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“Managing in the Next Society” by Peter F. Drucker Report

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Introduction

The book Managing in the Next Society discusses and identifies the main trends and technological changes affected a modern organization. Peter F. Drucker examines new organizational identity and culture, information demands and knowledge creation. A special attention is given to a service-oriented economy including such industries as technology, management and healthcare. Also, Drucker discusses e-commerce and virtual business environment, its uniqueness and challenges. The book consists of four parts and fifteen chapters.

Main text

The first part of the book, the Information Society, is devoted to recent changes and technological innovations took place at the end of the 20th century. The first chapter depicts information revolution and its impact on the business world. Drucker states that the information revolution now means that we can look at any part of business — whether an investment decision, an office building or an individual product — and examine all the individual bits of information that make it up: we can attribute costs to a single activity or good; we can watch the shopping behavior of individual customers in stores; we can evaluate the return from a complex range of marketing activities. What we thought were markets turn out to be complex, interdependent systems; what we thought was an organization turns out to be an interactive group of individuals. There is a whole new — ‘virtual’ — universe out there, every bit of information a new star waiting to be examined, understood and made use of. It is a universe that will challenge fundamentally (and already is challenging) many of existing ideas about doing business. It is a universe that offers immense possibilities and massive dangers. The companies that do not explore and exploit it will fail.

The second and third chapters, “the Exploring world of the Internet” and “From Computer Literacy to Information Literacy” depict changes in understanding and perception of technology and information. The fourth chapter, “E-Commerce and Central Challenge”, depicts the role and importance of e-commerce and virtual business environment for modern business relations. In this new environment, small companies may have advantages that larger ones lack. First, because their contact with customers will mostly be channeled through the telephone, or increasingly e-mail, they will be able to record and keep track of their customer’s preferences and needs much more effectively than a company that communicates through mass media. Second, they will be able to offer added value services, for example by personalizing products that they sell based on the information gathered and manipulated through these new media. While the number of alliances between companies — both formal and informal — grows, while information and knowledge shared — at least within the same ‘ecosystem’ — increases, we believe that intellectual assets will become the most prized capital in the business world.

It also seems likely that the single most important of these assets will be information on customers. Knowing who customers are will allow us to bypass traditional middlemen and distribution channels; knowing what they want — potentially on an individual basis — will enable us to develop new products and market them effectively; knowing how they behave will allow us to link up to other organizations so that joint offering is that much more persuasive. In other words, information about customers will be at the center of those ecosystems of the future. This trend will be self-reinforcing. The more important intellectual capital becomes, the more systems will be built and methodologies developed that allow companies to value — and trade — their intellectual property. And in this environment, it is the information-based business — the virtual company — that will succeed. providing electronic commerce solutions is an activity that is quintessentially information-based. The Andersen joint venture does not rely on shared office accommodation, or even on achieving traditional economies of scale, but on being able to share the skills and experience of the participants.

The fifth chapter, “the New Economy: Isn’t it Here Yet”, underlines that in spite of changes and new relations many companies do not shift from traditional business patterns to innovative approaches based on the Internet and virtual business chains. Drucker states that modern firms exist in a diverse environment. Almost all face global competition from countries with extremely varied economies, cost structures, and social/governmental structures. Many are truly global competitors, operating within several countries with diverse cultures, regulations, ethics, and workforces. Those that compete worldwide in the global marketplace must deal with the changing requirements of doing business and the emerging shape of a transitional economy. Those that are “protected” from global competition, such as U.S. defense firms, often service the government as their major customer; they deal with rapidly changing and increasing sets of constraints, regulations, and restrictions. Drucker writes: “They’re a world leader, but not many of their products have come out of innovation. More has come out of improvements” (73).

