Harper Business 1993 ISBN 0 88730 615 2 Extracts... begin chapter 31 page 399

Management: Tasks, Responsibilities, Practices

By Peter F. Drucker



The New Challenges
The Entrepreneurial Manager

For three-quarters of a century management has meant primarily managing the established, going business. Entrepreneurship and innovation, while mentioned in many management books, were not seen as central from 1900 till today. From now on, management will have to concern itself more and more with creating the new in addition to optimizing the already existing. Managers will have to become entrepreneurs, will have to learn to build and manage innovative organizations.

We face a period of innovation such as the one in which the modern industrial economy was born in the last half of the nineteenth century. Then, in the fifty years between the end of America's Civil War and the outbreak of World War I, a new major invention made its appearance on average every fifteen or eighteen months. Each soon spawned new businesses and entirely new industries. Practically all the industries that we consider "modern" today, including aircraft and electronics, grew out of these inventions of the late nineteenth and early twentieth centuries. Eco- nomic growth right through the period of reconstruction after World War II was carried primarily by technologies that had been fully developed by the time World War I broke out, and by the four large industries built on these technologies: steel, the automobile, scientific agriculture, and organic chemistry. Now we face another period of.major technological change in which the thrust of economic and industrial development will come from industries based on new, twentieth-century technologies and their development.

In sharp contrast to the late nineteenth century, much of the new technology will have to be developed and, above all, will have to be applied in and by already existing businesses. In the late nineteenth century the ar- chetype was the inventor, a Siemens, a Nobel, an Edison, an Alexander Graham Bell, who worked by himself, at most with a few assistants. Even then successful application of an invention very rapidly led to the emergence of an enterprise. But it was not the enterprise that had to generate the new. These days increasingly it will be the existing, often large organization to which we will have to look for innovation -- for the simple reason that both the trained people and the money needed to develop the new are concen- trated in existing and usually large organizations. Management will there- fore have to learn to run, at one and the same time, an existing managerial organization and a new innovative organization.

The management boom was a boom in business management, and most management work of the preceding century centered in managing a business.

Now we know, however, that all our institutions need management.

This would have been heresy only a few years ago (as it still is in England and France to a good many managers in businesses and service institutions alike). Running a business and administering a public-service institution, e.g., a hospital, were then seen as being poles apart. The mission and purpose of an institution does indeed make a basic difference. Nothing is less likely to cure the managerial ills of the public-service institution than the attempt to make its management "businesslike" (on this see Chapters 11 through 14). But then, an investment banking firm also requires manage- ment that is different from that of a steel mill or of a department store. And the manager in public-service institutions faces the same tasks as the manager in a business: to perform the function for the sake of which the institution exists; to make work productive and the worker achieving; to manage the institution's social impacts and to discharge its social responsibilities. These are managerial tasks. Public-service institutions equally face the challenge of innovation, and have to manage growth, diversity, and complexity. And we do know, as said before, that a central management need is to make the nonbusiness, the service institution, manageable and managed for performance.

Knowledge and Knowledge Worker

A primary task of management in the developed countries in the decades ahead will be to make knowledge productive. The manual worker is yesterday -- and all we can fight on that front is a rearguard action. The basic capital resource, the fundamental investment, but also the cost center of a developed economy, is the knowledge worker who puts to work what he has learned in systematic education, that is, concepts, ideas, and theories, rather than the man who puts to work manual skill or muscle.

The New Challenges 33

Taylor put knowledge to work to make the manual worker productive. His industrial engineer was one of the first knowledge workers employed in the manufacturing process. But Taylor himself never asked the question What constitutes "productivity" with respect to the industrial engineer who applies "scientific management"? As a result of Taylor's work, we could define what productivity is with respect to the manual worker; we still cannot answer what productivity is with respect to the industrial engineer, or to any other knowledge worker. The measurements which give us productivity for the manual worker, such as the number of pieces turned out per hour or per dollar of wage, are irrelevant if applied to the knowledge worker.

