Drucker’s “New Certainties"
Posted: 11/01/2011 12:00:00 AM EDT
Strategy comes from the ancient Greek, and it means literally “the art of the general.” So when you are developing strategy, you are literally practicing the art of the general. Drucker wrote that the purpose of strategy is to enable an organization to achieve its desired results in an unpredictable environment. So contrary to what many believe, strategy is not about achieving results in a known and foreseeable environment, but an environment that is unknown and unforeseeable. In Drucker’s own words, it allows an organization to be purposefully opportunistic. That’s something that a leader of any type of organization can aspire to.
The Five Certainties
Drucker was never afraid to propose ideas which others may never have even considered, and this was certainly the case with the five environmental variables which he felt were phenomena so unique that they could safely be considered certainties and not just possibilities as we normally assume for fixed variables that we sometimes call “environmental.” Moreover, he believed that they were different from anything current strategies considered as they were not essentially economic, but were primarily social and political. Undoubtedly these were derived based on his notion that such certainties could be accurately predicted based on events that had already occurred.
The Collapsing Birthrate in the Developed World
Drucker found the falling birthrate in the developed world to be a phenomenon unique in history, with dramatic collateral effects and important secondary effects. Perhaps the most obvious change was in the very old assumption that markets would continue to increase as the population increased. How many times have we heard that markets are bound to enlarge due to simply to the automatic increase in birthrate? But Drucker looked at the facts and found that birthrates were no longer steadily increasing for populations in the developed world. The biggest decline may be in Japan. Of course the decline in birthrate could be somewhat offset, delayed, or somewhat hidden by immigration. But even this would result in dramatic changes and would also cause turmoil as border populations with different, customs, religions, and even languages were attracted into countries of diminished numbers of younger workers.
Drucker saw several important secondary effects resulting from the collapsing birthrate. He said that for the immediate future demographics would dominate the politics in developed countries, shunted aside only temporarily by wars and economic conditions such as what we currently face. The result would be that government instability in developed countries would likely soon become the norm. The definition of the concept of retirement was certain to change. While early “retirement” would continue, it would no longer mean a return to childhood in some kind of golden years playground. Rather it might mean extended employment with the former employer, but under a different name and conditions. For example, it has long been recognized that an experienced employee paid as an outside consultant could save the corporation a lot of money.
Drucker noted that older workers, especially the knowledge worker who worked primarily with his mind and not his hands would become increasingly productive. He speculated that firms that first discovered how best to utilize this experienced talent in a new type of relationship would acquire a significant competitive advantage. Perhaps of even more direct importance would be the effect on potential markets. The size of the youth and younger market would inevitably decline and the senior market increase. But the increase in potential would not only be due to numbers of potential customers, but to the individual purchasing power of those who retired from a first career and continued to find employment while in a “retired” state.
Shifts in the Distribution of Disposable Income
Drucker found that the truly important statistic that most companies overlook completely was the share of disposable income spent on the products or services that they provide. Drucker believed that this figure was the most reliable in formulating strategy as it changed very little over long periods.
He concluded that utilizing this certainty required both quantitative information and qualitative analysis. Thus another example of looking at data but deciding what the data meant rather than primarily crunching numbers. Most try to both quantify both the information and the analysis. The tyranny of numbers rather than human thinking becomes the governing factor and frequently leads to erroneous conclusions.
Though not clearly defined, business is supposed to be run for an ill defined conglomeration of interests including customers, employees, shareholders, and society. The only big question is whether this should be short term for gain in stock price, or longer term for future growth.
However, a fixed certainty is that the definition of performance will need to be revised. This being due to the new demographics and longer life spans in developed countries as well as investments by these groups.
These new definitions would have a clear impact on strategy, would be based on longer term estimates, and less and less on “social harmony,” and that performance would need to be redefined with a nonfinancial “value” return. Only in this way would this be meaningful to knowledge workers and generate “engagement.”
According to most definitions of global competitiveness, this has to do with competiveness of nations. Each year the World Economic Forum compiles a weighted average of many different components measured by publically available data and surveys of a country’s relative competitiveness globally. That’s not what Drucker was talking about with this certainty.
As Drucker looked into the future, no small business, giant corporation, hospital, university, you name it could ignore institutions outside of its own national boundaries. It could neither succeed, nor even survive, without measuring up to standards set by the leaders in its industry anywhere on the planet. Drucker’s contention was that traditional means of protection of home industries no longer protects, “no matter how high the customs duties nor how low the import quotas.” Drucker easily predicted the struggles now occurring for increased protectionism and one can easily see this in the failure of the G20 summit. He said that the net result of protectionism would not solve a nation’s problems, or a particular institutions, only make individual companies even more vulnerable. The only solution was for the organization to find a way to compete considering the standards set by the best organizations in every area of management no matter where located, and essentially to consider such issues as government subsidies of global competitors as environmental variables which must be overcome by superior strategies, not by similar protection strategies of its own government.
Drucker cautioned thateven within transnational economic units, national politics would overrule economic rationality but certainly that incorporating these certainties were more important than incorporating the traditional environmental variables that strategists traditionally consider.
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