The Essential Drucker

Peter F. Drucker

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000205589
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Peter Drucker's wide-ranging book, drawn from his best work, looks at management, the individual and society. He connects these themes of today's world with his usual clear-sighted and far-reaching style to create a work which encapsulates his essential and strongest writings in one volume.Under the three headings, Drucker covers aspects such as what the non-profits are teaching business and the information that executives need today. In his section on the individual he gives advice on knowing your own strengths and values, your time and, intriguingly, the second half of your life. The third part on society encompasses the coming of the entrepreneurial society and citizenship through the social sector.

PART I

MANAGEMENT

CHAPTER 1

Management as Social Function and Liberal Art

When Karl Marx was beginning work on Das Kapital in the 1850s, the phenomenon of management was unknown. So were the enterprises that managers run. The largest manufacturing company around was a Manchester cotton mill employing fewer than three hundred people and owned by Marx’s friend and collaborator Friedrich Engels. And in Engels’s mill—one of the most profitable businesses of its day—there were no “managers,” only “charge hands” who, themselves workers, enforced discipline over a handful of fellow “proletarians.”

Rarely in human history has any institution emerged as quickly as management or had as great an impact so fast. In less than 150 years, management has transformed the social and economic fabric of the world’s developed countries. It has created a global economy and set new rules for countries that would participate in that economy as equals. And it has itself been transformed. Few executives are aware of the tremendous impact management has had. Indeed, a good many are like M. Jourdain, the character in Molière’s Bourgeois Gentil-homme, who did not know that he spoke prose. They barely realize that they practice—or mispractice—management. As a result, they are ill prepared for the tremendous challenges that now confront them. The truly important problems managers face do not come from technology or politics; they do not originate outside of management and enterprise. They are problems caused by the very success of management itself.

To be sure, the fundamental task of management remains the same: to make people capable of joint performance through common goals, common values, the right structure, and the training and development they need to perform and to respond to change. But the very meaning of this task has changed, if only because the performance of management has converted the workforce from one composed largely of unskilled laborers to one of highly educated knowledge workers.

THE ORIGINS AND DEVELOPMENT OF MANAGEMENT

On the threshold of World War I, a few thinkers were just becoming aware of management’s existence. But few people even in the most advanced countries had anything to do with it. Now the largest single group in the labor force, more than one-third of the total, are people whom the U.S. Bureau of the Census calls “managerial and professional.” Management has been the main agent of this transformation. Management explains why, for the first time in human history, we can employ large numbers of knowledgeable, skilled people in productive work. No earlier society could do this. Indeed, no earlier society could support more than a handful of such people. Until quite recently, no one knew how to put people with different skills and knowledge together to achieve common goals.

Eighteenth-century China was the envy of contemporary Western intellectuals because it supplied more jobs for educated people than all of Europe did—some twenty thousand per year. Today, the United States, with about the same population China then had, graduates nearly a million college students a year, few of whom have the slightest difficulty finding well-paid employment. Management enables us to employ them.

Knowledge, especially advanced knowledge, is always specialized. By itself it produces nothing. Yet a modern business, and not only the largest ones, may employ up to ten thousand highly knowledgeable people who represent up to sixty different knowledge areas. Engineers of all sorts, designers, marketing experts, economists, statisticians, psychologists, planners, accountants, human-resources people—all working together in a joint venture. None would be effective without the managed enterprise.

There is no point in asking which came first, the educational explosion of the last one hundred years or the management that put this knowledge to productive use. Modern management and modern enterprise could not exist without the knowledge base that developed societies have built. But equally, it is management, and management alone, that makes effective all this knowledge and these knowledgeable people. The emergence of management has converted knowledge from social ornament and luxury into the true capital of any economy.

Not many business leaders could have predicted this development back in 1870, when large enterprises were first beginning to take shape. The reason was not so much lack of foresight as lack of precedent. At that time, the only large permanent organization around was the army. Not surprisingly, therefore, its command-and-control structure became the model for the men who were putting together transcontinental railroads, steel mills, modern banks, and department stores. The command model, with a very few at the top giving orders and a great many at the bottom obeying them, remained the norm for nearly one hundred years. But it was never as static as its longevity might suggest. On the contrary, it began to change almost at once, as specialized knowledge of all sorts poured into enterprise.

