Drucker's Billion Dollar Reality Test

Drucker discovered that all executives needed to understand and apply the correct principles of marketing research in HR, manufacturing, sales, management and virtually all business areas.

Let’s say that you’re an HR manager and need to develop a radical new procedure to handle new and complex human resource procedures in our company. You can get it completely wrong even if your basic idea is right on target. Think that this can’t happen?

IBM, then the leading manufacturer of corporate computers researched the market for personal computers long before anyone else. They thought they understood an obvious need and potential and had the money, resources, and knowhow to develop it. The IBM people did a thorough study too, and their investigation cost a lot of money. The researchers concluded, with little margin for error, that if IBM invested the millions necessary to develop a personal computer for home use, their total market was no more than 1000 units a year. So overwhelming and compelling was the data that IBM was dissuaded from this potential "terrible waste of money and resources" and dropped the whole personal computer idea. This left the way open for Jobs and Wozniak not only to found a company called Apple, but a billion dollar industry that changed the world. Steve Jobs later said, "A lot of times people don’t know what they want until you show it to them." Drucker had said it many times previously and cautioned: "One cannot do market research for something genuinely new. One cannot do market research for something that is not yet on the market."

You need to do marketing research to consider important factors for a new HR procedure, but if the procedure is that new and that innovative, many potential users can’t see it and won’t understand it because it doesn’t exist. It may be rejected or fail for that reason. So which comes first, the chicken or the egg? What to do? Drucker recommended what he called "the test of reality."

The Test of Reality

The test of reality is simply to get something out there in a small way and see what happens. It needn’t be big, complicated, cost a lot of money or require complex computer analysis. Do a little test in real time and look at the results.

I heard once that when Lee Iacocca thought about introducing a convertible into a market which had seen few convertibles over the preceding ten years, he called a meeting of his design and production team at Chrysler and told them, "Cut the top off one of our standard sedans." He gave his staff one day to get the job done. The next day the team met with Iacocca and presented him with plans and drawings as to how they would proceed using a current model, but with new tooling to incorporate a convertible feature that would fold into the trunk. The plans included cost estimates and approval points. They had worked all night to get this done in only 24 hours and were pretty proud of their accomplishment.

"No," cried Iacocca, "You don’t understand. I don’t want assumptions and plans. I want you to cut the top off of one of our cars and have it ready for me this afternoon." According to corporate legend, if Iacocca did any quantitative analysis in this research, it was that he counted how many people waved as he drove this "convertible" around town. This, Drucker would agree, was a test of reality. This simple approach is amazingly effective because it is not the individual who introduces a new product, procedure or idea who ultimately defines a non-existent concept. It is the potential customer or user.

A Product or Service or Idea is Defined by the Customer

DuPont introduced the product Kevlar in the early 1970’s. Kevlar was a supercloth whose fibers had five times the tensile strength of steel. The developers thought it would make an excellent substitution for the steel reinforcement in heavy duty tires. It did, but it made even better fragmentation protective body armor, and when impregnated for rigidity could also provide protective helmets worn by infantry soldiers.

When I was a West Point cadet, the most effective way to get a quick shine on shoes was with 5-day Deodorant Pads. This use wasn’t confined to West Point. A professor of Nutrition at the University of California, Davis recently recounted from his ROTC days at UCLA; "I learned quickly how to use 5-day deodorant pads for that mirror finish on my shoes that was required for passing inspection . . ."Understandably, I don’t think anyone from the 5-day Company ever tried to exploit this additional use for their product. But it illustrates the point that regardless of your intent, it is the user that applies the concept that decides how that wonderful idea or product will be used.

What You Need to Know about Users Outside of Your Department

One of my top people in my new graduate school developed a wonderful new form required for all candidates wishing to join us adjunct professors. It was complex and several pages long, but it not only met every legal requirement, it anticipated many of our needs in the selection process. I suggested that he test the form with a few candidates before we made the decision to adopt it throughout our system. It was a small test of reality but it tested the form "in the marketplace." We eventually adopted a version of his original idea, but the original instrument was just too complex and caused all sorts of problems which we could not anticipate. Sure this is basic, but how many actually do a test of reality with new concepts, big or small in your organization? It’s important to discover what users actually value. It’s not what we are so certain about that is important or what we consider an advantage, but rather what the user thinks in using the concept in real time.

So there you have it --- an extremely valuable Drucker lesson which costs little, let’s you find and solve problems before you get fully exposed, and yet is based on what the user really wants, values, and needs. That’s one of the reasons that two college dropouts were able to start an entirely new industry in a garage, and mighty IBM with all its resources and power committed one of its rare blunders and did not.