Drucker on Information Challenges, Part 2

In his book, Management Challenges for the 21st Century, Peter Drucker analyzed and discussed the new paradigms of management.

Although much of the discussion revolves around the perspective of the organization, these are my takeaways on how we can apply his teaching on our journey of being a knowledge worker.

Drucker discussed the challenges of managing information in an enterprise. He believed that enterprises exist to create customers and wealth, not to control costs. To run an organization that focuses on wealth creation, Drucker outlined four sets of diagnostic information the executive will need.

1. Foundation Information

The foundation information encompasses the oldest and most widely used tools such as profit-and-loss, cash-flow, and financial ratios. They are like the measurements from routine physical for human health. If those readings are normal, they do not tell us much. If they are abnormal, we need to do something to fix the situation.

2. Productivity Information

We used to measure only the productivity of workers, but those measurements are not enough anymore. Enterprises need data on total-factor productivity. Until business return a profit that is greater than its cost of capital, it operates at a loss. The combination of Economic Value-Added Analysis and benchmarking provide the diagnostic tools to measure total-factor productivity and to manage it.

3. Competence Information

According to Drucker, leadership rests on core competencies that the organization can do but others find it difficult to do them well. Core competencies often meld market or customer value with a special ability from the producer or supplier.

Every organization needs a set of core competencies, and they all might be different. They, however, all need one common core competency: innovation. Every organization needs a way to record and appraise its innovative performance.

4. Resource Allocation Information

The last area of diagnostic information is the allocation of scarce resources: capital and performing people. In the effort to create wealth, all managers need to allocate human resources and capital as purposely and as thoughtful as they can. The outcomes of those allocations must be recorded and studied carefully.

These four sets of diagnostic information inform the executives about their organizations from an internal perspective. They are tactical by nature. To achieve the required results, executives will also need information about the outside world. Those sources of information are more strategic by nature.

A serious cause of business failure if the common, and frequently incorrect assumptions made by the organizations about taxes, social legislation, market preferences, distribution channels, intellectual property and many other. The organization’s information system must be able to capture, measure and report on that information required by the executives, whether from internal or external sources.

At the end of the day, Drucker asserted that “Inside an organization there are only cost centers. The only profit center is a customer whose check has not bounced.”