Just as the microprocessor opened up the possibilities of our machines,
Peter Drucker opened up our minds. Drucker is the preeminent business
philosopher of the 20th century, creating the concept of management as a
practical discipline. His intellectual rigor and prescience separate him
from the pack of futurists. His great strength is an extraordinary ability
to interpret the present, to read the lines in the sand that get to the
heart of the matter. In more than 30 books, he has written lucidly on many
of the crucial business trends of the past 50 years, identifying the
"knowledge society" as the cornerstone of modern business.
Today, at 90, he lives in a leafy Los Angeles suburb. He moved there in
1971, expecting to stay for three months. "That’s one reason I don’t teach
long-term planning," he says. Drucker swims daily, exhibits obvious pride in
the blooming violet flowers of a jacaranda tree, speaks lovingly of his
grandchildren. He’s still spry, able to hobble along on a cane as fast as
many people can walk and can put down a cooling double espresso in a single
Drucker’s speech is slower now, but his mind no less sharp. His ideas are as
important as ever, and he continues to spread them as fast as possible. He
has produced a five-part series of hour-long management programs for
Corpedia, an interactive corporate learning company. The online programs
are animated, colorful, jammed with information and sure to become a
touchstone of corporate skills training. Even today, Drucker remains the
guru of management.
Many of the newer Internet companies are struggling to keep their
businesses afloat. What are they doing wrong?
Drucker: I don’t think they are doing anything wrong. They’re just not doing
anything right. It’s highly probable that the age in which you automatically
got lots of money by calling yourself a dot-com is over. Many of these
Internet startups were not startups of business, at all. They were just
stock exchange gambles. If there was a business plan, it was only to launch
an IPO or be bought. Not to build a business. And sometimes I am rather
appalled by the greed of today’s executives.
Is it too late to pull out of the tailspin?
Possibly. Venture capital will be increasingly hard to get for many of them.
I once worked with a man named Cecil Rose. A financial man. He said that any
startup that promises to have profits in less than five years is a phony,
but any startup that doesn’t have a positive cash flow in 18 months is also
a phony. Now that may be too orthodox today. The fact that some Internet
startups take a long time to become profitable is fine. Amazon.com is
typical. I am not worried about it. But very few of the Internet startups
will have a positive cash flow ever. And that’s not a business.
The argument that many of the startups pose is that they are simply
buying land while land is cheap. That is, they will spend a lot of money
today to build mind-share, and that leads to market share and, ultimately,
profitability in the future.
OK, but you can only finance mind-share if you
have the cash flow. You had exactly the same arguments in the 1920s,
although the term "mind-share" didn’t exist. "Market share" was also an
unknown term. The terms are new, but the illusions or promises are old and
they were the same in all of the other booms. Typically, the speculative
boom precedes the growth of the real businesses by 10 years. The first great
speculative boom of our modern economy was with the railroads. The great
English railroad boom in the 1830s led to a collapse of many of the first
companies in the early 1840s. After that, railroad building began in
earnest. The same happened in this country after the Civil War. The railroad
boom was in the 1860s. But railroad building, and profit-making, only began
in earnest with the transcontinental railroad after the Civil War.
Does that 10-year beginnings-to-boom timetable still apply? Do you
think it will take a decade before we see the real champions of the New
Yes. The promise in any new business in any new
industry is that you have to buy back every penny you spend. But if you
don’t have the cash flow, you must depend on ever growing infusions of new
money: Investment capital. If you don’t get what you call "mind-share"
translating into market share, you must depend on stock market gains rather
then business gains. And that is very, very risky. It makes you exceedingly
vulnerable to even the slightest downturn.
If so many new Net companies are stock market gambles, what about
the established old-line companies? How are they faring online?
