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Vol. 8, No. 1
www.stuffofheroes.com
(626) 350-1500 Ext 102  

Extraordinary achievements demand extraordinary leaders.

 

Drucker’s Methodology for Developing Strategy

© 2010 William A. Cohen, PhD  

Adapted from  Drucker on Leadership  (Jossey – Bass, 2009)

    Drucker’s views on strategy were quite different from those taught by others. He did not believe in “portfolio management” or quantitative methods for strategy development. He never taught such methods in the classroom and a review of his published writings will reveal little along these lines. Drucker felt that every situation had to be approached individually and with common sense based on the history of strategy development as it evolved over the millennia. This is probably one reason that Drucker, although a self-proclaimed “non historian,” used historical examples to illustrate his concepts. Reaching back into history, the origin of the word “strategy” is the Greek word, “strategos,” which is defined as the art of the general.

     Although Peter admired the military for many reasons, including its ability to develop good leaders, he did not believe that “business is war” or that one should look at business as an act of warfare. He certainly did not believe in simply mimicking military principles of strategy. In fact, at one time he was opposed to the very use of the word strategy in business because he thought it was too closely related to the military[1] and might lead business leaders astray in their approach to strategy development. Nevertheless he recognized that there were principles in common that strategy for any organization, of any purpose, shared with military strategy. The military or any organization operates on a “theory of business.”[2] Drucker wrote that strategy converted this theory of business into performance; that its purpose was to enable an organization to achieve its desired results in an unpredictable environment.[3] He distinguished planning from the strategy involved in this planning in that while planning tries to optimize tomorrow the trends of today, strategy seeks to exploit the new and different opportunities of tomorrow.[4]

 Don’t Develop Strategy by Formula

Peter did not believe in developing strategy by formula.  He avoided what is now termed “portfolio management.” This included Bruce Henderson and the Boston Consulting Group’s well-known four-celled matrix with their division into problem children, stars, cash cows and dogs, or the nine-celled matrix developed by the General Electric with the McKinsey Consulting Company and other methods based on quantitative analysis and fixed methodologies.

     Peter would have none of it. He has largely been proven correct.  For example, in the early four-celled matrix, bigness was supposed to lead to increased profitability through some efficiencies of size. In fact, there were plenty of smaller companies which were quite profitable while some giant corporations stumbled and choked on too much acquisition in their attempt to build efficiency following this model and this strategy. What frequently happened was that bloated size did not allow for a transfer of advantages enjoyed by the acquiring organization to those acquired. This resulted in a loss of efficiency a subsequent inability to satisfy the customer or give the customer what he considered value. Many companies didn’t figure this out until the 1980’s, and for many it was too late.

How Drucker Looked at Strategy

In practice, Peter first looked at a company’s overall objectives and whether they matched the results of his injunction to determine what business the company was in, what the business should be, who was customer, what the customer wanted, and what the customer termed successful in fulfilling this want. Then the leader would insure that the organization had got its information together and that some thought had been given to what the events that had happened in the environment actually meant. Peter called the results of these analyses “certainties.” Pleasant or unpleasant, the “certainties” in the situation had to be faced squarely.

     Increasing global competition was a “certainty” of which Peter was very much aware of. He foresaw the likely shift to foreign automobiles long before it actually happened.  He knew that as early as the late 1950’s Detroit automobile manufacturers knew that overseas competitors were acquiring the capability of producing high quality, low cost cars. As quality increased, and with the right marketing, this would invariably lead to their capturing a dominant share of the American market. Any leader could see this by looking out the window and analyzing the likely results from events that had already occurred.

     American automobile manufacturers would lose much of their market unless a new strategy was implemented in that industry. Unfortunately, this did not happen and little was done. The oil crises and the fact that foreign cars, especially Japanese cars, were far more fuel efficient than American cars, was simply the luck of the draw which speeded an inevitable process. Japanese companies would have still taken giant shares from the American companies even without the unpredicted and unpredictable event of the gasoline crises of the 1970s. Of course even the importance of fuel efficiency might have been predicted from an analysis of our dependency on foreign oil, a fact over which the automobile companies had little control. So while the automobile manufacturers might rightfully claim that they were simply responding to their customer’s demands in once again manufacturing less fuel-efficient vehicles when gasoline again became available, they were playing a tactical game which was inevitably going to hurt them strategically and did.

