A Strong Position on Neutrality

May 092012
 

When we visit a grocery store, we can expect Kellogg’s breakfast cereals to be taking up a lot more shelf space than those of its smaller rivals. The big guys tend to have access to the best distribution channels.

On the Internet, though, a start-up website created by a guy sitting at home in his underwear has a real shot at going head-to-head with a much bigger rival, secure in the knowledge that his offerings can show up just as clearly and quickly as a far larger and more established site. This is what Eduardo Porter, who worries today in a New York Times column about the danger of losing Internet neutrality, wants to protect.

Companies offering broadband access, Porter suggests, should not be allowed to discriminate among services online. “If they did, the best service would not always win the day,” Porter writes. Instead, the winners would be those in the best position to cut a deal with AT&T, Verizon, Comcast or Time Warner—in other words, those with the deepest pockets and most clout.

In his book The New Realities, Peter Drucker noted that government regulation is sometimes required to keep the big players from smothering the small ones. Among the most complicated and controversial of government functions, Drucker wrote, is “to maintain what we today call a ‘level playing field.’ Government can set ground rules that are equally binding on everybody.”

In this respect, government “should be a good deal more activist than 19th-century liberals such as Herbert Spencer preached and wanted,” according to Drucker.

But, as we’ve noted previously, Drucker also strongly counseled businesses to rein themselves in. Wherever the elimination of a negative impact to society “requires a restriction,” Drucker wrote, “regulation is in the interest of business, and especially in the interest of responsible business.”

If an enterprise forgets this, it’s liable to generate public outrage—perhaps not immediately, but eventually—that results in punitive regulation. “If our social impacts are not right, it is the responsibility of the company to educate the customer and society so that the negative impact can be eliminated,” Drucker wrote. “The fact that today the public sees no issue is not relevant.”

What do you think: Should companies offering broadband access work to preserve Internet neutrality—for their own good, as well as for ours?

If You Like This Post, You Might Blog Something Similar

Apr 252012
 

We should be inventors and monopolists. That is the case columnist David Brooks makes in the New York Times today.

Inspired by the example of Peter Thiel, co-founder of PayPal, Brooks writes that more Americans should disengage from head-to-head competition and instead do an end-run around it. Don’t give the consumer more choices; instead, come up with a monopoly on something so great that no one can resist it.

“Instead of being slightly better than everybody else in a crowded and established field, it’s often more valuable to create a new market and totally dominate it,” Brooks writes. “The profit margins are much bigger, and the value to society is often bigger, too.”

Nice work if you can get it, and Peter Drucker certainly saw the value of having a lock on something, a “niche” to yourself. He also taught that to be successful, an innovation “aims at leadership” in a given market or industry.

But at the same time, Drucker liked to speak up for good old-fashioned competition through aping—what he called “creative imitation.” That’s when the entrepreneur copies something others have already done, but does so with a better understanding of what the innovation represents. “The creative imitator does not invent a product or service,” Drucker wrote in Innovation and Entrepreneurship. “He perfects and positions it.”

Take IBM in the early 1980s. It suddenly decided, based on the competition, that it wanted to produce personal computers. “The idea was Apple’s,” Drucker noted, but IBM acted fast. “Within two years it had taken over from Apple leadership in the personal computer field.” And, he added, “Procter & Gamble acts very much the same way in the market for detergents, soaps, toiletries and processed foods.”

This sort of thing also saves the copycat a lot of trouble. “By the time the creative imitator moves, the market has been established and the new venture has been accepted,” Drucker wrote. “Most of the uncertainties that abound when the first innovator appears have been dispelled or can at least be analyzed and studied.”

Still, that doesn’t mean that creative imitator is always the best way to go. “What it lacks in risk,” Drucker warned, “creative imitation makes up for in its requirements for alertness, for flexibility, for willingness to accept the verdict of the market and, above all, for hard work and massive efforts.”

Has your business ever been a creative imitator? Did it work?

What’s In Store for Stores?

Apr 112012
 

To purchase a product for a bargain at a store is nice. But to find a product in a store and then purchase it even more cheaply online—often from a rival purveyor—is heavenly.

It’s a practice known as “showrooming,” and, as The Wall Street Journal explained today, the customers who practice it “have become the bête noir of many big-box retailers.”

Not surprisingly, these brick-and-mortar stores are scrambling to stave off the trend. Target, for instance, has “pushed its suppliers to offer it exclusive products that can’t be found elsewhere,” the Journal reported.

Whatever happens, showrooming is merely the latest phenomenon to roil the industry. “The retail store has . . . changed many times over the past 300 years of its existence,” Drucker pointed out in Managing in a Time of Great Change, noting that “new retailers” grasp that shopping is “no longer a satisfaction” but a chore.