We all, including myself, greatly underrated the
speed at which old businesses have been able to adapt to ecommerce and
actually become leaders. Overrated it fantastically, and still do. Let me
give you one example: Four years ago I told one of the world’s very large
automobile companies they would have to go on the Internet. They listened
politely, which means they didn’t throw stones at me. But they thought I was
absolutely crazy. Now this same company has started an Internet buying
collective and is working with at least two, and probably four or five,
other big automobile companies. The buying co-op will turn into a worldwide
auctions market, and they are moving very aggressively. But it took four
years. And they also still only focus on their own brands, instead of being
multibrand as the dot-com people are. Both sides still need to learn from
Is it important to be a multibrand organization?
It’s critical. If you are, let’s say, Ford, and
you go on the Internet, you sell Ford cars to Ford dealers. If you’re one of
the dot-com companies, however, you sell every brand and find the dealer for
it. That gives the dot-coms an enormous advantage, but only for the time
being. I don’t know which of the big automobile companies is going to
realize that its marketing strength enables it to become the seller of all
brands and especially of the brands that don’t have the volume. From all I
know, they’re all working on it. Give it another six months. They have
severe internal problems with these things, however–with dealers, with their
own people. They must overcome that.
Are there new metrics for success in an Internet company?
That’s a little more than I can answer. A great
deal more. But I’m not sure that it will be any different then the
traditional metrics. There’s an old grand theory of stock-market valuation
that looks upon the value of a stock as the valuation of future gains.
There’s a great deal to be said for it. Works very well over fairly long
periods of time. And it applies beautifully to the dot-com boom, where the
valuation is based on expectations of capital gains. When debt shrinks, the
expectations of future earnings become more important and established
businesses–but not necessarily large companies only–have a tremendous
advantage, because their cost of capital is so much lower. If your cost of
capital is based on tremendous stock market gains, then your cost of capital
is actually very high if those expectations go down. Still, I do believe
that new economics are very badly needed.
Such as? What are the most important numbers you’d look at to value
What I think is irrelevant. What matters is that
prospective investors will look on these companies differently and that is
What do you think the corporation of the future looks like?
Which corporation? What kind of corporation?
Interestingly, the impact of the Internet may be much greater on the
nonprofits then on for-profit businesses. And on higher education. The cost
of your basic resource, brainpower, is going up fast. It has become very
expensive. Technically savvy and innovative people have become unbelievably
expensive. They can make all the money they want by remaining independent
contractors rather than working for one of the companies, no matter what
your stock options are.
The impact of the Net on higher education is
almost certain to be very much greater than on any business. The average
knowledge worker will outlive the average employing organization. This is
the first time in history that this has happened. You must have a great deal
of knowledge today, and it must often be highly focused. So the center of
gravity of higher education is already shifting from the education of the
young to the continuing education of adults. Skills in business used to
change very slowly. My last name, drucker
, is Dutch. It means printer. My ancestors were printers in Amsterdam from
1510 or so until 1750 and during that entire time they didn’t have to learn
anything new. All of the basic innovations in printing after the 19th
century had been done by the early 16th century. Socrates was stone mason.
If he came back to life and went to work in a stone yard, it would take him
about six hours to catch on. Neither the tools nor the products have
Will this ongoing quest for continuing education affect the
structure of the corporation?
Almost certainly. The corporation as we know it,
which is now 120 years old, is unlikely to survive the next 25 years.
Legally and financially yes, but not structurally and economically.
Today’s corporation is structured around layers of
management. Most of those layers are information relays, and like any
relays, they are very poor. Every transfer of information cuts the message
in half. There needs to be very few layers of management in the future and
those who relay the information must be very smart. But knowledge, as you
know, often becomes obsolete incredibly fast. The continuing professional
education of adults is the No. 1 gross industry in the next 30 years, but
not in the traditional form. In five years, we will deliver most of our
executive management programs online. The Internet combines the advantages
of both class and book. In a book you can go back to page 16. In a class you
can’t, but in a class there is a physical presence; and on the Internet you
Several years ago you set down the five dos and the three don’ts of
innovation. If you were to create those rules for innovation today, what
would they be?
