Peter Drucker Got it Right

I didn't hear much about Peter Drucker when I went through my MBA program. Most of what I know came from reading his books after graduation. I think Drucker can be confusing at first because his writings sometimes seem contradictory, but they aren't. Drucker, to me, has always focused on context and balance, and those are things that too many business people don't acknowledge. We normally hear that business is all about profit. But you have to balance that against other things. One meditation in The Daily Drucker that caught my attention a few weeks ago was about profit margins. Normally we think high=good, but that might not always be the case. Huge profit margins invite competition, and they give startups too much room for error. That gives your competition a chance to make mistakes, learn from them, and possibly recover in time to each your lunch the next round. It seems counterintuitive, but in some ways high profit margins could be your downfall.

The thing I like most about Peter Drucker is that he realized the underlying power of business as a force for social and economic good. I think this quote sums it up well

Managers must convert society's needs into opportunities for profitable business.

Exactly. That is what business is all about. Back to the issue of profits, Drucker makes an excellent point:

Profit is not the explanation, cause, or rationale of business behavior and business decisions, but rather the test of their validity. If archangels instead of businessmen sat in directors' charis, they would still have to be concerned with profitability, despite their total lack of personal interest in making profits.

Again Drucker nails it. Economic profit (not trick-accounting profits) is proof that you are making a valuable contribution to society, and it justifies the existence of your business.

I could write so much about Drucker, what i've learned form his books, and now much he has influenced my thoughts about business. But I want to keep this short, so I will end this with a Drucker story that exposes the ultimate problem in business – that we don't always have a good understanding of what is going on.

One company chairman was absolutely certain that he divided his time roughly into three parts. One third he thought he was spending with his senior men. One third he htought he spent with his important customers. And one-third he thought was devoted to community activities. The actual record of his activities over six weeks brought out clearly that he spent almost no time in any of those areas. There were the tasks on which he knew he should spend his time — and therefore memory, obliging as usual, told him that they were the tasks on which he actually had spent his time. The record showed, however, that he spent most of his hours as a kind of dispatcher, keeping track of orders from customers he personally knew, and bothering the plant with telephone calls about them. Most of those orders were going through all right anyhow and his intervention could only delay them. But when his secretary first came in with the time record, he did not believe her. It took two or three more time logs to convinced him that the record, rather than his memory, had to be trusted when it came to the use of time.

The effective person therefore knows that to manage his time, he first has to know where it actually goes.

Drucker nails it. Our memories convince us we are doing the right things, even when we aren't. That is Drucker in a nutshell. He asked questions to which the answers seemed obvious, but upon closer examination we realized they weren't what we thought.

Factoring: What Is It and How Do You Choose The Right Service?

Rest in peace Peter Drucker, and thank you for all your wisdom and insight. You have shown us how to make the world a better place through business.

  • Great post. Drucker rules. It’s hard to underestimate his contribution to management science.

  • Sorry Rob I don’t see where Drucker elevates profit to the “proof that you are making a valuable contribution to society.”

    He says very clearly profit is not the “explanation, cause, or rationale of business behavior and business decisions.” If profit was the proof that you are making a valuable contribution to society wouldn’t it be a valid rationale or at least an explanation of why you behave the way you do? He says no!

    Later Drucker says that not making a profit wastes society’s resources. But to stretch “not wasting resources” to the proof that you are making a valuable contribution to society is going too far.

    I think his statement that profit “is the test of their [business behavior or a decision’s] validity” needs to be explored further. Drucker was (to my mind) very clearly admonishing both the view that profit is a bad thing and that profit is the driver of good decision making.

  • Rob

    Doh! I guess I’m busted for affirming the consequent
    . That was my take on Drucker’s statement that managers must convert society’s needs into opportunities for profitable business.

    The question is, does it work both ways? If solving customer pRoblems => profit, does profit => solving customer pRoblems? When I say this, I mean economic profit, not financial profit.

  • I don’t think so (frankly in either direction).

    Solving customer pRoblems must be done profitably (so that you don’t waste society’s resources). But the only test of your business’s ability to solve pRoblems is a clear statement of the pRoblem and proof (which could include perception of a solution but can’t be solely based on customer perceptions) that the pRoblem has been solved.

    Profit has been made by many businesses that failed to solve customer pRoblems. Again there is a lag time between people buying a promise and finding out that the business doesn’t live up to their promises. During the lag many businesses are profitable.

    For example, a lot of enterprise software buyers get far less than an acceptable solution from their vendors. I even saw one study where a significant minority of software buyers were worse off after employing the software. The profits in those cases were earned while making a pRoblem worse!