By

[Book Notes] The Essential Drucker, chapter 3

One of the books on my reading list that I have been going through has been The Essential Drucker, a collection of essays written by Peter Drucker, famed management consultant and business writer.

For each chapter, I've pulled out key passages that I find interesting and expand on them with my own thoughts and modern day examples.

Chapter 3. The purpose and objectives of business

Innovation is not invention. It is a term of economics rather than of technology. Nontechnological innovations—social or economic innovations—are at least as important as technological ones.

Innovation is a word that has been heavily overused in media. Drucker's definition here is particularly true today: many successful startups have not invented new technology but rather used existing technology to reduce friction in existing use cases.

The canonical example here is Uber, which built a platform around smartphones, a technology which many people already had, reducing the traditional friction of dispatching a car (phone calls, getting the address right, communication with driver, ETA updates).

Innovation can be defined as the task of endowing human and material resources with new and greater wealth-producing capacity.

The customer defines the business. To satisfy the customer is the mission and purpose of every business. All the customer is interested in are his or her own values, wants, and reality. For this reason alone, any serious attempt to state "what our business is" must start iwth the customer's realities, his situation, his behavior, his expectations, and his values.

The number one cause of startup failure is failure to find product-market fit. Drucker makes it blatantly clear when he says that "the customer defines the business".

Many startup founders do want to change the world, and the mandate to serve customers does not preclude any mission to change the world or the status quo. Customers (and the revenue that they represent) are the lifeblood of all successful businesses.

Even non-profit companies have a core customer that they need to serve: the donors contribute money and in return the company serves them by using contributions to deliver services or create products, and communicating the results to donors.

The most important advice I can give to any entrepreneur is this: go talk to your customer. Find out their passions, their fears, and their desires. Learn about the real problems that they have and build a product that they will use and pay for.

No matter how smart you are, you will never find out the answer by building products in isolation. Better to discover whether your product will succeed or fail before you burn capital and more importantly time building something people won't use. Get out there and learn!

The Cadillac people say that they make an automobile, and their business is called the Cadillac Motor Division of General Motors. But does the man who buy s anew Cadillac buy transportation, or does he buy primarily prestige? Does the Cadillac compete with Chevrolet, Ford, and Volkswagen?

Nicholas Dreystadt, the German-born service mechanic who took over Cadillac in the Great Depression years of the 1930s, answered: "Cadillac competes with diamonds and mink coats. The Cadillac customer does not buy 'transportation' but 'status.'" This answer saved Cadillac, which was about to go under. Within two years or so, it made it into a major growth business despite the depression.

This vignette teaches a great lesson that all founders should keep in mind. Clayton Christensen also tells a story of how a fast food chain boosted its milkshake sales that illustrates a similar point.

Even if you are selling a commodity product, thinking about your product in this way can clarify who your competitors actually are and help you position yourself at an advantage.

Stop competing on features and focus on what your customers use your product to do. Once you understand this, it will be easier to communicate how your product does the desired job better than other offerings on the market.

Success always makes obsolete the very behavior that achieved it. It always creates new realities. It always creates, above all, its own and different problems.

This is a great problem to have. Drucker's point here is that organizations never have the luxury of resting on their laurels, even amidst the shining glow of success.

Big wins like successfully launching a new product line or entering a new market segment create massive new opportunities and corresponding responsibilities.

To achieve long term, sustained success, corporations need to keep in mind that success must be maintained. A market leader will only remain the market leader if management continues to invest for growth and keep the company from stagnating.

Written by
Full stack engineer, entrepreneur, technologist, former med student. "The best way to predict the future is to create it."