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CHAPTER THREE

To Create a Customer

Peter Drucker

There is a lot of competition among the world’s top management gurus. But, strangely, they all agree on the answer to the question: who is the most important modern management thinker? The answer is obviously Peter Drucker. Everyone agrees that he is the man who invented modern management. He was the first person to think carefully about the position of business in society. He supported the idea of giving more power to workers at a time when the boss’s word was law. He saw the importance of computers before Bill Gates had learnt to read. He also said that government businesses should return to the private part of the economy over twenty years before the idea changed the face of Europe.

But Drucker is not just a business specialist. He has written two books of fiction and he has also taught university courses on Japanese art. Even his books about business are full of ideas and information from history and literature. ‘How many Englishmen were gentlemen in the nineteenth century?’ he asks in one of his books. (Not many, is his answer.) He often gives examples from the works of Jane Austen and Charles Dickens to explain his ideas about company life.

The truth is that Drucker is not a normal management writer. He has no real experience of business, because he has spent most of his life in universities. And although he has worked in the USA for over half a century, he is not really an American. Perhaps that’s why he’s always been a little bit different.

Drucker was born in 1909 and grew up in Vienna, Austria. When he was a teenager in the 1920s, Vienna was a city that lived in the past. Just a few years before, it had been the capital of an area that stretched from the Alps to the edge of Russia. More than 50 million people lived there. Vienna’s wonderful palaces had welcomed the world’s richest and most powerful leaders. Its cafes had been full of great artists and writers. Its concert halls and theatres produced some of the greatest music and plays in all of Europe. But the First World War changed all that. At the end of the war, Austria found that it had lost its power, most of its land and nearly all of its people. By the early 1920s, Austria was a small country of just 6.5 million people, with no real place on the world’s stage.

Certainly, Austria had changed, but its people hadn’t forgotten its traditions - especially, its tradition of great work in art and science. Peter Drucker’s family was typical. His grandmother was a musician who had played for Gustav Mahler; his father had been a friend of Sigmund Freud. Drucker grew up in a home where people spoke three languages. They discussed science, books and mathematics in the way that many modern families talk about TV and sport today.


It was soon clear that the young Peter Drucker was very clever. He got excellent results at school and at the age of seventeen, he decided to leave Austria and find a new life. He moved to Hamburg in the north of Germany. His father wanted him to become a full-time student at Hamburg University. But the idea was too boring for Drucker.

‘Students live in a dream that is two parts beer and one part sex,’ he said. He wanted to find out about real life. So, he worked in an office job during the day and studied law in the university library in the evenings. His father was worried. He thought that his son was wasting his life. But Drucker soon proved him wrong.

At the age of twenty, he was already publishing his writing in important magazines. His first report was about the world economy. It was very well written and very cleverly argued; sadly, it was also very wrong.

‘The world economy looks good,’ he wrote. ‘The New York Stock Exchange will almost certainly go up.’

The report appeared in September 1929. Just one month later, the New York Stock Exchange crashed. It was the worst financial disaster of the twentieth century. Drucker said that after that experience, he never tried to make guesses about the financial future again.

The crash of the New York Stock Exchange had a terrible effect on all the economies of the world. And one of the places that suffered most was Germany. German businesses failed, the value of German money fell and millions of ordinary Germans lost their jobs. Some German families had to sell everything they owned so that they could still afford to eat. Drucker was shocked by the problems that he saw. But he was even more shocked by the events that followed.

It seemed that Germany’s politicians could do nothing to help their people. Many ordinary Germans lost hope in their government and looked for other solutions to their problems. One person who said that he had the answer was Adolf Hitler. Support for Hitler grew as Germany’s problems got worse. In 1932, Hitler and his Nazi party came to power.

In the early 1930s, Drucker had moved to Frankfurt and had taken a job as a journalist for a newspaper. He was in an excellent position to see the changes in German life and he was frightened by what he saw. But what should he do? Should he stay and fight the Nazis, or should he leave the country and find a new life somewhere else?

It was soon clear that he had no choice. Drucker was working on a book about a writer and thinker called Julius Stahl. He knew that Stahl’s ideas were very different from the ideas of people in the Nazi party. When the book was published, he was very worried. In fact he was right to be worried. The Nazis hated the book so much that they burnt it. Drucker realized that he had to leave the country.


