Peter Drucker on Entrepreneurs and Innovation

Excerpts from "Knowledge and Power: The Information Theory of Capitalism and How it is Revolutionizing our World" by George Gilder

Chapter 20

The Explosive Elasticities of Freedom

THE LAST TIME I saw Peter Drucker was early in the year 2000. He was keynoting a Forbes conference in Seattle for CEOs, and they had wheeled the great man out to the middle of the stage in a fluffy easy chair. Just over ninety years old, Drucker was a Delphic presence at the conference. Everyone leaned forward to hear what he had to say.

Suddenly a collective gasp rose from the assembled CEOs. The conference managers stood stricken. “For the love of Malcolm’s motorcycle,” we wondered, “What is this?”

The hoary sage’s balding pate had flopped back in the chair as if he had fallen asleep … or worse. I was horrified. Perhaps Forbes had erred in staking the success of a major conference on an aging guru seemingly in parlous health.

Then his entire body crumpled forward. I was ready to run up to catch him if he should tumble toward the crowd. But he somehow caught himself. His eyes opened, and he looked out intently at the throng of CEOs. Everyone sighed with relief. He was awake. He had their attention. Pointing his right forefinger toward the audience, Drucker growled, “I have just one thing to tell you today. Just one thing….”

“Wow,” I said to myself, “it better be good.”

“No one,” he continued, “but no one in your company knows less about your business than your see eff oh.”

Huh?

This was the era of the heroic chief financial officer (CFO). Scott Sullivan of WorldCom, Andy Fastow of Enron—clever, inventive folk like that. You remember them. Across the country, CFOs were in the saddle. GE’s CFO, Dennis Dammerman, was given heavy credit by Jack Welch for the ascent of General Electric and its transformation into a leviathan of finance. CEOs would not move without consulting them.

What could Drucker have meant?

He was stating Law Number One of enterprise: Knowledge, particularly financial knowledge, is about the past. Entrepreneurship is about the future.

CFOs deal with past numbers, with accounts. By the time they get them all parsed and pinned down, the numbers are often wrong. In effect, CFOs are trying to steer companies by peering into the rearview mirror. Past numbers have little to do with future numbers. Remember Ken Fisher’s principle: company returns and stock prices are not serially correlated.

As Drucker points out, company returns are not determined within companies. In companies are no profit centers, just cost centers. Whether a particular cost yields a profit is the result of decisions made outside the company, by customers and investors. Reaching customers and investors takes outward-looking vision and leadership, not inward-looking problem solving.¹

Once again, we return to Drucker’s rule: entrepreneurs should pursue opportunities, not solve problems. Solving problems sounds good, and it is the CFO’s specialty—and pitfall. You end up staring into the past. You feed your failures, starve your strengths, and achieve costly mediocrity. Instead, pursue opportunities.

Drucker’s view of CFOs was relevant far beyond the boundaries of the individual companies that hire them. CFOs in effect are “economists” studying the economy of one company. They abstract from existing data to create an orderly picture of the company at a given moment, focusing on apparent sources of profit and loss. The CFO makes sure his firm has enough low-entropy cash in case things go badly. He makes sure the company can sustain reversals. Fastow, Sullivan, and the others were disasters because the last thing you want from the finance department is bravado. The daring young man on the flying trapeze makes a terrible CFO.

The reason economists cannot explain growth is that economists are just macro-CFOs. When they do their jobs well they can warn us against certain dangers, such as the crippling buildup of federal and state debt. But when economists become creative; when they seek to surprise us with their ingenuity at conjuring growth by manipulating government spending, monetary policy, and mandates; they do to the economy what Fastow did to Enron.

Chapter 22

The Technology Evolution Myth

The importance of innovations, as Peter Drucker has stressed, is not their efficiency but their effectiveness.15 They do not do existing jobs better; they redefine the work. They don’t do things right; they identify the right things to do. Innovations are not linear but saltatory.

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