PDF Summary:The Essential Drucker, by Peter Drucker

Peter F. Drucker is widely regarded as one of the most influential thinkers in the field of modern management. Drawing from his decades of experience as a consultant, Drucker authored dozens of books on organizational management and innovation, and he’s been cited as a major influence on many of today’s business leaders. The Essential Drucker is composed of key chapters from Drucker’s most respected works and provides an overview of Drucker’s core ideas.

In this guide, we’ll distill the heart of Drucker’s writings, from the roles and duties of management to the skills managers need to keep a workforce productive. We’ll explore the responsibilities of management to society and its importance in fostering innovation. We’ll also turn to other business writers who’ve expanded from Drucker’s principles, companies that have successfully implemented Drucker’s concepts, and experts who offer ideas that contrast with those that Drucker presents.

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(Shortform note: As tricky as one-on-one communication can be, fostering open communication across teams can be complicated indeed. In Radical Candor, Kim Scott lays out a seven-step process for building group collaboration out of communication. These include listening to everyone on the team, clarifying the ideas they present, debating the merits of each idea, deciding upon the best course of action, persuading everyone to carry out that decision, executing the appropriate actions, and learning from the process as a whole. While Drucker has much to say on decision-making and implementation, which we’ll cover next, he doesn’t include debate and persuasion as part of his decision-making process.)

Making Decisions

Finally, it’s management’s role to make decisions based on issues affecting the whole organization. Drucker asserts that at the executive level, managers should devote their time to making strategic, broad-ranging decisions, not solving low-level problems. The decision path that Drucker lays out involves establishing the nature of the issue being addressed, determining the minimum requirements that a solution needs to meet, devising an action plan to implement your decision, and collecting feedback to determine whether your solution was correct.

Drucker writes that the first step in making a business decision is to determine whether the problem at hand is an isolated occurrence (such as property damage caused by a natural disaster) or a systemic issue (such as damage caused by lack of maintenance). Isolated problems can be solved individually, but systemic problems require policy decisions. However, managers ought to keep in mind that isolated problems are extremely rare, and what may seem like a one-of-a-kind problem could be a warning sign of a new systemic issue. It’s important to figure out the underlying nature of a problem before deciding on a course of action.

Jeff Bezos’s Perspective on Making Decisions

In Invent and Wander, Amazon founder Jeff Bezos offers a different way of classifying business decisions than Drucker does. Bezos argues that the two main categories of decisions are those that can be rolled back if they prove unsuccessful and those that can’t be undone once you enact them. Decisions that aren’t necessarily permanent—such as offering a new seasonal discount—can be made with a minimum of fuss, while decisions that will stick with you forever—such as starting a wide-ranging customer loyalty program like Bezos’s Amazon Prime—must only be made after careful consideration.

Bezos argues that the mistake many big companies make is to view all decisions as potentially permanent and then get bogged down in a wasteful, time-consuming decision-making process. In Drucker’s terms, this would be equivalent to viewing every problem as systemic, requiring major policy decisions.

The next step is to determine what bare minimum requirements your decision must meet to ensure a successful result. Drucker says not to try this on your own—instead, you should seek input from a variety of others within your organization or outside it. When seeking advice, you want different opinions. Especially for tricky problems, you’ll want a selection of alternatives, not consensus from colleagues who are afraid to ruffle each other’s feathers. Encourage debate if you have to, avoiding the assumption that there’s only one viable solution. When there’s disagreement on an issue, Drucker suggests figuring out why people disagree. Answering that will give you further insight into what decision you should make.

(Shortform note: In Principles: Life and Work, hedge fund manager Ray Dalio points out an aspect of debate that Drucker doesn’t—the clash of egos and emotion that goes with it. Inside each person, there’s a divide between their rational self and their emotional subconscious, both of which come with their own agenda. To overcome your emotional ego and that of whomever you’re trying to engage in a productive debate, you have to find the balance between being assertive and open-minded. It’s best to ask questions instead of arguing, and to focus on the substance of the discussion rather than letting it become heated and disrespectful.)

