Peter Drucker's Legacy
Includes Simple Advice:
It's All About the People

Peter Drucker was the most influential management thinker of the past century. But his most crucial insights were about workers.

Mr. Drucker, who died Friday at age 95, was among the first to see the limits of large industrial organizations and their authoritarian hierarchies. Long before the Internet, before even the first computer chips, he foresaw the arrival of "knowledge workers" motivated by personal pride as much as by fear and a paycheck. Harnessing their talents, he argued, required a new approach to management.

He dispensed this advice in simple prose in 39 books over a remarkable 60-year career, and in probing conversations with scores of executives. Along the way, he developed a loyal following among many of the world's most-famous corporate chieftains, and became the model of the modern management guru, a craft he plied far more modestly than many of his successors.

While Mr. Drucker's eclectic interests ran from European history to Japanese art, his management teachings centered on ways to make workers more effective.

David A. Jones, co-founder and retired chairman and chief executive of Humana Inc., a Louisville, Ky., health insurer, recalls the core of Mr. Drucker's advice this way: "Successful enterprises create the conditions to allow their employees to do their best work."

Mr. Drucker offered plenty of other lessons, of course. He believed organizations should articulate a clear purpose, with specific, measurable goals; he developed the concept of "management by objective," to keep managers in step with those goals; he encouraged managers to ask unspoken questions and consider ignored issues.

His interests weren't limited to profit-seeking corporations. Mr. Drucker viewed nonprofit organizations as social linchpins, and devoted entire books to management of these groups.

"He had the anthropologist's insight into this strange tribe [of managers] that had these formal rituals and strange practices," says Michael Useem, a professor at the University of Pennsylvania's Wharton School, and an author of several books on management and leadership. "Peter Drucker was able to see behind them, and also see what could be changed and made for the better."

Mr. Drucker contributed much to the modern cult of the chief executive. Yet as an emigrant from Nazi Europe, he retained a lifelong distrust of charismatic leaders. "He was skeptical of hero worship," says John Alexander, president of the Center for Creative Leadership in Greensboro, N.C. "He saw management as an activity rather than a heroic venture."

Mr. Drucker's varied interests led him to predictions that gave him a reputation of a visionary in some circles. Warren Bennis, a University of Southern California business professor and author of more than two dozen books about leadership and related subjects, recalls Mr. Drucker warning him 15 years ago about coming social disruptions because of shrinking populations in Western Europe. In 1987, when Japan's roaring economy was the envy of the world, Mr. Drucker saw trouble ahead. "The pillar of their success -- lifetime employment -- is becoming an almost insurmountable barrier to flexibility," he said.

Skeptics, and there were few, who studied his record said that Mr. Drucker was wrong as often as he was right, and had a penchant for twisting anecdotes in the retelling. But that did little to shake the faith of several generations of CEOs. Mr. Drucker's impact was so profound that most of them still remember the first time they read, or met, him.

For Humana's Mr. Jones, it was in 1974, when his colleague Wendell Cherry bought one of Mr. Drucker's books at an airport to help pass the time of a flight delay. "Wendell called me and said, 'Some guy wrote a book about us," Mr. Jones recalls. The two finished the book, "Management, Tasks, Responsibilities, Practices," in a weekend, then called Mr. Drucker on Monday morning.

A few weeks later, the pair flew to Mr. Drucker's home in Claremont, Calif. There, Mr. Jones quickly learned the cornerstone of Mr. Drucker's style: "He never really answered questions. He always asked them." Still, Mr. Jones was sufficiently impressed that he repeated the pilgrimage annually for more than a decade. He recalls two preachings: That profit is a requirement for a company, but should not be a goal in itself; and that productivity and quality are effectively the same thing. "A day or two spent with Peter was the most valuable way I could spend my time," Mr. Jones says.

Dan W. Lufkin, co-founder of the Wall Street investment firm Donaldson Lufkin & Jenrette, encountered Mr. Drucker's unusual style during their first meeting, in the early 1960s, just as DLJ was just getting off the ground. Mr. Drucker, who spoke with an Austrian accent, initially seemed "formal and authoritarian," Mr. Lufkin recalls. "I asked him if he thought we should sell a certain product or do a certain strategy, but all he said was 'I don't know' to every question I posed," he recalls. "So finally I asked, 'what am I hiring you for?' " Mr. Lufkin says.

In response, Mr. Drucker said, "I'm not going to give you any answers, because there are always many different ways to approach problems, but I'm going to give you the questions you should ask,' " Mr. Lufkin says. "So we started talking in great length and depth about who we were and what we wanted to do -- and I can't tell you how important he was to the development of the firm," Mr. Lufkin says.

For Andrew Grove, the retired chairman and chief executive of Intel Corp., the Peter Drucker moment came in the late 1970s, when he ran across a book that Mr. Drucker had published about a decade earlier. The book included a chapter on the multiple roles of a CEO: the public face of the company, a strategist and an operational manager.

Mr. Grove says the descriptions echoed the way that he and two other Intel co-founders, Robert Noyce and Gordon Moore, had unconsciously divided the duties at the top of the semiconductor maker: Mr. Noyce as the public face, Mr. Moore as "a man of thought," and Mr. Grove as "a man of action." Mr. Grove says he ran to a copy machine and distributed copies of the chapter to Messrs. Noyce and Moore.

At the time, Mr. Grove says, he was a "young manager, very skeptical about management gurus and consultants." Nonetheless, he says Mr. Drucker's writings "spoke to me." He was so impressed that Mr. Grove drove an hour from Intel's Silicon Valley offices to San Francisco to watch that era's motivational video -- a three-hour movie of Mr. Drucker speaking about management.

Mr. Grove singles out two of Mr. Drucker's precepts that have stuck with him: That managers should never promote an employee on the basis of his or her potential, but based only on performance; and that managers should make a decision "no later than you need it, but as late as possible, because you always have more information."

Mr. Drucker's lessons still resonate with a younger generation of managers. Mike Zafirovski, 51, who begins work tomorrow as chief executive of Nortel Networks Corp., never met Mr. Drucker, but says the author had a "huge influence" on him. Reading Mr. Drucker's books, Mr. Zafirovski says he was persuaded by the argument that companies should "treat employees like their most valuable resources, including pushing decision making to the lowest levels."

Theory & Practice is a weekly look at people and ideas influencing managers.

Write to Scott Thurm at scott.thurm@wsj.com and Joann S. Lublin at joann.lublin@wsj.com

By STEVE FORBES
November 15, 2005; 

What made Peter Drucker, who died last Friday just shy of his 96th birthday, the most influential management guru of the modern era?

Mr. Drucker's genius for extraordinarily farsighted insights came from a combination of intense curiosity, right principles and deep understanding of the perfections and imperfections of human nature. He never went stale intellectually, which is why business journalists, executives, entrepreneurs, leaders of nonprofit institutions, students and the occasionally wise politician eagerly sought to pick his brains right up to the time he died.

* * *

What helped make Mr. Drucker so insightful was a profound understanding of economics, an understanding that still eludes most economists today. Not for him was the notion of "macroeconomics," of seeing the economy as something of a machine that can achieve steady, stable growth. To him, traditional economic notions of "equilibrium" or Keynesian ideas of "aggregate demand" were nonsense. Innovation, constant change, and turmoil were the true constants of a progressing economy.

No surprise that the economist fellow-Austrian (at least by birth) Joseph Schumpeter was Mr. Drucker's hero. In 1983, at the centennial of both Schumpeter and the then-legendary John Maynard Keynes, Mr. Drucker wrote in Forbes that Schumpeter's centenary birthday would hardly be noticed. Yet "Schumpeter it is who will shape the thinking and inform the questions on economic theory and economy policy for the rest of this century, if not for the next 30 or 50 years." Today Schumpeter's emphasis on the crucial importance of entrepreneurship and "creative destruction" are now commonplaces.

