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Millennium Challenges The change Leader You can't manage change. You can only try to stay ahead of it. To embrace tomorrow one must first abandon today. By Peter F Drucker One cannot manage change. One can only be ahead of it. In a period of rapid structural change only change leaders will survive. The changes are not primarily economic. Not even primarily technological. They are changes in demographics, in politics, society, and in philosophy. In a period of upheavals, such as the one we are living in, change is the norm. Unless
it is seen as the task of the organization to lead change, the organization will not
survive. A change leader sees change as opportunity. A change leader looks for change, knows how to find the right changes, and knows how to make them effective both outside the organization and inside it. This requires: Policies to make the future; Systematic methods to look for and to anticipate change; The right way to introduce change, both within and outside the organization; and Policies to balance change and continuity. Change policies There is a great deal of talk today about "the innovative organization." But making an organization more receptive to innovation--even organizing it for innovation--is not nearly enough to be a change leader. It might even be a distraction. For to be a change leader requires the willingness and ability to change what is already being done just as much as to do new and different things. It requires policies to make the present create the future. The first policy--and the foundation for all the others--is to abandon yesterday. In fact, it is not possible to create tomorrow unless one first sloughs off yesterday. To maintain yesterday always commits the institution's scarcest and most valuable resources and above all, its ablest people to non-results. The first change policy has to be Organized Abandonment. The change leader puts every product, service, process, market, distribution channel, customer, and end-user, on trial for its life on a regular schedule. In three cases the right action is always outright abandonment. Abandonment is the right action if a product, service, market, or process "still has a few good years of life." It is these dying products that always demand the greatest efforts. They tie down the most productive and ablest people. Usually they are not "dying"; they are dead. But equally, a product, service, market, or process should be abandoned if the only
argument for keeping it is: "It's fully written off." To treat assets as being
fully written off has its place in tax accounting, but nowhere else. The question is
never: "What have they cost?" The question is: "What will they
produce?" And assets that no longer produce except in accounting terms. Drucker The third case where abandonment is the right policy--and the most important one--is when efforts to maintain the old, just for the sake of maintaining it causes the new project to be neglected. One recent example of what not to do is how the future was sacrificed in the nineties, on the altar of yesterday, by General Motors and the United Automobile Workers Union (UAW). Everybody knows that the Japanese automobile makers acquired 30% of the U.S. passenger-car market in ten short years. For 15 years General Motors did nothing except fiddle with prices and discounts--none
to any effect. Then, finally, in the late 1980s it decided to counterattack with a new car
called the "Saturn." But the Saturn did not compete with the Japanese makes. All
its sales came at the expense of declining--if not dying--GM brands such as Oldsmobile and
Buick. And then GM--and even more so GM's labor union, the United Automobile
Workers--began to throttle the Saturn. It was denied money for expansion; that money went
instead into futile attempts to "modernize" Oldsmobile and Buick plants. It was
denied money to develop new models. And the UAW began to whittle away at the Saturn's new
and successful labor relations for fear that Saturn's example in building management-labor
partnerships might spread to GM's other plants. How to act on abandonment is thus the second question. It is actually more controversial and more difficult. The answer should therefore always be tested on a small scale. The change leader must therefore also ask of every product, service, market, or process: "If we were to go into this now, knowing what we now know, would we go into it the way we are doing it now?" And this question needs to be asked of the successful product, service, market and process as regularly--and as seriously--as of the unsuccessful product. Organized improvement The next policy for the change leader is organized improvement (what the Japanese call "Kaizen"). Whatever an enterprise does internally and externally needs to be improved systematically and continuously: product and service, production processes, marketing, service, technology, training and development of people, using information. And it needs to be improved at a preset annual rate: In most areas, as the Japanese have shown, an annual improvement rate of 3% is realistic and achievable. However, continuing improvement requires a major decision. What constitutes "performance" in a given area? One example: complex and difficult products in which the rejection rate is high. To improve a rejection rate of 40% of a finished product to one of 35% is quite obviously a substantial improvement. But in most other areas the decision is by no means that simple. Continuous improvements in any area eventually transform the operation. They lead to product innovation, service innovation, new processes, and new businesses. Eventually continuous improvements lead to fundamental change. Exploiting success The next policy that the change leader needs to develop is the exploitation of success. It is only 70 or 80 years since the "monthly report" was introduced in most business organizations. Almost without exception this report focuses on problems. In the monthly operating committee meeting it is this report on the problems that is discussed, and nothing else. Problems cannot be ignored. But to be change leaders, enterprises have to focus on opportunities. They have to starve problems and feed opportunities. This requires an additional "first page" to the monthly report, that should precede the page that shows the problems. It focuses on where results are better than expected, whether in terms of sales, revenues, profits or volume. As much time then should be spent on this new first page as has traditionally been spent on the problem page. In some organizations, the opportunity page is given its own full morning, with a second full morning devoted to the problems. Enterprises that succeed in being change leaders staff the opportunities. The way to do this is to list the opportunities on one page and the organization's capable people on another. Then one allocates the ablest people to the top opportunities. Creating change The last policy for the change leader is a systematic policy of innovation. The main reason may not even be that change leaders need to innovate--though they do. The main reason is that a policy of systematic innovation produces the mindset for an organization to be a change leader. It makes the entire organization see change as an opportunity. Windows of opportunity This requires a systematic policy to look, every six to 12 months, for changes in the areas that I call "the windows of opportunity":