Implementing Decisions

In the end, you’ll have to make a decision that won’t please everyone you consulted. Some managers may be tempted to delay decision-making as they wait for more data, but often that’s an excuse to avoid discomfort. Drucker says that if you feel hesitant, take some time to think it through—two or three days at most—then when you settle on a decision, follow through with a plan of action. This includes identifying who needs to know about the decision, who is going to carry it out, and what resources they’ll need to enact it. The manager and everyone involved will have to commit to carry out the decision, or else it’ll carry no weight.

(Shortform note: In practice, creating an action plan to carry out a business decision is often more complex than Drucker suggests. This is because individual decisions don’t exist in isolation. In Getting Things Done, David Allen explains that any plan of action is composed of multiple steps and decisions to be made. Therefore, organizing a project into its components is a vital step before taking action, as is deciding what every component action will be and which team members are responsible for each. The implementation steps Drucker describes won’t be carried out once, but multiple times for each major business decision that you make.)

Drucker says that no matter how confident you are in your decisions, at some level they’re always going to be judgment calls. Part of the action plan to implement decisions has to include feedback measures to determine if the decision was correct. Every decision is based on opinions that should be treated as hypotheses and tested. There are various measures for collecting data in any given situation, but Drucker insists there’s no substitute for checking the results of a decision yourself. If this means getting out of the office to see how management decisions are carried out on the organization’s front lines, so much the better.

(Shortform note: Though Drucker only covers why managers need feedback, it’s actually an invaluable tool for everyone in an organization. The authors of The Phoenix Project argue that fast, corrective feedback is a fundamental pillar of a successful system, and it has to be accessible at every step of any process. For feedback to be fast and effective, workers shouldn’t have to wait for information to be filtered by management—an organization has to set up a system where knowledge workers and front-line employees can use real-time data to guide their performance and improve the system to keep up with their customers’ needs.)

Management and Innovation

In addition to keeping an organization afloat, managers are also responsible for steering their business toward the future, which requires innovating and experimenting with new ideas. Innovation is vital for any organization because the world in which it operates is continually changing. Drucker describes how organizations should approach innovation as a part of doing business, how market analysis can generate new ideas, and how businesses should structure themselves to enable risk-taking experiments while protecting the organization as a whole.

To be clear, innovation isn’t limited to new technological developments. It includes new business practices, sales strategies, or moving a company into new markets. Drucker states that even the basic premise on which an organization is founded can go out of date. For example, video rental stores saw their business evaporate when streaming replaced physical media. The question that managers should always be asking is “What will our organization’s mission be in the future, not just in the present?” The needs you’re currently fulfilling may vanish, while new needs (and therefore customers) emerge that your organization may be suited to engage with. Watching for changes keeps organizations alive and creates opportunities for growth.

(Shortform note: According to Mark W. Johnson and Josh Suskewicz, it’s not enough just to prepare for the future—a business in a shifting marketplace must take an active role in shaping what the future looks like. In Lead From the Future, they lay out a visionary planning process to envision how your business will operate in the future, just as Drucker suggests, then develop a strategy to innovate for that future so that you can remain years ahead of your competition. Johnson and Suskewicz argue that an organization can be structured so that forward-looking innovation is baked into its culture and doesn’t rely solely on management’s perspective.)

Innovation and the Market

Drucker says that innovation comes from hard, diligent market analyses. Managers should watch for anomalous events, ongoing changes in demographics, and unforeseen failures or triumphs, either within the organization itself or from elsewhere in the market. If these lead to new ideas, Drucker insists that you should test innovations on a small, simple scale before developing them further. Small-scale innovations will let your organization fail, recover, and experiment again without a major loss of resources. Once you have a successful innovation, you should then be able to scale it up as much as your business and the market can bear.

It’s a common, though untrue, stereotype that big businesses aren’t innovative. The kernel of truth behind that idea is that within large, corporate structures, new ideas have a hard time taking root. Drucker writes that the solution to that is to create new, innovative business programs as separate startup ventures outside the regular chain of operations. Rather than running wild, however, the organization’s entrepreneurial side venture should be managed by someone high in the organization who can give it their full attention. If the venture is successful, it can be folded back into the larger institution, and if it fails, its negative returns won’t impact the ongoing success of the parent company.