There are few things as useless and unproductive as the engineering department which with great dispatch, industry, and elegance turns out the drawings for an unsalable product. Productivity with respect to the knowledge worker is, in other words, primarily quality.

One thing is clear: making knowledge productive will bring about changes in job structure, careers, and organizations as drastic as those which resulted in the factory from the application of scientific management to manual work. The entrance job -- that is, the job that first introduces the man or woman with high formal education to the adult world of work and experience -- will have to be changed drastically to enable the knowledge worker to become productive. For it is abundantly clear that knowledge cannot be productive unless the knowledge worker finds out who he is himself, what kind of work he is fitted for, and how he works best.

There can be no divorce of planning from doing in knowledge work. On the contrary, the knowledge worker must be able to plan himself. Present entrance jobs, by and large, do not make this possible. They are based on the assumption -- valid to some extent for manual work but quite inappropriate to knowledge work -- that an outside expert such as the industrial engineer or the work-study specialist can objectively determine the one best way for any kind of work to be done. For knowledge work, this is simply not true. There may be one best way, but it is heavily conditioned by the individual and not entirely determined by physical, or even by mental, characteristics of the job. It is temperamental as well.

Multinational and Multicultural Management

There is need for business managements to be multinational. Economically the world, and especially the developed world, has become one market. And the underdeveloped, the poor, countries differ from the developed ones only in their inability to afford what they would like to have. In terms of its demands, its appetites, and its economic values, the whole world has become one global shopping center, however divided it may be politically.

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The multinational enterprise which optimizes productive resources, market opportunities, and talents beyond and across national boundaries is thus a normal, indeed a necessary, response to economic reality.

But all these developments introduce complexity into management well beyond what earlier generations had to deal with. For management is also a culture and a system of values and beliefs. It is also the means through which a given society makes productive its own values and beliefs. Management may well be considered the bridge between a civilization that is rapidly becoming worldwide and a culture which expresses divergent traditions, values, beliefs, and heritages. Management must become the instrument through which cultural diversity can be made to serve the common pur- poses of mankind. At the same time, management increasingly is not being practiced within the confines of one national culture, law, or sovereignty but multinationally. Indeed, management is becoming an institution -- so far, almost the only one -- of a genuine world economy.

Management, we now know, has to make productive the values, aspirations, and traditions of individuals, community, and society for a common productive purpose. If management does not succeed in putting to work the specific cultural heritage of a country and of a people, social and economic development is unlikely to take place. This is, of course, the great lesson of Japan--and the fact that Japan managed, a century ago, to put to work her own traditions of community and human values for the new ends of a modern industrialized state explains why Japan succeeded while every other non-Western country has so &r failed. Management will have to be considered both a science and a humanity, both a statement of findings that can be objectively tested and validated, and a system of belief and experience.

What Is a Business? 61

for, or likely to be a good neighbor and a desirable member of the commu- nity--no matter what some sociologists of today seem to believe to the contrary.

The Purpose of a Business

To know what a business is we have to start with its purpose. Its purpose must lie outside of the business itself. In fact, it must lie in society since business enterprise is an organ of society. There is only one valid definition of business purpose: to create a customer.

Markets are not created by God, nature, or economic forces but by businessmen. The want a business satisfies may have been felt by the cus- tomer before he was offered the means of satisfying it. Like food in a famine, it may have dominated the customer's life and filled all his waking mo- ments, but it remained a potential want until the action of businessmen converted it into effective demand. Only then is there a customer and a market. The want may have been unfelt by the potential customer; no one knew that he wanted a Xerox machine or a computer until these became available. There may have been no want at all until business action created it--by innovation, by credit, by advertising, or by salesmanship. In every case, it is business action that creates the customer.