You Can’t Avoid Risk

Drucker knew that risk could not be avoided. In fact, he believed that risk was a requirement for future success and no risk was a litmus test to him. Little or no risk meant that the corporation was aiming high enough as to what it should become. There were uncertainties in every situation, and the future was unknown. The unknown meant risk. He felt that these unknowns could best be dealt with by taking the initiative to create one’s own future. Therefore, a leader had to plan ahead and then take the actions to achieve the goals he or she had established. Of course major threats should be identified along with some alternatives should these threats become realities. That might have been done by American companies in planning for stiffer competition from all foreign cars, not just those coming from Japan. Unfortunately, it was not. In any case, Peter started with an analysis of the situation in the marketplace and identifying those certainties that would be faced.

The Four Questions of Strategy

Drucker recognized that any company’s strategy had to incorporate the answers to four questions:

1.   What opportunities it wants to pursue and what risks it is willing and able to accept.

2.   The scope and structure of its strategy, including the right balance among such aspects as specialization, diversification, and integration.

3.   Acceptable trade-offs between time and money and between in-house execution versus using a merger, acquisition, or joint venture or some external means to reach its objectives and attain its goals.

4.   The organizational structure appropriate to its economic realities, the opportunities, and it performance expectations.[5]

A recognition that strategy had to be based on these four questions led to a methodology which Drucker adopted which was more inferred than

spelled out as a “by the numbers” process.

 

A Drucker Methodology for Strategy Development

Since Drucker never revealed his methodology for developing strategy as a step-by-step process, I set out to do this some years ago. To accomplish this task, I researched not only his work, but strategists and strategic thinkers spanning more than 7000 years of recorded history, from both east and west, and representing a wide variety of fields. As reported in A Class with Drucker, this was one of the most difficult studies that I undertook in applying Drucker’s classroom lessons. Moreover, the work was only completed at a time when Peter’s health had begun to fail. As a result although I intended to show him what I had done and to get his feedback, this never happened. The entire story can be found in Chapter 17 of A Class with Drucker (New York: AMACOM, 2008).

 

I saw that what Drucker did was to integrate goals and objectives (what the business should be) with the variables of the situation and the resources needed along with his judgment based on his own observations. This latter was the most difficult. I knew his judgment involved principles of strategy many of which he had not written about and may not even have been aware that he was applying in formulation of strategies as he recommended. I was familiar with various principles of strategy due to my military background and education, but understood that strategy in other disciplines were probably not identical. I was seeking general principles which could be applied to any human endeavor. 

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At first I identified several hundred principles of strategy. However, many were repetitive. I reduced this list to fourteen principles of the original group. I extended the results of my research to a wide range of other endeavors including office politics, sports, and even romance. I was surprised, but the fourteen principles endured in all of the areas which I investigated.

I thought that I’d better get this all together before approaching him. Also, it looked like I had a way to go and although I knew that he was already in his nineties, I had come to look at him as eternal, almost immortal. Still, I knew he had been ill, and this too caused me to pause before sharing my work with him.

As I re-examined them I had found that some of my fourteen principles were too specific to certain situations.  Others needed to be reworked for clarity and emphasis. So the work required further refinement. Eventually, I reduced my original list again, this time to ten essential principles. They were the distillation from the thinking of many strategists in many areas of human activity. They were applicable across the board to all areas of human endeavor, including of course, business.

I saw Peter at Claremont Graduate University after concluding this research at a conference held in Claremont in the spring of 2004. I had told him about this work sometime previously. I had hoped to speak with him at the conference as my work was almost done, but I did not get the opportunity. For various reasons including both of our schedules and his declining health, I did not get an opportunity to share these strategy principles with him before publication of them asThe Art of the Strategist (AMACOM, 2004).  As a result, while I am confident of the other parts of the methodology as being absolutely consistent with Drucker’s thinking, I cannot say whether he would have agreed with the principles of strategy that I developed based at least in part of his writings, but also many other strategists going all the way back to antiquity. Nevertheless, following are the ten finalized principles which you should consider in developing strategy..

1.   Commit Fully to a Definite Objective

Drucker made it clear that the definite objective was what the business should be. This is why he devoted so much importance to defining this issue.  For many years I have said that you can’t get to where you are going until you know where that is. The other components of this principle are equally important. The objective must be precisely defined, and you must commit fully to it. This commitment is not only important for yourself, it is important to gain and maintain the commitment of those you lead. No one will be more committed than you are yourself.

2.   Seize the Initiative and Keep It

History records many stories about individuals who have a great idea, but delay in developing it or bringing it to market. Maybe they never do and someone else does and is highly successful. Or maybe they do, but someone else gets in just a little bit sooner. So this principle says you must get the initiative and keep it until you achieve your goal. Drucker emphasized not theory, or even planning, but action. It’s not enough to have a great idea you must take action on it for it to mean anything.