In 1933, Drucker moved to London. There, he worked for banks or other financial organizations during the day and continued to write in the evenings. But the news from Germany got worse and worse and he became more and more worried about the political situation in Europe.

But he also had some happy times in London. One day he was on his way to catch a train at a London station when he saw a beautiful young woman on the moving stairs next to him. She was going up and he was going down. But it wasn’t just that she was beautiful, he also recognized her! It was a woman he had known in Hamburg called Doris. When he got to the bottom of the moving stairs, he decided to follow her, so he ran up after her. But when he got halfway up, he saw that she was now coming down. She had also recognized him and had decided to follow him! When they at last caught each other, they talked excitedly about the old times in Germany and arranged to see each other again. A few years later, Drucker and Doris were married - it was a partnership that lasted for the rest of the century!

While he was in London, Drucker thought very hard about the events in Germany. Why had the Nazis come to power? he asked himself. He decided that it was the result of changes in the societies and the economies of European countries. The modern world had brought big changes to the way that people lived. In Europe and America people had left the farms and the countryside and moved to the cities to find work in factories and offices. The old ideas of society didn’t mean anything to these people any more. The problem was that there were no good new ideas to replace them. He felt that ordinary people had lost hope in the future. In Germany, the solution to this problem was Adolf Hitler and the Nazis. But Drucker was sure that this problem could be solved in other ways.

He put his ideas into a book called The End of Economic Man. It was published in 1939, just before the start of the Second World War. It was an immediate success among certain kinds of people. The British politician Winston Churchill (who had not yet become a war leader) read the book and said that it was excellent. He said that all top soldiers in the British army should receive a copy to help them to understand the international situation. Drucker later learnt that they received his book in a package that also contained the famous children’s story Alice In Wonderland.

So, what did that say about the world’s opinion of his ideas?


At the end of the 1930s, Peter and Doris Drucker crossed the Atlantic and set up home in the USA. Drucker soon found a job as a teacher at Bennington College in Vermont. But he didn’t stop thinking about the ideas in his first book. He decided that many of the problems of the modern world were problems that had been created by business. Business had lots of power in modern society, but it did not always use this power responsibly.

He thought that companies needed to think more carefully about their purpose and about their duty to look after their workers. But if business had caused the problems, then business could also solve them. In his next book, The Future of Economic Man, he said that the future of society was all about the future of organizations.

Drucker wanted to find out more about big business organizations. But as the world was at war, he knew he had to wait. Every big company in the USA was working as hard as possible to produce equipment for the army. Drucker realized that managers had no time to talk to a university teacher like him. Then, one day in 1943, he was sitting in his office at Bennington College, when he received a phone call.

‘Hello, Mr Drucker,’ said the voice. ‘I’m calling from General Motors. We’d like to talk to you about something. Can you come for a meeting?’

Two days later Drucker visited General Motors’ offices. There, he met one of the top managers, Donaldson Brown.

‘We’ve read your books,’ Brown told him, ‘and people at GM are interested in your ideas. We’re mostly technical and financial people here, but we’re asking the same questions as you. What is the place of big business in society? How should a big organization be run? That sort of thing.’

Drucker couldn’t believe his ears.

‘Well, obviously I’m very happy to hear that,’ he said. ‘But how can I help you?’

‘We have to start planning for the years after the war has finished,’ Brown explained. ‘So we’d like you to come to GM and look at our work. We’d like you to think about our organization and our methods and then write a report for top management.’

‘That sounds very interesting,’ said Drucker, ‘but I already have a job at Bennington College.’

‘That’s OK,’ said Brown. ‘We don’t want to employ you. We want someone from outside. You can keep your job at Bennington, but of course, we’ll pay you some extra money.’

For Drucker it was a great opportunity. General Motors was the most powerful company in the world. Drucker also wanted to meet GM’s boss, Alfred Sloan. Sloan and his ideas were already famous in the business world. Drucker had heard that Sloan kept tight central control of the company’s direction and its finances. But he also knew that Sloan allowed GM’s managers to be independent and he liked to listen to their opinions.

