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The Practice of Management

Google: A Druckerian Ideal?

Google turned out quite a dazzling display of data recently when it released its third-quarter results: Profit jumped 46 percent. Revenue soared 57 percent. The company’s shares shot up $6.14, to more than $639 each, on the news. But it’s another set of figures that most impresses me: 17, $0, and 20 percent.

These refer, respectively, to the number of cafés at Google’s Mountain View (Calif.) campus; what it charges employees for all the meals and snacks eaten there; and the amount of time it encourages its engineers to carve out each week to tackle company-related projects that interest them personally but aren’t part of their core assignments.

More than any enterprise I know of, Google has built a working environment that can only be described as Druckerian—early Druckerian, to be precise.

Beginning with some of his first major writings in the 1940s, Peter Drucker wanted “work to reflect social values like opportunity, community, solidarity, and individual fulfillment, not just business values like cost and efficiency,” explained the late management philosopher’s biographer, Jack Beatty.

Of course, plenty of companies (as well as other types of organizations) espouse these tenets, and many observe them to varying degrees.

The difference is that Google applies them to the fullest, and not simply through its much-vaunted list of perks, which includes—in addition to free gourmet food and the encouragement to dream—on-site haircuts and oil changes (which aren’t gratis); medical checkups; subsidized exercise classes; film series and lectures; gatherings for all sorts of hobbyists; shuttle-bus service throughout the Bay Area; parties and family events; weekly TGIF “town halls” and schmooze-fests where top executives Larry Page, Sergey Brin, and Eric Schmidt are regularly present; and hefty cash rewards for referring someone to work for the company or when buying a hybrid car.

A Self-Governing Village

Indeed, more than any one of these things, it’s the overall atmosphere that the Internet company has cultivated—Google’s gestalt—that puts it in step with Drucker’s early belief that “the corporation is not only an economic tool but a social institution.”

More specifically, his industrial-age vision called for the establishment of a “plant community” in which line workers would govern many of their own affairs and, in doing so, reap rewards that went well beyond their paychecks. Drucker, in his 1949 book, The New Society, wrote of workers’ demand “for good and close group relationships with their fellow workers, for good relations with their supervisors, for advancement, and above all, for recognition as human beings, for social and prestige satisfactions, for status and functions.”

At Google, there is no “plant” per se. But employees use language strikingly similar to Drucker’s when describing their high-tech home. “It’s like a village,” says Dan Ratner, a mechanical engineer who joined the company about two years ago.

The lunches and dinners served at Café Pintxo, a tapas joint, the pan-Asian Pacific Café, and any of the other eateries around Googleplex (as headquarters is known) are supposed to be pretty terrific. But what most whets Ratner’s appetite is the camaraderie and brainstorming that occur between bites.

It is not uncommon, he says, for a mealtime conversation to develop into a serious collaboration, often involving fellow employees he may never have met before. Once that happens, Ratner is likely to be off and running, using his 20 percent time to zip to Home Depot (where he can charge Google, without managerial approval, for basic supplies), build a prototype of his idea with some of his colleagues, and begin measuring its effectiveness.

A Dividend-Yielding Culture

The best innovations find their way in front of a supervisor and, if they make the cut, can ultimately win formal project status and funding. The ones that aren’t so hot fade away—usually very quickly. “It’s a real competitive place,” Ratner says. “It’s not all touchy-feely.”

Google won’t disclose what it spends on its myriad employee benefits, and a spokeswoman says that, in spite of the company’s computational prowess, it can’t quantify their effect on productivity. Clearly, however, the culture yields dividends. Among the projects that have emerged from 20 percent time are Gmail, Google News, and the Sky feature on Google Earth.

For Ratner, though, even the ideas that flame out have a tremendous value. The mere act of pursuing them, he says, speaks to “the entrepreneur, the artist” that tends to reside in many of Google’s 15,000-plus employees. It fulfills the “need in every human to create,” he adds.

What If the Going Gets Tough?

It must be noted that all of these offerings are relatively easy to provide when almost everything seems to be going without a glitch and the financial picture is so bright. Should Google’s swagger give way to a big enough stumble—as has happened with countless other firms that once seemed invincible—its commitment in all these areas will surely be tested.

Over time, Drucker himself gave up on the notion of a “plant community,” convinced, sadly, that most companies were consumed with the bottom line and little else. It also became more difficult to promote the corporate-community paradigm with job security in the U.S. and elsewhere growing ever more elusive. By the late 1980s, he had begun to look toward the nonprofit sector as the one that “gives people a sense of community, gives purpose, gives direction.”

Perhaps he abandoned the model of workplace-as-social-institution too soon. Then again, who could have guessed that the world’s most forward-thinking company in 2007 would have so boldly adopted a concept that Drucker framed more than half a century ago?

October 25, 2007

Has Toyota Lost Its Way?

The Toyota Way might just as well be called the Drucker Way. As much as any company anywhere, Toyota Motor eagerly embraced many of the key principles that Peter Drucker first laid out in the 1940s and ’50s: that corporations must move away from a “command and control” structure and cultivate a true spirit of teamwork at all levels; that line workers must adopt a managerial outlook and take responsibility for the quality of what they produce; that the enterprise must be steered by a clear set of objectives while giving each employee the autonomy to decide how to reach those results.

Though widely accepted now, plenty of U.S. companies at the time dismissed these notions as dangerously radical, if not downright loony. By contrast, they were “almost immediately translated into Japanese, eagerly read and applied,” Drucker wrote decades later.

Indeed, “Drucker deeply influenced Japanese management thinking,” Pascal Dennis noted in his 2002 book, Lean Production Simplified. “Companies like Toyota,” he added, organized their manufacturing operations by soaking in and then “refining Drucker’s ideas.”

So what might Drucker say now that Toyota finds itself hitting a particularly rough patch of road?

I believe that his advice would, in the end, be quite simple: Slow down, even just a tad, in the quest to be the world’s largest automaker.

Quality Slips

In the last few months, Toyota has been beset by a variety of troubles, including departures from its North American unit by several top executives; slumping sales (though things picked up again in October); and condemnation from environmentalists, who’ve challenged the company’s commitment to fighting global warming.

Most serious have been rising concerns over the reliability of Toyota’s vehicles. In October, Consumer Reports said quality had slipped so badly, it would stop giving Toyota’s new or redesigned models an automatic stamp of approval. A series of high-profile recalls in the last couple of years have also tarnished the Toyota Production System, long the envy of the world.

Toyota has downplayed many of its problems, contending that as it continues to expand and prosper, more and more people are quick to criticize it. “The nail that stands highest gets hammered,” a company spokesman told one reporter recently, invoking an old Japanese proverb.

Without a doubt, there is some truth to that. But make no mistake: It’s shoddiness, more than schadenfreude, that’s really the issue here.

Growth Can Make You Vulnerable

Toyota is bent on becoming the top-selling car company in the world, and as it hits the gas pedal on growth, it’s obviously finding it tough to maintain its usual standards for quality. The company shouldn’t be surprised by this. Perhaps, though, this was the one lesson from Drucker that Toyota somehow missed.

“Growth at a high rate and for an extended period is . . . anything but healthy,” Drucker declared in Management: Tasks, Responsibilities, Practices, his 1973 classic. “It makes a business—or any institution—exceedingly vulnerable. It makes it all but impossible to manage it properly. It creates stresses, weaknesses, and hidden defects which, at the first slight setback, become major crises.”

In fairness, it’s General Motors, even more than Toyota, that seems caught up in the game of who’s the biggest. After Toyota took over as the world’s leading seller of automobiles earlier this year, GM Chief Executive Rick Wagoner sounded like a kid who’d just lost his marbles at recess. “I like being No. 1,” he said. “And I think our people take pride in that, so it’s not something that we’re going to sit back and let somebody else pass us by.” (GM has since reclaimed the crown—at least for the moment.)

Yet Toyota hasn’t been above a bit of grandstanding of its own. Several years ago, for instance, it announced plans to ramp up global production and seize market share under the slogan “We Can & We Will.” Last August, Toyota President Katsuaki Watanabe predicted that the company would sell 10.4 million vehicles in 2009—smashing GM’s industry record of 9.6 million sold, set in 1978.

Continuous Improvement

Nobody is accusing Toyota of being reckless. Watanabe has spoken repeatedly of the company’s need to be extra-attentive to the dependability of its products as it keeps growing, and executives have imposed even tougher quality-control methods in light of its recent difficulties. Hubris, it’s safe to say, won’t destroy Toyota.

“Breakthrough innovation is only one aspect of “the company’s culture, Jeffrey Liker concluded in his book The Toyota Way. “Possibly the most important aspect is Toyota’s relentless application of the more ‘mundane’ process of continuous improvement”—kaizen in Japanese. The company has proven, Liker continued, that it’s adept at “learning from its mistakes, determining the root cause of problems, providing effective countermeasures,” and “empowering people to implement those measures.”

For all these reasons, it’s a darn good bet that Toyota will restore its reputation for quality in the next couple of years and also get where it’s trying to go, distancing itself from GM to become the undisputed king of the auto industry.

But in the meantime, the few dents it has suffered of late serve as a useful reminder for all managers. As Drucker put it: “The idea that growth is by itself a goal is altogether a delusion. There is no virtue in a company’s getting bigger. The right goal is to become better. Growth, to be sound, should be the result of doing the right things. By itself, growth is vanity and little else.”

November 26, 2007

Wikia’s People-Powered Engine

As I sat down to work on this column, I couldn’t help but feel as if I should be lending my voice to the “Wikia Search stinks” chorus. After all, the Internet search engine, rolled out this month by Wikipedia cofounder Jimmy Wales, didn’t seem to be doing much to enhance the standing of my organization, the Drucker Institute.

When I typed our name into the search field, I got reasonably close: The top result that popped up was the Web site for our affiliate, the Peter F. Drucker & Masatoshi Ito Graduate School of Management. But our own site was nowhere to be found.

After sifting through the first 100 returns—including off-the-mark links to an organization of jewelry appraisers, a group of Scrabble enthusiasts from Canada, violinist Eugene Drucker, and the Virginia Peninsula Chamber of Commerce—without seeing www.druckerinstitute.com, I gave up. (On Google, by contrast, we were in our usual spot: No. 1 on the list.) No wonder Wales has been upbraided across the blogosphere. “Wikia Search Is a Complete Letdown,” howled the headline on TechCrunch.com. At SearchEngineLand.com, the review was just as blunt, characterizing Wikia’s offering as “crappy.”

Still, I can’t help but think the man whose ideas my institute is advancing, Peter Drucker, would have loved what Wales is attempting: having people play more of a role, and computers less of one, when it comes to interpreting information and spreading knowledge.

Will User Input Improve Search?

“The strength of the computer lies in its being a logic machine,” Drucker wrote in The Effective Executive, first published in 1967. “It does . . . what it is programmed to do. This makes it fast and precise. It also makes it a total moron; for logic is essentially stupid. It is doing the simple and obvious. The human being, by contrast, is not logical; he is perceptual. This means that he is slow and sloppy. But he is also bright and has insight. The human being can adapt; that is, he can infer from scanty information or from no information at all what the total picture might be like. He can remember a great many things nobody has programmed.”

Wales’s vision is to improve the potency, accuracy, and ingenuity of his search tool over time largely through the input of users, as opposed to the algorithms that drive searches on Google, Yahoo, and Microsoft. There are several ways folks can participate in the process, including by rating search results on a five-star system (complete with a note about why a particular link received the score it did). They can also write “miniarticles” to discuss results in an open-ended forum.

Wales has acknowledged this won’t happen overnight. It’s going to take time “for the humans to come in and start building” these functions, he told TechCrunch. Many are skeptical—and rightly so—that Wales’s effort will ever snatch meaningful market share from Google, home to nearly 60 percent of all Internet searches in the U.S., according to Nielsen/Net Ratings. (Its closest rival, Yahoo, accounts for about 18 percent.) Nevertheless, Wales’s instincts about what is needed in the world of search (and, indeed, across many areas of the high-tech universe) are right on, at least from Drucker’s perspective.

Birth of the Knowledge Worker

Long before most anyone else had begun to glimpse it, Drucker recognized we were in the midst of a historic transformation. He came to call the age we had entered the “postcapitalist society”—an era in which labor, land, and capital are less important and “the main producers of wealth have become information and knowledge.” The denizens of this new world are, of course, “knowledge workers”—a term Drucker coined in 1959.

But Drucker wasn’t always so enamored of the way knowledge was being cultivated. For one thing, he suggested information technology was, by and large, too focused on the “T”—that is, the collection, storage, transmission, and presentation of data—and not focused enough on the nature of the “I.” As he put it, “What is the meaning of the information? What is the purpose?”

What can get at those questions, he wrote in 1999’s Management Challenges for the 21st Century, is not “more data, more technology, more speed.” What’s required is to step back and figure out what kind of information would best help tackle the task at hand—a determination in which living, breathing creatures have a clear advantage over cold calculations.

People Connect the Dots

Drucker also taught that those using information should assume active roles in shaping it. “Only individual knowledge workers . . . can convert data into information,” he counseled. “And only individual knowledge workers . . . can decide how to organize their information so that it becomes their key to effective action.” To leave it to the technology wizards, in other words, is a big mistake.

Finally, humans may well be better equipped than computers to do something else Drucker deemed crucial: connect the dots between highly specialized disciplines or, as he described it, “to mobilize the multiple knowledges that we possess.”

Whether Wikia can do all this in a search context remains to be seen. Certainly it has a long way to go. And yet by early this week, my institute’s Web site had magically soared to the second slot on the list, evidently propelled there by the thing Drucker believed in most: people power.

January 17, 2008

What Can Microsoft Offer Yahoo?

You’d be hard-pressed to find many things to which Peter Drucker was as openly hostile as the hostile takeover. In his book The New Realities, he went so far as to call the gobbling up of companies in this fashion “the most serious assault on management in its history—a far more serious assault than any mounted by Marxists.”

Mind you, he made these comments in 1989, when all too many real-life Gordon Gekkos were commanding center stage. What rankled Drucker was the tendency of these corporate raiders to quickly dismantle the enterprises they’d just gotten their hands on, as if they were stolen cars, “sacrificing long-range, wealth-producing capacity to short-term gains.”

Of course, the unsolicited takeover proposal dominating the news these days—Microsoft’s $44.6 billion bid for Yahoo—doesn’t fit this mold. Microsoft hopes to strengthen Yahoo’s core assets, not strip them.

Still, that doesn’t mean Drucker wouldn’t have viewed Microsoft’s attempt as fundamentally flawed. The reason: I suspect he would have questioned whether the software giant actually brings enough to the party.

What may happen next is unclear. Yahoo, having spurned Microsoft’s overture, is reportedly in talks with News Corp. about some alternative alliance. Microsoft, meanwhile, seems to have two choices: raise its offer in the hopes that Yahoo will yield, or launch a proxy fight and take its case straight to shareholders.

Cash: Not Enough

But what is its case, exactly? Contrary to the way many people tend to look at such propositions, Drucker believed it’s incumbent on the purchaser—not the entity being purchased—to add value. In his Jan. 31 letter to the Yahoo board, Microsoft Chief Executive Steve Ballmer focused primarily on one advantage that a combination of the two companies’ Internet operations would create: “scale.” In fact, he used the word no fewer than five times in his missive.

There’s sound logic behind that. No one doubts it’s going to take considerable heft at this stage to even try to challenge Google, the undisputed industry leader. As Ballmer noted, this means possessing a sufficiently large online advertising platform, as well as having the “expanded R&D capacity” to drive innovation.

The issue is: What specific pluses, besides sheer size, would result from a Microsoft-Yahoo marriage? By definition, the union of any two big companies will help achieve scale; that’s simply a function of arithmetic. What Drucker suggested is if a takeover is going to work in the long run, it needs to be predicated on much more than that.

“An acquisition will succeed,” he wrote in The Frontiers of Management, “only if the acquiring company thinks through what it can contribute to the business it is buying, not what the acquired company will contribute to the acquirer, no matter how attractive the expected ‘synergy’ may look.

“What the acquiring company contributes may vary,” Drucker added. “It may be management, technology, or strength in distribution.” The one thing it can’t be, according to Drucker, is the one thing that Microsoft has lots of: dough. “Money alone,” he said, “is never enough.”

Two-Way Street

A collection of case studies, written by Drucker and updated by my Claremont Graduate University colleague Joe Maciariello, cites the 1998 merger of Citibank and Travelers—a transaction initiated by Sandy Weill, then chairman of Travelers—as an example of how to do this right. At the time, Citibank enjoyed a strong presence around the globe. Travelers, for its part, boasted a terrific portfolio of financial products and services.

“What Travelers saw itself as being able to contribute,” Drucker and Maciariello explained, “was to greatly increase the volume of business the superb Citibank worldwide distribution system . . . could sell, and at little or no cost.”

So what would Microsoft provide if it were ultimately able to snap up Yahoo? Some analysts say plenty. Imran Khan of JPMorgan Securities has pointed, for instance, to Microsoft’s international reach. “If you look at Yahoo,” he says, “it is very strong in the United States, but it’s not very strong outside the U.S., whereas Microsoft has a . . . stronger position in the European market.”

Notably, however, most observers have zeroed in on the benefits that Yahoo would deliver to Microsoft—not the other way around. Among them: a share of online advertising revenue that’s more than double that of Microsoft’s MSN; advances Yahoo has made in online advertising auction theory and data-mining; and, as Jeffrey Rayport of the consulting firm Marketspace has put it, “features with the kind of sex appeal Microsoft itself could never achieve.”

No Simple Execution

Takeovers, even friendly ones, are rarely easy to execute. Top talent often flees, if it isn’t fired first. Cultures can clash, resulting in an ugly Us vs. Them dynamic. “Sometimes,” wrote Drucker, “it takes a whole generation before these invisible but impenetrable barriers come down.”