As Mr. Drucker wrote over two decades ago, "The economy is forever going to change and is biological rather than mechanistic in nature. The innovator is the true subject of economics. Entrepreneurs that move resources from old and obsolescent to new and more productive employments are the very essence of economics and certainly of a modern economy. Innovation makes obsolete yesterday's capital earnings and capital investment. The more an economy progresses the more capital formation -- profits -- will it therefore need." These two men saw profits as a moral imperative, a genuine "cost" in the cost of staying in business because "Nothing is predictable except that today's profitable business will become tomorrow's white elephant."

B.C. Forbes, our company's founder, who came to this country 100 years ago with little education and even less money, liked to say that you learn more about a company's prospects from observing its "head knocker" (what he called CEOs) than you will from its balance sheet. Mr. Drucker spent a lifetime hammering home the point that people are key. For instance, a leader who looks at workers as a cost instead of a resource is fatally flawed.

No surprise he long recognized the importance of entrepreneurs: "All great change in business has come from outside the firm, not from inside."

Mr. Drucker's ability to prophesy -- almost always correctly -- was uncanny. All of this is why he could come up with innovations that now seem commonplace, such as management by objective. He continued to admonish executives to carve out time to think and make careful decisions, to focus on one or two tasks, to delegate to others what you can't do well yourself. That's why, for example, Mr. Drucker remained a one-man shop, a soloist; he could easily have founded a large consulting firm and gotten immensely rich. But that would have gone against his profoundest instincts. He was at his best as a teacher -- gathering information, gaining insights and then getting others to gain understanding. Schumpeter believed asking the right questions was more important than the answers. Mr. Drucker agreed -- to a point, anyway.

Decades ago, Mr. Drucker foresaw the rise of "knowledge workers." After World War II, he realized the far-reaching consequences of the GI Bill of Rights, which enabled millions of veterans to go to college, thus leading him to predict long before computer chips and the Internet that "knowledge workers" would replace manual workers. Mr. Drucker also prophesied the breakdown of the traditional, thoroughly integrated, hierarchal industrial corporation. In the 1950s, he predicted the rise of Japan as a major economy, an astonishing insight when many experts thought the country would forever be a nation of small farmers and manufacturers of cheap, shoddy goods. He also saw Japan's subsequent troubles -- an aging population and lack of vigorous entrepreneurship and worker flexibility.

Mr. Drucker long ago warned of the consequences of the rise of corporate and government pension funds, and the impact these vast accumulations of money -- and thus power -- would have on corporate governance, years before anyone had heard of Calpers. He also warned of a backlash from the extraordinary rise in CEO pay. "In the next economic downturn," he told Forbes readers nearly a decade ago, "there will be an outbreak of bitterness and contempt for these super corporate chieftains who pay themselves millions. In every major economic downturn in U.S. history, the villains have been the heroes during the preceding book."

Mr. Drucker also told us to expect enormous changes that will come in higher education, thanks to the rise of satellites and the Internet. "Thirty years from now big universities will be relics. Universities won't survive. It is as large a change as when we first got the printed book." He believed "High school graduates should work for at least five years before going on to college." It will be news to most college presidents and a lot of alumni that "higher education is in deep crisis. Colleges won't survive as residential institutions. Today's buildings are hopelessly unsuited and totally unneeded." All this from a life-long academic.

He brooked no nonsense about some of the topics that obsess Chicken Little today. Outsourcing? He told Fortune in 2002 that "We import two to three times as many jobs as we export. Wage costs are of primary importance for very few industries. The industries that are losing jobs out of the U.S. are the more backward industries." He never tired of pointing out the huge advantage the U.S. has over Europe and Japan and other countries with American workers' flexibility, not only for changing jobs but physically moving from one area to another to pursue opportunities.

In fact, outsourcing is a necessity, Mr. Drucker said. Companies should have others do what is not their prime task. Outsourcing is not so much about cost cutting ("illusory") as it is about improving the quality of work that others can do better than you: "You should outsource everything for which there is no career track that can lead to senior management."

* * *

How higher education is managed did not impress Mr. Drucker; but what did is our continuing education system, whether in community colleges or by computers. Also: "Our most important education system is in the employees' own organization." That is where most Americans learn the most. Mr. Drucker also came up with the admonition of pursuing your opportunities and cutting your losses: "A critical question for leaders is 'When do you stop pouring resources into things that have achieved their purpose?'" As he repeatedly told Pastor Rick Warren, founder of the 15,000 member Saddleback Community Church in Lake Forest, Calif., and who has helped start another 60 churches around the world, "Don't tell me what you are doing, Rick, tell me what you stopped doing."

Until his last breath, Mr. Drucker himself never stopped doing and doing.

Mr. Forbes is president & CEO of Forbes, Inc. and editor-in-chief of Forbes magazine.

By PETER F. DRUCKER
November 15, 2005

(This article originally appeared in The Wall Street Journal on March 24, 1987)

The policy decisions that led to "Irangate" have been proved by hindsight to have been mistakes. But the management methods that turned Irangate into a scandal should have been seen from the beginning as likely -- indeed almost certain -- to lead to trouble, if not to disaster. They were violations of well-known and amply tested management principles. The Reagan administration violated not just one of these principles -- it violated four.

First -- in one of the most common but also most unforgivable management mistakes -- it confused delegation of authority with abdication of responsibility. A chief executive officer must delegate. Otherwise, he'll end up like Gulliver in Lilliput, ineffectual and ensnared in details, as were Lyndon Johnson and Jimmy Carter. But delegation requires greater accountability and tighter control. Delegation requires clear assignment of a specific task, clear definition of the expected results and a deadline. Above all it requires that the subordinate to whom a task is delegated keep the boss fully informed. It is the subordinate's job to alert the boss immediately to any possible "surprise" -- rather than to try to "protect" the boss against surprises, as Mr. Reagan's subordinates apparently did. If they keep surprises away from the boss, they invariably will end up making him look incompetent or not in control or a liar -- or all three.

The greatest delegator in recent American political history was not Ronald Reagan; he is apparently quite immersed in all kinds of operational matters. The greatest delegator was Franklin D. Roosevelt, who "did" an absolute minimum. Yet FDR always delegated a specific task, defined the desired results, and stipulated when and how the subordinate -- a cabinet member as a rule -- would report back. And he demanded upward responsibility from his subordinates. In particular, they had to inform him immediately if the project deviated from the plan even in the smallest detail. He knew, as every chief executive officer learns sooner or later, that there are no "pleasant surprises."

The second major management lesson of Irangate is not to confuse, as the Reagan administration did (and apparently still does), two different and actually incompatible roles -- that of the chief operating officer and that of the chief of staff.

Whether a chief operating officer can work in the American constitutional system is by no means clear. The system centralizes all executive authority in the president, after all. None of the cabinet ministers, for instance, have any political or constitutional authority of their own as they have in a cabinet-government, like that of Britain. And the concept of chief operating officer has never worked when tried in Washington. It always gets the president into trouble.

It did not work when Franklin D. Roosevelt put in James Byrnes as the chief domestic operating officer during World War II. And Dwight Eisenhower did not become an effective president until a scandal forced him to get rid of Sherman Adams, his chief operating officer. But if there is a chief operating officer, the chief executive must retain some direct operating responsibility. Otherwise he soon becomes isolated, and loses "feel" and "touch."

