A Bit of Peter Drucker for You All
“Peter Drucker Sets Us Straight,” January 12, 2004 (cnn.com), Peter Drucker and Brent Schlender
This is an oldie from 2004 which still has relevance to what has occurred and is occurring in the world today. Any number of times I have found myself fixing supply chain operations globally for various companies of different countries.
Ninety-Four year-old guru says most people are thinking all wrong about jobs, debt, globalization, and recession. They say that the U.S. economy today suffers from profound misperceptions. Can you give some examples of what you mean?
The structure of the U.S. economy is remarkably different from what everybody thinks. Nobody seems to realize that we import twice or three times as many jobs as we export. I’m talking about the jobs created by foreign companies coming into the U.S. The most obvious are the foreign automobile companies. Siemens alone has 60,000 employees in the U.S. We are exporting low-skill, low-paying jobs but are importing high-skill, high-paying jobs.
But isn’t it true that labor costs are much higher in the U.S., and that moving more manufacturing abroad harms our balance of trade?
Wage cost is of primary importance today for very few industries, namely ones where labor costs account for more than 20% of the total cost of the product–like textiles.
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Warren Buffett: Lesson from the Textile Business, GuruFocus.com, “Many of our competitors, both domestic and foreign, were stepping up to the same kind of expenditures and, once enough companies did so, their reduced costs became the baseline for reduced prices industry wide. Viewed individually, each company’s capital investment decision appeared cost-effective and rational; viewed collectively, the decisions neutralized each other and were irrational. After each round of investment, all the players had more money in the game and returns remained anemic.”
As the story goes, Buffett divested his enterprise of Berkshire Hathaway.
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I don’t know what proportion of the cost of a typical American product is attributable to labor, but it’s a small and shrinking one. Take automobile parts. Because of my consulting, I happen to know the internal cost structure for one of the world’s biggest auto parts makers. They tell me that it is still very much cheaper to produce in this country–or maybe in conjunction with a maquilladora plant along the Texas-Mexico border–than to import, because the parts, while labor-intensive, are also very skill-intensive to design and make. When that’s the case, you’re still better off producing in this country. So the belief that labor costs are a main reason for producing outside the U.S. is justified for only a very small segment of industry.
Consequently, the industries that are moving jobs out of the U.S. are the more backward industries. The U.S. remains the cheapest place in the world to produce for many of the more advanced industries. I say that not because our wages and salaries are so low. They aren’t. But employee benefits are much cheaper than in Europe, and American workers are more flexible.
I don’t just mean you can move people out of accounting and into engineering here; I mean physically moving people from Chicago to Los Angeles.
Don’t you dare try that in Germany. They won’t go. That’s one of the absurd byproducts of their huge and restrictive employee benefits: It’s cheaper to allow someone to remain unemployed in the Ruhr than to move him to Stuttgart for a real job. The same thing is true in Japan.
So what I call “invisible” costs are quickly beginning to be more significant than direct labor costs.
These are pension costs, benefits and health-care costs, and especially something nobody has yet assessed, which I call “reporting” costs. These are complying with regulations, taxation, labor relations requirements, and the like.
What about the widespread impression that the U.S. Has an unemployment problem?
Nobody seems to realize that we have the highest proportion of our population in the workforce by far than any other country in the industrialized world. We have the lowest long-term unemployment rate in the West. Most of the unemployment we do have is not the long-term kind, but the short-term kind when people are between jobs for at most a few months. And we have easily the highest availability of good jobs for educated people who want to enter the labor force. We basically have no unemployment for college graduates, as they do in much of Europe. Now they all may not get the job they would like. They may not get $70,000 a year the first year. They are employed. And finally, when you think about it, in less than three decades we absorbed all the women who wanted to work into the workforce with no upheaval. It’s quite remarkable.
Let’s talk about the productivity of the U.S. economy. The numbers measuring productivity keep going up and up, even in this period of sluggish growth.
I don’t think you can trust all the productivity improvement figures that we see. But there’s no doubt that in manufacturing we’re seeing some basic changes in philosophy and in systems that may be comparable to the industrial revolution of the 1920s. The changes are coming, not by computerizing and automating production in the literal sense, but by systematizing production. In the past, the way to increase your productivity was to specialize. Today we design manufacturing and to some extent distribution not so much to maximize it but to optimize it. And the new manufacturing systems build flexibility into the system, which may actually result in a loss of immediate productivity by the way we currently measure it.
These figures measure productivity when work is being done. They do not measure the loss of productivity when work cannot be done. Work such as setting up a plant to make something different. I would suspect that the productivity increases are actually greater than all the figures we see because the new, more flexible manufacturing processes practically eliminate setting-up time, when manufacturing has to cease. In some cases, this setting-up time has come down from three hours to four minutes. This does not show up in our productivity figures (One of my six-sigma projects was consolidating set ups for making care hoods).
