Snippets from Drucker.

MANAGEMENT CHALLENGES for the 21st Century
Drucker, Peter F.
Citation (MLA): Drucker, Peter F.. MANAGEMENT CHALLENGES for the 21st Century. HarperCollins, 2009. Kindle file.
1 Management’s New Paradigms
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2 Strategy — The New Certainties
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The four growth sectors during the 20th century were, respectively: Government Health Care Education Leisure with Leisure probably taking as much of the enormous expansion of economic productivity and output as the other three together. In 1900 the great majority of people in the developed countries still worked at least sixty hours a week, fifty-one weeks a year—with about eight holidays a year—and six days a week. By the end of the century the great majority works fewer than forty hours a week—thirty-four or thirty-five in Germany—and at most (in the United States) forty-seven weeks a year (i.e., with about twelve holidays per year) and five days a week—a drop from more than 3,000 hours a year to fewer than 1,500 hours in Germany and to 1,850 hours in the hardest-working developed country, the United States. Of these four 20th-century growth sectors, Government probably has the greatest impact on the distribution of
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disposable income. Not because it is a major buyer or user of products and services; except in wartime even the biggest government is only a marginal consumer. But the main economic function of government in a developed country is to redistribute between 30 and 50 percent of the country’s national income. Nothing else has therefore as great an impact on the distribution of shares of national income as changes in government policy. The other three—Health Care, Education, Leisure—are all major users of products and services, that is, of material goods. But none of them provides material, and that means “economic,” satisfactions. And all four are not in the “Free Market,” do not behave according to the economist’s rules of supply and demand, are not particularly “price sensitive” and altogether do not fit the economist’s model or behave according to the economist’s theories. And yet, together, they are well over half of a developed economy, even of the most “capitalist” one.
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As a result the traditional financial giants have greatly overexpanded worldwide. And as their legitimate corporate business became less and less profitable—in part because there was increasingly less of it, in part because competition for the pieces of the shrinking pie has become fiercer and fiercer, driving down profits to the vanishing point—these corporate-banking giants, American, British, Japanese, German, French, Swiss, have increasingly resorted to “trading for their own account,” that is, to outright speculation, so as to support their swollen overheads. This, however, as centuries of financial history teach (beginning with the Medici in 15th-century Europe), has only one—but an absolutely certain—outcome: catastrophic losses. And it is these losses resulting from a misreading of the trend toward financial services as a major growth industry which in large measure triggered the financial crisis that began in Asia in the mid-nineties and is threatening to engulf the entire world economy.
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The development began in the United States (it was first described in my 1975 book, The Unseen Revolution, reissued in 1993 as The Pension Fund Revolution). As a result, institutions representing the future pensioners now own at least 40 percent of all American publicly listed corporations, and probably more than 60 percent of the big ones. They similarly own British business. And they are beginning to be the owners of business in all other developed countries, Germany, France, Japan and so on. And with that shift in property, we are seeing a shift in power.
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Till now it has not been the prevailing theorem in any country that a business, and especially a large business, should be run exclusively—or even primarily—in the interest of the shareholders. In the United States, since the late 1920s, the prevailing theorem, however fuzzy, held that the business should be run for a balance of interests—customers, employees, shareholders and so on—which in fact meant that it should not be accountable to anyone. Britain more or less followed the same path. In Japan, Germany and Scandinavia, large enterprises have been seen—and are still being seen—as being run primarily to create and to maintain social harmony, which in effect means that they are to be run in the interest of manual workers. These traditional views are now obsolescent. But the emerging American theorem that businesses should be run exclusively for the short-term interest of the shareholders is also not tenable, and will certainly have to be revised.
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One implication: It is no longer possible to base a business or a country’s economic development on cheap labor. However low its wages, a business—except for the smallest and most purely local one, for example, a local restaurant—is unlikely to survive, let alone to prosper, unless its workforce rapidly attains the productivity of the leaders of the industry anyplace in the world. This is true particularly in manufacturing. For in most manufacturing industries of the developed world the cost of manual labor is rapidly becoming a smaller and smaller factor—one-eighth of total costs or less. Low labor productivity endangers a company’s survival. But low labor costs no longer give enough of a cost advantage to offset low labor productivity.
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Performance below the world’s highest standards stunts, even if the costs are very low and even if government subsidies are very high. And “Protection” no longer protects, no matter how high the custom duties or how low the import quotas. Still, in all likelihood, we face a protectionist wave throughout the world in the next few decades. For the first reaction to a period of turbulence is to try to build a wall that shields one’s own garden from the cold winds outside. But such walls no longer protect institutions—and especially businesses—that do not perform up to world standards. It will only make them more vulnerable.
