Still, Drucker, often called the father of modern management, knew that the board should actively participate in the strategic agenda of the company. In helping it fulfill this vital role, Drucker’s primary tools were a set of well-directed questions and thought-provoking suggestions—the kind of tools for which he is famous. As Drucker correctly predicted, this role of constructive adversary of top management is increasingly critical in the “Lego World.” Legos were a favorite analogy for Drucker to demonstrate how the pieces of a company—its people, products, ideas, and physical assets—fit together and connected and interconnected to build out the two-dimensional proposition of “what products at what price?”

Serving more than seven decades as our leading observer and strategic adviser to business—and as the author of 39 books on management—Drucker, who died in 2005 at age 95, developed a unique perspective on the healthy balance between preservation and change. His theories still revolutionize the way companies operate in the age of the Internet, changing demographics, and the knowledge worker (a term Drucker coined).

The timelessness of Drucker’s thinking continues to amaze even his newest readers. Nobody knew how to capitalize on the past and make way for the future like Drucker. His writings are all about business as an innovative agent of change; he provided solid, practical advice on how to succeed with start-ups as well as with established companies. Should a business stick to what it knows best, or should it take a risk and make a foray into a different area? His laser-like, penetrating questions helped management and the board see their challenges in a new perspective and arrive at innovative answers to strategic dilemmas. Here are some of Drucker’s thoughts, questions, and the cases he referenced as he took on the art of boardroom strategy.

Location, Location, Location

John Bachman, the retired managing partner of the financial services firm Edward Jones, remembers how Drucker got into a contentious discussion with Ted Jones, the chairman of the board. The discussion began with Drucker asking Jones, “How do you decide where you put your offices?” Jones, being clever, said, “Well we do it like the baseball player, Wee Willie Keeler. We hit ‘em where they ain’t.” He went on to explain that they targeted cities where there were no competitors and Edward Jones would be the only game in town. Drucker, pushing him, asked, “Why would you do that?” Jones responded, “Because we do better.” Drucker asked how much better and suggested that they look at the facts. When they did, they found that Edward Jones did 25 percent better where there were competitors. Jones had parsed the market geographically and had defined the customer as the rurally located American with no alternative access to the stock market. After some persistent challenging by Drucker, Edward Jones came to see that its customers were actually people who wanted personal service and relatively low-risk investments, regardless of location. Drucker’s questions fundamentally changed the board’s understanding of the Edward Jones customer and hence, the company’s value proposition.

Early Warnings to DEC About Tsunami

In a 1985 letter to a member of the board of Digital Equipment, Drucker asked if they had thought about the assumptions the business was built upon: “I have a strong feeling that the company—and indeed every other second-tier computer company in the United Statess—has to rethink its basic business assumptions and strategies. I have the distinct impression that the basic rules of the game have changed. First, that the Japanese have decided to adopt IBM as the standard has simply made IBM the standard. The basic strategy of a company like DEC…was to offer an alternative to IBM and thereby [try to] prevent the establishment of one standard in which a DEC would not have a separate identity but would be another IBM-compatible supplier. When the Japanese decided…to adopt IBM as their standard, they…made obsolete the basic assumptions of the smaller American computer companies…But perhaps more serious is…that the entry of the three Japanese companies on the world market has freed IBM from all restraints…Up until a year or two ago IBM very carefully nurtured enough competition to avoid accusations of being a monopoly. It seems to me dangerous to depend on mistakes made by the big competitors especially if the competitor’s pockets are so deep that they can write off a mistake without much pain. What does this mean, assuming my reasoning is correct, for DEC? Can they maintain a traditional strategy or is it time to think through the basic assumptions on which their business rests? Do let me know what you think of my questions.”

The DEC board chose not to question the assumptions underlying the company’s “traditional strategy” despite new external realities. DEC was acquired by Compaq in 1998 after years of poor results.

How P&G Lost Its Way

In 2001, during a period of performance decline at Procter & Gamble, Drucker was asked by the board to review a position paper that was meant to address this decline, which had preceded a broad slow down in the U.S. economy. Drucker followed up his review with a letter to the board:

“In a consumer boom you actually lost market share in some of your most important brands. There are three plausible explanations:

“Incompetent people can be dismissed out of hand. The same people, who today do not produce results, performed magnificently only yesterday.

“The basic assumptions and strategies on which the business operates no longer fit reality. P&G is already re-thinking its basic theory of business, adapting it, changing it, re-focusing it.

“The knowledge, the competence, and drive of performing people are misdirected or inadequately utilized.

“Your position paper is concerned primarily with explanation number three. Your paper argues that traditionally P&G has focused on optimizing its market capital–brands–and has treated the information, knowledge, and passion of people as an ‘input,’ that is, the traditional economist’s ‘labor’ and a ‘cost.’

