Consulting Drucker Page 20

  • Politics, laws, and regulations – what was once legal becomes illegal and visa versa. The sale of alcoholic beverages became illegal in the US on 17 January 1920, and became legal again a little more than 13 years later.2 The effects on business, management, crime, and a great deal more have been the subject of numerous Hollywood gangster movies since.

  • Actions of competitors – if a competitor is successful in an action that you have not anticipated and allowed for, you can be in serious trouble. Apple opened the market for personal computers and dominated the market; IBM was very much a latecomer. In the personal computer market, it had been caught unaware. But once IBM finally decided to get into this market, it moved very quickly and with an excellent counter-strategy. Whereas Apple had not allowed anyone to create software for its operating system, IBM not only allowed this, but encouraged anyone and everyone to do so. As a result, the number of software programs, including games, business programs, and more available for IBM’s operating system soon far exceeded Apple’s. Through this strategy, computers based on IBM’s operating system quickly moved into this market and dominated it even after a late start and entering with a product that was, for many years, technically inferior to Apple’s system.

  • Unexpected major events – the terrorist attacks on 9/11 led to reduced air travel and created demand for much greater security. The “Great Recession” caused major changes and failure for many businesses that were slow to adapt. Major outbreaks of disease in Africa, Asia, or the United States greatly affect formerly successful products or services. The rise of Japan, Korea, and China as major suppliers of cheap quality goods can immediately affect former successes in other countries. Swiss watches, once a universal name, would be replaced by upscale watches from Japanese manufacturers or unbelievably inexpensive watches from China. Most recently, the series of coordinated attacks in Paris by ISIS or ISIL on the evening of November 15 2015 created havoc and insecurity around the world, including in the US, which will cause the demise of formerly successful products or services, and not just in security.

  The Bigger They Are, the Harder They Fall

  In the mid-1980s, the entire billion-dollar vinyl record industry vanished almost overnight and vinyl record manufacturers lost millions when they failed to prepare for the growing threat from compact disc technology.

  Slide rules, once a product that an engineer wouldn’t have been seen without, went the way of the buffalo, gone except for very specialized roles and in museums. The handheld slide rules were manually manipulated, non-electronic, analogue computers. The basic models had two stationary rules, with a central sliding rule. A clear sliding piece with a crosshair, called a cursor, completed the basic model. With this device, engineers could accomplish a variety of complex mathematical and algebraic computations. Every single engineer in the world owned at least one. Major companies like Pickett and K + E dominated the industry. Yet, their markets disappeared within two years after the introduction of the handheld electronic calculator.

  I could go on, but you get the general idea. The point is, like a light bulb that burns brightest just prior to complete failure, many of these companies and industries were at their best just a few years – or in some cases just a few months or days – prior to their demise. They optimized their success but it led eventually to failure, sometimes quicker than anyone could imagine, exactly as Drucker stated.

  You might think that senior executives easily anticipate and readily prepare for change. This is rarely the case for several reasons. Most executives are where they are because they were promoted under the old paradigm of the organization’s success. Their prior actions made them and their organizations even more successful. They are comfortable with the old way, not some new, usually unproven, idea. Even though they may not realize it, they are apprehensive about leaving what they know and are comfortable with. They invested heavily in the old modus operandi and tend to avoid anything that says that they must invest again and start over. It takes an exceptional individual to do this, or even to utter the words that imply that anything will change. However, the truth is that the new model may hardly be rocket science once accepting of the fact that there will be change, like it or not.

  I have written about one of the most remarkable cases of an organizational leader who was able to recognize that future success based on great past success was not inevitable. He was not a business executive, but a military leader. His name was Henry H. “Hap” Arnold. He was the commander of the US Army Air Forces during World War II. To understand his vision, you need to know the whole story.

  After the US Air Force was given the status of an independent military service after World War II, “Hap” Arnold became the first and only five-star general that the Air Force ever had. But getting there hadn’t been easy. Arnold had fought his entire career for an Air Force independent of the US Army, with full career opportunities for the pilots who flew the airplanes central to any Air Force. Before independence, when the Air Force had been under the control of non-flying senior officers of the US Army, pilots were allowed to command only flying organizations. They were not permitted to head up non-flying divisions, corps, and others assignments. Without these assignments in their backgrounds, they could not reach the top posts in the US Army.

  Soon after the United States Air Force was created, and despite a lifetime of fighting for this flying Air Force and equal career opportunities for pilots, Arnold wrote words then considered heresy by those who flew. General Arnold wrote that Air Force officers must be flexible and forward-looking in their vision of the future of this new military service. “We must think in terms of tomorrow. We must bear in mind that air power itself can become obsolete.”3 General Arnold said that at a time when airplanes were the essential vehicles in the Air Force’s arsenal; space and other unmanned systems didn’t exist except as experimental prototypes. Today, the need for pilots of unmanned flying drones is so great that it rivals not only the need for aircraft pilots, but for crews manning launch systems for intercontinental missiles and space systems. A situation General Arnold could never have predicted as he wrote these words.

