though Drucker agreed that profit is as essential for sustaining a business as oxygen is for continual breathing, profit, not maximum profitability, is the essential element
Photo: Wikipedia February 2023
Before he died, Peter Drucker debunked a well-known approach for attaining success with a new product or service by calculating a price through one of the many methods of “quantitative analysis for business decisions” and attaining maximum profitability. If you priced high and charged “as much as the market would bear” – in other words the highest possible price that could be squeezed out of the market while customers continued to buy, you should make all the profit you could while you could.
The theory is that you can reduce the price later to defeat competitors that have been attracted by your high profitability and enter the market. Also, by using the money you obtained with your high price, you can advertise more than competitors and use other means of promoting your product to maintain your dominance.
Drucker Disagreed
However, though Drucker agreed that profit is as essential for sustaining a business as oxygen is for continual breathing, profit, not maximum profitability, is the essential element. There is a big difference between the two. In fact, maximum profitability, is not only not essential, but may not even be desirable or even possible. For example, to treat a life-threatening sickness, potential buyers of a medicine may be willing to pay almost any price if the product is the only medicine available. That might result in high profitability, but it is hardly beneficial financially for those needing the product or for society. Moreover, it is unethical to demand an unreasonably high price for products such as a cancer medicine even if legal restrictions don’t restrict the price. Of course, pricing high briefly to confirm quality of your product versus a competitor’s may be acceptable, but pricing high to attain “all the market will bear” will eventually get you in trouble and succeed mostly in attracting additional competitors.
Guess Who Invented and Introduced the Transistor Radio?
Pricing the product for maximum profit attracts more competitors than would be attracted normally, and some of them may have advantages unavailable to you. For example, “everyone knows” that it was Japanese companies that invented and popularized the transistor radio and that Japanese companies sold millions of their transistor radios in the U.S. and dominated the market for years after they had introduced this product. The truth is that transistor radios were invented and first sold by AT&T, not a Japanese company. Moreover AT&T dominated the U.S. market long before any Japanese company sold a single transistor radio. What happened to give Sony the credit?
A visit to the U.S. in 1952 by Masaru Ibuka, founder of what became Sony got things started. Sony was then a small company with less than ten employees. It was not selling transistors at the time. AT&T had invented the transistor radio and was selling it and pricing their product for maximum profit. AT&T was even licensing their product to other companies to produce additional income. Ibaka and his partner, Japanese physicist , Akio Morita, couldn’t afford the $25,000 that AT&T demanded for a license. However, the partners didn’t have to use their own money for the licensing fee. The Japanese Ministry of International Trade and Industry (MITI) was happy to loan them the money as a good business investment. For several months Ibuka traveled around the United States and examined features from different transistor radios being sold in the U.S. They re-engineered the best of these and designed an improved transistor radio that offered incorporated these features and offered much more than their competitors. Sony, then known as Tokyo Telecommunications Engineering Corporation, started manufacturing and selling this newly improved transistor radio in 1954 and in addition, offered it at a lower price. This was possible as it was made in Japan, taking advantage of the then much lower manufacturing costs there. However, Sony did not accept the idea of pricing their improved model for maximum profitability. They priced it lower even with the improvements they had added. In addition to other features, Sony’s TR-55 was the first transistor radio to utilize all miniature components. Within five years, Sony had captured the whole market and sold sufficient transistor radios to expand from seven employees to over five hundred. Yet transistors had started as an American invention from AT&T and it had previously had all the advantages and dominated the market. Sony did nothing illegal or unethical, but they captured the entire American market not by seeking maximum profitability, but by providing a better product, at a lower price. No wonder many think that the Japanese invented the transistor radio and beat others to the market.
Emerson Model 888 Pioneer 8-Transistor AM Radio, Made in the USA, Circa 1958, Wikipedia
Drucker’s Analysis
Through this and other innovations which had been successfully introduced, Drucker decided that business success was based not on charging high prices and striving for maximum profits that could be squeezed out of a market, but on product superiority at a lower price and features desired by buyers. From this knowledge, Drucker laid the framework for what is now known as “management as a liberal art” or MLA and in his book, The New Realities, Drucker, wrote that since management is a liberal art, it should be practiced more as an art than a science. Drucker, however, was not the first to make this discovery.
Einstein’s Amazing Year in His First Job after Earning His PhD
E=MC², the equation for energy which is called the world’s most famous equation, was derived by Einstein during his “miracle year.” It came not from computer calculations or mathematical analysis, but through an MLA technique and it came his first year out of school. In 1905, Einstein, after being passed over for promotion and working at an entry level job as a patent examiner in the Swiss patent office in Bern, published three major scientific papers his first year, including this formula and was awarded the Nobel Prize for Theoretical Physics for these accomplishments. He had done this without a slide rule, computer, or white-coated assistants.
