Book: Managing for Results

Peter F. Drucker's "Managing for Results"

This briefing document summarizes the main themes and important ideas presented in Peter F. Drucker's "Managing for Results." Written in the early 1960s and considered a foundational work on business strategy, the book emphasizes understanding the business, focusing on opportunities, and developing a program for performance.

I. Introduction: The Task

Drucker argues that before tackling the future, executives must effectively manage the present. He identifies three inseparable dimensions of the economic task:

1. Making the present business effective.
2. Identifying and realizing its potential.
3. Making it into a different business for a different future.

These tasks must be done simultaneously with the same organization and resources, requiring a unified strategy. "The future is not going to be made tomorrow; it is being made today, and largely by the decisions and actions taken with respect to the tasks of today. Conversely, what is being done to bring about the future directly affects the present."

II. Part I: Understanding the Business

This section focuses on analyzing the existing business to understand its economic realities, result areas, resources, costs, customers, and core knowledge.

A. Business Realities & The Result Areas:

• The analysis should begin with the "hard skeleton, the basic stuff that is the economic structure" by examining the relationship between resources and results, efforts and achievements, and revenues and costs.
• Result areas are identified as areas where results can be measured: "the businesses within the larger business complex; products and product lines (or services); markets (including customers and end-users); and distributive channels."
• Drucker highlights that a product's economic existence is tied to its market, customer, and distribution channel. Markets and channels are often primary, existing independently of a specific product. "Indeed a product does not exist, economically speaking, except within a market, bought by a customer for an end-use, and brought to him through a distributive channel. Markets as well as distributive channels do exist, however, independently of any one product. They are primary; the product is secondary."
• He provides examples like Gillette's safety razor (a loss leader to sell profitable blades) and the office reproduction equipment manufacturer (whose machines succeeded but failed to generate supply sales).
• Understanding who the real customer is (not just who pays, but who determines the buying decision) is crucial. For example, consumer goods manufacturers have two distinct customers: the housewife and the retailer.

B. Revenues, Resources, and Prospects:

• Executives are often overwhelmed with data, so it's essential to identify the "few but fundamental facts" that are meaningful for diagnosis.
• Net sales are defined as "simply sales of the company less purchased raw materials."
• The concept of the unit of transaction is introduced as a more meaningful metric than overall sales or profit. Examples include proposals for a scientific computer company, production runs for an aluminum rolling mill, diemakers' hours for an extrusion plant, and "seat-miles available but not sold" for an airline.
• Drucker notes that a sole-source supplier often has lower sales than if there were competitors, as customers dislike dependency.

C. How Are We Doing? Cost Centers and Cost Structure:

• Analysis should identify products that are "today's breadwinners" (high volume, good revenue contribution), "yesterday's breadwinners" (declining), "potential breadwinners" (need development), "tomorrow's breadwinners" (new, high potential), "also-rans" (low volume, poor contribution), "failures," "sleepers" (potentially valuable but neglected), and "unnecessary specialties."
• He critiques the tendency for "unnecessary specialties" to proliferate, hindering efficiency. "For what is unnecessary here is the existence of specialties instead of one successful main product with enough volume to yield results."
• The concept of the cost of incremental acquisitions is presented as a crucial diagnostic tool, moving beyond past audits to anticipate and prevent future issues. "This concept applies to a great many business tasks over and beyond that of making the present business effective. Indeed, it is one of the most important diagnostic tools at our disposal."
• Drucker emphasizes that "cost" is an economic term, representing what the customer pays for utility, not just legal expenses within a single business entity. "Two-thirds of the cost of every single product or service lies outside any one particular business."
• Cost centers need to be identified to understand where cost control efforts will have the most significant impact on total costs. Distribution is highlighted as a major but often neglected cost center.

