Monday, June 23, 2008

Develop Disagreement Rather Than Consensus

To make more effective decisions, develop disagreement rather than consensus.  Disagreement provides alternatives and makes you think more deeply about the issue.  In fact, if you don't have disagreement, you're not ready to make a decision.  In The Essential Drucker: The Best of Sixty Years of Peter Drucker's Essential Writings on Management, Peter F. Drucker writes about encouraging disagreement rather than consensus to helps make more effective decisions.

Don’t Make a Decision Unless There’s Disagreement
Drucker writes that you should not make a decision unless you've considered alternatives:

Unless one has considered alternatives, one has a closed mind.  This above all, explains why effective decision-makers deliberately disregard the second major command of the textbooks on decision-making and create dissension and disagreement, rather than consensus.  Decisions of the kind the executive has to make are not made well by acclamation.  They are made well only if based on the clash of conflicting views, the dialogue between different points of view, the choice between different judgments.  The first rule in decision-making is that one does not make a decision unless there is disagreement.

The Right Decision Demands Adequate Disagreements
If you don't have disagreement, then you're not ready for a decision.  You don't fully understand the problem.  Drucker writes:

Alfred P. Sloan is reported to have said at a meeting of one of his top committees, “Gentlemen, I take it we are all in complete agreement on the decision here.”  Everyone around the table nodded assent.  “Then,”continued Mr. Sloan, “I propose we postpone further discussion of this matter until our next meeting to give ourselves time to develop disagreement and perhaps gain some understanding of what the decision is all about.”  Sloan was anything but an “intuitive” decision-maker.  He always emphasized the need to test opinions against facts and the need to make absolutely sure that one did not start out with the conclusion and then look for the facts that would support it.  But he knew that the right decision demands adequate disagreements.

3 Reasons for Insisting on Disagreement
Disagreement can help you avoid preconceived notions, find new alternatives, and stimulate the imagination.  Drucker writes:

There are three main reasons for the insistence on disagreement.  It is, first, the only safeguard against the decision-maker’s becoming the prisoner of the organization.  Everybody always wants something from the decision-maker.  Everybody is a special pleader, trying – often in perfectly good faith – to obtain the decision he favors.  This is true whether the decision-maker is the president of the United States or the most junior engineer working on a design modification.  The only way to break out of the prison of special pleading and preconceived notions is to make sure of argued, documented, thought-through disagreements.

Second, disagreement alone can provide alternatives to a decision.  And a decision without an alternative is a desperate gambler’s throw, no matter how carefully thought through it might be.  There is always a high possibility that the decision will prove wrong – either because it was wrong to begin with or because a change in circumstances makes it wrong.  If one has thought through alternatives during the decision-making process, one has something to fall back on, something that has already been thought through, that has been studied.  Without such an alternative, one is likely to flounder dismally when reality proves a decision to be inoperative.

Above all, disagreement is needed to stimulate the imagination.  One does not, to be sure, need imagination to find the right solution to a problem.  But then this is of value only in mathematics.  In all matters of true uncertainty such as the executive deals with, whether his sphere is political, economic, social, or military – one needs “creative” solutions that create a new situation.  And this means that one needs imagination – a new and different way of perceiving and understanding.

Commit to Find Out Why People Disagree
Don't just disagree, find out why there's disagreement.  Knowing why people disagree helps you cut through the fog.  Drucker writes:

The effective decision-maker, therefore, organizes disagreement.  This protects him against being taken in by the plausible but false or incomplete.  It gives him the alternatives so that he can choose and make a decision, but also so that he is not lost in the fog when his decision proves deficient or wrong in execution.  And it forces the imagination – his own and that of his associates.  Disagreement converts the plausible into the right and the right into the good decision.  The effective decision-maker does not start out with the assumption that one proposed course of action is right and that all others must be wrong.  Nor does he start out with the assumption, I am right and he is wrong.  He starts out with the commitment to find out why people disagree.

