Managing For Results

Peter Drucker

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781136009693
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Managing for Results demonstrates Drucker's particular genius for breaking through conventional outlooks and opening up new perspectives for ultimate profits in the world of business. What must be done to make the organization perform, prosper and grow - what the executive, the maker of decisions, must do to move the enterprise forward - is the subject of this book. It will be of great value to students of management as well as executives in industry and commerce, and it deals skilfully and perceptively with economic tasks which every business has to tackle in order to achieve sound performance and economic results.

PART I Understanding The Business

1 Business Realities

DOI: 10.4324/9780080575315-1

That executives give neither sufficient time nor sufficient thought to the future is a universal complaint. Every executive voices it when he talks about his own working day and when he talks or writes to his associates. It is a recurrent theme in the articles and in the books on management.

It is a valid complaint. Executives should spend more time and thought on the future of their business. They also should spend more time and thought on a good many other things, their social and community responsibilities for instance. Both they and their businesses pay a stiff penalty for these neglects. And yet, to complain that executives spend so little time on the work of tomorrow is futile. The neglect of the future is only a symptom; the executive slights tomorrow because he cannot get ahead of today. That too is a symptom. The real disease is the absence of any foundation of knowledge and system for tackling the economic tasks in business.

Today’s job takes all the executive’s time, as a rule; yet it is seldom done well. Few managers are greatly impressed with their own performance in the immediate tasks. They feel themselves caught in a ‘rat race’, and managed by whatever the mailboy dumps into their ‘in’ tray. They know that crash programmes which attempt to ‘solve’ this or that particular ‘urgent’ problem rarely achieve right and lasting results. And yet, they rush from one crash programme to the next. Worse still, they know that the same problems recur again and again, no matter how many times they are ‘solved’.

Before an executive can think of tackling the future, he must be able therefore to dispose of the challenges of today in less time and with greater impact and permanence. For this he needs a systematic approach to today’s job.

There are three different dimensions to the economic task: (1) the present business must be made effective; (2) its potential must be identified and realized; (3) it must be made into a different business for a different future. Each task requires a distinct approach. Each asks different questions. Each comes out with different conclusions. Yet they are inseparable. All three have to be done at the same time: today. All three have to be carried out with the same organization, the same resources of men, knowledge and money, and in the same entrepreneurial process. The future is not going to be made tomorrow; it is being made today, and largely by the decisions and actions taken with respect to the tasks of today. Conversely, what is being done to bring about the future directly affects the present. The tasks overlap. They require one unified strategy. Otherwise, they cannot really get done at all.

To tackle any one of these jobs, let alone all three together, requires an understanding of the true realities of the business as an economic system, of its capacity for economic performance, and of the relationship between available resources and possible results. Otherwise, there is no alternative to the ‘rat race’. This understanding never comes ready-made; it has to be developed separately for each business. Yet the assumptions and expectations that underlie it are largely common. Businesses are different, but business is much the same, regardless of size and structure, of products, technology and markets, of culture and managerial competence. There is a common business reality.

There are actually two sets of generalizations that apply to most businesses most of the time: one with respect to the results and resources of a business, one with respect to its efforts. Together they lead to a number of conclusions regarding the nature and direction of the entrepreneurial job.

Most of these assumptions will sound plausible, perhaps even familiar, to most businessmen, but few businessmen ever pull them together into a coherent whole. Few draw action conclusions from them, no matter how much each individual statement agrees with their experience and knowledge. As a result, few executives base their actions on these, their own assumptions and expectations.