D. The Customer Is the Business:

• This chapter shifts the focus from internal analysis to an external perspective, asking, "what is our business—and what should it be?" Drucker asserts, "The purpose of a business is to create a customer."
• Understanding the market's reality is crucial. Customers buy satisfactions, not just products. No single product or company is very important to the market.
• Businesses must understand who the "customer" truly is – the one who determines the buying decision. This may involve multiple parties, such as the physician and the patient in the pharmaceutical industry, or the housewife and the grocery store for canned foods. "Not ‘who pays’ but ‘who determines the buying decision’ is the ‘customer.’"
• For businesses in materials or end-use industries without a clearly identifiable customer, the analysis should focus on markets or end-uses. "Every business can thus be defined as serving either customers, or markets, or end-uses."
• It's important to understand what customers buy altogether (their total spending and time allocation) and what they buy from others, including the value and satisfaction derived. This can reveal potential competition and unmet needs.
• Businesses should also consider what might enable customers to do without their products or services and what dependencies exist in the customer's world.
• Drucker stresses the importance of understanding seemingly "irrational" customer behavior to truly grasp their reality. He uses the example of retailers insisting on private brands despite potentially lower total profits. "Attempting to understand seemingly irrational customer behavior forces the manufacturer to adopt the marketing view rather than merely talk about it."

E. Knowledge Is the Business:

• Economic results stem from differentiation, which is rooted in the "specific, distinct knowledge possessed by a group of people in the business."
• While every successful business has such knowledge, no two are alike. Drucker provides examples of the distinct knowledge of companies like General Motors (business development of mass-produced units), space and defense contractors (systems design and management), Philips (building and running an international company), and a metal stamping division (speed and simplicity of design).
• Knowledge can be technological (e.g., National Distillers' fermentation chemistry) or related to other areas like marketing or commercial development.
• It's crucial for a business to understand what it can do with excellence and to focus on that.
• Asking good customers, "What do we do for you that no one else does as well?" can help identify this specific knowledge.
• A valid definition of a business's specific knowledge often seems simple because it's something the company considers obvious.

F. This Is Our Business:

• This chapter emphasizes the need to integrate the analyses of results, revenues, resources, costs, marketing, and knowledge to achieve a comprehensive understanding of the business.
• The tentative diagnosis based solely on initial facts will likely need substantial revision after considering the marketing and knowledge perspectives. "Even though the ‘facts’ were recorded precisely at the tentative stage, they could not yet be truly understood."
• Drucker provides examples of companies that successfully redefined their business based on market and knowledge analyses, such as the aluminum foil company that realized it was a consumer goods business and the chemical company that expanded internationally and into equipment manufacturing.

III. Part II: Focus on Opportunity

This section shifts the focus to identifying and capitalizing on opportunities for growth and development.

A. Building on Strength:

• Market and knowledge analyses should highlight what the business should be doing but isn't.
• Three common gaps in result areas are: the need for a major development effort to replace declining products or markets, the absence of a clear idea of the business, and constraints that hinder the realization of potential.
• Developing a new market or distribution system is as much "design and development" as creating a new product.
• Alfred P. Sloan Jr.'s redesign of General Motors in the 1920s is presented as a prime example of building on strength by understanding the market and creating distinct but overlapping product categories. Sloan focused on customer needs and the used-car market, transforming GM into the dominant and most profitable American automobile manufacturer. "Sloan actually practiced the total marketing approach thirty years before the term was coined."
• Opportunity thinking involves asking "What could our knowledge and our strength enable us to do that would radically alter our prospects?" Drucker uses the examples of Siemens (from electric generator to electric apparatus industry) and Edison (from light bulb to electric power and light industry).
• The Japanese Zaibatsu's success was attributed to their consistent focus on maximizing opportunities relevant to Japan's economic development. "Successful planning is always based on maximizing opportunities."
• The rise of the House of Rothschild illustrates the maximization of resources, strategically allocating family members to key financial centers and building a robust information network.
• Defining the "present" in terms of a significant period for market results (e.g., General Motors' five-year cycle) is crucial for planning and investment.

B. Finding Business Potential:

• Distinguishing between replacements (different idea of the market or knowledge exploitation) and developments (incremental improvements) is important. Sloan's GM redesign involved replacements (revamped car models with new market positioning).
• Constraints that hinder potential can lie in product policy (e.g., being unwilling to cannibalize existing products), market structure and economics (e.g., seemingly irrational customer behavior), or imbalances in productive resources.
• Drucker suggests looking for solutions that get paid for the value provided to the customer (e.g., banks charging fees for money management).
• Imbalances in resources (marketing, technological, financial) can be both a danger and an opportunity. The example of the installment finance company demonstrates how underutilized resources can be leveraged for growth.
• Companies should have clear rules regarding support activities, either keeping them small if they don't fit the main business or developing and then selling them off if they can become substantial and profitable.
• For companies that are "in-between" in size, the right solution might be to retrench to a smaller, economical volume or to make a "quantum jump" through sale, acquisition, or merger to reach a viable scale. "The only solution to this vicious circle is to jump."

