Peter Drucker, the father of modern management, discusses how knowledge, not capital, is the new basis of wealth.
__Long before the arrival of commercial computers, even before the pervasive presence of electronic gear, Peter Drucker forecast a society shaped and altered by information. In the 1950s, Drucker perceived a coming revolution in the way businesses would be run. He saw that success in business would not be tied to how old, large, reputable, or well-financed a company was, but how it was managed. Through his insights and constant evaluations, Drucker practically invented the science of modern corporate management. He coined the term "knowledge worker" long before the information age was a cliche. In 1988 he claimed that in another decade the Soviet Union will be neither. In many ways, Drucker is the arch-guru of capitalism. His writings and opinions are followed avidly by the readers of the Wall Street Journal, the CEOs of Japan, and other ambitious corporate types in the rest of the world. Born in Austria in 1909, Drucker is still two steps ahead of everyone else. His latest book, Post-Capitalist Society, is a brave effort to outline the shape into which capitalistic society may evolve next, now that knowledge, rather than capital, is the basis of wealth.
This interview was conducted in Drucker's home by Peter Schwartz, who may be the Drucker of this generation. Schwartz is co-founder of Global Business Network (GBN), an organization structured to gather, analyze, and disseminate information about global business issues via a network of individuals and companies. Of course, electronic networks are used extensively, but more important, GBN is exploring the virtues of a highly open flow of information from author to client, from client to client, and client to author - a very unusual model in the often highly secretive world of futurism, management consulting, and international business. Schwartz has been a key developer of the popular "scenario method" of strategic planning. His vision is laid out in _The Art of the Long View_.__
Productivity Versus Innovation
PETER SCHWARTZ: As Japanese worker output rapidly grew, American businesspeople, academics, and the new administration in Washington bemoaned the relatively low rate of productivity improvement in the US. At the same time, a parallel troika in Japan worries about the pace of Japanese innovation. Japanese industry has been remarkably adept in picking up foreign technology. Now that it has achieved near parity in many areas, it could develop new technological frontiers of its own. But given this moment of rapid economic and political restructuring in America, could the advantage be shifting back to the US? Is it possible that the conventional wisdom is wrong and that the US is better able to adapt to the emerging realities?
PETER DRUCKER: International economic theory is obsolete. The traditional factors of production - land, labor, and capital - are becoming restraints rather than driving forces. Knowledge is becoming the one critical factor of production. It has two incarnations: Knowledge applied to existing processes, services, and products is productivity; knowledge applied to the new is innovation.
When you look at it that way, the last 40 years of economic history begins to make some sense. The Japanese have shot themselves into the world economy by concentrating on productivity, while we have concentrated on innovation. But the Japanese have neglected innovation. They are now desperately trying to catch up; the results are not yet good. The Germans have totally neglected innovation and show no signs of even trying to catch up. Now we in the US are desperately trying to catch up on productivity.
Knowledge has become the central, key resource that knows no geography. It underlies the most significant and unprecedented social phenomenon of this century. No class in history has ever risen as fast as the blue- collar worker and no class has ever fallen as fast. All within less than a century.
In 1900 the blue-collar worker was still a proletarian. Trade unions were still either totally illegal or barely tolerated. There was no job security. There was no eight-hour day. There was no health insurance (except in Germany). Fifty years later, the blue-collar worker seemed to dominate every single developed society.
Now we have a Secretary of Labor who openly declared, in _The Work of Nations_, that the blue-collar worker doesn't matter. And the unions accepted him.
S: Yet the new administration has come to power saying that there are certain classes of blue-collar jobs that do matter - high-paying manufacturing jobs. Clinton keeps talking about those. Do you think that's really misguided?
D: No matter what the administration says, by the end of this decade the number of people working in the big three automobile companies is going to be about a third of what it is now, maybe 40 percent. And the Japanese auto companies are no longer going to grow.
I don't think there is anything the administration can do. If the administration tries to prevent the old industries from restructuring themselves around knowledge, then the work will just be shifted offshore. It's that simple. We have gone quite a ways along the restructuring road. In 1980, US Steel employed 120,000 people in steel making. Now it turns out the same tonnage with 20,000 workers.
This shift will be a particular problem in this country because in the last forty years the one way a black could rapidly rise to a middle- class or upper-class income was by working on the assembly line. So it aggravates racism, already our worst problem.