When Drucker met him for the first time, he saw immediately that Sloan believed strongly in duty.

‘Mr Drucker,’ said Sloan, ‘you have probably heard that I didn’t want you to study General Motors. I saw no reason for your work. But my managers disagreed with me and so we took a decision to invite you here. This means that it is my duty to make sure that you do the best possible job. Come and see me at any time. Ask me any question you like. You can attend our meetings and you can make suggestions. I only ask that you do not tell people our secrets.’

Drucker admired Sloan but when he looked around the rest of GM, he was often surprised. On several occasions, he found a big difference between Sloan’s ideas and the real world of GM’s factories and offices.

One of Drucker’s first appointments at GM was with a man called Marvin Coyle. Coyle was head of Chevrolet. He was a big man with hard, mean eyes. Many of Chevrolet’s employees were afraid of him. Coyle knew it, but he was the kind of man who didn’t care. One morning, Coyle was telling Drucker about the importance of Sloan’s ideas.

‘We like our managers to be independent,’ said Coyle. ‘We want them to take their own decisions.’

At that moment, the conversation was interrupted as a message started to come through on the noisy machine behind him.

‘Is everything all right?’ asked Drucker.

‘Oh yes,’ said Coyle. ‘That’s just the manager in Kansas City. He always tells me when he goes out to lunch.’

Drucker shook his head.

‘So that’s what “independent” means, is it?’ he said to himself.


Although GM had only asked Drucker to write a report, he soon realized that he had enough ideas for a book. Business books were not popular at that time, but he found a publisher and called it Concept of the Corporation. On the whole, the book was very positive about General Motors. Drucker was very enthusiastic about Sloan’s way of mixing central control and independence for managers. But he also found a few faults. He was especially worried about the company’s attitude towards its workers. At that time all businesses were tough on the workers. At General Motors they were only employed when there was a job to do. During the company’s quiet times, many workers sat at home and earned nothing at all. When they were able to work, managers often shouted at them and ordered them to work harder.

But as early as the 1920s, people had asked if this was the right way to manage. An Australian called Elton Mayo had done some tests with 20,000 workers at Western Electrics Hawthorne factory outside Chicago. He wanted to see the effects of different lighting conditions on the factory’s production. In the first test, the lighting conditions in the Hawthorne factory were improved. The result was that workers increased their production. In the second test, the lighting conditions were made worse. Perhaps surprisingly, production went up again. Finally, lighting conditions in the factory were returned to normal. And once again, the workers’ production improved.

How could Elton Mayo explain these results? He decided that the improvements in production had nothing to do with the changes in lighting conditions. Production had only increased because the workers felt valued - and they felt valued simply because they were part of his test.

Elton Mayo said that this showed that it was important for managers to be good to workers. It was not enough for managers to offer extra money for good work and punishments for bad work. He said that people work harder when they feel their work is valued. Managers needed to understand that they were dealing with human beings and not machines.

Drucker thought in a similar way. In Concept of the Corporation he wrote that business should not see workers simply as a cost. The workers are the most important thing in any company. He believed that they should help to manage the company. He also said companies like GM should improve the workers’ conditions and pay them regular money in good times and in bad.

Drucker thought that these points were completely fair, but when the top management of General Motors read the book, they were very angry.

‘This is not a study of General Motors,’ said Marvin Coyle, ‘it is an attack on the company.’

Alfred Sloan wanted nothing to do with it.

Nearly all the people that Drucker had worked with at GM stopped speaking to him.

If any GM manager was found with a copy of the book, he was told, ‘It’s probably best if you go and work for Mr Ford.’


While he was working at General Motors, Drucker often asked people, ‘What books on management have you read?’

The answer was nearly always the same.

‘There aren’t any books on management, are there?’

Then one day, one of the GM managers suggested that he should visit a man called Harry Hopf.

‘I’m told he’s got the biggest collection of business books in the world,’ he said.

A few days later, Drucker was knocking on the door of Harry Hopf’s house in New York. An old man answered the door.

‘So, young man,’ said Hopf. ‘I understand that you are interested in management.’

Hopf led him into a huge library that contained thousands and thousands of books. Drucker looked around him.

‘Are all these books about management?’ he asked.

Hopf laughed.