Nor do the figures address the value of being able to change the mix of production, because they focus on the pure output of traditional mass-production industries. We don’t quite know yet how to measure productivity in some of our newer industries.
How can the productivity of knowledge workers be measured and improved?
Nobody has really looked at productivity in white-collar work in a scientific way. But whenever we do look at it, it is grotesquely unproductive. As you know, most of my work these days is with universities and hospitals and churches, which are three of the biggest knowledge-worker employers, and their productivity is dismal. In part this is because knowledge work by definition is highly specialized. This mean the utilization of the knowledge worker tends to be very low.
The inefficiency of knowledge workers is partly the legacy of the 19th-century belief that a modern company tries to do everything for itself. Now, thank God, we’ve discovered outsourcing. I would also say we don’t yet really know how to do outsourcing well. Most look at outsourcing from the point of view of cutting costs, which I think is a delusion. What outsourcing does is greatly improve the quality of the people who still work for you. I believe you should outsource everything for which there is no career track that could lead into senior management. When you outsource to a total-quality-control specialist, he is busy 48 weeks a year working for you and a number of other clients on something he sees as challenging. Whereas a total-quality-control person employed by the company is busy six weeks a year and the rest of the time is writing memoranda and looking for projects. That’s why when you outsource you may actually increase costs, but you also get better effectiveness.
Many high-tech CEOs worry about the higher-education system in the U.S. There are fewer people studying technology. Does this concern you?
That’s perfectly true. But there are two things they forget. We are the only country that has a very significant continuing-education system. This doesn’t exist anywhere else. And we are the only country in which it is easy for the younger people to move from one area at work to another. That’s impossible in Japan. If you’re an accountant, you’re an accountant. That’s equally impossible in Europe. But here it is easy.
Consequently, our most important educational system in the U.S., unlike Europe, is in the employee’s own organization. I’m conscious of that because my European friends, when they move into this country, are overwhelmed by the expectations they face. Look at the career path for many people here. Jeffrey Immelt, the CEO of GE, worked in about half a dozen different categories–in sales, in design, in different product groups. In contrast, the head of Siemens never held a job outside Germany until he became CEO.
What do you make of the recent so-called recession?
What we have been going through these past three years is most definitely not a recession. It’s a transition–a transition with a lot of incongruities. Let me tell you a simple incongruity. We are going to have both fewer young people because of our own birth rate, and yet more young people because of immigration. For educated American young people there is no recession. But the immigrants have a mismatch of skills: They are qualified for yesterday’s jobs, which are the kinds of jobs that are going away.
This also is especially hard on uneducated urban American blacks. Their great ladder of opportunity since World War II is going away. When Mr. Bush talks about the manufacturing crisis, that’s what he’s talking about. But it doesn’t touch anybody else. And in reality there is no crisis: Manufacturing production in this country has doubled in the past ten years, even as factory employment has gone down. So our productivity improvement has to do with the shift from the old way of manufacturing to the new, more systematized form that happens to require less unskilled labor.
You sound fairly sanguine about the state of the U.S. economy. Do you see any danger signs?
Oh, yes. The biggest problem I see is our total dependence on foreign money to cover our government debt. Never before has a major debtor country owed its debt in its own currency. It is unprecedented in economic history. Japan, by contrast, owes all its foreign debt in dollars. Now if you devalue the dollar, the Japanese economy benefits, because their imports become much cheaper. And the value of their debt goes down also. The individual Japanese companies that invest in dollars would lose, but the overall Japanese economy gains. We have no experience about what will happen here when we owe so much debt in our own currency and we’re forced to devalue the dollar. Sooner or later, we’re going to find out.
What’s more, there is an enormous amount of surplus capital in the world for which there is no productive investment. The supply greatly exceeds the demand. So there is a very jittery body of excess money that is desperately in need of returns, and it could become panic-prone. We have no economic theory or model for this.
Does the U.S. still set the tone for the world economy?
The dominance of the U.S. is already over. What is emerging is a world economy of blocs represented by NAFTA, the European Union, ASEAN. There’s no one center in this world economy. India is becoming a powerhouse very fast. The medical school in New Delhi is now perhaps the best in the world. And the technical graduates of the Institute of Technology in Bangalore are as good as any in the world. Also, India has 150 million people for whom English is their main language. So India is indeed becoming a knowledge center.
In contrast, the greatest weakness of China is its incredibly small proportion of educated people. China has only 1.5 million college students, out of a total population of over 1.3 billion. If they had the American proportion, they’d have 12 million or more in college. Those who are educated are well trained, but there are so few of them. And then there is the enormous undeveloped hinterland with excess rural population. Yes, that means there is enormous manufacturing potential. In China, however, the likelihood of the absorption of rural workers into the cities without upheaval seems very dubious. You don’t have that problem in India because they have already done an amazing job of absorbing excess rural population into the cities–its rural population has gone from 90% to 54% without any upheaval.
