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Drucker Perspective

GM vs. Drucker: Management Science vs. Management Practice

Elizabeth Edersheim
Contributor: Elizabeth Edersheim
Posted: 09/29/2008

Alfred Sloan, the inventor of the modern corporation, and Peter Drucker, the father of management, had a 25-year running disagreement. We can resolve that disagreement today.

Sloan was the visionary behind General Motors, who believed that management was a science. He saw GM’s success as a result of the company's ability to optimize its distinctive economies of scale, manage the flow of money and investments and provide an expansive dealer network that encouraged trade-ins while selling new cars.

Drucker, meanwhile, always believed that management was a practice, like medicine or law. The practitioner's job was to continually challenge the theory and bounds to redefine the "what," not the "how." Drucker believed that GM’s success was because its management practices, in particular its people-centric ethos.

At the time of Sloan's death in 1964 it wasn't clear who was right. By the time of Drucker's death in late 2005 we had come to see that in business and not incidentally in public policy and politics—practice trumps science. Or as Drucker wrote, the "what" supersedes the "how." The most powerful management skill in the 21st century is the ability to step back and rapidly assess and modify "what" your enterprise is doing.

By failing to reassess its "what," GM is just a sickly shadow of the robust corporation that Sloan built, which thrived for 70 years. In the post-Sloan period, GM continued to adapt strategy to his "science" without the support of Sloan's innate people and management skills.

The "what" of GM is not just a car. The "what" Sloan defined was built on customers from different income levels being loyal to different GM brands and the prestige of a new car. GM built itself around servicing this market—from factories to dealers. Their market share in the United States exceeded 55 percent through 1960. Today it is less than half of that. In 1980, GM was still the most sought after company to work for by college engineers, according to MIT's placement office. Today it is not even in the top 10.

What happened? Customers’ values changed to reflect major shifts in society, taste and culture. Americans adopted convenience, safety, fuel efficiency and commuting comfort. Rather than listening and connecting with these customers, GM invested in quicker patches—solutions built from their old way of doing business—while the company continued to lose market share.

Meanwhile, Toyota quietly used the Peter Drucker approach, continuously redefining their approach to "what." That includes being part of the local community. Who would have foreseen a Japanese auto running in NASCAR? Toyota entered last year. Also last year, Toyota passed GM as the number one automobile company in the world; it's expected to become number one in the U.S. market this year.

Why is getting the "what" right so critical today? In the global information age, managers are inundated with a nonstop flow of real-time information. This information flow brings about change at a breakneck speed unlike anything businesses have experienced before. To move deftly amid so much change, a company needs to keep questioning. What does the customer consider of value? How can that value be enhanced? The company must challenge the "what." Opportunities come from redefining "what" the company should be doing.

The best companies are doing just that. Google's breakthrough didn't come from the science of algorithms, but from the fundamental concept that users wanted a search engine—the "what" and "how." Management quickly stepped back and asked, given this access to millions of searchers across the world, what other value can be provided? Google's "what" continues to change both in terms of additional services, and accessing the network of connections.

It is time for Google to challenge the "what" and ask what would make its search function more user-friendly. One that doesn't provide 10,000 access points, but rather logically helps pinpoint the best one or two sources through a series of menus. Google's agility at keeping ahead of the competition by re-inventing the business will be the ultimate test of whether it becomes just another General Motors.

Many companies have failed to challenge the "what" of their businesses by shying away from asking their customers about what they value. Drucker indicated that this failure is probably the single greatest cause of corporate death. It is what killed Polaroid. It is what killed Wang Laboratories, which in the early 1980s had cornered the market for word processing and completely missed the PC boat. It is what almost killed AT&T. Circuit City recently announced that the "what" of its business has changed. It is no longer competing with other retailers. Its competition is Apple, Dell and HP. It's too early to tell if Circuit City can reconfigure and survive.

We are seeing all sorts of companies challenge their "what." Nintendo challenge the definition of "what" a game is when they introduced Wii. Cognizant changed their "what" from a small in-house technology facility for Dun & Bradstreet to one of the most successful global outsourcing companies. When Jeffrey Immelt announced that GE would focus on alternative energies, he changed the "what" of a corporate giant. Rupert Murdoch is challenging the definition of a news company. Drucker suggested that Sony needed to get out of the film business. He indicated that the company's strength comes from the delivery mechanisms and consumer interface, not from making thrillers and sitcoms.

From the 1940s into the 21st century, Drucker advised management to consistently seek the answers to these forward-looking questions:

  1. What is different in the world around us and what part of my business still fits with realities?
  2. What are our opportunities and what boundaries should we be challenging to create/leverage those opportunities?
  3. What results should we expect in six months?
  4. What competencies do we need to act on these opportunities? Are we building and properly investing in these competencies?

Failure to do so is not a sustainable alternative.

Elizabeth Edersheim
Contributor: Elizabeth Edersheim
Posted: 09/29/2008