It is the customer who determines what a business is. It is the customer alone whose willingness to pay for a good or for a service converts economic resources into wealth, things into goods. What the business thinks it pro- duces is not of first importance especially not to the future of the business and to its success. The typical engineering definition of quality is something that is hard to do, is complicated, and costs a lot of money! But that isn't quality; it's incompetence. What the customer thinks he is buying, what he considers value, is decisive--it determines what a business is, what it pro- duces, and whether it will prosper. And what the customer buys and consid- ers value is never a product. It is always utility, that is, what a product or service does for him. And what is value for the customer is, as we shall see (in Chapter 7), anything but obvious.

Marketing is so basic that it cannot be considered a separate function (i.e., a separate skill or work) within the business, on a par with others such as manufacturing or personnel. Marketing requires separate work, and a dis- tinct group of activities. But it is, first, a central dimension of the entire business. It is the whole business seen from the point of view of its final result, that is, from the customer's point of view. Concern and responsibility for marketing must, therefore, permeate all areas of the enterprise.

Among American manufacturing companies the outstanding practi-

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tioner of the marketing approach may well be IBM; and IBM is also thebest example of the power of marketing. (See the discussion of IBM's near-miss in Chapter 60.) IBM does not owe its meteoric rise to technologi- cal innovation or product leadership. It was a Johnny-come-lately when it entered the computer field, without technological expertise or scientific knowledge. But while the technological leaders in the early computer days, Univac, GE, and RCA, were product-focused and technology-focused, the punch-card salesmen who ran IBM asked: "Who is the customer? What is value for him? How does he buy? And, what does he need?" As a result, IBM took over the market.

From Selling to Marketing

Despite the emphasis on marketing and the marketing approach, market- ing is still rhetoric rather than reality in far too many businesses. "Consum- erism" proves this. For what consumerism demands of business is that it actually market. It demands that business start out with the needs, the realities, the values of the customer. It demands that business define its goal as the satisfaction of customer needs. It demands that business base its reward on its contribution to the customer. That after twenty years of marketing rhetoric consumerism could become a powerful popular move- ment proves that not much marketing has been practiced. Consumerism is the "shame of marketing."

But consumerism is also the opportunity of marketing. It will force businesses to become market-focused in their actions as well as in their pronouncements.

Above all, consumerism should dispel the confusion which largely ex- plains why there has been so little real marketing. When managers speak of marketing, they usually mean the organized performance of all selling functions. This is still selling. It still starts out with "our products." It still looks for "our market." True marketing starts out the way Sears starts out --with the customer, his demographics, his realities, his needs, his values. It does not ask, "What do we want to sell?" It asks, "What does the customer want to buy?" It does not say, "This is what our product or service does." It says, "These are the satisfactions the customer looks for, values, and needs."

Indeed, selling and marketing are antithetical rather than synonymous or even complementary.

There will always, one can assume, be need for some selling. But the aim of marketing is to make selling superfluous. The aim of marketing is to know and understand the customer so well that the product or service fits him and sells itself.

Ideally, marketing should result in a customer who is ready to buy. All What Is a Business7 65

that should be needed then is to make the product or service available, i.e., logistics rather than salesmanship, and statistical distribution rather than promotion. We may be a long way from this ideal. But consumerism is a clear indication that the right motto for business management should in- creasin~ly be, "from selling to marketing."

The Enterprise as the Organ of Economic Growth and Development

Marketing alone does not make a business enterprise. In a static economy there are no business enterprises. There are not even businessmen. The middleman of a static society is a broker who receives his compensation in the form of a fee, or a speculator who creates no value.

A business enterprise can exist only in an expanding economy, or at least in one which considers change both natural and acceptable. And business is the specific organ of growth, expansion, and change.

The second function of a business is, therefore, innovation--the provision of different economic satisfactions. It is not enough for the business to provide just any economic goods and services; it must provide better and more economic ones. It is not necessary for a business to grow bigger; but it is necessary that it constantly grow better.

Innovation may result in a lower price--the datum with which the econo- mist has been most concerned, for the si~ple reason that it is the only one that can be handled by quantitative tools. But the result may also be a new and better product, a new convenience, or the definition of a new want.

