This book contains great words of wisdom from the Management Guru. Iam trying to summarize some such words of wisdom, from this Bible of management.
Drucker starts with the concept of "Knowledge Worker" which he first introduced in 1959 in his book "The Landmarks of Tomorrow". Starting in 1881, 2 years before Marx's death, the systemic study of work, tasks, and tools has raised the productivity of manual making and moving of things by 3-4% compounded each year over 100 years. Since the 1880s, the amount of information and knowledge needed for each additional unit of output have been going up steadily at a compound rate of 1% year-the rate at which businesses have added educated people to their payrolls. The new jobs require a good deal of formal education and the ability to acquire and to apply theoretical and analytical knowledge. They require a different approach to work and a different mind-set. Above all they require a habit of continuous learning. Also, Knowledge and knowledge jobs are equally accessible to both the sexes.
At the end of world war 1, the GI Bill of Rights and the enthusiastic response to it on the part of America's veterans signaled the shift to a knowledge society. Knowledge becomes the primary resource, and land, labor, and capital become the secondary resources. The knowledge employee will need a machine, whether it is a computer, an ultrasound analyzer, or a telescope. But the machine will not tell the knowledge worker what to do. And without this knowledge, the machine is unproductive. The technicians own the means of production, the "knowledge", the organization only owns the tools of production. The two needed each other.
The rise of the "knowledge worker" comes with the fall of the "blue collar worker". Since world war 2, more and more blacks have moved into blue collar, unionized, mass production industry, that is, into jobs paying middle class and upper middle class wages while requiring neither education nor skill. Fall of the industrial worker has been a traumatic shock for the black community in US. Only in the 20th century, has the "master" been replaced by a "boss", who, himself, ninety-nine times out of hundred, is an employee and has a boss himself.
Drucker next deals with the dynamics of organizations. Michael Hammer pointed out in HBR that when an organization reengineers itself around information, the majority of management layers become redundant. Rank and power in an organization are being replaced by mutual understanding and responsibility.
Every 3 years, an organization should challenge every product, every service, every policy, every distribution channel with the question, If we were not in it already, would we be going into it now ? Organizations will have to plan abandonment rather than try to prolong the life of a successful product, policy, or practice.
A company will outsource all work that does not have a career ladder up to senior management. To get productivity, you have to outsource activities that have their own senior management.
Power in economies of developed countries is rapidly shifting from manufacturers to distributors and retailers. Wal-Mart rather than P&G controls what should be produced, in what product mix, in what quantities, when it should be delivered, and to which stores. Wal-Mart's warehouse is more like a switching yard than a holding yard.
Drucker next talks about five deadly sins in any business. The most common sin is the worship of high profit margins and of "premium pricing". Xerox started adding features to the machine, priced to yield the maximum profit margin and each feature drove up the machine's price. Most of the customers wanted a simple machine, and turned to Canon instead.
Second sin is mis-pricing a new product by charging "what the market will bear", even if the product has patent protection. In the mid 1940s, Du Point priced the patented nylon on the world market for the price at which it would have to be sold five years hence to maintain itself against competition.
Third deadly sin is cost-driven pricing. The only thing that works is price driven costing. Cost driven pricing destroyed US electronics and machine tool industries.
Fourth deadly sin is slaughtering tomorrow's opportunity on the altar of yesterday. IBM destroyed itself by forebading PC people to sell to potential mainframe customers.
Last deadly sin is feeding problems and starving opportunities. Best people in a company should not work on solving problems, instead on newer opportunities.
Drucker now turns to family owned businesses. In a mafia family, the consigliere, the lawyer, who is the second most powerful person, might even be a non-sicillian. So should be the case for a family run company. At least one senior executive should be from outside. He says that the decision on succession should be entrusted to an outsider who is neither part of the family nor part of the business. Benjamin Disraeli, the great Tory prime minister, played this role for the Rothschilds in the 1880s, when he persuaded the youngest-but ablest of the next generation, the Viennese Leopold to be the head of all 3 Rothschild banks-London, Paris, Vienna.
Drucker talks about the importance of the third sector. Other than the private and Government sector, the third sector is the "nonprofit sector" which takes care of the social challenges of a modern society. The social sector institution aims at changing the human being. They create human health, i.e. an educated child or a cured patient. After gaining independence in 1965 from Malaysia, Singapore heavily promoted and financed advanced education. It has become a producer and exporter of high value added and highly engineered products-pharma, electronics, computers, telecom equipment, optics etc.
An example of the results of the third sector being the Green revolution in which new seeds and improved farming methods, financed and promoted by Rockefeller and Ford foundations, changed India in the 1960s.
Drucker talks about wastage in Government. VA hospitals have outlived their usefulness. They were established when veterans lived in rural areas which did not have access to hospitals. There is no need for a department of agriculture anymore. Entitlements were introduced by Bismarck in the 1880s and have now become a threat to the very survival of democracy. Modern welfare destroys. It does not build competence; it creates dependence.
An example of a good Government program was the Marshall plan which gave "seed money" to businesses which submitted a realistic plan with clear performance goals with the purpose of rebuilding war torn Europe immediately following world war 2. Both the support and money were withdrawn when a business diverted money from the agreed upon plan or failed to meet the performance goals.
Another role of Government, as Douglas North wrote in his Nobel Prize winning work "Institutions, Institutional Change and Economic Performance" in 1990, is that for a free market to work, it requires a reliable legal system, an infrastructure of financial institutions and an adequate educational system. The free market does not create a functioning society-it presupposes it. Without such a functioning civil society a few speculators may get very rich, but the economy will remain poor. Hong Kong, Taiwan, Singapore, Korea, Malaysia, Indonesia all inherited legal, financial, educational institutions from their former colonial rulers.