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Exponential Change: Applying PeterDruckers Principles to Your Business

W. Lloyd Williams, CIMAwww.finishwell.net

Over the years, Peter Drucker has been the foremost writer on business management.Writing for nearly sixty years, he has published 36 books on the topic of managing abusiness. Recently, he published a compilation of some of his works under the title,The Essential Drucker. This book should be mandatory reading by all businessowners. It is probably the greatest compendium of thought about managing a businessprudently, properly and effectively, that has ever been written. I simply cannotrecommend this book too highly.

As I was reading through the book, I was impressed by the amount of material that isdirectly applicable to the financial industry. Two major points that Drucker emphasizesare of particular interest and I want to review those with you.

Drucker says there are two basic functions in a business: marketing and innovation.The aim of marketing, he says, is to make selling superfluous. To know andunderstand the customer so well that the product or service fits him and sells itself." Ourprimary business focus has tended to be on sales and service, but Drucker says thatmarketing and innovation are what is important today. From Drucker's standpoint, if weunderstand the customer, we understand the market and, if we identify the customer'sneed, we identify the solution. Sales then become superfluous and the client, whoseneeds are being met by our services, will beat a path to our door.

Let us look more closely at what Drucker means by marketing. He says that the firstquestion you should ask is: who is our client right now? Ask yourself, what does he looklike? Demographically, where does he come from? The next question is: what is goingon in the mind of the client? Where is the clients head? With the ups and downs of themarket over time, clients tend to be more bullish or more bearish, scared at times, andexcited at times. Without knowing where our client is, we can sometimes be marketingto the wrong person. The third question Drucker poses is: what does our client buy? Inthe past, what have been his buying patterns? What are the attractions in his life? If hestops buying stocks and bonds, will he shift to real estate? Is he buying antiques?What is the client spending money on? As the client base gets older, they move from aninvesting stage into savings and then later into the enjoyment of those savings, as theystart to spend it in retirement on leisure activities and travel. So, where does your clientbuy and what is he buying? The last question of the four, which Drucker says areimportant about marketing, is what I believe to be the most important. Which of myclients wants are not adequately satisfied by the products or services offered himtoday? This question goes to the heart of the matter. What is it he would like to have?

Drucker states that our primary job is to define the landscape for our client as well as thevoid in that landscape. Imagine a client in front of a window looking out to see a


beautiful landscape. Imagine it as an oil painting, which is unfinished because theclients life is unfinished. There are still parts that need to be completed. Because ofthe unfinished nature, there is a void that exists and Drucker says it is our job to not onlydefine the landscape for our client, but also the void within that landscape, because it isthat empty space that reveals what is needed now. As we look at our clients life, we seethose areas that need improvement and it is there that the opportunity lies for us to be ofbenefit. It is there that innovation comes into play.

Drucker says that the first and foremost function of a business is marketing, whichentails asking the four questions and determining the void in your clients life, but theninnovation comes into play to identify the solution. Innovation, Drucker states, is the taskof endowing human and material resources with new and greater wealth-producingcapacity. This calls for a strategic look at a client's life.

As we draw the landscape for the client, we are asking him or her to look out three yearsto the future and focus on the five most important areas of life, both business andpersonal. If he is still actively involved in business, he has to deal with the areas ofmarketing, client retention, practice management and finance. He also has to thinkabout the personal side of life as well. By helping him to focus on these thought barriers,just as we have to focus ourselves, we will assist the client in thinking strategically abouthis life. This is why it is essential to realize that the most important investment policydecision is in the area of asset allocation, because it is there that we are strategicallyaligning the clients investments with his life's goals.

But how do we manage this innovation? Drucker says that there are three importantquestions we must ask to manage innovation. First, what is our business? Whatbusiness are we in? What have we been doing? What is the attraction that we have tothe community at large today? But then more importantly, Drucker says, the secondquestion is, what business should we be in? Based upon our analysis of the clientsbuying habits, needs and wants, what should our business be? We may find that thepath we are traveling down is not the same one that our client is on. The client we had10 years ago might not be the same client we are dealing with today, so what businessshould we be in? Where are the trends that are impacting our industry, and how arethey affecting our practice? But third and most importantly, I believe, the final questionabout managing innovation is: What should we abandon? Peter Drucker says in aquote: "Just as important as the decision on what new or different things to do...isplanned, systematic abandonment of the old that no longer fits the purpose andmission of the business, no longer conveys satisfaction to the customer, no longermakes the superior contribution." Looking out and saying: What has changed? Whatsystem, procedure, product or service that we have been providing, has now becomehabitual, is no longer necessary, is no longer valid or is no longer meeting its originalintent because either the client, the circumstances or society at large has changed? Toooften the procedures, processes, products and services become outdated, but becausewe are comfortable with them and they have worked in the past, we continue to stay withthem. The reality is that we need to systematically examine and abandon those that nolonger fit our needs.

If your business looks today like it did five or ten years ago, if the products and services,systems and procedures that you are using today look identical to what they did a


decade ago, you probably have a problem. The client has changed and you have not.This has been a real problem in the past for companies like Leica and Kodak. Leicawas once considered one of the premier camera companies in the world, but thenalong comes Nikon, an upstart with a camera called the single lens reflex. It was biggerand noisier than the very sophisticated and beautiful Leica, but it gave an exactrepresentation of the picture that the photographer would see on the film. BecauseNikon looked out to the professional photographer and asked, "What do you want?" andthen delivered that, Leica woke up one day and realized that they had lost the majority ofthe market share they once held and were never to regain it again. They forgot toabandon things that stopped working. They stopped innovating.

Kodak almost had the same problem when digital film came onto the marketplace andthey delayed, thinking it was not going to be very popular, it was not going to work. Theydid not realize the importance of convenience, and they almost missed the boat andcreated a huge opportunity for Fuji, Epson, Sony, and Apple to come into the digitalphotography marketplace and capture huge amounts of market share. This samescenario has been repeated over and over again through the lives of numerouscompanies. But by asking these three questions - What is our business? What shouldit be? and What should we abandon?, - we can stay closer aligned with the clients pointof view.

The next and most important thing that Drucker says about a business is mission - theimportance and realization that the mission is the passion that drives our life withimpact. The mission of our business must be translated into objectives, and Druckeruses a great phrase, "Objectives are action commitments." Its an idea that fits alongperfectly with what we have taught in the past in regards to the Exponential Changeprocess and doing your 90-day action plans. These are the commitments that you needto achieve to reach the vision you have of your business three years out.

As we look at the tools and resources that we have delivered in the past through theExponential Change Worksheets, we have decided to make these available to youonline for free download. Because we believe that they are so powerful and the impactthat they have had on the lives of our coaching teams have been so great, you can go tohttp://www.finishwell.net/Tools/CEC_Workbook.pdf and download a set of theExponential Change Worksheets. They walk you through these steps of first identifyingthe mission, of secondly, looking out and identifying the landscape of your life and thevoids in that landscape in five specific areas and then identifying, as Drucker calls them,the action commitments or the action plan for the next 90 days. Then it drills the processdown to this week's meeting with your team and determines the specific tasksnecessary so that in three years you have more than accomplished the vision that youestablished up front.

I hope these tools are valuable to you. I encourage you, at times when you seeksomething of benefit, a resource or an answer to a problem that you would like us tohelp with, to send us an email at [email protected] and we would be happy toassist you in identifying a solution.

Until we talk next month, I would like to wish you all a great fall, and hope to talk to yousoon.

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