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**************************** G*E*T**W*I*R*E*D*! ***************************


_Wired 1.3_
Post-Capitalist
***************

Peter Drucker, the father of modern management, discusses how knowledge, 
not capital, is the new basis of wealth; why the "success" of Japan's 
MITI is a myth; and what his Aunt Trudy told the woman who complained, 
"Doctor, my Johnny won't eat."
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

-- A conversation with Peter Schwartz


Long before the arrival of commercial computers, even before the 
pervasive presence of electronic gear, Peter Drucker forecast a society 
shaped and altered by information. In the 1950s, Drucker perceived a 
coming revolution in the way businesses would be run. He saw that 
success in business would not be tied to how old, large, reputable, or 
well-financed a company was, but how it was managed. Through his 
insights and constant evaluations, Drucker practically invented the 
science of modern corporate management. He coined the term "knowledge 
worker" long before the information age was a cliche. In 1988 he claimed 
that in another decade the Soviet Union will be neither. 

In many ways, Drucker is the arch-guru of capitalism. His writings and 
opinions are followed avidly by the readers of the Wall Street Journal, 
the CEOs of Japan, and other ambitious corporate types in the rest of 
the world. Born in Austria in 1909, Drucker is still two steps ahead of 
everyone else. His latest book, Post-Capitalist Society, is a brave 
effort to outline the shape into which capitalistic society may evolve 
next, now that knowledge, rather than capital, is the basis of wealth.

This interview was conducted in Drucker's home by Peter Schwartz, who 
may be the Drucker of this generation. Schwartz is co-founder of Global 
Business Network (GBN), an organization structured to gather, analyze, 
and disseminate information about global business issues via a network 
of individuals and companies. Of course, electronic networks are used 
extensively, but more important, GBN is exploring the virtues of a 
highly open flow of information from author to client, from client to 
client, and client to author - a very unusual model in the often highly 
secretive world of futurism, management consulting, and international 
business. Schwartz has been a key developer of the popular "scenario 
method" of strategic planning. His vision is laid out in _The Art of the 
Long View_.


Productivity Versus Innovation
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
PETER SCHWARTZ: As Japanese worker output rapidly grew, American 
businesspeople, academics, and the new administration in Washington 
bemoaned the relatively low rate of productivity improvement in the US. 
At the same time, a parallel troika in Japan worries about the pace of 
Japanese innovation. Japanese industry has been remarkably adept in 
picking up foreign technology. Now that it has achieved near parity in 
many areas, it could develop new technological frontiers of its own. But 
given this moment of rapid economic and political restructuring in 
America, could the advantage be shifting back to the US? Is it possible 
that the conventional wisdom is wrong and that the US is better able to 
adapt to the emerging realities?

PETER DRUCKER: International economic theory is obsolete. The 
traditional factors of production - land, labor, and capital - are 
becoming restraints rather than driving forces. Knowledge is becoming 
the one critical factor of production. It has two incarnations: 
Knowledge applied to existing processes, services, and products is 
productivity; knowledge applied to the new is innovation. 

When you look at it that way, the last 40 years of economic history 
begins to make some sense. The Japanese have shot themselves into the 
world economy by concentrating on productivity, while we have 
concentrated on innovation. But the Japanese have neglected innovation. 
They are now desperately trying to catch up; the results are not yet 
good. The Germans have totally neglected innovation and show no signs of 
even trying to catch up. Now we in the US are desperately trying to 
catch up on productivity. 

Knowledge has become the central, key resource that knows no geography. 
It underlies the most significant and unprecedented social phenomenon of 
this century. No class in history has ever risen as fast as the blue-
collar worker and no class has ever fallen as fast. All within less than 
a century.

In 1900 the blue-collar worker was still a proletarian. Trade unions 
were still either totally illegal or barely tolerated. There was no job 
security. There was no eight-hour day. There was no health insurance 
(except in Germany). Fifty years later, the blue-collar worker seemed to 
dominate every single developed society. 

Now we have a Secretary of Labor who openly declared, in _The Work of 
Nations_, that the blue-collar worker doesn't matter. And the unions 
accepted him. 

