Business Strategy: Drucker's "New Certainties" and why when all else fails, think!
Drucker wrote that the purpose of strategy is to enable an organization to achieve its desired results in an unpredictable environment. Contrary to what "everybody knows," strategy is not about achieving results in a known and foreseeable environment, but in an environment that is unknown and unforeseeable.
That’s why politicians, military leaders, as well as business executives frequently, err as their well-laid out strategies and plans fall flat. The military especially is frequently criticized as wanting to fight the next war with the last war’s weapons, concepts, and strategy.
The most egregious example usually cited is that of the French Maginot Line of concrete bunkers on the border between France and Germany costing billions and emulating the trench warfare of World War I, intended to be an indestructible and impassable, a "super trench." The Germans simply rendered it useless by going around it.
Unfortunately, we have learned little. Many managers today assume that the environment tomorrow will be pretty much the same as today --- just extrapolated forward for increasing population, increasing longevity, or whatever else is the trend of the day.
That’s a guaranteed recipe for failure and you can look at many and recognize this common cause.
Becoming Purposefully Opportunistic
Drucker said that what strategists should do is to be become "purposefully opportunistic." That is you look through the window and see what events that have already occurred mean for the future. Then your plans are based not on what is unknown and unforeseeable, but what is known and is foreseeable. You see the opportunity before others and develop a strategy to take advantage of coming events which are inevitable.
The New Certainties
Drucker was never afraid to propose ideas that others may never have even considered. This was certainly the case with certain environmental variables which he felt were phenomena so unique that they could safely be considered certainties and not just possibilities as we normally assume for fixed variables that we sometimes call "environmental."
Moreover, he believed that they were different from other contemporary strategies as they were not essentially economic, but were primarily social and political.
Undoubtedly, these were derived based on his notion that such certainties could be accurately predicted based on events that had already occurred.
The Collapsing Birthrate in the Developed World
Drucker saw the falling birthrate in the developed world as a phenomenon unique in history. He saw that this would result in dramatic collateral effects, both primary and secondary.
Perhaps the most obvious change was in the very old assumption, still current, that markets would continue to increase as the population increased. How many times have we heard that markets are bound to enlarge due to simply to the automatic increase in birthrate? And this "known fact" is used in too many business and political assumptions both locally and internationally.
Drucker looked at the facts and found that birthrates were no longer steadily increasing for populations in the developed world. Of course the decline in birthrate could be somewhat offset, delayed, or somewhat hidden by immigration.
But even this would result in dramatic changes and would also cause turmoil as border populations with different, customs, religions, and even languages were attracted into countries of diminished numbers of younger workers.
The result would be that government instability in developed countries would likely soon become the norm. Consider the developed countries of Western Europe, the UK, and the U.S., too. Drucker’s book mentioning the certainties as such was published later but his book, The New Realities was published in 1989 where he said some of the same things.
Retirement No Longer Retirement
A socialist politician friend of mine in a friendly foreign country told me back in 1968, that the trends were such that people were retiring earlier and earlier and that his party already was planning for the day when the maximum work age would be 49.
Drucker disagreed . . . strongly. He wrote that the concept of retirement was certain to change. While early "retirement" would continue, it would no longer mean a return to childhood in some kind of adult playground. Rather it might mean extended employment with the former employer, but under a different name and under different conditions.
Thirty years ago we talked about the return of younger workers to "the nest" of their parents. Last week I read that a new trend had come along and was attracting attention. It was a return to the nest of their parents alright, but not by the young…by retired workers! These former workers were taking refuge in the nests of their elderly parents as their savings were wiped out due to reasons of health or the economy.
Drucker said that the knowledge worker who worked primarily with his mind and not his hands, would become increasingly productive in the modern workforce. He speculated that firms that first discovered how best to utilize this experienced talent in a new type of relationship would acquire a significant competitive advantage.
Perhaps of even more importance would be the effect on potential markets. The size of the youth and younger market would inevitably decline and senior markets increase.
My university recently took a full page ad emphasizing our proven ability to teach consulting. We thought that most interest would come from younger frustrated "rising stars". Wrong! The majority of respondents were in their 50 or 60s, and one was in his 80s.
Drucker felt that the increase in market potential would not only be due to numbers of potential customers, but to the individual purchasing power of those who retired from a first career and continued now to seek employment while in a "retired" state.
Disposable Income and Distribution Changes
Drucker found that the truly important statistic that most companies overlook completely was the share of disposable income spent on the products or services that they provide. Drucker believed that this figure was the most reliable in formulating strategy as it changed very little, even over long periods.
He concluded that utilizing this fact required both quantitative information and qualitative analysis. This provides another example of looking at data but recognizing that what the data really meant was more than crunching numbers and making decisions based on current trends.
In other words retirement was a’changing, but this mean much more extrapolating trends into the future. One had to think as well.
What is Performance?
Though not clearly defined, business is supposed to be run for an ill defined conglomeration of interests including customers, employees, shareholders, and society. Is the best measurement short term as quantified by in gain in stock price, or longer term for future growth?
That’s an important question.
However, a fixed certainty is that even the definition of performance will need to be revised. This being due to the new demographics and longer life spans in developed countries as well as investments by these groups. But that’s not all. These new definitions that would have a clear impact on strategy, would be based on longer term estimates, and that performance would need to be redefined with a nonfinancial "value" return.
Only in this way would this be meaningful to knowledge workers and generate "engagement." And "engagement," too would have to be quantified in order to be calculated as a performance factor.
Finally, What about Global Competitiveness?
According to most definitions of global competitiveness, this has to do with the competiveness of nations. Each year the World Economic Forum compiles a weighted average of many different components measured by publically available data and surveys of a country’s relative competitiveness globally. Useful as this might be, it is not what Drucker was talking about..
As Drucker looked into the future, no small business, giant corporation, hospital, university, you name, it could ignore institutions outside of its own national boundaries. It could neither succeed, nor even survive, without measuring up to standards set by the leaders in its industry anywhere on the planet. Drucker’s contention was that traditional means of protection of home industries no longer protects, "no matter how high the customs duties, nor how low the import quotas."
Drucker easily predicted the struggles now occurring for increased protectionism and one can easily see this in the failure of such negotiations as the G20 summit. He said that the net result of protectionism would not solve a nation’s problems, or a particular institution’s problems. Instead, it would only make individual companies even more vulnerable.
The only logical solution was for the organization to find a way to compete considering the standards set by the best organizations in every area of management no matter where located, and essentially to consider such issues as government subsidies of global competitors as environmental variables which must be overcome by superior strategies, not by similar protection strategies of its own government.
What Should the Modern Executive Do?
Drucker cautioned that even within transnational economic units, national politics would overrule economic rationality, but certainly that incorporating these certainties were more important than incorporating the traditional environmental variables that strategists are still basing their strategies on and failing. When all else fails, think!