Drucker Perspective

Drucker's New Certainties for Developing Strategy

William Cohen, Ph.D.
Posted: 10/05/2011

Drucker wrote that the purpose of strategy is to enable an organization to achieve its desired results in an unpredictable environment. So contrary to what many believe, strategy is not about achieving results in a known and foreseeable environment but rather in an environment that is unknown and unforeseeable. In Drucker’s own words, it allows an organization to be "purposefully opportunistic."

The Five Certainties

Drucker was never afraid to propose ideas which others may never have even considered, and this was certainly the case with the five environmental variables which he felt were phenomena so unique that they could safely be considered certainties and not just possibilities as we normally assume for fixed variables that we sometimes call "environmental." Moreover, he believed that they were different from anything current strategies considered as they were not essentially economic, but were primarily social and political.

The Collapsing Birthrate in the Developed World

Drucker found the falling birthrate in the developed world to be a phenomenon unique in history, with dramatic collateral effects and important secondary effects. Perhaps the most obvious change was in the very old assumption that markets would continue to increase as the population increased. How many times have we heard that markets are bound to enlarge due to simply to the automatic increase in birthrate? But Drucker looked at the facts and found that birthrates were no longer steadily increasing for populations in the developed world. Of course the decline in birthrate could be somewhat offset, delayed, or somewhat concealed by immigration. But even this would result in dramatic changes and would also cause turmoil as border populations with different, customs, religions, and even languages were attracted into countries of diminished numbers of younger workers.

Drucker saw several important secondary effects resulting from the collapsing birthrate. He said that for the immediate future demographics would dominate the politics in developed countries, shunted aside only temporarily by wars and economic conditions. Eventually government instability in developed countries would likely soon become the norm. The definition of the concept of retirement was certain to change. While early "retirement" would continue, it would no longer mean a return to childhood in some kind of golden years playground. Rather it might mean extended employment with the former employer, but under a different name and conditions. We have seen this come to pass even before the onset of the current recession.

Drucker noted that older workers, especially the knowledge worker who worked primarily with his mind and not his hands would become increasingly productive. He speculated that firms that first discovered how best to utilize this experienced talent in a new type of relationship would acquire a significant competitive advantage. Perhaps of even more direct importance would be the effect on potential markets. The size of the youth and younger market would inevitably decline and the senior market increase. But the increase in potential would not only be due to numbers of potential customers but to the individual purchasing power of those who retired from a first career and continued to find employment while in a "retired" state.

Shifts in the Distribution of Disposable Income

Drucker found that the truly important statistic that most companies overlook completely is the share of disposable income that is being spent on the products or services that they provide. Drucker believed that this figure was the most reliable in formulating strategy as it changed very little over long periods while any change in trends of disposable income are crucial to a firm’s strategy. He concluded that utilizing this certainty required both quantitative information and qualitative analysis. Thus another example of looking at data but deciding what the data meant rather than primarily crunching numbers.

Defining Performance

According to Drucker, the traditional view of performance has been that the corporation was run for the interest of the manual worker, at least in Japan, Germany, Scandinavian countries and some others. Of course, in the U.S. and Britain, the interests have been somewhat different, at least since the late 1920s. Though not clearly defined, business is supposed to be run for an ill defined conglomeration of interests including customers, employees, shareholders, and society. The only big question is whether this should be short term for gain in stock price, or longer term for future growth. Drucker noted that even "long term" isn’t necessarily all that long since the average span of a "successful" enterprise in the U.S. is usually less than thirty years. The resulting fixed certainty was many traditional views would need to be revised including the definition of performance.

These new definitions of performance would have a clear impact on strategy, would be based on longer term estimates, and less and less on "social harmony," and that performance would need to be defined nonfinancially with a nonfinancial "value" return. Only in this way would this be meaningful to knowledge workers and generate the commitment which today is frequently termed "engagement."

Global Competitiveness

Each year the World Economic Forum compiles a weighted average of many different components measured by publically available data and surveys of a country’s relative competitiveness globally. That’s not what Drucker was talking about with this certainty.

As he looked into the future, no small business, giant corporation, hospital, or university could ignore institutions outside of its own national boundaries. It could neither succeed, nor even survive, without measuring up to standards set by the leaders in its industry anywhere on the planet. Of considerable benefit if our political, corporate, and labor leaders would simply integrate the knowledge into their strategies it was Drucker’s contention that traditional means of protection of home industries no longer protects, "no matter how high the customs duties nor how low the import quotas." Drucker easily predicted the struggles now occurring for increased protectionism and one can easily see this in the failure of the G20 summit. He said that the net result of protectionism would not solve a nation’s problems, or a particular institutions, only make individual companies even more vulnerable. The only solution was for the organization to find a way to compete considering the standards set by the best organizations in every area of management no matter where located, and essentially to consider such issues as government subsidies of global competitors as environmental variables which must be overcome by superior strategies, not by similar protection strategies of its own government.

The Growing Incongruence Between Economic Globalization and Political Splintering

Drucker’s first successful book, The End of Economic Man took on the historic notion that man behaved rationally in response to economics. According to Drucker, the rise of Nazism disproved that theory. Sixty years later Drucker revisited his earlier work in a management context and strategy development. His conclusion: even within transnational economic units, national politics will invariably overrule economic rationality.

Managers in all industries and disciplines are well advised to consider these certainties as equally important to traditional environmental variables usually considered the sole factors in developing strategy.

William Cohen, Ph.D.
Posted: 10/05/2011

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