  Yet, almost every day one can read of a company failing due to not heeding Drucker’s warning. Not long ago I read a headline in the Wall Street Journal: “Fat Lady Sings for Columbia House.” The owner of Columbia House, Filmed Entertainment, Inc filed for chapter 11 bankruptcy. Columbia House was founded as a division of CBS Inc. Do you remember the direct-mail offers of the clubs records, then tapes, and finally DVDs – all by this famous mail order recording house? As an inducement to join the club, you could buy a tape or CD for as little as one cent. Their operations brought in as much as $1.4 billion a year. That’s billion, with a B. It wasn’t technology alone that did Columbia House in. It kept up with and improved its basic product. It was the way that consumers purchased and listened to music and other products that changed and led to its demise. On folding, the company still had 110,000 members, but it had years of declining revenue. The basic changes needed in marketing and distribution had never occurred.4

  Stopping Success from Leading to Failure

  • Understand that continuing what led to past success will invariably lead to eventual future failure due to one or more reasons, no matter what.

  • Organizations must be willing to abandon what was formerly successful or even what may have once been its very essence.

  • An organization must always be ready to take action to make even revolutionary changes.

  • Plan your own “what-if” scenarios and how you would handle negative things before or as they begin to happen.

  • Keep watch at every major happening, and ask what it will mean for your business and your products.

  • Avoiding failure requires innovation, and innovation is one of two primary tasks of any business – the other is marketing.

  Innovation Means Something Different

  Drucker understood that as a consultant, innovation meant something different
and maybe something completely new. But he also understood that resources in time, talent, capital, and facilities are needed every time an innovation is initiated and exploited. This led Drucker to a very important concept, which has come to be called abandonment.

  The Revolutionary Posture: Abandonment of Profitable Products

  Drucker’s two questions to Jack Welch that contributed significantly to his phenomenal success as GE’s head were: “If GE wasn’t already in a particular business, would you enter it today?” and “If the answer is no, what are you going to do about it?” These questions led to the abandonment of successful businesses. According to Welch, Drucker’s questions led him to shed profitable but underperforming businesses that had streamlined GE into its extraordinary success. Welch mandated that any GE business that was neither number one or two in its market would be sold or liquidated.5, 6 These two examples of Drucker’s theory of abandonment were discussed in his book Managing by Results in 1964, almost 20 years earlier. The questions are actually a powerful example of Welch’s successful application of Drucker’s theory.7 These simple questions contributed greatly to Welch’s accomplishments at GE and the universal success attributed to him as a leader and as a manager.

  Should the Best-known Automobile Have Been Abandoned?

  Henry Ford’s Model T was named the world’s most influential car of the 20th century. The actual title of the award was “The Car of the Century”. No doubt the award was well deserved, as no less than 15 million Model Ts were built between 1908 and 1927. Although there were minor changes over this 19-year period, the Model T was primarily characterized by no change and maintenance of its initial design. This was exemplified by Ford’s well-known declaration that Ford’s customers could have any colour they wanted, so long as it was black. Ford’s rival, General Motors, began to provide a variety of designs and options. Henry Ford responded with a one-liner: “The Model T design ‘was already correct’ and therefore would not be altered.” The fact is that, at the end of its career, the Model T could no longer compete with more modern offerings. The design should have been abandoned years earlier, despite its having been the basis of Ford’s success. Failure to do this cost Ford his company’s leadership to General Motors for 40 years, which hardly offset the slim profits made at the end and Ford’s brave declaration that it was “already correct”.8, 9

  Abandon with Finesse and Logic

  Drucker saw that logically this meant that an organization must be prepared to abandon everything it does at the same time that it must be prepared to devote itself to creating the new. Abandonment must simultaneously be executed along with continuous improvement, exploitation of past successes, and innovation.10 Drucker insisted that any proposal for a major new effort must always spell out what old effort must be abandoned.11 I found this necessary early in my own career, as director of research and development, when my boss insisted on initiating products for development without simultaneously increasing my overall budget.

  Drucker saw that all these processes must be systematic, and not done in a haphazard or ad hoc fashion. He thought that this process must start with clients rethinking what they were doing.

