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No. of Recommendations: 39
I have read extensively the philosophies of Peter Drucker. I think he is an exceptional thinker. While I've never read where Buffett and/or Munger have referenced Drucker, in reading Drucker's works, I am frequently impressed with concepts, thoughts, and opinions that are very consistent with those of our Berkshire two-some.

Given our recent discussion here about the fearless leaders of Intel and their suggestion that Technology, not “old-economy” businesses of Berkshire Hathaway, would lead the future, I think many of you will find the prescient words of the Peter Drucker an interesting test to suggestions by Craig Barrett of Intel. More interesting is the fact that the words below come from an interview completed in 2001 and provided in full at the Business 2.0 link directly below; makes you wonder whether Barrett et al are familiar with Drucker and capable of accepting of potential realities beyond an Intel-centric economy.

http://www.business2.com/articles/web/0,1653,17104,00.html

Below are some of the selected highlights from the full interview provided through the above link.

Business 2.0, Peter Drucker Interview—Unabridged, by Erick Schonfeld, October 2001

“On the Internet's Real Impact
Did the bursting of the Internet bubble surprise you?

What surprised me was that the bubble didn't burst two years earlier.

And it lasted another year or more. Why? In the public mind, size often is confused with importance. The two have little to do with one another. The Internet has tremendous importance, but only marginal [economic] size.

And so there is a misconception that size equals performance. During the Internet bubble, it was argued that because the Internet is important, it must be profitable. That does not follow. Whether the Internet will ever be profitable -- as a business or as an industry -- is doubtful. But its impact is unbelievably great. The same is true of the history of medicine.

What is an important example of the Internet's impact?

The Internet eliminates distance. That is its impact. The elimination of distance began with the railroad in England in the 1820s. The impact of the railroad was greater than that of the Internet, and faster. The inventors of the railroad did not see its potential.

But it is reasonable to expect that we have not yet really discovered what the Internet is best suited for. Mind you, the steamship was not a great improvement over the first sailing ships. Up until the end of the 19th century, most of the world's ocean freight was still carried by sail. What eliminated the sailing ship was that it takes several years to learn to be a sailor, while it takes 10 minutes to learn to shovel coal into the steamship boiler. The sailing ships died because they couldn't get crews and the steamship crews are unskilled. You need only a very few skilled people on a steamship. To furl and unfurl sails is highly skilled. But the railroad immediately created mobility, on the land, which had never existed.

The Internet is also forming new communities. The engineer whose specialty is bonding materials and plastics, his community is a few hundred engineers spread worldwide, but they are probably in contact every day. The economic impact is probably the least important. The social impact is the most important.

Is there anything really new about the new economy?

There are no signs that the business cycle has disappeared. There have been fundamental shifts in consumer behavior and distribution, but not because of information technology. From the point of view of the economy, the Internet is just another distribution channel so far.

Is that as profitable?

Maybe it has no choice. There is no law that a company has to stay in business. On the contrary, there is a law that everything man creates is mortal. It is rare for a company to be successful for more than 25 years. The idea that companies are immortal is a Wall Street misunderstanding. The main impact of the Internet is not economic; it is psychological. There is no new economy. The Internet greatly extends the old economy, OK?

Why "the Computer Is a Moron"
What about the importance of non-Internet technologies?

In business-to-business, the Internet is accelerating a trend that has been there all along. In the 1920s, Sears and Marks & Spencer managed their supply distribution. Toyota then copied Marks & Spencer. GM now has a co-op with Ford and Daimler Chrysler in an auction market for automobile suppliers. This is not a new idea; the Germans did it long ago. Toyota is going the other way to exclusive suppliers -- that's carrying the Sears and Marks & Spencer model further. There may be a third model coming up very fast: the outsourcing model. You maintain control of your manufacturing, but you outsource it. You don't want to get more than two or three suppliers, but you need to connect to them with information technology.

Information technology is simply a response to new systems. In business we have had good information systems all along. The accounting system, for example, is the best information system; we did not need the computer to get a month's report the first Monday after the month. So again, the real impact of information is not economic. That was the reason for the bursting of the bubble: the realization that the information industry as a business really wasn't going anyplace. How much is the total production of computers? In a world manufacturing economy in the trillions, this is a small industry, and it will remain so.

Haven't computers been important in making businesses more efficient?
The Internet just creates a recording system for something that most businesses have done all along. The computer enables us to take accounts from loose-leaf books and put them on the computer, but they remain accounts. Before the computer, we had mathematical models: vector analysis and Boltzmann equations -- 1890s stuff. We had models that enabled us to organize transportation. The first model was developed by Sears, when they were going into stores. The balance between shipping and warehousing, and where to keep inventory, was worked out in the 1920s…General Robert Wood, the Sears CEO who had been quartermaster general for the Panama Canal and then for the American Army in Europe, developed these mathematical models for transportation and supply…Nobody but the U.S. Army understood [logistics], and Wood worked it out. Yes, it was very primitive by our standards, but not because he did not have a computer. While his mathematics was still very primitive, he had a lot of experience…which no one else could do. And that made Sears: logistics ability at minimum cost. He did it without the computer, largely by developing a logical system so that the independent variables were reduced to a very small number. That is the secret of systems analysis. The computer makes it seem possible to do this work without the systems analysis, but if you do that you will fall flat on your face. If you don't do the systems analysis, the data are not logical, or rather, not one logic.

