CHAPTER | THIRTY-FOUR
There Are Only Two Organizational Functions
It's been sixty years since Drucker first wrote, “Because the purpose of business is to create a customer, the business enterprise has two—and only two—basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.”1
Was he being overly simplistic? Was he mistaken? Was he denying the wisdom of pundits who for years had been saying that a business exists to make a profit, that its duty or responsibility was to its stockholders, customers, employees, and/or society? Or, was he just trying to make a point? Moreover, what has this got to do with you if you are a professional or first-line supervisor in an organization?
In much of what Drucker wrote, his concepts aren't limited to big business or higher management levels. They can and should be applied to small businesses, start-ups, governments, nonprofit organizations, and individual professionals, in whatever the line of work. Perhaps this isn't obvious because sometimes Drucker's ideas aren't immediately obvious. They require us to think through his ideas and apply them to ourselves.
Maybe that is one reason he used only a single “textbook” in several of his courses. It was not really a textbook in the true sense. It was his seminal work: Management, Tasks, Responsibilities, Practices.2 The book had over 800 pages, but that's not unusual for management texts. The “Drucker difference” in this case was how he used the book to supplement his lectures.
Many professors divide an 800-page textbook into its parts to correspond with the classes in the term, so that by the end of the course the students have gone through the entire book. But Drucker said that it was impossible to master the contents of an 800-page book in one course. So his students were responsible only for a limited number of chapters. Moreover, if students took another Drucker course, they simply got familiar with a different set of chapters from the same book.
Drucker, No Nostradamus
Understanding Drucker is sometimes not too different from trying to comprehend the predictions of early astrologers, such as the sixteenth-century Italian Nostradamus. The problem with reading Nostradamus's predictions today is that no matter how amazingly accurate they seemed to be in their time, they are difficult to interpret now. Detractors point out that since these ancients are viewed with hindsight, people tend to analyze their predictions so as to confirm their accuracy. This is not true of Drucker, however.
Among his economic and business predictions, Drucker proves to have been right. He foresaw the rise of the healthcare industry and the future of online executive education. Also, fifty years ago he warned us of the terrible price society would pay as a result of the greed of both management and labor—consequences that we feel today. Although he had hoped to become a professor at the University of Cologne, Peter Drucker escaped Germany only days after Hitler took power. He knew what Hitler was about, and there certainly is little doubt about the accuracy of Drucker's predictions in this case.
Nevertheless, there is still sometimes a mysterious touch of Nostradamus in Drucker's observations and in trying to apply his advice to business operations today. Years ago, a reviewer noted of Drucker's writings, “It's not that Drucker isn't explicit; he is very explicit in everything he writes. The problem is, Drucker frequently tells us what to do, but not how to do it.”
The Essential Nature of Innovation
As noted above, Drucker wrote that innovation and marketing are the two basic functions of any business. Innovation refers to the introduction of something new and better. He confirmed this in his assertion that if a business continued to do what made it successful in the past, it would eventually fail. Though not obvious, that point applies to any organization today. It seems logical that if a company has been successful, it should keep doing what has made it successful, with the expectation that it will continue to do so. Yet, as usual, Drucker was right.
Of course, some examples of this are so evident that one wonders how anyone can miss the point. Henry Ford made millions of dollars with his Model T, “the car of the century.” Yet this wonderfully successful vehicle also caused Ford to lose a good part of its market to General Motors for forty years as the Model T went through its life cycle. As pointed out in Chapter 23, this happened because Henry Ford refused to accept that potential customers were prepared to pay more for a variety of options. Ford stubbornly would not provide these options because, blinded by past success, he was convinced that allowing even just the paint color to deviate from basic black would be an unnecessary concession to a temporary aberration and would befoul the legacy of his car's success. This sort of thing happens all the time.
Example: Burma-Shave and Its Highway Signs
Innovation can be many things, but its success does not go on forever. Remember those roadside Burma-Shave signs? You could not escape them years ago. It all started with a failing company that manufactured a brushless shaving cream, the ingredients of which supposedly originated in the Malay Peninsula and Burma. Its marketing innovation was novel, exciting, timely, and wildly successful.
This was the early 1920s, and America had fallen in love with the automobile—and not only Ford's Model T. By the millions, Americans took to the highways. Fun, yes, but also a little boring. Cars could travel at only a relatively modest speed in those days. So, the Burma-Shave people put small signs at intervals along the road, spacing out the short messages so they could be read easily. Space for the signs was rented from farmers at low cost. Americans were soon reading little sayings, such as:
Soon there were 7,000 such jingles lining America's highways, and Burma-Shave sales soared such that the company's product became the number two choice for shaving cream. Burma-Shave stood out in American marketing and advertising endeavors. It was different from anything else and it had its own personality. It became part of the national culture. People talked about the signs, they were mentioned in the entertainment media, and the lyrics even began to include public-service messages, such as:
But in 1963 the signs suddenly disappeared. What had happened? It was the same old story. The signs were originally highly successful, so the company continued the same campaign—the campaign never changed. Automobiles did—they traveled a lot faster. Billboards changed, too—they got bigger and more costly. The signs drew competition. Suddenly this successful innovation was no longer a novelty. More important, the signs no longer attracted customers.3,4,5
Innovation Required!
In my years of consulting for local small businesses, I was amazed at the numbers of businesses whose owners went into business without understanding that a mere desire to open a retail store, laundry, restaurant, or barbershop did not guarantee customers. A large number of them hadn't considered the question of why a prospect should buy from them rather than from an established enterprise already serving the area. Innovation, as well as marketing, was always needed.
Drucker Views Marketing
Drucker's second basic function of business is marketing. Why is marketing a basic function? The answer is bound up in the terms selling and marketing. Most people think that marketing and selling are pretty much the same, but they are mistaken. Drucker knew that they are not the same, and he was one of the first to write about this. Moreover, he taught that good selling could actually be adversarial to good marketing.
How can this be? Remember that an important aspect of selling is to persuade a prospect to buy something that you have. On the other hand, marketing involves telling a prospect what you have that he or she wants. Making decisions on where to invest your time, money, and effort is part of marketing. So, marketing is much broader and more strategic than selling.
Drucker liked to say that if marketing were done perfectly, selling would be unnecessary. Of course, it's not unnecessary; selling is absolutely necessary. However, good selling of a product or service you shouldn't be selling is a waste of time, money, and effort; you need to move on and seek something more valued by your prospect. Then you can sell easier, at lower cost, and in greater quantities than you would have sold that other product or service. With this perspective, good selling may indeed be the enemy of good marketing.
Innovation and Marketing Apply to You
As with other Drucker insights, this insight about innovation and marketing applies to you, as an individual, as well as to any business with which you might be associated. If you are doing a competent job and are successful as an HR professional or a nuclear scientist, you had better think about innovating, especially when the economy is tough. Innovation and marketing are the ingredients of business success, and they are the essentials of personal success as well. Drucker was right again.