First Understand the Alternatives
Drucker writes that you need to understand the alternatives:

Effective people know, of course, that there are fools around and that there are mischief-makers.  But they do no assume that the man who disagrees with what they themselves see as clear and obvious is, therefore, either a fool or a knave.  They know that unless prove otherwise, the dissenter has to be assumed to be reasonably intelligent and reasonably fair-minded.  Therefore, it has to be assumed that he has reaches his so obviously wrong conclusion because he sees a different reality and is concerned with a different problem.  The effective person, therefore, always asks, What does this fellow have to see if his position were, after all, tenable, rational, intelligent?  The effective person is concerned first with understanding.  Only then does he even think about who is right and who is wrong.

Lawyers Know Both Sides
Drucker writes that to make the most effective decisions, you need to understand both sides of the issue:

In a good law office, the beginner, fresh out of law school, is first assigned to drafting the strongest possible case for the other lawyer’s client.  This is not only the intelligent thing to do before one sits down to work out the case for one’s own client.  (One has to assume, after all, that the opposition’s lawyer knows his business, too.)  It is also the right training for a young lawyer.  It trains him not to start with, “I know why my case is right,” but with thinking through what it is that the other side must know, see, or take as probable to believe that it has a case at all.  It tells him to see the two cases as alternatives.  And only then is he likely to understand what his own case is all about.  Only then can he make out a strong case in court that his alternative is to be preferred over that of the other side.

Key Take Aways
Here's my key take aways:

  • Don’t make a decision unless there’s disagreement.
  • Disagreement provides alternatives, stimulates the imagination, and helps you break out of preconceived notions.
  • Understand the alternatives.
  • Know why people disagree.
  • Know both sides of the issue.

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What is the Relevant Decision Making Criteria

How will you measure whether your decision will be effective?  To make the most effective decisions, you need to know what to measure. You also need to select among alternatives of measurement so that you can truly understand what's at stake.  In  The Essential Drucker: The Best of Sixty Years of Peter Drucker's Essential Writings on Management , Peter F. Drucker writes about how you need to figure out the most appropriate and relevant measurements.

What is the Criterion of Relevance?
The most effective decisions are made by finding the appropriate measurement.  Drucker writes:

Perhaps the crucial question here is, What is the criterion of relevance?  This, more often than not, turns on the measurement appropriate to the matter under discussion and to the decision to be reached.  Whenever one analyzes the way a truly effective, a truly right, decision has been reached, one finds that a great deal of work and thought went into finding the appropriate measurement.

The Traditional Measurement is Not the Right Measurement
The traditional measurement reflect's yesterday's decision.  Drucker writes that you need to know what's relevant for today:

The effective decision-maker assumes that the traditional measurement is not the right measurement.  Otherwise, there would generally be no need for a decision; a simple adjustment would do.  The traditional measurement reflects yesterday’s decision.  That there is need for a new one normally indicates that the measurement is no longer relevant.  The best way to find the appropriate measurement is again to go out and look for the “feedback” discussed earlier – only this is “feedback” before the decision.

Example of How Traditional Measurements Can Be Irrelevant
Drucker provides an example to illustrate how traditional measurements can be irrelevant for making effective decisions:

In most personnel matters, for instance, events are measured in “averages,” such as the average number of lost-time accidents per hundred employees, the average percentage of absenteeism in the whole workforce, or the average illness rate per hundred.  But the executive who goes out and looks for himself will soon find that he needs a different measurement.  The average serve the purposes of the insurance company, but they are meaningless, indeed misleading, for personnel management decisions.  The great majority of all accidents occur in one or two places in the plant.  The great bulk of absenteeism is in one department.  Even illness resulting in absence from work, we now know, is not distributed as an average, but is concentrated in a very small part of the workforce, e.g. young unmarried women.  The personnel actions which dependence on the averages will lead – for instance, the typical plantwide safety campaign – will not produce the desired results, may indeed make things worse.

Finding the Appropriate Measurement is Risk-Taking Judgement
Drucker writes that appropriate measurement is risk-taking judgment:

Finding the appropriate measurement is thus not a mathematical exercise.  It is a risk-taking judgment. 

Effective People Insist on Alternatives of Measurement
Drucker writes that effective people insist on alternatives of measurment:

Whenever one has to judge, one must have alternatives among which to choose.  A judgment is which one can only say yes or no is no judgment at all.  Only if there are alternatives can one hope to get insight into what is truly at stake.  Effective people therefore insist on alternatives of measurement – so that they can choose the appropriate one.