  Rethinking Means an Examination of What the Organization Is Doing

  Drucker thought seriously about what many clients and their consultants ignore: rethinking the environment and the actions of the organizations in it. Drucker considered rethinking as a preamble to abandonment. Drucker noted that rethinking should result in a long list of activities, programmes, or products that must be examined, analysed, and ranked by current and potential for further success. Once this is accomplished, those with the highest potential are given priority with the resources necessary to reach full potential. Those at the bottom (think “dogs” in the Boston Consulting Group’s old four-cell matrix), should be liquidated and those in between should be given further thought and possibly refocused to be made more successful, but without a large increase in the limited resources expended. Drucker found that frequently the usual methods ranked programmes and activities according to what he called “good intentions”. The Drucker difference was not to rank by good intentions, but rather according to actual, observed performance.12

  Drucker warned clients to institutionalize the process, and he even recommended the period by which the process should be repeated: “Every three 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 doing it now?”13 every distribution channel with the question: if we were

  This last question assumes that conditions have changed and perhaps, even more importantly, that the organization has learned something new since the original action was initiated or in the interim. Drucker emphasized that if the answer to the above question was “no”, the reaction must never be for additional study, but always, “What are we to do now?” Drucker was no fan of unnecessary study or research, but rather of action. With Drucker, the emphasis in his consulting was always on action.14 He knew that only through action could failure be avoided and success be attained. Throughout he emphasized that abandonment was a necessity, but it was also an opportunity.15

  When a product, business, or service is abandoned, it frees up resources: money, personnel, facilities, equipment, and time for new opportunities, or to take advantage of older ones that have a higher potential and have been ignored. These were “push priorities,” which were easy to identify because the results of the push, if successful, produced their additional investments many times over.16

  But there are other advantages to abandonment even if it is unknown where freed-up resources will be applied. Psychologically, it stimulates the search for a replacement to take the place of the old “something” that is no longer present. He also thought abandonment necessary to ignite a “ho-hum”, existing business “to work today on the products, services, processes, and technologies that will make a difference tomorrow”.17 Finally, he told clients that abandonment even helps change management, since another of his beliefs was that the most effective way to manage change is to create it yourself, just as he recommended “predicting” the future by creating it yourself.18

  Toward the end of his career, Drucker summarized a lifetime of observation of the abandonment concept by stating three cases where he could barely contain himself and boldly stated, “The right action is always outright abandonment.”

  1. If a product, service, or process was thought to “still have a few good years left.”

  2. If the only argument for keeping it is that it is “fully written off.”

  3. If a new product or service is being stunted or neglected because an old, perhaps declining, product is being maintained.

  Drucker wrote that case number three was the most important reason for abandonment.19 Even Steve Jobs had difficulty getting his people to quit emphasizing the once-potent Apple II, which had established the company and one could say the entire computer industry. I remember Jobs taking the reins in the development of the “Mac” and saying that those still enamoured with Apple II were working on “the boring project”. At the time this was reported, I didn’t understand why he had said this. Analysing Drucker’s methods of consulting, I understood what Jobs was trying to do.

  Discovering a Specific Criterion for Abandonment

  Drucker simply did not provide specific criteria for abandonment. No four- or nine-celled matrix, no equations—nothing. Once again he recommended thinking. The potential products, processes, or businesses that might usefully be abandoned and the criteria for their selection are unlimited. However, he did provide a few guidelines. For example, in decision making he recommended looking at what he called “boundary conditions”. These are specifications regarding intended objectives, minimal attainment goals, and other conditions that must be satisfied. He felt that clear thinking regarding the boundary conditions was needed to know when something must be abandoned, and by inference their understanding was also ne
cessary for development of criterion for abandonment.20

  Though he cautioned clients and those who helped them to beware of “the tyranny of numbers”,21 he also commented that budgeting – the most widely-used management tool – did provide a forum for evaluating and analysing the existing situation, along with other measurement and controls as well as organized information needed to be reviewed as candidates for abandonment were sought.22 It follows that quantitative criteria for deciding what should be eliminated and what should remain could be determined, but again, beware “the tyranny of numbers”.

  You’ve Got to Have a Plan… But then, the Plan Must Be Implemented

  Once a candidate for abandonment has been identified and criteria for specific abandonment established, organize everything with a plan. This should include specific objectives, the number of people of various capabilities needed, the tools, money, information, and other resources necessary for completion of the abandonment, and unambiguous deadlines.23 It’s very much the same way as planning for new product development. Drucker noted that the “how” of abandonment was of no less importance than the “what”. If this detail is ignored, the whole abandonment will be postponed in the hope that the abandonment will be abandoned. The reason is simple: abandonment policies are never popular and will be actively opposed by many, as Jack Welch discovered.24 The abandonment at GE, which led to GE and Welch’s incredible success, involved the displacement of more than 100,000 employees during the first years of his tenure as he discarded underperforming businesses and acquired new ones. It was also the source of the disparaging nickname given to him of “Neutron Jack”. However, supporters argue that not only did this boost GE to the heights it ascended, but ultimately benefited employees, as well as stockholders. Without these final systematic steps of planning and execution, all this is just good intentions that, Drucker added, should rarely include the adjective “good”.