FDR, for all his delegating, never relinquished direct, day-to-day control of congressional relations or of relations with the press. Alfred Sloan at General Motors always had a president and chief operating officer. But he himself kept day-to-day operating responsibility for what he considered the two true "controls" of the corporation: personnel decisions down four levels -- that is, for all appointments to a senior management position even in the smallest accessory division; and allocation of capital, with the chief financial officer reporting directly to him. Both Harry Truman and John F. Kennedy trusted their respective secretaries of state. But both kept day-to-day control of foreign affairs.

It will be argued that Donald Regan was not "chief operating officer"; he was "chief of staff." If so, he was set up to do exactly what a chief of staff must never do: to keep information from the president. The first job of a chief of staff is to make sure that the chief executive officer gets all dissents, conflicting points of view and alternatives. To do this, he must not himself be a "part of the problem," must not himself represent one of the contending interests or ideologies, and must, above all, not be in the "line of command." In the military the chief of staff is never allowed to get between the senior commander and his subordinate commanders -- they always outrank the chief of staff. His job is to make sure that the boss gets all the information he needs to make a decision, rather than only what the chief of staff thinks the boss should hear.

If the two roles are mixed, the chief of staff invariably cuts the boss off from vital information, invariably tries to monopolize access to the boss, invariably ends up making the boss look out of touch. And he also encourages subordinates to do what President Reagan's subordinates at the National Security Council apparently did: keep information away from "upstairs" and bootleg their own policies.

Confusing delegation and abdication, and the chief operating officer with the chief of staff, are structural mistakes. But the Reagan administration also made two elementary mistakes in how it did things. It asked Vice Adm. John Poindexter and Lt. Col. Oliver North to carry out the official policy toward Nicaragua sanctioned by Congress -- which was not to give additional aid to the contras. At the same time, these two men also apparently were charged to raise private money for the contras. It does not matter that this hypocrisy was exactly what most members of Congress clearly wanted (including, probably, many who had voted against aid to the contras). If for whatever reason two conflicting policies have to be carried out at the same time -- and that, of course, does happen -- they must be carried out by different people and in separate organizations. The right hand must not know what the left hand is doing, if the two are working at cross-purposes. Otherwise there will always be a scandal and both policies will miscarry, as they did in Nicaragua.

Finally, the Reagan administration violated the simplest rule: There ain't no secrets. If more than one person knows it, it won't stay a secret. And then the only thing to do with bad news -- such as the miscarriage of the McFarlane-Poindexter mission to Tehran -- is for the executive himself to make it public. This way he has control. If he tries to cover up, he will make sure only that the "secret" is published at the worst possible moment, by someone who tries to hurt him, and in a form that gives it the worst possible interpretation.

American presidents in this century have tended toward secret actions in foreign affairs. Only one of these worked: the Kissinger-Nixon rapprochement with China. The other three ended in disaster. President Wilson, in 1916, sent his personal confidant, Colonel House, to Berlin to get the Germans to stop sinking civilian shipping. House succeeded only in convincing the Germans that Wilson was profoundly isolationist and would never go to war -- which then encouraged them, after Wilson's reelection a year later, to launch the unrestricted submarine warfare that forced America into World War I.

President Roosevelt sent Col. Charles Lindbergh to Berlin 20 years later to "establish contact with Nazi moderates." Lindbergh convinced the Germans only that the U.S. was unprepared, and could not mobilize fast enough to turn the balance in Europe. And the McFarlane-Poindexter mission to Tehran clearly also sent the wrong signals to the Iranians.

Yet, the dilemma created by kidnapping and hostage-taking is a real one, and if -- a big if, of course -- the mission had resulted in the release of the remaining hostages, President Reagan would have been a hero. But when such an endeavor fails, then one does what Franklin D. Roosevelt was particularly good at: make sure that the news is leaked by the president (or, in a business, the chief executive officer), and in a form in which it deflects blame to someone who is sympathetic. But above all one makes sure that there is no secret -- for the only secret no one pays any attention to (as Edgar Allen Poe showed 150 years ago in "The Purloined Letter") is something that is out in the open.

These are elementary lessons, and obvious ones. But it is not only the politicians in Washington who seem not to know them. There are far too many chief executives in American business who make the same mistakes. Let's hope that they will learn the management lessons of Irangate.

Mr. Drucker is a professor of social sciences at the Claremont Graduate School in California.

By PETER F. DRUCKER
November 15, 2005; Page B2

Peter F. Drucker died on Friday. The following article ran in The Wall Street Journal on July 25, 1989.

More and more people working in and for organizations will actually be on the payroll of an independent outside contractor. Businesses, hospitals, schools, governments, labor unions -- all kinds of organizations, large and small -- are increasingly "unbundling" clerical, maintenance and support work.

Of course, the trend is not altogether new. A great many American hospitals -- and European and Japanese hospitals as well -- now farm out maintenance and patient feeding; 40 years ago none did. "Temporary help" firms go back more than 30 years; but while in the beginning they handled file clerks and typists, they now provide computer programmers, accountants, engineers, nurses and even plant managers. Cities farm out "waste management" (once known as street cleaning and garbage disposal); even prisons are being run by private contractors. . .

Support work is rapidly becoming capital-intensive. In many manufacturing companies, the investment in information technology for each office employee now equals the investment in machinery for each production worker. Yet the productivity of clerical, maintenance and support work is dismally low, and is improving only at snail's pace, if at all. Unbundling will not by itself make this work more productive. But without it the productivity of clerical, maintenance and support work is unlikely to be tackled seriously.

In-house service and support activities are de facto monopolies. They have little incentive to improve their productivity. There is, after all, no competition. In fact, they have considerable disincentive to improve their productivity. In the typical organization, business or government, the standard and prestige of an activity is judged by its size and budget -- particularly in the case of activities that, like clerical, maintenance and support work, do not make a direct and measurable contribution to the bottom line. To improve the productivity of such an activity is thus hardly the way to advancement and success.

When in-house support staff are criticized for doing a poor job, their managers are likely to respond by hiring more people. An outside contractor knows that he will be tossed out and replaced by a better-performing competitor unless he improves quality and cuts costs.

The people running in-house support services are also unlikely to do the hard, innovative and often costly work that is required to make service work productive. Systematic innovation in service work is as desperately needed as it was in machine in the 50 years between Frederick Winslow Taylor in the 1870s and Henry Ford in the 1920s. Each task, each job, has to be analyzed and then reconfigured. Practically every tool has to be re-designed. . . .

The most important reason for unbundling the organization, however, is one that economists and engineers are likely to dismiss as "intangible": The productivity of support work is not likely to go up until it is possible to be promoted into senior management for doing a good job at it. And that will happen in support work only when such work is done by separate, free-standing enterprises. Until then, ambitious and able people will not go into support work; and if they find themselves in it, will soon get out of it.

It is hardly coincidental that the productivity decline in American factories set in as soon as finance and marketing were taking over from manufacturing in the early '60s as the main avenues of advancement into senior management. Nor is it coincidence that stock brokers have been plagued by recurrent "back office" crises despite steadily increasing employment and increasing investment in clerical and support work. Until very recently even the head of the back office (though responsible for half the firm's expenses), was at best a "titular" partner. Promotions, bonuses, but equally the time available on the part of top management were reserved by and large for traders, analysts and sales people.

They are "we"; the back office is "they." And one explanation why non-instructional costs in colleges and universities have risen twice as fast as instructional ones since World War II -- to the point where they now account for almost two-fifths of the total bill -- is surely that the people who run the dorms or the business office don't have Ph.D.s and are therefore non-persons in the value system of academia.

Forty years ago, service and support costs accounted for no more than 10% or 15% of total costs. So long as they were so marginal, their low productivity did not matter. Now that they are more likely to take 40 cents out of every dollar they can no longer be brushed aside. But value systems are unlikely to change. The business of the college, after all, is not to feed kids; it is teaching and research.

