Book: Practice of Management

This briefing document summarizes the main themes and important ideas presented in Peter F. Drucker’s “The Practice of Management.” The book lays a foundational understanding of management principles applicable across various organizational sizes and industries.

I. The Nature and Purpose of a Business

• Shifting View of Resources: Drucker contrasts the historical view of resources as limitations with the modern Western belief that they are opportunities to advance the human spirit. He argues this modern view is distinct from materialism.
• “Prior to, and outside of, the modern West, resources have always been considered a limit to man’s activities, a restriction on his control over his environment—rather than an opportunity and a tool of his control over nature.”
• Primacy of Economic Performance in Management: While acknowledging the importance of societal impact, Drucker asserts that management’s primary responsibility is economic performance. This distinguishes it from other organizations like the military, where security takes precedence.
• “Similarly, management, while always taking into consideration the impact of its decisions on society, both within and without the enterprise, must always put economic performance first.”
• The Irrelevance of the Profit Motive: Drucker argues that focusing solely on the profit motive obscures the true function and purpose of a business. Profit is a result, not the driving force.
• “But it is irrelevant for an understanding of business behavior, including an understanding of profit and profitability, whether there is a profit motive or not. That Jim Smith is in business to make a profit concerns only him and the Recording Angel. It does not tell us what Jim Smith does and how he performs.”
• The Defining Purpose: To Create a Customer: Drucker states unequivocally that the sole valid purpose of a business is to create a customer. This perspective shifts the focus from the product or service itself to the needs and wants of the market.
• “If we want to know what a business is we have to start with its purpose. And its purpose must lie outside of the business itself. In fact, it must lie in society since a business enterprise is an organ of society. There is only one valid definition of business purpose: to create a customer.”
• The Customer Determines the Business: It is the customer’s perception of value, not the company’s self-perception, that defines what the business truly is and whether it will succeed.
• “What the business thinks it produces is not of first importance—especially not to the future of the business and to its success. What the customer thinks he is buying, what he considers “value,” is decisive—it determines what a business is, what it produces and whether it will prosper.”
• The Two Entrepreneurial Functions: Marketing and Innovation: To create a customer, every business must undertake marketing (understanding and reaching the customer) and innovation (creating new value for the customer).
• “Because it is its purpose to create a customer, any business enterprise has two—and only these two—basic functions: marketing and innovation. They are the entrepreneurial functions.”
• Outside-In Perspective: Understanding a business requires looking at it from the customer’s viewpoint, considering their wants, beliefs, and values.
• “What is our business is not determined by the producer but by the consumer. It is not defined by the company’s name, statutes or articles of incorporation but by the want the consumer satisfies when he buys a product or a service.”

II. Setting Objectives for Performance

• The Necessity of Objectives: Drucker emphasizes that managing a business effectively requires setting clear objectives. Without them, management operates without direction, relying on intuition which is insufficient in the modern industrial economy.
• “Managing a business cannot, in other words, depend on “intuition.” In fact, in the modern industrial economy with its long time-span between a decision and the ripening of its fruits, the intuitive manager is a luxury few companies, large or small, can afford.”
• Objectives as a Compass Bearing: Objectives provide direction but are not rigid timelines. Businesses must be flexible to adapt to changing circumstances while still striving towards their goals.
• “Of course, objectives are not a railroad time-table. They can be compared to the compass bearing by which a ship navigates.”
• Limitations of Current Measurements: Drucker notes that measurements in key business areas (beyond market standing) are often unreliable. Profitability measures are imprecise, and innovation and productivity are even harder to quantify.
• “Unfortunately the measurements available to us in the key areas of business enterprise are, by and large, even shakier than the I.Q.”
• Key Areas for Objectives: Drucker highlights several key areas where objectives are crucial for a business enterprise, including market standing, innovation, productivity, physical and financial resources, profitability, manager performance and development, worker performance and attitude, and public responsibility.
• Market Standing: Achieving a sufficient market share is vital to avoid becoming a marginal supplier vulnerable to market fluctuations.
• “A business that supplies less than a certain share of the market becomes a marginal supplier. Its pricing becomes dependent on the decisions of the larger suppliers.”
• Profitability: Profitability objectives must consider the time factor and should be stated as anticipated total profits discounted for present cash value, rather than just an annual rate of return.
• “First, as Joel Dean has pointed out, profitably must always include the time factor. Profitability as such is meaningless and misleading unless we know for how many years the profit can be expected.”
• The “Instrument Panel” of Management: Objectives in key areas act as essential indicators for guiding the business enterprise.
• “Objectives in the key areas are the “instrument panel” necessary to pilot the business enterprise.”
• The Importance of Anticipation: Effective objective setting requires the ability to anticipate future trends and developments.
• “However, an instrument panel is no better than the pilot’s ability to read and interpret it. In the case of management this means ability to anticipate the future.”
• Tools for Limiting Prediction Risks: Drucker discusses bedrock analysis, business cycle analysis, and trend analysis as tools to mitigate the risks associated with predicting the future when setting objectives.