“It makes no sense, however, to look for an explanation of P&G’s recent malperformance in faulty or inadequate utilization of the intellectual capital. There has never…been a company that has done a better job than P&G in developing people, putting them where the results are, and making high performers out of them. Rather, it may be precisely the very perfection of the P&G system that has become a straightjacket and tends to imprison the individual’s knowledge in the silo of a specialty, a brand, or a market segment, rather than allow it to become a company asset. That approach is, so to speak, a ‘planned economy.’ Worse, it does not utilize the individual’s motivation and passion, the ‘fire in the belly.’ As in any planned economy, performance standards are minimums below which the individual is not allowed to fall. The exceptional performer does so despite them rather than because of them. And he or she is thus also encouraged by the system to keep his or her information and knowledge to themselves rather than contribute them to the company.”

Under the leadership of then P&G CEO A.G. Lafley, who worked closely with Drucker, P&G effectively turned itself around by listening to the exact prescription Drucker advised—it abandoned its rigidity and enabled everyone to recognize the consumer as the ultimate boss.

If Only GM Had Listened

Beginning in 1939, Drucker and Alfred Sloane, then CEO and chairman of the board of General Motors, had a running disagreement. Sloan believed that management was a science. He saw General Motors’ success as a result of the company’s ability to optimize its distinctive economies of scale, manage the flow of money and investments, and provide an expansive dealer network that encouraged trade-ins while selling new cars. Drucker, on the other hand, believed that management was a practice and that the practitioner’s job was to continually challenge the theory and bounds to redefine the “what,” not the “how.”

By failing to reassess its “what,” today’s GM is a sickly shadow of the robust corporation that Sloan built and that thrived for 70 years. Its market share in the United States exceeded 55 percent through 1960. Today, it is less than half of that. In 1980, GM was still the most sought after company to work for by college engineers, according to MIT’s placement office. Today, it is not even in the top ten.

What happened? Customers’ values changed to reflect major shifts in society, taste, and culture. Americans wanted convenience, safety, fuel efficiency, and commuting comfort. Rather than listening and connecting with these values, GM invested in quick fixes and patches—solutions built from their old way of doing business—while the company continued to decline.

Meanwhile, Toyota quietly adopted the Drucker approach, continuously redefining their approach to “what.” At the time, the idea of a Japanese auto running in NASCAR would have been unthinkable. Toyota passed GM last year as the number one automobile company in the world; it’s expected to become number one in the U.S. market this year.

In one of his last conversations, Drucker shared what his advice to the GM board would have been. He would have told them: “Lock yourselves up in a room and assume in two years that you will not make another car anything like the ones you make today.” Then, he would have asked them, “‘how can you use your strength, your position, and your scale to redefine the transportation industry?’ Are they asking those questions?”

The Art of the Boardroom

Anyone reading today’s headlines would conclude that boards need Drucker’s advice more than ever. They need his clarity and often his ethical guidance. To perform effectively, Drucker would say that a board should:

• Understand and embrace the board’s unique mission to be a constructive adversary, even towards the CEO and his or her executive team.
• Guard the ability to have a truly external and longer-term perspective, one that, for example, values innovation and the development of human capital.
• View social responsibility as a necessary, engrained characteristic of the organization. Directors should focus on activities that enhance their organization’s knowledge and abilities in production and marketing but they should also realize the wonderful opportunity to bring responsibility to an organization.
• Balance their role as overseers of the executive team with their critical role as a valuable “sounding board.”
• Challenge their own assumptions and biases—and check the date stamp on their frame of reference—that might otherwise preclude their effectiveness as directors.
• Help ensure thoughtful and sensible succession planning from one era of management to the next.
• Establish effective methods of reporting and communications up and down the organization.
• Conduct detailed self-performance monitoring and tracking evaluations with metrics tied to targeted results.

Elizabeth Haas Edersheim is author of The Definitive Drucker: Challenges for Tomorrow’s Executives—Final Advice from the Father of Modern Management. She is the founder of New York Consulting Partners and a former partner at McKinsey & Co.

Sidebar – P&G’s Lafley on Drucker: curiosity and humility were two of his greatest assets

As I’ve looked back on the conversations and countless hours spent reading Peter Drucker’s books and articles, I’ve thought about what made him so extraordinary. For me, it comes down to five things.

First and foremost, Peter’s basic rule was the importance of serving customers. “The purpose of a business is to create and serve a customer,” he said. Plain and simple. Second, Peter insisted on the practice of management. He had little patience for detached theory and abstract plans.

The third characteristic was his gift for reducing complexity to simplicity. His curiosity was insatiable, and he never stopped asking questions. The fourth defining Drucker strength was his focus on the responsibility of leaders. “The CEO,” he said, “is the link between the inside, where there are only costs, and the outside, which is where the results are.” For many reasons, businesses become inwardly focused. The CEO has primary responsibility for bringing the outside in, for ensuring that the organization understands the views of the market, current and potential customers, and competitors.

The fifth and most important of Peter’s many attributes was his humility. He treated everyone with deep respect. “Management is about human beings,” he wrote. “Its task is to make people capable of joint performance, to make their strengths effective, and their weaknesses irrelevant.”

- From the forward of The Definitive Drucker: Challenges for Tomorrow’s Executives—Final Advice from the Father of Modern Management.