S: Yet the new administration has come to power saying that there are 
certain classes of blue-collar jobs that do matter - high-paying 
manufacturing jobs. Clinton keeps talking about those. Do you think 
that's really misguided?

D: No matter what the administration says, by the end of this decade the 
number of people working in the big three automobile companies is going 
to be about a third of what it is now, maybe 40 percent. And the 
Japanese auto companies are no longer going to grow. 

I don't think there is anything the administration can do. If the 
administration tries to prevent the old industries from restructuring 
themselves around knowledge, then the work will just be shifted 
offshore. It's that simple. We have gone quite a ways along the 
restructuring road. In 1980, US Steel employed 120,000 people in steel 
making. Now it turns out the same tonnage with 20,000 workers.

This shift will be a particular problem in this country because in the 
last forty years the one way a black could rapidly rise to a middle-
class or upper-class income was by working on the assembly line. So it 
aggravates racism, already our worst problem. 

But I think we are way ahead in this country, because we have done two-
thirds of our restructuring already, whereas the Japanese and the 
Germans haven't even begun. The Japanese are only now facing up to it. 
They had hoped to be bailed out by demographics - by labor shortages 
caused by an aging population. Also, the Japanese have a rule that if 
you finished high school you can't be a blue-collar worker, you have to 
be a clerk. And if you finish college, you have to be a professional or 
a manager. Since everybody in Japan now at least finishes high school, 
there is an incredible surplus of clerks and would-be managers. You 
know, it is unbelievable how overstaffed Japanese companies are in 
management.

S: Is that because a stabilization mechanism that is a virtue in one 
environment becomes a problem in another environment?

D: Precisely. Look, I am largely (but not entirely) responsible for 
lifetime employment in Japan. Forty years ago I preached guaranteed 
wage, guaranteed job, guaranteed income. The Japanese listened to me. 
There was such a labor shortage in Japanese industry during World War 
II, with industries outbidding each other for workers, that the Japanese 
army simply imposed a rule: If you have a job you can't leave it. 
Period. But Japanese industry after World War II wanted very much to get 
rid of this rule. There was a big strike against Nissan over this 
question, and the union lost. 

I was one of the people at that time who told the Japanese that if you 
want labor peace, you have to give job security; not to everybody, but 
to that small core of permanent people. 

But in retrospect I was wrong. I was right for the Japanese at that 
time, but I was wrong to preach it to American managers. American 
workers are so adaptable, so mobile. It's amazing how very little 
permanent unemployment there is in such places as Youngstown or Detroit. 
It's incredible. 

The mobility and resourcefulness of the American worker is remarkable, 
and has saved us from very severe social problems. But in Japan it's 
going to be very rough the next few years.


Productivity and the Knowledge Worker
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
S: You and I are both knowledge workers. Movie studios, hospitals, 
universities, R&D organizations, software developers, government and law 
enforcement agencies, newspapers, and publishers are all knowledge 
organizations of some kind. Yet these industries all experience 
notoriously low productivity. If you are right that knowledge is the new 
driver of economic progress and increasing incomes depend on increasing 
productivity, how can we increase the productivity of knowledge workers? 
How do we improve the productivity of researchers, an editorial group, a 
consulting team, and critically, executive management, among the least 
productive of knowledge workers?

D: There are two sides to this. When Frederick Taylor started studying 
the fellow in the iron foundry who shoveled sand, neither Taylor nor 
anybody else questioned what the sand shoveler was doing. This was an 
iron foundry; you needed sand. It came in from the quarry and it had to 
be shoveled someplace. Nobody argued. What you had to do was pre-
determined. How you did it was the question. 

In knowledge work, the first question is "What should you be doing?" Not 
how. There is very little joy in heaven or on earth over an engineering 
department that, with great zeal, great expertise, and great diligence, 
produces drawings for the wrong product. What you should do is the first 
question when you deal with the productivity of knowledge. It's a very 
difficult question, but an important one. 