Today you need an organization that is a change
leader, not just an innovator. Five years ago, you had an enormous amount of
literature on creativity. Most of creativity is the normal amount of hard
and systematic work. Fifteen years ago, everyone wanted to be an innovative
company, but unless you are a "change leader" company you won’t have the
mindset for innovation. Innovation has to have a systematic approach. And
innovation is very unpredictable. Look, you have a zipper on your pants
Last time I looked, yes.
But if you look at the invention of the zipper
this is totally irrational. The zipper could not possibly have been a
success in the clothing industry. It was invented to close bales of heavy
stuff, such as grain, in the port. Nobody thought of clothes. The market
turned out to be not where the inventor thought it would be. And this
happens time and time again. The first major war fought after the Napoleonic
conflicts was in Crimea and it had horrible casualties. It was very
important to develop an anesthetic that could be used on the battlefield.
One of the first things they came up with was cocaine. It was supposed to be
nonaddictive and everyone began using it–Sigmund Freud even. But it was
addictive and had to be dropped. Around 1905, the Germans invented the first
nonaddictive anesthetic, called novocaine. The inventor spent the last 20
years of his life trying to get everyone to use it. But where was it used?
By dental students. And the inventor could not believe that his noble
invention could be used for something as mundane as pulling teeth. So the
market is almost never where the inventor thinks it will be.
No more than 10 or 15 percent of innovations move
up to that founder’s wishes. Another 15, 20, or 30 percent are not
disastrous, but not successes either. Five years later they’ll say that this
is a nice specialty. You know what that means, don’t you? It means you have
to wrap it in a five-dollar bill to give it away. Sixty percent are
footnotes at best. Timing is also important. An invention may not succeed,
but 10 years later someone else does the same thing, but gives it a slight
twist and it clicks. Sometimes strategies are more important than the
innovation itself. The trouble is that you rarely get a second chance.
Do you believe that an organization should be involved in the
process of creative destruction, such as that described by Clayton M.
Christensen in The Innovator’s Dilemma ?
Absolutely, but this needs to be an ongoing
process and it has to be organized. Let me give you an example of a company
that I’ve worked with. A fairly big one. A leader in worldwide specialized
field. And every three months, a group of people from the
organization–younger people, junior people, but never the same people–sits
down and looks at one segment of the company’s products, or services, or
process, or policies with a question: If we didn’t do this already, would we
go into the way we are now? And if the answer is no then the question is
what would we do. Every four or
five years, that company has systematically abandoned or at least modified,
every single one of its products and processes, and especially its services.
That’s the secret of its growth and its profitability.
A company should be able to eliminate its waste.
The human body does it automatically. In the corporate body, there is
enormous resistance. Abandonment isn’t that easy, and don’t underrate the
effect abandonment can have. It has a tremendous impact on the mindset of
the people and the organization. Sometimes a so-called improvement can
become a new problem. Of the people and companies I know, 70 percent of the
new comes from a slight modification of what already exists. The best
example I know is probably GE Medical Electronics. They’re a world leader,
but not many of their products have come out of innovation. More have come
out of improvement.
Any thoughts on the Microsoft antitrust trial?
Antitrust is an obsession of American lawyers, but
I have no use for it. Any monopoly holds an umbrella over the newcomers, to
be sure, but I am not afraid of monopolies because they eventually collapse.
Thucydides wrote years ago that hegemony kills itself. A power that has
hegemony always becomes arrogant. Always becomes overweened. And always
unites the rest of the world against it. A countervailing power always
reacts. A hegemonous system is very self-destructive. It becomes defensive,
arrogant, and a defender of yesterday. It destroys itself. Therefore no
monopoly in history lives for very long.
The best thing that could happen to an old
monopoly is to be broken up. If antitrust had not forced IBM to give up the
punch card, it would never have become the computer giant. The best thing
that happened to the Rockefellers was to be broken up. The Rockefellers were
wedded to kerosene. They considered gasoline a fad. By the time Standard Oil
was broken up, it was on the decline. The new companies that were focusing
on the growing car market, like Texaco, were growing by leaps and bounds.