C. Making the Future Today:

• Entrepreneurial risk-taking involves committing present resources to an unknown future. Drucker quotes J. B. Say, who described the entrepreneur as someone who "attracts capital locked up in the unproductive past... and commits it to the risk of making a different future."
• Identifying and exploiting the "discontinuity between today and tomorrow" is key.
• Looking at other industries, countries, and markets for emerging patterns is essential. The example of the Japanese electronics manufacturer who defied the assumption that television was unaffordable for farmers illustrates the power of questioning conventional wisdom and observing trends in other markets.
• Recognizing when a primary market becomes saturated (as with Bell Telephone's initial focus on telephone installation) necessitates a shift in strategy to promote usage.
• Significant entrepreneurial innovations often involve converting existing ideas into successful businesses, as seen with the Credit Mobilier's impact on European banking and the modern chemical industry.
• Even simple ideas, like Mitsui's concept of the merchant as a principal or Bata's vision of providing affordable shoes to the masses based on the American model, can lead to immense success. "The basic entrepreneurial idea may be merely imitation of something that works well in another country or in another industry."

IV. Part III: A Program for Performance

This final section outlines the key decisions, business strategies, and principles for building economic performance into a business.

A. The Key Decisions:

• Every business needs a clear idea of the business that defines what it is, what it does, and what it should do. "It gives direction to the business." This idea must be operational, leading to concrete action conclusions regarding product development, marketing focus, and knowledge application.
• A lack of a valid business idea is a danger signal, indicating either irrelevant specialization or meaningless fragmentation of effort.
• Businesses must strive to minimize risks but avoid the "greatest and least rational risk of all: the risk of doing nothing." Actions should be selected to maximize opportunities, with risks acting as restraints, not grounds for inaction.
• Opportunities identified through analysis should be prioritized and classified.
• Sound business strategy involves understanding the specific risks inherent in the industry and the potential impact of failure. Drucker uses the example of the pharmaceutical industry and the unavoidable risks associated with drug development. "The breakthrough opportunity is the risk one cannot afford not to take." The decision of General Electric to enter the atomic energy field despite initial doubts exemplifies taking a strategic risk to avoid being left behind.

B. Business Strategies:

• Companies need to balance specialization and diversification. Diversification can occur in products, markets, and end-uses while concentrating on a core knowledge area, or vice versa. An imbalance can lead to unsatisfactory results. Cummins Engine Company's shift in strategy illustrates this balance and the potential for complete reversals.
• Entrepreneurial alliances (as seen in developing countries) can be effective in early stages by leveraging scarce business development and management knowledge. However, as economies mature, specialized technical and marketing knowledge become more critical.
• Acquisition can be a tool to buy time, market access, product lines, or expertise, but it is expensive and requires purposeful internal efforts to succeed. Durant's creation of General Motors through acquisition only became viable after Sloan defined the business and built a management team. "Financial transactions are a tool of business policy. They are not a substitute for it." Litton Industries is presented as a postwar example of growth through strategic acquisitions.

C. Building Economic Performance into a Business:

• Economic decisions in modern businesses are increasingly the product of multiple judgments, involving knowledge workers across different functions.
• Enabling knowledge workers to contribute requires: a clear view of needs and feasibility, a well-reasoned plan, and reliable measures of available and needed resources. "The responsibility for decision rests with the head of the business but the decision itself is the product of multiple judgment."
• A clear understanding of the business's aims and their explicit articulation are crucial for motivating and engaging knowledge workers.

V. Conclusion: The Commitment

The book concludes by emphasizing that managing for results requires a continuous commitment to understanding the business, focusing on opportunities, and making strategic decisions that build long-term economic performance.

VI. Bibliography:

Drucker includes a bibliography of key works related to strategy, structure, and economic analysis, highlighting authors such as Alfred D. Chandler Jr., Edith T. Penrose, Joel Dean, Walter Rautenstrauch, Raymond Villers, Milton Spencer, and Louis Siegelman.

VII. About the Author:

Peter F. Drucker is presented as a prolific and influential writer on management, economics, politics, and society.

This briefing document provides a comprehensive overview of the key concepts in "Managing for Results." The book remains highly relevant for its emphasis on strategic thinking, understanding the customer, leveraging core competencies, and proactively shaping the future of the business.

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