Second, you have to make sure that people can concentrate on results. In 
manual work, you are concentrated by the task. That farmer in Iowa 
plowing the south forty doesn't climb off the tractor to take a 
telephone call or attend a meeting. I ran an unscientific time check the 
other day on the brilliant engineering department of a big company. I 
just asked engineers to keep a time log for a few weeks. I learned they 
spend two-thirds of their time polishing reports. Nobody goes to 
engineering school because of brilliance in writing. On the other hand, 
the world is full of English majors who can do nothing else. It has 
taken me two years to get that company to accept the fact that you want 
your engineers to give you the data, and maybe even write the first 
draft. But since it takes five drafts before you have a decent report, 
you hire editors. 


"Organizations as a Source of Instability"
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
S: In your book, _The Post Industrial Society_, you state: "Society, 
community, family are all conserving institutions. They try to maintain 
stability and to prevent, or at least slow down, change. But the 
organization of the post-capitalist society of organizations is a 
destabilizer. Because its function is to put knowledge to work - on 
tools, processes, and products; on work; on knowledge itself - it must 
be organized for constant change. It must be organized for innovation."

Hardly a day goes by that we do not read of thousands of jobs being cut 
somewhere in the industrialized world. Factories, offices, department 
stores, military bases are closing all over the world. Abandoning people 
and products is the necessary hand-maiden of organizational survival. In 
the early '70s, the last round of military cuts in the California Bay 
Area caused massive unemployment; but that became the fertile ground in 
which Silicon Valley blossomed.

I thought one of the most marvelous points in your book was the notion 
of organizations as a source of instability. Historically, most people 
have said that the creation of organizational institutions is one of the 
great stabilizing forces of society; they endure even as people change. 
You make the argument that organizational survival demands innovation, 
which means perpetual destruction.

D: Political and social institutions are conservers. We always go back 
to the church fathers, or try to. Economic organizations are innovators. 
They have to be. It's one of their functions.In ordinary times, the 
fairly large organization, or economic business, can contain innovation 
within an ongoing system for about fifty, or at most sixty years. The 
ones who try to extend beyond that are soon in trouble. Such as Sears 
Roebuck, or IBM.

Thirty-odd years ago I began to counsel that you should build organized 
abandonment into your system. It follows the old line that it makes more 
sense for you to make obsolete your own products than to wait for the 
competitor to do it. But this is very hard for organizations to do. The 
internal resistance is great. They have to be forced. Remember the 
Edsel? After eighteen months the Ford Motor Company announced that it 
was abandoning the Edsel. I think we all roared with laughter. We had 
already abandoned the Edsel. The Ford Motor Company just took a hell of 
a long time to accept it. 

S: Why is it that so many organizations, even in the United States, have 
such a high resistance to that process of systematically abandoning 
their past and building a future?

D: One reason is ignorance. People do not know that you cannot 
successfully innovate in an existing organization unless you 
systematically abandon. I come from a medical family. My Aunt Trudy was 
one of the great pediatricians of continental Europe, and the first 
woman physician in Austro-Hungary. She invented neonatal medicine. One 
evening when Aunt Trudy was at dinner at our house the telephone rang. 
It was some mother calling and she said, "Doctor, my Johnny won't eat." 
And Aunt Trudy said, "Has he had a bowel movement?" And the mother said, 
"Yes, doctor, every day." And Aunt Trudy said, "Don't you worry, he'll 
eat soon enough." 

As long as you eliminate, you'll eat again. But if you stop eliminating, 
you don't last long. 

S: Many organizations I know struggle with the problem of innovation, 
investing substantial resources and having little to show for it. Luck 
seems to matter almost as much as commitment, talent, and resources. Yet 
some companies like Motorola and Hewlett-Packard, and a few government 
agencies like Defense Advanced Research Projects Agency (DARPA), have 
been consistent innovators. They must be doing something right. 