The most productive innovation is a different product or service creating a new potential of satisfaction, rather than an improvement. Typically this new and different product costs more--yet its overall effect is to make the economy more productive.

The antibiotic drug costs far more than the cold compress which is all yesterday's physician had to fight pneumonia. The computer costs far more than an adding machine or a punch-card sorter, the typewriter far more than a quill pen, the Xerox duplicator far more than a copy press or even a mimeograph copier. And, if and when we get a cancer cure, it will cost more than even a first-class funeral.

The price of the product is thus only one measurement of the value of an innovation, or of economic process altogether. We may relate price to unit output, i.e., price of a drug to the saving it produces in days of hospital stay and in added years of working life. But even that is hardly adequate. We really need a value measurement. What economic value does innovation give the customer? The customer is the only judge; he (or she) alone knows his (or her) economic reality.

Innovation may be finding new uses for old products. A salesman who


succeeds in selling refrigerators to Eskimos to prevent food from freezing would be as much of an innovator as if he had developed brand-new processes or invented a new product. To sell Eskimos a refrigerator to keep food cold is finding a new market; to sell a refrigerator to keep food from getting too cold is actually creating a new product. Technologically there is, of course, only the same old product; but economically there is innova- tion.

Above all, innovation is not invention. It is a term of economics rather than of technology. Non-technological innovations--social or economic in- novations--are at least as important as technological ones. (On this see

Chapter 61, "The Innovative Organization.")

However important the steam engine was as an invention, two nontech- nological innovations have had as much to do with the rise of modern economy: the mobilization of purchasing power through bank credit, and the application of probability mathematics to the physical risks of economic activity, that is, insurance. The innovation of limited liability and the subse- quent development of the publicly owned limited-liability company were of equal importance. And installment credit (or as the British call it more accurately, hire purchase) has equal impact. It makes it possible to pay for the means to increase production out of the future fruits of the investment. It thus enabled the American farmer in the nineteenth century to buy the implements that made him productive and to pay for them after he had obtained the larger crop at lower cost. And this also makes installment credit a powerful dynamo of economic development in today's poor, under- developed countries.

In the organization of the business enterprise innovation can no more be considered a separate function than marketing. It is not confined to engi- neering or research but extends across all parts of the business, all functions, all activities. It cannot be confined to manufacturing business. Innovation in distribution has been as important as innovation in manufacturing; and so has been innovation in an insurance company or in a bank.

The leadership in innovation with respect to product and service has traditionally been focused in one functional activity which is responsible for nothing else. This has been particularly true for businesses with heavy engineering or chemical technology. In an insurance company, too, a spe- cial department charged with leadership responsibility for the development of new kinds of coverage may be in order; and there might well be other such departments charged with innovation in the organization of sales, the administration of policies, and the settling of claims. Yet another group might work on innovation in investing the company's funds. All these are the insurance company's business.

But--as discussed in more detail in Chapter 61--the best way to organize

What Is a Business? 67

for systematic, purposeful innovation is as a business activity rather than as functional work. At the same time, every managerial unit of a business should have responsibility for innovation and definite innovation goals. It should be responsible for contributing to innovation in the company's prod- uct or service; in addition, it should strive consciously to advance the art in the particular area in which it is engaged: selling or accounting, quality control or personnel management.

Innovation can be defined as the task of endowing human and material resources with new and greater wealth-producing capacity. Innovation is particularly important for developing countries. These countries have the resources. They are poor because they lack the capacity to make these resources wealth-producing. They can import technology. But they have to produce their own social innovations to make imported technology work.

To have realized this was the great strength of the founders of modern Japan a century ago. They deliberately kept their country dependent on the West's technology--a dependence that remained until very recently. But they channeled their energies and those of their people into social innova- tions that would enable their country to become a strong modern society and economy and yet retain its distinct Japanese character and culture.

