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Lessons From Peter Drucker

Drucker's Two Essential Functions for Success

William Cohen, Ph.D.
Posted: 10/03/2010

Peter Drucker was the first to understand that the basis of success in any business rested on only two basic functions. I emphasize that Drucker referred to any business. That means any business or organization regardless of product or service. What are these two magic functions that are clearly so important? Let’s look at Drucker’s thinking.

Drucker’s Analysis

Every business or human endeavor has a purpose. Unfortunately individuals engaged in the business or who are responsible for its operation frequently misidentify this purpose. Drucker used the example of a for-profit business. Executives may think that its purpose is to create a profit. Drucker said this was inadequate. Profit was only a means to an end. Drucker reasoned that the ultimate purpose of any business was to create a customer.

Many focus on profit as the business’s ultimate objective because it is an easy measurement. However this focus can actually impede success. This is why even in a recession some businesses increase their quality, level of service or advanced products and stand head and shoulders above their competitors who try to cut corners in order to stay profitable.

Customers look around with certainty at a correctly focused business and know that such a business is not only going to survive and continue to be profitable, it’s going to emerge from the recession in a highly successful fashion. The future of other businesses which have cut services, quality or development in order to "stay profitable" is much less certain.

Drucker recognized that profit was needed for business survival and growth. In fact, he speculated about replacing the word "profit" with the word "responsibility." He agreed that profit was not the whole responsibility of a business, but it was the first. This was true because it was needed to cover the cost of capital, innovation and future risks.

But he also concluded that the business’s ultimate purpose was definitely not profit. Rather its purpose was to create a highly satisfied consumer or user of whatever the product, service. Drucker saw that those businesses prospering maintain this focus on purpose and had the advantage.

Important Relationships

The word "business" is actually one synonym for a "responsibility," which is probably why Drucker contemplated using this word. "Profit" also means "return." In other words, you invest money in something and you get a return on that investment. If you are in HR, money has been invested in your responsibility for which you expect to receive a return or profit.

How is that profit measured? Rarely by money. Rather it is measured by the effectiveness or efficiency of your output. Let’s say you are responsible for recruiting. Your recruitment of qualified engineers, salesmen, or whatever specialty is needed for the appropriate department is the resulting return on investment. This return is actually evaluated by your "customer" which internally is the department you service by your recruitment.

Success means satisfied users of what you supply, and that is the ultimate purpose of your "business." This is true of any internal business or responsibility from sales to production. Identifying and focusing on the real purpose of your business is necessary for success because:

• Regardless of the area of the company in which you work, you are involved in "a business."

• Your output must result in a profit, or return on the investment made.

• This profit is evaluated by your customer, the organization which your organization supports.

This implies that both correct purpose and "profit" is needed at many levels within an organization and for many different departments in order to create satisfied users of the "product" of that department.

The Two (and only Two) Functions of Any Business for Success

Surprisingly, Drucker identified only two basic functions of any business in order to be successful. These may surprise you. The two essential functions are marketing and innovation.

You may think that Drucker was talking about selling and a sales job. He wasn’t. In fact, Drucker noted not only that marketing and selling were not the same, but that that the two might not even be complementary.

For example, he said that if marketing were done correctly and without error, selling would be unnecessary since the prospect would inherently recognize that the product or service you offered satisfied an important need which exactly fit his values and goals, and the results he wanted to achieve. Of course, no marketing is done perfectly, so selling would always be necessary.

But this demonstrates that Drucker was referring to marketing as strategy, and sales as a part of tactics supporting the strategy selected. However, Drucker went on to demonstrate the difference in these two functions.

Drucker wrote, marketing begins with the question, "What does the other party want?" Then we need to know "What does it value?" "What are its goals?" "What does it consider results?" Marketing not only determines who the other party is, it may also determine which other party we plan to target. So marketing is the strategy.

Anyone who has completed Marketing 101 will tell you that tactically, marketing is described by the "marketing mix" of four "p’s." These are, product, price, promotion and place (distribution). Promotion is further categorized into subsets, one of which is personal selling. This means that selling is part of marketing, and supportive of it.

The general assumption is, the better the sales job, the better the overall marketing (strategy) effort and that there is an automatic connection. I even read once that a Harvard professor wrote that good tactics in marketing can overcome a poor strategy. Drucker disagreed. With selling, he claimed that not only might it not be congruent or complementary to marketing, but that selling and marketing could very well be adversarial. For example, successful selling of the wrong product, or to the wrong market, would result in misallocation of scarce company resources, even if successful.

Is This True for All Human Endeavors?

If any enterprise has only these two basic functions, we would expect to see this as a part of virtually any human endeavor where the purpose was to create a customer. Today, even some parts of our military routinely use words like "customer," "price" and "service" as part of its everyday vocabulary.

For example, a training organization realizes that it has an important customer who is not the trainee. This customer is the combat organization that acquires these trained soldiers after their completion of basic training. Basic trainees are expected to possess essential military skills such as being able to operate as a small unit team, rifle marksmanship, and field skills such that they can be integrated into a combat-ready organization as fully functioning members.

This training is price and time sensitive, and the level of service provided represents a cost which must be carefully considered. While the training organization may not be able to choose its target customer as part of its overall strategy, it is expected to innovate, make changes in training and do everything else it can to provide the most highly trained and capable soldiers possible within the restrictions of time and budget. In short, its success is based on marketing and innovation.

Apply the Two Basic Functions to Your Organization

Let’s take this to a business organization in which you may be involved. Earlier we looked at an HR manager tasked with furnishing a variety of qualified candidates for varying levels of positions in widely different organizations within the company. We saw that these different organizations are really customers.

If success rests on only two functions: marketing and innovation, you face a number of problems. Economic conditions are such that budgets are severely restricted. This affects the numbers of individuals that can be hired by your "customers," compensation levels that can be paid, level of experience of new hires, money that can be allocated for advertising openings, and a lot more.

Let’s look first at Drucker’s recommendation to start with the question, "What does the other party want?" Well obviously in this instance the customer wants qualified people, but there is a lot more. What does the customer value? Different departments value different aspects of gaining qualified employees. One department may value the absolutely best people it can obtain. Another department may value speed of recruitment above all else. When it needs people, it needs them NOW and doesn’t want a lot of time spent on trying to recruit the optimum candidate.

A good marketing job means understanding the department’s goals both near and long term and what it would consider good results. For the customer focused on speed, you may recruit the top three candidates in the country for the position in the thought that after interviewing all three your customer can pick the perfect employee. If the customer needs an immediate hire he may want you to send the first candidate in today and forget giving him multiple choices.

Ongoing economic and business conditions in your industry always mean additional tactical problems. If you no longer have the budget for extensive media advertising, you might need to use innovation and develop new methods of candidate acquisition or screening.

Of course this is only one example of one job, in one type of department. In all cases you must adapt Drucker’s concept of the true purpose of business and the two essential functions of marketing and innovation to your responsibility. Do it, and be ready to be amazed at the results.

William Cohen, Ph.D.
Posted: 10/03/2010