Junto Boys

PETER DRUCKER, R.I.P.

I was too busy working the event over the weekend to see that Peter Drucker passed away. His books on management were full of wisdom and insight and he created a lot of imitators. The WSJ published some "best of" pieces from articles he wrote for them over the years. Here are some highlights of the highlights:

The first and easily the most common sin is the worship of high profit margins and of "premium pricing." . . . 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.

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.

It's the essence of why Wal-Mart became bigger than Sears.

These few very large salaries are being explained by the "need" to pay the "market price" for executives. But this is nonsense. Every executive knows perfectly well that it is the internal logic of a hierarchical structure that explains them. . . . Money is a status symbol which defines an executive's place in the corporate hierarchy. And the more levels there are the more pay does the man at the top have to get. This rewards people for creating additional levels of management. . . . Yet levels of management should be kept to the minimum. . . .

It's similar in government, though power not money grow as more levels of management are created.

Businessmen owe it to themselves and owe it to society to hammer home that there is no such thing as "profit." There are only "costs": costs of doing business and costs of staying in business; costs of labor and raw materials, and costs of capital; costs of today's jobs and costs of tomorrow's jobs and tomorrow's pensions.

There is no conflict between "profit" and "social responsibility." To earn enough to cover the genuine costs which only the so-called "profit" can cover, is economic and social responsibility--indeed, it is the specific social and economic responsibility of business. It is not the business that earns a profit adequate to its genuine costs of capital, to the risks of tomorrow and to the needs of tomorrow's worker and pensioner that "rips off" society. It is the business that fails to do so.

He will be missed.