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, technologies, or distribution channels?" Innovation can never be risk-free. But if innovation is based on exploiting what has already happened--in the enterprise itself, in its markets, in knowledge, in society, in demographics and so on--it is far less risky than not to innovate by exploiting these opportunities. Innovation is not a "flash of genius." It is hard work. What not to do There are three traps into which change leaders fall again and again. An innovation opportunity that is not in tune with the strategic realities of the business. To confuse "novelty" with "innovation." The test of an innovation is that it creates value. A novelty only creates amusement. Yet, again and again, management decides to innovate for no other reason than that they are bored doing the same thing day in and day out. Confusing motion with action. Typically when a product, service or process no longer produces results and should be abandoned or changed radically, management "reorganizes." To be sure, reorganization is often needed. But it comes after the action--that is, after the "what" and the "how" have been faced up to. Piloting Enterprises increasingly use all kinds of market and customer research to limit, if not eliminate, the risks of change. But one cannot market research the truly new. Neither market research nor computer modeling are a substitute for the test of reality. Everything improved or new needs 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. As said before, everything new gets into trouble. And then it needs a champion. And this person needs to be somebody whom the organization respects. This need not even be somebody within the organization. A good way to pilot a new product or new service is often to find a customer who really wants the new, and who is willing to work with the producer on making it truly successful. The change leader's two budgets Finally, successful change leadership keeps two separate budgets. 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 first budget is an operating budget that shows the expenditures to maintain the present business. This is normally 80% to 90% of all expenditures. Then the change leader has a second, separate budget for the future. This budget remains stable throughout good times and bad. It rarely amounts to more than 10% or 12% of an enterprise's total expenditures. The future budget should be approached with the question: "What is the maximum this activity can absorb to produce optimal results?" That amount should be maintained in good times or bad--unless times are so catastrophic that maintaining expenditures threatens survival of the enterprise. But 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 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 the competition is likely to cut spending and therefore likely to create an opening. Changes and continuity The traditional institution is designed for continuity. That explains why existing institutions face resistance to change. Change leaders are designed for change. Yet they still require continuity. People need to know where they stand. They do not function if the environment is not predictable. But continuity is equally needed outside the enterprise. To be able to change rapidly, one needs close and continuous relationships with suppliers and distributors. 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, to balance rapid change and continuity. This balance will predictably be one of the major concerns of tomorrow's management. One way is to make partnership-in-change the basis of continuing relationships. This is what the Japanese "Keiretsu" has done with respect to the relationship between supplier and manufacturer, and what is now adopted fast in American business through "Economic-Chain Accounting." Balancing change and continuity requires continuous work on information. It has to become routine for any enterprise to ask at any change--even the most minor one--"Who needs to be informed of this?" This will become more important as people no longer work next door to one another and see one another half a dozen times a day. At the same time, it will also become more and more important for these people to get together and actually meet one another and work with one another on an organized, systematic, scheduled basis. Finally, the balance between change and continuity has to be built into compensation, recognition and rewards. We long ago learned that an organization will not innovate unless innovators are properly rewarded. Making the future One thing is certain for developed countries--and probably for the entire world: We face long years of profound changes. The changes are not primarily economic changes. They are not even primarily technological changes. They are changes in demographics, in politics, in society, in philosophy and, above all, in world-view. But a few things are certain in such a period. It is futile to try to ignore the changes and to pretend that tomorrow will be like yesterday, only more so. The only policy likely to succeed is to try to make the future. To try to make the future is highly risky. It is less risky, however, than not to try to make it. [This abridgement of Chapter 3, "The Change Leaders," from the book Management Challenges for the 21st Century by Peter F Drucker, Copyright 1999 by Peter F Drucker, is reprinted by permission of the author and HarperCollins, publishers, New York, NY. Peter F Drucker was born in 1909 in Vienna and educated there and in England.
After earning his doctorate in public and international law while working as a journalist
in Frankfurt, Germany, he came to the US in 1937. Two years later he published his first
book, The End of Economic Man. His books and analyses of economics and society are
widely respected and are published in 20 languages. For more than 20 years he has been a
professor at the Graduate School of Business of New York University. Since 1971 he's been
Clark Professor of Social Science at Claremont Graduate School in California.] |
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Originally published in the April 2000
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