In a 1993 Wall Street Journal article, Peter Drucker listed his controversial five deadly business sins. Though proven by over two decades of practical application since that article was released, these five sins are still widely committed by companies today. Take heed to avoid them at all costs:
- Seeking high profit margins and premium pricing. The most common of the five mistakes is adding more features and services simply to charge more in an attempt to increase profit margins. This practice never adds value for customers. The erroneous assumption is that big margins mean maximum profit, when in fact a high profit margin strategy essentially invites competition. Seek the optimum profit margin coupled with sales over time to reach your highest margin.
- Charging what the market will bear. According to Drucker, the only sure thing about charging high (“what the market will pay”) is that you will lose your market entirely. The higher the price, the lower the risk to your competitor to jump in and steal your customer base. Don’t get greedy with prices: charge low prices to keep your market loyal, while shutting out the competition.
- Using cost-driven pricing. It’s a simple formula: add all costs including a percentage for profit, and that is the final price. But this theory is actually backwards. Drucker instead suggests price-driven costing. Start with the optimal price, then work back to determine your allowable costs.
- Focusing on past winners. Drucker described this particular sin as “slaughtering tomorrow’s opportunity on the altar of yesterday.” Newly won services and successes should not be subordinated to previously ineffective processes. Managers should never allow what worked yesterday to override what needs to work now.
- Prioritizing problems over opportunities. The highest performing talent should not be tasked with futile problems. This tends to be an ego problem, with companies allocating valuable time and talent defending one of their established, albeit dwindling, markets. Put your best workers on new opportunities and cut dead weight to seize the future.
Does your business find itself in a cycle of repeating one – or several – of these critical mistakes? Learn more about how Salient’s decision support solutions help managers focus on the practice of continuous improvement to avoid Drucker’s five deadly business sins.