However, if clerical, maintenance and support work is done by an outside independent contractor it can offer opportunities, respect and visibility. As employees of a college, managers of student dining will never be anything but subordinates. In an independent catering company they can rise to be vice president in charge of feeding the students in a dozen schools; they might even become CEOs of their firms. If they have a problem there is a knowledgeable person in their own firm to get help from. If they discover how to do the job better or how to improve the equipment they are welcomed and listened to. The same is true in the independent firm that takes over customer accounting in the mutual-fund company.

In one large hospital-maintenance company, some of the women who started 12 or 15 years ago pushing vacuum cleaners are now division heads or vice presidents and own substantial blocks of company stock. As hospital employees, most of them would still be pushing vacuum cleaners.

Of course there is a price for unbundling. If large numbers of people cease to be employees of the organization for which they actually work, there are bound to be substantial social repercussions. And yet there is so far no other option in sight for giving us a chance to tackle what is fast becoming a central productivity problem of developed societies.

Japan: New Strategies for a New Reality

(This article originally appeared in The Wall Street Journal on Oct. 2, 1991)

Quietly, and with a minimum of discussion, the leading Japanese companies are moving to new business strategies. They are embracing two radically new theories: To do blue-collar manufacturing work in Japan is a gross misallocation of resources that weakens both the company and the national economy. And leadership throughout the developed world no longer rests on financial control or traditional cost advantages. It rests on control of brain power.

These companies are also fast restructuring their organizations on the assumption that the winner in a competitive world economy is going to be the firm that best organizes the systematic abandonment of its own products. And they are moving from Total Quality Management toward Zero-Defects Management based on drastically different principles and methods.

The Japanese now hold about 30% of the U.S. automobile market and expect to increase this share substantially in the next few years. Yet they also expect to stop exporting Japanese-made cars to the American market within the next three to five years; by 1995 or so, most Japanese marques sold in the U.S. should be manufactured in North American plants.

Similarly, the Japanese expect to have something like one-third of the automobile market of the European Economic Community by the year 2000 (whatever their present promises to the EC to the contrary), but again without exporting many cars from Japan. And Japanese multinationals -- Toyota, Honda, Sony, Matsushita, Fujitsu, the ceramics leader Kyocera, and the Mitsubishi companies -- are pouring staggering amounts of money into manufacturing plants in developing countries. They are in Tijuana on the U.S.-Mexican border, throughout South America, in Southern Europe, and in Southeast Asia.

The standard explanations for moving manufacturing out of Japan are "foreign protectionism" and "Japan's growing labor shortage." Both explanations are legitimate, but they are also smoke screens. The real reason is the growing conviction among Japan's business leaders and influential bureaucrats that manufacturing work does not belong in a developed country such as Japan.

Before youngsters can go to work on the assembly line, my Japanese friends say again and again, Japan pours $100,000 in school expenses into them. And then they have to get a middle-class income, lifetime security, a pension and health care. In Bangkok or in Tijuana, youngsters require very little capital investment in their educations; and they are "middle class" if paid a 10th the wages of the U.S. or Japan. Yet their productivity after two or three years of training is as high in Tijuana or in Bangkok as it is in Nagoya or Detroit. When you figure the enormous social capital invested in them, my friends say, the return that blue-collar workers make to society in developed countries is at most 1% or 2%; in Latin America or Indonesia, it's 20 times that.

Whenever I then argue that a country is highly vulnerable without a strong manufacturing base, they respond that the supply of young people in the developing world will be so large in the next 30 years that it's absurd to worry about the "manufacturing base," the way Americans do. Indeed it's my friends' social responsibility to Japan, they say, to make sure that as few as possible of its high-investment, high-cost young people are being misused for low-yield manufacturing work.

Instead, the new Japanese strategies call for total control of what now matters. To be competitive, the argument goes, Japan requires leadership in technology, marketing and management, and firm control of what my Japanese friends are beginning to call "brain capital."

The Japanese are willing to pay large sums to gain access to knowledge -- through a minority participation in a Silicon Valley computer specialist; through similar investments in U.S. and European pharmaceutical or genetics entrepreneurships; above all, through financing research in Western (mainly U.S.) universities. The direct financial return is usually zero. But the Japanese are paying not for dividends but access to the knowledge their partners will produce, and control over it -- or at least priority in using it.

Increasingly Japanese companies employ foreigners in their international operations, both as professionals and as executives. The large Japanese auto makers now all have design studios in Southern California and Westerners running their international marketing. But the use of the knowledge these foreigners produce is "proprietary" and tightly held within the Japanese management team. And while in the past some Japanese companies granted licenses on their knowledge to Western companies -- e.g., on some Japanese-developed cardiac drugs -- they are now revoking or not renewing them.

Every major Japanese industrial group now has its own research institute, whose main function is to bring to the group awareness of any important new knowledge -- in technology, in management and organization, in marketing, in finance, in training -- developed world-wide. On my last trip to Japan, a few months ago, I spoke at the 20th anniversary of one of these think tanks, that of the Mitsubishi Group. At lunch after my talk, one of the most respected elders of the Mitsubishi clan said to me: "In another 20 years the entire Mitsubishi Group will be organized around this research institute."

Everybody now knows that the Japanese can bring out a new product in half the time it takes their American competitors and in one-third the time it takes the Europeans. And everybody also knows that major U.S. companies are reorganizing their research and development work on the Japanese model, along cross-functional lines. But the Japanese are already moving to the next stage.

They are reorganizing R&D so that it simultaneously produces three new products with the effort traditionally needed to produce one. And they do this by starting out with a deadline for abandoning today's new product on the very day it is first sold. "The faster we can abandon today's new product, the stronger and the more profitable we'll be" is the new motto.

To most Western businessmen, this is madness. They believe that a product becomes more profitable the longer its product life -- for then the money spent on developing it has been written off. But "writing off" to the Japanese is useful to cut taxes but otherwise self-delusion.

Money spent on developing a product or a process is not "investment" to the Japanese; it is "sunk cost." But the main reason the leading Japanese businesses are now shifting the life cycle of their products is their conviction that the only alternative is for a competitor to do so -- and then the competitor will have not only the profits but the market.

My Japanese friends acknowledge that some Western companies -- 3M, for example -- have long operated on the policy that 70% of their sales five years hence will have to come from products that do not exist today. But these companies rely on a spontaneous upswelling of entrepreneurship from within.

By deciding in advance that they will abandon a new product within a given period of time, the Japanese force themselves to go to work immediately on replacing it, and to do so on three tracks:

One track ("kaizen") is organized work on improvement of the product with specific goals and deadlines -- e.g., a 10% reduction in cost within 15 months and/or a 10% improvement in reliability within the same time, and/or a 15% increase in performance characteristics -- and enough in any event to result in a truly different product. The second track is "leaping" -- developing a new product out of the old. The best example is still the earliest one: Sony's development of the Walkman out of the newly developed portable tape recorder. And finally there is genuine innovation.

Increasingly, the leading Japanese companies organize themselves so that all three tracks are pursued simultaneously and under the direction of the same crossfunctional team. The idea is to produce three new products to replace each present product, with the same investment of time and money -- with one of the three then becoming the new market leader and producing the "innovator's profit."

Finally, the leading Japanese companies are moving from Total Quality Management to Zero Defects Management. "We can't use TQM," one of the top manufacturing people at Toyota recently said. "At its very best -- and no one has reached that yet -- it cuts defects to 10%. But we turn out four million cars, and a 10% defect rate means that 400,000 Toyota buyers get a 100% defective car. But Zero-Defects Management is now possible and actually not too difficult."

