Drucker's Fundamental Business Decision

Peter Drucker placed an enormous emphasis on determining the real business of an organization. He saw this as a major responsibility of any leader. It was one of the first lessons I learned from Drucker, and I learned this lesson even before I met him and became his student. In those days, I was a young manager but one who knew very little about business management.

Shortly before meeting Drucker I became Director of Research and Development for a small company producing life support equipment for military aviators and the airlines. While I was getting things organized in research and development, the company began to run into increasing difficulties due to the U.S. Government’s purchasing policies that were dependent on its cyclical fiscal year approval of funds for the coming year. Since Government received this approval for funds expenditure only once a year, it would contract the same time every year. When the work was complete and the product delivered, we had to wait for another year for the next contract. As a result, our production schedule was a continuous cycle of peaks and valleys and we always had too many or too few workers.

In production most of our costs were for government work .We had nothing for consumers. Every five years or so the president would look at this problem and arrive at essentially the same conclusion: get a consumer product to smooth out the peaks and valleys. We could use the same machinery, workers and materials to produce the consumer product. Unfortunately, the result was always the same. At project initiation there was much enthusiasm and high hopes followed by a considerable investment, and then ultimate failure with a big loss. Each time the failure was apparently due to a different reason, and no one ever figured out that maybe a larger issue was causing things to go awry.

One year we had the annual sales meeting and it was decided that the company would present a copy of Drucker’s book, Management: Tasks, Responsibilities, and Practices to each attendee. In the book, Drucker exhorted managers to determine what business they were in first. This subject was number one on the agenda for our meeting, and a lengthy discussion followed its introduction.

It soon became obvious why our efforts at getting into one consumer market or another always failed. The consumer market had nothing to do with our business of providing life support protection for aviators. For example, at one point the company had decided to enter the commercial market for motorcycle helmets, about which we knew nothing. Sure we knew how to produce a protective helmet. We were doing that for aviators. But motorcycle helmets were different. What was considered value to the consumer was different. The consumer valued light weight and comfort and then price. For the military, it was protection first and then comfort. Price was secondary. We didn’t even know how to reach the consumer for the motorcycle helmet product. The end result was that the company invested a million dollars, produced a heavy, very protective, but relatively uncomfortable and high-priced, motorcycle helmet that no one wanted.

Deciding on your business doesn’t just apply to products, it is critical to all elements of an organization including HR. Determining what business you are in is the top rung in creating an organization’s future, and Drucker knew and taught that it was a primary responsibility for any leader. Once you determine this one aspect about your business, a lot falls into place. Accurately defining your business will automatically save your time, money and resources on aspects which detract rather than add value to what you are doing. At the same time it will help you to focus on those opportunities and possibilities that are important for success. Until you decide what business you are in your organization will drift, no matter how effective a leader you are in other ways. It is akin to a constant theme in management and leadership, and that is that resources of any kind are always limited. No leader has enough to pursue every opportunity, or even to avoid every threat. Therefore, you must pick and choose and concentrate these always limited resources where they will do the most good. This can only be accomplished after you decide what you are really about: what business you are in—and this is true for every organization. Without this important definition members of the organization may be striving in support of a direction, product or simply a way of operating that will hurt rather than help simply because no one has a clear understanding of the real and basic objective.

Nowadays, we speak of what business we are in primarily as a "mission statement." Drucker had a favorite mission statement. Drucker’s favorite was from a very old business. But this mission statement, though not recent and a one-liner, was his favorite for a very important reason. It changed Sears Roebuck during its rise from a struggling mail order house that was sometimes close to bankruptcy to the world’s leading retailer, all within 10 years. It was to be the informed and responsible buyer first for the American farmer, and later for the American family.

Of course there is only one leader, and ultimately it is this leader’s responsibility for the final decision as to the mission statement and deciding on the business. Having said this, Peter learned much from the Japanese. Peter had observed an interesting phenomenon which contrasted American and Japanese management practices. American leaders made decisions very quickly, but they gained little real support for their decisions in the organization. This causes many of their initiatives to fail for no other reason than lack of support by leaders at all levels.

Japanese leaders made decisions much slower. This frequently frustrated American leaders negotiating with them. However, once the decision was made, the entire organization was committed to these decisions and supported them to a much greater extent than leaders were able to gain general support for their decisions in American companies.

Why was this? Drucker found that the Japanese practiced a system known as "ringi." In ringi all major decisions had to be reviewed and commented on by managers throughout the company. This could require several cycles and months of feedback and revision. However, once the decision was finalized the consensus built by "ringi’ resulted in major commitments by leaders at all levels of the organization because they all felt ownership in the decision.

I doubt whether adopting ringi for leaders in all countries would be very effective. As a matter of fact, this was tried in the United States during the Japanese management fad of the early 1980s. It didn’t work. However, as is true of many ideas originating elsewhere, they cannot usually be copied in whole cloth. The cultures and others aspects of leadership and management are different, and that they fail without some modification shouldn’t be surprising. American emphasis on rapid decision making by leaders goes back to the frontier days of America. Ours was a country in formation, not centuries old like Japan. It was important for leaders to make decisions quickly, in some cases on-the-spot, and this became ingrained into our culture and how we operate.

Even the adoption of simple devices may cause problems when the application is to another culture. Traffic signals were invented in England, but the version in use today was developed in the U.S. and first used in 1912. This was a worthy invention and there were no difficulties with it until the traffic signal was introduced into Ireland. In Ireland people were outraged and use of traffics signals which had been so successful elsewhere actually caused riots. This was for the simple reason that the red light was on top and the green light on the bottom. These are the conventional locations for the two lights, and not at all noteworthy in any other country; that is, except Ireland. Red is the color of Britain; green, Ireland. Seeing the red color placed over the green in Ireland infuriated many Irishmen. The solution which finally worked at the time of introduction was to mount the traffic lights horizontally.

Simply copying ringi in America didn’t work either. Drucker promoted adapting the concept by involving subordinate leaders in different ways than the Japanese. However Drucker recognized the merit of the idea and realized that consensus was valuable for deciding on the fundamental decision.

Drucker said that the fundamental decision for any organization was what "business" it was in. Though it was the top leader’s responsibility, the more "buy in" he could obtain through participation, the more commitment to this decision and the easier it would be to be successful in this business.

Adapted from Drucker on Leadership published by Jossey-Bass.