Peruse just a few of Drucker's writings and it quickly
is apparent that he doesn't mince words - his thinking is strong, and
served straight up! Basic to his thought process is that enterprises are
developed to create wealth, not control costs. Yet, traditional business
measurements are woefully inadequate for management to perform the
firm's basic responsibility - create shareholder wealth! Drucker's view
is that management's key responsibility is to help workers to achieve
(productivity) and to maximize corporate assets (move capital to most
productive use). Most enterprises don't know how to accomplish this
because they don't have the tools that timely provide the information
necessary to make informed decisions.
After years of practicing, and refining his business
thinking, Drucker developed key tools top management will benefit from,
if used. Each area brings focus and information to senior managers
enabling them to make more informed decisions. There are three
categories: baseline information, productivity information, and
competency information.
I found them to be thought provoking and worthy of
your review. For lack of a better term, I call them Drucker's executive
tool kit. After you read on, you may want to compare your business
metrics to these and see where you might benefit.
Baseline information - These are very
traditional measurements and metrics. They might include cash flow,
inventory, revenue, profits, receivable, etc. Fairly routine financial
information, needed to run any operation, and easily understood by the
financial community, but not material enough, or timely enough (most
metrics are lagging indicators) to help senior managers make investment
decisions or productivity audits. Although these basic metrics are
important, more ‘leading' indicators are required. Which brings us to
the next tool.
Productivity information - This portion of
the tool kit is vital and includes metrics that deal with the
productivity of significant resources. A business must make visible the
productivity of the labor pool - both manual and knowledge-based
workers. However, this doesn't tell the whole story. Measuring
productivity requires more than a traditional P&L statement. Today's
astute business leaders recognize that profit may or may not create
shareholder wealth. That until profit covers the cost-of-capital the
enterprise operates at a loss. Businesses must implement metrics such as
(EVA) economical value add (see: Marketing Tip #407 EVA - drive more
value into your business!) which is better at providing the enterprise
with a cleaner picture of its performance in creating or destroying
shareholder wealth.
EVA fundamentally measures the value added over all
costs, including the cost of capital. This provides a simple, easy
method for non-financial managers to understand if their decisions
regarding programs and investments make economic sense to the
enterprise. EVA metrics can also improve the effectiveness of
compensation or bonus programs normally used to enhance worker
productivity. EVA allows a business to objectively determine if the task
(programs, new product, etc.) creates or destroys shareholder value.
Competence information - Perhaps one of the
more esoteric of measurements Drucker talks about, but none-the-less
equally as important is competence information. A business must find
ways to measure and constantly analyze their core competence. At
minimum, businesses should do this as a part of their yearly planning
exercise. Marketing folks call it a SWOT analysis - strengths, weakness,
opportunities and threats. However, I would suggest quarterly would be
more appropriate. The core competency of any business determines its
ability to be a market leader. In other words leadership is the ability
to do something other companies in your field cannot or find extremely
difficult. Core competency blends together customer value with the
enterprises' special ability to produce or service customers better than
any competitor.
Companies that already get this point use benchmarking
as a tool to determine trends in core competency. They determine what
their special ability is and objectively compare it to direct and
emerging competitors. On-going analysis (monthly is not unusual for
certain companies) track and trend what is working and not working in
the market place. What works should be straightened. What doesn't work
needs further review, and may provide an indication that your customers
are losing value in your offering or finding degradation in your core
competency. Either way, it becomes an early warning that a change is
occurring in your targeted customers' valuation of your product or
service. You may then, more effectively, redirect corporate assets to
meet this threat. This brings added opportunity and continued
leadership.
Final Thoughts
Peter Drucker as the CEO. Of course it can't happen, but it stimulated
me into thinking of possibilities that I may not have otherwise thought
about. There is no ‘silver-bullet' that magically transforms your
business, but hopefully this article presented a thoughtful blend of
Drucker's wisdom, experience, and knowledge wrapped in his pragmatic
approach and directed at motivating you to focus on creating shareholder
wealth.
You might find a new book from John E. Flaherty, Peter
Drucker: Shaping the Managerial Mind - How the World's Foremost
Management Thinker Crafted the Essentials of Business Success worth the
read. It helped to shape some of my thoughts as I wrote this piece.
Drucker is quoted as saying, "Efficiency is doing
things right; effectiveness is doing the right things". Which is
your business doing and what measurements are you using that give you
this truth?
