Startups Fail Because They Don’t Ask These Three Drucker Questions

Editor's Note:

Peter F. Drucker maintained he never predicted the future. That's a thankless/impossible task.

"I just look out the window," Drucker once quipped, "and see what's visible but not yet seen." To the point: There's a big difference between looking versus seeing.

In this article, Jim Champy shares with us his "disciplined observations" about what's happening with respect to the so-called "new-economy."

Further, he reminds us, manufactured enthusiasm inevitably will collapse into disappointment and retreat if basic management principles go unheeded.

Introduction

I spend a lot of time in San Francisco. After all, this is the epicenter of the “new economy.”

Today, I’m walking up Brannan Street, in the area known as “South of Market.” Some large tech companies, like LinkedIn and Dropbox, are headquartered here, in addition to many early stage tech companies.

For a while, the rents in San Francisco were cheaper than in Silicon Valley, making it attractive for startups.

There are no retail shops on this street, only tech companies and restaurants. I have learned that, here in San Francisco, everything from TVs to food is just delivered to your home by UPS or Instacart.

I don’t see anyone shopping until I get to Union Square. Could this be the future?

What’s in a Name?

My walk has started in front of Splunk’s headquarters. A large billboard on its roof shouts “Work here. Be Happy.” It’s an appeal to many of the young engineers who otherwise make an hour trek to the Valley every day.

The company’s tagline, “Listen to your data,” hints at what the company does: data analytics.

Most company names I see—Tunein, Ubisoft, Say, Tilt—leave me wondering what’s going on inside the front door.

Peter Drucker would love it. Peter always told me that a good company name leaves a person asking, “What does this company do?” It’s a great way to start a sales process.

Energy and Contrast

The area is filled with energy, exuberance, and a positive vibe. I’m almost hit by three scooters, as the 20-somethings head to work.

Everyone is wearing a t-shirt or hoodie with their company name or logo.

I pass a steakhouse with a formidable menu. Its specialty is a 48-ounce steak, priced at $190. Not far away are a few of San Francisco’s homeless, still sleeping under their blankets. The new economy hasn’t lifted everyone.

The Interesting Question 

Several times along the way, I’m tempted to stop by an inviting cafe, only to find it’s the private domain of one of the tech companies. Free food for employees is a common benefit here in San Francisco and the Valley.

But for me, the interesting question is: What else is different about these companies. How are they being managed?

The cheerleaders of the new economy would say that everything is changing. I don’t buy it.

Business Is Changing… But What About Management?

What’s clear is the nature of business is changing—a phenomena led by many of the companies here and in the Valley.

Amazon has massively disrupted retailing. Uber has upended transportation. Netflix is reinventing entertainment.

And all this is being enabled by platform companies like Apple and Google.

If Peter were writing today, he would acknowledge many principles and practices have entered the management lexicon: new models for funding innovation, the aggressive use of equity in compensation, the extension of agile methodologies to solve difficult problems, and the mantra of “failing fast.”

More On "Failing Fast"

I have seen the value of “failing fast” in the early stage technology companies I advise. Often these companies have an interesting technology that has not found a viable market.

A company will be constantly adjusting its strategy, testing and often failing, until it finds a practical use for its service or product—one for which someone will pay.

Hopefully, this happens before the company runs out of money. Failing fast can be important.

And a Counter to "Failing Fast”

Peter often referred to the advice of Bernard Baruch—a noted venture capitalist back in the 1920s and 30s—with respect to success, failure, and the near-success.

Baruch pointedly said (from his personal experience) projects and ventures which were near-successes turned out to be his most costly investment blunders.

Success and failure were more easily recognized. It was the near-success that caused all the trouble.

In his early years, Baruch stayed with the venture, spent a great deal of time on attempting to turn it around, and make them into the success everyone involved originally expected.

Baruch sadly admitted this never worked for him. This prompted him in his later years, when confronted with the near-success, to sell as early as possible for whatever he could get.

Timeless Management Principles and Practices

My experience tells me many management principles and practices (especially those formulated by Drucker) should remain the same, even for these companies with very different business models.

Here are a few that came to mind as I walked up Brannan Street.

Are you working on something important? The “new economy” continues to waste money and talent developing “me-too” products and services.

Companies that are just trying to build a slightly better version of a product or service cannot compete with the newly established players that have already built a massive customer base.

The world doesn’t need another app to call a car service or order food. Yes, disruption is possible, but it will be costly.

Even Stanford’s Business School recently urged its students to complete their degrees and learn something—not leave early to start the next social media company.

Customers have lots of unmet needs and the world has a lot of unsolved problems. Focus on these. Besides, nothing inspires people more than knowing they are working on something important.

Will someone pay for this? I think the world of venture funding is finally wising up to the fact that a business requires products and services for which customers will pay, at a price that produces a profit.

Companies that have tried to emulate Amazon by just by beating Amazon’s prices at a loss and building a customer base have not been successful. And social media companies whose revenues are based solely on advertising still have to cover their costs and hopefully more.

Maybe a company is just developing a technology with hopes of selling it to another company that will use it to create value. But this is becoming increasingly risky as potential buyers are being more cautious.

Besides, the old-fashioned ideas of profits and paying customers are great practices that drive other management disciplines.

Are you creating a valued experience? When processes get digitized without a focus on outcomes, a customer’s experience can get worse, not better.

As we digitize more and more processes, managers need to consider how to create a workplace that creates a valued experience for its people—both employees and customers.

I have always been an admirer of UPS, a company that has digitized many of its processes but still maintains a welcoming human touch.

Last week, I was tracking delivery of some packages. I had been receiving messages that shipping was delayed by Southern California wildfires.

When the packages showed up, a UPS delivery person graciously helped me get the packages into my apartment.

It happens thousands of times a day, mostly without fail. Consistent performance requires a lot of attention to process design, with a focus on the outcome you want to achieve.

In the euphoria of launching a new business here on Brannan Street—or anywhere else—it may be hard to get managers to pay attention to these simple ideas.

But I strongly believe they are critical to developing a sustainable business.