3.   Economize to Mass Your Resources

You can’t be strong everywhere because your resources will always be limited. Consider time. We all get the same amount, but some waste a good deal and spend it in areas not impacting as strongly on the goals they seek. The idea is to economize where your efforts and resources are not critical and concentrate them where they are more important. You must concentrate superior resources at the decisive point in the situation. This is exactly what Drucker was saying when he asked Jack Welch his two famous questions. “If you weren’t already in a business, would you enter it today?” and “If the answer is no, what are you going to do about it?” GE owned some businesses earning less money than others. The company was expending resources less than optimally. Welch made the decision that if a GE-owned business was not first or second in its industry it should be axed. This was the first of many strategies that led to his increasing GE’s market capitalization by $400 billion during his twenty year tenure.

4.   Use Strategic Positioning

To achieve any strategic objective, you will need to maneuver due to environmental or other unexpected changes. You may need to modify your approach and your positioning, even as you continue to work toward an objective. That’s why if what you are doing isn’t working you need to alter your strategy to something else. It’s true that persistence is an immensely valuable trait for reaching any goal. However maintaining a faulty strategy in pursuit of a goal is foolish or worse.

5.   Do the Unexpected

When you have competition, it is most effective to surprise your competition and do the unexpected. This principle can also be profitably applied with customers and prospects, so long as the surprise is pleasant. The concept of giving your customers more than they expect is the embodiment of such a principle.

6.   Keep Things Simple

Someone at NASA once calculated that if every single one of the parts in one of NASA’s rockets was 99.9% reliable, the rocket would fail 50% of the time. We would curtail our space program in short order. The more things that can go wrong, the more will go wrong. If you want less to go wrong, keep your strategy simple where fewer things can go wrong.

7.   Prepare Multiple Simultaneous Alternatives

Since some actions inspired by your thinking are going to fail, you should always have an alternative action, even an alternative intermediate objective thought through and ready to be implemented.

8.   Take the Indirect Route to Your Objective

Moving directly against any human thought or endeavor always arouses opposition. People hold on all the more strongly to their previously held notions. So moving indirectly, perhaps using an incentive desired by those you want to persuade or influence can work well. No one likes to be sold anything. However, most are eager to take advantage of a bargain. The difference is subtle, but the results can be decisive. The direct route will always lead to the strongest opposition. The same principle holds true in a situation where there is competition that must be faced and this principle should be integrated into your strategy. This concept was first explained fully by B.H. Liddell Hart, probably the greatest strategist of the last century. I am happy to recommend his book, Strategy (Meridian, 1991)first published more than fifty years ago, and still in print.

9.   Practice Timing and Sequencing

The Bible says that there is a time for every purpose under heaven. Implementing the “right” strategy at the wrong time or in the wrong sequence can be just as ineffective as if the strategy was all wrong. You’ve heard the saying, “he was ahead of his time.” Yet, someone with the same idea at the right time may be extraordinarily successful. Bottled water is very successful today, and some branded names command very high prices. Yet twenty-five years ago, the idea of anyone paying for bottled water, unless from Lourdes, would have been considered a joke..

10. Exploit Your Success

Don’t stop or slow down when you are winning and achieving your objectives. Not staying continually ahead of your competition is simply giving your competition another chance to stop you.

 

What the Business Should Be, Principles, Resources, and Fixed Certainties

Drucker saw that what the business should be, the principles of strategy, the resources of the firm, and what he called the fixed certainties needed to be brought together in order to develop strategy. The organization of his methodology had been foreseen by an earlier strategist, the Englishman J.F.C.  Fuller.[6]After deciding on what the business should be, the leader looks at all aspects of the situation and carefully selects the relevant “certainties.” Each fixed certainty must be turned to an advantage, avoided, overcome, or ignored. The strategist’s purpose is to integrate the relevant variables with the principles, and using the available resources, develop a plan to accomplish the mission.

In Figure 4-1, I prepared the three lists of the aspects necessary, side by side. Rather than relying on numbers, statistics, percentages and the like, this chart provides a quick overview of the elements that should be considered when developing an appropriate strategy for a given situation.