1. Neither results nor resources exist inside the business. Both exist outside. There are no profit centres within the business; there are only cost centres. The only thing one can say with certainty about any business activity, whether engineering or selling, manufacturing or accounting, is that it consumes efforts and thereby incurs costs. Whether it contributes to results remains to be seen. Results depend not on anybody within the business nor on anything within the control of the business. They depend on somebody outside – the customer in a market economy, the political authorities in a controlled economy. It is always somebody outside who decides whether the efforts of a business become economic results or whether they become so much waste and scrap. The same is true of the one and only distinct resource of any business: knowledge. Other resources, money or physical equipment, for instance, do not confer any distinction. What does make a business distinct and what is its peculiar resource is its ability to use knowledge of all kinds – from scientific and technical knowledge to social, economic and managerial knowledge. It is only in respect to knowledge that a business can be distinct, can therefore produce something that has a value in the market place. Yet knowledge is not a business resource. It is a universal social resource. It cannot be kept a secret for any length of time. ‘What one man has done, another man can always do again’ is old and profound wisdom. The one decisive resource of business, therefore, is as much outside of the business as are business results. Indeed, business can be defined as a process that converts an outside resource, namely knowledge, into outside results, namely economic values.
2. Results are obtained by exploiting opportunities, not by solving problems. All one can hope to get by solving a problem is to restore normality. All one can hope, at best, is to eliminate a restriction on the capacity of the business to obtain results. The results themselves must come from the exploitation of opportunities.
3. Resources, to produce results, must be allocated to opportunities rather than to problems. Needless to say, one cannot shrug off all problems, but they can and and should be minimized Economists talk a great deal about the maximization of profit in business. This, as countless critics have pointed out, is so vague a concept as to be meaningless. But ‘maximization of opportunities’ is a meaningful, indeed a precise, definition of the entrepreneurial job. It implies that effectiveness rather than efficiency is essential in business. The pertinent question is not how to do things right but how to find the right things to do, and to concentrate resources and efforts on them.
4. Economic results are earned only by leadership, not by mere competence. Profits are the rewards for making a unique, or at least a distinct, contribution in a meaningful area; and what is meaningful is decided by market and customer. Profit can only be earned by providing something the market accepts as value and is willing to pay for as such. And value always implies the differentiation of leadership. The genuine monopoly, which is as mythical a beast as the unicorn (save for politically enforced, that is, governmental monopolies), is the one exception. This does not mean that a business has to be the giant of its industry nor that it has to be first in every single product line, market, or technology in which it is engaged. To be big is not identical with leadership. In many industries the largest company is by no means the most profitable one, since it has to carry product lines, supply markets, or apply technologies where it cannot do a distinct, let alone a unique job. The second spot, or even the third spot is often preferable, for it may make possible that concentration on one segment of the market, on one class of customer, on one application of the technology, in which genuine leadership often lies. In fact, the belief of so many companies that they could – or should – have leadership in everything within their market or industry is a major obstacle to achieving it. But a company which wants economic results has to have leadership in something of real value to a customer or market. It may be in one narrow but important aspect of the product line, it may be in its service, it may be in its distribution, or it may be in its ability to convert ideas into saleable products on the market speedily and at low cost. Unless it has such leadership position, a business, a product, a service, becomes marginal. It may seem to be a leader, may supply a large share of the market, may have the full weight of momentum, history, and tradition behind it. But the marginal is incapable of survival in the long run, let alone of producing profits. It lives on borrowed time. It exists on sufferance and through the inertia of others. Sooner or later, whenever boom conditions abate, it will be squeezed out.

   The leadership requirement has serious implications for business strategy. It makes most questionable, for instance, the common practice of trying to catch up with a competitor who has brought out a new or improved product. All one can hope to achieve thereby is to become a little less marginal. It also makes questionable ‘defensive research’ which throws scarce and expensive resources of knowledge into the usually futile task of slowing down the decline of a product that is already obsolete.

