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Classic Drucker

From the WSJ this morning via Reveries:

In “The Five Deadly Business Sins (10/21/93), he wrote: “The first and easily the most common sin is the worship of high profit margins and of ‘premium pricing’ … The worship of premium pricing always creates a market for the competitor. And high profit margins do not equal maximum profits. Total profit is profit margin multiplied by turnover. Maximum profit is thus obtained by the profit margin that yields the largest total profit flow, and that is usually the profit margin that produces optimum market standing.”

Mr. Drucker cited the U.S. auto industry’s “fixation on profit margins” as an example, versus the Volkswagen Beetle, which by 1970 “had taken almost 10 percent of the American market, showing there was U.S. demand for a small and fuel efficient car.” In “The Delusion of Profits,” (2/5/75), he wrote: “There is no conflict between ‘profit and ‘social responsibility.’ To earn enough to cover the genuine costs which only the so-called ‘profit’ can cover, is economic and social responsibility — indeed, it is the specific social and economic responsibility of business. It is not the business that earns a profit adequate to its genuine costs of capital, to the risks of tomorrow and to the needs of tomorrow’s worker and pensioner that ‘rips off’ society. It is the business that fails to do so.”

And, in an essay entitled, “Is Executive Pay Excessive?” (5/23/77), Mr. Drucker wrote: “Economically, [the] very few large executive salaries are quite unimportant. Socially, they do enormous damage … These very few large salaries are being explained by the ‘need’ to pay the ‘market price’ for executives. But this is nonsense. Every executive knows perfectly well that it is the internal logic of a hierarchical structure that explains them (i.e., status symbols) … If and when the attack on the ‘excessive compensation of executives’ is launched … business will … bemoan the public’s ‘hostility to business.’ But business will have only itself to blame. It is a business responsibility, but also a business self-interest, to develop a sensible executive compensation structure that portrays economic reality and asserts and codifies the achievement of U.S. business in this century: the steady narrowing of the income gap between the ‘boss man’ and the ‘working man.'”

2 Responses

  1. By Kevin Dugan on November 15th, 2005 at 9:46 am

    One of my favorite Drucker lines is something like “growth without profit is cancer.”

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