If Microsoft does wind up swallowing Yahoo, it may well have to sort out many such problems. But first, there is a more basic question for the boards and shareholders of both companies to ask themselves: What does Microsoft really offer Yahoo beyond a bucketful of cash? If there’s no good answer, count this as a deal Drucker would have discouraged.

February 14, 2008

Buffett’s Plan
for Successful Succession

A couple of weeks ago, Berkshire Hathaway Chairman Warren Buffett officially put the kibosh on what many an investor must have regarded as the ultimate succession plan: “I’ve reluctantly discarded the notion of continuing to manage the portfolio after my death—abandoning my hope to give new meaning to the term ‘thinking outside the box,’” Buffett, 77, wrote in his annual letter to shareholders.

Despite his tongue-in-cheek approach, Buffett touched on one of the most important issues an enterprise faces: figuring out who’s the right person to one day take the reins.

A company’s very “survival,” Peter Drucker wrote in his 1946 book, Concept of the Corporation, depends on the ability “to develop independent leaders below the top who are capable of taking top command themselves, and to devise a system under which succession will be rational and by recognized merit rather than the result of a civil war within the institution and of force, fraud, or favoritism.”

Drucker’s thinking on many topics evolved over the course of his long career. This wasn’t one of them. In Management Challenges for the 21st Century, published in 1999, he echoed what he had concluded more than 50 years earlier: “Succession has always been the ultimate test of any top management and the ultimate test of any institution.”

Failed Succession Planning

What’s amazing is how many organizations are, by this measure, outright failures. The Human Capital Institute, a professional association and research group, estimates fewer than 50 percent of North American companies with revenue of more than $500,000 “have any meaningful CEO succession planning in place.”

Even some of the biggest corporations have been caught flat-footed. After Stan O’Neal was ousted as Merrill Lynch’s chief executive last year, his predecessor, Daniel Tully, decried the fact that the investment bank was forced to look outside for a successor. Previously, “we spent days, months talking about succession planning,” Tully said in an interview with a Bloomberg reporter. In what he called the “hit-by-the-bus scenario,” names were continually collected in case “something happened to the chairman.”

The philanthropic universe isn’t any better. A 2006 survey by DRG, an executive recruitment firm that works exclusively with nonprofits, found that 58 percent of social-sector chief executives and their boards hadn’t discussed succession—even though 40 percent of CEOs intended to leave their job within two years. Size mattered not. “Organizations, large and small, are equally challenged and equally unprepared for leadership changes,” notes DRG’s managing partner, David Hinsley Cheng.

How does this happen?

Some of it is the result of fear—specifically, a fear by certain leaders (or “misleaders,” as Drucker labeled them) of having smart, self-assured colleagues around them. “An effective leader knows, of course, that there is a risk: Able people tend to be ambitious,” Drucker wrote in 1992’s Managing for the Future. “But he realizes that it is a much smaller risk than to be served by mediocrity. He also knows that the gravest predicament of a leader is for the organization to collapse as soon as he leaves or dies.”

Grooming and Promoting

Indeed, there is powerful evidence that the best institutions constantly cultivate and elevate those within—and don’t fall into the trap that says the only way to stimulate progress and change is to reach outside for new blood.

In their book Built to Last, Jim Collins and Jerry Porras reported that of 113 CEOs who had overseen corporations that were both outstanding and enduring—“visionary companies,” in their words—only 3.5 percent came directly from somewhere else. This compared with 22 percent of the 140 CEOs at the other companies they examined, businesses that were deemed “good” but not great.

What’s more, the most excellent organizations nurture their people up and down the line. Collins and Porras pointed to the financial publication Dun’s Review, which once described Procter & Gamble’s program for grooming managers as “so thoroughgoing and consistent that the company has talent stacked like cordwood—in every job and in every level.”

When it comes to choosing who to promote, there is no shortage of advice out there. The management shelf is crowded with books on the subject. Drucker, though, kept things pretty simple. One hard-and-fast rule is that the leader heading for the exit should never select his or her own heir. He or she can be part of the process—but shouldn’t control it. Otherwise, vanity is apt to override most every other consideration.

“We tend to pick people who remind us of ourselves when we were 20 years younger,” Drucker said. “First, this is pure delusion. Second, you end up with carbon copies, and carbon copies are weak.”

Strength in Numbers

As for Berkshire Hathaway, it’s evidently inclined to find different folks to put on the three hats Buffett wears: chairman, chief executive, and chief investment officer. Buffett has indicated that his son, Howard Buffett, will become chairman—a way to help preserve the company’s distinctive culture. Three internal contenders are being eyed for the CEO gig. (One of those widely thought to be in the running, David Sokol, just last week modified his duties at Berkshire’s utility unit, leading some to speculate he may be the favorite.)

For the investment job, Buffett said he has identified four outside possibilities, and “all wish to work for Berkshire for reasons that go beyond compensation.” Earlier, Buffett had suggested he might bring in a potential successor or two in this area—“a younger man or woman”—in something of an understudy role.

Meantime, Drucker would no doubt be delighted the billionaire is so clearly determined to meet his definition of true greatness: “the leader who himself has strength and leaves behind strength.”

March 13, 2008

Exxon Mobil Needs a Longer View

John D. Rockefeller has been described in many different ways: as greedy and cutthroat; as munificent and caring; as “solitary, taciturn, remote, and ascetic,” in the words of author Daniel Yergin. But as a manager, perhaps Rockefeller’s most indispensable quality was this: He was uncompromisingly forward-looking.

It was Rockefeller, more than any single figure, who helped revolutionize the way people in the nineteenth century illuminated their homes, hastening the shift from costly whale oil to kerosene—a fuel that was, as he put it, “cheap and good.”

Rockefeller’s heirs recently evoked that history as they went public with their criticism of Exxon Mobil, charging the company with concentrating too much on short-term gains and not doing enough to cultivate cleaner, renewable forms of energy for the long haul. “They are fighting the last war, and they’re not seeing they’re facing a new war,” griped Peter O’Neill, Rockefeller’s great-great-grandson.

It’s not that Exxon Mobil is doing nothing to pave a path to the future. Just last week—coincidently or not, given the Rockefellers’ rebuke—the company announced it would spend more than $100 million to complete development and testing of a technology that could cut the expense of removing carbon dioxide during the production of natural gas.

A Change Will Do You Good

Still, the controversy highlights a challenge Peter Drucker believed every organization must face head-on if it is going to survive, much less thrive: deciding what to walk away from as it endeavors to move from yesterday to tomorrow.

“To call abandonment an ‘opportunity’ may come as a surprise,” Drucker wrote in his 1964 book, Managing for Results. “Yet planned, purposeful abandonment of the old and of the unrewarding is a prerequisite to successful pursuit of the new and highly promising.”

It might sound simple. But Drucker recognized that human beings are loath to let go of things. Egos are inevitably bound up in whatever direction an institution is already headed. In many cases, fiefdoms have been established—and they are sure to be guarded zealously. Unless something has been an outright failure, it can be extremely difficult to convince folks that any change is warranted, that any existing operation should be pared back or altogether axed.

Hanging on Too Long

This is all the more true in enterprises where there is relentless pressure to get bigger and bigger. “Most common is the plea, ‘We must grow; we cannot afford to shrink,’” Drucker noted, quickly adding that this argument is pure sophistry. “It confuses fat with muscle,” he wrote, “and busyness with economic accomplishment.”

Exxon Mobil, for its part, raked in $10.9 billion in profit during the first three months of the year—its second-best quarterly showing ever—because of skyrocketing crude prices. Yet even in cases where a particular line of activity seems to be going swimmingly, one must not get seduced into hanging on too long.

“Yesterday’s breadwinner should almost always be abandoned on a fairly fast schedule,” Drucker asserted. “It still may produce net revenue. But it soon becomes a bar to the introduction and success of tomorrow’s breadwinner. One should, therefore, abandon yesterday’s breadwinner before one really wants to, let alone before one has to.”

Drucker’s chief issue was resources. Any institution, be it a corporation, a nonprofit, or a government agency, has a finite amount of capacity to do anything: If you place more money and brainpower in one area, another will automatically get less.

Also-Rans and New Opportunities

With this zero-sum situation in mind, Drucker cautioned managers to be especially careful when determining what to do with the “also-rans”—products, services, and assorted efforts that “are neither clear candidates for concentrated major work nor candidates for abandonment.” In this middling category, he explained, will likely fall “today’s breadwinners.”

The trick, Drucker said, is to ensure the also-rans don’t command resources that should be steered to initiatives with richer potential. “Only if resources are left over after the high-opportunity areas have received all the support they need, should the also-rans be considered,” Drucker advised. In general, he added, the also-rans will “have to make do with what they have—or with less. They are put on ‘milking status’: as long as they yield results, they will be kept—and milked. They will, however, not be ‘fed.’ And as soon as these ‘milk cows’ go into rapid decline, they should be slaughtered.”

Of course, figuring out what to abandon is only half the equation. Deciding what to zero in on next requires the same kind of discipline, the same level of focus. When seeking out a new opportunity, “don’t diversify; don’t splinter; don’t try to do too many things at once,” Drucker counseled in his 1985 classic, Innovation and Entrepreneurship.

But, at the same time, what’s most crucial is that you do try. As Drucker declared: “Of course innovation is risky. But . . . defending yesterday—that is, not innovating—is far more risky than making tomorrow.”

May 9, 2008

Drucker’s Take on Making Mistakes

Lyndon Johnson occupied the White House when KeyCorp first began raising its dividend. The Beatles topped the pop charts. Martin Luther King led tens of thousands of civil rights marchers through Alabama.

For 43 straight years, the company’s annual payout climbed, “a record we were extremely proud of,” in the words of KeyCorp Chief Executive Henry Meyer. That is, until earlier this month. The Cleveland bank, slammed by the weak housing market and an adverse tax ruling, announced that it would halve its dividend to 75 cents in a bid to save $200 million a year. It also said it would seek to raise $1.5 billion in capital.

“We think hope is a bad management strategy,” Meyer explained. “We’re trying to admit where we made mistakes.”

Mistakes are part of life; they’re part of business. But far too many enterprises spend time hiding them and running from them, rather than owning up to them.

Capitalizing on Candor

Given that, KeyCorp deserves much credit. Whether the company can now capitalize on its candor will depend, in large measure, on how management deals with those responsible for its stumbles. The smartest organizations, according to Peter Drucker, are those that turn lapses into learning opportunities.

“Nobody learns except by making mistakes,” Drucker wrote in his 1954 landmark book, The Practice of Management. “The better a man is, the more mistakes he will make—for the more new things he will try. I would never promote a man into a top-level job who has not made mistakes, and big ones at that. Otherwise, he is sure to be mediocre. Worse still, not having made mistakes, he will not have learned how to spot them early and how to correct them.”

Drucker’s tolerance for mistakes shouldn’t be confused with him cottoning to incompetence. There are plenty of occasions, he believed, when employees should be let go. “Management owes this to the enterprise,” Drucker said. “It owes it to the spirit of the management group, especially to those who perform well. It owes it to the man himself, for he is likely to be the major victim of his own inadequacy.”

But he cautioned against overreaching: “That a man who consistently renders poor or mediocre performance should be removed from his job also does not mean that a company should ruthlessly fire people right and left.” And he made clear that those in charge can’t just turn around and blame those who work for them. “Whenever a man’s failure can be traced to management’s mistakes,” Drucker declared, “he has to be kept on the payroll.”

Batting Average

Among management’s most common errors is putting a good person into the wrong job. After all, Drucker noted, “there is no such thing as an infallible judge of people, at least not on this side of the Pearly Gates.” Whenever such a slipup is made, Drucker counseled, it’s incumbent on the boss to say: “I have no business blaming that person, no business invoking the ‘Peter Principle,’ no business complaining. I have made a mistake.”

In the end, Drucker defined success not as being right every time. Rather, he wrote in his 1973 classic, Management: Tasks, Responsibilities, Practices, performance must be evaluated on terms more akin to a batting average. (Slugging percentage might even be a more apt way to look at it: Sometimes you hit a single or a double, and occasionally a home run. But other times, you strike out. Maybe even with the bases loaded.)

In Drucker’s view, not always getting a hit is not only acceptable; it’s part of what it takes to be an organization of excellence. “A management which does not define performance as a batting average is a management that mistakes conformity for achievement, and absence of weaknesses for strengths,” Drucker asserted.

Different Performances

A batting-average mentality, he added, allows for companies to accommodate different kinds of talent. “One man will consistently do well, rarely falling far below a respectable standard, but also rarely excel through brilliance or virtuosity,” Drucker wrote. “Another man will perform only adequately under normal circumstances but will rise to the demands of a crisis or a major challenge and then perform like a true ‘star.’ Both are ‘performers.’ Both need to be recognized. But their performances will look quite different.

“The one man to distrust, however, is the one who never makes a mistake,” Drucker continued, “never commits a blunder, never fails in what he tries to do. He is either a phony, or he stays with the safe, the tried, and the trivial.”

Drucker not only penned these words; he lived them. By the 1950s, Drucker had concluded there was only one way to manage people correctly: by assuming that all of them will be responsible and self-directed as long as they find their work fulfilling. In 1960 a competing theory was articulated, which held that managers treat each and every employee as if they are inherently self-centered, lazy, and resistant to change.

But then along came psychologist Abraham Maslow, who in 1962 maintained that, either way, a single approach is silly. Drucker was quickly persuaded. “Maslow’s evidence is overwhelming,” he wrote, that “different people have to be managed differently.”

The bottom line for Drucker was that he and others who’d shared his one-size-fits-all view of human motivation “were dead wrong.” If only more people had the courage to say that—and then learn from it—a lot more things would go right.

June 19, 2008

What Drucker Would Say About Mervyns

Mervyns portrayed itself as a victim of the crummy economy and a miserable retail environment last week as it filed for Chapter 11 bankruptcy protection. But in truth, a key part of the department store chain went bankrupt long ago. It’s what Peter Drucker called the “theory of the business.”

Every organization rests upon a set of such premises—fundamental notions about customers and competitors, about technology, about a company’s own strengths and weaknesses. When an enterprise fails, Drucker explained, it is often because “the assumptions on which the organization has been built and is being run no longer fit reality.”

As obvious as this may seem, it can be surprisingly hard to see. Many times, managers become preoccupied with how they are doing things. But what’s equally important—maybe even more important—is what they are doing in the first place. As Drucker noted: “There is surely nothing quite so useless as doing with great efficiency what should not be done at all.”

In a 1994 Harvard Business Review article, Drucker asserted that when a valid theory of the business is “clear, consistent, and focused,” it’s bound to be “extraordinarily powerful.”

Naming the Mission

It all starts with mission. Drucker cited, for example, Sears Roebuck, which “in the years during and following World War I defined its mission as being the informed buyer for the American family. A decade later, Marks and Spencer in Britain defined its mission as being the change agent in British society by becoming the first classless retailer.”

Mervyns, launched in San Lorenzo, Calif., in 1949, once had its own compelling vision of what it should be: a store that would provide high-quality products at a good value, filling a niche between Sears and Montgomery Ward at the lower end of the market and fancier, white-glove merchants at the upper end.

Through the 1950s and ’60s, Mervyns prospered under this formula, even in the face of heavy competition from J.C. Penney and others. In 1971, the company went public, and it soon boasted dozens of stores bringing in hundreds of millions of dollars in revenue. Seven years later Dayton Hudson (now Target) acquired Mervyns and pushed it into Arizona, Louisiana, New Mexico, Oklahoma, Oregon, and Washington. In 1983, Mervyns opened its 100th store. (It has 177 now.)

But all the while, its basic theory of the business stood still; in fact, Mervyns continues to tout itself as “the prototype for the midrange department store.”

The trouble is, all around it, things changed. More and more players barged into the space that Mervyns had comfortably occupied—Kohl’s, most prominently. Meanwhile, the whole idea of “midrange” had itself become blurry, as those considered lower-tier began carrying trendier goods and designer labels. “There is no middle anymore,” says retail consultant George Whalin. “It doesn’t exist.”

Under such challenging conditions, what should Mervyns’ theory of the business have become?

“That Emotional Connection”

There are no easy answers. But Tom Kelley, a branding expert with Concept Group USA who briefly worked at Mervyns, expressed little doubt when I posed the question to him. He believes that each store should have accentuated its “homespun feel,” deeply integrating itself into the community where it operated. He would have recruited store managers from local colleges, encouraged them to be active in civic affairs, and had them serve as a highly visible and welcoming presence for shoppers. “It’s all about building that emotional connection with your customer,” Kelley says.

In a sense, this is a page from the past. Being community-minded was originally a big part of Mervyns’ culture. In essence, it had been baked into its theory of the business from the get-go. But here, too, Mervyns faltered—so much so that it lost its distinctive identity both inside the organization and among consumers. “Think of Mervyns and what image comes to mind?” asked a 1997 newspaper piece on the company. “If you draw a blank, you’re not alone.”

Drucker pointed out that it’s not uncommon for a company to slip in this way, to take its theory of the business for granted as time passes. Management grows “less and less conscious of it,” Drucker wrote. “Then the organization becomes sloppy. It begins to cut corners. It begins to pursue what is expedient rather than what is right. It stops thinking. It stops questioning. It remembers the answers but has forgotten the questions.”

It would be unfair to suggest that Mervyns has done nothing to try to remedy its sagging fortunes over the years. It has highlighted its California roots, featured $1 to $5 in-store shops, and fiddled with its mix of name-brand versus private-label goods. But none of this amounted to what the company needed most: a thorough overhaul of its theory of the business. And, as Drucker cautioned, “patching never works.”

A Desultory Nature

In 2004, Target sold Mervyns to a consortium of investment firms. Since then, Mervyns has had four chief executives—another sign of its desultory nature when what is called for is decisive action.

