Peter Drucker’s Most Frequent Comment

Entrepreneurs are motivated by the possibility that the products and services they deliver can add value to society. But they also are keenly aware that in order to operate sustainably, they need to generate profits. As a result, thriving entrepreneurs constantly re-evaluate their products or services, the market in which they compete, and the way they produce and distribute their offerings. Moreover, entrepreneurs understand that in order to survive the intense rivalry and competition they face in the marketplace, they must find ways to continually innovate. Entrepreneurs’ efforts to offer goods and services to the market often leads to innovation as entrepreneurs introduce new ways of doing things and engage in a process referred to as ‘creative destruction’. Joseph Schumpeter coined this term to describe the inherently disorderly process of change, where ideas, products, firms, and whole industries are displaced by new innovations. Schumpeter posited that entrepreneurs’ principal contribution to society is to advocate for change and disruption, and in doing so, they help advance society. Schumpeter conceptually established the ‘entrepreneur as innovator’ as a key figure in driving economic development. Schumpeter argued that innovation is a critical factor of economic change. He indicated that economic change orbits around innovation, entrepreneurial activities, and market power. Schumpeter asserted that innovation-originated market power could provide better results than price competition and the invisible hand. Additionally, he suggested that innovation often creates temporary monopolies, allowing anomalous profits that would soon be contested away by imitators and rivals. He explained that these temporary monopolies were needed to provide the incentive required for other firms to develop new products and processes. The entrepreneur introduces new things, processes, and business acumen in an effort to transform innovations into economic goods. And the entrepreneur is willing to bear the risk associated with introducing change. The innovative activities of entrepreneurs feed a creative ‘destruction process’ by causing constant disturbances to an economic system in equilibrium, thus creating opportunities for generating income and profits. Hence, entrepreneurship disrupts the stationary flow of the economic system, and in this manner initiates and sustains the process of economic development. In adjusting to a new equilibrium, other innovations are spun off, and more entrepreneurs enter the economic system, introducing new products and services, thereby fostering advancement. In similar fashion, entrepreneurial firms engage in creative destruction and thus are able to capture a share of the market by replacing firms that have failed to produce valuable products and services. The creative destruction process incentivizes firms to develop new products, services, and processes; otherwise, they will not survive in the long run. Accordingly, entrepreneurship encompasses the market entry of new firms, but it also supports the development of innovative activities in existing firms that allow them to create continuing value in the marketplace. In this vein, innovation can be characterized as the development of a new product, service, or process as the firm embarks upon new combinations of the factors of production. Innovation is a complex, dynamic process that requires commitment, resources, and investment. Often times, firms will modify their existing business model, re-arranging the manner in how they develop a product or the way they deliver new product functionalities or services to their customers. Modifications to an existing organizational process, to an existing business model, or even to a service delivery method, are all examples of how innovation is harnessed towards the pursuit of greater effectiveness and efficiency.  Innovation can be characterized as the development of a new process or product (or service) that meets new requirements and/or existing market needs. Drucker tells us: “Innovation should be focused on a specific need that it satisfies, on a specific end result that it produces” (Drucker, 1985). Innovation allows for more effective products, processes, services, technologies, and ideas to be made readily available to markets, and society in general. As a result, innovation is used by the enterprise (firm) as a means of meeting the needs of consumers; as a tool for competing with other enterprises in an existing market; and as an instrument for entering into a new market. Hence, innovation conceptually increases the likelihood of the enterprise achieving economic efficiency in the short run, and may allow the enterprise to establish a more competitive long-run position. Nonetheless, the enterprise encounters internal constraints (e.g. cost of inputs) and external constraints (e.g. market competition) that make it challenging for it to subsist in a market. Moreover, diminishing marginal returns influence the production capability of the enterprise. Based on these basic premises, innovation can be considered essential for the long-term economic survival and success of enterprises across different sectors and industries. According to some scholars, innovation can help improve the long-term survival of a firm as it can enhance its product line / service line offering while enabling it to establish a competitive advantage over other firms (Antonelli, 2003; Lundvall, 2007; Porter, 1990; Schumpeter, 1936; Teece and Pisano, 1994). It is worth noting that the firm that chooses to innovate does so based primarily on the information that it has about preferences, wants and needs of consumers in its market. In other words, the firm innovates because it recognizes the opportunity and value of meeting consumers’ needs and wants in the short-run and sees the innovation investment as a means to also help position itself effectively for the long run. Drucker reminds us that: “purposeful, systematic innovation begins with the analysis of the opportunities” (Drucker, 1985) And since the firm most often faces competition, innovation becomes an avenue through which the firm can differentiate its products from those of other competing firms. Innovation is the successful embodiment of a useful idea in the marketplace, where the idea can be commercialized. Innovation also allows the firm to re-configure resources more