And five years later, the Rockefeller fortune was ten times what it had been
before it was broken up.
So I think the best thing that could happen to
Microsoft is to be broken up into several pieces. I do not think Bill Gates
would agree with me, but then Mr. Rockefeller did not agree either.
He fought the breaking up of Standard Oil to the
very last minute. AT&T fought it until it became clear that it was hopeless.
The same with IBM and
old man Watson, whom I knew very well. Not the man who built IBM but his
father, who had the vision of the computer as early as 1929 but when reality
came in a danger to punch-card business did everything to kill the computer.
And the antitrust suit enabled his loving sons to ease the old man out.
These were clients of mine. Friends of mine.
One of the seminal books that you wrote was The Age
of Discontinuity . If you were to revisit that today, in
this age of accelerated change, what would you write?
I don’t know, because I haven’t read that book for
30 years. I don’t read my old books, I write new ones. But I would put much
more emphasis on demographics, much more emphasis on globalization. Much
more emphasis on the Internet, particularly on business-to-business
ecommerce. What the new economy or new society will look like you can’t
predict, but you can see certain trends and some things I believe you can
In the last 40 or 50 years, economics was
dominant. In the next 20 or 30 years, social issues will be dominant. The
rapidly growing aging population and the rapidly shrinking younger
population means there will be social problems. Because of manufacturing
advances, production will increase exponentially. Employment is
disappearing. Blue collar employment and the share in manufacturing of gross
national product is going down. We came out of World War II with farming
still employing 25 percent of the work force, and producing some 20 percent
of the gross national product. It is down to 3 and 5 percent now. And
manufacturing is in the same direction, but maybe not going that far down,
if you translate manufacturing goods prices into stable dollars. They have
been going down at least 1 to 2 percent a year since 1960.
How does one manage successfully in this time of dramatic change?
It is very tempting to manage only for the short
term, but very dangerous. One of the things managers have to learn, and very
few of them have, is to balance short term and long term. I would say the
unique accomplishment of CEO Jack Welch of GE has been that he has been
developing the tools for keeping an eye on the financial short term–and by
that I don’t mean six months but three years–but he has a very strong,
strong emphasis on developing people long term. Call it a mind power
strategy. This came fairly easy to GE because GE in the 1920s developed a
sound and modern financial strategy and it was one of the very first
companies in the 1930s to develop a human resources strategy. So these are
all GE traditions. Jack Welch has put this balance to the forefront of his
business. He gets monthly reports on each of his 167 businesses, I am sure,
but he makes people investments for seven years ahead.
How do you turn transition to an advantage?
By looking at every change, looking out every
window. And asking: Could this be an opportunity? Is this new thing a
genuine change, or simply a fad? And the difference is a very simple: A
change is something people do, and a fad is something people talk about. An
enormous amount of talk is a fad. I have an old friend and he is an
important man at a big institution. I think he was being accused of never
changing anything. He has a very prosperous, very successful organization,
and he said buying a book about change is much cheaper than changing
anything. You must also ask yourself if these transitions, these changes,
are an opportunity or a threat. If you start out by looking at change as
threats, you will never innovate. Don’t dismiss something simply because
this is not what you had planned. The unexpected is often the best source of
Remember that many transitions may be meaningless
for a particular business. They may be exceedingly meaningful for some other
institution, but for us they are meaningless. They don’t change our market,
they don’t change our customers, they don’t change our technology, and the
large part is just things they talk about at conferences. So most of the
things are not for us. You may read about these changes in
Business 2.0 , and it’s very interesting and
I put a sticker on it and have all of my people read it. And they discuss
it. And I will remember it even, and five years later, yes, maybe I do
something. It becomes part of my instrument kit. So you just watch out at
What do you believe is the future of business on the Internet?
I think it’s too early to speculate about
ecommerce. One never knows how a new distribution channel will change what
is being distributed and how customer values will change. If ecommerce takes
only a relatively small part of the total consumer business, (and it may
take a fairly large part), it will have a profound impact, and force
existing distribution channels to change radically.