The current CEO, a highly regarded Levi Strauss veteran named John Goodman, has spoken in recent months of taking a tack similar to the one Kelley favors: In an era of faceless corporate behemoths, he has indicated that he’d like to turn Mervyns into a real “neighborhood department store” by catering to Latino customers, making strategic hires and investments in staff training, and directing sourcing and buying accordingly.

My fear is that it’s too little, too late—that Mervyns didn’t recognize soon enough that when a theory of the business becomes obsolete, it is, as Drucker put it, “a degenerative and, indeed, life-threatening disease.” And that requires surgery, not Band-Aids.

July 31, 2008

When Cutting Costs Is Not the Answer

The layoff announcements are mounting by the day: 50,000 at Citigroup, 12,000 at AT&T, 6,000 at Sun Microsystems, 2,500 at DuPont, 1,200 at United Airlines, 850 at Viacom.

In all, major U.S. companies said in November that they were going to whack 181,671 jobs, the outplacement firm Challenger, Gray & Christmas reported this week. That was the most since January 2002 and brought the total number of reductions planned this year to more than 1 million. Earlier today, the Labor Department said nonfarm payrolls fell by a larger-than-expected 533,000, while the unemployment rate climbed to 6.7 percent, its highest point since October 1993.

Given the fragile state of the economy, it’s not surprising that employers are more likely to hand their workers a pink slip than a turkey this Christmas. But perhaps bloodletting isn’t the only answer. Certainly, it isn’t the only one that Peter Drucker would prescribe.

Not that Drucker was blind to the need for keeping a lid on costs. Indeed, he taught that enterprises big and small should always be asking themselves not how to make a particular aspect of the business more efficient but whether it should exist at all. “The question should be: ‘Would the roof cave in if we stopped doing this work altogether?’” Drucker explained. “And if the answer is ‘probably not,’ one eliminates the operation. It is always amazing how many of the things we do will never be missed.”

What’s important, Drucker said, is to make this a routine exercise—not something that happens only during downturns. “Businesses that actually succeed in cutting costs,” he said, “don’t wait until they have to cut costs.”

Investing in Knowledge Workers

In the same way, Drucker believed in investing in productive assets as a regular, everyday function—and there was no doubt as to where he thought investment should be channeled in this day and age. “The most valuable assets of the twentieth-century company were its production equipment,” he wrote. “The most valuable asset of a twenty-first-century institution . . . will be its knowledge workers.”

One person who has acted on these words—with extraordinary results to show for it—is K.H. Moon, the former chief executive of Korean consumer-products maker Yuhan-Kimberly. (Full disclosure: Moon, who is now a member of the national parliament in Seoul, until recently served on the board of the Drucker Institute, which I run.)

It was during the late 1990s, amid the Asian financial contagion, that Moon looked around and was disgusted by what he saw. “At almost all companies,” he recalls, “the management just followed the old wisdom—massive layoffs.”

Yet Moon felt that simply to slash employment was irresponsible, and he began to persuade his colleagues that there was a better way to go—not just to survive but to grow and prosper. This “was not the time to lose jobs,” he says, “but to build our capability, personally and companywide.”

To get there, Moon took several bold steps. One was to accelerate a push to a new staffing system, moving from a three-crew, three-shift arrangement to a four-crew, two-shift model. By spreading out the work this way—Moon has likened it to “job sharing in Western countries”—the company figures it has been able to employ 25 percent more mill workers than it otherwise would have.

Lifelong Learning

Because of this setup, employees work fewer hours overall. But they’re encouraged not to be idle. Yuhan-Kimberly pays for them to attend classes so they can improve their technical acumen as well as increase their general knowledge (through Chinese language instruction, for instance). It’s all based on a philosophy of lifelong learning—what Yuhan-Kimberly Chairman D.J. Lee calls the company’s “true source of competitiveness and sustainable growth.”

“It comes down to what Peter Drucker wrote about again and again—to see people not just as cogs in the wheel,” says Edward Gordon, author of The 2010 Meltdown: Solving the Impending Jobs Crisis, which commends Yuhan-Kimberly’s “counterintuitive approach.”

The upshot is that by providing a healthier work-life balance, by giving the rank and file the opportunity to enhance their skills continually, and by taking other steps to create a self-directed team culture, Yuhan-Kimberly has seen job satisfaction among its 1,700 employees soar. So has productivity (along with market share and revenue)—so much so that workers’ wages have also risen substantially.

Moon, meanwhile, has helped set up the New Paradigm Center, a government-funded organization that is teaching other Korean companies how to be Yuhan-Kimberly–like.

This formula won’t work for everyone; implementing it involves real costs and, thus, real risks. What’s more, there’s no avoiding the fact that layoffs are inevitable during a recession, no matter what is tried. Even Drucker, who so admired Japanese industry for its commitment to lifetime employment, recognized this ideal was bound to crack amid the unrelenting pressures of globalization.

But what Yuhan-Kimberly reminds us is that shedding thousands of positions doesn’t necessarily have to be management’s automatic response to a bleak economy. When things seem darkest, it’s time to innovate, not just eliminate.

December 5, 2008

Ask “For What?” Before “Who?”

At Borders, you can buy a hardback version of the essay collection Classic Drucker for $24.95 or grab the paperback for 10 bucks less. Here’s hoping that a few folks on the bookstore chain’s board of directors had the good sense to pick up a copy and peruse Chapter 5 before selecting their new chief executive.

Had they done so, they would have gleaned a few insights into what may well be the most crucial call that any enterprise makes: hiring key employees.

Ask the Right Question

In “How to Make People Decisions,” first printed in Harvard Business Review in 1985, Peter Drucker laid out a handful of guidelines for making a good hire. Among them: Look at three to five qualified candidates and make sure you perform adequate due diligence by checking out each with several former bosses and colleagues. “One executive’s judgment alone is worthless,” Drucker wrote. “Because all of us have first impressions, prejudices, likes and dislikes, we need to listen to what other people think.”

But in many ways, the hardest principle to follow is Drucker’s first: “Think through the assignment.” Or, to put it another way, you can’t answer “Who?” until you’ve first figured out, “For what?”

“When the task is to select a new regional sales manager,” Drucker explained, “the responsible executive must first know what the heart of the assignment is: to recruit and train new salespeople because, say, the present sales force is nearing retirement age? Or is it to open up . . . new and growing markets? Or, since the bulk of sales still comes from products that are 25 years old, is it to establish a market presence for the company’s new products? Each of these is a different assignment and requires a different kind of person.”

Beware the Renaissance Man

Though most executives would surely agree with this logic, many violate it nonetheless. In their book Who, Geoff Smart (who studied with Drucker) and Randy Street warn against falling into “one of the most common hiring traps”: getting seduced by somebody who seems to be able to do almost everything exceptionally well, thus promising to be a star no matter the situation.

“There is a tendency to gravitate to the best all-around athlete; you know—tremendous skill set, résumé that is knock-your-socks-off,” the authors quote Nicholas Chabraja, the chief executive officer of General Dynamics, as saying. Chabraja goes on to recall that he once hired someone like that—a man whose broad talents and creativity made him “a splendid business developer.” But what the company really needed at that point was an executive with a knack for running operations who could shrink a bulging backlog.

The Right Person for the Right Job

“I made the mistake of putting in place a guy who went on to put more orders in the backlog,” Chabraja says. “Operating margins actually went down. It took me a couple of years to address the mistake. The moral of the story was that I later got a guy whose skill set exactly matched the job at hand. He did gangbusters for us. . . . The other guy went on elsewhere to a splendid career where his role matched his skill set.”

Drucker could have easily guessed this would happen. The best business leaders, he wrote in his 1967 classic, The Effective Executive, “never talk of a ‘good man’ but always about a man who is ‘good’ for some one task.”

Borders, in announcing this week that it had tapped Ron Marshall to be its new CEO, seems to have this very idea in mind. The beleaguered retailer, weighed down by a heavy debt load and trying to stave off bankruptcy, said it must move “more aggressively” to improve its cash flow. Marshall, who most recently served as the head of a private equity firm, has the kind of deep financial background that may well lend itself to the specific challenges Borders now faces. The CEO he replaces, George Jones, came into the job with more of a reputation as an innovator than as a moneyman.

Not everyone views the who-vs.-what dynamic exactly the same. Jim Collins, in Good to Great, is adamant that building “a superior executive team” should be the first order of business for any company aspiring to be world-class. “Get the right people on the bus . . . before you figure out where to drive it,” he advises.

But Collins also points out that you must get “the right people in the right seats”—a matchmaking exercise that’s impossible without assessing, at least on some level, the specific work that needs to get done.

Effective Specialization

If all of this sounds as if we’re saying companies need people who are specialists, Drucker wouldn’t disagree. This isn’t to suggest that employees shouldn’t possess strong general traits: a good work ethic, high standards, and the like. But today’s knowledge worker is “usually a specialist,” Drucker wrote. “In fact, he can, as a rule, be effective only if he has learned to do one thing very well.”

Given that, however, Drucker also believed it’s essential for the specialist to understand how his or her job fits into the framework of the organization overall.

The goal of this “is not to breed generalists,” Drucker said. “It is to enable the specialist to make himself and his specialty effective. This means that he must think through who is to use his output and what the user needs to know and to understand to be able to make productive the fragment the specialist produces.”

All of which is to say: It’s critical that every “who” grasp the “why,” “when,” and “how” behind his or her “what.”

January 9, 2009

How Lack of Focus Hurt Detroit

Though it is sheer coincidence that Ford Motor, the only one of Detroit’s Big Three automakers not seeking aid from Uncle Sam, builds a car called the Focus, it’s hard not to appreciate the symbolism. Peter Drucker, for one, surely would have gotten a kick out it.

Drucker also wouldn’t be surprised that Ford’s rivals, Chrysler and General Motors, now find themselves struggling to survive. He had critical things to say about both of these companies over the years. As I’ve noted before, Drucker believed that since at least the 1940s, when he first studied GM, its top managers have resisted changing long-standing plans and policies—even as the world shifted around them. The upshot: a company that’s had tremendous trouble moving forward, like a Chevy stuck in the mud.

President Barack Obama’s auto task force zeroed in on that same weakness when it chided GM for being “far too slow” in doing what’s needed to turn itself around. But there’s another part of the task force’s assessment that Drucker would have agreed with as well, for it highlights a principle that he held was essential to good management (yet gets violated time and again): Don’t spread yourself too thin. “GM,” the White House panel said, “has retained too many unprofitable nameplates that tarnish its brands, distract the focus of its management team, demand increasingly scarce marketing dollars, and are a lingering drag on consumer perception, market share, and margin.”

To Drucker, one of the most important things that any organization can do is to adopt what he called a “rifle approach,” eschewing “product clutter.” “Economic results,” he wrote, “require that managers concentrate their efforts on the smallest number of products, product lines, services, customers, markets, distribution channels, end users, and so on which will produce the largest amount of revenue.”

Abandon Those Products

And yet as fundamental as this seems, Drucker added, many businesses foolishly “pride themselves on being willing and able to supply any specialty, to satisfy any demand for variety, even to stimulate such demands in the first place. And many businesses boast that they never, of their own free will, abandon a product.” Thanks to this attitude, plenty of companies “end up with thousands of products in their product line—and all too frequently fewer than 20 really ‘sell.’”

Assembling the workforce often gets handled with a similar lack of focus. “We build enormous staffs,” Drucker asserted, “and yet do not concentrate enough effort in any one area to get very far.” Then, during tough times, many companies pare expenses the same, ineffectual way: Rather than “pinpoint” cuts, as Drucker advocated, they resort to across-the-board reductions.

Drucker warned about this in a piece for Harvard Business Review in 1963. But it’s just as prevalent a problem these days. John Sullivan, a management professor at San Francisco State University and the former chief talent officer at Agilent Technologies, figures that more than half of all companies cutting back in the current downturn are implementing across-the-board layoffs, pay freezes, and furloughs. The reason, he says: “They don’t have the courage” to confront employees individually, and in many cases don’t have the proper performance measures to even know where to target.

Drucker’s basic message—“focus, focus, focus”—extended beyond the organization as a whole, right down to the individual. The best managers “do first things first and they do one thing at a time,” he wrote more than 40 years ago in The Effective Executive. Such single-mindedness, he explained, is dictated by a simple reality: “Most of us find it hard enough to do well even one thing at a time, let alone two.”

Concentration Is Key

“Mankind,” Drucker continued, “is indeed capable of doing an amazingly wide diversity of things; humanity is a ‘multipurpose tool.’ But the way to apply productively mankind’s greatest range is to bring to bear a large number of individual capabilities on one task. It is concentration in which all faculties are focused on one achievement.”

Time magazine may have dubbed today’s young people “the Multitasking Generation,” with their seeming ability to do their homework, chat online, and listen to their iPods—all simultaneously—but Drucker (a man who wrote 39 books, taught, and consulted) assiduously avoided being sidetracked from the main activity at hand.

He even kept a stack of preprinted response cards at the ready, allowing him to politely, but quickly and firmly, decline all manner of potential diversions. “Mr. Peter F. Drucker appreciates your kind interest,” the cards read, “but is unable to endorse or to review books, manuscripts, or proposals; to appear on radio or television; to join boards or panels of any kind,” and so on and so forth.

In fact, the “secret” of people who “do so many things,” according to Drucker, is that they knock them off one by one. “We rightly consider keeping many balls in the air a circus stunt,” he wrote. “Yet even the juggler does it only for 10 minutes or so. If he were to try doing it longer, he would soon drop all the balls.”

Or, perhaps, drive his company to the brink.

April 3, 2009

A Company Is More than Its CEO

It’s hard to read recent issues of The Atlantic and Harvard Business Review and not see one as a counterpoise to the other: “Do CEOs Matter?” asks a headline in the former. “What Only the CEO Can Do” trumpets a headline in the latter.

At a glance, there appears little question as to which of the two essays Peter Drucker would have found most persuasive. The piece in May’s HBR was authored by none other than A.G. Lafley, the chief executive of Procter & Gamble and a Drucker disciple. Indeed, many of Lafley’s insights are based on what he learned from Drucker.

But it’s doubtful that Drucker would have dismissed the June Atlantic article out of hand. Written by Harris Collingwood, it asserts that “the American obsession with who sits at the top of the organizational chart has gone much too far.”

We should be skeptical, Collingwood suggests, that the CEO possesses “supreme importance” and are right to challenge “the indispensability” of any single executive—even one as lionized as Warren Buffett or Steve Jobs.

What we’ve adopted as a culture “is Carlyle’s Great Man theory of history, painted on a corporate canvas,” Collingwood writes—and it’s often used to try to justify inordinately “big pay packages.”

Too Much for One Person

On all of this, Drucker surely would have agreed. At the very heart of his philosophy, after all, lies the notion that the magic of management is to “make people capable of joint performance.” Running any enterprise is, inherently, a team sport. No one person, no matter how capable, can handle it alone. For one thing, there’s simply too much to do. “An unlimited supply of universal geniuses could not save the one-man chief executive concept unless they could also bid the sun stand still in the heavens,” Drucker wrote in his 1954 classic, The Practice of Management.

Beyond that, nobody—not even the CEO—is good at everything. “Strong people,” Drucker pointed out, “always have strong weaknesses, too.” In the end, then, having “chief executive” embossed on your business card is “not about being less or more important,” Drucker wrote in his book Managing in the Next Society, “but differently important.”

Which takes us back to the pages of The Atlantic and, in turn, HBR. For his part, Collingwood cites several academic studies that have concluded “external forces influence corporate performance far more than CEOs do.” Yet for Drucker (and, by extension, Lafley), this is precisely the point: The first task of the CEO is to size up those external forces and decide how best to react to them.

“The CEO is the link between the Inside, i.e., ‘the organization,’ and the Outside—society, the economy, technology, markets, customers, the media, public opinion,” Drucker declared in 2004. “Inside, there are only costs. Results are only on the outside.”

Recalling these very words, Lafley says they helped him determine “which external constituency mattered most” for P&G—namely, the customer. While this may seem obvious, Lafley notes, P&G had started “losing touch with consumers” before he took the helm in 2000. At headquarters in Cincinnati, “employees were glued to their computers” and “mired in internal meetings with other P&Gers. . . . Too often we were working on initiatives consumers did not want and incurring costs that consumers should not have to pay for.”

Now, Lafley explains, “everywhere I go, I try to hammer home the simple message that the consumer is boss. We must win the consumer value equation every day at two critical moments of truth: first, when the consumer chooses a P&G product over all the others in the store; and second, when she or a family member uses the product and it delivers a delightful and memorable experience—or not.”

Information from “Outside”

To help maximize the chance for success, says Lafley, “almost every trip I take includes in-home or in-store consumer visits. Virtually every P&G office and innovation center has consumers working inside with employees. Our employees spend days living with lower-income consumers and working in neighborhood stores.” Such activities capture beautifully what Drucker described as the second specific task of the CEO: “to think through what information regarding the Outside is meaningful and needed for the organization, and then to work on getting it in usable form.”

Many businesses mistakenly view this exercise in parochial terms. “Toy makers tend to define the Outside as their toy-maker competitors,” Drucker wrote. “But the most meaningful competitors for the toy maker are not other toy makers but other claimants on potential customers’ disposable dollars. . . . Customer research, in other words, may be more important than market research.”

It is only after the CEO has adequately assessed the Outside, according to Drucker, that he or she is poised to tackle the other aspects of the job: answering the fundamental questions, “What is our business? What should it be? What should it not be?”; judging which results are most relevant for the institution; deciding between “short-term yields and deferred expectations”; picking priorities—and resisting the incessant pressure “to do a little bit of everything”; and placing the right people in key positions.

So, go ahead and read Lafley’s article to understand what being a CEO is all about. But just in case you find yourself intoxicated by the title, keep The Atlantic handy, too. It’ll sober you right back up.