Key Take Aways
Here's my key take aways:

  • To make the most effective decisions, find the most relevant measurements.
  • Traditional measurements are not the right measurement or there would be no need for a decision.
  • Finding the right measurements is risk-taking judgment.
  • Insist on having alternatives to choose from.

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Sunday, June 22, 2008

Opinions Over Facts for Effective Decision Making

How do you make more effective decisions?  Do you start with the facts?  To make effective decisions, you first start with opinions.  You gather facts based on what's relevant.  You then test opinions against reality.   In The Essential Drucker: The Best of Sixty Years of Peter Drucker's Essential Writings on Management, Peter F. Drucker writes about making more effective decisions.

Decisions are Judgements
Drucker writes that a decision is a judgment:

A decision is a judgement.  It is a choice between alternatives.  It is rarely a choice between right and wrong.  It is at best a choice between “almost right” and “probably wrong” – but much more often a choice between two courses of action neither of which is probably more right than the other. 

Executives Who Make Effective Decisions Don’t Start With the Facts
Drucker writes that effective decisions start with opinions:

Most books on decision-making tell the reader: First find the facts.  But executives who make effective decisions know that one does not start with the facts.  One starts with opinions.  These are, of course, nothing but untested hypotheses and, as such, worthless unless tested against reality.  To determine what is a fact requires first a decision of the criteria of relevance, especially on appropriate measurement.  This is the hinge of the effective decision, and usually its most controversial aspect.

No One Has Ever Failed to Find the Facts They are Looking For
Drucker writes that there are no facts unless you first know what's relevant:

To get the facts first is impossible.  There are no facts unless one has a criterion of relevance.  Events by themselves are not facts.  People inevitably start out with an opinion; to ask them to search for the facts first is even undesirable.  They will simply do what everyone is far too prone to do anyhow; look for the facts that fit the conclusion they have already reached.  And no one has ever failed to find the facts he is looking for.  The good statistician knows this and distrusts all figures – he either knows the fellow who found them or he does not know him; in either case he is suspicious.

Opinion Comes First
Drucker writes that we start out with untested hypotheses:

The only rigorous method, the only one that enables us to test an opinion against reality, is based on the clear recognition that opinion comes first – and this is the way it should be.  Then no one can fail to see that we start out with untested hypotheses – in decision-making as in science the only starting point.  We know what to do with hypotheses – once does not argue them; one tests them.  One finds out which hypotheses are tenable, and therefore worthy of serious consideration, and which are eliminated by the first test against observable experience.

Test an Opinion Against Reality
Drucker writes that effective people test their opinions against reality:

The effective person encourages opinions.  But he insists that the people who voice them also think through what it is that the “experiment” – that is, the testing of the opinion against reality – would have to show.  The effective person, therefore asks, What do we have to know to test the validity of this hypothesis?  What would the facts have to be to make this opinion tenable?  And he makes it a habit – in himself and in the people with whom he works – to think through and spell out what needs to be looked at, studied, and tested.  He insists that people who voice an opinion also take responsibility for defining what factual findings can be expected and should be looked for.

Key Take Aways
Here's my key take aways:

  • Know that decisions are judgments
  • Start with opinions over facts
  • Know the criteria of what's relevant
  • Test your opinions against reality

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Monday, June 9, 2008

Objectives are Like Flight Plans

How do you create effective objectives?  Effective objectives are not straightjackets.  Instead, effective objectives are more like flight plans.  They set directions and guide the resources and energies.  In The Essential Drucker: The Best of Sixty Years of Peter Drucker's Essential Writings on Management, Peter F. Drucker writes about creating and setting effective objectives.

Objectives Must Be Transformed into Work
Drucker writes that objectives don't help unless they're turned into actions:

If objectives are only good intentions, they are worthless.  They must be transformed into work.  And work is always specific, always has – or should have – clear, unambiguous, measurable results, a deadline, and a specific assignment of accountability.

Don't Treat Objectives Like Straightjackets
Drucker writes that objectives must be flexible:

But objectives that become a straightjacket do harm.  Objectives are always based on expectations.  And expectations are, at best, informed guesses.  Objectives express an appraisal of factors that are largely outside of the business and not under its control.  The world does not stand still.