The sixth chapter portrays the role of the CEO in the 21 century. Drucker finds that a role of the modern leader is based on unique personality and strategic vision, intuition and strong personal ideals. “Tomorrow’s leader won’t be able to lead by charisma. He or she will need to think through the fundamentals” (Drucker 89). This chapter examines the interface between leadership and managerial behavior, and the ways in which the literature from these two areas reinforces each other. It centers around a triad of new models with a foot in both establishment and nonestablishment camps. Drucker considers micro and macro extensions of establishment views. The author includes examples of modern leaders and their personal qualities and skills. Precisely what the new structure for studying leadership will look like is currently unknown, and we are likely to be in a transitional state for some time to come. The contents of this volume and the other volumes in the series suggest, however, that the structure will be highly pluralistic. The author believes that there will probably, be different models for different purposes, in contrast to one or a few grand models of leadership. Such a structure would allow for the acceptance of many views and would help reconcile the sharp splits now so prevalent in the literature. One of the most dramatic of these has been the researcher/practitioner split. In a utopian, pluralistic world, researchers and practitioners recognize and use different models for their own purposes, without feeling compelled to be defensive.

The second part of the book, Business Opportunities, consists of four chapters. The seventh chapter of the book describes the role on innovation and entrepreneur activity in the new society. “There are companies that are good at extending what they’re doing. And finally there are companies that are good at innovation” (106). Drucker states that innovation and entrepreneurship are the engines of modern business. Following the initial sales generation, managing growth becomes relevant, and creating value ultimately depends on customer feedback and a constant reappraisal of customer needs relative to the product or service offered. Risk-taking and creativity permeate the entire process most fundamentally at the business mission level. It is readily evident that the interface between marketing and entrepreneurship is extensive.

Related variables often include few, if any, economies of scale, severe resource constraints, a limited geographic market presence and limited market image, little brand loyalty or market share, little specialized management expertise, decision making under even more imperfect information conditions than in larger firms, a marked scarcity of time per major management task, a scarcity of professional managers, and a mixture of personal, non-maximizing financial goals. Drucker advises managers to: “Look at the others, and think about what each of them is good at” (101). In firms where several of these conditions exist, one could expect that the marketing function would be both viewed differently and performed differently from marketing functions in mature firms. Although the basic definition of marketing remains intact, new venture marketing could join the ranks of other specialized areas; such as international marketing, industrial marketing, and services marketing. Finally, a study of the inherent definitional and conceptual similarities between marketing and entrepreneurship supported the hypothesis that more entrepreneurial firms should also be more marketing oriented.

The next chapter, “The are not Employees, They are People” analyses the role of human resources in organizational success. Drucker claims that modern employees differ greatly from traditional workers because of increased levels of skills and knowledge. Employees determine the level of innovation and technological change, they actively participate in business activities and decision-making of the company. “In new industries, leadership can be obtained -and maintained by innovation. In an established industry, however, what differentiates the leading company is almost always outstanding productivity of capital….” (126).

Drucker underlines that when making decisions regarding the structure, size, and deployment of the sales force, the sales manager should emphasize flexibility, minimal hierarchy, empowerment, and open communication. The guiding principle in deciding how to organize the sales force should be value creation for customers, whereas experimentation should be the byword. Novel structures and sales force sizes should be developed and subsequently modified based on marketplace conditions and opportunities. This is especially the case as markets become more segmented, fragmented, and niched. Territories should be designed as if they were of entrepreneurial ventures to be developed by the assigned sales personnel. Sales managers should have fairly broad spans of control. An entrepreneurial perspective might also find managers looking for innovative ways to tie in telemarketing and newer computer and telecommunications technologies with the sales force, as well as creatively mixing independent contractors with company reps when designing and organizing the sales force.

The chapter, “Financial Service Innovate or Die”, depicts importance of innovation in all spheres of business activity including financial reporting and accounting. The success of companies is based on the relevant macro environment analysis and evaluation of its major forces (economic, social, technological, legal, and natural) are uncovered that might affect market opportunity. Second, major markets in which the product might compete are identified and segmented. Next, a wealth of information is gathered to learn about specific customers in markets, the competition, and appropriate channels of distribution. This information, in turn, both provides important guides for developing a strategy to take advantage of market opportunities and lays the foundation for forecasts of the new venture’s sales. The final step in the process is an evaluation of the attractiveness of the entire market opportunity in terms of financial return, consistency with organizational objectives, and other criteria. “Indeed the biggest-and probably most profitable-opportunity does not require innovation at all. It requires only hard work. It lies in demographics” (143).

