JOIN USPeter Drucker was born in 1909. Drucker gave an academic frame to management. Drucker looked at all its aspects. Druckers’ book ‘The Practice of Management’ bridged economics and other social sciences to show how to make things happen.
In 1955 he wrote that management was an entrepreneurial function: There is only one valid definition of business purpose: to create a customer. It is the customer who determines what a business is.
Alfred Sloan who made General Motors the huge and successful corporation it was till 2006, demonstrated that management could make large organisations work and achieve complex and ambitious objectives. For him customers were in segments and he designed products to appeal to different segments. In ‘My Years with General Motors,’ Sloan described what he had done. Sloan also permitted Drucker to study GM in those formative years. Drucker wrote: Management converts a mob into an organisation and human efforts into performance.
General Motors and Drucker’s lessons from it led to large organisations being created and run effectively. Polaris, the nuclear submarine was the first great example of successful management of large and complex tasks. However, recent events have shown that there is a limit to size in organisations. This is more so in service organisations.
One cause of the recent financial crisis was the unbridled growth of banks, brokerages, hedge funds, etc. Their size and complexity across geographies made planning, coordination and control very difficult. A refinement to Drucker’s idea of managing large organisations was when companies diversified beyond their core competence.
In India unrelated diversification resulted from industrial licensing by government that refused companies permissions to expand. After the delicensing in 1991 most companies divested many unrelated businesses and focused on what they were best at doing. But diversified companies like General Electric do exist and are successful.
Even during the command and control regimes especially under Indira Gandhi, Peter Drucker’s relevance was in enabling large organisations in the public sector, and running reasonably efficiently. However Drucker championed privatisation and argued that private ownership gave more incentive for an enterprise to perform well.
BALCO, CMC, privatised ITDC hotels, the privatised Delhi Electricity Board, are some examples of state owned enterprises performing better after privatisation. Drucker did not consider traditional methods as in the Indian private companies with single-entry book keeping, emphasis on cash management and the embracing of employees as members of the promoters family.
Even they had by the 1980s begun employing professionally qualified managers, managing enormous and diversified organisations, with distributed manufacturing, quality standards, national sales and distribution, etc. Professional management now pervades many not-for-profit organisations, government-owned enterprises, and social services like health and education.
Drucker said that a large organisation should aim to be No.1 or 2 in its line of business, or get out. Using this benchmark, Welch made General Electric the most successful and admired organisation. Some Indian companies have also begun to follow this idea. Drucker also argued for empowering workers, treating them as resources and not just as costs. Today many companies put a monetary value on their employee knowledge base.
Drucker criticised aiming for short term profit as the principal goal of business. To the dismay of some of us, SEBI imposed this condition on listed companies. Declaration of corporate results every quarter puts excessive pressure to deliver short-term results and less on long-term development and also encourages volatile share prices.
He criticised soaring executive pay. Stock options, directors commissions, and such sharing of annual profits as rewarding performance. However, one year’s profits could be at the expense of future profits. Incentives must reward consistency over the longer term. Fortunately, India with past government regulation still avoids American excesses.
Drucker predicted the rise of a knowledge economy and that brains in a work force would increasingly replace brawn as has happened in India. Indian knowledge companies have shown how large work forces of skilled people over much geography can be managed to deliver high quality services at profit.
In the 1990s Al Gore advocated reinventing government. This was another Drucker idea. India is also in that process. Independent regulatory commissions have replaced government in many sectors and the Right to Information Act is making governments increasingly transparent.
Drucker extended the meaning of innovation from mere technology to management. He wrote: “The second function of a business is innovation, that is, the provision of better and more economic goods and services. Innovation may take the form of a lower price, be a new and better product, a new convenience or the creation of a new want or finding new uses for old products. Innovation must be in design, in product, in marketing techniques, in price or in service to the customer, in management organisation or in management methods, in materials handling, in manager development.”
Drucker was against big government. For him, Edward Albee’s ‘man in the grey flannel suit’ held more hope for mankind than the hidden hand of Adam Smith or the command and control model of the Soviet Union.
He did not use the rigorous mathematical models that many management scholars do today. He is not identified with a single great idea. His ideas are well known today. That is his major contribution. Drucker was the fountainhead of modern management.