By PETER F. DRUCKER
November 15, 2005

(This article originally appeared in The Wall Street Journal on Dec. 3, 1992)

Executives have become computer-literate. The younger ones, especially, know more about the way the computer works than they know about the mechanics of the automobile or the telephone. But not many executives are information-literate. They know how to get data. But most still have to learn how to use data.

Few executives yet know how to ask: What information do I need to do my job? When do I need it? In what form? And from whom should I be getting it? Fewer still ask: What new tasks can I tackle now that I get all these data? Which old tasks should I abandon? Which tasks should I do differently? Practically no one asks: What information do I owe? To whom? When? In what form?

A "database," no matter how copious, is not information. It is information's ore. For raw material to become information, it must be organized for a task, directed toward specific performance, applied to a decision. Raw material cannot do that itself. Nor can information specialists. They can cajole their customers, the data users. They can advise, demonstrate, teach. But they can no more manage data for users than a personnel department can take over the management of the people who work with an executive.

Information specialists are toolmakers. The data users, whether executive or professional, have to decide what information to use, what to use it for and how to use it. They have to make themselves information-literate. This is the first challenge facing information users now that executives have become computer-literate.

But the organization also has to become information-literate. It also needs to learn to ask: What information do we need in this company? When do we need it? In what form? And where do we get it? So far, such questions are being asked primarily by the military, and even there mainly for tactical, day-to-day decisions. In business such questions have been asked only by a few multinationals, foremost among them the Anglo-Dutch Unilever, a few oil companies such as Shell, and the large Japanese trading companies.

The moment these questions are asked, it becomes clear that the information a business most depends on is available, if at all, only in primitive and disorganized form. For what a business needs the most for its decisions -- especially its strategic ones -- are data about what goes on outside of it. It is only outside the business where there are results, opportunities and threats.

So far, the only data from the outside that have been integrated into most companies' information systems and into their decision-making process are day-to-day market data: what existing customers buy, where they buy, how they buy. Few businesses have tried to get information about their noncustomers, let alone have integrated such information into their databases. Yet no matter how powerful a company is in its industry or market, non-customers almost always outnumber customers.

American department stores had a very large customer base, perhaps 30% of the middle-class market, and they had far more information about their own customers than any other industry. Yet their failure to pay attention to the 70% who were not customers largely explains why they are today in a severe crisis. Their non-customers increasingly were the young affluent, double-earner families who were the growth market of the 1980s.

The commercial banks, for all their copious statistics about their customers, similarly did not realize until very late that more and more of their potential customers had become non-customers. Many had turned to commercial paper to finance themselves instead of borrowing from the banks.

When it comes to non-market information-demographics; the behavior and plans of actual and potential competitors; technology; economics; the shifts signaling foreign-exchange fluctuations to come and capital movements -- there are either no data at all or only the broadest of generalizations. Few attempts have been made to think through the bearing that such information has on the company's decisions. How to obtain these data; how to test them; how to put them together with the existing information system to make them effective in a company's decision process-this is the second major challenge facing information users today.

It needs to be tackled soon. Companies today rely for their decisions either on inside data such as costs or on untested assumptions about the outside. In either case they are trying to fly on one wing.

Finally, the most difficult of the new challenges: We will have to bring together the two information systems that businesses now run side by side -- computer-based data processing and the accounting system. At least we will have to make the two compatible.

People usually consider accounting to be "financial." But that is valid only for the part, going back 700 years, that deals with assets, liabilities and cash flows; it is only a small part of modern accounting. Most of accounting deals with operations rather than with finance, and for operational accounting money is simply a notation and the language in which to express nonmonetary events. Indeed, accounting is being shaken to its very roots by reform movements aimed at moving it away from being financial and toward becoming operational.

There is the new "transactional" accounting that attempts to relate operations to their expected results. There are attempts to change asset values from historical cost to estimates of expected future returns. Accounting has become the most intellectually challenging area in the field of management, and the most turbulent one. All these new accounting theories aim at turning accounting data into information for management decision-making. In other words, they share the goals of computer-based data processing.

Today these two information systems operate in isolation from each other. They do not even compete, as a rule. In the business schools we keep the two apart with separate departments of accounting and of computer science, and separate degrees in each.

The practitioners have different backgrounds, different values, different career ladders. They work in different departments and for different bosses. There is a "chief information officer" for computer-based data processing, usually with a background in computer technology. Accounting typically reports to a "chief financial officer," often with a background in financing the company and in managing its money. Neither boss, in other words, is information-focused as a rule. The two systems increasingly overlap. They also increasingly come up with what look like conflicting -- or at least incompatible -- data about the same event; for the two look at the same event quite differently. Till now this has created little confusion. Companies tended to pay attention to what their accountants told them and to disregard the data of their information system, at least for top-management decisions. But this is changing as computer-literate executives are moving into decision-making positions.

One development can be considered highly probable: Managing money -- what we now call the "treasury function" -- will be divorced from accounting (that is, from its information component) and will be set up, staffed and run separately. How we will otherwise manage the two information systems is up for grabs. But that we will bring them together within the next 10 years, or at least sort out which system does what, can be predicted.

Computer people still are concerned with greater speed and bigger memories. But the challenges increasingly will be not technical, but to convert data into usable information that is actually being used.

Mr. Drucker is a professor of social sciences at the Claremont Graduate School in California.

By PETER F. DRUCKER
October 21, 2005

(This article originally appeared in The Wall Street Journal on Oct. 21, 1993)

The past few years have seen the downfall of one once-dominant business after another: General Motors, Sears and IBM, to name just a few. But in every case the main cause has been at least one of the five deadly business sins-avoidable mistakes that will harm the mightiest business.

The prime example of what this leads to is the near-collapse of Xerox in the 1970s. Having invented the copier -- and few products in industrial history have had greater success faster -- Xerox soon began to add feature after feature to the machine, each priced to yield the maximum profit margin and each driving up the machine's price. Xerox profits soared and so did the stock price. But the vast majority of consumers who need only a simple machine became increasingly ready to buy from a competitor. And when Japan's Canon brought out such a machine it immediately took over the U.S. market -- Xerox barely survived.

GM's troubles -- and those of the entire U.S. automobile industry -- are, in large measure, also the result of the fixation on profit margin. By 1970, the Volkswagen Beetle had taken almost 10% of the American market, showing there was U.S. demand for a small and fuel-efficient car. A few years later, after the first "oil crisis," that market had become very large and was growing fast. Yet the U.S. auto makers were quite content for many years to leave it to the Japanese, as small-car profit margins appeared to be so much lower than those for big cars.

This soon turned out to be a delusion -- it usually is. GM, Chrysler and Ford increasingly had to subsidize their big-car buyers with discounts, rebates, cash bonuses. In the end, the Big Three probably gave away more in subsidies than it would have cost them to develop a competitive (and profitable) small car.

The lesson: The worship of premium pricing always creates a market for the competitor. And high profit margins do not equal maximum profits. Total profit is profit margin multiplied by turnover. Maximum profit is thus obtained by the profit margin that yields the largest total profit flow, and that is usually the profit margin that produces optimum market standing.

This, too, creates risk-free opportunity for the competition. It is the wrong policy even if the product has patent protection. Given enough incentive, a potential competitor will find a way around the strongest patent.

The Japanese have the world's fax-machine market today because the Americans who invented the machine, developed it and first produced it charged what the market would bear -- the highest price they could get. The Japanese, however, priced the machine in the U.S. two or three years down the learning curve -- a good 40% lower. They had the market virtually overnight; only one small U.S. fax-machine manufacturer, which makes a specialty product in tiny quantities, survives.