III. The Structure of Management

• Decentralization as a Key Principle: Drucker contrasts Henry Ford’s centralized control with the decentralized structure of General Motors, highlighting the benefits of autonomy and responsibility at divisional levels.
• “By contrast Ford today is decentralized into fifteen autonomous divisions, each with its own complete management fully responsible for the performance and results of its business and with full authority to make all decisions to attain these results.”
• Forming Managerial Habits: A manager’s habits, vision, and values are largely shaped during their functional and specialized work. High standards of workmanship are essential.
• “A man’s habits as a manager, his vision and his values, therefore, will as a rule be formed while he does functional and specialized work. And it is essential that the functional specialist develop high standards of workmanship…”
• Levels of Management and Misdirection: Differences in concerns and functions at various management levels can lead to misdirection, as illustrated by “the mystery of the broken washroom door.”
• Setting Managers’ Objectives: Managers’ objectives should be defined by the contribution they need to make to the success of the larger unit they are part of, aiming upwards rather than downwards.
• “By definition, a manager is responsible for the contribution that his component makes to the larger unit above him and eventually to the enterprise. His performance aims upward rather than downward.”
• Manager Self-Setting of Objectives: Each manager should participate in developing their own objectives and the objectives of the higher unit, fostering a sense of responsibility and alignment. The “manager’s letter” is presented as a powerful tool for this.
• “This requires each manager to develop and set the objectives of his unit himself. Higher management must, of course, reserve the power to approve or disapprove these objectives.”
• The Importance of Self-Control: Management by objectives implies self-control. Managers should be measured by their ability to achieve agreed-upon objectives, making external control mechanisms less necessary and potentially demotivating.
• “Management by objectives and self-control may legitimately be called a “philosophy” of management. It rests on a concept of the job of management.”
• Designing Managerial Jobs: Managerial jobs should be determined by the tasks and contributions needed to achieve company objectives. Each job should have sufficient scope, authority, and responsibility, with a visible and measurable contribution to the overall results.
• “What managerial jobs are needed and what each of them is should always be determined by the activities that have to be performed, the contributions that have to be made to attain the company’s objectives.”
• The Manager and Their Superior: A Three-Dimensional Relationship: The relationship between higher and lower managers involves responsibilities upwards (contributing to the superior’s unit), towards the enterprise (analyzing tasks, organizing, developing people), and downwards (ensuring subordinates understand expectations, helping them achieve objectives). The downward relationship is best defined as “assistance.”
• “The relationship between higher and lower manager is not just the downward relationship expressed in the term “supervision.” Indeed, it is not even a two-way, up-and-down relationship. It has three dimensions…”
• Systematic Appraisal of Managers: Regular appraisal focusing on proven performance (what a person does) is crucial for making sound decisions about assignments, promotions, and development. Building on strengths is emphasized over focusing on weaknesses.
• “Appraisal should always be the direct responsibility of a man’s manager. It should always focus on proven performance.”
• “One cannot do anything with what one cannot do. One cannot achieve anything with what one does not do. One can only build on strength.”
• The Importance of Integrity in Management: A key quality for managers is integrity, particularly the ability to focus on people’s strengths rather than weaknesses.
• “A man should never be appointed to a managerial position if his vision focuses on people’s weaknesses rather than on their strengths.”
• Responsibilities of the Company President: Drucker outlines specific responsibilities unique to the company president, including long-range planning, defining company character, capital expenditure planning, and external relations.
• Assigning Responsibility for Long-Range Planning: Clearly assigned responsibility for long-range planning, objective setting, measurement development, and manager education is vital for a well-managed business.
• Developing People: Every manager has a responsibility to help their subordinates focus, direct, and productively apply their self-development efforts.
• “But every manager in a business has the opportunity to encourage individual self-development or to stifle it, to direct it or to misdirect it.”
• Organizing Activities and Jobs: Management involves analyzing, classifying, and grouping activities into manageable jobs and an appropriate organizational structure.
• “The first job of management is to think through and define the purpose and mission of the business.”
• Functional vs. Federal Decentralization: Drucker distinguishes between functional decentralization (grouping activities by function like manufacturing or marketing) and federal decentralization (creating autonomous units with their own markets and profit responsibility). The choice depends on the nature of the business and its activities.
• “There are basically two structural principles: federal decentralization and functional decentralization.”
• The Importance of a Distinct Market for Federal Units: For federal decentralization to be effective, each unit should ideally have its own distinct market or product.
• “To be able to contribute a profit to the company the unit must have a market of its own.”
• “Right of Nullification” in Federal Decentralization: In situations where federally decentralized units are interdependent, granting the right to buy or sell outside the company if better terms are available strengthens both units.
• Connecting Functional Units “In Series”: Functional units, unlike federal units, need to work together in a sequential manner, requiring clear areas of cooperation and some flexibility.
• Size and Management Structure: While the fundamental nature of business and management principles remain constant, the size of a business significantly impacts its management structure and requires different behaviors and attitudes. Drucker identifies several stages of business size, each with unique characteristics.