Everybody says China has 8% growth and India only 3%, but that is a total misconception. We don’t really know. I think India’s progress is far more impressive than China’s.
What is the most important impact of information technology on business?
Information technology forces you to organize your processes more logically. The computer can handle only things to which the answer is yes or no. It cannot handle maybe. It’s not the computerization that’s important, then; it’s the discipline you have to bring to your processes. You have to do your thinking before you computerize it or else the computer simply goes on strike.
This enforced discipline has some disadvantages, because it often forces people to oversimplify. The process of arriving at business decisions isn’t always systematic enough. Systematic enough to be supported by computers. You have to take the assumptions out of the mind of the decision-maker and put them explicitly into the process, along with a method to check them, and only then can a computer help you manage it. Older executives find it excruciating to have to be that explicit, because they just don’t want to be. Aas we all know, many decisions are ultimately made by the hydrostatic pressure in the boss’s bladder.
Given all these systemic changes in how businesses plan and operate, do you think the role and status of the CEO is changing too?
In every boom there is a tendency toward hero-worship of CEOs. The smart CEOs methodically build a management team around them. But many of those celebrity CEOs who are so highly regarded don’t know what a team is. Moreover, the compensation inflation for CEOs has done very real damage to the concept of the management team. In an executive program I have at Claremont, the typical students are general managers of major divisions at very large companies, and they are very well paid. But it’s fair to say they are contemptuous of the excessive pay that many of their CEOs receive. J.P. Morgan once said the top manager of a company should have a salary 20 times that of the rank-and-file worker. Today it is more like 400 times that. I’m not talking about the bitter feelings of the people on the plant floor. They’re convinced that their bosses are crooks anyway. It is midlevel management that is incredibly disillusioned. And so the present crisis of the CEO is a serious disaster. Let me again quote J.P. Morgan, who said, “The CEO is just a hired hand.” That’s what today’s CEOs have forgotten.
Looking back on your career, is there anything you wish you had done? Things you were not able to do?
Yes, quite a few things. There are many books I could have written that are better than the ones I actually wrote. My best book would have been one titled Managing Ignorance, and I’m very sorry I didn’t write it.
I don’t regret turning down Henry Luce when he asked me to be foreign editor of Time magazine, and later to be managing editor of FORTUNE. I wanted to keep teaching, and I wanted to do my own writing, which you can’t do when you’re working for a publication.
I’m also glad one job I was to have didn’t materialize. After teaching at Bennington College, I planned to work with a friend at Columbia University who was starting a department of American studies. Dwight Eisenhower, who was then the president of Columbia, vetoed the funding. He was a cost cutter. I was approved by the trustees. I already had a contract. All it needed was Eisenhower’s signature.
On the day I was told I didn’t have the job, I left Columbia. I was going into the subway at 116th Street when I ran into another old friend, who taught at New York University. He told me he was going to Columbia to look for some teachers to help him staff a graduate school of management at NYU. Before I even got on the subway, I had signed up. And that is how I became a professor of management. So in retrospect I’m exceedingly glad the job at Columbia fell through.
thinking the idea that companies train their work forces (post high school or college) has for the most died off. basically they only expect to educate workers in the way they operate, and expect new employees to already have the knowledge to do the other parts of their jobs (i recall my father who was a college math professor saying that the students coming to college were ….not all that good, but that empoloyers wanted the universities to teach exactly what they needed graduates who didnt need to be educated in their field. and to some degree that is exactly what the schools dd)
Looking forwards to solar powered cargo planes and container ships to solve the inherent problems of globalization that have been swept under the rug. Sadly, even Buckminster Fuller was seen holding a broom. JP Morgan would be proud.
So far the best bet is solar powered production of hydrogen fuel cells, albeit a long shot still.
Great 60 Minutes last night. Turns out fusion power research is neither cold nor much closer to creating a useful power alternative since the recent successful ignition experiment. The devil is in the details. Color me surprised. The great thing about fusion is that it is sucking a great deal of investment capital away from more practical solutions. Big oil must have some influence over big media.
In case the connection is unclear, globalization requires transportation and transportation requires transportation fuel. Do the math.
Ron:
When people make this comment: “Do the math” its because they can not do math and also think in a logical manner. They want you to arrive at a conclusion for them because they can not. It is a silly and lazy remark.
Description
An extraordinarily insightful and thought-provoking look at how our society and culture are going to change, and change rapidly, as the price of gasoline, heating oil, and all other everyday consumer products that are derived from oil continue to escalate.
Imagine an everyday world in which the price of gasoline (and oil) continues to go up, and up, and up. Think about the immediate impact that would have on our lives.
