Drucker’s article presents, in the pithiest form possible, a clear denunciation of many commonly-held truths about managing businesses. These are the five sins.
- The worship of high profit margins and of ‘premium pricing’
- Mispricing a new product by charging ‘what the market will bear’
- Cost-driven pricing
- Slaughtering tomorrow’s opportunity on the allure of yesterday
- Feeding problems and starving opportunities
A couple of these really stood out for me. Cost-driven pricing is at the heart of many business models. Many law firms hear it from their suppliers, and they pass it on to their clients. Neither of these is sustainable. As Drucker puts it:
Most American and practically all European companies arrive at their prices by adding up costs and putting a profit margin on top. And then, as soon as they have introduced the product, they have to cut the price, redesign it at enormous expense, take losses and often drop a perfectly good product because it is priced incorrectly. Their argument? ‘We have to recover our costs and make a profit.’
This is true, but irrelevant. Customers do not see it as their job to ensure a profit for manufacturers. The only sound way to price is to start out with what the market is willing to pay – and thus, it must be assumed, what the competition will charge – and design to that price specification.
Cost-driven pricing is the reason there is no American consumer electronics industry any more. If Toyota and Nissan succeed in pushing the German luxury car makers out of the US market it will be a result of their using price-led costing.
Starting out with price and then whittling down costs is more work initially. But in the end it is much less work than to start out wrong and then spend loss-making years bringing costs into line.
Another sin is one that some KM activities mistakenly support and promote: “feeding problems and starving opportunities.” KM is often seen as a toolkit to improve problem-solving, but for Drucker, “All one can get by ‘problem-solving’ is damage containment. Only opportunities produce results and growth.”
What do we do in our knowledge work to feed opportunities, rather than dwell on problems?