The chapter “Moving Beyond Capitalism”, portrays that the major implication for entrepreneurs and venture capitalists is a restatement of an often forgotten idea: good venture ideas (many venture plans are simply statements of ideas) do not equate with good venture opportunities. A sound product or idea is a necessary, but not sufficient, condition for launching, building, and eventually harvesting an economically successful venture. The third implication of research for fund managers and investors is that a basic understanding of the target market for a potential venture’s products and the value-added to the customer of the products are essential. Venture capitalists should strive to understand the basic economics of the product and the business before investment. “Wealth or efficiently provide social services. Yet capitalism ignores any other dimension of life besides economic exchange.

And, as you say, the market is only short-term” (154). Final key finding for practitioners is that the existence of a good concept and product-market strategy does not guarantee the existence of a good venture opportunity. The entrepreneur and management team were the most critical elements for venture success and cited in research. The top management of the proposed venture must demonstrate basic general management skills and the ability to manage under uncertainty. Although small-firm job creation is not identical to entrepreneurship, detailed analyses of job creation data have shown that new establishment births (entrepreneurship) have dominated new job creation, accounting for three times as many new jobs as establishment expansions. Furthermore, new establishments formed by small firms have accounted for the majority of jobs created by births. Thus, new small firm births (entrepreneurship) are a most important component of new job creation.

The third part of the book, the Changing World Economy, discusses the problem of new business institutions and economic relations between the nations and global corporations. Every new venture seeks market opportunity in the context of a larger macro environment. Forces arising from this part of the external environment may affect the venture’s organizational capabilities, customers, competitors, and channels of distribution. explosive growth in the volume of cross-border flows, clearly no longer linked to trade. In developing countries we witness not only increasing flows but also a shift in their composition.

The postwar development model of transferring capital resources from government to government has largely been replaced by private sector flows to governments and emerging private firms. Clearly this reaction has its roots in a changed market structure. Institutional investors now dominate, and although they often place long-term funds they have a very short-term perspective on relative performance, which can encourage large-scale risk-taking by competitors who are reassured by the similarity of each other’s actions. At the other end of the spectrum, but moving in the same direction, are the individual investors in OECD countries who increasingly participate in savings and defined contribution plans, and who are advised to seek long-term returns by increasing their exposure to risk. Taken together, these flows can be very large in relation to the size and institutional capacity of the markets into which they flow. Even more dangerously, however, they may have little information content. Rather than reflecting underlying economic fundamentals, they are just as much a product of rapidly changing risk appetites, and therefore risk premia.

The chapter, “the global Economy and the Nation states”, depicts relations between global leaders and global corporations, changing market systems and economic networks. Drucker states that effective intermediation will require mechanisms that permit regulators and supervisors to manage that which they cannot (or dare not) control. They will have to deal with generalized liquidity events, often arising out of seemingly isolated credit events. They will have to continue to be vigilant about preventing systemic risk, providing time for leveraged borrowers to restructure and for leveraged investors to unwind – and to do all this according to a formula that does not reward imprudent behavior.

As financial globalization proceeds and financial interdependence deepens, it is increasingly recognized that financial regulation and supervision need to take into account the impact of globalization and its implications for financial activities. The recent financial crisis in Asia and other emerging market countries demonstrated that crisis is highly contagious in a globalized market and may threaten the stability of the financial markets in the world at large. The Asian crisis was initially thought to be due largely to the failure of the macroeconomic policies and rigid exchange rate arrangements of the countries involved, or to social and cultural factors such as ‘crony capitalism and corruption. But it was gradually recognized that a more fundamental cause of the crisis was related to financial globalization. In other words the underlying cause of the crisis was the fact that the emerging market countries were too eager to enjoy the benefits of financial globalization and failed to pay due to regard to the risks arising from it. The international financial institutions may have been too hasty in preaching the virtues and benefits of financial liberalization in the age of globalization and too lax about pointing out the need for caution.