By contrast, DuPont has remained the world's largest producer of synthetic fibers because, in the mid-1940s, it offered its new and patented nylon on the world market for the price at which it would have to be sold five years hence to maintain itself against competition. This was some two-fifths lower than the price DuPont could then have gotten from the manufacturers of women's hosiery and underwear.

DuPont's move delayed competition by five or six years. But it also immediately created a market for nylon that nobody at the company had even thought about (for example, in automobile tires), and this market soon became both bigger and more profitable than the women's wear market could ever have been. This strategy thus produced a much larger total profit for DuPont than charging what the traffic would bear could have done. And DuPont kept the markets when the competitors did appear, after five or six years.

The only thing that works is price-driven costing. Most American and practically all European companies arrive at their prices by adding up costs and then putting a profit margin on top. And then, as soon as they have introduced the product, they have to start cutting the price, have to redesign the product at enormous expense, have to take losses -- and, often, have to drop a perfectly good product because it is priced incorrectly. Their argument? "We have to recover our costs and make a profit."

This is true but irrelevant: Customers do not see it as their job to ensure manufacturers a profit. The only sound way to price is to start out with what the market is willing to pay -- and thus, it must be assumed, what the competition will charge and design to that price specification.

Cost-driven pricing is the reason there is no American consumer-electronics industry anymore. It had the technology and the products. But it operated on cost-led pricing -- and the Japanese practiced price-led costing. Cost-led pricing also nearly destroyed the U.S. machine-tool industry and gave the Japanese, who again used price-led costing, their leadership in the world market. The U.S. industry's recent (and still quite modest) comeback is the result of the U.S. industry's finally having switched to price-led costing.

If Toyota and Nissan succeed in pushing the German luxury auto makers out of the U.S. market, it will be the result of their using price-led costing. To be sure, to start out with price and then whittle down costs is more work initially. But in the end it is much less work than to start out wrong and then spend loss-making years bringing costs into line -- let alone far cheaper than losing a market.

It is what derailed IBM. IBM's downfall was paradoxically caused by unique success: IBM's catching up, almost overnight, when Apple brought out the first PC in the mid-1970s. This feat actually contradicts everything everybody now says about the company's "stodginess" and its "bureaucracy." But then when IBM had gained leadership in the new PC market, it subordinated this new and growing business to the old cash cow, the mainframe computer.

Top management practically forbade the PC people to sell to potential mainframe customers. This did not help the mainframe business -- it never does. But it stunted the PC business. All it did was create sales for the IBM "clones" and thereby guarantee that IBM would not reap the fruits of its achievement.

This is actually the second time that IBM has committed this sin. Forty years ago, when IBM first had a computer, top management decreed that it must not be offered where it might interfere with the possible sale of punch cards, then the company's cash cow. Then, the company was saved by the Justice Department's bringing an antitrust suit against IBM's domination of the punch-card market, which forced management to abandon the cards -- and saved the fledgling computer. The second time providence did not come to IBM's rescue, however.

For many years I have been asking new clients to tell me who their best-performing people are. And then I ask: "What are they assigned to?" Almost without exception, the performers are assigned to problems -- to the old business that is sinking faster than had been forecast; to the old product that is being outflanked by a competitor's new offering; to the old technology -- e.g., analog switches, when the market has already switched to digital. Then I ask: "And who takes care of the opportunities?" Almost invariably, the opportunities are left to fend for themselves.

All one can get by "problem-solving" is damage-containment. Only opportunities produce results and growth. And opportunities are actually every bit as difficult and demanding as problems are. First draw up a list of the opportunities facing the business and make sure that each is adequately staffed (and adequately supported). Only then should you draw up a list of the problems and worry about staffing them.

I suspect that Sears has been doing the opposite -- starving the opportunities and feeding the problems -- in its retail business these past few years. This is also, I suspect, what is being done by the major European companies that have steadily been losing ground on the world market (e.g., Siemens in Germany). The right thing to do has been demonstrated by GE, with its policy to get rid of all businesses -- even profitable ones -- that do not offer long-range growth and the opportunity for the company to be number one or number two world-wide. And then GE places its best-performing people in the opportunity businesses, and pushes and pushes.

Everything I have been saying in this article has been known for generations. Everything has been amply proved by decades of experience. There is thus no excuse for managements to indulge in the five deadly sins. They are temptations that must be resisted.

Mr. Drucker is a professor of social sciences at the Claremont Graduate School in California.

How to Save the Family Business

(This article originally appeared in The Wall Street Journal on Aug. 19, 1994)

Management books and courses deal almost entirely with the publicly owned and professionally managed company. Yet the majority of businesses everywhere -- including the U.S. -- are owned and run by family members. They even include some of the world's largest companies.

If the family-managed business is to survive, let alone prosper, it must stringently observe the following rules:

In a family-managed company, relatives are always "top management," whatever their official job or title. On Saturday evenings they sit at the boss's dinner table and call him "Dad" or "Uncle." Mediocre or lazy family members are therefore -- rightly -- resented by non-family co-workers, and respect for top management and the business as a whole rapidly erodes. Capable non-family people will simply not stay, and the ones who do soon become courtiers and toadies. It is much cheaper to pay a lazy nephew not to come to work than to keep him on the payroll.

DuPont, controlled and managed by family members from its founding in 1802 until professional management took over in the mid-1970s, grew into the world's largest chemical company. It prospered as a family business because it faced up to this problem. All male duPonts were entitled to an entry-level job in the company, but five or six years later their performance was carefully reviewed by four or five family seniors. If this review concluded that the young family member was not likely to be top management material 10 years later, he was eased out.

The demands for knowledge and expertise -- whether in manufacturing, marketing, finance, research, or human resource management -- have become far too great to be satisfied by family members alone, no matter how competent they may be. Once hired, these non-family professionals have to have "full citizenship" in the firm. Otherwise they simply will not stay.

The first people, perhaps, to realize this were the Rothschilds, who -- two centuries after a coin dealer began to send out his sons to establish banks in Europe's capitals -- are still among the world's premier private bankers. Until World War II, they admitted only family members to partnerships in any of their banks. But during the 19th and early 20th centuries, whenever a non-family general manager reached age 45, he was given a huge severance payment and set up in his own banking firm.

The duPonts, around 1920, found an even better method. While not appointed to top management jobs, non-family members in key positions were given "phantom stock" -- participation in profits and capital gains without diluting family ownership and control, a still popular solution.

Typically, this is either the financial executive or the head of research -- the two positions in which technical qualifications are most important. But I also know successful companies in which this outsider heads marketing or personnel. And while the CEO of Levi Strauss is a family member and a descendant of the founder of this 144-year-old company, the president and chief operating officer is a non-family professional. Such an outsider can be objective and does not have to worry about the reactions of relatives, whether in the business or not.

I met my first "outsider-insider" almost 60 years ago, the chief financial officer of a very large family-managed business in Britain. Though he was on the closest terms of friendship with his family-member colleagues, he never attended a family party or family wedding. He did not even play golf where the family played. "The only family affairs I attend," he once said to me, "are funerals. But I chair the monthly top-management meeting."

Even the family-managed business that observes the first three rules tends to get into trouble -- and often breaks up -- over management succession. It is then that what the business needs and what family members want collide head on.

Typical are the two brothers who built a successful manufacturing business, working together for 25 years. Now reaching retirement age, each pushes his own son to head the company. The brothers become adversaries and eventually decide to sell out. Or take the case of the widow of one of the founders of a company. To save her daughter's marriage, she pushes her moderately endowed son-in-law as the next CEO and successor to her aging brother-in-law. Anyone who has worked with family-managed companies could add to this list.

