price of highunemployment and dangerous labour-market rigidity. The Japanesemodel was strikingly successful for 20 years, but faltered at the firstserious challenge; indeed it has become a major obstacle to recoveryfrom Japan’s present recession. Shareholder sovereignty is also bound toflounder. It is a fair-weather model that works well only in times ofprosperity.”

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Interestingly, Germany took action to deal with the issue of labor flexibility,and this one of the key success factors for Germany today. Meanwhile mostbig US corporations are still wedded to shareholder sovereignty.

A different kind of leadership is needed

“Corporations will have to pay attention,” Drucker argued, “both to theirshort-term business results and to their long-term performance”

Druckers hope was that the pension funds and mutual funds would lead theway.

“By 2000, pension funds and mutual funds had come to own themajority of the share capital of America’s large companies. This hasgiven shareholders the power to demand short-term rewards. But theneed for a secure retirement income will increasingly focus people’sminds on the future value of the investment.”

What Drucker didnt fully foresee is that the managers of pension funds andmutual funds would themselves have powerful incentives to focus on short-term shareholder value and the stock price. Their compensation is oftengeared to it, and the success of their fund sometimes depends on it–at leastin the near term.

Nor could he have foreseen the massive shift in CEO compensation that wasto occur by 2014. “In 1993, some 20 percent of executive compensation wasbased on stock,” Eduardo Porter wrote recently in the NYT. “Today, equityaccounts for about 60 percent of the remuneration of executives atcompanies in the S&P 500-stock index. With so much money tied up instock options and the like, it is not surprising that executives will do almostanything to give their share price a boost regardless of what costs this mightincur after their options have vested.”

Nor could Drucker have foreseen how severely the system would bedegraded by self-interest. Thus in a recent study published in the Accounting

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Review, an astonishing 62 percent of directors, who had a disclosedfriendship with the CEO, said they would cut the budget for research anddevelopment in order to assure the bonus for their friend, the CEO. Insteadof senior managers acting as responsible stewards of societal resources, asDrucker optimistically envisaged, we see leaders driven by greed andnepotism. Instead of wise statesmen capable of balancing social interests, wehave inherited the mean-spirited and the narrow-minded.

A different kind of management

To accomplish the kind of positive future that Drucker envisaged, it is nowmuch clearer in today than in 2001 that a different kind of leadership andmanagement is needed for our corporations.

It means a fundamental shift in how leaders think, speak and act in theworkplace. Whereas the 20 Century economy flourished with an ethos ofefficiency and control, accentuated in recent decades by values of self-interest and self-aggrandisement, the economy of the 21 Century willrequire an ethos of imagination, exploration, experiment, discovery andcollaboration, driven by a commitment to make a positive difference in theworld.

It implies:

a shift from a goal of making money to the goal of delightingcustomers profitably. Innovation is not an option: its an imperative.The only question is how.

a shift from controlling individuals to inspiring collaboration amongself-organizing teams, networks and ecosystems.;

a shift from coordinating work by hierarchical bureaucracy todynamic linking, with iterative approaches to development withdirect customer feedback and interaction with teams and networks.Co

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Of course, Drucker recognized all along that management is not a staticpursuit. “The demands on the skill, knowledge, performance, responsibilityand integrity of the manager have doubled in every generation during thepast half century,” he wrote in The Practice of Management, his 1954classic. That is even more true in 2014.

Other short introductions to Peter Drucker

Other short introductions to the world of Peter Drucker include:

And read also:

Why The Worlds Dumbest Idea Is (Finally) Dying

The Origin Of The Dumbest Idea In The World

How America lost the capacity to compete

Can Management Get Us Out Of The Mess It Has Created?

The five surprises of radical management

a shift from a preoccupation with economic value to an embrace ofvalues that will grow the firm and the accompanying ecosystems,particularly radical transparency, continuous improvement andsustainability.

a shift from top-down communications to horizontal conversations.Instead of telling people what to do, leaders inspire people acrossorganizational boundaries to work together on common goals.

“The Coming of the New Organization” by Peter Drucker: (HBRarticle, 1988)

“The American CEO,” by Peter Drucker (December 2004)

“A time to rediscover Peter F Drucker”, by Richard Straub (2009)

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Follow Steve Denning on Twitter @stevedenning

This article was prepared with assistance from Jim Hays, Richard Strauband Rick Wartzman

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My book, “The Age of Agile” was published by HarperCollins in 2018 and was selected by

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