But I think we are way ahead in this country, because we have done two- thirds of our restructuring already, whereas the Japanese and the Germans haven't even begun. The Japanese are only now facing up to it. They had hoped to be bailed out by demographics - by labor shortages caused by an aging population. Also, the Japanese have a rule that if you finished high school you can't be a blue-collar worker, you have to be a clerk. And if you finish college, you have to be a professional or a manager. Since everybody in Japan now at least finishes high school, there is an incredible surplus of clerks and would-be managers. You know, it is unbelievable how overstaffed Japanese companies are in management.
S: Is that because a stabilization mechanism that is a virtue in one environment becomes a problem in another environment?
D: Precisely. Look, I am largely (but not entirely) responsible for lifetime employment in Japan. Forty years ago I preached guaranteed wage, guaranteed job, guaranteed income. The Japanese listened to me. There was such a labor shortage in Japanese industry during World War II, with industries outbidding each other for workers, that the Japanese army simply imposed a rule: If you have a job you can't leave it. Period. But Japanese industry after World War II wanted very much to get rid of this rule. There was a big strike against Nissan over this question, and the union lost.
I was one of the people at that time who told the Japanese that if you want labor peace, you have to give job security; not to everybody, but to that small core of permanent people.
But in retrospect I was wrong. I was right for the Japanese at that time, but I was wrong to preach it to American managers. American workers are so adaptable, so mobile. It's amazing how very little permanent unemployment there is in such places as Youngstown or Detroit. It's incredible.
The mobility and resourcefulness of the American worker is remarkable, and has saved us from very severe social problems. But in Japan it's going to be very rough the next few years.
Productivity and the Knowledge Worker
S: You and I are both knowledge workers. Movie studios, hospitals, universities, R&D organizations, software developers, government and law enforcement agencies, newspapers, and publishers are all knowledge organizations of some kind. Yet these industries all experience notoriously low productivity. If you are right that knowledge is the new driver of economic progress and increasing incomes depend on increasing productivity, how can we increase the productivity of knowledge workers? How do we improve the productivity of researchers, an editorial group, a consulting team, and critically, executive management, among the least productive of knowledge workers?
D: There are two sides to this. When Frederick Taylor started studying the fellow in the iron foundry who shoveled sand, neither Taylor nor anybody else questioned what the sand shoveler was doing. This was an iron foundry; you needed sand. It came in from the quarry and it had to be shoveled someplace. Nobody argued. What you had to do was pre- determined. How you did it was the question.
In knowledge work, the first question is "What should you be doing?" Not how. There is very little joy in heaven or on earth over an engineering department that, with great zeal, great expertise, and great diligence, produces drawings for the wrong product. What you should do is the first question when you deal with the productivity of knowledge. It's a very difficult question, but an important one.
Second, you have to make sure that people can concentrate on results. In manual work, you are concentrated by the task. That farmer in Iowa plowing the south forty doesn't climb off the tractor to take a telephone call or attend a meeting. I ran an unscientific time check the other day on the brilliant engineering department of a big company. I just asked engineers to keep a time log for a few weeks. I learned they spend two-thirds of their time polishing reports. Nobody goes to engineering school because of brilliance in writing. On the other hand, the world is full of English majors who can do nothing else. It has taken me two years to get that company to accept the fact that you want your engineers to give you the data, and maybe even write the first draft. But since it takes five drafts before you have a decent report, you hire editors.
"Organizations as a Source of Instability"
S: In your book, _The Post Industrial Society_, you state: "Society, community, family are all conserving institutions. They try to maintain stability and to prevent, or at least slow down, change. But the organization of the post-capitalist society of organizations is a destabilizer. Because its function is to put knowledge to work - on tools, processes, and products; on work; on knowledge itself - it must be organized for constant change. It must be organized for innovation."
Hardly a day goes by that we do not read of thousands of jobs being cut somewhere in the industrialized world. Factories, offices, department stores, military bases are closing all over the world. Abandoning people and products is the necessary hand-maiden of organizational survival. In the early '70s, the last round of military cuts in the California Bay Area caused massive unemployment; but that became the fertile ground in which Silicon Valley blossomed.
I thought one of the most marvelous points in your book was the notion of organizations as a source of instability. Historically, most people have said that the creation of organizational institutions is one of the great stabilizing forces of society; they endure even as people change. You make the argument that organizational survival demands innovation, which means perpetual destruction.
D: Political and social institutions are conservers. We always go back to the church fathers, or try to. Economic organizations are innovators. They have to be. It's one of their functions.In ordinary times, the fairly large organization, or economic business, can contain innovation within an ongoing system for about fifty, or at most sixty years. The ones who try to extend beyond that are soon in trouble. Such as Sears Roebuck, or IBM.
