Cooke’s description of the latter method matches how Einstein, Doyle, and Drucker all shortened the analytical method by focusing on the powers of ordinary observation and applying analytical reasoning in their methods of research, leading to practical results. It seems clear that all three followed this “other way”.
Unexpected Insights at an Academic Conference
I found insights into the value of Drucker’s methods about 15 years ago. I was invited to participate as a member of a special panel at an academic conference. The purpose of the panel was to discuss the influence of textbooks on management practice, or rather the lack thereof. During this discussion, and before an audience of marketing and management professors, one question was directed precisely at me. I was the only one of the five academic authors on the panel to have written both professional books for practising managers and textbooks for students. The question directed to me was why textbooks seemed many years behind the latest practices in management, while professional or “trade” books seemed to be frequently right on the cutting edge.
I pondered this question for several seconds and then responded: “The writers of textbooks must bring together research from many sources to confirm the main points or theories they discuss in their textbook. In some cases, there are also alternate theories to present regarding the various methods proposed for practice. Essentially, the time needed for the textbook writer to do the research must be added to the time it takes for the researcher to conduct the necessary experiments, to write about each in one or more articles, and to find a suitable academic journal for publication. For a top research journal, this in itself can take many months before such a paper is accepted. After a textbook has been published, it is used to instruct students in the classroom and rarely read by practitioners. It may take several years before these students are in supervisory positions and able to practise what is taught in the classroom. On the other hand, a professional book based on a theory resulting from personal observations is prepared using analytical research and can be applied much more quickly, as the professional book goes right into the hands of the practitioner, who can put it to immediate use.”
More Insight from the Conference
What happened at this conference motivated me to do some research on my own. While preparing a lecture for doctoral students on the value of writing professional books for disseminating theory as Drucker did, rather than publishing in academic journals as is the method preferred by most scholars and academic institutions, I came across an unexpected fact. Many of the most widely publicized theories of management reached practitioners using Drucker’s method of publishing a book and getting the information directly to the user. These include not only Drucker’s Management by Objectives from The Practice of Management (Harper & Brothers, 1954) and other methods resulting from Drucker’s own theories, but also Abraham Maslow’s Hierarchy of Needs disseminated through his book, Motivation and Personality (Harper & Brothers, 1954) and Douglas McGregor’s Theory X and Theory Y disseminated through his book, The Human Side of Enterprise. (McGraw-Hill, 1960). Sure, there were also a lot of articles published in research journals on all these topics, but this was only after the professional books had been published by the originators of these ideas and the theories had been put into practice and were well known and in common discussion by business professionals. The research was written to confirm or deny various aspects of the theories that the book authors proposed; or the authors themselves wrote these to help define their theories already published in books.
Drucker’s Resulting Methodology and Thinking
Drucker empirically observed general properties of phenomena or through his questions and their answers, or had his clients report their observations. He did not start with synthetic mathematical formulae into which data was inserted to determine what was to be done, but used his powers of observation and reasoning in determining theory and then further testing this theory as he saw it applied.
This is perhaps why, although Drucker claimed that he always began with his ignorance about any problem, he insisted on measurements and numbers when seeking to measure performance and progress. But he eschewed quantitative methods for developing theory and its application to strategy. Less clear was what this process was, stating only when queried about his methods that he listened, and then added, that he listened “to himself”. This comment was made in a humorous and not arrogant way. It is also probable that Drucker was speaking 100% accurately. He listened to his own logical reasoning in developing theory or in applying the resulting theory for action by his clients. That he followed an established process was clear, but unlike Einstein, he did not explicitly reveal it. It is highly likely that their methods were very similar, if not identical.
This important tool – Drucker’s thinking processes – was part of Drucker’s vast mental arsenal for his consulting and should not be overlooked. It is especially important since he did not use models of mathematical analysis to arrive at his conclusions and recommendations. I cannot state the mathematical equations, or his favourite methods of determining significant differences, because there were none. Still, if we can understand the processes of his thinking, we may do the same in our problem solving, decision making, and in assisting others through consultation.
The Missing Link in Drucker’s Thinking in Developing Theory
So now we understand that the foundation of Drucker’s thinking was analytical reasoning, but based on his own observations. While looking from the outside, he would draw on the logic of what a system’s optimal or failed performance revealed, rather than “taking a load of measurements from a lot of different people”. But Drucker used one final link that even Einstein may have overlooked, although Doyle, through the Holmes character, may have hit it. Drucker uncovered his theories by challenging “the known explanation” of what he saw. He actually challenged the assumed logic of the outcome of the events that he witnessed. Here are just a few clues about his challenging methodology that I have uncovered:
1. He examined ideas even if they appeared intuitively obvious.
2. He stood “facts” on their heads to see how they looked if basic ideas were reversed.
3. He was able to instantly discern certain things that others missed.
4. He adopted a Sherlock Holmes guideline that if all other conclusions had been examined and found to be lacking, then the one remaining must be the truth, no matter how unlikely or seemingly impossible. This latter “clue” to Drucker’s methods merely confirmed the rationale for the first three. But let’s us look at these first three clues to his thinking in more detail.
