Peter Drucker, Calling the Housing Crash

peterdruckerThe Drucker Institute at Claremont McKenna will be celebrating the 100th birthday of famed management writer Peter Drucker on November 19.  TriplePoint is a Drucker fanboy, most notably The Practice of Management (1953) which still has many lessons to teach, and The Effective Executive (1966, revised numerous times.)  These works have focused on scientific management.

His Management Challenges for the 21st Century might even be better.  It is certainly among most distinct of his works.   It focuses more on social trends that will affect management.  Most notably, the opening chapters cover the implications of a falling birthrate in the western world.  He reminds us that:

…trends in the distribution of disposable income that go to a certain product category or service category tend, once established, to persist for long periods of time.  They are usually impervious even to the business cycle. (p. 51)

With the declining birthrate, there are massive demographic implications are towards a society obsessed with retirement.  This is even responsible, he argues, for an increased emphasis on shareholder-centric views of the corporation in the last part of the century.  (Equity shares being the principal means of establishing retirement income for the middle class, the maximization of profit becomes paramount when in conflict with other social or personnel obligations traditionally seen as a corporate role by mid-century.)

Financial services companies he writes (presciently in 1999, those halcyon financial times) have nevertheless misread their share of disposable income

[The world’s fastest growing…industry] has been Financial Services-but Financial Services the like of which did not exist at any earlier time, that is, retail services to provide an affluent, aging population in the developed countries with financial products to provide retirement income…This new growth industry is, however, quite diferent from the traditional financial industry as the “corporate banker”, a J.P. Morgan for instance, a Citibank or a Goldman Sachs…They only saw that “finance” takes a larger–a much larger — share of the disposable income in the developed countries.  But actually the share of these traditional financial services-major corporate loans {etc} is not growing.  As a result the traditional financial giants have greatly overexpanded worldwide.  And as their legitimate corporate business became less and less profitable…these corporate giants…have increasingly resorted to “trading for their own account,” that is, to outright speculation, so as to support their swollen overheads…[this] has only one – but an absolutely certain outcome: catastrophic losses. (p. 56)

As a prediction this couldn’t have been more spot on.  As macroeconomic attributions for what caused the financial implosion of the last two years proliferate (persistence of low interest rates, political pressures on housing) it serves as a good reminder that there still was a managerial misread in the use of capital, driven by a mega trend that arguably hasn’t been mentioned in other analyses.   Even today, investment banks are aggressively trading for their own accounts, “doing God’s work.” Mutual funds and insurance companies who are really capitalizing on this trend do not.

There are lessons here for the gaming industry.  A company’s industry can be in a great growth curve, but if misreading the appetites and shifts within that curve (the second derivative so to speak) you can wind up rather bloated and inefficient, resorting to ever-more desperate gambits to keep the enterprise afloat.  This often comes in the form of repeatedly overpriced acquisitions.