Thirty-odd years ago I began to counsel that you should build organized abandonment into your system. It follows the old line that it makes more sense for you to make obsolete your own products than to wait for the competitor to do it. But this is very hard for organizations to do. The internal resistance is great. They have to be forced. Remember the Edsel? After eighteen months the Ford Motor Company announced that it was abandoning the Edsel. I think we all roared with laughter. We had already abandoned the Edsel. The Ford Motor Company just took a hell of a long time to accept it.
S: Why is it that so many organizations, even in the United States, have such a high resistance to that process of systematically abandoning their past and building a future?
D: One reason is ignorance. People do not know that you cannot successfully innovate in an existing organization unless you systematically abandon. I come from a medical family. My Aunt Trudy was one of the great pediatricians of continental Europe, and the first woman physician in Austro-Hungary. She invented neonatal medicine. One evening when Aunt Trudy was at dinner at our house the telephone rang. It was some mother calling and she said, "Doctor, my Johnny won't eat." And Aunt Trudy said, "Has he had a bowel movement?" And the mother said, "Yes, doctor, every day." And Aunt Trudy said, "Don't you worry, he'll eat soon enough."
As long as you eliminate, you'll eat again. But if you stop eliminating, you don't last long.
S: Many organizations I know struggle with the problem of innovation, investing substantial resources and having little to show for it. Luck seems to matter almost as much as commitment, talent, and resources. Yet some companies like Motorola and Hewlett-Packard, and a few government agencies like Defense Advanced Research Projects Agency (DARPA), have been consistent innovators. They must be doing something right.
D: When Akio Morita started looking at what was to become the VCR, it was quite clear to him that to convert it into a consumer product would come awfully close to suspending some laws of nature. The Americans had invented the physics, and Sony engineered around the physics. Morita was a physicist, and a good one, but he didn't think there was more than a 25 percent chance of success. But if he could do it, then he'd have a fantastic market. Morita put five teams of designers in competition, and then did something fiendish for which those people haven't yet forgiven him. Every two years, he dissolved the teams and put them together in a new combination. They hated his guts. He almost gave up. I don't know why he decided to give it one more try. It took fifteen years. He was committed to a 25 percent chance for something that was theoretically barely possible.
Does MITI Matter?
S: I've always believed that success is the worst enemy of change, and failure its best friend. You have cited the example of the great change now underway in the US military. I think the reason for this change is the failure of Vietnam. They learned a great deal from Vietnam. Of the companies that I know, it's not the ones who have succeeded but the ones who have had catastrophes that have changed.
In Washington today there's a new impe-tus to stimulate technological innovation. Is there any real role for the government in this?
D: Not much. In part it rests on a total misunderstanding of what happened in Japan. None of the Japanese successes in technology owe anything to MITI (the Japanese industrial policy ministry), with one exception: the semiconductor.
MITI did its darnedest to kill the Japanese automobile industry. First, MITI had deep convictions that the automobile was the wrong thing for Japan because everything it needed had to be imported, and roads eat up precious rice land. Second, they pointed out that Japan had nine automobile companies, and every fool knows just by looking at America that three is all one country can possibly afford. So MITI exerted incredible pressure on Mazda and Honda and Isuzu and Zeluki to sell out to the big ones. Third, MITI knew that no Japanese manufacturer could possibly compete with the likes of General Motors. They wanted the Japanese to go into India and China and Tibet and the Congo - wherever GM was not. Well, the Japanese automobile industry simply said "To hell with you."
The Japanese never got anywhere with the things MITI put as priorities. MITI is responsible for what? For the Japanese going into supercomputers instead of workstations. MITI pushed Japan into pharmaceuticals, where they now rank about number nine, after the Austrians and the Swedes. MITI is responsible for Japan's failure in telecommunications. When NEC came out with totally digital equipment, the national telephone company in Japan put pressure on MITI and said, "Look, we have warehouses full of old analog equipment. Get those wild men at NEC to make something that can be analog and digital."
Analog is a great export market; all those people all over the world are not going to tear out their analog just to put in digital. Well, the only people I know who bought this hybrid system were the Claremont colleges [where Drucker teaches]. And now we have torn it out. Like most hybrids, it never worked.
MITI had nothing, but nothing, to do with the fax machine. Didn't even know about it. But MITI is responsible for Japan's greatest mistake, which is the steel industry; it's two-and-a-half times the size of what Japan can support. What to do with those steelworkers is going to be the real problem.
The Meaning of Intellectual Property
S: What role will intellectual property play in the knowledge society? How does one move around and manage knowledge, accredit it, and track it?