There is only one solution: Entrust the settlement of the succession issue to an outsider. This role was played successfully by a CPA who was the outside auditor of a medium-sized food retailer since its founding 20 years earlier. A professor who for 10 years had been scientific adviser to a fair-sized high-tech company saved both it and its parent corporation by persuading two brothers and two cousins -- and the wives of all four -- to accept the ablest member of the next generation as the future CEO.

But it is usually much too late to bring in the outsider when the succession problem becomes acute. Family members have taken positions and have committed themselves to this or that candidate. Moreover, succession planning needs to be integrated with financial and tax planning. Family-managed businesses, therefore, should try to find the right outside arbitrator long before the decision itself has to be made.

Sixth- or seventh-generation family businesses like Levi Strauss and the Rothschild banks are quite rare. The biggest family-managed business today, Italy's Fiat, is run by the third-generation of Agnellis, now in their 60s and 70s. Few people in the company, I am told, expect it to be family managed 20 years hence.

The fourth generation of a family owning a successful business is sufficiently well off, as a rule, for the ablest members to want to pursue their own interests and careers rather than dedicate themselves to the business. Also, by that time there are usually so many family members that ownership has become splintered. For the members of the fourth generation, their share in the company is no longer "ownership"; it has become an "investment." They will want to diversify rather than to keep all their financial eggs in the family-company basket, and thus want the company to be sold or to go public.

By contrast, maintaining the family company is usually the best course for the second or even third generation. Often it is the only course, as the business is not big enough to be sold or to go public. And it surely also is in the public interest. The economy needs entrepreneurship. The growth dynamics in the economy are shifting fast from the giant company toward the medium-sized one -- and that tends to be such an owner-controlled and owner-managed company.

Unfortunately, the family-managed business that survives the founder -- let alone one that still prospers under the third generation of family management -- is still the exception. Far too few of these businesses accept the one basic precept that underlies all four of the rules outlined here: Both the business and the family will survive and do well only if the family serves the business. Neither will do well if the business is run to serve the family.

Mr. Drucker is a professor of social sciences at the Claremont Graduate School in California.

November 15, 2005

By Peter F. Drucker, a professor of social science and management at the Claremont Graduate University and a former president of the Society for the History of Technology. He is author, most recently, of "Management Challenges for the 21st Century," just out from Harperbusiness.

(This article originally appeared in The Wall Street Journal on June 1, 1999)

The history of society in the West during the last millennium can -- without much oversimplification -- be summed up in one phrase: The Rise, Fall and Rise of Pluralism.

By the year 1000 the West -- that is, Europe north of the Mediterranean and west of Greek Orthodoxy -- had become a startlingly new and distinct civilization and society, much later dubbed feudalism. At its core was the world's first, and all but invincible, fighting machine: the heavily armored knight fighting on horseback. What made possible fighting on horseback, and with it the armored knight, was the stirrup, an invention that had originated in Central Asia sometime around the year 600. The entire Old World had accepted the stirrup long before 1000; everybody riding a horse anywhere in the Old World rode with a stirrup.

But every other Old World civilization -- Islam, India, China, Japan -- rejected what the stirrup made possible: fighting on horseback. And the reason these civilizations rejected it, despite its tremendous military superiority, was that the armored knight on horseback had to be an autonomous power center beyond the control of central government. To support a single one of these fighting machines -- the knight and his three to five horses and their attendants; the five or more squires (knights in training) necessitated by the profession's high casualty rate; the unspeakable expensive armor -- required the economic output of 100 peasant families, that is of some 500 people, about 50 times as many as were needed to support the best-equipped professional foot soldier, such as a Roman Legionnaire or a Japanese Samurai.

The knight exercised full political, economic and social control over the entire knightly enterprise, the fief. This, in short order, induced every other unit in medieval Western society -- secular or religious -- to become an autonomous power center, paying lip service to a central authority such as the pope or a king, but certainly nothing else such as taxes. These separate power centers included barons and counts, bishops and the enormously wealthy monasteries, free cities and craft guilds and, a few decades later, the early universities and countless trading monopolies.

By 1066, when William the Conqueror's victory brought feudalism to England, the West had become totally pluralist. And every group tried constantly to gain more autonomy and more power: political and social control of its members and of access to the privileges membership conferred, its own judiciary, its own fighting force, the right to coin its own money and so on. By 1200 these "special interests" had all but taken over. Every one of them pursued only its goals and was concerned only with its own aggrandizement, wealth and power. No one was concerned with the common good; and the capacity to make societywide policy was all but gone.

The reaction began in the 13th century in the religious sphere, when -- feebly at first -- the papacy tried, at two councils in Lyon, France, to reassert control over bishops and monasteries. It finally established that control at the Council of Trent in mid-16th century, by which time the pope and the Catholic Church had lost both England and Northern Europe to Protestantism. In the secular sphere, the counterattack against pluralism began 100 years later. The Long Bow -- a Welsh invention perfected by the English -- had by 1350 destroyed the knight's superiority on the battlefield. A few years later the cannon -- adapting to military uses the powder the Chinese had invented for their fireworks -- brought down the hitherto impregnable knight's castle.

From then on, for more than 500 years, Western history is the history of the advance of the national state as the sovereign, that is as the only power center in society. The process was very slow; the resistance of the entrenched "special interests" was enormous. It was not until 1648, for instance -- in the Treaty of Westphalia, which ended Europe's Thirty Years War -- that private armies were abolished, with the nation-state acquiring a monopoly on maintaining armies and on fighting wars. But the process was steady. Step by step, pluralist institutions lost their autonomy. By the end of the Napoleonic Wars -- or shortly thereafter -- the sovereign national state had triumphed everywhere in Europe. Even the clergy in European countries had become civil servants, controlled by the state, paid by the state and subject to the sovereign, whether king or parliament.

The one exception was the United States. Here pluralism survived -- the main reason being America's almost unique religious diversity. And even in the U.S., religiously grounded pluralism was deprived of power by the separation of church and state. It is no accident that in sharp contrast to Continental Europe, no denominationally based party or movement has ever attracted more than marginal political support in the U.S.

By the middle of the last century, social and political theorists, including Hegel and the liberal political philosophers of England and America, proclaimed proudly that pluralism was dead beyond redemption. And at that very moment it came back to life. The first organization that had to have substantial power and substantial autonomy was the new business enterprise as it first arose, practically without precedent, between 1860 and 1870. It was followed in rapid order by a horde of other new institutions, scores of them by now, each requiring substantial autonomy and exercising considerable social control: the labor union, the civil service with its lifetime tenure, the hospital, the university. Each of them, like the pluralist institutions of 800 years ago, is a "special interest." Each needs -- and fights for -- its autonomy.

Not one of them is concerned with the common good. Consider what John L. Lewis, the powerful labor leader, said when FDR asked him to call off a coal miners strike that threatened to cripple the war effort: "The president of the United States is paid to look after the interests of the nation; I am paid to look after the interest of the coal miners." That is only an especially blunt version of what the leaders of every one of today's "special interests" believe -- and what their constituents pay them for. As happened 800 years ago, this new pluralism threatens to destroy the capacity to make policy -- and with it social cohesion altogether -- in all developed countries.

But there is one essential difference between today's social pluralism and that of 800 years ago. Then, the pluralist institutions -- knights in armor, free cities, merchant guilds or "exempt" bishoprics -- were based on property and power. Today's autonomous organization -- business enterprise, labor union, university, hospital -- is based on function. It derives its capacity to perform squarely from its narrow focus on its single function. The one major attempt to restore the power monopoly of the sovereign state, Stalin's Russia, collapsed primarily because none of its institutions, being deprived of the needed autonomy, could or did function -- not even, it seems, the military, let alone businesses or hospitals.

