The Management Theory of Peter Drucker: Key Terms

The management theory of Peter Drucker

Drucker is often referred to as the father of modern business management, with his ideas and principles profoundly impacting the way organizations are managed and led. 

“One of [Drucker’s] most famous [management theories]… claim[s] that the modern business enterprise… only has two functions: innovation and marketing,” explained Rita McGrath, a strategy professor at Columbia Business School and author. “If you get either of those wrong, you’re out of business.”

Drucker’s beliefs are especially relevant to small businesses, emphasizing the need for organizations to be flexible, innovative and customer-focused. At the same time, they should recognize the importance of keeping employees engaged and instilling strong leadership. Here are the biggest takeaways from Drucker’s management theory.

Focus on results.

Managers should be primarily concerned with achieving outcomes and creating value for customers and stakeholders, according to Drucker. This entails setting clear objectives, measuring performance against those objectives and continuously improving processes to enhance productivity and efficiency.

Drucker also advocated for decision-making authority and responsibility to be in the hands of those closest to the information and action. He believed that organizations should be structured in a way that enables individuals to contribute their knowledge and expertise, which in turn fosters innovation and growth. This concept is known as decentralization, a key term to keep in mind.

Another central aspect of Drucker’s theory is the concept of management by objectives (MBO). He proposed that managers and employees should establish mutually agreed-upon goals that align individual objectives with overall organizational ones. Regular feedback and performance evaluations should be conducted to track progress and provide guidance.

Learn and adapt.

Drucker believed organizations should be proactive in anticipating and responding to changes in the external environment. Managers must scan the business landscape constantly, gather information and adjust strategies accordingly. Learning and innovation should be ingrained in a business’s culture.

Drucker also recognized the significance of effective leadership. He argued that leaders should inspire and motivate their teams, provide clear direction and foster a sense of purpose and shared values. 

Key terms in Drucker’s management theory 

Drucker’s management theory includes concepts and terminology that may be unfamiliar to small business owners. Here’s what you need to know to fully grasp his principles. 

MBO

MBO stands for Management by Objectives, a phrase Drucker coined in his book “The Practice of Management,” published in 1954. MBO measures the performance of employees against typical standards for the job. The idea is that if employees help determine those standards, they will be more likely to fulfill them.

SMART Method

Drucker’s SMART method is a means of checking to make sure an objective is valid. Managers can use the SMART acronym to make sure each objective is specific, measurable, achievable, realistic and time-related.

Knowledge worker

“Knowledge worker” is one of the many terms Drucker coined to describe aspects of his management theories. By the measure of today’s society, a knowledge worker is equivalent to a company executive.

Decentralization

Drucker believed in the decentralization of management. He saw that many leaders try to take on everything in a demonstration of power or a means of maintaining control, under the assumption that they were the only ones who could accomplish a task correctly. Instead, Drucker believed that managers should delegate tasks to empower employees.

Corporate social responsibility

Corporate social responsibility (CSR) refers to a company’s responsibility to consider the impact of its actions on society. Drucker emphasized that businesses should go beyond profit-making and seek to actively contribute to the well-being of their communities.

Organizational culture

Drucker viewed culture as a powerful force that guides employee behavior, decision-making and overall organizational performance. He emphasized that culture is deeply rooted in an organization and has a significant impact on its ability to adapt, innovate and achieve its objectives. According to Drucker, effective leaders should actively shape and align their company’s culture with the organization’s values and goals.

How SMBs can apply Drucker’s theory

Drucker’s management theory is highly applicable to small and midsize businesses (SMBs) and can provide valuable tools for their effective management and growth. Drucker’s principles can be tailored and implemented in the following ways.

Adopt a results-oriented approach.

Drucker’s focus on achieving results is particularly relevant because SMBs often operate in resource-constrained environments and need to optimize performance. SMBs can benefit from setting clear objectives and tracking progress toward those goals regularly. By measuring performance against objectives, SMBs can identify areas for improvement and take necessary actions to enhance productivity and profitability.

Consider decentralization and empowerment.

SMBs often have flatter organizational structures, which makes it easier to distribute decision-making authority. By involving employees in the decision-making processes and encouraging their input, SMB owners and managers can empower and engage their employees. 

Drew Yancey, founder of Teleios Strategy, emphasized the value of this approach and recommended viewing employees as “partners in creating value” rather than merely resources to manage. “When leaders shift their mindset from controlling to enabling, they unlock tremendous potential,” Yancey said. “This plays out in practical ways — from involving team members in strategic decisions to creating autonomous work teams that can respond quickly to customer needs.”