May 29, 2009

GM: Lessons from the Alfred Sloan Era

Last week’s historic bankruptcy filing by General Motors has pundits pointing to places where the fallen car giant can learn important lessons as it seeks to revive its fortunes—rival Toyota, for example, or AT&T, which newly named GM Chairman Edward Whitacre helped turn into the world’s largest telecommunications company.

But here’s another, less obvious model of managerial success to consider: General Motors.

It was the GM of 60 years ago, after all, that helped define the discipline of management, having served as the subject of Peter Drucker’s landmark book Concept of the Corporation. “When this book was being written . . . the corporation had barely been discovered and was totally unexplored—resembling somewhat the Africa of the medieval mapmaker, a big white space across which was written: ‘Here elephants roam,’” Drucker remarked some four decades after the book’s publication in 1946. “Books on the corporation itself and its management could have been counted on the fingers of one hand.”

As noted previously in this space, Concept of the Corporation—and GM’s head-in-the-sand reaction to its mild criticisms—foreshadowed an insularity that would ultimately prove crippling to the automaker.

Yet it’s also worth recalling that Drucker found many, many things to admire about GM—and especially its chairman, Alfred Sloan. In an introduction to Sloan’s autobiography, My Years with General Motors, Drucker credited the no-nonsense executive with being “the first to work out systematic organization in a big company, planning and strategy, measurements, the principle of decentralization,” and more. Sloan’s role “as the designer and architect of management,” Drucker added, “surely was a foundation for America’s economic leadership in the 40 years following World War II.”

Defining the Professional Manager

Indeed, as Drucker saw it, Sloan was the pioneer who transformed management into a real profession, establishing the standard that the professional manager is duty-bound to put the interests of the enterprise ahead of his own. Sloan, Drucker wrote, also made clear that “the job of a professional manager is not to like people. It is not to change people. It is to put their strengths to work. And whether one approves of people or the way they do their work, their performance is the only thing that counts.” Sloan’s definition of performance, Drucker was quick to explain, meant much “more than the bottom line. It is also setting an example. And this requires integrity.”

But of all the pointers Drucker picked up from observing Sloan, there is one in particular that today’s GM might want to pay close attention to: reaching difficult decisions (Hummer or hybrid?) demands healthy dissent.

David Garvin, a professor at Harvard Business School, says one of GM’s fundamental problems over the years—an inability to make the right strategic calls—has been caused, at least in part, by a dearth of open debate among top managers. Rather than frankly and candidly working through various options, executives would often line up needed votes before meetings, like a group of Chicago ward heelers, and gather privately at “premeetings” to eliminate any surprises at the regular session.

“All too many decisions were precooked,” says Garvin, who wrote a 2004 case study on GM’s process for determining policy. Garvin points out that Sloan’s basic challenge was in some ways the opposite of that faced by his successors. He had to take a collection of highly independent, entrepreneurial car companies and coordinate their actions. As time has rolled on, GM has had the burden of figuring out how divisions scattered all over the world could tailor their lines to meet varying customer needs.

Test Opinions Against Facts

But whether you’re talking about the Alfred Sloan era or the Ed Whitacre era, there are a couple of common denominators: First, the company must provide absolute clarity as to who is responsible for deciding what. This, says Garvin, got “fuzzier and fuzzier” at GM as the organization became “progressively more complex” and layered with bureaucracy.

Second, when the time comes for a major decision to be made, such as which products to pursue and which to abandon, all the alternatives must be vetted honestly.

“Gentlemen, I take it we are all in complete agreement on the decision here,” Drucker quotes Sloan as saying. After everyone around the table nodded affirmatively, Sloan is said to have continued: “Then I propose we postpone further discussion of this matter until our next meeting to give ourselves time to develop disagreement and perhaps gain some understanding of what the decision is all about.”

Sloan, Drucker wrote in 1967’s The Effective Executive, “was anything but an ‘intuitive’ decision maker. He always emphasized the need to test opinions against facts and the need to make absolutely sure that one did not start out with the conclusion and then look for the facts that would support it. But he knew that the right decision demands adequate disagreement.”

That said, perhaps we can all agree on this: The “New GM” would be wise to study up on the GM of old.

June 12, 2009

Manage Your Boss

The moment has come for workers everywhere to be put through the midyear microscope, as supervisors assess their employees’ performances for the first six months of 2009 and gauge what they need to focus on in the future.

But this is also a useful time to remember one of Peter Drucker’s most fundamental teachings: Your success depends not just on how well you do your job. It also depends, a great deal, on how well the person to whom you report does his or hers. And that means you must become adept not only at managing yourself and those who work for you but also at managing the boss.

“Few managers seem to realize how important it is to manage the boss or, worse, believe that it can be done at all,” Drucker wrote. “They bellyache about the boss but do not even try to manage him (or her). Yet managing the boss is fairly simple—indeed, generally quite a bit simpler than managing subordinates.”

That said, please don’t take Drucker’s insight as a license to suck up. He had no patience for brownnosers. “One does not make the strengths of the boss productive by toadying to him,” Drucker declared in 1967’s The Effective Executive. “One does it by starting out with what is right and presenting it in a form which is accessible to the superior.”

Take a Letter

Among the best forms of communication, Drucker advised in his 1954 landmark, The Practice of Management, is a twice-yearly letter written to one’s supervisor. The goal, Drucker explained, is for the employee to spell out not only his own goals but also what he sees as the boss’s objectives. After that, the employee enumerates the “things he must do himself to attain these goals—and the things within his own unit he considers the major obstacles. He lists the things his superior and the company do that help him and the things that hamper him.

“Finally,” Drucker continued, “he outlines what he proposes to do during the next year to reach his goals. If his superior accepts this statement, the ‘manager’s letter’ becomes the charter” under which one carries out his duties—and, done right, it leaves little room for confusion or second-guessing. Said Drucker: “This device, like no other I have seen, brings out how easily the unconsidered and casual remarks of even the best ‘boss’ can confuse and misdirect.”

The dialogue between superior and subordinate shouldn’t stop there, however. Drucker also recommended that, at least once a year, every employee ask his or her boss (or bosses): “What do I do and what do my people do that helps you do your job? And what do we do that . . . makes life more difficult for you?”

Meanwhile, Drucker provided two other bits of counsel for managing upward. First, be mindful that nobody likes surprises—especially the boss. So keep him or her in the loop.

Second, never underestimate the person with the reserved parking space. “The boss may look illiterate; he may look stupid—and looks are not always deceptive,” Drucker wrote. “But there is no risk at all in overrating a boss. The worst that can happen is for the boss to feel flattered.” Yet if you underrate the boss, he may well “see through your little game and will bitterly resent it.”

Candor and Trust

This doesn’t mean that you should be cynical or insincere in the way you connect to those in the corner office. The key to managing people for whom you work, just as it is to managing people who work for you, is building relationships based on candor and trust—and recognizing, as part of that process, that everyone has his or her own strengths, weaknesses, and idiosyncrasies.

“Bosses are not a title on the organization chart or a ‘function,’” Drucker remarked. “They are individuals and are entitled to do their work in the way they do it. And it is incumbent on the people who work with them to observe them, to find out how they work, and to adapt themselves to the way the bosses are effective.”

If your boss is a reader, for example, give him reports in writing. If he’s a listener, approach him that way instead.

Though Drucker began writing about managing the boss some 50 years ago, it is a subject that has particular resonance today. The more knowledge-driven that organizations become, Drucker noted, the greater the likelihood that a supervisor hasn’t actually performed many of the specialized tasks for which his or her employees have been hired.

Like an Orchestra Conductor

The interplay that develops, therefore, “is far more like that between the conductor of an orchestra and the instrumentalist than it is like the traditional superior/subordinate relationship,” Drucker wrote in his 1999 book, Management Challenges for the 21st Century. “The superior in an organization employing knowledge workers cannot, as a rule, do the work of the supposed subordinate any more than the conductor of an orchestra can play the tuba.”

In turn, those down the ladder may hold more power than they realize. “Just as an orchestra can sabotage even the ablest conductor,” said Drucker, “a knowledge organization can easily sabotage even the ablest, let alone the most autocratic, superior.”

Be careful, though, before you do. Figuring out how to manage—rather than damage—the boss is very likely in your self-interest. After all, as Drucker pointed out, one of the surest ways to get ahead is “to work for a boss who is going places.”

July 10, 2009

Innovation Isn’t Just for Start—Ups

We can all picture the scene: A couple of guys toiling away in a cluttered garage, perfecting the next innovation that will shake an entire industry. Meanwhile, the big corporate players in the market stand oblivious—fat, dumb, happy, and too bogged down by bureaucracy and conservatism to be innovative themselves.

It’s a great image—one that has long persisted. There’s just one problem with it: It’s false. “The all but universal belief that large businesses do not and cannot innovate is not even a half-truth,” Peter Drucker wrote in his 1985 classic, Innovation and Entrepreneurship.

Yet what is true, Drucker added, is that “it takes special effort for the existing business” to get beyond the temptation “to feed yesterday and to starve tomorrow.”

I was reminded recently of the wisdom in Drucker’s words when I had a chance to chat with Mike Shapiro, engineering director and chief technology officer for Sun Microsystem’s Open Storage operation. As much as any story I’ve heard, Shapiro’s demonstrates that, as Drucker put it, “innovation can be achieved by any business”—even the largest. But what Shapiro and his colleagues have accomplished also serves as a textbook example of Drucker’s other insight: A major company must follow specific practices if it’s to convert breakthrough ideas into real results.

Leaping Forward

Shapiro, his partner, Bryan Cantrill, and their small team are the brains behind a family of data-storage systems—the 7000 line—that Sun introduced late last year. It features oodles of capacity, a “killer app” that uses real-time graphics so that customers can observe and understand what their storage system is doing, and a pricing model that appears to blow away the competition. I’m more of a Luddite than a techie myself, but I can tell you that reviews in the trade press have been very strong, praising the products’ speed, simplicity, and low cost.

So how can a corporation pull off something like this? First, it must focus “managerial vision on opportunity,” Drucker wrote. This sounds simple, he noted, but most companies spend the bulk of their time concentrating on problems instead. And you can’t exactly hit a bull’s-eye if you never bother to look at the target.

At Sun, Shapiro and Cantrill made a conscious decision to hunt for opportunity. Highly accomplished engineers and close friends since their days together at Brown University, the two spent a decade working on Sun’s Solaris operating system. A few years ago, they became intent on pushing Sun into an area where it hasn’t tread much traditionally: making special-purpose appliances. This is opposed to general-purpose computer servers, whose underlying technology other companies have been able to exploit at times and turn into moneymaking products, leaving Sun with relatively little to show for all its high-tech prowess. (It is this vulnerability that helped lead Sun into the arms of Oracle, which is now waiting to complete its $7.4 billion acquisition of the company.)

Shapiro and Cantrill eventually settled on data storage as a particularly rich field to explore. But the duo didn’t just lock themselves in a laboratory, examine the current state of storage technology, and dream up ways to improve upon it. Instead, they spent a lot of time acting as market researchers, hitting the road and talking with potential customers about what they were really looking for—a crucial step, according to Drucker.

“Because innovation is both conceptual and perceptual, would-be innovators must . . . go out and look, ask, and listen,” Drucker wrote. “Successful innovators use both the left and right sides of their brains. They work out analytically what the innovation has to be. . . . Then they go out and look at potential users to study their expectations, their values, and their needs.”

The Right Space

What Shapiro and Cantrill realized from this exercise was that they had to devise a genuinely “disruptive product”—not just a souped-up version of what was available. Because of the hassle and expense, customers weren’t going to scrap their existing data-storage solutions unless Sun came up with something far superior. “We had to cost half as much and be twice as fast,” Shapiro says.

The trouble was, Shapiro couldn’t figure out how to create something like that within the confines of Sun. It wasn’t for lack of talent. The concern, he says, was that “in large organizations, people’s ways of solving problems are limited by the horizons that they see.”

Shapiro also worried that his project, which by its nature needed to draw on resources from different parts of Sun, would give way to political infighting, with various vice presidents at the Santa Clara (Calif.)–based company vying for control.

Drucker certainly would have understood Shapiro’s fears. “The entrepreneurial, the new, has to be organized separately from the old and existing,” he asserted. “No matter what has been tried—and we have now been trying every conceivable mechanism for 30 or 40 years—existing units have been found to be capable mainly of extending, modifying, and adapting what already is in existence. The new belongs elsewhere.”

In Sun’s case, the elsewhere was downtown San Francisco, where Shapiro and Cantrill—with the full support of Sun’s top brass—set up a separate organization inside an old office building. Dubbed Fishworks (the “fish” stands for fully integrated software and hardware), the venture was allowed to plug away largely under wraps.

Don’t Reinvent Everything

At one point, Cantrill discovered a book called Skunk Works, written by the former chief of Lockheed’s supersecret aircraft factory. Among the lessons it provided was that when Lockheed built the SR-71 spy plane, those in charge of the program didn’t try to reinvent everything. They grabbed all the standard parts they could, ripping components out of old jets, so that they could direct their energy and attention to the SR-71’s radar-absorbing skin and other groundbreaking advances. Shapiro and Cantrill adopted a similar strategy. “We decided we weren’t going to rebuild the operating system,” Shapiro explains. “That let us tease out the things that were truly innovative and disruptive.”

Or, as Drucker counseled all innovators: “Don’t diversify, don’t splinter, don’t try to do too many things at once.”

He had another piece of advice, too: “A successful innovation aims at leadership” in a given market. If it doesn’t boldly seek such a position, “it is unlikely to be innovative enough, and therefore unlikely to be capable of establishing itself.”

With hundreds of customers out of the gate, the Sun Storage 7000 Series has definitely established itself—and Fishworks, which Shapiro continues to run, could well prove one of the hidden gems of the Oracle acquisition. In the meantime, the new product line stands as powerful proof of what Drucker preached: When it comes to innovation, it’s smarts, not size, that matter most.

July 24, 2009

An Enthusiastic Thumbs Up for Netflix

Save for enjoying the occasional Charlie Chaplin or Buster Keaton send-up in his younger days, Peter Drucker was never much of a movie fan. Yet he certainly would have appreciated Netflix’s efforts to upgrade its film recommendation system for its customers.

Netflix announced last week that it was awarding an international team of researchers and computer whizzes a $1 million prize for improving by 10.06 percent the online movie rental company’s ability to predict what films its users will enjoy based on how they’ve rated other titles.

The winners, who bested tens of thousands of other teams from more than 180 countries, took nearly 36 months to reach the required 10 percent threshold as they labored to make technical advances in the field of taste prediction. By prompting scientists to wrestle with a huge data set of 100 million movie ratings, Netflix may well have spurred advances in large-scale modeling that will have widespread impact.

Achieving Concrete Results

But it was three underlying management principles, which Netflix embraced by setting up the contest in the first place, that would have earned an enthusiastic thumbs up from Drucker.

The first is that, by its very nature, a competition like this is all about achieving concrete results, not merely generating well-intentioned activity. And in the end, that’s the most important thing for any organization to do. “Supplying knowledge to find out how existing knowledge can best be applied to produce results is, in effect, what we mean by management,” Drucker asserted.

The second principle highlighted by the Netflix prize is that to be successful, companies must constantly strive to gain deeper insight into their customers’ wants and desires. Nearly every business says that it does this, of course. But relatively few approach it with the discipline required—one reason that many corporations lose half their customers within five years.

“What the people in the business think they know about customer and market is more likely to be wrong than right,” Drucker wrote in his book Managing for Results. “Only by asking the customer, by watching him, by trying to understand his behavior can one find out who he is, what he does, how he buys, how he uses what he buys, what he expects, what he values, and so on.”

Going Outside for Information

Drucker worried that computers weren’t terribly good for this job. The information they spit out “tends to focus too much on inside information,” he explained, “not the outside sources and customers that count.” While Netflix, Amazon, Google, and others have made great strides over the last decade in getting inside consumers’ heads, most brick-and-mortar companies must still figure out how to use their IT networks for a similar purpose.

For whether your business is online or not, Drucker’s maxim holds true: Outside “is where the results are. Inside an organization, there are only cost centers.” Which brings us to the third principle showcased by Netflix: a bold willingness to open up in general to the outside.

This sounds much easier than it is. After all, “it is the inside of the organization that is most visible to the executive,” Drucker noted. “It is the inside that has immediacy for him. Its relations and contacts, its problems and challenges, its crosscurrents and gossip reach him and touch him at every point. Unless he makes special efforts to gain direct access to outside reality, he will become increasingly inside-focused.”

Gaining Traction

Still, more and more, some of the best-performing companies are getting beyond what Drucker termed this “degenerative tendency.” IBM, Hewlett-Packard, Procter & Gamble, and others are engaging in collaborative research and open innovation. Intuit is devising ways, as cofounder Scott Cook has described it, for consumers, employees, sales prospects, and even those without any ties to the company to “volunteer their time, energy, and expertise to make life better for our customers.” One example: a “Q&A community” that’s embedded in Intuit’s TurboTax software product, which provides users with a forum to learn from and share information with one another.

Meanwhile, the prize model is also gaining traction across the corporate arena as well as in the social sector. The X Prize Foundation, for instance, is promising eight-figure bounties to those able to make huge leaps in private space exploration, genomics, and alternative-energy vehicles. And sites such as InnoCentive allow companies to post challenges in product development or applied science, and then have outsiders vie for cash or other goodies as they attempt to solve them. Netflix, for its part, is already dangling another monetary prize for those who can create an algorithm that uses demographic and rental history information to predict the taste of users who haven’t rated any movies.

But what every manager should keep in mind is that you don’t need to stage a contest to mirror Netflix’s commitment to attaining results, its attentiveness to the customer, and its eagerness to reach beyond its own walls to find and cultivate the best thinking from anywhere.

By doing these things every single day, your business will be the real winner.

