The other day I was cleaning out some of my old files and I came across an article I had copied from the Wall Street Journal back on October 21st, 1993, written by Peter Drucker.
It was entitled, “The Five Deadly Business Sins”. After scanning through the lessons I remembered why I took the time to make a copy of the article. The advice was classic Drucker – simple, straightforward, and timeless.
As a newly reinvented entrepreneur, the timing of this rediscovery couldn’t have been better – I needed to remind myself of the classic mistakes that have sunk many a business.
Here are the sins, according to Drucker:
1) Worshiping high profit margins and “premium pricing”
2) Mispricing a new product by charging “what the market will bear”
3) Cost-Driven pricing
4) Slaughtering tomorrow’s opportunity on the altar of yesterday
5) Feeding problems and starving opportunities
Back in 1993 I wondered why Drucker devoted 3 out of the 5 sins to product pricing, but 18 years later I totally understand his insistence on what he called “price-driven costing” as the most effective way to gain market share.
His key point then: “Customers do not see it as their jobs to ensure {businesses) a profit. The only sound way to price is to start out with what the market is willing to pay”.
So true, but yes, a bit counter-intuitive, Shouldn’t we be costing out our product or service first, and then calculate an appropriate “margin” to put on top of it, to determine a price?
That’s fine, but if this is done with a blind eye to the consumer’s perception of the value of the product, regardless of its cost, we could easily price ourselves in a way that stunts growth at a critical time, or worse, kills the business entirely.
Once we avoid the pitfalls of pricing our product, we then need to put our blinders on, according to Drucker. What he means by that is the over-reliance on any current “cash cows” at the expense of new (and better) opportunities that are usually the real drivers of sustainable success.
In other words, the gravy trains NEVER last forever – we HAVE to be thinking ahead, perhaps even at the expense of our current cash generator. Drucker cited IBM as a historical example, when back in the 80’s and 90’s it subordinated its great new PC business to their mainframe business, with disastrous results.
With blinders secured, we then tackle our problems and opportunities. Drucker saw this as a real battle between success and failure – those who failed to put opportunities first when allocating their precious resources of time and talent were almost certainly doomed to failure or mediocrity.
As he noted, “All one can get by “problem solving” is damage-containment”. His example of a company winning this battle was GE, who to this day still demonstrates its policy to jettison businesses – even ones that generate a profit – that “do not offer long range growth and the opportunity for the company to be number one or number two world-wide”
Drucker closes the article forcefully (since after all, he was great teacher): “Everything I have been saying in this article has been known for generations. Everything has been amply proved by decades of experience. There is thus no excuse for managements to indulge in the five deadly sins. They are temptations that must be resisted”
Yes sir, copy that.
And thanks again Mr. Drucker for re-appearing with these great lessons, just when I needed them.
For me this once again explains why I went to Claremont for my MBA when I had the chance back in the late 80’s. If you listened long enough you were bound to get some gems from Peter and this is one of them. Running a non-automotve related business in Detroit in the early nineties before this article was published I remember touring a factory of an automotive supplier in Ohio. The plant was trying to qualify to become a supplier to Toyota in Georgetown, Ky. He was his companies expert on implementing TPS (Toyota production system). The Toyota engineers told him that that the only legitimate way to make money was to reduce your cost. And the example they gave him was the Honda Accord and how Toyota viewed it as unrealistic to think that they could price the Camry above the Accord if the consumer perceived the Accord to be equal or better. They needed to price it to be competitive and work on getting cost out of their system through elimination of waste. To this day I am still surprised on how many executives and board members think they can raise prices without regard for competition and the customer’s perception of value. They do so at their own peril.
Thank you Steve for sharing this story, and I continue to be surprised too.
All the best,
Terry