Drucker’s 10 Principles For Developing a Business Strategy
Management theorist Peter Drucker knew that risk could not be avoided. In fact, he believed that some risk was a requirement for success. Little or no risk meant that the corporation was not aiming high enough. The future was always unknown, and unknowns mean risk.
He felt that the risks from unknowns could best be dealt with by taking the initiative to create one’s own future. Therefore, in developing strategy, a leader had to take the actions to achieve the goals he or she had established. Of course major threats had to be identified along with alternatives of action, should these threats become realities.
But to take on any type of risk required strategy.
Drucker’s views on developing strategy were in a class of its own. He did not believe in "portfolio management" or quantitative methods. Drucker felt that every situation had to be approached individually and with common sense based on history.
This is probably one reason that Drucker, although a self-proclaimed "non historian," used historical examples to illustrate his concepts. And though the word "strategy" comes from the Greek word, "strategos," he did not believe that "business is war" or that one should look at business as an act of warfare.
Instead Drucker believed that the purpose of strategy was to enable an organization to achieve its desired results in an unpredictable environment. In practice, his first step in developing strategy involved analyzing a company and the company’s marketplace to identify “certainties.” Pleasant or unpleasant, the certainties had to be faced squarely
Four Questions that Must be Incorporated
Drucker recognized that any company’s strategy had to incorporate the answers to four questions:
- What opportunities does the company want to pursue -- and what risk is it willing to take?
- What is the current scope and structure of the organization’s strategy, and does it strike the right balance among aspects like specialization, diversification and integration?
- Are there acceptable trade-offs between time and money and between in-house execution versus using a merger, acquisition, or joint venture or some external means to reach its objectives?
- Which organizational structure will best serve the company’s economic realities, the opportunities, and its performance expectations?
Drucker adopted a methodology based on these four questions, which was more inferred than spelled out as a "by the numbers" process.
Using Judgment to Develop Strategy
I saw that Drucker integrated goals and objectives (what the business should be) with the variables of the situation and the resources needed based on his own observations.
This latter was the most difficult. I knew his judgment involved certain principles. These included the following that you must consider when developing strategy:
1. Commit Fully to a Definite Objective
Drucker made it clear that the definite objective was what the business should be. This is why he devoted so much to defining this issue. The objective must be precisely defined, and then you must commit to it.
2. Seize the Initiative and Keep It
There are many historical situations describing individuals or organizations that have a great idea, but delay in developing it or bringing it to market. Maybe they never do and someone else does and is highly successful. Or maybe they do, but someone else gets in just a little bit sooner. So you must take the initiative and stick to it until you achieve your goal. Drucker didn’t emphasize theory or even planning, but action.
3. Economize to Mass Your Resources
You can’t be strong everywhere because your resources will always be limited. The idea is to economize where your efforts and resources are not critical and concentrate them where they are more important.
You must concentrate superior resources at the decisive point in the situation. This is exactly what Drucker was saying when he asked Jack Welch his two famous questions. "If you weren't already in a business, would you enter it today?" and "If the answer is no, what are you going to do about it?"
For example, GE owned some businesses earning less money than others. As a result, the company was wasting resources instead of investing in projects with much greater potential. Welch made the decision that if a GE-owned business was not first or second in its industry or could become so, it should be axed. This was the first of many strategies that led to his increasing GE’s market capitalization by $400 billion during his 20-year tenure.
4. Use Strategic Positioning
To achieve any strategic objective, you will need to make changes and maneuver due to environmental or other unexpected factors that may occur. That’s why if what you are doing isn’t working you need to change or modify your strategy. It’s true that persistence is an immensely valuable trait for reaching any goal. However maintaining a faulty strategy in pursuit of a worthwhile goal is foolish or worse.
5. Do the Unexpected
When you have competition, it is most effective to surprise your competition and do the unexpected. This principle can also be profitably applied with customers, so long as the surprise to them is a pleasant one. For example, giving your customers, or those you service in an organization, more than they expect is almost always a valuable surprise.
6. Keep Things Simple
Someone at NASA once calculated that if every single one of the parts in one of NASA’s rockets was 99.9 percent reliable, the rocket would fail 50 percent of the time. We would have to curtail our space program in short order. The more things that can go wrong, the more will go wrong. If you want less to go wrong, keep your strategy simple where fewer things can go wrong.
7. Prepare Multiple Simultaneous Alternatives
Since some actions inspired by your thinking are going to fail, you should always have an alternative action that can be readily implemented.
8. Take the Indirect Route to Your Objective
Moving directly against any human thought or endeavor always arouses opposition. People hold on all the more strongly to their previously held notions. No one likes to be sold anything, either a product or an idea. However, most are eager to take advantage of a bargain or an idea, which will benefit them. The difference is subtle, but the results can be decisive. The direct route will always lead to the strongest opposition.
The same principle holds true in a situation where there is competition that must be faced and this principle should be integrated into your strategy. This concept was first uncovered and fully analyzed by B.H. Liddell Hart, probably the greatest strategist of the last century.
9. Practice Timing and Sequencing
The Bible says that there is a time for every purpose under heaven. Implementing the "right" strategy at the wrong time can be just as ineffective as if the strategy was all wrong. You’ve heard the saying, "he was ahead of his time." Yet, someone with the same idea at the right time may be extraordinarily successful. Bottled water is very successful today, and some branded names command very high prices. Yet some years ago, the idea of anyone paying for bottled water, unless from Lourdes, would have been considered a joke.
10. Exploit Your Success
Don’t stop or slow down when you are achieving your objectives. Not staying continually ahead of your competition is simply giving your competition another chance to stop you.
In summary, to develop strategy the Drucker way:
- Decide on your objectives
- Find the "certainties" in the situation
- Bring together the certainties, the resources required, and the variables of the situation
- Decide on action steps to implement the strategy using the 10 principles above
- Take action