D: When Akio Morita started looking at what was to become the VCR, it 
was quite clear to him that to convert it into a consumer product would 
come awfully close to suspending some laws of nature. The Americans had 
invented the physics, and Sony engineered around the physics. Morita was 
a physicist, and a good one, but he didn't think there was more than a 
25 percent chance of success. But if he could do it, then he'd have a 
fantastic market. Morita put five teams of designers in competition, and 
then did something fiendish for which those people haven't yet forgiven 
him. Every two years, he dissolved the teams and put them together in a 
new combination. They hated his guts. He almost gave up. I don't know 
why he decided to give it one more try. It took fifteen years. He was 
committed to a 25 percent chance for something that was theoretically 
barely possible.


Does MITI Matter?
^^^^^^^^^^^^^^^^^
S: I've always believed that success is the worst enemy of change, and 
failure its best friend. You have cited the example of the great change 
now underway in the US military. I think the reason for this change is 
the failure of Vietnam. They learned a great deal from Vietnam. Of the 
companies that I know, it's not the ones who have succeeded but the ones 
who have had catastrophes that have changed.

In Washington today there's a new impe-tus to stimulate technological 
innovation. Is there any real role for the government in this?

D: Not much. In part it rests on a total misunderstanding of what 
happened in Japan. None of the Japanese successes in technology owe 
anything to MITI (the Japanese industrial policy ministry), with one 
exception: the semiconductor. 

MITI did its darnedest to kill the Japanese automobile industry. First, 
MITI had deep convictions that the automobile was the wrong thing for 
Japan because everything it needed had to be imported, and roads eat up 
precious rice land. Second, they pointed out that Japan had nine 
automobile companies, and every fool knows just by looking at America 
that three is all one country can possibly afford. So MITI exerted 
incredible pressure on Mazda and Honda and Isuzu and Zeluki to sell out 
to the big ones. Third, MITI knew that no Japanese manufacturer could 
possibly compete with the likes of General Motors. They wanted the 
Japanese to go into India and China and Tibet and the Congo - wherever 
GM was not. Well, the Japanese automobile industry simply said "To hell 
with you."

The Japanese never got anywhere with the things MITI put as priorities. 
MITI is responsible for what? For the Japanese going into supercomputers 
instead of workstations. MITI pushed Japan into pharmaceuticals, where 
they now rank about number nine, after the Austrians and the Swedes. 
MITI is responsible for Japan's failure in telecommunications. When NEC 
came out with totally digital equipment, the national telephone company 
in Japan put pressure on MITI and said, "Look, we have warehouses full 
of old analog equipment. Get those wild men at NEC to make something 
that can be analog and digital." 

Analog is a great export market; all those people all over the world are 
not going to tear out their analog just to put in digital. Well, the 
only people I know who bought this hybrid system were the Claremont 
colleges [where Drucker teaches]. And now we have torn it out. Like most 
hybrids, it never worked.

MITI had nothing, but nothing, to do with the fax machine. Didn't even 
know about it. But MITI is responsible for Japan's greatest mistake, 
which is the steel industry; it's two-and-a-half times the size of what 
Japan can support. What to do with those steelworkers is going to be the 
real problem.


The Meaning of Intellectual Property
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
S: What role will intellectual property play in the knowledge society? 
How does one move around and manage knowledge, accredit it, and track 
it?

D: A friend of mine is a publisher of scientific monographs. He brought 
out a new book on brain surgery, and printed 2,126 copies. I said, "Why 
that number?" He said, "We always keep a hundred for our archives. There 
are 2,026 brain surgeons and hospitals that perform brain surgery. And 
we send it to them COD." That was before the copying machine.

He just sold that business and is starting an electronic service. He is 
not going to print any more. He said, "If I print it, it only gets 
copied. But if I simply send it via electronic mail to the people who 
are members of that society, and bill them, I get paid, and what they 
then do with it is their business. But no way I can control it." So, 
what is a copyright any more? 

We have to rethink the whole concept of intellectual property, which was 
focused on the printed word. Perhaps within a few decades, the 
distinction between electronic transmissions and the printed word will 
have disappeared. The only solution may be a universal licensing system. 
Where you basically become a subscriber, and where it is taken for 
granted that everything that is published is reproduced. In other words, 
if you don't want everybody to know, don't talk about it. I think we are 
getting there very fast.