efficiently, and hence allows it to increase productivity, with the implication that this can help augment profit. Innovation has helped build companies and grow and develop industries. For instance, just two decades ago, organizations struggled managing the vast amount of information and data related to their ongoing customer interactions. Since 1999, Salesforce has revolutionized how organizations keep track of customer interactions and manage their sales data. Since its founding, Salesforce has developed multiple iterations of its products, leading to a sophisticated cloud-based enterprise software which supports customer relationship management (CRM). Salesforce’s innovative solutions include sales force automation, customer service and support, marketing automation, and digital commerce. Salesforce has enabled large organizations around the globe to automate their sales and marketing processes and to become increasingly efficient, while becoming effective managers of customer data and information. Innovation is not a linear process. Instead, innovation is a highly iterative process of re-considering many internal technical and operational factors, and external factors, with an ever-changing interpretation of how the firm might continue to develop and deliver products and services. The firm in which innovation is fostered must support the diverse iterations, interactions, and transactions needed to support innovation efforts. The entrepreneur, who does not mind the uncertainty and risk, is able to manage this dynamic process. Innovation that addresses a real market need or want delivers value to society. Yet, innovation requires that firms systematically analyze opportunities that are present. Hence, the entrepreneur and entrepreneurial firm must be able to develop the ability to observe and perceive the evolving needs of people. The entrepreneur must then focus on delivering a solution that meets a specific set of needs or wants. This implies that innovation must be purposeful. And it also requires that the entrepreneur is not only disciplined, but willing to invest in acquiring knowledge which can be applied productively. Both the entrepreneur and entrepreneurial firm must continually re-evaluate their products and services, analyze the market in which they compete, and re-consider the way they produce and distribute their products and services. By embracing innovation, they will advocate for change and disruption, and help advance society. References Antonelli, C. (2003). The economics of innovation, new technologies and structural change: studies in global competition series. New York, NY: Routledge. Drucker, P. (1985). Innovation and entrepreneurship: practice and principles. New York, NY: Harper Business. Lundvall, B. Å. (2007). National innovation systems—analytical concept and development tool. Industry and innovation, 14(1), 95-119. Porter, M. E. (1990). The Competitive advantage of nations: creating and sustaining superior performance. New York: Simon and Schuster Inc. Schumpeter, J.A. (1936). The Theory of Economic Development, Second Edition. Cambridge: Harvard University press. Teece, D., & Pisano, G. (1994). The dynamic capabilities of firms: an introduction. Industrial and corporate change, 3(3), 537-556.

The Executive PhD program that Peter Drucker, “the Father of Modern Management,” and his dean, Paul Albrecht, developed at Claremont Graduate University in 1975 was the first accredited PhD intended for future top executives. According to Albrecht, this PhD taught the “Drucker Difference” for those “with top management potential.” It was and is expensive. There were only ten students in the first cohort, and only one of the ten completed the program. This individual eventually rose to the rank of major general in the U.S. Air Force, and, after retirement, founded The California Institute of Advanced Management with Minglo Shao, a Chinese billionaire who had earlier founded Drucker Academies across China. Others graduated in later cohorts and became senior corporate executives, presidents of colleges and universities, and entrepreneurs. Was Drucker Really Different? Most professors built their careers on conventional research and publication in academic journals. Drucker didn’t. His numerous articles were written for practitioners, not primarily researchers. They appeared in the Harvard Business Review, the Wall Street Journal and other journals read primarily by practitioners. In June 2004, Harvard Business Review honored Drucker with his seventh McKinsey Award for his article, "What Makes an Effective Executive. Drucker’s 39 books were written for practitioners as well. They won and received numerous accolades. Yet Drucker did not write synthetic research typical in academia, where one or more hypotheses based on multiple inputs are tested for significant differences. Drucker used a different research model. He declared, “corporations are my laboratories.” His conclusions from observation are the basis of the Drucker Difference. They were explained first by Einstein who used the method and explained it in an article in the London Times. Drucker’s Research Model Asked in class where he got his vast knowledge and extensive experience to help organizations in so many different industries, Drucker answered: “I have no vast knowledge nor extensive experience on any specific topic. I have only ignorance and lack of experience. Therefore, all I can do is to ask questions. Clients have the knowledge and experience which I lack; they are the real experts on the topics they hire me for.” He then gave examples of his questions, beginning with “What business are you in?” “Who is your customer” “What does your customer value? “What are your objectives” and “What is your plan for getting those results?” Other Questions General Electric’s former CEO Jack Welch, who retired with the largest retirement package ever awarded, significantly increased GE’s wealth. He credited Drucker’s consulting. Welch said that Drucker had asked him two questions: “If you have a choice, which GE businesses would you discard?” and “If this is true, what are you going to do about it?” Welch explained that he made the decision to sell or liquidate even profitable GE businesses, which were not number one or two in their markets and were unlikely to attain these positions. He used the funds to invest in businesses with better potential. Over nine years this increased GE’s wealth