Objectives are Like Flight Plans
Drucker writes that the most effective objectives are like flight plans:

The proper way to use objectives is the way an airline uses schedules and flight plans.  The schedule provides for the 9:00 A.M. flight from Los Angeles to get to Boston by 5:00 P.M.  But if there is a blizzard in Boston that day, the plane will land in Pittsburgh instead and wait out the storm.  The flight plan provides for flying at thirty thousand feet and for flying over Denver and Chicago.  But if the pilot encounters turbulence or strong headwinds, he will ask flight control for permission to go up another five thousand feet and to produce a new schedule and flight plan.  Unless 97 percent or so of its flights proceed on the original schedule and flight plan – or within a very limited range of deviation from either – a well-run airline gets another operations manager who knows his job.

Objectives are Directions Not Fate
Drucker writes that the objectives do not determine the future:

Objectives are not fate; they are directions.  They are not commands; they are commitments.  They do not determine the future; they are means to mobilize the resources and energies of the business for the making of the future.

Key Take Aways
Here's my key take aways:

  • Turn objectives into specific work.
  • Effective objectives are like flight plans.
  • Don't treat objectives like straightjackets.

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Sunday, June 8, 2008

What Our Business Is, Will Be, and Should Be

What is your business?  What will it be?  What should it be? In The Essential Drucker: The Best of Sixty Years of Peter Drucker's Essential Writings on Management, Peter F. Drucker writes about asking what your business is, will be, and should be to avoid spending your energy defending yesterday and instead, spend your energy exploiting today and the future.  

What Should Your Business Be
Drucker writes that you should aim to figure out how to modify, extend and develop your business:

What will our business be?  Aims at adaption to anticipated changes.  It aims at modifying, extending, and developing the existing, ongoing business.  But there is need also to ask, What should our business be?  What opportunities are opening up or can be created to fulfill the purpose and mission of the business by making it into a different business?  Businesses that fail to ask this question are likely to miss their major opportunity.

Systematically Abandon the Old
Drucker writes that you should adjust for changes in society, economy, and market as well as respond to innovation:

Next to changes in society, economy, and market as factors demanding consideration in answering the question What should our business be? comes, of course, innovation, one’s own and that of others.  Just as important as the decision on what new and different things to do is planned, systematic abandonment of the old that no longer fits the purpose and mission of the business, no longer conveys satisfaction to the customer or customers, no longer makes a superior contribution.

Exploit Today and Work on Making Tomorrow
Drucker writes that you should systematically analyze what your business is and what it should be to survive and thrive:

An essential step in deciding what our business is, what it will be, and what it should be is, therefore, systematic analysis of all existing products, services, processes, markets, end users, and distribution channels.  Are they still viable?  And are they likely to remain viable?  Do they still give value to the customer?  And they are likely to do so tomorrow?  Do they still fit the realities of population and markets, of technology and economy?  And if not, how can we best abandon them – or at least stop pouring in further resources and efforts?  Unless these questions are being asked seriously and systematically, and unless managements are willing to act on the answers to them, the best definition of “what our business is, will be, and should be,” will remain a pious platitude.  Energy will be used up in defending yesterday.  No one will have the time, resources or will to work on exploiting today, let alone to work on making tomorrow.

Purpose and Mission Enable Objectives, Strategies, and Focus
Drucker writes that defining the purpose of your business is the key to managing a business:

Defining the purpose and the mission of the business is difficult, painful and risky.  But it alone enables a business to set objectives, to develop strategies, to concentrate its resources, and to go to work.  It alone enables a business to be managed for performance.

Key Take Aways
Here's my key take aways:

  • Ask what your business should be.
  • Systematically abandon what no longer adds value.
  • Don't waste energy defending yesterday.
  • Exploit today and tomorrow through systematic analysis.
  • Systematically analyze existing products, services, processes, markets, end users and distribution channels.
  • Defining your business's purpose and mission enable you to set objectives, develop strategies, and concentrate resources.

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Friday, June 6, 2008

5 Bad Entrepreneurial Habits

What leads to the downfall of established companies?  In The Essential Drucker: The Best of Sixty Years of Peter Drucker's Essential Writings on Management, Peter F. Drucker writes about five bad Entrepreneurial habits that let small companies leapfrog over the big companies.