S: But if you have a knowledge-based economy, then how can you own the 
knowledge? 

I have worked with musician Peter Gabriel on several projects. At a 
workshop we were holding for AT&T he was asked, "How do you deal with 
piracy of your albums?" Gabriel said, "Oh, I treat it as free 
advertising. I follow it with a rock concert. When they steal my albums 
in Indonesia, I go there and I perform." 

Now, that stands the whole relationship on its head.

D: I feel very much the same way. Our entire mentality is still thing 
focused. We still call our trade in intellectual property "invisible 
trade." Hell! It ain't no more invisible than any other. We are still 
merchandise focused.

There are 700 American university campuses offshore. And there are 50 
Japanese campuses on the West Coast now. Why? Because there is an 
enormous rigidity in Japanese universities. So they come here, where the 
diploma is from a Japanese university, and they learn English. And 
American universities go offshore because no university in the world, 
except the Open University in England, is willing to offer any teaching 
or any learning to older people. Continuous learning is still an 
American innovation; it is still considered absolutely unimaginable in 
Japan or in Germany. 

We have a half million foreign students. American higher education has a 
positive balance of payments of about $5 billion to $8 billion a year. 
When I tried to explain that to somebody at the bureau or Department of 
Education, he looked at me blankly. Never heard of it.

S: I'm president of a knowledge company. We generate information. We 
have processes to help people learn, and knowledge about knowledge in 
your terms. Yet none of that shows up on my balance sheet. My machines 
show up. My debt shows up. But my knowledge and my knowledge about 
knowledge is nowhere on my balance sheet. What do I do?

D: It doesn't belong on a balance sheet. A balance sheet should contain 
only things that in theory are saleable. Your knowledge is between the 
ears of people. 

But that only means that our balance sheets are meaningless. Our 
accounting system is still based on the assumption that 80 percent of 
our costs are manual labor. Even GM operates with only 28 percent manual 
labor. And the figure for the factory that's now on the drawing boards 
at Ford will be down to 11 percent. Not because it will be automated, 
but because they finally went to work and redesigned the process around 
information. 

GM's first idea was to redesign the process around robots. It wasted $30 
billion on that. No. You redesign the process around the information, 
which costs very little. 

Forty years ago, if you had said that you could run a multi-national 
company in any way other than as a parent company with subsidiaries, it 
would have been literally impossible. Yet here is the medical 
electronics business of General Electric, the largest medical 
electronics business in the world. They have three headquarters now. The 
one in Japan is in charge of X-ray equipment all over the world. The one 
in France is in charge of everything else that is traditional. The one 
in Milwaukee is in charge of high-tech scanners. They don't know 
countries. They know only customers.

You couldn't have done that forty years ago, not because we couldn't 
have done it technically, we probably could have. The mindset wasn't 
there.


Electronic Entertainment Has Peaked
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
S: Consumer electronics has provided a motor of growth for music, 
movies, and for Japan. Entertainment software that plays on this 
electronic gear has been a major export for California and Britain. But 
things seem to be slowing down. I have the impression that electronic 
entertainment is at its peak.

D: For the first time the Japanese are not willing to pay for new 
technology. They are not buying the new Sony MiniDisc CD players. It's 
wonderful technology but it's no different from my old player. When you 
see that happening, when people begin to ask for product 
differentiation, the boom period is over. From then on you have to work 
to earn your living. And that's hard. 

I was very unpopular in Armonk, New York [IBM headquarters] when I said 
in the late '60s - before the PC - that the mainframe is past its peak. 
I said that because for the first time the people who were getting into 
information were beginning to ask "What do I get?" And not "What can I 
do?" When that happens, it very soon becomes a biased market.

S: This is a very important perception. Because there are a lot of 
people out there driving on the technology. They want to continue to 
push the frontiers and meanwhile the customer is concerned with "What I 
am going to do with it?"

D: There is a war to be fought, but it lies in performance, and not in 
how one does things. You know, it's like that very old French story 
about what it means to become an adult. You no longer talk about having 
sex, you have it.  ===



(c) 1993 Wired magazine