October 2, 2009

Getting Toyota Out of Reverse

Shoichiro Toyoda, the honorary chairman of Toyota Motor, once recounted a conversation between two Japanese educators—Atsuo Ueda, an expert in the management practices of Peter Drucker, and Masatomo Tanaka, who was responsible for teaching about the automaker’s vaunted production system.

“Toyota,” Ueda observed, “operates exactly the way Drucker-san said a company ought to operate.”

Tanaka replied: “Yes, when we have trouble explaining what we’re doing, we can usually find a good explanation in one of his books.”

Never, of course, has there been a more crucial time for Toyota to go back to the books. The company recently recalled 3.8 million cars and trucks, as regulators investigate hundreds of complaints that its vehicles are prone to accelerating without warning. At the same time, Toyota’s finances have lurched into reverse: In May, the company reported a $4.3 billion deficit for the fiscal year—its first net loss since 1950. And with Toyota’s luster fading, consumers appear to be turning their attention elsewhere.

A few weeks ago, a San Diego consulting firm called Strategic Vision released its annual Total Value Index, based on feedback about prices, expected fuel economy, innovation, and other factors from 48,000 car buyers who’d purchased 2009 models. For the first time since the index was launched in 1995, Toyota did not have a single winner in any of the 23 categories, which range from small cars to heavy-duty pickups. Instead, Ford, Volkswagen, and Honda dominated the list.

Turnaround in the Works

Toyota’s struggles aren’t new. Two years ago this column took note of the company’s mounting quality problems and suggested that executives would be wise to slow down in their headlong rush to become the world’s largest carmaker.

But what’s called for now is not more piling on. Some seem to delight in knocking Toyota almost as much as they do in tearing down Tiger Woods. (One blogger has posted on the Web a song called My Toyota, sung to the tune of the old hit by The Knack, My Sharona: Are you gonna stop?/Speeding up/Such a scary ride, always speeding up.)

Rather, what’s instructive is to focus on how Toyota President Akio Toyoda, Shoichiro’s son, and his team are trying to engineer a turnaround. Not surprisingly, one can see some Drucker-like thinking in their approach.

Last October, Akio addressed the media in Tokyo. What captured most of the attention were his remarks that Toyota stood on the brink of “irrelevance or death” and was “grasping for salvation”—a public display of contrition extraordinary even by Japanese standards.

Waning Passion

But what Drucker would have zeroed in on, I think, was Toyoda’s less hyperbolic comment that consumers have been demonstrating a decided lack of enthusiasm toward the company’s products, even in its home market. “They say that young people are moving away from cars,” Toyoda said. “But surely it is us—the automakers—who have abandoned our passion for cars.”

To combat this, Toyoda—a self-described “car nut” who is qualified to race professionally—has been pushing his company to offer more autos that are “fun and exciting to drive.” This might sound like pure fluff. But for Toyota, which has long made quality and reliability its only real hallmarks, it amounts to nothing less than a shift in what Drucker termed “the theory of the business.”

“Every business, in fact every organization, operates on such a theory—that is, on a set of assumptions regarding the outside (customers, markets, distributive channels, competition) and a set of assumptions regarding the inside (core competencies, technology, products, processes),” Drucker wrote. “These assumptions are usually taken for holy writ by the company and its executives. It is on them that they base their decisions, their actions, their behavior. The longer such a business theory works, the more it pervades the organization.

A New Business Theory

“But, as an old proverb has it: ‘Whom the gods want to destroy they send 40 years of success,’” Drucker added. “For a business theory is not a law of nature. Eventually it becomes inappropriate to the realities of the market and technology. Then long-successful companies—especially big ones—begin to deteriorate. They lose their bearings. And the only thing that can effect the needed turnaround is rethinking and reformulating the company’s business theory and repositioning the business on a new set of assumptions.”

This repositioning, Drucker advised, always starts with a few basic questions: Who are the company’s customers and noncustomers, and what do they value? What are other players in the market doing and not doing? What assumptions are they making?

In the case of Toyota, the Total Value Index provides some answers, and it suggests the company is on the right track with its emphasis on “fun and exciting.” The auto market, according to Strategic Vision, is undergoing “a revolution in buyer perceptions,” with more and more manufacturers having greatly improved the quality of their cars over the years—inspired in part by Toyota’s traditional excellence in this area. And that means Toyota is going to have to differentiate itself in other ways.

More Dazzle?

First and foremost, Toyota must overcome its production-line troubles. If it doesn’t restore its own reputation for consistently high quality, nothing else will matter. But beyond that, it has to give customers more: a bit of dazzle along with the durability and dependability.

“Professor Drucker was long a believer . . . in always improving,” Shoichiro Toyoda explained. “Asked which of his books was the best, he would reply, ‘The next one.’” Similarly, he said, Toyota “is always better today than yesterday and better still tomorrow.”

I’m not so sure about today. But if the company can manage to adjust its theory of the business, it may well be right about tomorrow.

December 18, 2009

A Lesson in Performance Metrics

In calling last week for wholesale changes to the way public school teachers are evaluated, American Federation of Teachers President Randi Weingarten noted that her union had developed its plan in conjunction with some of the nation’s leading authorities in the field, including Harvard researchers Susan Moore Johnson and Thomas Kane. But it was hard not to feel in her bold remarks the spirit of another longtime educator: Peter Drucker.

For years, Drucker warned that, in a knowledge economy, there was no choice but to take the kinds of steps that Weingarten is now urging to measure the quality of classroom instruction and, where necessary, to remove bad teachers.

“Schools are . . . becoming much too important not to be held accountable—for thinking through what their results should be, as well as for their performance in attaining these results,” Drucker wrote in his 1993 book, Post-Capitalist Society. “To be sure, different school systems will give different answers to these questions. But every school system and every school will soon be required to ask them, and to take them seriously.”

Yet Drucker would have appreciated another truth reflected in Weingarten’s National Press Club speech: the inherent complexity in devising a measurement framework that is fair and focused on the right things.

Indeed, one might broadly interpret Weingarten’s push to make use of “good and meaningful data” as an imperative not just for our sick schools but also for any enterprise. The truth is, no matter what sector they’re in, relatively few organizations define and measure results very well.

“A Tool of Control”

For starters, too many corporations, nonprofits, and government agencies fail to look at metrics as resources that employees should use to improve their performances. Instead, the boss mainly wields them to criticize and penalize. “As long as measurements are abused as a tool of control,” Drucker asserted, “measuring will remain the weakest area” for most managers.

Even finding the right mix of measures is tricky. In his 1973 classic, Management: Tasks, Responsibilities, Practices, Drucker pointed out that many businesses use annual return on investment as a key determinant in judging success. He then went on to tell the story of a chemical company that failed to develop a much-anticipated new product for three years. When pressed on why there was such a delay, the executive in charge fessed up: “My entire management group gets its main income from a bonus geared to return on investment. The new product is the future of this business. But for five or eight years there will be only investment and no return. I know we are three years late. But do you really expect me to take the bread out of the mouths of my closest associates?”

Today, teachers are typically evaluated when an administrator makes a quick-and-dirty visit to the classroom once a year—a method that sheds little light on what’s actually happening day to day and gives high marks to too many mediocre educators. In her address, Weingarten advocated a far more comprehensive approach: classroom observations, self-evaluations, appraisals of lesson plans, portfolio reviews, rigorous assessments of student work, and test scores that demonstrate real growth throughout the year.

Meeting the Mission

Drucker would have undoubtedly been impressed by Weingarten’s instinct to collect both quantitative and qualitative data. “These two types of measures are interwoven—they shed light on one another,” he wrote.

But there is also a danger here. Lots of executives get so caught up in counting this and analyzing that—often rolling out fancy IT systems to capture a whole host of numbers and other indicators—they forget that any measurement is at best meaningless and at worst counterproductive if it’s not done in the service of helping the organization meet its mission.

Implicit in this notion, of course, is that the organization has a clearly articulated mission that it fully embraces—what Drucker described as its “purpose and very reason for being.” Many do not.

“Finding the right metric has a lot less to do with technology than it does with the culture of the organization,” says strategy consultant Howard Dresner. “The question is: What are the right metrics that will reinforce the right behavior?”

Teachers Teaching Managers

In his book The Performance Management Revolution, Dresner compares the data that most companies generate to what appears on a scoreboard at a sporting event: “It doesn’t tell spectators anything about the play action that led to the teams achieving that score. It doesn’t provide any information to the coach of the trailing team that would help it catch up and overtake its opponent. It doesn’t tell individual players what they can do to play better for the remainder of the game.” What’s missing is context.

To her credit, Weingarten is envisioning an evaluation process that doesn’t lose sight of the big picture. “We propose rigorous reviews by trained expert and peer evaluators and principals, based on professional teaching standards, best practices, and student achievement,” she said. “The goal is to lift whole schools and systems: to help promising teachers improve, to enable good teachers to become great, and to identify those teachers who shouldn’t be in the classroom at all.”

If Weingarten and the teachers’ union reach their aims—and given the depth of the challenge and the politics involved, it’s far from certain that they can—they will do no less than lift the fortunes of millions and millions of young people. Nothing could be more crucial for the health of society. But there would be a pretty nifty side benefit, as well: By measuring results so skillfully, the teachers would provide a powerful lesson for managers everywhere.

January 22, 2010

Insourcing and Outsourcing: The Right Mix

Admittedly, it’s not Cooperstown. But about a year ago, Peter Drucker received a major posthumous honor when he was inducted into the Outsourcing Hall of Fame—recognition of his having helped ignite the field with his 1989 article “Sell the Mailroom.”

Yet ever since, it has been hard not to notice that the flip side of the equation—the insourcing of activities—seems to be getting renewed attention. And Drucker, his election to the Hall of Fame notwithstanding, would have been the first to praise the shift.

“In some areas we have outsourced too much,” General Electric CEO Jeffrey Immelt acknowledged in a speech last summer as he announced plans to open a new manufacturing research center outside Detroit that will create more than 1,000 jobs. Shortly after Immelt made his remarks, Boeing acquired a South Carolina factory from one of its key suppliers, Vought Aircraft Industries. Bringing the facility in-house, Boeing said, would help “accelerate productivity and efficiency improvements” on its much-troubled 787 Dreamliner jet program.

An In-House Chip

Meanwhile, the latest high-profile example of doing things under one’s own roof came last week when Apple unveiled its iPad touch-screen tablet computer. What many analysts quickly seized on was that Apple had designed the guts of the device, a semiconductor called the A4, instead of turning to a chip supplier such as Intel. During the product’s introduction, Apple CEO Steve Jobs even crowed about the company’s “custom silicon.”

Notoriously tight-lipped, Apple hasn’t said a whole lot else about the A4, and reviews of the technology have been mixed. But the company clearly believes that having its own chip provides an edge—an optimal balance between battery life and speed, perhaps—that will allow it, in Drucker’s words, “to create a customer.”

“Leadership” in any industry, Drucker wrote, “rests on being able to do something others cannot do at all or find difficult to do even poorly. It rests on core competencies that meld market or consumer value with a special ability” that the business possesses.

Avenues for Advancement

As Drucker saw it, the only areas a company should farm out are those in which it demonstrates no “special ability.” And in these cases, it shouldn’t hesitate to outsource at all. Drucker thought this made good economic sense and also considered contracting out an important social innovation—especially for service workers who are hungering to find pathways for advancement.

If “clerical, maintenance, and support work” are undertaken by an outside vendor, “it can offer opportunities, respect, and visibility,” Drucker explained in his 1989 piece, which appeared in The Wall Street Journal. “As employees of a college, managers of student dining will never be anything but subordinates. In an independent catering company they can rise to be vice president in charge of feeding the students in a dozen schools; they might even become CEOs of their firms. If they have a problem, there is a knowledgeable person in their own firm to get help from. If they discover how to do the job better or how to improve the equipment, they are welcomed and listened to.”

Notably, Drucker didn’t call for outsourcing only the drudgery. He suggested that knowledge work—such as that performed by a quality-control specialist—was ripe for the same kind of treatment. In short, “you should outsource everything for which there is no career track that could lead into senior management,” Drucker advised.

Not Just for Cutting Costs

But as keen as he was on the concept, Drucker also recognized that outsourcing was not without its pitfalls. Most serious of all, he warned, were the “substantial social repercussions” that would result “if large numbers of people cease to be employees of the organization for which they actually work.”

Beyond that, Drucker anticipated dangers for the company itself. Many corporations, of course, have become quite sophisticated at managing their supply chains. But plenty of others still see outsourcing primarily as a blunt instrument to cut costs—a limited perspective that Drucker labeled “a delusion.”

A company’s real aim, Drucker said, should be to enhance effectiveness, not to try to lower expenses. (Drucker maintained that outsourcing, properly executed, might even increase costs.)

To that end, he added, the overriding question for executives is, “Where do activities belong?” Inside the company’s walls? Or outside its doors? Or should they be reorganized as part of a joint venture or some other type of alliance?

The answer isn’t always so obvious. To illustrate the point, Drucker cited a top manufacturer of consumer goods. For a time, the company assumed that the more it manufactured itself, the better. But on closer analysis, it decided to outsource its final assembly to a host of suppliers. At the same time, Drucker related, the company asserted greater control over other aspects of its operations, insourcing basic compounds to achieve higher quality.

The lesson in all this: Structure should follow strategy. Or, as Apple has shown, the last thing you want to do is outsource simply because it may save you a little money in the short run—and then just let the chips fall where they may.

February 5, 2010

Toyota’s Management Challenge

To the dismay of its growing chorus of critics, Toyota Motor continued to insist this week that its electronic throttle control isn’t to blame for any unintended acceleration in its cars. But what the company has readily conceded—and what Peter Drucker would have surely seen as the key to its hoped-for resurgence—is that it needs to get a much better handle on another type of control system: that by which the entire enterprise manages the reliability of its products.

“We are fundamentally overhauling Toyota’s quality assurance process . . . from vehicle planning and design to manufacturing, sales, and service,” Shinichi Sasaki, an executive vice president, told a Senate committee.

Given the pleasure that some lawmakers and news outlets seem to be taking in Toyota’s fall, it would be easy to dismiss Sasaki’s comments as empty rhetoric or to overlook them altogether. At the same time, Toyota hasn’t done itself any favors with some of its behavior. The company’s now-infamous “safety wins” presentation—in which it boasted of having saved $100 million by averting a full-blown recall of 50,000 sedans—has only helped fuel the tar-and-feather-them attitude that many have adopted.

Yet the steps that Sasaki outlined—and that have been echoed by others, including Toyota President Akio Toyoda—are anything but hollow or trivial. For they get right to the heart of a question that Drucker thought every company needs to rigorously address: What set of “controls” will provide the utmost “control”?

“The synonyms for controls are measurement and information,” Drucker wrote in his 1973 book, Management: Tasks, Responsibilities, Practices. “The synonym for control is direction. . . . Controls deal with facts, that is, with events of the past. Control deals with expectations, that is, with the future. Controls are analytical, concerned with what was and is. Control is normative and concerned with what ought to be.”

Manager Control

Drucker explained that to give a manager proper control, controls must satisfy a number of criteria, including several that Toyota seems to be zeroing in on. For example, the company has pledged to increase its collection of consumer complaints and to then respond to them more quickly than in the past by deploying “SWAT teams” of technicians. It has also vowed to give its executives in the U.S. and other regions across the globe a greater voice in safety-related decisions. Until now, such authority has resided largely in Japan.

Drucker, having stressed the need for controls “to be timely,” would undoubtedly have favored these moves. But what may be most crucial here is the way that Toyota is positioning itself to meet another one of his specifications: “Controls,” Drucker wrote, “must be operational. They must be focused on action.”

In a day-to-day context, Drucker added, “this means that controls—whether reports, studies, or figures—must always reach the person who is capable of taking controlling action. Whether they should reach anyone else, and especially someone higher up, is debatable. But their prime addressee is the manager or professional who can take action by virtue of his position in the flow of work. . . . This further means that the measurement must be in a form that is suitable for the recipient and tailored to his needs.”

More than Just Data-Tracking

There is more, as well. “Controls,” Drucker wrote, “have to be appropriate to the character and nature of the phenomena measured.” In other words, it’s quite possible to track data on quality and safety—and yet completely miss “what the real structure of events is,” as Drucker put it.

Toyota, for its part, seems to be cognizant of this danger. Rather than just paying attention to “technical and regulatory considerations” going forward, Sasaki said, “we need to do more to consider customer expectations and real-world usage of our vehicles, even irregular use.”

Another Drucker insight: “Control is a principle of economy. The less effort needed to gain control, the better the control design.” One imagines that Toyota had this very notion in mind when it committed to Congress that it would go beyond the use of Event Data Recorders—the so-called automotive black box—and “improve our vehicle diagnostic tools.”

Finally, there is Akio Toyoda’s promise to push senior managers to actually drive those cars in which troubles have surfaced. “I believe that only by examining the problems on-site can one make decisions from the customer perspective,” he said. “One cannot rely on reports or data in a meeting room.”

Such sentiments speak directly to a big concern that Drucker had about controls: their tendency to be inward-looking. “The central problem of the executive in the large organization is his . . . insulation from the outside,” Drucker asserted. “This applies to the President of the United States as well as to the president of United States Steel. What today’s organization therefore needs are synthetic sense organs for the outside.”

Setting Values

In his testimony on Capitol Hill and in other recent remarks, Toyoda acknowledged that his company became preoccupied with precisely the wrong metrics: market share and short-term profitability. By enhancing its controls around safety and dependability, the automaker is sending a powerful message to all of its employees about what really matters.

Drucker, whose teachings have had a great influence on Toyota, noted that the mere act of measuring something is “neither objective nor neutral.” For “no matter how ‘scientific’ we are,” he wrote, “the fact that this or that set of phenomena is singled out for being controlled signals that it is . . . considered to be important.” In this way, Drucker concluded, controls in any company are both “goal-setting and value-setting.”