Drucker made this observation in 1993, as new chains like Wal-Mart were growing fast. “Still, there are signs that theirs, too, may be a fairly short-lived success,” Drucker warned. “Retailers now talk of ‘shopping without a store’ through interactive TV.”

The potential of online shopping, in other words, was already visible (to Drucker, at least) two decades ago. “The technology for all this is available and is increasingly less expensive,” Drucker wrote. “And there are quite a few signs that a substantial number of customers are becoming receptive to it.”

As for what Drucker would advise traditional retailers to do now, we can’t say for sure. But he would probably have supported Target’s focus on exclusive brands, even if they aren’t moneymakers. “A store whose reputation rests exclusively on the brand names everybody else can carry has no reputation or identity at all,” Drucker wrote in Managing for Results. “All it has is an address.”

Illustration credit: Sylvia Nickerson

And he may also have urged some of the retailers to reconsider their basic business model, as Sears did early in the 20th century. As Drucker recalled, Sears evolved “from a near-bankrupt, struggling mail-order house at the beginning of the century into the world’s leading retailer within less than 10 years” by altering its mission from serving the American farmer (through its catalogue) to serving the American family (through its stores).

If this kind of insight can transform a struggling mail-order house into a leading retailer, perhaps it can also transform a struggling retailer into a leading mail-order house (which, of course, is basically what Amazon is).

What do you think is going to happen to big-box retail over the next decade?

Minds Over Mines

Mar 122012
 

You may have heard the term “resource curse,” but who knew that you could put numbers to it?

According to a study from the Organization for Economic Cooperation and Development, the more oil and other natural resources (whether diamonds or coal) that your country has, the worse you’re likely to do in school.

The OECD came to this conclusion by looking at the Program for International Student Assessment, or PISA, exam, which tests the math and reading of 15-year-olds around the world. Writing in the New York Times over the weekend, Thomas Friedman summed up the findings: “Add it all up and the numbers say that if you really want to know how a country is going to do in the 21st century, don’t count its oil reserves or gold mines, count its highly effective teachers, involved parents and committed students.”

That academic achievement correlates with success is hardly news, of course. But it’s a striking testament to the increasing importance of knowledge work, something Peter Drucker defined and wrote about for much of his life.

Illustration by Marie Rossettie

“Knowledge is the only meaningful resource today,” Drucker declared in Post-Capitalist Society. “The traditional ‘factors of production’—land (i.e., natural resources), labor, and capital—have not disappeared, but they have become secondary. They can be obtained, and obtained easily, provided there is knowledge.”

There was a time, of course, when the United States boasted arguably the best education system in the world. “The only resource in respect to which America can possibly have a competitive advantage is education,” Drucker wrote in his 1967 book The Effective Executive. “American education may leave a good deal to be desired, but it is massive beyond anything poorer countries can afford. For education is the most expensive capital investment we have ever seen.”

In more recent years, the ability of American students to excel in the classroom has come into question. Many other parts of the world—including Macau, Slovenia and Poland—outrank the U.S. on the OECD chart. For his part, Friedman said that Taiwan is his favorite place when it comes to mining its people’s “talent, energy and intelligence.”

What about you? What country do you think is best positioned in this knowledge age—and why?

When Your Broken Hip Is My Incentive

Mar 052012
 

Image credit: Sean McCabe

You never want to be embroiled in something that ends with a “gate.”

Unfortunately, if you’re on the New Orleans Saints, you’re now caught up in “Bountygate.”  As the New York Times reported, members of the team’s defense “maintained a lucrative bounty system that paid players for injuring opponents, according to an extensive investigation by the NFL.”

“The bounty system was financed mostly by players—as many as 27 of them—and was administered by the former defensive coordinator Gregg Williams,” the Times explained. “The system paid $1,500 for knocking a player out of a game and $1,000 for when an opponent was carted off the field, with payouts doubling or tripling during the playoffs.”

You could say that this is little more than an indication of how competitive—and inherently violent—the NFL is. But another way to look at it is a management lesson in the consequences of bad incentives.

“Human beings will behave as they are rewarded—whether the reward is money and promotion, a medal, an autographed picture of the boss, or a pat on the back,” Peter Drucker wrote in Management: Tasks, Responsibilities, Practices. “This is the lesson that the behavioral psychologist has taught us.”

That’s why Drucker warned against any compensation schemes that would “reward the wrong behavior, emphasize the wrong results and direct people away from performance for the common good.” Simply put, Bountygate is a cartoonish example of rewarding the wrong behavior.

