Most people know Peter Drucker through his books and articles. But Drucker was also a great speaker, especially in the classroom, where his students would sit rapt, listening as he pulled facts from his encyclopedic mind and shared insights on countless subjects. This side of the "father of modern management" is captured in The Drucker Lectures, (McGraw-Hill, 2010). Edited by Rick Wartzman, executive director of the Drucker Institute and a columnist for Bloomberg Businessweek, The Drucker Lectures features 33 of his most important talks. The earliest was delivered in 1943. The latest were given at Claremont Graduate University in 2003, two years before Drucker died. The excerpt below, on "The Future of the Corporation," comes from one of those final lectures.
Our topic today is: What are results? And that sounds like a very simple topic, but I've been working on it now for quite some time, and it's becoming worse and worse and more complicated. And so I hope you will forgive me when I don't make sense because there are some areas where I know I don't make sense but I haven't worked my way through.
We have moved into a society of organizations. And what all of them have in common—maybe more or less for the first time—is that they have results only on the outside. If one of you has to go to the hospital, you couldn't care less whether the nurses are satisfied. The result you care about is a cured patient, not a satisfied nurse. And a cured patient is one who leaves under his own steam and doesn't come back. That's a result. And the same is true of all the organizations in our society of organizations.
And yet when you look at what we have been writing about and thinking about in management, including all that I have done, we have looked really only at the inside. It makes no difference whether you take an early work like my book The Practice of Management [published in 1954] or [Harvard Business School professor] Michael Porter's books on strategy. They look from the inside out, and they really talk about organizing the inside of an organization.
And so if you want to have an understanding of what management is and what management does, you have to start with results on the outside. In many cases, it's not easy to define results. I've been working with some excellent Midwestern colleges. But what are their results? Is it how many people get into Harvard Law School? That's probably a minus. Or tell me what the bottom line is for the Girl Scouts or for a church. You'd be surprised how difficult it is.
We know that the bottom line for a business is net income. But what about market standing? That is not so easy to define, and it is changing very rapidly.
From the point of view of the shareholder, the only thing of interest is financial results, whether it is dividends or the stock price. From the point of view of the enterprise, the question is: How do we get capital the most cheaply and how do we use it the most effectively? But you'd be surprised, whenever you raise this question how management differs.
Let me give you a recent example. There are two department store chains that are very similar. Both came to me independently and at different times about what they should expect from their salespeople. One of those chains defined the results of the salespeople by the size of the sales ticket—whether the item sold on one ticket was for $6.15 or for $615. The other sees the results of its salespeople as attracting and holding customers. They judge their salespeople on whether Mrs. Smith comes in and asks for Betty. Does Betty build a customer base? And let me say that when you look at it from the point of view of ultimate income to the store, the two are indistinguishable. You can't say one is a better way. But they are totally different. They lead to hiring different salespeople, to training different salespeople, and to paying them differently. And the saleswoman who does well in chain A is unlikely to do well in chain B, and vice versa. So results are not that obvious.
All of our early organizations had one major goal, which was to prevent change or at least to delay it. But the business organization exists to create change and to exploit change. All early organizations also aimed at monopoly. But the modern organization—and I'm not talking only of business—exists in a competitive world. And so you have to ask: What does this mean in terms of results?
It used to be that if you had a paper company and you had a paper laboratory, all the work of the lab went toward the production of paper, and everything the paper industry needed came out of that lab. That was the theory on which the great labs of the nineteenth century were founded. They were focused on one industry, and it was the common assumption that to a given industry pertains a certain technology and to a given technology pertains a certain industry.
Most of us in this room still believe this. But if you look at where the competition comes from now, that's not the way it is. If you look at the technology that is rapidly changing the last of the great materials industries of the nineteenth century—aluminum—it not coming out of the aluminum industry. It is coming out of plastics. Technologies are no longer tied to one specific industry. They crisscross.
And so you are in a world in which your competition is not just from those who make the same goods or produce the same services. You don't know where the competition will come from. And you have to decide to define your results in terms of constant change and innovation.
You also have to define what competition means. It is not what the textbooks tell you. You have to produce results in the short term. But you also have to produce results in the long term. And the long term is not simply the adding up of short terms.
The question that must constantly be asked is: "If we are doing something because we see the short-term opportunity, will it make it more difficult for us to obtain our long-term results? Or will it help? And vice versa."
There's an old medical proverb that says it doesn't help much if a sick, old woman is going into surgery tomorrow to save her life and she dies during the night. But it also doesn't help if she survives the night and dies during surgery. So you have to have short-term results and long-term results, and the two have to be compatible and yet they're different. And so this is the challenging task ahead of us. What are results? How do you define them? How do you balance them?
Now the fashion is to look at quarterly earnings only. But go back to the 1950s, when General Electric brought in Ralph Cordiner as CEO. He reorganized GE, and tried to think through how to measure its results. And Cordiner basically operated on the assumption that shareholders didn't matter.
This was the prevailing belief—and reality—up until very recently, up until the rise of the pension funds over the last 10 years or so. Now, having these big institutional investors owning such a very large share of big American companies is not a good thing because the pressure is always short term. I've seen more mistakes being made so that the stock will be up five points or what have you. And I think that this is a very real danger.
Reprinted by permission of McGraw-Hill Professional. Excerpt from The Drucker Lectures: Essential Lessons on Management, Society, and Economy by Peter F. Drucker, edited by Rick Wartzman. Copyright 2010 The Drucker Institute.