The chapter, “It’s the Society, Stupid”, criticizes current globalization and unveils drawbacks of financial policies provided by the global leaders. In the wake of the financial crises of 1997–98 the need was widely recognized for a strengthening of financial systems and the promotion of financial stability in the globalized market. The building of a new international financial architecture has become a major issue of international concern. One key area in this undertaking is the strengthening of prudential regulation of financial institutions and of regulatory enforcement to deal with the increased risks stemming from financial globalization. The task has two aspects: building strong and effective national regulatory systems, and strengthening the international supervisory framework and international cooperation. In the developed countries, cooperation in the strengthening of regulatory systems has quite a long history. The approach they adopted was basically to rely on national regulatory models, establishing general standards and principles through agreement, but leaving actual devices and implementation to the individual countries. This was a realistic approach, as the diversity of cultural and historical backgrounds would have made it difficult to set up and enforce a uniform regulatory system.

Even in the euro-zone countries, where monetary unification is completed, there is no enthusiasm for greater formal centralization through the European Central Bank of policies relating to prudential supervision, even though the Maastricht Treaty provides for the possibility. Yet the globalize market has come to accept that national supervisory bodies should adopt common rules and standards. Drucker writes: “Where Japan’s banks were by far the heaviest lenders, as they have also been to China. Japan faces the largest financial crisis of any developed country since World War II” (218). Likewise, because the financial turmoil in the emerging market economies shook the whole world, the strengthening of financial and prudential systems in those countries has become an important aspect of the new financial architecture. Here, as in the case of the developed countries, a one-size-fits-all regulatory system will not work. But at least the emerging market countries are to be required to establish financial and regulatory systems that incorporate common international rules and standards of best practices. In this context, the need to develop such rules and standards has been underscored. Assistance to the emerging market countries in building robust and effective systems is being provided by international financial institutions and through various forms of international cooperation.As regards the supervision and surveillance of the international financial system, a number of international frameworks and arrangements have been set up to this end. International financial institutions such as the IMF, IBRD and BIS are sharing the work and the responsibility.

The Chapter 14, “On Civilizing the City”, Drucker portrays current problems faced by megacities and their reaction to changing financial and economic relations. Drucker states that “for millennia, the dream of rural people was to escape into the city” (228). It is not social but economic, and those in the highest stratum of society, a bare one percent of the population, lead relatively private and privileged lives, so that economic aristocracy becomes, in effect, a social one also. But it is not legal or official, so that many Americans delude themselves into thinking that we have no classes. Although there are some opportunities for moving up in society, those at the top start out way ahead, and very few are able to catch them. Since we measure achievement in economic terms, this means those at the bottom must suffer from a grievous sense of inadequacy. In order to assuage these feelings, the affordinary man goes into debt, and a gigantic economic institution has developed to allow him to do so — installment buying. Figures show that the ordinary man is heavily in debt, which puts terrific emotional strains on him.

The fourth Part, The Next Society, depicts a new society created by innovations and technological changes. The chapter, the Next Society, portrays a new social order and relations between people shaped by technology and new economic environments. The chapter consists of subsections: New Demographics, New Workforce, the Manufacturing Paradox, will the Corporation Survive? The Future of Top Management and the Way Ahead. The technological environment is perhaps the most interesting and complex of all, and certainly is the one that most distinguishes the high technology arena from lower technology settings. High technology organizations are fueled by the relentless march of technology–by the generation and communication of knowledge that can be used to solve a problem or accomplish a function. Each new breakthrough in basic scientific knowledge and in engineering and design capabilities can propel an entire industry to a new level of product or process. It can simultaneously create new opportunities for entry, bankrupt existing companies, and overnight render obsolete entire product lines and manufacturing and design processes. Technology progresses in diverse directions. No one firm has sufficient resources to keep up with all directions and aspects–from basic research to product development in multiple technical areas. Drucker writes: “The markets of the developed world have been dominated by the values, habits, and preferences of the young population” (249).

