Four Challenges to Received Wisdom

"My topic is not really the future according to me," Peter Drucker began. "The probability of any prediction coming true is no better than 2%."

In my view, he said, the future has already happened. The task we must take up is to look at all that has already happened, but has yet to have an impact.

1. Demographic Upheavals

Set aside technology and wars and politics and economics and business for a moment. The greatest revolution taking place today is in the demographic makeup of the nations of the world.

The danger turns out to be no overpopulation, which environmentalists have been warning us about, but underpopulation. There will simply not be enough young people in the next century to support all the old people.

The shrinkage of the pool of young people is not only very rapid, it is irreversible.

Otto Von Bismarck started this trend in motion in 1888 when he created the first social security plan, with a retirement age of 65. Only, he didn't plan on a lot of Germans reaching that age. Today, life expectancy is in the 70s and 80s in developed countries. The birth rates are not keeping up with the accumulation of healthy old people.

The unavoidable implication of this shift is that future politics will be decided by a group of old people who produce nothing and use up much of their societies' resources.

For one thing, Drucker said, we will have to raise retirement age, to 75 or even higher. For another, the nature of retirement will change. Expect people in the next century to phase in and out of retirement. And why not? They will be in better shape than 75 year olds of this era, and will have great job mobility from having worked in many positions and places in their careers.

2. The World Economy

We are living in a world economy now, which is not the same as an international economy. It is more competitive and more dangerous. Competition can turn up overnight anyplace.

American software companies, for instance, are outsourcing much of their software engineering to software technicians in Bangalore, India. Their engineers are terrific, and they cost mush less.

If this is so, is America doomed to lose in global competition? Drucker does not think so, and the answer has to do with knowledge workers. America has more than anyone, and knows how to make more. The rest of the world is struggling to catch up.

China, for instance, with 1.3 billion people, has only 250,000 in post-secondary education. (The U.S. has 14 million college students.) Though China's colleges are great and the students are world-class, there are just too few of them.

Around the developing world, it's the same story. Good schools, great efforts, but poor numbers.

3. Activity-Based Accounting

The third are is information, but it has nothing to do with computers.

Our accounting system, our oldest and most important information system, needs to change and it is changing. Manufacturing cost accounting served us well for many years. The concept itself is 700 years old! But it did not yield the kind of information managers need to make intelligent decisions.

Now it is giving way to activity-based accounting and other ideas, for the first time gives us cost information outside manufacturing. One reason for rising costs in healthcare and education is that managers of these nonmanufacturing industries simply don't have the information they need to manage.

Traditional cost accounting made it difficult to justify product improvements or innovation. The new measures of the new accounting will allow us to take these matters into consideration.

In a few years, Drucker said, it will be in your accounting system. You will have two major officers, a CFO concerned with managing money, and a CIO who will run both the accounting and management information systems.

4. Change Management

Drucker says he is sometimes credited with the idea that the only way to successfully predict the future is to make it new. Actually, the idea was Aristotle's, which proves there really is very little that's truly new.

As examples of things that may seem new but are not really ...

Kaizen, or continuous improvement. We think of it as Japanese, but the idea originated in Alfred Sloane's practices at General Motors in the 1920s. Sloane saw that whatever one person could do, another person can do again. That notion is the foundation for a practical philosophy of quality. Best practices can be copied. Drucker commented that the Deming approach to continuous improvement has its pitfalls. "The Japanese don't use it any more, they've moved on to zero defects. Deming's approach takes an existing system and systematizes it. It takes a valuable idea and makes it into a straitjacket.

Exploit your successes. Innovation does not mean reinventing the wheel at every opportunity. More often it means honing that wheel and putting it to a variety of uses. Sony became a great multinational corporation by continuing to recapitalize on its little tape recorder idea. More locally, 3M is another company that has made much of its existing ideas. It isn't a matter of genius, but of paying attention to what's right in front of you.

Innovate. The spirit of innovation looks at changes happening around one and sees them as opportunities. In organizations, innovation is critical. We need organizations that understans that there is no single right organization. No single kind of organization is right for every mission. Certain types of teams are not sacred. Teams themselves are not sacred. Don't imagine for a moment that command-and-control organizations will dry up and fly away forever. They have a purpose, and are good for that purpose. Crisis is the one staple of doing business. The Titanic sank and took so many lives in part because the captain was reluctant to take command at the critical instant.

The following dialogue is a paraphrase of Mr. Drucker's answers, not direct quotation.