In the end, this is what’s most significant about the overhaul that Toyota is undertaking: It recognizes that regaining control of the company’s gas pedals and brakes cannot be achieved without also regaining control of its values.

March 5, 2010

Peter Drucker and the Hon Hai Suicides

We will never really know why 10 workers at a Hon Hai Precision Industry plant in China have committed suicide this year and three others there have attempted to kill themselves. Yet their actions are a stark reminder for managers everywhere: The most complicated thing you will ever deal with, by far, is not some elaborate IT system or intricate financial model, but rather the people you must lead and inspire every day.

Work “is impersonal and objective,” Peter Drucker wrote in his 1973 classic, Management: Tasks, Responsibilities, Practices. “But working is done by a human being. . . . As the old human relations tag has it, ‘One cannot hire a hand; the whole man always comes with it.’”

Because of this, Drucker believed, working has five specific dimensions, each of which recognizes that what we do on the job is “an essential part” of our humanity.

First, there is a physiological dimension. “If confined to an individual motion or operation, the human being tires fast,” Drucker pointed out. What’s more, he added, people perform best if they’re able to vary “both speed and rhythm fairly frequently” as they tackle a particular task. “What is good industrial engineering for work,” Drucker concluded, “is exceedingly poor human engineering for the worker.”

In China, some labor activists maintain that the shifts at Hon Hai, also known as Foxconn, are too long; the work is too repetitive; and the assembly line churning out products for Apple, HP, and others moves too fast. The company, based in Taiwan, has denied these charges. But there is no getting around the fact that all over the world, including in the U.S., Japan, and South Korea, a huge body of research has found that many people are overworked and their physical health is declining as a result.

Knowledge Workers Suffering, Too

This problem isn’t confined to those in factory jobs; knowledge workers are suffering similarly. Late last month, a senior executive at Bank of New York Mellon in London sued the firm for, among other things, allegedly piling on too much work. He had previously complained to his employer that “we are all working . . . unbearably hard.”

The second dimension of a person at work is psychological. “Work is an extension of personality,” Drucker wrote. “It is achievement. It is one of the ways in which a person defines himself or herself.”

Tellingly, perhaps, a 19-year-old Hon Hai worker who jumped to his death last week from a fifth-floor window of a training center left behind a note indicating that he had “lost confidence” in the future and had become convinced that what he once hoped to accomplish at work “far outweighed what could be achieved.”

Although this young man’s reaction to such feelings was obviously extreme, the struggle to find meaning and fulfillment on the job is hardly unusual. Earlier this year, the Conference Board reported that only 45 percent of the Americans it surveyed are happy with their jobs, down from 61 percent in 1987—a long-term slide that the research organization said “should be a red flag to employers.”

The third dimension of working, according to Drucker, is that it provides a sense of community. Even in cases where people have outside activities, he wrote, the workplace is where they find much of their “companionship” and “group identification.”

In the case of Hon Hai, some observers have suggested that the company has grown so quickly, with about 400,000 workers at its sprawling Longhua complex, it has been difficult to forge these social bonds. One news report from Beijing quoted a former employee as saying: The factory “is too big. When I was walking to and from work . . . I felt helplessly lonely.”

How to Foster Community?

Those employing knowledge workers, meanwhile, face their own challenges on this front, as people have more and more choices about where they live and work and with whom they affiliate. For managers, this pattern leads to a tough question: How can you foster a close-knit community in an age of worker mobility?

Drucker’s fourth dimension of working is that it’s “a living”—“the foundation” of a person’s “economic existence.” In the U.S., Conference Board officials have made a direct link between people’s low job satisfaction and the dual hardship of stagnant wages and high out-of-pocket health-care costs.

China, where income inequality is widening, is now dealing with its own economic strife. A Honda Motor transmission plant in Guangdong province resumed normal operations this week after the automaker offered to increase compensation by 24 percent to end a strike there. Also this week, Hon Hai announced that it would boost its workers’ pay by 30 percent. The company stressed that the raise was a response to a labor shortage, not the suicides, but one representative acknowledged that the move could help lift morale.

The fifth and final dimension, Drucker explained, is that there “is always a power relationship implicit . . . in working within an organization.” In any business, after all, “jobs have to be designed, structured, and assigned. Work has to be done on schedule and in a prearranged sequence. People are promoted or not promoted.” The trick, said Drucker, is to balance this authority with employee participation—to make sure that workers are given an adequate amount of freedom and responsibility.

But this is far from the only trick. Indeed, the thorniest job for any manager is to simultaneously address all of these things: the physiological, the psychological, the social, the economic, and the power dimension of working. The interplay among them, Drucker cautioned, “may be far too complex ever to be truly understood.”

Still, managers must try—with intelligence, sensitivity, and the constant realization that, while there is more to life than work, working is life.

June 4, 2010

A Bold Management Strategy: Keeping Quiet

Several weeks ago, I arrived at a meeting in Washington at the same time as Kathy Cloninger, chief executive officer of Girl Scouts of the USA. I hadn’t seen her for a while, so I reached out to give her a hug and a big hello.

“Nice to see you,” she said in a hushed tone. I strained to pick up her words. Obviously something was wrong.

Cloninger had mysteriously lost her voice a few months before. For some reason, which her doctors still haven’t pinned down, one of her two vocal cords had become paralyzed. For a while, she couldn’t talk above a whisper. A recent injection of medication had helped her to raise the volume slightly, but even such modest relief, she told me, would be only temporary.

My first reaction was to tell Cloninger how sorry I was that this had happened. But it wasn’t long before my mind veered from sympathy to curiosity. What was it like, I asked, to run an organization with 10,000 employees and more than 3 million members—and suddenly have such a hard time being heard?

As Cloninger describes it, she has gleaned from her ordeal three vital lessons, all of which Peter Drucker—who was such a close adviser to the Girl Scouts that he was honored with a lifetime membership—surely would have advocated.

A Greater Understanding of Stigma

The first has to do with the customer. Cloninger has been widely praised for encouraging girls in the scouting movement to have empathy for others and embrace diversity. Her struggles with her voice have given her an even deeper appreciation of young people who find themselves set apart from the crowd.

“I’ve been thinking a lot about our work with girls who are different in some way,” Cloninger explains. “This is the closest I’ve come to really understanding what that must be like,” including how stigmatized some must feel.

The message for managers everywhere: There is no better way to conduct customer research than to actually experience what the customer does. While in Cloninger’s case, the opportunity to do this stemmed from an unfortunate illness, others can be proactive about it. Drucker pointed out, for instance, that the nineteenth-century orchestra conductor Gustav Mahler used to require his musicians to sit in the audience so that they could hear what the music sounded like in front of the stage. Likewise, Drucker said: “The best hospital administrators I know have themselves admitted once a year as a patient.”

Cloninger’s second lesson pertains to empowering people. Because of her condition, she has had to rely more than ever on colleagues. This has caused her to discover strengths in some employees who previously lacked such opportunities to shine.

Giving the Spotlight to Subordinates

“I’ve too often let myself be the organization’s spokesperson,” says Cloninger, who has overseen the Girl Scouts since 2003. “Because I lead very well verbally, I haven’t really given others the chance” to play this role.

For Drucker, one of the essential ingredients of exemplary leadership is finding a way to step out of the spotlight so as to bring out the best in others. “An effective leader wants strong associates; he encourages them, pushes them, indeed glories in them,” Drucker wrote in his 1992 book, Managing for the Future. “Because he holds himself ultimately responsible for the mistakes of his associates and subordinates, he also sees the triumphs of his associates and subordinates as his triumphs, rather than as threats.”

Drucker believed, moreover, that organizations must give knowledge workers in particular more and more responsibility if they are to remain satisfied and productive. This, he asserted, “will have to be done by turning them from subordinates into fellow executives, and from employees . . . into partners.”

The third lesson Cloninger has absorbed is about the importance of listening. She has always prided herself on being an excellent listener. But her current circumstances—in which she participates in large conference calls by typing out e-mails that are then read aloud by one of her staffers—have made Cloninger pay attention more intently. “I have to listen for the spaces where I can get into the conversation in an efficient way,” she says. “Your listening ear really has to be acute.”

Drucker: “Listen First, Speak Last”

Above all, Cloninger now realizes that her long periods of silence are just fine. “I’m not going to be valued less if I don’t speak up,” she says. To be a leader, she adds, “you don’t have to have an opinion on everything.”

Drucker would have been pleased with this insight. One of his favorite bits of management advice—frequently quoted by Frances Hesselbein, the former Girl Scouts CEO who now runs the Leader to Leader Institute in New York—couldn’t be more straightforward: “Listen first, speak last.”

In the time since I met with Cloninger, her voice has improved about 60 percent. Nevertheless she continues to manage the Girl Scouts differently from the way she once did. “I still lean on others more than before,” she says, “and I am much more conscious about giving others a chance . . . versus just jumping in and taking charge.”

Learning from adversity is a hallmark of great leadership, and Kathy Cloninger is a great leader. It’s a quality that, even when she’s quiet, comes through loud and clear.

July 6, 2010

BP Needed an Andon Cord

Peter Drucker, who took to calling himself “a very old environmentalist” as far back as the early 1970s, would surely have felt saddened by the devastation resulting from the explosion of the Deepwater Horizon oil rig in the Gulf of Mexico. But I believe he would have been distressed, as well, by the damage done to one of his guiding management principles: the need for employers to hand workers a healthy mix of independence and responsibility.

During his infamous appearance on Capitol Hill last month, BP’s Tony Hayward assured lawmakers that the British oil company’s own workers and those from rig owner Transocean have “stop-order authority,” meaning they can instantly shut down a drilling operation if something appears unsound. Once such an order is given, the chief executive explained, “it requires everyone to agree to continue. And if there is one person who does not agree, then they do not continue.”

Exactly what triggered the massive spill is still being determined. But in the months since oil first gushed into the Gulf, a steady flow of media reports and congressional findings has made clear that there was no shortage of concern leading up to the tragedy. Less than a week before the explosion, for instance, a BP engineer called Deepwater Horizon a “nightmare well.” Subcontractor Halliburton warned that a “SEVERE gas flow problem” could occur. Another worker has said he raised a red flag about leaks in a crucial device called a blowout preventer.

All this begs the question: Why didn’t anybody on that rig step up and issue a stop order?

Line Workers Know Best

In a sense, a stop order is the utmost expression of something that Drucker advocated for many decades: pushing authority down through the organization to the lowest level possible. He thought this was particularly vital for knowledge work (and running an oil rig, with its myriad technical demands, certainly qualifies as that).

In highly specialized fields, Drucker asserted, “each worker should know more about his or her specific area than anyone else in the organization.” In turn, he or she “should be expected to work out his or her own course and to take responsibility for it. . . . Knowledge work requires both autonomy and accountability.”

For years, Toyota has touted its own version of the stop order, in which every factory worker at the automaker has the ability to signal for help and ultimately halt the assembly line by pulling a rope known as an andon cord.

John Shook, who in the early 1980s helped Toyota launch a joint venture with General Motors, knows firsthand that this concept invites great skepticism. “Some of our GM colleagues questioned the wisdom of trying to install andon” in the enterprise, Shook recalled in a piece he wrote earlier this year for MIT Sloan Management Review. “’You intend to give these workers the right to stop the line?’ they asked. Toyota’s answer: ‘No, we intend to give them the obligation to stop it—whenever they find a problem.’”

Too Much Control at the Top

Of course, a stop-the-line system is no cure-all, as Toyota has painfully discovered. But it is equally true that any organization with too much control concentrated at the top is likely to fail. As Drucker noted, “In the old days the ‘boss’ issued a proclamation or order ‘to my workers.’ After 1900, he increasingly addressed himself ‘to our fellow employees.’” He added, “No one yet addresses workers as ‘fellow managers.’ . . . Yet this is the goal.”

So if they really had stop-order authority, why didn’t anyone on the Deepwater Horizon rig intervene before it was too late? Based on the evidence that has emerged so far, it appears that some may have tried to sound the alarm, but higher-ups disregarded them. In other cases, it seems that BP and Transocean workers felt themselves under tremendous pressure to save time and money, despite claims by the companies that safety always comes first. Some have even suggested that they were afraid they could lose their jobs for making a stink—a situation Drucker would have regarded as especially perilous.

Any business in which the flow of information is “circular from the bottom up and then down again” is capable of “fast decisions and quick response,” Drucker wrote in his 1986 book, The Frontiers of Management. But “these advantages will be obtained only if there are understanding, shared values, and, above all, mutual respect. . . . There has to be a common language, a common core of unity” throughout the organization.

What’s more, Drucker cautioned, any company in which “financial control is the only language is bound to collapse in the confusion of the Tower of Babel.”

Robert Dudley, who is set to take over Hayward’s job as CEO of BP, has a full agenda: soothing regulators, restoring investor confidence, and most important, cleaning up the Gulf. But if he’s smart, he’ll put another task at the head of the list: ensuring his workers have the power—and the responsibility—to stop a disaster before it happens, and not just on paper.

July 30, 2010

Facebook’s Privacy Puzzle

In his book The Facebook Effect: The Inside Story of the Company That Is Connecting the World, David Kirkpatrick describes how when Mark Zuckerberg was beginning to build his social-networking business, he would sit around on weekends and read the works of Peter Drucker. Now, it seems, would be a pretty good time for Zuckerberg to make sure he and his entire team brush up on Drucker’s teachings about the customer.

In particular, the folks at Facebook would do well to consider Drucker’s notions about how to juggle the needs of primary customers (in Face-book’s case, its 500 million users, who have certain expectations when it comes to privacy) and supporting customers (the company’s advertisers, who are eager to access and exploit as much customer data as possible).

“The primary customer is never the only customer, and to satisfy one customer without satisfying others means there is no performance,” Drucker asserted. “This makes it very tempting to say there is more than one primary customer, but effective organizations resist this temptation and keep to a focus—the primary customer.”

Creating a Community

On a basic level, Facebook has clearly figured out how to give its primary customers what they’re looking for: a way to share messages, photos, videos, and other information with groups of friends. Indeed, that one out of every 13 people on the planet is now on Facebook attests to the staggering power of the product.

It is an innovation that Drucker, even though he was computer-shy, would have greatly appreciated. “People do need a community,” Drucker wrote in his 1993 book, Post-Capitalist Society. “They need it particularly in the sprawling huge cities and suburbs in which more and more of us live. One can no longer count . . . on neighbors who share the same interests, the same occupations, the same ignorance, and who live together in the same world. Even if the bond is close, one cannot count on family.”

At the same time, Facebook also seems to be satisfying its other customers—the marketers hoping to target ads to those online. In an interview last week with Bloomberg, Facebook’s chief operating officer, Sheryl Sandberg, crowed that some of the Palo Alto (Calif.) company’s biggest advertisers have upped their spending at least tenfold in the past year.

A Clash with Advertisers

But increasingly, the needs of these two camps—users (who participate on Facebook for free) and advertisers (who pay the bills)—appear to be coming into conflict. Striking the proper balance can be tricky for all sorts of enterprises. A hospital, for instance, must decide “whether the patient or the physician is the primary customer,” Drucker noted. And nonprofit organizations routinely run into a thicket of competing “customer” interests: those of funders, volunteers, and the people they serve.

At Facebook, tensions have been mounting steadily. In May, The Wall Street Journal reported that once someone clicked on an ad, data were being shared with the advertiser that could potentially reveal the user’s name, age, hometown, and occupation, depending on how much public information the person had disclosed on his or her profile. After the story broke, Facebook said it was fixing the situation, while maintaining that its policy is never to share user information without the person’s consent.

More generally, though, privacy advocates see a troubling pattern in Facebook’s behavior. Kurt Opsahl, a senior staff attorney with the Electronic Frontier Foundation, has traced Facebook’s privacy policy since the site’s early days in 2005. And his analysis shows, without question, that Facebook has been transformed from a relatively safe space for communicating “with a group of your choice” to a platform where it has gotten harder and harder not to put pieces of your life on display. Along the way, Opsahl says, the company has “slowly but surely helped itself—and its advertising and business partners—to more and more of its users’ information.”

“The Stupidest Thing We Could Do”

Zuckerberg insists there is a line he won’t cross. “We don’t sell any information” to advertisers “and we never will,” he told an interviewer earlier this year. In another forum, Zuckerberg declared that selling user data to advertisers is “the stupidest thing we could do. . . . People are only going to stay on there as long as they trust us.”

Yet Zuckerberg has also suggested that people are growing more and more comfortable with being transparent and, in turn, having their online experience used for “personalized” marketing. Perhaps he is on to something, and if he has gleaned this insight by honestly probing and understanding what his primary customer values, then Facebook should by all means continue pushing in that direction.

“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,” Drucker wrote. “Leadership should not even try to guess at the answers but should always go to the customers in a sympathetic quest for those answers.”

But there are reasons to be skeptical. The 2010 American Customer Satisfaction Index gave Facebook very low marks, in part because “privacy concerns . . . and commercialization and advertising adversely affect the consumer experience.” Even young adults—the supposed exhibitionists of the Web—are “far from being nonchalant and unconcerned about privacy matters,” according to a recent study by two researchers at Harvard’s Berkman Center for Internet & Society.

The real impetus to make Facebook more of a glass house, I suspect, comes from Zuckerberg’s supporting customers, who are tempting him to betray his primary customers. And that’s something Drucker wouldn’t have “Liked” one bit.

August 13, 2010

The Rules of Alliance

The news last week that Intel is buying security software maker McAfee for $7.68 billion has people buzzing from Silicon Valley to Wall Street. But another Intel deal, announced earlier this month, is what would have likely captured Peter Drucker’s attention.

In that one, the Santa Clara (Calif.) chipmaker said it is forming a jointly owned company with General Electric to serve the home healthcare market—the kind of arrangement that Drucker believed, even more than mergers and acquisitions, would increasingly become a recipe for “business growth and business expansion.”