Only yesterday most of the tasks today's organizations discharge were supposed to be done by the family. The family educated its members. It took care of the old and the sick. It found jobs for members who needed it. And not one of these jobs was actually done, as even the most cursory look at 19th-century family letters or family histories shows. These tasks can be accomplished only by a truly autonomous institution, independent from either the community or the state.

The challenge of the next millennium, or rather of the next century (we won't have a thousand years), is to preserve the autonomy of our institutions -- and in some cases, like transnational business, autonomy over and beyond national sovereignties -- while at the same time restoring the unity of the polity that we have all but lost, at least in peacetime. We can only hope this can be done -- but so far no one yet knows how to do it. We do know that it will require something that is even less precedented than today's pluralism: the willingness and ability of each of today's institutions to maintain the focus on the narrow and specific function that gives them the capacity to perform, and yet the willingness and ability to work together and with political authority for the common good.

This is the enormous challenge the second millennium in the developed countries is bequeathing the third millennium.

By PETER F. DRUCKER
December 12, 2005 7:59 a.m.

(This article originally appeared in The Wall Street Journal on Dec. 30, 2004)

CEOs have ultimate responsibility for the work of everybody else in their institution. But they also have work of their own -- and the study of management has so far paid little attention to it. It is the same work, whether the organization is a business enterprise, a nonprofit, a church, a school or university, a government agency; and whether it is large or small, world-wide or purely local. And it is work only CEOs can do, but also work which CEOs must do.

In any organization, regardless of its mission, the CEO is the link between the Inside, i.e., "the organization," and the Outside -- society, the economy, technology, markets, customers, the media, public opinion. Inside, there are only costs. Results are only on the outside. Indeed the modern organization (beginning with the Jesuit Order in 1536) was expressly created to have results on the outside, that is, to make a difference in its society or its economy.

The CEO's Tasks

To define the meaningful Outside of the organization is the CEO's first task. The definition is anything but easy, let alone obvious. For a particular bank, for instance, is the meaningful Outside the local market for commercial loans? Is it the national market for mutual funds? Or is it major industrial companies and their short-term credit needs? All three of these "outsides" deal with money and credit. And one cannot tell from the bank's published accounts, e.g., its balance sheet, on which of these "outsides" it concentrates. Each of them is a different business and requires a different organization, different people, different competencies and different definitions of results. Even the very biggest bank is unlikely to be a leader in all these "outsides." For which of these to concentrate on is a highly risky decision and one very hard to change or reverse. Only the CEO can make it. But also the CEO must make it. It is the first task of the CEO.

The second specific task of the CEO is to think through what information regarding the Outside is meaningful and needed for the organization, and then to work on getting it in usable form. Organized information has grown tremendously in the last hundred years. But the growth has been mainly in Inside information, e.g., in accounting. The computer has further accentuated this inside focus. As regards the Outside there has been an enormous growth in data -- beginning with Herbert Hoover in the 1920s (to whose work as secretary of commerce we largely owe the data on GNP, on productivity, and on standard of living). But few CEOs, whether in business, in nonprofits, or in government agencies have yet organized these data into systematic information for their own work.

One example: Every major maker of branded consumer goods knows that few things are as important as the values and the behavior of that great majority of consumers who are not buyers of the company's products, and especially information on major changes in the non-customers' values and habits. The data are largely available. But few consumer-goods manufacturers have so far converted them into organized information on which to base their decisions (one well-publicized exception is the Shell Petroleum group of companies). Again it is primarily the CEO who needs this information and whose work it is to organize getting it.

The definition of the institution's meaningful Outside, and of the information it needs, makes it possible to answer the key questions: "What is our business? What should it be? What should it not be?" The answers to these questions establish the boundaries within which an institution operates. And they are the foundation for the specific work of the CEO. Particularly:

This is particularly important, particularly critical, and particularly risky for institutions that lack the discipline of the "bottom line," that is, for non-businesses. And non-businesses constitute the great majority of organizations in every developed society. But even for businesses, the bottom line is not by itself adequate as a definition of results -- the same bottom line may have very differing meanings according to how an institution defines "meaningful results." To decide what results a given bottom line represents is a major job of the executive. It is not based on "facts" -- there are no facts about the future. It is not made well by intuition. It is a judgment. Again, only the CEO can make this judgment, but also the CEO must make it.

This judgment is so risky that all pre-modern economies tried to avoid making it. In fact, the Modern Enterprise -- the one major institutional innovation of the Modern Economy -- was in large part created as the systematic risk-taker and risk-sharer, thereby enabling the individual strictly to limit the personal risk of investing in future expectations.

By thus making possible these time decisions in very large numbers and on an enormous scale, the Enterprise can be said to be the one invention that created the Modern Economy -- far more so than any other invention, whether material or conceptual. With the invention of the Enterprise the Executive came into being as a distinct role and function, with one of his or her major tasks being the making of the decision between short-term yields and deferred expectations. Making this decision requires a good deal of very hard work on the part of the CEO. (Both Machiavelli's "Prince" and Shakespeare's "The Merchant of Venice," two Renaissance masterpieces the background of which is the emergence of the modern economy, are built around the challenge of this decision).

This too is a high-risk decision. That U.S. business executives, for instance in the '50s and '60s, decided (in many cases quite deliberately) that what was going on in Japan was not particularly meaningful information for them and their companies, explains in large part why the Japanese export push caught them so unawares and unprepared.

It is information about the Outside that needs the most work. For far too many institutions -- and not only businesses -- define Outside in large part as their direct competitors. Toy makers tend to define the Outside as their toy-maker competitors; a hospital as the two competing hospitals in the same suburb, and so on. But the most meaningful competitors for the toy maker are not other toy makers but other claimants on potential customers' disposable dollars. The most meaningful information about the toy maker's Outside is therefore what value the toy presents to the potential buyer. (Customer Research, in other words, may be more important than market research -- but also far more difficult).

In any but a dying organization there are always far more tasks than there are available resources. But results are obtained only by concentration of resources, especially by concentration of the scarcest and most valuable resource, people with proven performance capacity.

There is constant pressure on every CEO to do a little bit of everything. That makes everybody happy but guarantees that there are no results. The CEO's most critical job -- also the CEO's most difficult job -- is to say "No." To do so is not just a matter of will power. It requires an inordinate amount of study and work -- work which only the CEO can do but again work which the CEO must do.

Every organization says, "We have better people." But this is, of course, impossible. Once an organization grows beyond a handful of people, it is subject to statistics' most ruthless law: the law of the great number, which dictates that there is only "normal distribution." What differentiates organizations is whether they can make common people perform uncommon things -- and that depends primarily on whether people are being placed where their strengths can perform or whether, as is only too common, they are being placed for the absence of weakness. And nothing requires as much hard work as "people decisions." The only thing that requires even more time (and even more work) than putting people into a job is unmaking a wrong people decision. And again, critical people decisions only the CEO can make.

No Real Counterpart

The CEO is an American invention -- designed first by Alexander Hamilton in the Constitution in the earliest years of the Republic, and then transferred into the private sector in the form of Hamilton's own Bank of New York and of the Second Bank of the United States in Philadelphia. There is no real counterpart to the CEO in the management and organization of any other country. The German "Sprecher des Vorstands," the French "Administrateur Delegue," the British "Chairman," or the Japanese "President" are all quite different in their powers and in the limitations thereon.

The American CEO is, however, fast becoming a major U.S. export. Tony Blair and Gerhard Schroeder are trying to make over their countries' top political job in the image of the U.S. president. In business the CEO model is being adopted even faster all over the world, e.g., in the recent restructuring of Europe's largest industrial complex, the German Siemens Group. And what makes the American CEO unique is that he or she has distinct and specific work.

Mr. Drucker is the author, most recently, of "The Daily Drucker," just out from HarperBusiness. This is the first in a three-