Of course, everybody already knows how about gasoline has affected our driving habits. People can’t wait to junk their gas-guzzling SUVs for a new Prius. But there are more, not-so-obvious changes on the horizon that Chris Steiner tracks brilliantly in this provocative work.
Consider the following societal changes: people who own homes in far-off suburbs will soon realize that there’s no longer any market for their houses (reason: nobody wants to live too far away because it’s too expensive to commute to work). Telecommuting will begin to expand rapidly. Trains will become the mode of national transportation (as it used to be) as the price of flying becomes prohibitive. Families will begin to migrate southward as the price of heating northern homes in the winter is too pricey. Cheap everyday items that are comprised of plastic will go away because of the rising price to produce them (plastic is derived from oil). And this is just the beginning of a huge and overwhelming domino effect that our way of life will undergo in the years to come.
Steiner, an engineer by training before turning to journalism, sees how this simple but constant rise in oil and gas prices will totally re-structure our lifestyle. But what may be surprising to readers is that all of these changes may not be negative – but actually will usher in some new and very promising aspects of our society.
Steiner will probe how the liberation of technology and innovation, triggered by climbing gas prices, will change our lives. The book may start as an alarmist’s exercise…. but don’t be misled. The future will be exhilarating.
Also, “Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization” by Jeff Rubin; Random House (304 pages). Both books are from 2009, back when questioning the wisdom of the status quo establishment was still acceptable and even profitable. The actual math has not changed in the interim, but other things have. Realism has become irrelevant. How else could Donald Trump ever become POTUS?
So what could be unrealistic about a political Left that Woke itself into empty-headed persistent and pervasive virtue signaling alongside an ever empty-headed political Right that has modeled itself after the Taliban?
Ron:
“Do the math” is still a silly remark to make even after you have proven you know better and also more. Go and sin no more.
” We are the only country that has a very significant continuing-education system. This doesn’t exist anywhere else. And we are the only country in which it is easy for the younger people to move from one area at work to another”
He seriously believes this?? he really does have those USA blinkers on
Yarpos
Yes, he was serious in his commentary. He was mostly correct when it came to manufacturing. The date of this is 2004 and he spoke of his experiences. It was and still may be easier for people to pull up and move to a different area of the country when you are young. You do have to know the costs of living, housing, etc. Between Illinois. Wisconsin, and Michigan we did it. You do have to do the research and not let emotions drive your decisions.
Remember he talks of pre-2004. Concentrate on his version of the costs of manufacturing. Much of which still holds true today.
What has changed is the cost of an education which made me more valuable allowing me to win concessions to my needs. It is far more pricey now than decades ago.
The cost of production does not reflect external costs such as environmental impact or social costs. Likewise the cost of living does not reflect external costs upon one’s life such as family separation or the relocation of children away from friends they had since toddlers. How one calculates the value of their own lives would be the bottom line.
Peter and Doris were married for 71 years, so my guess is that emotion played a bigger part in Peter’s personal life than it did on the job. Peter had found his equal in Doris, but that is an unusual circumstance and a great gift.
The Peter Drucker of the 1950’s-60’s (Practice of Management and Management for Results) was my biggest business hero. By the early 80’s Drucker was dismissive of Keynes and all in on Schumpeter. However, by the end of that decade Drucker had revised his POV on shareholder value and founded the Leader to Leader Institute, by which he regained some respect again from me. Before dying he began to get Keynes, but remained far too charitable towards the vulture capitalist POV of Schumpeter for my tastes.
[All men have biased POV. The deepest biases are inherited birthrights, thereby unquestionable since they were taken at birth.]
https://www.taylorfrancis.com/chapters/edit/10.4324/9780203402184-18/peter-drucker-1909
“…Drucker was born in Vienna on 19 November 1909. His father, Adolph Drucker, was a lawyer and leading member of the liberal intelligentsia of pre-war Austria-Hungary, whose friends included the economist Joseph Schumpeter…”
Ron:
Thank you for all of the information. What does this post discuss?
“…Ninety-Four year-old guru says most people are thinking all wrong about jobs, debt, globalization, and recession…”
[Classic case of pot calling kettle black. Globalization is great for boosting corporate profits through price arbitrage and avoiding labor and environmental regulation. Sure we get to have more cheap stuff to put in public landfills. Financialized consolidation needed the growing debt to provide safe assets, but consolidation and outsourcing whittled down domestic competition and accordingly institutional knowledge sufficient to lose market to foreign producers that have invested in better US jobs to avoid some of the rising transportation cost of trade. In Drucker’s mind this was better than the old economy business model. Given the evidence in the consolidation of wealth and political power, then Drucker’s better is better for no more than the top 10% of incomes, which of course includes everyone that Drucker had ever known in his entire life.]