The first university-trained engineer in manufacturing industry was hired by Siemens in Germany in 1867—his name was Friedrich von Hefner-Alteneck. Within five years he had built a research department. Other specialized departments followed suit. By World War I the standard functions of a manufacturer had been developed: research and engineering, manufacturing, sales, finance and accounting, and a little later, human resources (or personnel).

Even more important for its impact on enterprise—and on the world economy in general—was another management-directed development that took place at this time. That was the application of management to manual work in the form of training. The child of wartime necessity, training has propelled the transformation of the world economy in the last forty years because it allows low-wage countries to do something that traditional economic theory had said could never be done: to become efficient—and yet still low-wage—competitors almost overnight.

Adam Smith reported that it took several hundred years for a country or region to develop a tradition of labor and the expertise in manual and managerial skills needed to produce and market a given product, whether cotton textiles or violins.

During World War I, however, large numbers of unskilled, pre-industrial people had to be made productive workers in practically no time. To meet this need, businesses in the United States and the United Kingdom began to apply the theory of scientific management developed by Frederick W. Taylor between 1885 and 1910 to the systematic training of blue-collar workers on a large scale. They analyzed tasks and broke them down into individual, unskilled operations that could then be learned quite quickly. Further developed in World War II, training was then picked up by the Japanese and, twenty years later, by the South Koreans, who made it the basis for their countries’ phenomenal development.

During the 1920s and 1930s, management was applied to many more areas and aspects of the manufacturing business. Decentralization, for instance, arose to combine the advantages of bigness and the advantages of smallness within one enterprise. Accounting went from “bookkeeping” to analysis and control. Planning grew out of the “Gantt charts” designed in 1917 and 1918 to plan war production; and so did the use of analytical logic and statistics, which employ quantification to convert experience and intuition into definitions, information, and diagnosis. Marketing evolved as a result of applying management concepts to distribution and selling. Moreover, as early as the mid-1920s and early 1930s, some American management pioneers such as Thomas Watson Sr. at the fledgling IBM; Robert E. Wood at Sears, Roebuck; and George Elton Mayo at the Harvard Business School began to question the way manufacturing was organized. They concluded that the assembly line was a short-term compromise. Despite its tremendous productivity, it was poor economics because of its inflexibility, poor use of human resources, even poor engineering. They began the thinking and experimenting that eventually led to “automation” as the way to organize the manufacturing process, and to teamwork, quality circles, and the information-based organization as the way to manage human resources. Every one of these managerial innovations represented the application of knowledge to work, the substitution of system and information for guesswork, brawn, and toil. Every one, to use Frederick Taylor’s term, replaced “working harder” with “working smarter.”

The powerful effect of these changes became apparent during World War II. To the very end, the Germans were by far the better strategists. Having much shorter interior lines, they needed fewer support troops and could match their opponents in combat strength. Yet the Allies won—their victory achieved by management. The United States, with one-fifth the population of all the other belligerents combined, had almost as many men in uniform. Yet it produced more war materiél than all the others taken together. It managed to transport the stuff to fighting fronts as far apart as China, Russia, India, Africa, and Western Europe. No wonder, then, that by the war’s end almost all the world had become management-conscious. Or that management emerged as a recognizably distinct kind of work, one that could be studied and developed into a discipline—as happened in each country that has enjoyed economic leadership during the postwar period.

After World War II we began to see that management is not exclusively business management. It pertains to every human effort that brings together in one organization people of diverse knowledge and skills. It needs to be applied to all third-sector institutions, such as hospitals, universities, churches, arts organizations, and social service agencies, which since World War II have grown faster in the United States than either business or government. For even though the need to manage volunteers or raise funds may differentiate nonprofit managers from their for-profit peers, many more of their responsibilities are the same—among them defining the right strategy and goals, developing people, measuring performance, and marketing the organization’s services. Management worldwide has become the new social function.