IV. Managing Work and Worker

• Hiring the Whole Person: When hiring, the entire individual, with their complexities and potential, is brought into the organization.
• “IN HIRING a worker one always hires the whole man. It is evident in the IBM story that one cannot “hire a hand” its owner always comes with it.”
• Limitations of Scientific Management: While acknowledging its impact, Drucker critiques the limitations of scientific management, particularly its tendency to divorce planning from doing and its neglect of the human element and the need for synthesis.
• “This is false logic. It confuses a principle of analysis with a principle of action. To take apart and to put together are different things. To confuse the two is grossly unscientific.”
• The Importance of Placement: Properly placing individuals in roles that align with their skills and potential is crucial for their productivity, fulfillment, and the overall strength of the enterprise.
• “Where and how a man is placed at any given time decides largely whether he will be a productive employee or not…”
• Motivation of Responsibility: Providing proper placement, clear performance standards, and necessary information are conditions for motivating responsibility. However, the worker must also have a “managerial vision” through participation to truly assume responsibility for peak performance.
• “The worker will assume responsibility for peak performance only if he has a managerial vision, that is, if he sees the enterprise as if he were a manager responsible, through his performance, for its success and survival. This vision he can only attain through the experience of participation.”
• The Supervisor’s Role and Authority: The supervisor’s job is a hybrid, inheriting expectations from the old “master” and limitations from the “lead man.” To be effective, supervisors need authority commensurate with their responsibility for achieving departmental objectives.
• “The supervisor needs the authority that goes with the responsibility for reaching these objectives.”
• Distinguishing Professional Standards from Business Objectives: Professional employees derive their objectives from their professional goals, while managers’ actions are driven by business objectives.
• “A manager, too, has professional standards. But they do not determine what he does—the objectives of the business do that.”
• The Tasks of Management: Drucker summarizes the core tasks of a manager as setting objectives, organizing, motivating and communicating, measuring, and developing people.
• “A manager has a specific task to set the objectives for the group under his responsibility.”
• The Human Being as a Unique Resource: Managing people is fundamentally different from working with other resources due to the inherent two-way relationship and the need for development.
• “For man, and man alone, cannot be “worked.” There is always a two-way relationship between two men rather than a relationship between man and a resource.”
• Character and Integrity Over Likeability: While interpersonal skills are important, Drucker emphasizes that character, integrity, and the ability to set and uphold high standards are more critical qualities for a successful manager.
• “In every successful organization there is one boss who does not like people, does not help them, does not get along with them. Cold, unpleasant, demanding, he often teaches and develops more men than anyone else.”

V. Making Decisions

• Tactical vs. Strategic Decisions: Drucker differentiates between tactical (routine) and strategic (fundamental impact) decisions.
• The Fallacy of “Problem-Solving”: He argues that the primary tasks in decision-making are not just solving problems but finding the right questions and making the solution effective.
• “The two most important tasks: finding the right questions, and making the solution effective…”
• Defining the Problem and the Critical Factor: Effective decision-making starts with clearly defining the problem and identifying the “critical factor” – the element that, if changed, would resolve the issue.
• Defining Objectives and Rules: Decisions must be made in light of clear objectives and within the established value system or “rules” of the organization.
• The Importance of Analyzing and Clarifying the Problem: Thorough analysis and clarification are essential to avoid addressing symptoms rather than the root cause, as illustrated by the railroad yard expansion example.
• Developing Alternative Solutions: The decision-making process should involve exploring multiple potential solutions, including the option of doing nothing.
• Making the Decision Effective: Understanding and Acceptance: For a decision to be effective, it must be understood by those who need to implement it and, ideally, accepted by them. Participation can foster acceptance.
• The Manager of Tomorrow and Decision-Making: Future managers will need a broader perspective, relating their product and industry to the total environment and integrating global economic, political, and social developments into their decisions.
• “The manager of tomorrow will have to be able to relate his product and industry to the total environment, to find what is significant in it and to take it into account in his decisions and actions.”

VI. The Manager of Tomorrow

• New Demands on Tomorrow’s Manager: Drucker outlines new demands on future managers, including a broader perspective, the ability to integrate diverse knowledge, and adaptability to a rapidly changing world.
• Preparation for Tomorrow’s Manager: He discusses the need for general education for young managers and continuous management education for experienced ones to equip them with the necessary skills and vision.

“The Practice of Management” provides a comprehensive and enduring framework for understanding the principles and practices of effective management. Drucker’s emphasis on purpose, customer focus, objective setting, decentralization, and the development of people remains highly relevant for managers in today’s dynamic business environment.

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