5. Any leadership position is transitory and likely to be short-lived. No business is ever secure in its leadership position. The market in which the results exist, and the knowledge which is the resource, are both generally accessible. No leadership position is more than a temporary advantage.* In business (as in a physical system) energy always tends towards diffusion. Business tends to drift from leadership to mediocrity. And the mediocre is three-quarters down the road to being marginal. Results always drift from earning a profit towards earning, at best, a fee which is all competence is worth. It is, then, the executive’s job to reverse the normal drift. It is his job to focus the business on opportunity and away from problems, to re-create leadership and counteract the trend towards mediocrity, to replace inertia and its momentum by new energy and new direction. The second set of assumptions deals with the efforts within the business and their cost.
6. What exists is getting old. To say that most executives spend most of their time tackling the problems of today is euphemism. They spend most of their time on the problems of yesterday. Executives spend more of their time trying to unmake the past than on anything else. This, to a large extent, is inevitable. What exists today is of necessity the product of yesterday. The business itself – its present resources, its efforts and their allocation, its organization as well as its products, its markets and its customers – expresses necessarily decisions and actions taken in the past. Its people, in the great majority, grew up in the business of yesterday. Their attitudes, expectations, and values were formed at an earlier time; and they tend to apply the lessons of the past to the present. Indeed, every business regards what happened in the past as normal, with a strong inclination to reject as abnormal whatever does not fit the pattern. No matter how wise, forward-looking, or courageous the decisions and actions were when first made, they will have been overtaken by events by the time they become normal behaviour and the routine of a business. No matter how appropriate the attitudes were when formed, by the time their holders have moved into senior, policy-making positions, the world that made them no longer exists. Events never happen as anticipated; the future is always different. Just as generals tend to prepare for the last war, businessmen always tend to react in terms of the last boom or of the last depression. What exists is therefore always ageing. Any human decision or action starts to get old the moment it has been made. It is always futile to restore normality; ‘normality’ is only the reality of yesterday. The job is not to impose yesterday’s normal on a changed today; but to change the business, its behaviour, its attitudes, its expectations – as well as its products, its markets, and its distributive channels – to fit the new realities.
7. What exists is likely to be misallocated. Business enterprise is not a phenomenon of nature but one of society. In a social situation, however, events are not distributed according to the ‘normal distribution’ of a natural universe (that is, they are not distributed according to the bell-shaped Gaussian curve). In a social situation a very small number of events at one extreme – the first 10 per cent to 20 per cent at most – account for 90 per cent of all results; whereas the great majority of events account for 10 per cent or so of the results. This is true in the market place: a handful of large customers out of many thousands produce the bulk of orders; a handful of products out of hundreds of items in the line produce the bulk of the volume; and so on. It is true of sales efforts: a few salesmen out of several hundred always produce two-thirds of all new business. It is true in the plant: a handful of production runs account for most of the tonnage. It is true of research: the same few men in the laboratory are apt to produce nearly all the important innovations. It also holds true for practically all personnel problems: the bulk of the grievances always comes from a few places or from one group of employees (for example, from the older unmarried women or from the clean-up men on the night shift), as does the great bulk of absenteeism, of turnover, of suggestions under a suggestion system, of accidents. As studies at the New York Telephone Company have shown, this is true even in respect of sickness. The implications of this simple statement about normal distribution are broad. It means, first: while 90 per cent of the results are being produced by the first 10 per cent of events, 90 per cent of the costs are incurred by the remaining and resultless 90 per cent of events. In other words, results and costs stand in inverse relationship to each other. Economic results are, by and large, directly proportionate to revenue, while costs are directly proportionate to the number of transactions. (The only exceptions are the purchased materials and parts that go directly into the final product.) A second implication is that resources and efforts will normally allocate themselves to the 90 per cent of events that produce practically no results. They will allocate themselves to the number of events rather than to the results. In fact, the most expensive and potentially most productive resources (i.e., highly trained people) will misallocate themselves the worst. For the pressure exerted by the bulk of transactions is fortified by the individual’s pride in doing the difficult – whether productive or not. This has been proved by every study. Let me give some examples:

   A large engineering company prided itself on the high quality and reputation of its technical service group, which contained several hundred expensive men. The men were indeed first-rate. But analysis of their allocation showed clearly that while they worked hard, they contributed little. Most of them worked on the ‘interesting’ problems – especially those of the very small customers – problems which, even if solved, produced little business. The automobile industry was the company’s major customer and accounted for almost one-third of all purchases. But few technical service people had within memory set foot in the engineering department or the plant of an automobile company. ‘General Motors and Ford don’t need me; they have their own people’ was their reaction.

