Drucker’s fundamental business decision

Drucker placed an enormous emphasis on what he called the fundamental business decision. He wrote that deciding what business you were in was the fundamental decision and it was followed by concentrating on the practice of this decision. Neither is an easy task.

Limited resources and time demand focus

Demands for any business’s resources and time of its members are particularly important. Part of a manager’s job is determining whether an innovation, new idea, invention or other attraction is an important opportunity or a business distraction that will require an investment in time, resources, effort and money, or can damage the business’s future. Of course, any activity may be a worthy cause and may publicize, promote and help the business or be a social responsibility which should be adopted. All activities outside the fundamental purpose, however, must be examined closely for both positive and negative business impacts before they are implemented.

Management experts are fond of pointing out what can go amiss. One example often used highlights that while railroads once dominated transportation in the US, they missed an important opportunity because they failed to define their businesses more broadly, as transportation companies rather than as railroad companies. As airplane technology developed it assumed operations which formerly were performed only by locomotives because of advantages such as speed. Had airplanes been incorporated as a transport vehicle along with locomotives, this might have resulted in transportation companies incorporating both vehicles and become much larger than existing railroad companies, many of which disappeared as airplane technology developed and offered advantages which locomotives could not duplicate.

The wrong solution

A company needs also to be careful of a solution to a problem which will damage the organization. One company which developed and manufactured helmets for military aviators faced periodic losses due to the US. Government’s purchasing policies which were based on annual approval of funding. When the work was completed, the company waited for the next contract to be approved. Even foreign sales were affected because the Government acted as agent for sales of the product to allied countries. As a result, the workload was a continuous cycle of peaks and valleys in sales and the company always had too many workers during the periods it was inactive. Machinery and workers simply sat idle awaiting contract approval.

The company decided that a possible solution was to fill consumer needs for a product line that would substitute for the lack of government sales while awaiting contract approval.

Based on the company’s research, helmets for motorcyclists appeared to be a good candidate for production. Aviator’s protective helmets could protect motorcyclists and these helmets could be made with the same machinery and by the same workers.

However, the two markets were different. For example, the government bought aviator helmets once a year in large quantities while cyclists bought a single helmet as needed. Motorcycle helmets also required different standards of protection. It also required different marketing, pricing, substantial advertising to both the potential buyer and to retail sellers, and since users themselves, and not the government paid for the product, distribution systems. All of with which the company was unfamiliar. It was not just a question of packaging and giving the helmets a different name. Moreover, protective requirements, because of different types of accident impact, and the need for microphone communication in helmets used by military aviators required design changes in those helmets intended for cyclists.

As a result, differences in product design, manufacturing, and additional investments, were necessary. These necessitated many modifications and unexpected costs in the helmets sold individually to motorcyclists as opposed to aviators with helmets paid for in large quantity by the government.

In addition, what was considered value to the cyclist was different from that of military fliers. The motorcyclist sought similar values such as protection, lightweight and comfort, but these were different from those in helmets providing aviator protection.

In the end, the company invested several million dollars and produced a much heavier, more protective, but higher-priced motorcycle helmet that few users wanted or could afford to purchase, and the company not only lost money in manufacturing and marketing, but almost went bankrupt in trying to introduce and sell this much more expensive product to the different group of users buying in a totally different sales and user environment.

Information not to be taken lightly

Determining what business you are in is the most important factor in creating an organization’s operational strategy, and Drucker knew and taught that knowing this was the responsibility of every business manager. Once defined, other considerations and strategies could be more readily determined. Accurately defining the business and its fundamental purpose will save time, money, and other resources on aspects which add value to the business. At the same time, it will assist in focusing on those opportunities and possibilities that are important to building the business for the future.

Until you recognize what business you are in, your organization will commit errors, no matter how effective operations are in other ways. The fundamental decision is related to a constant theme in management and leadership. Since resources of all types are limited, selecting and concentrating these limited resources where they will be most effective and provide the most benefit is critical. This can only be accomplished after the answer to this fundamental question is determined. Without this important information members of the company may be working on activities that are counterproductive and may harm rather than help the business perform profitably. Time, money, and resources will be wasted and lead to wrong actions.

Nowadays, many companies use “mission statements” to define what business they are in. Drucker had a favorite mission statement. His favorite mission statement was from a very old business. But this mission statement, though not recent and very short, was his favorite for a very important reason. It changed Sears Roebuck from a struggling mail order house to the world’s leading retailer within ten years. Simply stated, it was to be the informed and responsible buyer, first for the American farmer and frontiersman, and later for the American family, although of course the statement was modified appropriately over the years.

Everyone needs to be heard

One major reason for hearing from all participants is to gain commitment. Another reason is that many have good ideas and may know something that others do not. By hearing from all, you not only gain commitment to the final business definition, but you can also avoid missing opportunities and escape threats. Drucker noted that for the purpose of deciding on your business, even dissent can be beneficial.

How to answer the question: “What is our business?”

In consulting employees you want more than just opinions. You must see the business from the customer’s point of view and, as Drucker noted, “in reality, it is the customer who defines your business”. So, it’s a good idea to include questioning customers, as well to determine:

• who the customer is;
• where is the customer is located;
• what the customer purchases;
• what the customer considers to be of value;
• and who and what the customer consults when making buying decisions.

When should you ask these questions?

Most executives don’t consider when to ask questions at all, or if they do it is usually only when they get into trouble or need to initiate an action and then maybe it is too late. A smart executive will ask this question when the business is formed and then periodically afterwards and not wait until he is forced to act.

The fundamental decision as to the business of the organization requires general input:

• It is the primary responsibility of the leader.
• The leader shouldn’t make this decision alone but should consult other relevant organizational leaders and customers.
• To analyze and get the right answer to the question “What is our business” you must define your customer as did Sears Roebuck.

Arriving at the correct fundamental decision can make the difference between success and failure and will benefit employees, workers, managers and customers, too.