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The Change Leader, according to Peter Drucker

We must accept that change is like “death and taxes” – it should be postponed as long as possible and no change would be vastly preferable, outlines Drucker.

Certainly, it’s painful and risky, and above all requires a lot of hard work. Unless an organization sees that its task is to lead change – whether a business, a university or a hospital, etc. – it will not survive.  In a period of rapid structural change the only organizations that survive are the change leaders, Drucker concludes.

To this author, a change leader sees change as an opportunity, seeks and knows how to find successful changes and how to make the most of them both inside and outside the organization.  This requires the following strategies:

  • Policies to create change.
  • Systematic methods to look for and to anticipate change.
  • Know the right way to introduce change inside and outside the organization.
  • Policies to balance change and continuity.

Listed below we summarize some aspects Drucker proposes for each one of these factors:

1. Policies to create change

Achieving openness to innovation in an organization is far from enough to become a change Leader. It can even be distracting,  because in order to be a change leader you need the will and the ability, to both alter what is already underway as well as doing new and different things.

The first policy – and the foundation to all other – is the need to abandon yesterday, a planned abandonment. The first requirement is to free resources from being committed to maintaining what no longer contributes to performance, and no longer produces results. It is not possible to create tomorrow unless one first sloughs off yesterday. However,  doing things differently always clashes with unexpected problems. For this reason, leadership must be exercised by people with great and proven capacity.

A change leader makes each product, each service, each project, each procedure,  “stand trial” and sentence them to life or death. And this should be done on a regular basis,  based on the following question: “If we were not doing this already, knowing what we know now, would we get into it now?”. If the answer is no, the reaction can’t be “let’s have another assessment”, but “What do we do now?”.

In these three cases, the right action is always outright abandonment, according to Drucker:

If a product, service, market or process “still has a few good years of life”. These dying products, services, or processes always demand the greatest care and the greatest efforts. They tie down the most productive and ablest people. But equally, a product, service or process should be abandoned if the only argument for keeping it is “It is fully written off.” The question should not be “How much have they cost?” but ” How much will they yield?”.

The third case where abandonment is the right policy – and the most important one-  is the one where, for the sake of maintaining the “old” or declining product, service, market or process the “new” and growing product, service or process is being stunted or neglected.

Abandonment may come in many forms. The right solution may be doing more of the same, but doing so in a different way.

That is why, after defining “what must be abandoned.”, the second question the change leader must ask is  “how to do it?”. Therefore he must ask himself the following question in reference to each product, service or process: “If we were to launch into this now, knowing what we know,  would we do so in the same way as we are currently doing it?”.

According to Drucker, this is a question the change leader needs to ask in relation to each successful product, service or process with the same seriousness and consistency as with unsuccessful products, services or processes.

This applies to all areas of the enterprise. But it applies with particular force to an area that many enterprises tend to neglect: distributors and distribution channels. In a time of rapid change distributors and distribution channels tend to change faster than anything else. And it is also on distributors and distribution channels that the “information revolution” is likely to have the greatest impact, as Drucker points out. The most obvious example is the impact of the e-commerce incursion on commercialization and marketing approaches and practices. Some data to illustrate this took place in the U.S. by the late 90s, more than half the purchases in the automotive industry were made over the Internet, relegating dealers to mere sale points.

The following policy for a change leader is what Drucker calls planned innovation, what Japanese know as “Kaizen”. This implies that whatever an enterprise does internally and externally needs to be improved systematically and continuously: products, services, processes, marketing, technology, training and development of people, use of information. Such improvements must be carried out at a preset annual rate: In most areas, as the Japanese have shown, an annual improvement rate of 3 percent is realistic and achievable.

However, continuous improvement requires an important decision.  What is “performance” in a given aspect? If we seek to improve performance – and this is naturally the goal of continuous improvement – we then need to define the meaning of “performance”. The essence here is to start from what is most valuable for customers, not limited to the quality of the product, but also considering services, speed, post-sale services, guarantee and others.

The other policy that a change leader must establish is the so-called exploitation of success. Drucker criticizes the “monthly reports” that most organizations perform and focus on highlighting problems, arguing that “problems can’t be ignored, and critical ones must be tackled. To be a change leader, companies have to focus on opportunities. They must starve problems and feed opportunities.”

