The APQC Blog

Drucker’s Five Deadly Sins in Business

There are often several things that can be critical mistakes for an organization. This article, courtesy of the Process Excellence Network (PEX), suggests five different errors that are made, according to Peter Drucker.

From 1975 to 1995, Peter F. Drucker wrote a column for The Wall Street Journal. On October 21, 1993, his column was titled “The Five Deadly Business Sins.” It could have been called “The Five Deadly Marketing Sins.” Many business experts suggest exactly what Drucker advised against. They still do. But his suggestions are still relevant in today’s market.  

Sin #1: Seeking High Profit Margins and Premium Pricing

Drucker called this sin the worship of high profit margins and of "premium pricing". He said it was easily the most common of the five sins. Why shouldn’t marketers at least seek high profit margins? That sounds like good common sense.

Drucker’s definition of “premium pricing” is offering more features and then charging more to increase profit margins. He cited Xerox, which invented the fax machine. It allowed Japanese organizations to take over the worldwide market because Xerox kept adding features—not to add value for their customers, but to raise the price and increase the profit margin. The Japanese industry looked at this and did a little re-engineering. Then they entered the market with a product that did the job at a much more reasonable piece. They captured Xerox’s market with great ease.

The problem is that it seems so automatic and obvious that big margins must lead to maximum profits. But this is an error. Total profit is margin multiplied by sales. So what the marketer should be seeking is an optimum profit margin which, combined with sales over time, equals maximum profits. Perhaps the worst part is that the strategy of high profit margins combined with the necessary tactics of premium pricing invariably opens the market to the competition and could result in the loss of the entire market to a competitor.

Sin #2: Charging What the Market Will Bear

Let’s say you have a patent or a secret formula. Conventional wisdom is to charge as much as the market will pay. When your competition finally catches up, if ever, you can use all the extra cash you have accumulated to fight off any and all competitors that try to enter the marketplace. At that time, you can also lower the price below that of your competitors. This way, competitors can never catch you. It seems that charging what the market will bear is a “sure thing” marketing strategy when you enter the market before your competition and have some leverage to keep competitors away. But is it?

Drucker claimed that the only sure thing about charging what the market will bear is that you will lose your market—and a lot sooner than you might think. The problem is that a high price creates an almost risk-free opportunity for your competitor to jump in seize the market. Risk is always present, so that when a nearly risk-free opportunity presents itself, it is a wonderful incentive. Moreover, the higher the price, the lower the risk to your competitor is a greater incentive to jump in and compete.

Drucker contrasted the loss of Xerox’s fax machine with DuPont’s synthetic fiber innovations. DuPoint patented nylon and sold it at a price that they anticipated they would have to sell it at five years later to undercut any potential competitor. Drucker estimated that this price was less than half of the price they could have sold the product for at the time. However, when competitors attempted to get in the market, DuPont had no difficulty keeping them out. In the process DuPont made nylon affordable and kept competitors away.

Sin #3: Using Cost-Driven Pricing

Cost-driven pricing means that you simply add up all your costs, and then add a profit, and there you are—the price you should charge. It’s all very logical, but it is wrong, according to Drucker. This, by the way, is how governments insist contractors price their products. It’s supposed to ensure both competition and a “fair” price. All you need to do is look at government cost overruns to see how well that approach is working.

Drucker said that instead of cost-driven pricing, you needed to do price-driven costing. That is, you need to start at the other end with the right price, and then to work back from price to determine your allowable costs. Drucker blamed the loss of the consumer-electronics industry and the machine-tool industry in the U.S. directly on this deadly sin. One begins to understand why Drucker called these deadly sins, and not simply marketing mistakes.

Sin #4: Focusing on Past Winners

Drucker called this “slaughtering tomorrow’s opportunity on the altar of yesterday” to emphasize that managers commit this sin in the name of past success. He pointed out that after IBM had accomplished the remarkable feat of recovering from missing the demand for PC computers, it still insisted on subordinating its newly won PC business to its old winner, the mainframe computer. Not only did resources go to the mainframes, but IBM PC marketers were discouraged from selling their product to mainframe customers. The net result, according to Drucker, was that IBM would not reap the fruits of its amazing achievement of coming from nowhere and taking leadership of the PC market. Instead its achievement was mainly to create IBM clones—and this major marketing blunder didn’t help its mainframe business.

Sin #5: Giving Problems Priority over Opportunities

Drucker saw that many companies put their best performers to work solving problems with businesses that were on the way out. Meanwhile opportunities were frequently assigned to those who lacked experience or ability.

This frequently occurs because egos get in the way. Otherwise smart marketers put resources, money, and people towards fending off someone’s encroachment into an established markets. Sure it may be declining, but this is their turf. So the ego is involved and they allocate time and resources to defending what may be barely worthwhile, while the real opportunity is picked up by a competitor.

When Drucker claimed these as sins, and not mere mistakes, he wasn’t exaggerating. Sinners take heed!