by 4000 percent. This became known as Drucker’s Abandonment Theory. Another former client explained: “Drucker got us thinking through our problems and applying our own knowledge and experience in a way we had never considered previously. This was amazingly effective, and we found solutions to our problems with his guidance that we had overlooked.” Drucker was Different Here was an expert who not only did not claim special talents but rejected the title “guru.” Drucker made no claim as being an extraordinary management researcher. When not at the university, Drucker used his home as his office. He practiced without a staff or even a secretary. He even answered his own phone. He did not claim any special expertise or experience. Yet he reportedly received as much as $10,000 for a few hours work. Few complained. He taught a simple procedure to students. It began with defining the problem and determining the relevant factors including facts, estimates, speculations, assumptions, time available and financial limitations. Only then did he advise clients to identify, discuss, compare, and analyze possible solutions. Strategy, not Formulae Drucker refused to develop strategy by formula. There was no BCG nor GE/McKinsey chart with cash cows or dogs. He believed that each situation was so unique, that a manager must know as much as possible to determine strategy. There was no common element of identical importance for all situations. What was decisive and important in one situation might be totally unimportant in another. Decisive elements might not even be quantitative or directly associated with profit. While profitability was deemed as necessary to a business as oxygen to breathing, he said that profit maximization was not, and noted that transistor radios were developed in the U.S., but lost the market to the Japanese because American developers tried to maximize profit. Drucker described management as a liberal art and suggested that liberal arts should be employed in developing strategies and management decisions. He noted economics, ethics, history, humanities, philosophy, social science, physical sciences, and psychology, as all being useful in a variety of managerial and business situations. He noted that in addition to external knowledge, self-knowledge of the organization and its people and available resources might be of even greater importance. Drucker also wrote that 50% of the outcome of any project was due to its leadership. Once invited by an organization to explain the latest leadership techniques, he rejected the opportunity with the explanation that the latest techniques were known to the ancients and recommended that his inquirer read “the first systematic book on leadership and still the best” which had been written 2000 years earlier by Xenophon, an ancient Grecian general and author. Drucker and Research Most controversial was Drucker’s approach to research, yet it was also employed by Einstein who’d been a researcher in theoretical physics. In the single year, 1905, Einstein produced four papers, winning the Nobel Prize for theoretical physics. All four were written a year after earning his PhD at the University of Zurich while he was working at the only job he could obtain: as Assistant Patent Examiner in the Swiss Patent Office in Bern. Like Drucker, he had no conventional laboratory or computers. The Theory of Relativity Einstein himself described the development of one of his most famous theories, the Theory of Relativity. He imagined himself traveling along side of a moving beam of light. Einstein may have provided Drucker with ideas of research. Drucker observed people in companies in action as Einstein had observed his imaginary beam of light. He used analysis and development of what he observed to develop his theories of management. Einstein Reveals His Research Methodology Einstein described his research methodology in an article in the London Times in 1919, discussing what he called his “Theories of Principle.” Einstein wrote “these theories employ the analytical, not the synthetic method of research. Their starting-point and foundation are not hypothetical components, but empirically observed general properties of phenomena, principles from which mathematical formulae are deduced of such a kind that they apply to every case which presents itself.” Synthetic research is what most use in research. It starts with the known and proceeds to the unknown, beginning with a hypothesis or hypotheses. It then tests these hypotheses by proving or disproving each usually by examination of a sufficient number of examples and testing mathematically for significant differences. Einstein’s analytical research starts with the unknown and proceeds to the known. There is no hypothesis. One definition of analytical research is “a specific type of research that involves critical thinking skills and the evaluation of facts and information relative to the research being conducted.” This analytical process is how Drucker arrived at his theories and is part of the Drucker difference. This research approach comes from a simple model: 1. Observation, either real or even imagined 2. Analysis of the observation or imagination 3. Construction of theory based on this analysis A sampling of Drucker’s theories derived analytically include: · That marketing and selling are not the same. · Moreover, selling is not a subset of marketing and marketing and selling could be adversarial. Since, if the product or strategy chosen by the company were better, with the same effort and ability, the same salesmen might sell more product with less effort. · What everyone knows (or think they know) is usually wrong. This short statement was the one most uttered by Drucker in the classroom. · Social Responsibility and Ethics are part of good leadership. · Society demands that an organization be profitable, but not the maximum profit attainable. · Many managerial decisions are made from the gut, and these may be optimal despite complex analyses. · Managers must ultimately make decisions from the gut.  What Drucker taught, worked, and the “Drucker Difference” produced many successful leaders using “Drucker Difference” skills. While other factors influence results and other research methods are still valuable, researchers using primary analytical research including Einstein confirm the value of the “Drucker Difference” confirming Drucker’s conclusion that Management is a Liberal Art.