Drucker held that such partnerships are a smart vehicle for small and midsize businesses “to go international.” As for bigger companies, he added, “they are the way to become multitechnological.” Nevertheless, creating an alliance that will last for the long term is far from easy.

Tug-of-War Over the Child

“These are all dangerous liaisons,” Drucker warned in his 1992 book, Managing for the Future. “While their failure rate in the early years is no higher than that of new ventures or acquisitions, they tend to get into serious—sometimes fatal—trouble when they succeed. Often when an alliance does well, it becomes apparent that the goals and objectives of the partners are not compatible. Each partner may want the ‘child’ to behave differently now that it is ‘growing up.’ . . . What makes it worse is there usually is no mechanism to resolve these disagreements. By that time it is usually too late to restore the joint enterprise to health.”

The trick to making the marriage work is to abide by a handful of rules that Drucker spelled out. And by the early sound of things, Intel and GE are, consciously or not, closely following these principles. (This isn’t surprising; both companies have Drucker in their blood. He advised Andy Grove, Intel’s cofounder, and counseled a series of GE chief executives, beginning in the 1950s with Ralph Cordiner.)

The first two rules: “Before the alliance is completed,” Drucker wrote, “all parties must think through their objectives and the objectives of the ‘child.’” Just as important, he said, “is advance agreement on how the joint enterprise should be run.”

Hormones in Command

These may seem like stunningly simple notions. But there is a powerful temptation for two companies that are strongly attracted to each other to rush things along, like teenagers with hormones raging. “You get impatient. You want to get moving. You’re excited,” says Louis Burns, vice president and general manager of Intel’s Digital Health Group, who is set to become CEO of the as-yet-unnamed new venture, which will be owned fifty-fifty.

Often during negotiations, Burns notes, if two sides agree on nine points and are stuck on the tenth, they’ll let the tenth one slide and agree to revisit it down the line, if need be. But for joint ventures, he warns, “the problem is that the tenth point will come and bite you in the backside later.” According to Burns, the worst thing that Intel and GE could possibly have said to each other was, “Let’s decide that after we form.”

Instead, the two corporate giants hashed things out for the better part of a year to make sure everyone involved agreed on specific goals. “You don’t want a Las Vegas wedding,” Burns says. The companies, which had struck a looser alliance last year, even drafted a prenup of sorts—an accord that, in fewer than 20 pages, lays out the basic structure and governance of the new venture, provides a product road map, and identifies target markets. Even though it is not legally binding, the document has become a much-referred-to guide for both companies, helping the partners stay focused on what matters.

Only One Steering Wheel

Drucker’s third rule: “There has to be careful thinking about who will manage the alliance.” In particular, Drucker said, “it cannot be managed by committee.” In the case of Intel and GE, there is no doubt that Burns is in charge. Everyone at both companies recognizes that “there are not two steering wheels in the front of the bus,” he says. At the same time, Burns is unequivocal that his individual responsibility has to be, as Drucker put it, “to the joint enterprise, not to one of the parents.”

Drucker’s fourth rule is that “each partner needs to make provisions in its own structure for the relationship to the joint enterprise and the other partner.” Most critical, he said, is for those in the alliance to “have access to someone in the parent organization who can say yes or no without having to go through channels.” Burns stresses that both he and his GE counterpart, Omar Ishrak, have close ties to the highest levels of their respective corporations—but that, again, the two companies have also codified how these open lines will “survive past the personal relationships.”

Drucker’s final rule was that “there has to be prior agreement on how to resolve disagreements.” At Intel and GE, “we weren’t naïve enough to think” that occasional disputes won’t erupt, Burns says. So the companies have been “crystal clear” on what happens “if there are deadlocks,” with certain calls in Burns’ hands as the CEO and others to be made by the joint venture’s board, which will be composed of equal numbers of Intel and GE representatives and be chaired by Ishrak.

In the end, Intel and GE are confident that by coming together, they can speed along the delivery of innovations that will help the elderly and those with chronic diseases manage their medical conditions from home. Yet plenty of challenges remain. The companies are not the market leaders. And neither Medicare nor private insurers in the U.S. currently offer reimbursement for home health-monitoring systems, raising questions about revenue generation.

Still, should success be realized, Burns and his new colleagues will find themselves with a huge advantage: Through thoughtful up-front planning, they’ve taken the danger out of their liaison.

August 27, 2010

Burger King: Start Courting the Noncustomer

Peter Drucker wasn’t one to eat much in fast-food joints, usually stopping but once a year for a quick meal at McDonald’s on the way to his family’s summer sojourn in Colorado. Still, he would have had a very clear idea of what Burger King needs to do to turn itself around, beginning with paying far more attention to its “noncustomers.”

“Even the biggest enterprise (other than a government monopoly) has many more noncustomers than it has customers,” Drucker wrote in Management Challenges for the 21st Century, noting that hardly any companies supply even 30 percent of a given market. “And yet very few institutions know anything about the noncustomers—very few of them even know that they exist, let alone know who they are. And even fewer know why they are not customers.”

Burger King, which sealed a deal last week to sell itself to private equity firm 3G Capital for $3.26 billion, has seemed to do just about everything it can to ignore its noncustomers. The Miami company has focused almost exclusively on what it calls “superfans”: males, 18 to 34 years old, who’ve tended to frequent its restaurants.

Certainly, Burger King knows what this testosterone-fueled group likes. It has geared its advertising accordingly (to the point, in fact, that some women have found the company’s spots creepy and offensive). Product innovations, such as fire-grilled ribs, have also been aimed at the same carnivorous demographic.

Recession’s Effect

But after a period of success for Burger King, the nation’s economic woes have hit the company disproportionately hard. Sales and profits have flagged, as the unemployment line has apparently replaced the line queuing up at a BK counter for many an erstwhile superfan. Some analysts also suspect that a longer-term trend is at play: As people become more health conscious, scarfing down bacon double cheeseburgers isn’t quite so appealing.

It is a trap that Drucker watched others tumble into. In his 1964 book, Managing for Results, Drucker told of a maker of do-it-yourself home-repair equipment that was happy with its base of customers: newly married couples who had just purchased a house. But after about five years, they’d invariably stop buying. “This seemed perfectly logical to the manufacturer,” Drucker wrote. It was only when they were a bit younger, the company figured, that these people “had the energy to do manual work. And, having small children, they normally spent most of their evenings and weekends at home.”

But when the company finally bothered to examine its noncustomers, it discovered it was overlooking a potentially vast market: people married longer than five years. “They were noncustomers primarily because the company had chosen a distributive channel, especially the neighborhood hardware store, which was not easily accessible to them except Saturday morning,” Drucker wrote. And “Saturday morning is not a good shopping time for men” once their children get a little older and have various activities to get to. By moving its products into shopping centers, which stayed open into the evening, and adding mail-order sales directly to the home, the manufacturer doubled its revenue.

Ignoring 70 Percent of the Market

Another, later example: At their peak in the 1970s, Drucker pointed out, department stores accounted for more than a quarter of nonfood retail sales in the U.S. And, just like at Burger King, the managers of these businesses had a very sharp sense of who their dedicated shoppers were.

“They questioned their customers constantly, studied them, surveyed them,” Drucker wrote. “But they paid no attention to the 70 percent of the market who were not their customers. They saw no reason why they should.” After all, their assumption—which was then totally valid—was that “most people who could afford to shop in department stores did.”

But eventually, behavior shifted. “For the dominant group among baby boomers—women in educated two-income families—it was not money that determined where to shop,” Drucker explained. “Time was the primary factor, and this generation’s women could not afford to spend their time shopping in department stores.” Executives in the department store world failed to recognize this, however, because they had been concentrating solely on their customers, not their noncustomers. “After a time,” Drucker said, “they knew more and more about less and less.”

Examining the “Satisfaction Areas”

To prevent this from happening, Drucker advised managers to regularly pose a series of questions “that are not asked in the ordinary market survey or customer study.” Among them: What do customers—and noncustomers—buy from others? What value do these purchases have for them? What satisfactions do they offer? Do they compete with the satisfactions presented by our products or services? Do they give satisfactions that our products or services could possibly fulfill, perhaps even better? Are there new products or services we could introduce to meet these satisfaction areas?

In sharp contrast to Burger King, rival McDonald’s has in recent years addressed these very issues—and as a result, it has thrived during the recession. Specifically, McDonald’s started serving fancy coffee drinks and smoothies, as well as providing free wireless Internet connections, with the intent of luring noncustomers through its doors.

At the same time, the company has been careful not to alienate existing customers by shaking things up too drastically. “We’ve learned not to mess with the core menu items—I personally would not change a single sesame seed,” McDonald’s executive chef and director of culinary innovation, Dan Coudreaut, has said. Yet “we’re also excited about pushing the envelope . . . to stay relevant.”

Burger King has a lot of hard work to do, including sprucing up its restaurants and improving its technology. But if it really hopes to get its sizzle back, it needs to remember that, as Drucker put it, “it is with the noncustomers that changes always start.”

September 10, 2010

Bank of America’s Self-Imposed Exam

Like other large financial institutions, Bank of America was put through a “stress test” by U.S. officials last year. But it’s a self-imposed procedure—one akin to Peter Drucker’s “Business X-Ray”—that may ensure the company’s long-term health.

Drucker, who was fond of medical analogies, thought every organization should regularly go through this kind of rigorous examination for all of its current lines: products, services, technologies, processes, and distribution channels. “The Business X-Ray is a tool for decision making,” Drucker wrote. “It enables us, indeed forces us, to allocate resources to results in the existing business. But it also makes it possible for us to determine how much is needed to create the business of tomorrow. . . . It enables us to turn innovative intentions into innovative performance.”

In the case of Charlotte (N.C.)–based Bank of America, the nation’s biggest lender, figuring out how to drive innovative performance is crucial. Like other banks, it faces tough questions about how it’s going to grow amid regulatory clampdowns on credit and debit cards, mortgages, reserve requirements, and derivatives.

Systematic Evaluation

The answer at which Bank of America appears to have arrived would surely please Drucker: Under Brian Moynihan, who became chief executive officer in January, the company has made clear that it isn’t going to automatically leap at the next opportunity to make an acquisition or dive into a new market just because it’s considered “hot.” Rather, Moynihan and his colleagues have been systematically going through most every part of the business and diagnosing what to sell, what to revamp, and where to invest capital and resources to meet customer needs for the long haul.

“We continue to streamline our franchise, getting rid of things that customers just don’t ask us for,” Moynihan said last week at a financial-services conference in San Francisco.

For his part, Drucker advised placing each piece of the business into one of a number of categories. These include “today’s breadwinners” as well as “tomorrow’s breadwinners,” or those products that already command a sizable market but whose best days still lie ahead. There are also the “productive specialties,” which serve a decidedly narrow niche but maintain a leadership position within it. “Their net revenue contribution should be higher than their volume; their share in the cost burden, a good deal lower,” Drucker explained.

Next come “development products,” which are still being fine-tuned but where “hopes run high,” Drucker wrote. “The number of people allocated to them should be small—though it will, of course, be larger than the revenue generated yet justifies.”

Then there are the outright “failures.” In a sense, things that fall into this group are the easiest to deal with. “They announce themselves and they liquidate themselves,” Drucker wrote.

Tricky Categories

More complicated, by contrast, are those aspects of the enterprise that Drucker called “the problem children.” Among these are “yesterday’s breadwinners.” “Everyone in the business loves yesterday’s breadwinner,” Drucker noted. “It is the ‘product which built this company.’” But yesterday’s breadwinners, he added, are on the verge of becoming obsolete, and in the meantime, “their gross revenue tends to be low in relation to their volume, while the number of transactions needed to keep them alive” is steadily increasing.

Equally tricky to deal with are “repair jobs.” These, Drucker said, should “suffer from one—and only one—major defect,” and this problem must be fairly simple to identify and correct. What’s more, anything inserted into this category should have a “high probability of exceptional results” if the fix works.

The rest of Drucker’s 11 categories include “unnecessary specialties,” in which products are needlessly sliced into different segments instead of concentrated into one high-volume offering; “unjustified specialties,” in which a product or service has been given a “meaningless differentiation for which the customer is not willing to pay”; “investments in managerial ego,” where more resources get pumped into a product the poorer it performs; and “Cinderellas,” or areas that might do well if only they were given a chance.

Growth Analysis

Once a company classifies all of its products and services in this manner, Drucker’s X-Ray machine can be switched on. It is then that a company may anticipate when a critical change is likely to occur (such as today’s breadwinner suddenly becoming yesterday’s breadwinner). But this won’t happen automatically. According to Drucker, the key is to make certain that every product is analyzed in terms of “the cost of further increments of growth,” which will help reveal where it stands in terms of its life cycle. Is this a product on the rise? Or is it about to go into decline? And, if so, how fast is it destined to fall?

At Bank of America, its review of what’s poised to grow and what doesn’t really fit anymore has led to a string of significant decisions in the last nine months. Specifically, the company has shed, or is getting set to sell off, a substantial list of assets, including stakes in a couple of Latin American banks, an insurance operation, and a portfolio of private equity interests.

At the same time, it is investing in a new product line that will reduce onerous overdraft fees for its mass-market customers. It is also shifting more employees to spots where cultivating deep customer relationships is important—an integral part of Moynihan’s overarching strategy to cross-sell products and services to Bank of America’s retail, corporate, and wealth-management clients.

Moynihan pointed out last week, for example, that the bank’s most affluent customers hold $7 trillion worth of investments at other financial institutions. This is a huge sum that, if played right, could start flowing to Merrill Lynch, which Bank of America bought last year.

Or, to put it another way, by having X-Ray vision, Moynihan might well be in the process of transforming a Cinderella into tomorrow’s breadwinner.

September 24, 2010

Churchill and Drucker: Perfect Together

A few weeks ago, Winston Churchill went digital. The former British Prime Minister’s estate announced that it was launching its own iPhone app featuring Churchill’s “wit and wisdom.” A related website, along with Facebook and Twitter profiles, has also been set up. About the only thing missing, from what I can tell, is a link to the work of Peter Drucker.

Ties between the two men go way back. In May 1939, Churchill reviewed Drucker’s first major book, The End of Economic Man, for The Times Literary Supplement, praising him as “one of those writers to whom almost anything can be forgiven because he not only has a mind of his own, but has a gift of starting other minds along a stimulating line of thought.”

But even more than by pen, Churchill and Drucker seem to be connected by deed—at least in the eyes of one Churchill authority. Daniel Myers, chief operating officer of the Churchill Center in Chicago, has in recent years been delivering to business executives a lecture that examines the British leader’s actions as “an executive success story.” More specifically, Myers details how Churchill illustrated Drucker’s eight rules for being an effective executive.

Myers came across these principles when Drucker laid them out in a 2004 Harvard Business Review article. “I read it and said ‘Wow,’” recalls Myers, whose educational organization boasts 3,000 members worldwide. “It’s pure Churchillian.”

What Needs to Be Done?

The first practice of effective executives, Drucker wrote, is “to ask what needs to be done” as opposed to “What do I want to do?” This can’t be a hollow gesture, either. “Taking the question seriously,” Drucker advised, “is crucial for managerial success.”

Myers recounts a number of stories that capture Churchill’s embodiment of this trait, including his sending aid to Russia in 1941. Churchill had long been a bitter foe of the Communists, but the Germans had invaded Russia earlier that year and Churchill knew what the situation demanded. As Myers tells it: “When questioned by Jock Colville, his principal private secretary, on his apparent about-face, Churchill explained, ‘If Hitler invaded hell, I would make at least a favorable reference to the devil in the House of Commons.’”

Drucker’s second rule for effective executives is to ask, “What is right for the enterprise?” “They do not ask if it’s right for the owners, the stock price, the employees, or the executives,” Drucker added. That’s because unless choices are made in the long-term interest of the organization, it will ultimately “not be right for any of the stakeholders.”

Here, Myers cites a chapter from the eve of World War I, when Churchill served as head of the British Navy and the fleet was on maneuvers. Although his officers were clamoring to get back to their home port at Scapa Flow, Churchill kept them at sea and continued their training. “In everything Churchill did, he always asked, ‘What is right for the country?’” Myers says. In this case, “even his staunchest opponents begrudgingly admitted that the fleet was ready for war, thanks to Churchill.”

Action Plans

Drucker’s third rule for effectiveness: Develop action plans. The best executives, he said, “think about desired results, probable restraints, future revisions, check-in points.” For Myers, at no time have these qualities been put to the test more than when Churchill in May 1940 was pressed by his foreign secretary, Lord Halifax, and others in his cabinet to explore an armistice with Hitler.

Churchill rebuffed them all by laying out clear goals and expectations. “It was idle to think that if we tried to make peace now, we should get better terms from Germany than if we went on and fought it out,” Churchill asserted. “Therefore, we shall go on and we shall fight it out, here or elsewhere, and if at last this long island story of ours is to end, let it end only when each of us lies choking in his own blood upon the ground.”

The next two things that effective executives do, according to Drucker, are to take responsibility for decisions and take responsibility for communicating. Regarding the former, Myers points to what many believe was Churchill’s greatest blunder—his failed attempt during World War I, as Britain’s First Lord of the Admiralty, to seize the Dardanelles in the eastern Mediterranean. “He never placed the blame on others,” Myers says. As to the latter, Myers says that Churchill worked hard to ensure that he was being fully understood; even his quips were practiced and refined.

Drucker’s sixth rule is to focus on opportunities rather than problems. “Above all,” wrote Drucker, “effective executives treat change as an opportunity rather than a threat.” Myers sees Churchill’s early years, during which he had published five books and traveled the globe by the age of 26, as a wonderful example of this Drucker principle come to life.