In this regard, Drucker suggests a small but fundamental procedural change, an additional “first page” in the monthly report that should focus on results that are better than expected, whether in terms of sales, revenue, profits or volume.  Organizations that succeed as change leaders dedicate a whole morning or a full day to opportunities, and after that, they dedicate a second morning to problems.

Enterprises that succeed in being change leaders make sure they staff opportunities, they focus on the ablest most performing people, acknowledge them and assign them tasks that constitute the best opportunities. According to Drucker, this means that the first opportunity for successful change is making the most out of one’s own success and build on it.

The best example is the Japanese company Sony, it has built itself into one of the world’s leaders in a number of major businesses by systematically exploiting one success after the other. All Sony’s electronic products are based on a product that was not invented by Sony:  the magnetic tape recorder, making the most out of success they took the opportunity to improve the design into their following product and another after that, all based on the first products success and so on.

 

2. Systematic methods to look for and to anticipate change (Creating change)

Drucker holds that without the abandonment, improvement and success exploitation policies, no organization can expect to be a successful innovator. However, to be a successful change leader you must have a systematic innovation policy,  this promotes creating a company mindset towards becoming change leaders. This makes the entire organization to deem change as an opportunity.

In view of the above the company needs a systematic policy to find, every six or twelve months, changes that can result in opportunities within the aspects the specialist considers ” windows of opportunity”,  and point out the following:

The organizations own unexpected successes and unexpected failures, as well as competitors’ successes and failures. Incongruities in the process, whether productivity or distribution or customer’s behavior.

  • Process needs
  • Changes in the market and industry structure
  • Changes in demographics
  • New Knowledge

A change in any one of these areas raises the question:  “Is this an opportunity for us to innovate, that is,  to develop different products, services, processes? Does it indicate new and different markets and/or customers? New and different technologies? New and different distribution channels: Innovation can never be risk-free. But if innovations based on exploiting what has already happened it is far less risky than not to innovate by exploiting these opportunities.

Innovation is not a “flash of genius” It is hard work. And this work should be organized as a regular part of every unit within the enterprise, and of every level of management, Drucker makes clear.

What not to do? There are three traps to avoid, into which change leaders fall again and again.

The first trap is an innovation opportunity that is not in tune within certain realities discussed, this means, any identified opportunity must correspond to the trends in the company’s environment, in technological, economic, demographic, social and political aspects.

The second trap is to confuse “novelty” with “innovation.” The test of an innovation is that it creates value. A novelty only creates amusement. Yet, again and again, managements decide to innovate for no other reason than that they are bored doing the same thing or making the same product day in and day out. The question to consider on innovation-  besides the “quality” test- is not: “Do we like it?” It’s: “Do customers want it and will they pay for it?”

The third trap is confusing motion with action. Typically when a product, service or process no longer produces results and should be abandoned or changed radically, management “reorganizes.” Reorganization is often needed. But it comes after the action, that is, after the “what” and the “how” have been faced up to. By itself, reorganization is just “motion” and no substitute for action.

These three traps are so attractive that every change leader can expect to fall into one of them. There is only one way to avoid them, or to extricate oneself if one has stumbled into them: to organize the introduction of change, that is, to PILOT,  according to Drucker.

 

3. The right way to introduce change both inside and outside the organization (Piloting)

Enterprises increasingly use all kinds of market research and customer research to limit, if not eliminate, the risks of change. But one cannot market research the truly new. But also nothing new is right the first time. Invariably, problems that nobody even thought of crop up. It is almost a “law of nature” that anything that is truly new, whether product or service or technology, finds its major market and its major application not where the innovator and entrepreneur expected, and not for the use for which they designed the product, service or technology. And that, no market or customer research can possibly discover, states Drucker.

Neither studies, nor market research, nor computer modeling are substitutes for the test of reality. Everything improved or new needs therefore first to be tested on a small scale, that is, it needs to be piloted. The way to do this is to find somebody within the enterprise who really wants the new. Everything new needs a champion. It needs somebody who says: “I am going to make this succeed”, and who then goes to work on it. This person needs to be someone the organization respects. This need not even be somebody within, it could be a customer.

