Lessons From Peter Drucker

Peter Drucker and the art of accomplishing more with less

William Cohen, Ph.D.
Posted: 02/24/2013

Why you might want to abandon profitable markets

Everyone knows that despite what top leaders sometimes demand, you can’t do more with less --- or can you? Drucker said that you could, and went on to prove it. Read on and learn how to do "the impossible" through the genius of Drucker with a little help from a 19th century Italian economist.

Vifredo Pareto was an Italian economist who, in the late 1890’s and early part of the 20th century, investigated the distribution of wealth in Italy. He found that roughly 20% of the population owned roughly 80% of the land. Strangely, this same breakdown held in a number of different populations which he investigated. Moreover this breakdown was strangely consistent and predictable.

Although published, not much was heard about this for many years. However, others began to notice the same rather unusual pattern in many other areas of human endeavor. Most notably this included Harvard Professor George K. Zipf in his Principle of Least Effort and quality expert Joseph Juran’s Rule of the Vital Few.

The Pareto principle says 20% of input causes roughly 80% of the output

Eventually it became to be thought as a quirk of nature which holds true in just about everything. Amazingly, roughly 20% of input causes roughly 80% of the output or - stated another way - 80% of results of anything comes from as a result of only 20% of the causative factor.

That part is the secret of accomplishing more with less.

I’ll show you what Drucker taught for management later. However please note that this unusual breakdown is approximate --- but it was close enough to catch the eye of a number of other geniuses including Drucker.

Pareto in action: Does 80% of your clothing sit idle?

Pareto in Your Personal Life

Pareto’s phenomenon can be easily seen in your daily life. For example, you probably wear about 20% of the clothes in your closet about 80% of the time. Now this means the money spent for the 80% which you rarely wear is largely wasted. Now maybe you just like to see them hanging there, but as far as the impression you’d like to make, you could do more with less. Pareto’s discovery began to be known as the 80:20 rule or the 80:20 principle in which a majority of output results from a minority of input.

This has a significant effect in both your business and personal life.

For example:

  • 80% of revenue comes from 20% of your clients.
  • 80% of your HR problems is from just 20% of your employees.
  • 80% of customer complaints come from 20% of your products; but also,
  • 80% of your profits comes from 20% of your products.

It is a basic principle of competitive strategy that the secret of success is to concentrate superior resources at the decisive point in the competition. The problem over the millennia has been to identify that decisive point. The 80:20 rule helps us to do this.

Drucker’s Awareness

Now to Drucker, we know that Drucker was aware of the rule from his widely reported advice to Jack Welch at GE, which Welch credited with building his $450 billion success at GE over the period of his tenure. According to Welch, Drucker advised him to look at GE’s businesses to determine which should be given resources and which should business should be divested. Since all these business were making money, this wasn’t a decision which would be based on simple profitability.

Welch looked at each and saw that a minority of the businesses which GE dominated were producing most of the profits for the corporation.

He, therefore, dictated that profitable or not, if a GE business was not or could not be number one or two in its industry, it would be sold or liquidated. Many GE managers thought that this policy was arbitrary and foolish. Why get rid of a business that was profitable and representing significant sales? But they obeyed Welch’s instructions. This not only caused GE to increase profitability many times, but helped build Welch’s reputation as one of the greatest businessmen of the 20th century.

But regarding Drucker, there is more evidence.

Drucker’s Concept of Systematic Process of Abandonment

Drucker saw that an organization must be prepared to abandon almost everything it does at the same time that it must devote itself to creating the new. Why? Because it needs resources to be focused on the new.

That’s the only way of doing more with less.

If abandonment wasn’t accomplished you would soon end up with 80% of your resources producing only about 20% of your best. This is because of the extensive resources still misallocated to past programs.

So abandonment must simultaneously be executed along with continuous improvement, exploitation of past successes and innovation. In fact, Drucker recommended that a proposal for a major new effort must always spell out what old effort must be abandoned.

This is something I found out from necessity early in my career as director research and development for a company. A boss I had insisted on initiating products for new development without simultaneously increasing my overall budget. Under the usual paradigm, I couldn’t do more with less without dropping projects with less potential than the new. I ended up with no more resources but by focusing efforts on potential new products, I accomplished much more.

Drucker saw that all of these processes must be systematic, but he emphasized abandonment especially was not to be done in a haphazard fashion and must be subjected to a systematic process. The process begins with Rethinking. It progresses to deciding on the Criterion of Abandonment. Then it requires an Abandonment Plan and implementation of that plan. Let’s focus only on the first of these steps, the Rethinking.

Rethinking the Prelude to Abandonment

In an essay on his thoughts on "re-thinking re-inventing government," Drucker analyzed the rethinking the must be done as a preamble to the abandonment.

The notion of rethinking is to be applied to re-inventing anything, including a company’s products or its policies. The re-thinking must involve all of the organizations ongoing programs which require resources of any kind to continue.

Drucker recognized that there would be a long list of activities, programs, or products to examine.

The most successful that were noted at the top of the list should be strengthened further. That is they should be given even more resources to further exploit their success. They would roughly correspond to GE’s businesses which were both profitable and the leaders in their markets. Those at the bottom of the rethinking list had to be discarded. Those in between, might be retained if they showed promise, but if so, they probably needed to be modified significantly.

Implementing Abandonment

Of course a plan complete with specific objectives, numbers of people of various capabilities needed, along with the tools, money, information and other resources necessary for completion of the abandonment along with unambiguous deadlines is needed.

Drucker noted that this "how" of abandonment was of no less importance than the "what. This was also important because abandonment was not without cost.

Welch’s abandonment at GE required the displacement of more than 100,000 employees as he discarded underperforming businesses and acquired new ones. It was also the source of the disparaging nickname given him of "Neutron Jack."

However, the abandonment Welch initiated ultimately benefited employees, customers and as stockholders and most importantly society because society is hurt when it continues to allocate workers and managers to no longer fully productive activities and it benefits enormously when these valuable personnel resources are reallocated to the best opportunities possible in any organization.

So Welch did more with less. Yes, he cheated. He quit doing that which was in the less effective 80% and focused on the 20% that brought in the 80% of the profits. Smart move.

You can do the same with any group of projects, work, or endeavor that you choose.

William Cohen, Ph.D.
Posted: 02/24/2013


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