MANAGEMENT AND ENTREPRENEURSHIP

One important advance in the discipline and practice of management is that both now embrace entrepreneurship and innovation. A sham fight these days pits “management” against “entrepreneurship” as adversaries, if not as mutually exclusive. That’s like saying that the fingering hand and the bow hand of the violinist are “adversaries” or “mutually exclusive.” Both are always needed and at the same time. And both have to be coordinated and work together. Any existing organization, whether a business, a church, a labor union, or a hospital, goes down fast if it does not innovate. Conversely, any new organization, whether a business, a church, a labor union, or a hospital, collapses if it does not manage. Not to innovate is the single largest reason for the decline of existing organizations. Not to know how to manage is the single largest reason for the failure of new ventures.

Yet few management books have paid attention to entrepreneurship and innovation. One reason is that during the period after World War II when most of those books were written, managing the existing rather than innovating the new and different was the dominant task. During this period most institutions developed along lines laid down thirty or fifty years earlier. This has now changed dramatically. We have again entered an era of innovation, and it is by no means confined to “high-tech” or to technology generally. In fact, social innovation—as this chapter tries to make clear—may be of greater importance and have much greater impact than any scientific or technical invention. Furthermore, we now have a “discipline” of entrepreneurship and innovation (see my Innovation and Entrepreneurship, 1986). It is clearly a part of management and rests, indeed, on well-known and tested management principles. It applies to both existing organizations and new ventures, and to both business and nonbusiness institutions, including government.

THE ACCOUNTABILITY OF MANAGEMENT

Management books tend to focus on the function of management inside its organization. Few yet accept it as a social function. But it is precisely because management has become so pervasive as a social function that it faces its most serious challenge. To whom is management accountable? And for what? On what does management base its power? What gives it legitimacy?

These are not business questions or economic questions. They are political questions. Yet they underlie the most serious assault on management in its history—a far more serious assault than any mounted by Marxists or labor unions: the hostile takeover. An American phenomenon at first, it has spread throughout the non-Communist developed world. What made it possible was the emergence of the employee pension funds as the controlling shareholders of publicly owned companies. The pension funds, while legally “owners,” are economically “investors”—and, indeed, often “speculators.” They have no interest in the enterprise and its welfare. In fact, in the United States at least they are “trustees,” and are not supposed to consider anything but immediate pecuniary gain. What underlies the takeover bid is the postulate that the enterprise’s sole function is to provide the largest possible immediate gain to the shareholder. In the absence of any other justification for management and enterprise, the “raider” with his hostile takeover bid prevails—and only too often immediately dismantles or loots the going concern, sacrificing long-range, wealth-producing capacity to short-term gains.

Management—and not only in the business enterprise—has to be accountable for performance. But how is performance to be defined? How is it to be measured? How is it to be enforced? And to whom should management be accountable? That these questions can be asked is in itself a measure of the success and importance of management. That they need to be asked is, however, also an indictment of managers. They have not yet faced up to the fact that they represent power—and power has to be accountable, has to be legitimate. They have not yet faced up to the fact that they matter.

WHAT IS MANAGEMENT?

But what is management? Is it a bag of techniques and tricks? A bundle of analytical tools like those taught in business schools? These are important, to be sure, just as thermometer and anatomy are important to the physician. But the evolution and history of management—its successes as well as its problems—teach that management is, above all else, based on a very few, essential principles. To be specific:

● Management is about human beings. Its task is to make people capable of joint performance, to make their strengths effective and their weaknesses irrelevant. This is what organization is all about, and it is the reason that management is the critical, determining factor. These days, practically all of us work for a managed institution, large or small, business or nonbusiness. We depend on management for our livelihoods. And our ability to contribute to society also depends as much on the management of the organization for which we work as it does on our own skills, dedication, and effort.

● Because management deals with the integration of people in a common venture, it is deeply embedded in culture. What managers do in West Germany, in the United Kingdom, in the United States, in Japan, or in Brazil is exactly the same. How they do it may be quite different. Thus one of the basic challenges managers in a developing country face is to find and identify those parts of their own tradition, history, and culture that can be used as management building blocks. The difference between Japan’s economic success and India’s relative backwardness is largely explained by the fact that Japanese managers were able to plant imported management concepts in their own cultural soil and make them grow.

● Every enterprise requires commitment to common goals and shared values. Without such commitment there is no enterprise; there is only a mob. The enterprise must have simple, clear, and unifying objectives. The mission of the organization has to be clear enough and big enough to provide common vision. The goals that embody it have to be clear, public, and constantly reaffirmed. Management’s first job is to think through, set, and exemplify tho...