Sunday, April 2, 2017

The Five Most Important Questions According to Drucker

My favorite business writer, the late Peter Drucker, once wrote a slim but important book called The Five Most Important Questions You Will Ever Ask About Your Organization. The questions are clear and simple and seem intended for executives (especially those in non-profits) wishing to conduct a self-assessment about their organization. According to Drucker, this “self-assessment process is a method for assessing what you are doing, why you are doing it, and what you must do to improve an organization’s performance.” The five questions are the following: What is our mission? Who is our customer? What does the customer value? What are our results? What is our plan? Within each of these questions, Drucker offered more detail and more specific probes.

Although these questions were intended to apply to organizations, I believe it has value in applying them at the individual or personal level. This idea is not entirely original; Marshall Goldsmith, another great management guru, wrote that he once asked Peter Drucker about applying his five questions at a personal level. So let’s give it a try in the context of someone thinking about going into business for himself/herself or doing a start-up with some kind of promising product or service that he/she has come up.

1.     What is your mission? Here’s what Drucker wrote about effective mission statements. First, they reflect an “exacting match” of the organization’s opportunities, competence, and commitment. At an individual level, to me this sounds like you find the sweet spot where there is a convergence between what the environment or customers need, your capabilities, and what you value. This is similar to Goldsmith’s point that what you value means two things: what makes you happy and what you consider to be meaningful (Goldsmith, 2015). Second, effective mission statements say why an organization does what it does (not how to do it). Ray Dalio, the successful founder of the hedge fund Bridgewater Associates, wrote something similar in his treatise (Dalio, 2011) when he made a distinction about the difference between values and principles:

“Your values are what you consider important, literally what you ‘value.’ Principles are what allow you to live a life consistent with those values. Principles connect your values to your actions; they are beacons to rule your actions, and help you successfully deal with the laws of reality. It is to your principles that you turn when you face hard choices.” (p. 7)

And third, effective mission statements are short and sharply focused; they should fit on a T-shirt. When thinking about your business at the individual level, ask yourself: do you or does your potential business have a mission statement? What do you want to be remembered for? What do you want your business to be remembered for?

2.     Who is your customer? In other words, who must be satisfied for the business or organization to achieve its results? Drucker asks organizations to think about who their primary and secondary customers are. Management theory suggests that the organization has different stakeholders; the distinction that Drucker makes between primary and secondary customers is simpler. So who are your primary customers – those individuals or groups who will use and benefit from your business’s products and services? In other words, who is your product or service intended for? And who are your supporting customers – the other stakeholders, such as employees, funders or investors - that you need to identify and be aware of? Recently, I was having a discussion with an acquaintance who had patented a medical device that he hoped to commercialize, and was asking my advice on potential investors. Although his device would eventually be used by individual customers, it was not clear to me that he had thought through carefully who his primary and secondary customers were, and how they might impact the success of his venture. By applying this framework, he was able to target a specific customer segment and identify potential investors to pursue.

3.     What does the customer value? Drucker points out that organizations need to understand what their primary and supporting customers value. This does not necessarily mean doing intensive market research; Steve Jobs was well-known for pointing out that he never did any market research. Yet he was very much in tune with what he believed customers wanted, and Apple continues to be successful. I think the important lesson here for individuals is to listen, listen, listen. Customers may not exactly know what they want, but when we try to truly understand our customers, which involves deep listening, among other things, then we will be able to provide them with what they value – whether they knew it at the time or not. Drucker also states that organizations need to accept what customers value as “objective fact.” At an individual level, many organizations use 360-degree feedback tools to help managers identify their strengths and development needs. As an executive coach, I often supplement this tool with interviews of my clients’ key “customers” – their boss, co-workers, direct reports, and perhaps their customers, such as suppliers and sometimes even friends and family members. These data provide great insights to a person on what their customers (such as their manager and even their peers) value, and can be of tremendous value to those who listen and accept them. Are you clear on what your potential customers will value about your product or service? How will you find out?

4.     What are your results? The key insight for me here is Drucker’s discussion of assessing, based on results, what must be strengthened and what must be abandoned. Determining whether an organization is assessing the right results is an important issue. When I was an intern at General Motors a few decades ago, I remember being in meetings with senior management in which they regularly discussed their objective of reaching a market share of 50%. At that time, GM was the most successful of the Big Three (Ford and Chrysler being the other two major U.S. car companies at that time), and it has been argued that this obsession with market share caused GM to lose sight of focusing on profitability and the creeping Japanese challenge. This question also reminds us that effort, while laudable, is not enough at an organizational or personal level, unless you are clear on what the right results should be and what the right measures of success are.

It is a little bit disappointing that Drucker does not raise the issue of the importance of “how” results are achieved. Since his time, there have been numerous discussions of this issue; Seidman’s book How goes into detail on the importance of this. As he has written, “… leaders now recognize that sustainable behavior is an offensive strategy that you need to deploy over an entire field … (and) behavior has become a powerful source of excellence and competitive advantage.” Many large companies, such as GE, Ford and Siemens, have competency models in which employees are evaluated not just on their results but also on their behaviors, or how they achieved those results. As individuals, we need to pay attention not only to whether we have achieved our goals, but also to whether we have done so with integrity, consistent with our values and principles.

5.     What is our plan? For Drucker, “planning defines the particular place you want to be and how you intend to get there.” Planning consists of having goals, no more than five for an institution, in Drucker’s opinion. I agree; in the research on successful strategy execution, one common theme that emerges is that companies that have been successful in executing their strategies successfully have focused on a few selected priorities rather than a laundry list of initiatives they try to tackle. The CEO (and his or her team) is responsible for the development of objectives, action steps, and the appropriate allocation of resources. The five elements of an effective plan are: abandonment (if it’s not working, are you prepared to change or even abandon it?), concentration (are you putting your best efforts into what’s working well and in fact raising the bar?), innovation (what’s around the bend – is this what our customers might value and where we can add value?), risk taking (will you take the risk, while balancing the short term with the long term), and analysis (do your due diligence). For Drucker, creating action steps – the execution of the plan – is very much a part of this aspect of planning.

In summary, here’s how these questions can apply to someone at an individual level. By stating a mission, you are in essence trying to answer the question of what you want to be remembered for. By defining the customer and what they value, you will be answering the question of what problem it is your product or service will be solving and for whom. By specifying your results, you will be able to clarify what success will look like for you (e.g., is it an IPO, is it building a brand?). And by creating your plan, you will be able to define your short- and long-term goals and be able to monitor your results (e.g., how will you scale, have you identified the elements in your value chain?).    

Dalio, R. (2011). Principles. Unpublished manuscript.

Drucker, P. (2015). The Five Most Important Questions: Enduring Wisdom for Today’s Leaders. Hoboken, NJ: Wiley.

Goldsmith, M. (2015). Triggers: Creating Behavior That Lasts – Becoming the Person You Want to Be. New York: Crown Business.

Seidman, D. (2007) How: Why HOW We Do Anything Means Everything. New York: Wiley.