Drucker’s Next MLA Step
Drucker took MLA to the next step. After studies of successful product introduction, Drucker specified four necessary fundamentals plus two essential co-practices: high ethics and social responsibility. The four fundamentals were: general knowledge of the liberal arts, self-knowledge of limitations and capabilities of people and resources available, wisdom based on past experience and one more. He concluded that ethical leadership was of foremost importance and was responsible for about 50% of the results achieved on any project.
Society Expects More
It is worth noting that Drucker believed that though a business cannot exist without making a profit, society expects that a business will assume social responsibility and accomplish worthwhile benefits for its customers, its employees, and society. In some mysterious way, actions which may have little to do directly with the business and may or may not be defined in explicit terms in the mission statement, invariably assist any business in its development and long term success. His favorite example was Julian Rosenwald, who while Chairman of Sears Roebuck and Company made the company successful and established the Rosenwald Fund, which donated millions in matching funds to promote vocational and technical education for African-Americans and others, but had little to do with operating the Sears Roebuck business.
The Contributions of Others
Minglo Shao a Chinese businessman and philanthropist with Canadian citizenship who had established Drucker Academies and pioneered teaching Drucker’s concepts throughout China along with two colleagues serving on the board of the Drucker Institute at Claremont Graduate University in California: Bill Pollard, and Bob Buford and two Claremont professors, Drs. Joseph Maciariello and Karen Linkletter, further developed MLA from Drucker’s work.
Principles and actions which might create short term results but cause long term harm are unintentionally demonstrated by companies which violate laws and human rights, or entrepreneurs with Ponzi schemes and governments who ignore ethics, social responsibility, and basic human rights claiming “societal benefit” were attacked by Drucker in print as early as 1936, first with an academic paper burned by the Nazis: “The Jewish Question in Germany” written in German in which Drucker bravely identified himself as a German citizen of Jewish origin, and then again in his first book written in English, “The End of Economic Man” publisheda year later which became a best seller acclaimed by Winston Churchill in an early review.
After World War II Drucker began to cite other examples of how dictatorships and the unethical and the defective leadership they practice, usually lead to chaos and disaster. Drucker stressed ethical performance and leadership and cited them as values as important as profits and once profit was attained, of more value than maximum profitability goals. In fact, pricing for the highest profitability can cost a bundle and even more, as even ethical organizations have discovered.
*Syndicated internationally
*הכותב ד"ר ביל כהן הנו מומחה בתורת המנהיגות. ד"ר כהן הינו מייג’ור גנרל בדימוס בחיל האויר האמריקאי, בעל תואר דוקטור בניהול מאוניברסיטת קלרמונט. כתב למעלה מ- 50 ספרים שתורגמו ל- 22 שפות בנושאי ניהול ומנהיגות. ביל כהן שימש כיועץ בעמדות בכירות וכמרצה באוניברסיטאות הטובות בארה”ב בינהן ביה”ס לניהול באוניברסיטת קלרמונט וב-UCLA. בנוסף, הוא מעביר הרצאות וסמינרים בנושא מנהיגות בכל זרועות הצבא האמריקאי ובאקדמיה הצבאית וזכה בפרסים על הרצאותיו בעולם. מעבר להיותו גנרל בצבא ארה”ב, ד”ר כהן הנו בעל דרגת רב סרן בחיל האויר הישראלי והשתתף בקרבות אוויר במלחמת יום כיפור. שימש בתפקידי ניהול בכירים במספר חברות וכיהן כנשיא של שתי אוניברסיטאות פרטיות. ביל כהן היה חבר דירקטוריון במספר מועצות מנהלים ומועצות סחר עירונית, ממשלתיות ושל תאגידים שונים.ביל כהן היה תלמידו הישיר לדוקטוראט של פיטר דרוקר אבי תורת הניהול המודרנית שאמר עליו בין היתר כי ” ביל כהן היה סטודנט אשר אני והקולגות שלי למדנו ממנו לפחות כפי שיכולנו ללמד אותו”.
ד"ר ביל כהן הוא נשיא המכון לאמנות המנהיגות, מייסד ונשיא לשעבר של המכון ללימודי ניהול מתקדם בקליפורניה CIAM וחבר בצוות המומחים של קבוצת ד"ר עדנה פשר שות'
קבוצת ד"ר עדנה פשר ושות' היא הנציגה הבלעדית של תוכנית CIAM בישראל
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