Innovation to Scale

Drucker’s idea of small-scale innovation that grows if successful has entered the modern management parlance as the “bullets before cannonballs” approach. In Great by Choice, Jim Collins and Morten T. Hansen cite the successes of businesses that test innovations with “bullets”—low-cost, nondisruptive business experiments—before committing all their resources to full-scale “cannonball” changes. Companies that fire cannonballs first, overcommitting to large, costly projects, risk depleting the organizations’ resources. Even if their untested, large-scale projects succeed, a business often learns the wrong lesson and continues its risky behavior in the future.

Nevertheless, even small innovations can end up being costly or disruptive. In The Innovator’s Dilemma, Clayton M. Christensen repeats Drucker’s assertion that businesses should spin off small startups to pursue potentially disruptive projects, or alternatively they can purchase a small company to try out the innovation for them. In either case, Christensen insists that the spin-off business should have a tight budget to discourage inefficiency and promote a quick turnaround. In Invent and Wander, Amazon founder Jeff Bezos gives two examples of this process by describing the genesis of Amazon Marketplace and Amazon Web Service as side ventures that were folded into the Amazon brand once they proved successful.

Three Innovation Strategies

While discussing the importance of innovation in general, Drucker lays out three different approaches that managers can apply to entrepreneurial endeavors. These include innovations that establish preeminence in a market, those that improve upon competitors’ work, and those that identify a specialty niche in which there’s no competition at all.

According to Drucker, the first of these options—establishing a commanding lead in the market—is the most popular in the literature on entrepreneurship, but it’s also by far the most risky approach. It requires extensive research, planning, and a willingness to commit all your resources to pushing forward one single gamble. If your innovation succeeds and your organization takes control of a market, your work will only get harder after that. You’ll constantly have to push for the next innovation, and the next, or else your competitors will pass you by and you’ll lose any advantage you may have had.

The second and somewhat less risky strategy is to identify someone else’s innovation that isn’t being used to its fullest extent. Drucker says this commonly happens in the tech industry, where innovators are so focused on the technology that they’re not paying attention to how customers actually use it. The primary catch to riding someone else’s coattails is that when you copycat someone else’s innovation, you have to give your version a distinctive twist that sets it apart from the original. Looking for these almost-successful innovations can let your business open up whole new markets.

Innovation Case Study: Apple Computers

In Walter Isaacson’s biography Steve Jobs, he shows how Apple Computers made use of both of Drucker’s first two innovation strategies, though neither method proved as successful or as long-lasting as Jobs may have hoped.

In the first instance, Jobs and his business partner, Steve Wozniak, pooled all their savings to create the Apple I, the first home computer with a keyboard that could be connected to a television screen. Their all-in innovation created a splash among computer hobbyists, but their dominance of the home computer market only lasted for a year. When the Apple II came out in 1977, their rival companies Tandy and Commodore released comparable home computers, with other copycats soon to follow.

The next innovation that set Apple apart came when Jobs was given a tour of the Xerox Palo Alto Research Center and saw their new Graphical User Interface (GUI). While Xerox meant to use this interface solely for expensive business computing systems, Jobs saw its potential in the home computer market and took the idea back to Apple’s designers. The result was Apple’s Macintosh computer with its point-and-click interface that was far simpler to learn than any competing system.

Unfortunately for Jobs, the Mac’s other limitations—a slow processor and its incompatibility with other systems—opened the door for Bill Gates at Microsoft to copycat Jobs with the Windows operating system, riding Apple’s coattails (to use Drucker’s words) just as Apple had done to Xerox. The lesson is that none of Drucker’s innovation strategies should be seen as a guarantee of long-term market dominance.

Drucker’s final strategy is one that comes along rarely but can yield rich rewards. The trick is to identify a niche in a market that isn’t being served and where there’s no competition. Taking advantage of this kind of opportunity usually involves your organization having a specialized skill or body of knowledge that’s otherwise absent in the market you’re exploring. If you spot such a niche and can fill it, it offers a form of monopoly protection—others may be discouraged from competing because the cost to duplicate your business’s specialty may be high. However, if your company successfully establishes a niche monopoly, it’s vital not to abuse that monopoly. Dissatisfied customers create a demand for competitors to step into the game.