But would men making millions of dollars a year really be tempted by payments of a few thousand dollars?  No way, says former Saints defensive back Darren Sharper, who denies that rewards ever got paid out for injuries. “The math doesn’t make sense,” Sharper told USA Today. “The amount that you would get fined for taking a cheap shot at a guy is exponentially higher than what the amount of money that a bounty could be.”

On this score, Drucker may well have agreed—at least partially. Money, Drucker pointed out, is only good for making people do something they already want to do. As he put it in The Practice of Management, cash “motivates only where other things have made the worker ready to assume responsibility.”  This could be seen, for example, in the workings of incentive pay for higher output. “The incentive pay produces better output where there is already a willingness to perform better,” Drucker wrote. “Otherwise it is ineffectual, is indeed sabotaged.”

In other words, maybe players did try to get $1,500 for injuring opponents, but, if so, they probably did it for love, not money.

What really motivates us—bonuses or the achievement that bonuses symbolize?

The Feedback

Feb 072012
 

When we asked our readers if they agreed with Charles Murray that the United States is cleaving into two castes, our readers agreed on this much: America is divided into stark economic classes. But when it came to assessing gravity, assigning blame or proposing solutions, our readers were even more divided than the America of Murray’s description. (Not that we would want it any other way; Peter Drucker encouraged dissent.)

George Williams said, sure, we’ve always had different classes, but the difference now is in alliances:

Reagan came along and convinced poor whites they were middle class and got them to give up their unions—their true source of economic advancement. In the 21st century, the rich do not need the poor of any color, and have no interest in their interests.

Reader Mike Grayson saw debt serfdom, special interests and lack of opportunity as a primary cause of our divides:

The bottom line is that people are enslaved by debt, and it is this debt that causes such a stark contrast between classes, and is what has eaten away at the middle class during the past decade. . . . Those of the lower classes must become more financially literate and not succumb to the temptation of debt. Equal opportunity must be defended. The legislation that tips the level playing field must be reversed, and the special interests must be defeated.

And reader Greg Zerovnik echoed David Brooks’ recommendation of an increased governmental role in fostering social cohesion:

In order to for our society to become less individuated, we need to have all socioeconomic levels do more things together—not just any things, but things that inculcate positive, constructive social norms. The answer is for us to require universal service to the country for two years for every man and woman. You hit the age of 18, in you go.

Difficult Tradeoffs

Jan 252012
 

For those of us who struggle to remember yesterday, let alone 30 years ago, the news came as a surprise. Japan, for the first time since the early 1980s, recorded a trade deficit for the year 2011.

“It reflects fundamental changes in Japan’s economy, particularly among manufacturers,” Hideki Matsumura, senior economist at Japan Research Institute, told the Associated Press this week. “Japan is losing its competitiveness to produce domestically.”

Of course, such a state of affairs is unlikely to endure. Massive earthquakes, nuclear disasters, tsunamis and skyrocketing currency value don’t come around every year. And the country maintains a high trade surplus with the United States. But at a time when every nation seems determined to run a trade surplus, Japan’s example is worth a look.

Peter Drucker characterized the Japanese economic model as being “highly mercantilist,” meaning that national power is sought through economic strength, in particular by maintaining a trade surplus. “The Japanese . . . only sell; they do not buy,” Drucker wrote in The Frontiers of Management. “They practice adversarial trade.”

This wasn’t simple Japan-bashing, for Drucker admired Japan immensely (as we’ve noted). But he warned that such insistence on being all-sell-and-no-buy was a mistake. “In adversarial trade, both sides lose—one side, the buyer, right away, the other side, the seller, within a decade or so,” Drucker wrote.

The costs to the buyer are obvious. “If the seller in adversarial trade is truly successful, he eventually destroys the buyer’s industry,” Drucker said. The U.S. saw its consumer electronics largely replaced by those from Japan, for instance.

Illustration by Michael Austin

But the costs to the seller are still considerable, if less obvious. 

“The seller has no defense against retaliatory action on the part of the buyer,” Drucker explained.  “He cannot counter-act by stopping his purchases: he does not make any.” For instance, while the U.S. could survive without imports from Japan, “Japan without industrial exports to the United States would face a major depression with double-digit unemployment.”

And that’s not all. “The seller in adversarial trade is also bound in the end to lose financially,” Drucker asserted. “He cannot be paid at all.”

Of course, today, China has long since displaced Japan as the chief mercantilist of the globe, and China faces similar problems. So while Japan’s trade deficit may seem like a setback, Drucker might call it an accidental blessing.

What do you think: Should Japan be worried about its trade deficit?  

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