Examining that which Appears to Be Intuitively Obvious
Ask nine out of ten businesspeople the purpose of their business and they will look at you as if you were crazy. “Why, to make a profit, of course,” or similar words would probably be the answer. Even a Drucker acolyte may simply repeat Drucker’s quotation, “The purpose of a business is to create a customer,” without understanding Drucker’s reasoning or what Drucker really meant, but for certain the profit motive and profit maximization were both fair game for Drucker’s genius. Let’s examine his thinking in some detail.
The Profit Motive
The profit motive is a basic economic concept. On the face of it, there is little to question. A typical definition of the profit motive is: “The intent to achieve monetary gain in a transaction or material endeavour. Profit motive can also be construed as the underlying reason why a taxpayer or company participates in business activities of any kind.” Many economists also take the societal view that in order to maximize an economy’s growth, one must also maximize profits. Drucker told us that profit is not the purpose of business and following that, he launched into an unheard-of concept: that profit maximization was not only meaningless, but could be dangerous.6
Drucker first called the profit motive itself into question. He claimed that there has never been any evidence for such a motive, and that the theory was inv
ented by classical economists to explain a reality that their theory of economic equilibrium could not explain. For example, a good deal of volunteerism in which individuals, some quite highly paid in other roles, work long, hard, hours for the common good in a variety of organizations for little or no pay is unexplained by the profit motive.
The term “dollar-a-year men” first became popular during World War I. US law prohibited work without financial compensation, so many volunteers went on salary during times of war emergency for the princely sum of one dollar, frequently awarded with much ceremony. Even in those days, one dollar was not a lot of money, and for a year’s work… well, the term attracted a lot of attention and publicity. Moreover, few can doubt that many talented individuals knowingly choose occupations that are less financially rewarding due to their personal interest or calling in more or less semi-permanent jobs, such as in the US Peace Corps, the Red Cross, or some cause that was important to them. Pat Tillman gave up a glamorous career as an NFL football star and a $3.6 million, three-year contract after the terrorist attack on 9/11 to become an army ranger. He served several tours of combat before he was accidentally killed by friendly fire during combat operations.7, 8
Drucker even challenged the notion that high corporate salaries were necessary to attract quality personnel “who would not work for less” due to the profit motive. Yet a variety of jobs attract high quality individuals with relatively low pay. Two examples are teaching and the military.
Drucker concluded that while profit can be motivating and a motivational factor, it need not be the primary motivator. And the notion of maximizing profit as the ultimate goal for a business, ignoring social issues or anything else is, according to Drucker, at best overstated.
Of course Drucker did not deny that profitability is neither a waste of time, immoral or both. This is not true and was not his point. He said that creating hostility to earning a profit was “the most dangerous disease of an industrial society”, causing some of the worst mistakes of public policy and went along with the mistaken notion that there is an inherent contradiction between profit and an organization’s ability to make a social contribution. Drucker pointed out that a business can only make a social contribution if it is profitable. It isn’t a good thing for anyone if a company goes out of business. Yet, many forget that to continue into the future, a business must invest both in research and development and provide cash reserves for that future. Many times well-meaning observers make an erroneous calculation and conclude that a business is being “greedy”, when it is doing exactly what it must do to continue to operate in the future. Drucker went on to prove that profitability – far from being a myth, immoral, or unneeded – is crucial for the success of both individual businesses and society. Moreover, he considered profit (as opposed to profit maximization) even more important for society than for an individual business. However, creating a profit is not the purpose of a business.
Is Profit Maximization a Dangerous Fallacy?
Now, if profit is necessary for sustainability, why isn’t profit maximization a good thing? Many economists consider profit maximization a basic principle and important driver of capitalism. Drucker said that if you strip this principle down to its basic tenant, it is simply another way of stating that a business should buy low and sell at a higher price. That’s pretty basic, right? However, Drucker noted that this simple description by itself doesn’t begin to explain the success or failure of a business or its sustainability. A local retailer may have been buying low and selling high. If that’s all that you know, you don’t know enough to claim that the business is a success or a failure. Look around at businesses that fail. Weren’t all of them buying low and selling high, or at least attempting to do so? If we look at the difficulties as many businesses struggle today, and the many failures that have already occurred, it is clear that buying low and selling high explains very little about why these businesses fail, just as buying low and selling high explains very little about those that are successful, or those that are accelerating their success despite the obstacles they face in any given environment or time period. There are many business successes, even in times of greatest economic challenge. For example, companies that attained great success in the Great Depression of 1929-1940 include Proctor and Gamble, Chevrolet, United Airlines, Hughes Aircraft, Camel Cigarettes, Kellogg Cereal, the Monopoly board game and hundreds more. Some say that more millionaires were created during the Great Depression than in any other period in US history. But look around and you’ll see successes and failures on any street corner. Buying low and selling high explains very little.