Uncontested Markets

Drucker describes the niche innovation strategy as something that’s incredibly rare and specialized, but in Blue Ocean Strategy, professors W. Chan Kim and Renée Mauborgne argue that uncontested markets may not be so uncommon. However, they require concerted work to locate. Kim and Mauborgne write that these kinds of innovative ideas can be sparked by viewing the market from the customers’ perspective and determining whether certain groups are underserved, what types of products or services are commonly bundled together, and what emotional value a business innovation might bring to a market.

In addition to the risk that Drucker proposes—creating competitors by abusing your market dominance—another downside of a niche monopoly is that you may run afoul of antitrust laws that prevent one business (or a conspiracy of businesses) from monopolizing a market and exerting undue influence on prices. Large monopolies that must exist for practical reasons—such as utility companies—are often regulated by government agencies. If a monopoly is deemed detrimental or in violation of antitrust statutes, the government may mandate its breakup into smaller, competing companies, as was done with the US telephone system.

Management for Startups

Whereas large organizations may struggle to innovate, small businesses just starting out often suffer from a lack of managerial expertise. Drucker explains that people starting new ventures must pay close attention to their markets, carefully manage their finances, and put a leadership team in place long before a business grows to the size where such a team is needed.

Especially for a new business based on an innovative product or service, market research must take a different tack than that employed by established industries. Drucker writes that most of the time, a new business doesn’t know who its customers are yet, nor how they’ll actually use what it has to offer. Therefore, the manager of a new operation should assume that their original business model will have to be adjusted as the market demands. For example, someone opening a vegan grocery in an underserved area may discover that their customers are more interested in pre-made dishes than buying separate ingredients. In the end, the market defines the nature of a business, despite the intentions of the owner.

Cultivating Customers

Regardless of who your customers turn out to be, one thing that’s common to every startup is providing the best possible customer experience. In Superfans, Pat Flynn explains that building a loyal, devoted base of customers is essential to the long-term survival of a business. By providing regular, positive associations between fledgling customers and your business, you can build an emotional connection between your customers and your brand, eventually turning them into ambassadors who bring even more customers to your business.

Of course, just as Drucker points out, part of creating a good customer experience is providing the right product or service. In The Lean Startup, Eric Ries provides specific tips for how to pivot from your original business strategy to providing what your customers actually need. One way is to focus on a specific feature of a product or service that customers value most. Another is to identify a specific customer need that you’re not filling yet. Lastly, you might consider whether there’s a more efficient technological solution to whatever customer need your business exists to satisfy.

Funding and Organizing

While identifying customers and its true market, a new business must also take great care with its money. Drucker argues that a new enterprise should absolutely not set its sights on profits. Instead, a growing business always needs more money, and draining its revenues during its early days to enrich its owners and investors is the surest way to starve it of resources. Money management for new businesses should focus on finding new sources of capital as the organization outgrows its original funding method. This may entail bringing in new partners, private investors, or even incorporating and taking the company public.

Funding Startups in the Internet Age

Two modern methods for financing startups that didn’t exist at the time of Drucker’s writing are crowdfunding and crowdsourcing, both of which rely on using online networks to funnel money and resources. In The Success Principles, Jack Canfield explains that crowdfunding is a strategy in which you reach out to customers and donors through websites such as Patreon and Kickstarter to acquire your business’s funding in exchange for early access to products and exclusive rewards.

Crowdsourcing, on the other hand, uses digital networks to directly connect customers and resources, as in rideshare companies like Uber and Lyft or freelance platforms such as Fiverr and Upwork. These internet tools for finding money and resources have created business opportunities far different from the traditional approaches familiar to Drucker.

Drucker writes that most businesses start as small operations with only one person or a handful in charge. If successful, a business will eventually outgrow its original management structure, and when that happens, it’s crucial that a management team is already in place. If it appears that your business will grow significantly over the next few years, you and your team should plan how management tasks will one day be divided so that everyone can start learning their future jobs and how they’ll interact. Another key decision to make at this point is what role the business’s founder will play. It may be that they don’t want to run a big business, but would rather contribute in some other fashion, such as being the company’s public face.