‘No, young man,’ he said. ‘These are mostly about selling, advertising and production. I have, I believe, only six books about management in the whole library.’

In fact, when Drucker looked at Hopf’s six management books more closely, he found that three of them weren’t really about management at all. It was clear that if Drucker wanted to read any more books on management, he would have to write them himself.

In the years immediately after the Second World War, Drucker thought deeply about business and the job of a manager. In 1954, he published a book called The Practice of Management. According to some people, it was the book that invented management.

In the book, he asked some important questions. Probably the most important one was: what is a business? At that time, most people’s answer was: an organization that tries to make a profit. But Drucker disagreed. For him, business wasn’t just about money. He said that a business should always be a part of society. He said that business should always act responsibly. For him, the purpose of business is to create a customer. A business should always make something that people want to buy. It might be a completely new product, or it might be something that people have always wanted. But businesses should never try to trick people and business people should never be greedy. The purpose of business was to serve society. If business people got rich as a result, that was their fair reward.

And what about managers? What exactly was their job in Drucker’s idea of business? To explain, Drucker told a simple story.

One day, he said, there were three workers who were all cutting some large pieces of stone. A stranger went up to them and asked, ‘What are you men doing?’

The first man looked up from his work and said, ‘I am earning some money.’

The second replied, ‘I am doing the best job of stonecutting in the country.’

But the third man stopped and said, ‘I am building a beautiful and enormous church.’

The third man, Drucker explained, was the true manager.

For Drucker, management wasn’t just about the everyday running of a business. For him, a manager was someone who could see into the future. A manager was someone who could bring together people’s skills and energies to produce something that was exciting and new. In the old world, the most important creative person had been the artist; in the modern world of organizations, according to Drucker, it was the manager.

But, in practice, how could a manager do this? Drucker’s answer was ‘management by objectives’ (MBO). He said that a manager’s job was not just to accept orders from above. A manager should always understand where he or she wants to go.

A company should set an objective for a manager and then reward that person when they succeeded. Over the next twenty years MBO was accepted by almost every big company in the world.

Since the 1950s, Drucker’s ideas have become more and more important. As well as a university teacher, he has also been a consultant to businesses and governments. People have always been ready to listen to his ideas because it seems that Drucker is able to see the future very clearly. In 1959, most people in the ‘world worked with their hands in factories or fields. Rich economies made their money from factories and physical strength. The most important products were things like planes, cars and trains. But 1959 was also the year that Drucker first talked about the knowledge worker. He said that more and more people are going to start working with their brains. He said that information and ideas will have a higher value than oil, wood and iron. Today, in many countries, the computer has made that situation a reality. But when Drucker first had those thoughts, the computer that sits on your desk today was the size of a small house!

In the 1960s, Drucker also thought hard about the job of government in society. He believed that the real purpose of government was to make decisions and to lead society. He was worried that many governments also tried to run businesses. He said that governments were bad at doing things themselves, because they nearly always wasted time and money. His solution was for governments to sell their businesses to private companies. In 1969, it seemed like a crazy idea. It was the time of the Cold War. In countries like China and the Soviet Union, governments owned all the businesses in the country. Even in places like Western Europe and the USA, governments owned many of their country’s factories and services. It was almost impossible to believe that anything could change.

But some people were listening to Drucker, and during the 1970s his ideas spread from the world of business into the world of politics. In the early 1980s, the UK’s new Prime Minister, Margaret Thatcher, tested Drucker’s ideas about government for the first time. She started selling many of Britain’s government businesses, like car factories and telephone companies, to the private part of the economy. Many people criticized Thatcher and said that she was selling things that belonged to the British people. But, soon governments in the rest of Europe and Latin America were copying Britain. And in the early 1990s, after the end of the Soviet Union, even Russia started to sell some of its factories and farms. Drucker had never dreamt that his ideas could travel so far!


Peter Drucker has had a big effect not just on business, but also on the world beyond the factory and the office. But management has always been at the centre of his thinking. So what about Drucker’s own ability as a manager? He has never really been a businessman himself. And, perhaps, that’s a good thing. With complete honesty, Drucker once said, ‘I would be a very poor manager. Hopeless. And a company job would be very, very boring.’

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