D: A friend of mine is a publisher of scientific monographs. He brought out a new book on brain surgery, and printed 2,126 copies. I said, "Why that number?" He said, "We always keep a hundred for our archives. There are 2,026 brain surgeons and hospitals that perform brain surgery. And we send it to them COD." That was before the copying machine.
He just sold that business and is starting an electronic service. He is not going to print any more. He said, "If I print it, it only gets copied. But if I simply send it via electronic mail to the people who are members of that society, and bill them, I get paid, and what they then do with it is their business. But no way I can control it." So, what is a copyright any more?
We have to rethink the whole concept of intellectual property, which was focused on the printed word. Perhaps within a few decades, the distinction between electronic transmissions and the printed word will have disappeared. The only solution may be a universal licensing system. Where you basically become a subscriber, and where it is taken for granted that everything that is published is reproduced. In other words, if you don't want everybody to know, don't talk about it. I think we are getting there very fast.
S: But if you have a knowledge-based economy, then how can you own the knowledge?
I have worked with musician Peter Gabriel on several projects. At a workshop we were holding for AT&T he was asked, "How do you deal with piracy of your albums?" Gabriel said, "Oh, I treat it as free advertising. I follow it with a rock concert. When they steal my albums in Indonesia, I go there and I perform."
Now, that stands the whole relationship on its head.
D: I feel very much the same way. Our entire mentality is still thing focused. We still call our trade in intellectual property "invisible trade." Hell! It ain't no more invisible than any other. We are still merchandise focused.
There are 700 American university campuses offshore. And there are 50 Japanese campuses on the West Coast now. Why? Because there is an enormous rigidity in Japanese universities. So they come here, where the diploma is from a Japanese university, and they learn English. And American universities go offshore because no university in the world, except the Open University in England, is willing to offer any teaching or any learning to older people. Continuous learning is still an American innovation; it is still considered absolutely unimaginable in Japan or in Germany.
We have a half million foreign students. American higher education has a positive balance of payments of about $5 billion to $8 billion a year. When I tried to explain that to somebody at the bureau or Department of Education, he looked at me blankly. Never heard of it.
S: I'm president of a knowledge company. We generate information. We have processes to help people learn, and knowledge about knowledge in your terms. Yet none of that shows up on my balance sheet. My machines show up. My debt shows up. But my knowledge and my knowledge about knowledge is nowhere on my balance sheet. What do I do?
D: It doesn't belong on a balance sheet. A balance sheet should contain only things that in theory are saleable. Your knowledge is between the ears of people.
But that only means that our balance sheets are meaningless. Our accounting system is still based on the assumption that 80 percent of our costs are manual labor. Even GM operates with only 28 percent manual labor. And the figure for the factory that's now on the drawing boards at Ford will be down to 11 percent. Not because it will be automated, but because they finally went to work and redesigned the process around information.
GM's first idea was to redesign the process around robots. It wasted $30 billion on that. No. You redesign the process around the information, which costs very little.
Forty years ago, if you had said that you could run a multi-national company in any way other than as a parent company with subsidiaries, it would have been literally impossible. Yet here is the medical electronics business of General Electric, the largest medical electronics business in the world. They have three headquarters now. The one in Japan is in charge of X-ray equipment all over the world. The one in France is in charge of everything else that is traditional. The one in Milwaukee is in charge of high-tech scanners. They don't know countries. They know only customers.
You couldn't have done that forty years ago, not because we couldn't have done it technically, we probably could have. The mindset wasn't there.
Electronic Entertainment Has Peaked
S: Consumer electronics has provided a motor of growth for music, movies, and for Japan. Entertainment software that plays on this electronic gear has been a major export for California and Britain. But things seem to be slowing down. I have the impression that electronic entertainment is at its peak.
D: For the first time the Japanese are not willing to pay for new technology. They are not buying the new Sony MiniDisc CD players. It's wonderful technology but it's no different from my old player. When you see that happening, when people begin to ask for product differentiation, the boom period is over. From then on you have to work to earn your living. And that's hard.
I was very unpopular in Armonk, New York [IBM headquarters] when I said in the late '60s - before the PC - that the mainframe is past its peak. I said that because for the first time the people who were getting into information were beginning to ask "What do I get?" And not "What can I do?" When that happens, it very soon becomes a biased market.
S: This is a very important perception. Because there are a lot of people out there driving on the technology. They want to continue to push the frontiers and meanwhile the customer is concerned with "What I am going to do with it?"
D: There is a war to be fought, but it lies in performance, and not in how one does things. You know, it's like that very old French story about what it means to become an adult. You no longer talk about having sex, you have it.