 

DRUCKER’S FIXED
CERTAINTIES

PRINCIPLES OF STRATEGY

AVAILABLE RESOURCES

Economic Conditions

Commitment to a definite objective

Manpower

Business Conditions

Seizing and maintaining the initiative

Capital

State of Technology

Economization to Mass

Equipment

Politics

Positioning

Special Knowledge

Legal and Regulatory Issues

Surprise

Leaders

Social and Cultural Norms

Simplicity

Other Relevant Resources

The Competition

Multiple Simultaneous Alternatives

 

Other Relevant Variables

The Indirect Approach

 

 

Timing and Sequencing

 

 

Exploitation of Success

 

FIG 4-1

Developing Strategy Based on Drucker’s Concepts

·        Decide on what business you are in and what the business should be

·        Initiate the process of creating the organization’s future

·        Get the information you need and decide what events that have already occurred will mean

·        Bring together the fixed certainties, the resources required, and the principles of strategy

·        Decide on action steps to implement the strategy

·        Take Action

 


 

[1] Drucker, Peter F., Managing the Nonprofit Organization (New York: HarperCollins, 1990).

[2] Drucker, Peter F., On the Profession of Management (Cambridge, Massachusetts: Harvard Business School Press, 1998) pp.5-17.

[3] Drucker, Peter F. Management Challenges for the 21st Century ( New York: HarperBusiness, 1999) p. 43.

[4] Drucker, Peter F. Managing in Turbulent Times (New York: Harper & Row, Publishers, 1980), p. 61.

[5] Drucker, Peter F., Managing for Results (New York: Harper & Row, 1964) p. 203.

[6] J.F.C. Fuller as developed in Anthony John Trythall, ‘Boney’ Fuller, (New Brunswick, New Jersey: Rutgers University Press, 1977) p.108.

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THIS IS WHAT THEY’RE SAYING ABOUT THE BOOK

Bill Cohen’s Drucker on Leadership is the best collection of Peter Drucker’s unique insights, deep wisdom, and practical advice I have  ever read. Cohen channels Drucker as only a three decades-long colleague and student can. You will find the lessons highly accessible, immensely enjoyable, and wonderfully fresh.  –    Jim Kouzes, Award-winning co-author of the bestselling, The Leadership Challenge

Cohen has written with clarity and authority about the major challenges facing leaders today. And Cohen, like Drucker, emphasizes responsibility and integrity in leadership, qualities so desperately needed today. I strongly recommend this book to you.  – Joseph A. Maciariello, Horton Professor of Management, Peter F. Drucker and Masatoshi Ito Graduate School of Management and Co-Author of The Daily Drucker by Peter F. Drucker and Management by Peter F. Drucker

    Cohen’s unique relationship with Peter Drucker, as student and friend, allows him to extract valuable leadership lessons from Drucker’s writings and teachings on management.  Bill Cohen’s “labor of love” provides the essential lessons for leaders straight from the Father of Modern Management. – Ronald E. Riggio, Henry R. Kravis Professor of Leadership and Organizational Psychology, and director of the Kravis Leadership Institute at Claremont McKenna College

For those who aspire to lead – and we need a new generation of Drucker— like leaders in organizations in every country around the world —  Bill Cohen distills the essential leadership lessons from the world’s greatest management thinker.        Ira A. Jackson, Dean and Professor of   Management, Peter F. Drucker and Masatoshi Ito Graduate School of Management

 

Through a blend of anecdote and analysis, Bill Cohen has given us great insight into Peter Drucker’s thinking on leadership—an aspect of Drucker’s  work that many have misconstrued or overlooked altogether. This is a new prism through which to view Drucker and, as such, a valuable contribution  to the field. –      Rick Wartzman, Executive Director, The Drucker Institute

    What Cohen learned as Peter Drucker’s student, and their personal relationship afterwards, changed Bill’s life. Reading Drucker on Leadership will change the way you look at and apply leadership forever.       Bruce Rosenstein, author of Living in More Than One World: How Peter Drucker’s Wisdom Can Inspire and Transform Your Life

I read Dr. Cohen’s books in Chinese, and with the help of a translator, reviewed a draft of Drucker on Leadership in English. Peter F. Drucker helped me found the Peter F. Drucker Academy in China. It was a pleasure to see his concepts and what he instructed me brought together in one place and explained so that they could be applied by any executive. This is a valuable and useful book.       Minglo Shao, Chairman and CEO of the Bright China Group, Founder of the Peter F. Drucker Academy

 


For more information, contact me directly by e-mail at wcohen@stuffofheroes.com or telephone (626) 794-5998. Yes we do give international seminars — The U.S. country code is 01.

 

THIS MONTH’S THOUGHT FOR LEADERS

A clever rabbit will have three openings to its den.

                                                                    – Ancient Chinese Proverb