The computer is a moron. It can't handle more than one logical system. All it can do is say zero or one, period. It forces you to do the systems analysis and come out with one logic for all your data. The human mind, on the other hand, can handle quite a few logical systems at the same time. I can look at something and see symbolical logic, or Aristotelian logic, or Whitehead and Russell logic (which is what underlies computer logic).

The computer can't do anything we could not do before; it just does it much faster and demands logical clarity that forces us to be rigorous. If you are sloppy, the computer goes on strike. Logic cannot perceive, and logic also cannot convince. You need rhetoric. And that a computer cannot do. I worked fairly closely with IBM in the early years. I started their internal education system. And it was one of the most important things to teach that you cannot be sloppy on the computer. You first have to get your data right. The human mind is good at interpolation, at perception, at guessing.

So basically the Internet -- which depends on what the computer can do -- forces organization and clarity, but it does not allow you to do anything you could not do before. And certain things it cannot do. The consumer-goods company that was here last week was one of the earliest computer users in Europe, and we talked about how you go about choosing a supplier. One of them said, "The last decision is, Do I trust this person?" I asked why that was important. He said, "Because whenever you get in any kind of a crisis, you rely on your supplier to bail you out." There is a difference between a supplier that sees a quick buck and a supplier that sees a relationship. These things have not changed. Judgment, the computer cannot overcome.

What other management thinkers do you admire?

I've learned far more from non-management thinkers. The best books on leadership are from Xenophon, one of Socrates's friends and disciples, who became a military leader. Nothing written since comes close. In fact, I don't particularly like to read management. I read Shakespeare. “

###

While reading this short interview, I was constantly reminded of Buffett & Munger. For one, Buffett's presence on a CNBC sponsored Technology Forum in 2000, or 2001, where Buffett concluded the show by unraveling a list of some 200-300 domestic automobile manufacturers in the mid-1900's, noting that there were 3 today and thereby drawing an analogy to the “technology” industry today. Buffett went on to suggest nearly the very same thing that Drucker said here – that the benefits from the internet will be broad-based, but that doesn't necessarily translate to profitability!

Furthermore, I was constantly reminded of Munger's suggestion that if you need a computer or calculator, you've got no business in the game.

Both Buffett & Munger have made a successful career of being rational! With few exceptions they have not permitted a personal desired outcomes overrule rational expectations.

For all of us who enjoy Munger's recommended readings, I thought you'd enjoy Drucker's offer of Xenophon.

Mistermarket


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No. of Recommendations: 5
Everybody should read Drucker.
http://www.pfdf.org/leaderbooks/drucker/index.html



In one volume, the best of sixty years of Peter Drucker's work on management by the man Warren Bennis calls "the most important management thinker of our time".
The Essential Drucker offers, in Drucker's words, "a coherent and fairly comprehensive 'Introduction to Management' and gives an overview of my management work and thus answers the question I've been asked again and again: Which writings are Essential?"
http://www.peter-drucker.com/

;o)

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No. of Recommendations: 3
I have to agree with most of what Peter Drucker says here. He takes most of the hype and hoopla surrounding the increase in productivity due to information technology and puts it into proper perspective. These technologies haven't changed the rules in a macro sense, they have just extended the old rules into new territory.

In a similar vein, I always have to laugh when people say that Warren doesn't understand technology. I believe Warren has a way better understanding of technology than many "new economy" thinkers do. I believe he understands the technology, but doesn't accept the hype. Certainly new technologies are revolutionary in certain industries (not too many profitable typewriter makers anymore) but the same basic rules apply to technology overall. Supply and demand still apply to the internet.

When people say Warren doesn't understand the internet or technology, I always think back to how I was able to download Warren's annual chairman's letter to shareholders off the internet long before I was ever able to buy books from a website called Amazon.com. Yep, Berkshire was taking advantage of the internet long before Jeff Bezos.

Understand indeed.
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No. of Recommendations: 1
This deciding what is important is at the heart of good stock picking.

~~~~~~~~~~~~~~~~~

Haven't computers been important in making businesses more efficient?
The Internet just creates a recording system for something that most businesses have done all along. The computer enables us to take accounts from loose-leaf books and put them on the computer, but they remain accounts. Before the computer, we had mathematical models: vector analysis and Boltzmann equations -- 1890s stuff. We had models that enabled us to organize transportation. The first model was developed by Sears, when they were going into stores. The balance between shipping and warehousing, and where to keep inventory, was worked out in the 1920s…General Robert Wood, the Sears CEO who had been quartermaster general for the Panama Canal and then for the American Army in Europe, developed these mathematical models for transportation and supply…Nobody but the U.S. Army understood [logistics], and Wood worked it out. Yes, it was very primitive by our standards, but not because he did not have a computer. While his mathematics was still very primitive, he had a lot of experience…which no one else could do. And that made Sears: logistics ability at minimum cost. He did it without the computer, largely by developing a logical system so that the independent variables were reduced to a very small number. That is the secret of systems analysis. The computer makes it seem possible to do this work without the systems analysis, but if you do that you will fall flat on your face. If you don't do the systems analysis, the data are not logical, or rather, not one logic.

The computer is a moron. It can't handle more than one logical system. All it can do is say zero or one, period. It forces you to do the systems analysis and come out with one logic for all your data. The human mind, on the other hand, can handle quite a few logical systems at the same time. I can look at something and see symbolical logic, or Aristotelian logic, or Whitehead and Russell logic (which is what underlies computer logic).

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