(Shortform note: While organizational change is a concern for startups growing beyond their founders’ control, as Drucker describes in this section, it’s also an issue for large corporations competing in a global marketplace. In Leading Change, John P. Kotter writes that managing organizational transitions relies heavily on coordination and motivation from upper management. Business leaders must cultivate a sense of urgency for a needed change, build a coalition of like-minded stakeholders both inside and outside the company, and express a coherent vision for how the business will operate in the future. While aimed at big company executives, Kotter’s advice is also applicable to the startup founders that Drucker addresses.)

Management in Society

As watching the market and customers should make clear, organizations only exist in the context of a larger community. Therefore, in addition to guiding the inner workings of a business, managers must also set objectives relating to the impact their organization has on the wider world. Drucker divides businesses’ social impacts into two classes—what an organization does to society, and what it can do for society—while arguing that an organization’s primary social responsibility is to carry out the function for which it was designed.

First of all, Drucker insists that social objectives aren’t just window dressing—they’re vital for an organization’s continued existence. After all, society won’t tolerate a business that it perceives as causing more harm than good. Managers must always be aware of any negative impacts an operation has and find a way to minimize those impacts before they do harm to the business. However, that solution may come at a cost, especially for large industries. Some negative impacts require cooperation between competitors and government agencies to find a cost-efficient path to mitigation. In these cases, Drucker says the responsible course is for a business to actively participate in the solution before one is imposed from the outside.

(Shortform note: A key way to align a company’s interests with the social responsibilities that Drucker says are vital is to establish a core philosophy that guides a business’s relationship with society. The example Collins and Porras give in Built to Last is that of the pharmaceutical company Johnson & Johnson, whose core philosophy prioritizes the health of their consumers above shareholder profits. Therefore, during the 1982 Tylenol poisoning crisis, Johnson & Johnson went out of its way to communicate the danger to the public, rather than trying to silence the problem. Because of its philosophy, Johnson & Johnson took part in framing the response to the crisis, rather than having its response dictated to it by a regulatory body.)

What Does a Business Owe Society?

There are also problems in society that aren’t a particular business’s fault but may still be worthy of that business’s concern. These may take the form of societal ills that negatively impact customers to the business’s detriment. There may also be problems customers face that a business might be uniquely suited to address, creating an outlet for even more business. Drucker warns against managerial overreach—in which a business steps into a social arena outside its area of competence—but within an organization’s expertise, there may be opportunities to make social contributions that pay dividends in higher revenues and new markets. Managers would be foolish to let chances like that slip by.

(Shortform note: One pitfall Drucker doesn’t address when discussing businesses’ relationship with society is their danger of confusing appropriate market behavior with social behavior. In Predictably Irrational, Dan Ariely gives examples of businesses that violate social agreements—and inadvertently harm themselves—to do what’s right from a market perspective, such as an insurance company denying claims for people to whom they market themselves as a “friend.” However, Ariely goes on to argue that using social norms to guide market decisions usually has a positive effect by cultivating relationships with both customers and employees.)

Nevertheless, Drucker insists that management’s first responsibility to society is to make sure the organization fulfills its primary mission. A successful business or nonprofit exists only because it fills a social need. If a business’s job is to provide the world with shoelaces, then it should focus on making the best shoelaces it can before it gets involved in external social problems. The same holds true for nonprofit groups, each of which has its own circle of competence. It’s always possible—and even desirable—for that circle of competence to grow, but that growth should be deliberate, well-planned, and consistent with an organization’s fundamental reason to exist.

(Shortform note: In 2005, Drucker passed away, a year before seeing the largest expression of this principle put in action by the world’s most successful investor, Warren Buffett. In Buffett’s biography The Snowball, Alice Schroeder explains that Buffett saw his responsibility to the world not in terms of lifelong philanthropy but as being a responsible steward of wealth. As such, he grew his company Berkshire Hathaway’s financial resources until 2006, when he announced that he would give away $37 billion—the largest charitable donation in history. Knowingly or not, he’d acted on Drucker’s thesis that fulfilling his primary mission as a businessman also fulfilled his obligation to society.)