Prioritize continuous learning and adaptation.

SMBs operate in dynamic and competitive markets. Drucker’s emphasis on continuous learning and adaptation could be crucial to their success. SMBs should foster a culture of learning that encourages employees to develop new skills, explore innovative approaches and adapt to changes in the market. Drucker’s principles encourage SMBs to regularly scan the external environment, gather market intelligence and make strategic adjustments as needed.

Lead effectively.

Drucker’s insights on leadership are particularly relevant for SMBs, where leaders often play multiple roles. SMB owners and managers should provide clear direction, create a positive work environment and inspire their teams. They should invest in developing their employees, fostering teamwork and nurturing a culture of open communication and collaboration.

By focusing on specific areas of management, SMBs can improve their performance, engage employees, adapt to market changes and foster a culture of innovation. Drucker’s principles, along with those of other renowned theorists, provide valuable guidance for SMB owners and managers to effectively manage and grow their businesses in a competitive landscape.

Alternatives to Drucker’s management theory

While Drucker’s management theory may work well for your business, it’s important to explore other theories, as different situations and team dynamics may call for alternative approaches. “[Adjusting one’s leadership style to the situation] requires managers to be knowledgeable about different management theories and styles so … they … [can best choose] one to employ, depending on the context and people in play,” said Shwetank Dixit, the founder of Voohy.com, a platform for leadership and career skills training. 

Here are some other theories to consider that can help support your team. 

Contingency management theory explained

Fred Fiedler’s contingency management theory emphasizes there is no one-size-fits-all approach to managing a business — different internal and external factors call for varying solutions. The theory highlights the importance of adaptability, self-awareness and objectivity. It also holds that successful managers need to employ a natural leadership style and situational favorableness to best meet the needs of their team. 

Covey management theory explained

Stephen Covey’s management theory advocates for becoming better leaders by changing from within. His book, The 7 Habits of Highly Effective People, suggests that leaders must implement certain practices for success: being proactive, envisioning the future, prioritizing, considering others’ needs, actively listening and understanding, encouraging creative cooperation through “synergizing” and practicing self-care. 

Follett management theory explained

Renowned for her influence on classical management theory, Mary Parker Follett developed Follett’s management theory, which emphasizes “powering with” — instead of “powering over”— employees. The theory uses four coordination principles: direct communication between managers and employees, mastering coordination early, fostering reciprocal responsibilities among employees and maintaining continuous coordination. 

Fayol management theory explained

According to Henri Fayol’s management theory, the way leaders approach employee management and interaction sets the tone for their organization. This theory highlights the importance of maintaining control as a leader through planning, organizing, commanding, coordinating and controlling teams. 

Juran management theory explained

Joseph Juran’s management theory uses a structured approach called the Juran Trilogy (or the Quality Trilogy) to improve an organization and achieve quality from the top down. This approach consists of three key stages: quality planning, quality control and quality improvement. 

Kanter management theory explained

Rosabeth Moss Kanter’s management theory focuses on making positive organizational improvements through a business’s operations and leadership. The Harvard professor’s theory emphasizes six steps for organizations to promote positive change: showing up, speaking up, looking up, teaming up, never giving up and lifting others up. 

Mayo management theory explained

As the founder of the human relations movement, George Elton Mayo set out to disprove that money is the main driver for employee motivation and productivity. The Mayo management theory highlights this, emphasizing that employees are more motivated by relational factors, such as teamwork or recognition, than by monetary benefits or their environment.

Mintzberg management theory explained

Henry Mintzberg’s management theory emphasizes that management skills aren’t taught in school; they’re developed through real-life experiences. The Canadian management expert believes companies should adopt one of five organizational structures — adhocracy, machine organization, professional organization, entrepreneurial organization or divisional organization — depending on factors like their industry, history and goals. 

Schein management theory explained

Edgar Schein’s management theory highlights how a business’s culture impacts — and can sometimes hinder — organizational change. By understanding and working with three levels of culture — artifacts, espoused values and basic assumptions — leaders can improve their organizational culture to promote positive change. 

Weber management theory explained

German sociologist Max Weber’s management theory, otherwise known as the bureaucratic theory, emphasizes the importance of adhering to strict rules and regulations. The theory advocates taking a bureaucratic approach to management, ensuring equal treatment and work distribution based on skill sets and qualifications, rather than relying on personal connections.