Q. What's up with Asia?

A. The present crisis in Asia is to be taken very seriously. When I hear governments and economists agree that a crisis is under control, as they are doing with Asia, I get jittery. it's the worst sign I know.

If everything goes right, the crisis is under control. But in time of crises, we are accident prone. It doesn't take much for an accident to happen.

In Indonesia, ethnic Chinese are making plans to leave if rioting breaks out. Forty years ago, several million Chinese were killed for the same reason. A major panic in the region could affect the entire world economy.

Q. What about China?

China is a high/low game, if you know poker. It could become one of the world's great economic powers in the next 20 years, or it may erupt in civil war. On the coast are 300 million mercantile types benefiting from the new approach. Inland are 900 million stagnating.

Periodically in its history, China has broken up into segments. The army and military are more unified than in the days of the warlords. China has seen a peasant rebellion every 50 years, and the last was Mao's, 50 years ago.

Q. And Japan?

Japan faces many years of severe structural changes. We think of Japan as being incredibly productive, but that's a misperception. Those star industries are confined to 10% of economy. Elsewhere, distribution is very inefficient. Finance, banking and asset management, and most manufacturing are unbelievably inefficient. It takes eight times as many Japanese employees per transaction as their U.S. counterparts.

If Japan has to open itself to outside trade under pressure, these structural problems will surface for all to see. But never underrate the unique Japanese capacity to face up to harsh reality and make a 180 degree turn.

Q. What do you mean by knowledge worker?

Knowledge workers are those who use their education to people who deliver value, as opposed to delivering it with manual skill or sheer brawn.

Teachers of all kinds, draftsmen, engineers, doctors, scientists, accountants, designers, information systems people all qualify for the term. Knowledge workers constitute two-fifths of workforce. One fifth is still manual labor. The remaining two fifths are the rapidly shrinking service unskilled people, such as McDonalds workers.

A knowledge worker need not be highly educated. Medical technologists require only two years of community college, but they qualify. Physical therapists, the fastest growing group in healthcare, also qualify.

Q. What is future of manufacturing?

Small question! The answer, in short, is that manufacturing is in decline. One of the important facts of the past 40 years is that power has shifted from manufacturer to distributor and retailer.

Today, retailers buy wherever goods are cheapest, whether it's Afghanistan or Minneapolis.

The ultimate customer also has veto power. Price is almost always the primary consideration. The exception is when a brand is so powerful that you ask for it by name. But there ain't no customer loyalty that five cents off can't usually overcome!

More and more manufacturing today is, in effect, OEM. When I buy a heating system, my contractor will decide what thermostat is included. Though the thermostat is branded, it functions as a nonbranded item in the purchase. Thus it occupies a weak spot on value chain

Manufacturers need to reestablish connections with end customers. When Alfred Sloane built General Motors, he spent the first week of every other month as a salesman or serviceman at a car dealership. This probably did more for GM's business success than any of his brilliant ideas.

Q. What do you think are the most important habits of mind and character for an executive, and what are the greatest impediments to success?

The greatest impediment is executives who start out with "what do I want to do?" and not "what do I need to do?"

Harry Truman, coming into the presidency, was considered a yokel with no international experience, totally domestic-focused. He be came president at one of our nation's most difficult moments, and had to travel almost immediately to Potsdam and do business with Churchill and Stalin, true heavyweights.

Before going, he consulted with his two top advisors, Dean Acheson and Gen. George Marshall for one hour each, and asked them, "What do I need to do?"

Because he was humble enough to ask, and because he cared enough abut what was required, he goes into history as the greatest president of this century.

Q. What is the one thing management success hinges on?

The prevailing belief that is management must be brilliant, but I say that management must be conscientious.

Brilliance is a surface quality. What matters is what's underneath. Very few things in this world are cast-iron; most things are papier-mache.

You should create a mission that is so simple it fits on a T-shirt.

Be like Alfred Sloane. Don't depend on reports. get out and test an idea yourself.

Understand that what is important is what's important to the customer. That's what we all paid for in the last analysis: how does the customer buy, and why.

Get outside. The truth is never inside your company or inside your ambitions. It's what's out there in the marketplace. You have to go out and look.

You may have to develop things you don't have, and downgrade things you are proud of.

Finally, work! This is about doing, not woolgathering. I want this to have been a working session. Today is Tuesday. You should be putting these ideas into operation by -- Thursday!