Business Leaders: Peter Drucker
We look at the business author behind 'management by objectives' which is attributed to the success of global enterprises including Hewlett-Packard
Name: Peter F Drucker
Expertise: Management consultancy
Known for: The concept of management by objectives (MBO)
Best-known titles: The Practice of Management (1954)
Who is Peter Drucker?
Peter Drucker is credited with turning management into a profession akin to that of the scientist or medical doctor. Educated in Austria and England, Drucker became a financial reporter for Frankfurter General Anzeiger in 1929. Always seen as an outsider, more writer than academic, his skill as a journalist made his work more accessible than the more usual business school tomes.
Drucker left Germany in 1933, first going to England, then going on to America in 1937 to work as a correspondent for a group of British newspapers. In 1939, Drucker took a part-time teaching position at Sarah Lawrence College in New York, giving him his first exposure to teaching, a vocation he was to pursue throughout his life, taking his last class in the spring of 2002. He joined the faculty of Bennington College in Vermont in 1942 as professor of politics and philosophy, where he had the opportunity to spend two years studying the management structure of General Motors (GM).
His 39 books, ranging from The End of the Economic Man (1939) to his last The Effective Executive in Action, published posthumously in January 2006, co-authored with Joseph A Maciariello, have between them been translated into more than 30 languages.
What is Drucker known for?
His experience with GM led to the publication of the ‘concept of the corporation’, where Drucker introduced the notion of the decentralised organisation using delegation, as opposed to command and control, to manage the enterprise. Despite it becoming a bestseller in both the US and Japan, GM largely ignored the lessons in this book, even going so far as to hint that owning a copy was not a career-enhancing strategy. It did, however, launch Drucker’s career as a management consultant par excellence.
In 1950 Drucker went to the New York University’s Graduate School of Business, where he taught until 1971 and by his own reckoning did his best work. First among many compelling works was his 1954 book The Practice of Management, with chapter headings such as ‘What is a Business?’ and ‘Managing Growth’, designed to appeal to practicing executives. In this book he introduced and popularised the idea of ‘management by objectives (MBO)’, without actually using that term. John Tarrant, Drucker’s biographer, noted that Drucker once said he had first heard the term MBO used by Alfred Sloan, author of My Years with General Motors, a book that didn’t come out until 1963, over a decade after Drucker’s.
He called the process ‘management by objectives and self-control’ and his student, the late George S Odiorne, used Management Decisions by Objectives as the title for a book published in 1969. However, MBO is the name that has stuck, spawning a host of imitators and embellishers whilst holding firm to its central tenet. Drucker identified five fundamental principles of management: organising, motivating, communicating, establishing measurements of performance and developing people, all around agreed objectives.
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The concepts advanced in support of MBO and much of Drucker’s other writing were based on the following beliefs.
- A company’s primary responsibility is to serve its customers, not simply to make a profit. Nevertheless profit is essential if the business is to survive. So a business should be managed by balancing a variety of needs and goals, rather than a single value.
- Drucker saw employees as assets rather than a cost, claiming them to be an organisation’s most valuable resource. He was amongst the first to use the term ‘knowledge worker’, identifying them as central to success in a progressive economy. A manager’s job is to give people the tools to perform. Drucker believed that ‘great companies could stand among humankind’s noblest inventions’. But to achieve this they had to understand the aspirations, needs and responsibilities of their workforces and the communities in which they had to operate.
- Decentralisation, Drucker believed, was a better way to run an organisation than the old command and control model with orders being given down the chain of command. He was an early advocate of de-layering an organisation.
- Drucker saw simplification as a virtue that many corporations had lost. Firms tend to produce too many products, build departments doing work that should really be outsourced and expand into sectors that they don’t really understand. Drucker posed three questions (What is our business? Who is our customer? What does our customer consider valuable?) whose answers would keep any organisation firmly pointed in the right direction. These now form the classic opening discussion for a management consultant’s first client meeting and are the yardstick against which every objective should be measured.
- The need for ‘planned abandonment’. Businesses share a human failing in wanting to trumpet ‘yesterday’s achievements’ rather than seeing when they are no longer useful and letting go. Drucker recommended that at regular intervals, say every three years or so, an organisation should rigorously examine every function, product, service, process, technology and market and prune out the inevitable deadwood.
- Drucker believed that taking action without thinking is the cause of every failure. Thinking he saw as a function of leadership, and whilst management is doing things right, leadership is doing the right things.
