Peter Drucker on Change

• Circling the drain: if something has ‘a few good years left’, it is probably taking a disproportionate amount of time and effort from the most capable people to wring the last life out of it, and there’s a good chance it’s dead already. For example, trying to maintain sales of an old technology (video recorders) once a new technology (DVD players) has become the norm would be counterproductive.
• Cost-free but unproductive: if an asset is being kept because it is ‘fully written off’ in accountancy terms, despite producing nothing, it should be consigned to the scrapheap. Looking good on a balance sheet is no justification for retaining a useless asset. [3]
• Old and starving the new: if an established product, service, process or market is in decline and using assets which could aid the development of something new, it should be abandoned to allow the new to flourish. For example, focusing on updating an old car model, the popularity of which is in decline, could prevent investment of time and resources in an entirely new model, which could be more popular.

Drucker’s ultimate test is: ‘If we did not do this already, would we, knowing what we now know, go into it?’. If the answer is no, it should be abandoned.

Improve Systematically

The Japanese concept of ‘Kaizen’ is based on a process of continuous improvement of all aspects of a business. Whether internal or external, Drucker argues that every product, activity and asset should target an improvement of 3% each year and work consistently toward this.

However, the first step must be to define the criteria for measurement – the key performance indicators (KPIs). While some processes can easily be measured for efficiency, and some products for quality, not everything has a performance which can easily be measured. Equally, be careful to ensure that the measurement is one which is actually beneficial to the business. Measuring the wrong thing can be worse than doing nothing, giving a false impression of improvement where the actual effect may be detrimental.

For example, in an attempt to improve customer service, a call center may choose to measure the number of calls handled per hour. However, this may induce call handlers to rush through calls in order to increase their call rate, and could consequently lower customer care standards rather than improving them.

Establishing the baseline must be the next step, once measurements have been decided. Essentially, this means measuring current performance, in order to have a starting point from which to measure changes later. Without a baseline, future measurements will be meaningless in terms of assessing the success of any changes.

You can read more about setting KPIs in John Kotter on Transformational Change.

Exploit Success

Far from focusing primarily on problems, though, Drucker argues it is important to recognize success – and to build on it. While problems, especially large ones, have to be addressed, a program of incremental improvements to existing successes can result in significant, lasting change. This is particularly clear to see in the area of technology, where companies with successful products regularly build on them, periodically releasing new, improved versions (e.g. Apple products like the iPhone and iPad, or game machines like the Xbox and PlayStation).

Drucker suggests identifying a list of opportunities presented by existing successes and matching them with the most capable people in the organization, thus maximizing their chances of producing sustained, ongoing improvement and, ultimately, genuine innovation.

Innovate Systematically

In order to remain truly innovative though, Drucker says that a business must have a structured policy of innovation at every level of management and in every part of the business. This should not only lead to innovations themselves, but also create the right mindset within the organization - to see change as opportunity.

To do this, he suggests looking every six to twelve months for changes in areas which he describes as ‘windows of opportunity’: [4]

• unexpected successes and failures within the organization and by its competitors
• incongruities, particularly of production and distribution processes or customer behavior
• process needs (where there is a well-known and understood need to improve a process, which has not, as yet, been provided for – e.g. a need to add functionality to a software program which would reduce manual work)
• changes in industry and market structures
• changes in demographics
• changes in meaning and perception (in people’s perception of themselves or of a product or service, e.g. a shift from seeing SUVs as desirable to environmentally harmful, or to a group seeing themselves as middle-class rather than working-class)
• new knowledge

Each of these should be examined for the opportunities they may present in terms of new markets, technologies or distribution channels. The answers could lead to innovative new products, processes or services. [5]

Avoid Innovation Traps

Drucker identifies three ‘innovation traps’ that Change Leaders regularly fall into:

1. Ignoring Social and Political Realities

There are a number of social and political factors which Drucker believes must be planned around for any initiative to be successful:

• the unprecedented falling birth rate and consequently aging population
• changes in growth industries and the distribution of disposable income shares
• new business performance measures incorporating long-term thinking (for example, the concept of the triple bottom line) [6]
• globalization
• the conflict between economic globalization and political sovereignty

None of these factors have definitive solutions, but they raise questions each organization must address for their individual industry. [7]

2. Confusing Novelty with Innovation

Novelty only gives short-term entertainment; innovation comes with long-term value. Drucker’s test for this is to be sure not only to ask, “Do we like it?” but more crucially, “Do customers want it and will they pay for it?”.

3. Confusing Motion With Action

Reorganization is only beneficial if it is done to meet the requirements of properly researched and defined changes. Drucker warns against rushing into change simply due to a belief that some kind of change is necessary. Careful planning is always vital to maximize the chances of the change having a beneficial impact.

Introduce Change on a Small Scale

Market research can limit risk in many ways, but it is of little use when introducing something completely new. Drucker argues that in the case of the truly unique, only real world testing can reveal all of an innovation’s problems and potentials.

Piloting something like this with a colleague or customer can help perfect it and identify all of its applications - many of which may be completely unforeseen - with minimal risk. Once this has been done, Drucker believes that the best strategies to introduce and exploit the change will become apparent.

Budget for Change

In order to properly invest in and finance change, Drucker says that an organization must set aside a separate budget, in the region of 10-12%, which is specifically for future developments. Unlike the main budget for ongoing operations, this budget should be maintained even in lean times, as change requires ongoing and stable investment to succeed.

While the main budget should be approached from the perspective of the minimum spend on which operations can be maintained, Drucker suggests setting the change budget by identifying the maximum amount that it can absorb on a sustained basis. Only in times of significant financial catastrophe should it be cut back.

Part of this budget’s purpose should be to exploit successes, as mentioned earlier. Where something works, rather than assume it will remain successful without further funding, Drucker argues it should be invested in to maximize its return.

At management level, this means making the case for a change budget at the next review. While some functions, like IT, may find this easier to justify, it should be applicable to most areas.

Balance Change and Continuity

While focusing on change, it is vital not to lose sight of the need for continuity. Employees will always need some certainty in their working life, regarding behavioral expectations and company policies, for example. Customers want a constant picture of a company’s identity and values. Relationships with suppliers and distributors should be long-term partnerships, which can evolve to accommodate change.

To avoid ‘change fatigue’ with employees, and keep customers and suppliers on side, one of the most important considerations is communication. As Drucker says, the first question asked when implementing any change should be “Who needs to know about this?”. This becomes more important as workers become more remote and have less direct contact with colleagues.

Compensation, recognition and reward are also essential for employees. Rewarding innovators is essential to embed a culture of change in a company. Equally, those who deliver continuous improvements should be recognized for their efforts and valued alongside the innovators.

Summary

The world is in a constant state of change, says Drucker. For the foreseeable future, change will be the norm and organizations that are not prepared for it will flounder. Even better than being prepared for change, he argues, is to attempt to shape the future by following these principles.

“To try to make the future is highly risky. It is less risky, however, than not to try to make it.” [8]