Profit maximization seems to imply that you might prevent failure or increase the success of any business by simply raising prices and creating a greater differential between revenue and cost, that is, maintain (or increase) the profit margin. In point of fact, as business costs rise, be they gasoline, material, necessary services, taxes, or anything else, profit maximization is the immediate and simplistic response of many businesses. Yet these businesses still fail or succeed independent of the act of raising prices to maximize profit. Profit maximization by itself is just not the determining factor.
Not so long ago, I was told that a local restaurant had failed due to the rising cost of produce. Yet other restaurants in the same general area serving the same target market did not fail. Some were thriving and even increasing sales. Yet the cost of produce rose for all equally.9 All this reminds me of a restaurant manager who once responded to an accusation of bad food and poor service with the response: “Bring me more customers and have them spend more money and I’ll give you good food and better service.” Well, I guess this is true as far as it goes.
The Purpose of a Business
After thinking about this, Drucker concluded that neither profits nor profit maximization are the purpose of a business, and that there is only one valid purpose for a business, and that is to create a customer. Drucker wrote, “The customer is the foundation of a business and keeps it in existence. He alone gives employment. To supply the wants and needs of a consumer, society entrusts wealth-producing resources to the business enterprise.” In other words, society gives the business the means to gain employment for the business, by granting a customer in return for supplying the wants and needs of society’s consumers. Yet profits and profit maximization as purposes still sound intuitively correct, even though they are clearly wrong for both the business and for society.
It was intuitively obvious that the purpose of a business was primarily profit. But Drucker analysed this intuitively obvious statement and came to an entirely different conclusion.
Standing “Facts” on their Heads
Drucker demonstrated again and again that almost any commonly “known” fact could be turned on its head and used to advantage in gaining an important insight. From this analysis came many of his comments that, as one experienced professor told me early in my academic career, made Drucker “eminently quotable”.
I discussed “what everybody knows is usually wrong” thoroughly and validated its truth in many cases by example in chapter eight. But let’s look at how Drucker arrived at this conclusion by turning the original upside down. The original belief is that knowledge known by everybody, or nearly everybody, is usually right. Actually Drucker was preceded in his warning to start questioning this notion by argumentum ad populum, which is Latin for “appeal to the people”. In the argumentation theory, argumentum ad populum is considered fallacious based on the notion that “if many people believe it, it is so” as simply irrelevant as to its truth.10
But Drucker went a step further. He took the idea that if many people knew something to be true, this truth could be turned on its head. He applied analytical reasoning and concluded that the exact opposite was true in so many cases and that he could make the statement that what everybody knows is usually wrong. Of course Drucker may have been exaggerating, and his statement may be equally fallacious because of this exaggeration. However, it is surpr
ising just how frequently Drucker’s statement is correct if the assumption is that because everyone or nearly everyone knows something is correct in one situation, it is true in every situation. As I indicated earlier in the book, even the US Supreme Court, the highest court in the land, can be clearly in error according to our beliefs about many things, including human rights; witness the Dred Scott decision defending slavery. If that is so, we cannot even state that court decisions made by a jury on a simple majority – even if unanimous – are always correct. And as proven time after time, sometimes they are not.
Standing facts on their heads is relatively easy to do to come up with some rather interesting truths. Here are two other well-known Drucker quotes:
• “The most important thing in communication is hearing what isn’t said”
• “The most serious mistakes are not made as a result of wrong answers. The truly dangerous thing is asking the wrong question”
As an exercise, you might consider examples of each and how Drucker might have arrived at these conclusions by “standing a known fact on its head”.
Here’s one that I thought of: “Success at sports comes from hard work, not fun.” Oh yeah? Why then do mountain climbers train, get up early, freeze, sweat, and sometimes risk life and limb in practising their sport? Obviously they must be experiencing some enjoyment and fun despite the drawbacks and risks. In other words, they are having fun. Is that really work then? I concluded that, “Success at sports comes not from working hard, but from playing hard.” After thinking about it a little more, I concluded that this may be true for just about everything, from babysitting to running a billion dollar corporation. In any case, you get the general idea.
Consulting Drucker Page 17