The Essential Drucker

by Peter F. Drucker

We do not learn anything about the work of a heart specialist by being told that he is trying to make a livelihood, or even that he is trying to benefit humanity. The profit motive and its offspring maximization of profits are just as irrelevant to the function of a business, the purpose of a business, and the job of managing a business.

It is the customer who determines what a business is. It is the customer alone whose willingness to pay for a good or for a service converts economic resources into wealth, things into goods. What the customer buys and considers value is never just a product. It is always a utility, that is, what a product or service does for him.

business is the specific organ of growth, expansion, and change. The second function of a business is, therefore, innovation—the provision of different economic satisfactions. It is not enough for the business to provide just any economic goods and services; it must provide better and more economic ones. It is not necessary for a business to grow bigger; but it is necessary that it constantly grow better.

Every one of these men and women bases their decisions on some, if only vague, theory of the business. Every one, in other words, has an answer to the question, What is our business and what should it be? Unless, therefore, the business itself—and that means its top management—has thought through the question and formulated the answer—or answers—to it, the decision-makers in the business, will decide and act on the basis of different, incompatible, and conflicting theories. They will pull in different directions without even being aware of their divergences. But they will also decide and act on the basis of wrong and misdirecting theories of the business. Common vision, common understanding, and unity of direction and effort of the entire organization require definition of “what our business is and what it should be.” Nothing may seem simpler or more obvious than to know what a company’s business is. A steel mill makes steel, a railroad runs trains to carry freight and passengers, an insurance company underwrites fire risks, and a bank lends money. Actually, What is our business? is almost always a difficult question and the right answer is usually anything but obvious. The answer to the question, What is our business? is the first responsibility of top management. That business purpose and business mission are so rarely given adequate thought is perhaps the single most important cause of business frustration and business failure. Conversely, in outstanding businesses such...

The basic definitions of the business, and of its purpose and mission, have to be translated into objectives. Otherwise, they remain insights, good intentions, and brilliant epigrams that never become achievement. 1. Objectives must be derived from “what our business is, what it will be, and what it should be.” They are not abstractions. They are the action commitments through which the mission of a business is to be carried out, and the standards against which performance is to be measured. Objectives, in other words, represent the fundamental strategy of a business. 2. Objectives must be operational. They must be capable of being converted into specific targets and specific assignments. They must be capable of becoming the basis, as well as the motivation, for work and achievement. 3. Objectives must make possible concentration of resources and efforts. They must winnow out the fundamentals among the goals of a business so that the key resources of men, money, and physical facilities can be concentrated. They must, therefore, be selective rather than encompass everything. 4. There must be multiple objectives rather than a single objective. Much of today’s lively discussion of management by objectives is concerned with the search for the “one right objective.” This search is not only likely to be as unproductive as the quest for the philosophers’ stone; it does harm and misdirects. To manage a business is to balance a variety of needs and goals. And this requires multiple...

Objectives, therefore, have to be set in these eight key areas: Marketing Innovation Human resources Financial resources Physical resources Productivity Social responsibility Profit requirements Objectives are the basis for work and assignments.

The area without specific objectives will be neglected.

One hears a great deal today about “the end of hierarchy.” This is blatant nonsense. In any institution there has to be a final authority, that is, a “boss”—someone who can make the final decisions and who can expect them to be obeyed. In a situation of common peril—and every institution is likely to encounter it sooner or later—survival of all depends on clear command. If the ship goes down, the captain does not call a meeting, the captain gives an order. And if the ship is to be saved, everyone must obey the order, must know exactly where to go and what to do, and do it without “participation” or argument. “Hierarchy,” and the unquestioning acceptance of it by everyone in the organization, is the only hope in a crisis.

succession has always been the ultimate test of any top management and the ultimate test of any institution.

once beyond the apprentice stage, knowledge workers must know more about their job than their boss does—or else they are no good at all. In fact, that they know more about their job than anybody else in the organization is part of the definition of knowledge workers.