Productive Meetings

The seventh rule is to run productive meetings—to make sure, as Drucker put it, that they “are work sessions rather than bull sessions.” A big key to this, Drucker wrote, is good follow-up. Churchill was a master of this, Myers says, affixing to his most urgent memos bright red labels marked “Action This Day” to help drive his staff to results.

Finally, Drucker wrote, effective executives share one more characteristic: They think and say, “we” rather than “I.” So it was, says Myers, that Churchill refused to be knighted after his party’s electoral defeat in 1945. “How can I accept the Order of the Garter,” Churchill is said to have asked, “when the people have just given me the Order of the Boot?”

Two decades after that dour comment, Drucker would remember Churchill most fondly. He wrote that when the world was coming apart in the 1930s, “what Churchill gave was precisely what Europe needed: moral authority, belief in values, and faith in the rightness of rational action.”

That quote from Drucker, it might be noted, is 134 characters—just perfect for a Churchill tweet.

October 22, 2010

The Wall-Less Office

Last week my colleagues and I at the Drucker Institute moved back into our office, which earlier in the month had been redesigned, top to bottom, by Herman Miller. It’s a beautiful facility, the perfect blend of form and function, featuring 140 new pieces of furniture that are flexible, mobile, multifunctional (with storage cabinets that double as benches, for example), and environmentally friendly.

Still, my favorite detail is this: There are no interior walls. Eight of us sit all together in one large, sunlit space, without any obstacles in between. We were configured pretty much this way before, but, as the boss, I’d had a work area enclosed by partitions. They’ve now been tossed away.

Far more than symbolism is at play here. With no walls, my team and I communicate in precisely the ways that Peter Drucker advocated. In fact, our 1,400 square feet of openness is, I’m convinced, a major driver of our results.

One of the most crucial things that any leader can do, Drucker wrote, “is to build the organization around information and communication instead of around hierarchy.”

Knocking down walls is the perfect way to achieve this. Not a day goes by in my shop when an idea isn’t honed as follows: One staffer is talking with another, wrestling with a particular challenge. Another overhears what they’re saying and weighs in. A fourth person then becomes engaged and offers up an altogether different perspective. Out of this ferment, some of our best innovations have been born.

Free-Flowing Dialogue

Just this week, for instance, we decided to refine our efforts to attract readers to our blog, the Drucker Exchange, after a semispontaneous discussion broke out among three of us; a coworker’s ears pricked up a bit later and he joined in, pushing our thinking even further. For me, as the supervisor, the best part was that two of my employees had initiated the conversation, and I was able to listen to them first—just as Drucker prescribed.

“Downward communications cannot work and do not work,” Drucker declared in his 1973 classic, Management: Tasks, Responsibilities, Practices. Initiatives from the top, he added, have a shot only if “they come after upward communications have successfully been established.” They must be “reaction rather than action; response rather than initiative.”

At our small university-based think tank, brainstorming in this fashion is part and parcel of the trade. But even the largest corporations can benefit from being imaginative with their space. In the late 1990s, when Paul O’Neill was the chief executive of Alcoa, he constructed a new headquarters with a largely open floor plan. Traditional offices gave way to 81-square-foot work areas—complete with “pass-through portals”—for most employees, O’Neill included.

Typical office layouts, with their nods to status, “are a barrier to the notion of collaboration, and they ‘put people in their place’ every day,” O’Neill says. A pecking order is “established by access to sunlight, square feet of space, proximity to ‘important people.’ I wanted to give physical expression to the idea that ‘if you work here, you are important, but no more or less important than anyone else who works here.’”

Eschewing Formal Jurisdictions

For Drucker, the very essence of teamwork is “communications sideways,” as “people of diverse knowledge and skills . . . work together voluntarily and according to the logic of the situation and the demands of the task, rather than according to a formal jurisdictional structure.” The free-flowing dialogue that emerges naturally from physical proximity only increases the chances for this kind of cooperation.

Another who believes strongly in this approach is Carlos Brito, the chief executive of Anheuser-Busch InBev, who hasn’t had his own office for more than 20 years. He shares a big table with his direct reports.

“We cherish informality and candor and encourage colleagues to bring ideas to the leadership team and to each other on the floor and even in the hallway,” Brito told me. To facilitate that, the giant beermaker has “people of all levels sitting near each other so that we can all learn from each other and so that leaders and managers can stay close to the day-to-day work that their teams are doing.

“It’s also more efficient to communicate more openly and on the fly,” Brito says. “Meetings are a necessary . . . part of business, but I’ve found that oftentimes you can get more accomplished with a five-minute conversation in the hallway than an hour-long meeting. You cannot schedule a five-minute meeting in Outlook.”

No Place to Hide

Brito perceives other advantages, too. Employees who work in a common area are apt to learn best practices from each other. What’s more, an office without walls increases individual accountability. “There’s no hiding in an open workspace,” Brito explains. “Because everyone sits in the open, it’s easier for people of all levels to recognize the high performers and the lower performers day to day, not just occasionally at big meetings or during performance reviews.”

There are times when a little private space is required, of course. A few people in my organization put on headphones when they need quiet. It’s also quite common for us to step outside onto the patio to take a phone call from a spouse or to speak confidentially with someone. But this minor inconvenience is greatly outweighed by the pluses of constant personal interaction—especially in an age when many organizations are drowning in data.

“Only direct contact . . . can communicate,” Drucker noted. “The more we automate information-handling, the more we will have to create opportunities for effective communication.”

Drucker once famously remarked, “The most important thing in communication is to hear what isn’t being said.”

Undoubtedly that’s true. But we also shouldn’t forget: There’s a lot to be gained, as well, from hearing what is being said by the person right next to you.

November 5, 2010

As the Walkman Retires, Sony Rewires

When the news hit late last month that Sony was discontinuing production of its original Walkman, the pioneering portable cassette-tape player, many in the media marked it as the passing of an era. Yet here’s what most everyone is missing: Thanks in part to a student of Peter Drucker’s, Sony may well be on the verge of creating a new slate of devices that have a shot at becoming as hot as the Walkman once was.

For Sony, that would certainly be a welcome development. For years now, competitors from South Korea, the U.S., and elsewhere have been clobbering the Japanese electronics company. The mojo that Sony had three decades ago, when the Walkman first hit the market, has long since faded away.

But now, Sony is being pushed in new directions. George Bailey, who was hired in 2009 from IBM and carries the title “chief transformation officer,” has been steadily tackling Sony’s cost, efficiency, and productivity problems. The company’s year-over-year operating margin has improved for four consecutive quarters.

But perhaps even more important than these financial reforms is the philosophy that Bailey is helping to instill at Sony: The business must start on the outside with the customer, not on the inside at the engineer’s workbench.

Customer Satisfaction

The message is pure Drucker, from whom Bailey took half a dozen classes at Claremont Graduate University in the early 1980s, when the Walkman was still the greatest gadget around. “The customer defines the business,” Drucker wrote in his 1973 classic, Management: Tasks, Responsibilities, Practices. “A business is not defined by a company’s name, statutes, or articles of incorporation. It is defined by the want the customer satisfies when he or she buys a product or a service.”

As basic as that insight may seem, it’s one that Sony has neglected. The company, Bailey says, has always been able to make superior products from an engineering standpoint. “A whole lot of what Sony did was make things smaller, faster, of higher quality,” he explains. And for quite some time, that was good enough. The formula fueled Sony’s incredible growth into the early 1990s.

But in more recent years, both technology and the marketplace have changed dramatically. For instance, the picture quality on televisions is generally so good these days that many new advances are “not even perceptible to the human eye,” Bailey says. Rivals such as Vizio, which uses contract manufacturers in China for its relatively low-priced sets, are closing the gap with Sony in terms of what Bailey calls “specmanship.”

Sony’s edge in design—Bailey likens some of the company’s offerings to works of art—has also slipped. “It’s not that Sony got any worse at that,” he says. “Others got a lot better,” including Samsung and LG.

Drucker’s Concept of Quality

At the same time, customers’ desires have evolved. Having fantastic hardware isn’t sufficient anymore. “All of a sudden, people have started to think differently about electronics,” Bailey says. “They want software that’s intuitive and makes things easy to use. They want applications, content, and services.

“What excites a Japanese engineer in Shinagawa,” he adds, “may not be what makes a consumer happy in Helsinki or New York or Mumbai.”

In this sense, the technician’s traditional concept of “quality” isn’t really relevant anymore, just as Drucker counseled. “Quality in a product or service is not what the supplier puts in,” Drucker asserted in his 1985 book, Innovation and Entrepreneurship. “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.”

And so Bailey and other Sony leaders are forcing the engineering team to ask the kinds of questions it hasn’t been asking: “It’s great that you made this thing faster, lighter, smaller. But what’s it going to do for the customers who buy it? Will it change their experience?”

Culture Shift

Bailey believes that the company’s culture is starting to shift, pointing to Sony’s new NEX-5 camera as one example. It is not only well-built but has managed, with its interchangeable lenses and a slew of other features, to provide “a vital difference” in “photography experience,” in the words of one product review. Sales are soaring.

Changing the mind-set of Sony’s engineers is only one part of the equation for success, of course. In addition, Bailey has introduced a program called FAST, for “focus, accountability, speed, and teamwork.” All of these are principles that also echo back to Drucker, whose “thoughts,” says Bailey, “are as valuable today as when he wrote them.”

But in the end, it is likely to be Sony’s renewed attention to the customer that proves most crucial. Bailey acknowledges that in some ways he, as well as Chief Executive Officer Howard Stringer and others, are attempting to nudge the company “back to the future.” The Walkman, after all, sold more than 200 million units not merely because it was small and lightweight but because it revolutionized the way people consumed music.

For Sony, the battle cry is clear: The Walkman is dead. Long live the Walkman.

November 19, 2010

A Different Steve Jobs Departs This Time

In 1985, when Steve Jobs left Apple in the wake of an ugly boardroom struggle, Peter Drucker wasn’t the least bit surprised—or sympathetic. The problem, he suggested, was that Jobs didn’t adequately understand the discipline of management.

Jobs and Apple cofounder Stephen Wozniak “never got their noses rubbed in the dirt,” Drucker said. “Success made them arrogant. They don’t know the simple elements. They’re like an architect who doesn’t know how one drives a nail or what a stud is.

“If you look at the successful companies,” Drucker added, “they are the ones who either learn management or they bring it in. In the really successful high-tech companies, usually the originator isn’t there five years later. He may be on the board; he may be honorary chairman. But he is out, and usually with bitterness. . . . Jobs lacked the discipline. I don’t mean the self-discipline. I mean the basic knowledges and the willingness to apply them.”

The Difference This Time

More than two decades later—with Jobs again departing Apple, this time for his second medical leave since 2009—it’s a good bet that Drucker wouldn’t say such disparaging things anymore. Jobs, after all, has more than mastered the fundamentals that Drucker thought he failed to grasp in his younger days.

Jobs, who returned to Apple in 1997 after several more-seasoned chief executives had nearly run the company into the ground, has emerged as particularly adept at implementing one of Drucker’s core principles: creating a customer.

“Markets are not created by God, nature, or economic forces, but by executives,” Drucker wrote. “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.”

Or perhaps, Drucker continued, “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.” To this list, of course, we would now add the iPod, iPhone, and iPad.

A Deep Bench

But Jobs has apparently grown into a terrific manager in another respect: He has surrounded himself with a highly talented group of senior executives, including Chief Operating Officer Tim Cook, who will serve as chief executive during Jobs’ absence; Phil Schiller, Apple’s worldwide marketing chief; and Jonathan Ive, the senior vice president for industrial design, who is widely credited with giving many of Apple’s products their sexy look and feel. Without question, the bench is much deeper than conventional wisdom would have it.

“At its inception, a company is often the ‘lengthened shadow of one man,’” Drucker wrote in his 1954 landmark, The Practice of Management. “But it will not grow and survive unless the one-man top is converted into a team.”

Drucker pointed out that even if only one person carries the CEO title, he must have a coterie of equally—if not more—talented colleagues “who are on his level and who do not therefore want anything from him; people with whom he can ‘let down his hair’ and speak freely, with whom he does not have to watch every one of his steps or words, with whom he can ‘think aloud’ without committing himself.”

Getting to this stage takes diligence. “Teams cannot be formed overnight,” Drucker cautioned in his 1985 book, Innovation and Entrepreneur-ship. “They require long periods before they can function. Teams are based on mutual trust and mutual understanding, and this takes years to build up”—three at a minimum.

To be sure, many people—especially among those who aren’t ardent Apple watchers—view Jobs as strictly a solo act. And that’s for good reason: He qualifies as what Drucker called “a CEO superman.” The trouble is, Drucker noted, “organizations cannot rely on supermen to run them; the supply is both unpredictable and far too limited.” Ultimately, he explained, “organizations survive only if they can be run by competent people who take their job seriously.”

More About Elves

For Apple, that’s precisely the point: The company clearly boasts an impressive slate of competent people. And though no single one of them may make a perfect replacement for Steve Jobs, as a team they might very well remain highly successful.

In the meantime, it would benefit Apple to showcase the contributions of some of these other, extremely capable leaders better. As Yale School of Management Professor Jeffrey Sonnenfeld remarked this week: “You only hear about Santa, but it’s time that we hear more about the elves.”

The No. 1 elf, at least for now, is Cook, who by all accounts did a splendid job overseeing Apple during Jobs’ previous hiatus. This week, with many wondering whether Jobs will ever actually come back, Cook tried to mollify people’s concerns. “The team here has an unparalleled breadth and depth of talent and a culture of innovation that Steve has driven in the company,” he said. “Excellence has become a habit.”

If that turns out to be true in the long run, Jobs will have proven himself more than a great visionary; he will have proven himself a great manager.

January 21, 2011

For Nokia, One Good Call, One Bad

Investors and technology watchers are trying to figure out whether Nokia has markedly improved, or furthered damaged, its position in the cutthroat mobile communications business. But it’s the company’s internal communications that Peter Drucker would have wondered most about.

Nokia announced last week that it planned to form an alliance under which it will use a Microsoft product as its primary operating system for smartphones. In going with Windows Phone 7, the Finnish company will largely leave behind its own Symbian operating system. By joining with Microsoft, Nokia also has elected to bypass other options, such as tapping Google’s Android software.

The partnership with Microsoft represents a dramatic shift for Nokia—and for good reason. The company’s share of the smartphone market has deteriorated rapidly in the face of Android and Apple’s iPhone. In some crucial parts of the world, such as the U.S., Nokia is all but invisible.

Making a Splash

Nokia Chief Executive Stephen Elop, in what has turned into an instant shoo-in for the Corporate Memo Hall of Fame, went so far as to liken the company’s situation to a man who finds himself standing on a burning oil rig. To save himself, the man jumps into the North Sea.

“In ordinary circumstances, the man would never consider plunging into icy waters,” Elop wrote employees in a missive issued shortly ahead of the Microsoft announcement. “But these were not ordinary times—his platform was on fire. The man survived the fall and the waters. After he was rescued, he noted that a ‘burning platform’ caused a radical change in his behavior.

“We too, are standing on a ‘burning platform,’ and we must decide how we are going to change our behavior.”

Drucker would have appreciated the candor and sense of vision in Elop’s comments, especially given the hotly competitive environment in which Nokia finds itself. During the most challenging times, Drucker wrote, management’s most important task is to make sure of the institution’s “structural strength and soundness, of its capacity to survive a blow, to adapt to sudden change, and to avail itself of new opportunities.”

Selling the Decision

The tougher question, though, is this: How effectively did Elop communicate his thinking in advance of unveiling the Microsoft deal?

Drucker believed that a key step in any decision is to achieve sufficient buy-in throughout the company before going forward. It’s a lesson, he added, that he learned from the Japanese. “As soon as the decision-making process starts, and long before the final decision is made, Japanese management sells the decision,” Drucker explained. “Japanese decisions are not being made by consensus; that’s a mistranslation of the Japanese term. The correct translation would be something like ‘common understanding.’”

There are, of course, practical and legal limits to how much any leader can say to the troops on the front end of a transaction. That holds particularly true at a huge corporation such as Nokia, which has more than 130,000 people on the payroll. But the general notion—that leadership is, in Drucker’s words, largely “a marketing job” and organizations need to view employees as a kind of customer—is one that more managers need to pay attention to.

In the case of the Japanese, “everyone who is likely to be affected by a decision—say, to go into a joint venture with a Western company or to acquire a minority stake in a potential U.S. distributor—is asked to write down how such a decision would affect his work, job, and unit,” Drucker noted. “He is expressly forbidden to have an opinion or to recommend or to object to the possible move. But he is expected to think it through. Top management, in turn, knows where each of these people stands. Then top management makes the decision from the top down.”

At that point, everyone already has a stake in the company’s new direction. Each employee is thoroughly prepared for what’s coming. “There is no need to sell it—it’s been sold,” Drucker concluded.

Sharing the Journey

At Nokia, by contrast, employees seemed taken aback by the Microsoft news. The day it came down, more than 1,000 workers walked out of the company’s offices in protest. Many are concerned about layoffs. Meanwhile, rivals are busy poaching talent. “Any Nokia software engineers need a job? We’re hiring,” read the tweet from a Google recruiter.

Elop, who left Microsoft to join Nokia last September, has taken his lumps for hooking up with his old company. A group of small shareholders is calling for his ouster, and plenty of analysts are questioning the wisdom of the alliance.

But in the end, even if Elop persuades these outsiders that his strategy makes sense, it’s the insiders who will have to deliver the results. As Drucker said, “Unless the organization has ‘bought’ the decision, it will remain ineffectual.”

Asked about the negative reaction from so many his workers, Elop remarked: “Every employee goes through an emotional journey, and the emotional journey is difficult, because this is such a big change. I’ve had four and a half months to go through my emotional journey, ending up in a very different position from what I had assumed when I first joined.”

Had more Nokia workers gone through at least some of the journey with him, and not been handed the road map after the fact, the company would be in a stronger place now.

February 18, 2011