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There has been talk about the “end of sovereignty” since well before 1918. But nothing has emerged yet to take the place of national government and national sovereignty in political affairs. In fact, since 1914, the trend has been toward increasing splintering. Gone are the empires that politically unified the largest areas of the world before 1914—Austria-Hungary and the Ottoman Empire; the British, the French, the Dutch; the Portuguese and the Belgian Empires; the Eurasian Empire of Tsars and Communists. At the same time, small political units have become economically viable because money and information have become “transnational” (which actually means that they have no nationality whatever). Since 1950 one mini-state after the other has come into being, each with its own government, its own military, its own diplomatic service, its own tax and fiscal policy and so on. So far there are no signs yet of any global institutions, not even in the economic sphere, for example, a global Central Bank controlling the totally reckless flows of money worldwide, let alone a global institution controlling tax and monetary policies worldwide. Even within transnational economic units, national politics still overrule economic rationality. Despite the European Economic Community, for instance, it has proven all but politically impossible to close a totally redundant plant in Belgium and shift the work to a French plant of the same company only thirty miles away, but on the other side of a national border.
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Do not expand or grow globally by going into businesses—especially not by acquisition—unless they fit into the company’s Theory of the Business and its overall strategy.
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In different regions or different countries, different products and/or services will behave differently. In France, for instance, the Coca-Cola Company does far better selling fruit juices than it does selling carbonated Cokes. In Japan one of its major products is coffee dispensed in vending machines. But both fruit juices and prepared coffee fit Coca-Cola’s Theory of the Business and its strategy. Physically they are different from the original Coke. In every other aspect, that is, as businesses, they are exactly the same.
3 The Change Leader
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The bank’s solution was to concentrate the tellers at the branches on the simple, repetitive, routine services, which require neither skill nor time. The new financial products were assigned to different groups of people who were moved to separate tables, with big signs advertising the products in which each table specialized. As soon as this was done, business went up sharply, both for the traditional and the new services. But because there had been no “pilot”—trying out the improvements in one or two branches would have sufficed—the bank lost almost two years and a great deal of money.
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In some organizations that have successfully organized themselves to be change leaders, the opportunity page is given its own full morning or its own full day, with a second full morning or full day then devoted to the problems. Enterprises that succeed in being change leaders make sure that they staff the opportunities. The way to do this is to list the opportunities on one page, and then to list the organization’s performing and capable people on another page. Then one allocates the ablest and most performing people to the top opportunities.
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3. And the third trap: confusing motion with action. Typically when a product, service or process no longer produces results and should be abandoned or changed radically, management “reorganizes.” To be sure, reorganization is often needed. But it comes after the action, that is, after the “what” and the “how” have been faced up to. By itself reorganization is just “motion” and no substitute for action.
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Enterprises of all kinds increasingly use all kinds of market research and customer research to limit, if not eliminate, the risks of change. But one cannot market research the truly new. But also nothing new is right the first time. Invariably, problems crop up that nobody even thought of. Invariably, problems that loom very large to the originator turn out to be trivial or not to exist at all. Above all, the way to do the job invariably turns out to be different from what is originally designed. It is almost a “law of nature” that anything that is truly new, whether product or service or technology, finds its major market and its major
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application not where the innovator and entrepreneur expected, and not for the use for which the innovator or entrepreneur has designed the product, service or technology. And that, no market or customer research can possibly discover.
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The way to do this is to find somebody within the enterprise who really wants the new. As said before, everything new gets into trouble. And then it needs a champion. It needs somebody who says: “I am going to make this succeed,” and who then goes to work on it. And this person needs to be somebody whom the organization respects. This need not even be somebody within the organization. A good way to pilot a new product or new service is often to find a customer who really wants the new, and who is willing to work with the producer on making truly successful the new product or the new service.
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And then the change leader has a second, separate budget for the future. This budget remains stable throughout good times and bad times. It rarely amounts to more than 10 or 12 percent of an enterprise’s total expenditures—and again this applies to non-businesses as well as to businesses. Very few of the expenditures for the future produce results unless maintained at a stable level over substantial periods. This goes for work on new products, new services and new technologies; for the development of markets and customers and distribution channels, and above all, for the development of people.
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But the future budget also should include expenditures to exploit success. The most common, but also the most damaging, practice is to cut back on expenditures for successes, especially in poor times, so as to maintain expenditures for ongoing operations, and especially expenditures to maintain the past.