- Asking the right questions, Drucker saw this as the defining skill of a great manager.
Management by objectives (MBO) was seen by Drucker as having five key stages: the first stage is to provide employees with a clear understanding of their roles and responsibilities as well as the results they are expected to achieve. Drucker saw the leader’s main task as defining the mission and vision for the organisation. Without absolute clarity at this stage no-one working there will be clear either. Drucker identified three big advantages for the organisation by starting the process in this way.
- Involving employees in the goal-setting process increases employee empowerment, job satisfaction and commitment to achieving the objectives.
- Understanding how their activities relate to the achievement of the organisation’s goal makes it easier for people to see where and why they need to cooperate.
- Higher levels of management can make certain that their subordinates are all rowing in the agreed direction.
Cascading the organisation’s objectives to those responsible for achieving them is the second stage of MBO. Cascading, though it is the word used, is not quite the meaning of the process. However, it is self-evident that if an organisation’s mission is to be achieved everyone on the payroll has to work in some way to that end. But in order to make the process effective Drucker determined that the goals that were agreed should be attainable and answerable. The acronym SMART, though not specifically mentioned in The Practice of Management, is certainly there in spirit. He indicated that the cascade should work in practice, including the following elements:
- Specific: Drucker was against ambiguous goals, as having clear goals was the only credible way to monitor progress.
- Measurable: activities that can be measured, such as sales targets, have a better chance of being achieved than less concrete goals, such as improving a business’s image. Drucker was an early adopter of the idea that what gets measured gets done.
- Achievable: this makes it much easier to get buy-in when the person responsible for achieving the goal has a hand in developing it.
- Realistic: this sets a limit on over-eager staff or hopelessly ambitious bosses.
- Time related: this provides an important constraint, tying objectives into the time frame of the planning cycle. The third stage is to monitor performance against agreed objectives. This reinforces the idea that objectives should be measurable and that a system to report against them must be in place.
The fourth stage is to evaluate performance against the agreed objectives. This is a critical element, as clearly some elements of performance are outside the control of even the most able, dedicated and committed individuals. The assumptions on which the objectives depend come into play here. So if, for example, the organisation assumes the economy will grow, and a major credit crunch drags the world into recession, then the original objectives may reasonably fail the test of being realistic.
The fifth stage is built around the idea that whilst what gets measured gets done, what gets rewarded gets done again. Then the organisation goes back round the cycle, setting new objectives for the next time period.
How real companies use Drucker’s concepts
MBO has been used successfully by businesses around the world. Although Drucker was persona non grata at General Motors, MBO was very much part of the culture in hundreds of other big American corporations and tens of thousands of other businesses, and not just in the US. Drucker had a big following in Japan, where his views on the corporation as more than simply a profit generator, but as a community built on trust and respect for employees, struck a chord. MBO’s big break came in 1957 when it was declared to be an integral part of ‘The HP Way’, the much-praised management philosophy of Hewlett-Packard, a phenomenally successful computer company.
In a comprehensive review of 30 years of research on the impact of management by objectives, (‘Impact of management by objectives on organizational productivity’, R Rodgers, JE Hunter, Journal of Applied Psychology), 68 of the 70 studies showed productivity gains, and only two studies showed losses. The authors concluded that companies whose CEOs demonstrated high commitment to MBO showed, on average, a 56% gain in productivity. Even in companies with CEOs who showed only lukewarm commitment there was a 6% gain in productivity.
MBO for most managers today is more likely to mean management buy-out than management by objectives. This would certainly not have given the master much pleasure. When acquisitive conglomerates were all the rage he crusaded against reckless mergers. But Drucker himself never saw MBO as a cureall, stating, “management by objectives works if you know the objectives: 90% of the time you don’t.”
Today’s managers would be more familiar with more complicated business tools doing much the same things. The most obvious successor to MBO is the balanced scorecard developed by Robert Kaplan and David Norton. It was introduced in a Harvard Business Review article in 1992 as ‘a management process that sets out to align business activities to the vision and strategy of the organisation, improve internal and external communication and monitor organisation performance against strategic goals’. Nothing here that Drucker would disagree with. Drucker’s philosophy was that management is a liberal art, “it deals with people, their values, their growth and development, social structure, the community and even with spiritual concerns … the nature of humankind, good and evil”. These issues look like being around for a while yet.
Business Gurus, edited by Ian Wallis and published by Crimson Publishing, is available to order now.