The Five Bad Entrepreneurial Habits
According to Drucker, the five bad habits are:

  1. NIH (Not Invented Here)
  2. "Cream" a market.
  3. The belief in "quality."
  4. The illusion of the "premium" price.
  5. Maximize rather than optimize.

The Downfall of Established Companies
Drucker writes how the bad habits let small companies use Entrepreneurial judo:

There are in particular five fairly common bad habits that enable newcomers to use entrepreneurial judo and to catapult themselves into a leadership position in an industry against the entrenched, established companies.

Not Invented Here (NIH)
Drucker writes about the Not Invented Here syndrome:

The first is what American slang calls NIH (“not invented here”), the arrogance that leads a company  or an industry to believe that something new cannot be any good unless they themselves thought of it.  And so the new invention is spurned, as was the transistor by the American electronics manufacturers.

"Cream" a Market
Drucker writes about the pitfall of only chasing the big customers:

The second is the tendency to “cream” a market, that is to get the high-profit part of it.

This is basically what Xerox did and what made it an easy target for the Japanese imitators of its copying machines.  Xerox focused its strategy on the big users, the buyers of large numbers of machines or of expensive, high-performance machines.  It did not reject the others; but it did not go after them.  In particular, it did not see fit to give them service.  In the end it was dissatisfaction with the service – or rather, with the lack of service – Xerox provided for its smaller customers that made them receptive to competitor’s machines.

“Creaming” is a violation of the elementary managerial and economic precepts.  It is always punished by loss of market.

The Belief in "Quality"
Customers only pay for what they value -- they don't care how hard it was for you to produce it.  Drucker writes:

Even more debilitating is the third bad habit: the belief in “quality.”  “Quality” in a product or service is not what the supplier puts in.    It is what the customer gets out and is willing to pay for.  A product is not “quality” because it is hard to make and costs a lot of money, as manufacturers typically believe.  That is incompetence.  Customers pay only for what is of use to them and gives them value.  Nothing else constitutes “quality.”

The Illusion of the "Premium" Price
Drucker warns to watch out for "premium" prices:

Closely related to both “creaming” and “quality” is the fourth bad habit, the illusion of the “premium” price.  A “premium” price is always an invitation to the competitor.

What looks like higher profit for the established leader is in effect  a subsidy to the newcomer who, in a very few years, will unseat the leader and claim the throne for himself.  “Premium” prices, instead of being an occasion for joy – and a reason for  a higher stock price or a higher price/earnings multiple – should always be considered a threat and dangerous vulnerability.

Yet the illusion of higher profits to be achieved through “premium” prices is almost universal, even though it always opens the door to entrepreneurial judo.

Maximize Rather Than Optimize
The fifth bad habit is maximizing when you should be optimizing.  Drucker writes that you need to optimize and move on, rather than maximize:

Finally, there is a fifth bad habit that is typical of established business and leads to their downfall.  They maximize rather than optimize.  As the market grows deep and develops, they try to satisfy every single user through the same product or service.  Xerox is a good example of a company with this habit.

Examples of Optimizing Over Maximizing
Drucker provides a couple of examples how smaller competitors beat the larger company through optimizing rather than maximizing:

Similarly, when the Japanese came onto the market with their copiers in competition with Xerox, they designed machines that fitted specific groups of users – for example, the small office, whether that of the dentist, the doctor, or the school principal.  They did not try to match the features of which the Xerox people were the proudest, such as the speed of the machine or the clarity of the copy.  They gave the small office what the small office needed most, a simple machine at a low cost.  And once they had established themselves in that market, they then moved in on the other markets, each with a  product designed to serve optimally a specific market segment.

Sony similarly first moved into the low end of the radio market, the market for cheap portables with limited range.  Once it had established itself there, it moved in on the other market segments.

Key Take Aways
Here's my key take aways:

  • Just because you aren't the first, doesn't mean it's not a good idea.
  • Go after the low-profit part of the market too, not just the "cream."
  • Customer's don't care how hard it is for you; they only pay for what they value.
  • Beware of "premium" prices.
  • Optimize over maximize.

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