I think one high probability guess is a system
that uses ecommerce to sell and a physical location to deliver. That is
already being developed very rapidly in Japan. Ito-Yokado is probably the
world’s largest retailer today. And they own, among other things, the
Japanese 7-Eleven stores. Japan has 10,000 7-Elevens. Increasingly, they
have deals with all kinds of suppliers where customers buy online and pick
up at the nearest 7-Eleven. Because a central problem of ecommerce is
The delivery has to be local. That is fairly easy
if you sell books. Books have an enormously high value-to-weight ratio.
There is almost no product except diamonds that has a ratio as high. They
are very easily shipped and, true, they can be damaged, but they’re fairly
sturdy. All over the world transportation costs of books are artificially
low. They are subsidized heavily. In this country, the best guess is that it
costs the post office four times what it charges. So books are easy, but
tractors aren’t quite that easy. And perishables are hopeless. So I would
say there is high probability that you will see develop a system in which
selling is online and delivery is in a physical location. At Japanese
7-Elevens, the online pickup system already accounts for about 40 percent of
what the store sells. The 7-Eleven gets a small commission but it costs them
nothing, it’s pure gravy. So I think that is one of the likely things. Other
changes are also profound. Because for the first time selling, making, and
delivery are separated. The center of power has been shifting to
distribution now for 50 years. That’s accelerated several orders of
magnitude. How many manufacturing plants will survive? Not many. But so far
the distributor has squandered that power. The distributors already have the
brands, but only a very few of the very big manufacturers have brands that
have real standing in the consumer market.
In other areas, the design of a product, its
manufacture, marketing and servicing will become separate businesses. They
will be owned by the same financial control but basically run as separate
businesses. Ford is considered a manufacturing company, but they don’t
manufacture anything. They assemble. Which is a radical break with the
mass-production concept. So the changes are very profound and very deep and
very long lasting. And we are just beginning to understand what it all
Books by Peter Drucker
Drucker has written some 30 books in a writing career that spans seven
decades. They fall into three broad categories: management studies,
socioeconomic political studies and collections of essays. Here are some of
the most important:
• The Future of Industrial Man (John
Day)–His second book, published in 1942. Had a considerable impact, and
along with his first book, The End of Economic Man
(John Day) in 1939, helped establish him as an insightful political
• Concept of the Corporation (John
Day)–Drucker’s epochal work. An in-depth study of General Motors published
in 1946 and one of the only corporate studies of lasting intellectual merit.
Combines social ideas with the practical observation of what actually
happens inside a profit-driven corporation.
• The Practice of Management (Harper &
Row)–Defines his groundbreaking theory of Management by Objectives, a
technique to improve individual and group performance in which managers at
every level of an organization have measurable goals that fits the overall
goals of the corporation. In many ways, The Practice of Management created
the management book craze.
• The Age of Discontinuity
(Harper&Row)–Published in 1969, this book was decades in advance of
conventional thinking. Drucker spotted three discontinuities in technology
and industry, the world economy and government. Introduced the concept of
the knowledge worker.
• Innovation and Entrepreneurship
(HarperCollins)–Tackles innovation as a discipline that can be taught and
learned–the sources, nature, and symptoms of which can be studied. Remains
the best manual on the practice and principles of entrepreneurship.
• Adventures of a Bystander (Harper &
Row)–A charming account, ending in the late 1970s, of a life and career of
intellectual distinction and lasting importance.
• The Effective Executive (Harper &
Row)–Focuses on personal effectiveness. The individual’s companion guide to
the organization’s Managing For Results. Published in 1985.
• Managing For Results (HarperBusiness)–A
how-to book that expands on the theories of Managing by Objectives and how
they can be made meaningful in the world outside the corporation.
• Management Challenges for the 21st Century
(HarperCollins)–His most recent book. Continues his acute analysis
of changing forces in management.
• Managing Oneself and Others
(www.corpedia.com)– A series of five online programs on modern corporate
management techniques. Colorful, insightful, and ultimately indispensable.