   Similarly, in many companies, salesmen are misallocated. The largest group of salesmen (and the most effective ones) are usually put on the products that are hard to sell, either because they are yesterday’s products or because they are also-rans which managerial vanity desperately is trying to make into winners. Tomorrow’s important products rarely get the sales effort required. And the product that has sensational success in the market, and which therefore ought to be pushed all out, tends to be slighted. ‘It is doing all right without extra effort, after all’ is the common conclusion.

   Research departments, design staffs, market development efforts, even advertising efforts have been shown to be allocated the same way in many companies – by transactions rather than by results, by what is difficult rather than by what is productive, by yesterday’s problems rather than by today’s and tomorrow’s opportunities.

   A third and important implication is that revenue money and cost money are rarely the same money stream. Most businessmen see in their mind’s eye – and most accounting presentations assume-that the revenue stream feeds back into the cost stream, which then, in turn, feeds back into the revenue stream. But the loop is not a closed one. Revenue obviously produces the wherewithal for the costs. But unless management constantly works at directing efforts into revenue-producing activities, the costs will tend to allocate themselves by drifting into nothing-producing activities, into sheer busy-ness. In respect then to efforts and costs as well as to resources and results the business tends to drift towards diffusion of energy. There is thus need for constant reappraisal and redirection; and the need is greatest where it is least expected: in making the present business effective. It is the present in which a business first has to perform with effectiveness. It is the present where both the keenest analysis and the greatest energy are required. Yet it is dangerously tempting to keep on patching yesterday’s garment rather than work on designing tomorrow’s pattern. A piecemeal approach will not suffice. To have a real understanding of the business, the executive must be able to see it in its entirety. He must be able to see its resources and efforts as a whole and to see their allocation to products and services, to markets, customers, end-uses, to distributive channels. He must be able to see which efforts go onto problems and which onto opportunities. He must be able to weigh alternatives of direction and allocation. Partial analysis is likely to misinform and misdirect. Only the overall view of the entire business as an economic system can give real knowledge.
8. Concentration is the key to real economic results. Economic results require that managers concentrate their efforts on the smallest number of products, product lines, services, customers, markets, distributive channels, end-uses, and soon, that will produce the largest amount of revenue. Managers must minimize the amount of attention devoted to products which produce primarily costs because, for instance, their volume is too small or too splintered. Economic results require that staff efforts be concentrated on the few activities that are capable of producing significant business results. Effective cost control requires a similar concentration of work and efforts on those few areas where improvement in cost performance will have significant impact on business performance and results – that is, on those areas where a relatively minor increase in efficiency will produce a major increase in economic effectiveness. Finally, human resources must be concentrated on a few major opportunities. This is particularly true for the high-grade human resources through which knowledge becomes effective in work. And above all it is true for the scarcest, most expensive, but also potentially most effective of all human resources in a business: managerial talent. No other principle of effectiveness is violated as constantly today as the basic principle of concentration. This, of course, is true not only of businesses. Governments try to do a little of everything. Today’s big university (especially...

Table of contents

• Cover
• Halftitle Page
• Books Page
• Title Page
• Copyright Page
• Contents
• Acknowledgement
• Introduction: The Task
• PART I: UNDERSTANDING THE BUSINESS
• 1. Business Realities
• 2. The Result Areas
• 3. Revenues, Resources and Prospects
• 4. How Are We Doing?
• 5. Cost Centres and Cost Structure
• 6. The Customer Is the Business
• 7. Knowledge Is the Business
• 8. This Is Our Business
• PART II: FOCUS ON OPPORTUNITY
• 9. Building on Strength
• 10. Finding Business Potential
• 11. Making the Future Today
• PART III: A PROGRAMME FOR PERFORMANCE
• 12. The Key Decisions
• 13. Business Strategies
• 14. Building Economic Performance into a Business
• Conclusion: The Commitment
• Bibliography
• Index