If the pilot test is successful – it finds the problems nobody anticipated but also finds the opportunities that nobody anticipated, whether in terms of design, of market, of service – the risk of change is usually quite small. And, it is usually also quite clear where to introduce the change, and how to introduce it, that is, what entrepreneurial strategy to employ.

Finally, successful change leadership requires appropriate accounting and budget policies.  It requires TWO separate budgets, Drucker makes clear. In most enterprises, there is only one budget, and it is adjusted to the business cycle.  In good times expenditures are increased across the board, In bad times expenditures are cut across the board. This, however practically guarantees missing out on the future.

The change leader’s firs budget is an operating budget that shows the expenditures to maintain the present business. This is normally 80 to 90 percent or so of all expenditures. The budget should always be approached with the question: “What is the minimum we need to spend to keep operations going?” And in poor times it should, indeed, be adjusted downward (though in good times most of it, probably, should not be adjusted upward, and certainly no more than volume and/or revenues increase).

And then the change leader has a second, separate budget for the future”. This budget remains stable throughout good times and bad times. It rarely amounts to more than 10-12% of an enterprise’s total expenditures. Very few of the expenditures for the future produce results unless maintained at a stable level over substantial periods. This goes for work on new products, new services, and new technologies; for the development of markets and customers and distribution channels, and above all, for the development of people.

The “future budget” should be approached with the question: “What is the maximum this activity can absorb to produce optimal results?” The amount should be maintained in good times or bad- unless times are so catastrophic that maintaining expenditures threatens the survival of the enterprise, suggests Drucker.

Now, the author alerts, the future budget also should include expenditures to exploit success. The most common, but also the most damaging, practice is to cut back on expenditures for successes, especially in poor times, so as to maintain expenditures for ongoing operations, and especially expenditures to maintain the past. The argument is always: “This product, service or technology is a success anyhow; it doesn’t need to have more money put into it.” But the right argument is: “This is a success, and therefore should be supported to the maximum possible.”  And it should be supported, especially in bad times, when competitors are likely to cut spending and therefore likely to create an opening.

 

4. Policies to balance change and continuity

The traditional institution is designed for continuity. It also explains why existing institutions face resistance to change. For traditional institutions, this is a contradiction in terms. Change leaders are, however, “designed” for change. And yet they still require continuity. People need to know where they stand. They need to know what they can expect. They do not function if the environment is not predictable, not known. But continuity is equally needed outside the enterprise. The enterprise also has to have a “personality” that identifies it among its customers and in its markets.

Therefore Drucker states, change and continuity are thus poles rather than opposites. The more an institution is organized to be a change leader, the more it will need to establish continuity internally and externally, the more it will need to balance rapid change and continuity. This balance will predictably be one of the major concerns of tomorrow’s management. But we do know already a good deal about how to create it. Some institutions are already change leaders and have tackled the problem, though not always solved it.

One way is to embrace the idea of partnerships in change as the grounds for continuing relationships. This is what the Japanese have done regarding the relationship between supplier and manufacturer, and what is now adopted fast in American business through “Economic-Chain Accounting” and is facilitated due to computer network interconnections. 

But relationships within the enterprise are also increasingly going to be partnerships – with employees of the organization, with people who work for an outsourcing firm but who are actually members of the enterprises own working teams. Balancing change and continuity requires continuous work on information. Nothing disrupts continuity and corrupts relationships more than poor or unreliable information. It has become routine for any enterprise to ask in the face of change, even the most minor one: “Who needs to be informed of this”?

It has to be a firm rule in any enterprise that wants to be successful as a change leader, that there are no surprises. Above all, there is a need for continuity in respect to the fundamentals of the enterprise: its mission, its values, its definitions of performance and results.

Finally, the balance between change and continuity has to be built in compensation, recognition and rewards. We long ago learned that an organization will not innovate unless innovators are properly rewarded. Similarly, we will have to learn, that an organization will have to reward continuity by considering, for instance, people who deliver continuing improvement are highly valuable to the organization, and as deserving of recognition and reward as the genuine innovator.

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