Technology strategy locates the firm among elements in an inter-organizational network that advances the generation and application of technical knowledge. Rogers and Chen’s chapter describes one manifestation of this network. These are clusters of organizations that create both the critical mass and the diversity of elements necessary for technology advance to occur and for commercialization to result. The research university or research institute is the growth stimulus, providing the energy for technological innovations that can then be converted into products and processes. Financial elements such as venture capitalists or banks are available to underwrite the costs of this conversion. The symbiotic nature of the relationship between the research organizations, financial organizations, and the entrepreneurial organizations that exist to commercialize the ideas is significant.

Drucker states that viewing high technology in the context of international competition, some key trends have emerged: the United States still enjoys a strong strategic position, especially in advanced high technology products and services, but this position is wilting against escalating Trans-Pacific competition; Japan has emerged as a strong and formidable competitor who is widely regarded as dislodging the United States from its preeminent position in the future; and Europe, with few exceptions, is slowly declining in its competitiveness, and needs a massive “catch-up” strategy to survive. And survival for firms in these countries will depend on their abilities to master their management skills, natural resources, and national institutions to compete in this area. While the trends discussed earlier conform to conventional wisdom, no clear consensus has emerged on which country will assume technological and economic preeminence in the future. Accordingly, competing in high technology creates new and different demands for managers. Since product life cycles are significantly shorter, there is more pressure to recoup initial investments over a shorter time period. “By now the new information technology-Internet and e-mail-have practically eliminated the physical costs of communications” (275).

Because the pace of technological innovation can render previously accepted products and technologies virtually obsolete within a short period of time, firms constantly jockey for positions to make them competitive in world markets. De-skilling, re-skilling, and dislocations create social anxieties that spill across as disturbing features in the workplace. “New society applies equally to high-knowledge workers such as research scientists and to knowledge technologists such as physiotherapists, computer technicians, and paralegals” (271). Collectively, the need for a rapid, timely, and appropriate response to competitor’s actions affects all phases of management, whether this is financing for research and development, pricing newer products in the marketplace, investing in new plant capacity, or training and developing persons to adapt to a high technology movement.

Conclusion

In general, Drucker portrays that there is a transition from old patterns of communication and business to new business environment shaped by technology and information systems. For many U.S. high technology firms, the answer lies in the tenets of a free market system. That is, success accrues from a healthy climate of innovation, such as that fostered by Silicon Valley, as well as a belief in the unencumbered access to Japanese and European markets. For Japanese high technology firms, the answer lies in their ability to exploit advantages in their national institutions. Some analysts have argued that selective targeting of industries by Japanese bureaucracies and nationalistic procurement practices within their interfirm groupings account for their favorable market position. This book involves a lot real-life examples and case analyses which help to understand current trends and future changes in business and social settings. For Drucker, eternal innovation seems the price of survival in contemporary economic competition, and this is especially true for high technology firms. Survival depends on maintaining a steady stream of innovative microelectronic products manufactured in high volume by frequently changing state-of-the-art technologies.

Drucker asks and answers how organizations that must continuously innovate over time can manage the dominant competitive issue of innovation. His focus is not merely on the creation of a single high technology innovation; rather he is concerned with how companies create a stream of innovations that are commercially successful. Innovations that have repeated marketplace success are concern. The book examines how companies organize for innovation, drawing from a longitudinal study of five highly innovative U.S. electronic firms that manufacture and compete in the semiconductor components, systems, and computer marketplaces. Companies must innovate their manufacturing processes, because success depends heavily on more and more sophisticated manufacturing techniques. They must efficiently manufacture in high volume a continuously changing set of products and manufacturing techniques–neither remains stable for long–so steady-state manufacturing is not possible, and yet manufacturing efficiency is incredibly important here, just as it is in other nonhigh technology industries. Their innovative products must have high market cachet: it is the market test that ultimately determines success for these companies. This imposes a dynamic tension on the organizations to be simultaneously clearly structured for efficiency while adapting to organizational modifications required by changes in their technical and market conditions. I would recommend this book to everyone interested in social changes and technological innovations, business opportunities and management.

Works Cited

Drucker, P. F. Managing in the Next Society. BUTTERWORTH HEINEMAN, 2002.

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