Innovation is thus crucial to economic development. Indeed, economic development is, above all, an entrepreneurial task.~

Managers must convert society's needs into opportunities for profitable business. That, too, is a definition of innovation. It needs to be stressed today, when we are so conscious of the needs of society, schools, health-care systems, cities, and environment. These needs are not too different in kind from those which the nineteenth-century entrepreneur converted into growth industries--the urban newspaper and the streetcar; the steel-frame skyscraper and the school textbook; the telephone and pharmaceuticals. The new needs similarly demand the innovating business.

The Productive Utilization of Wealth-Producing Resources

The enterprise must utilize wealth-producing resources to discharge its purpose of creating a customer. It is, therefore, charged with productive utilization of these resources. This is the administrative function of business. In its economic aspect it is called productivity.

Everybody these last few years has been talking productivity. That greater productivity--better utilization of resources--is both the key to a

On this see the essay by a South American educator and businessman Reinaldo Scarpetta, "Management Education as a Key to Social Development," in Preparing Tomorrow's Business leaders roday, edited by Peter F. Drucker (Prentice-Hall, 1969).


high standard of living and the result of business activity is not news. And everyone knows by now that the scourge of modern economies, uncontrolled inflation, is a deficiency disease caused by inadequate productivity. But we actually know very little about productivity; we are, indeed, not yet able to measure it.

Productivity means that balance between all factors of production that will give the greatest output for the smallest effort. This is quite different from productivity per worker or per hour of work; it is at best distantly and vaguely reflected in such traditional standards.

These standards are still based on the eighteenth-century tenet that manual labor is, in the last resort, the only productive resource; manual work the only real effort. The standards still express the mechanistic fallacy --of which Marx, to the permanent disability of Marxian economics, was the last important dupe--that all human achievement could eventually be measured in units of muscle effort. Increased productivity in a modern economy is never achieved by muscle effort. It is always the result of doing away with muscle effort, of substituting something else for the laborer. One of these substitutes is, of course, capital equipment, that is, mechanical energy. ~

At least as important, though unnoticed until very recently, is the in- crease in productivity achieved by replacing manual labor, whether skilled or unskilled, by knowledge, resulting in a shift from laborers to knowledge workers, such as managers, technicians, and professionals.

A little reflection will show that the rate of capital formation, to which economists give so much attention, is a secondary factor. Someone must plan and design the equipment--a conceptual, theoretical, and analytical task--before it can be installed and used. The basic factor in an economy's development must be the rate of "brain formation," the rate at which a country produces people with imagination and vision, education, and theoretical and analytical skills.

However, the planning, design, and installation of capital equipment is only a part of the increase in productivity through the substitution of brain for brawn. At least as important is the contribution made through the direct change of the character of work from one requiring the manual labor, skilled and unskilled, of many people, to one requiring theoretical analysis and conceptual planning without any investment in capital equipment.

This contribution first became evident in the 1950s in the analysis of the productivity gap between American and European industry. Studies--e.g.,

Here we now have available the careful studies of Simon Kuznets (of the University of Pennsylvania and of Harvard) to show the direct relationship in United States industry between investment in capital equipment and increases in productivity.

What Is a Business 69

by the Stanford Research Institute and by the Organization for Economic Cooperation (OEC~showed clearly that the productivity differential be- tween Western Europe and the United States was not a matter of capital investment. In many European industries productivity was as much as two-thirds below that of the corresponding American industry, even though capital investment and equipment were equal. The only explanation was the lower proportion of managers and technicians and the poor organization structure of European industry with its reliance on manual skill.

In 1900 the typical manufacturing company in the United States spent probably no more than $5 or $8 on managerial, technical, and professional personnel for every $100 in direct-labor wages. Today there are many manufacturing industries where the two items of expenditure are equal-- even though direct-labor wage rates have risen proportionately much faster. Outside of manufacturing, transportation, and mining, e.g., in distribution, finance, insurance, and the service industries (that is, in two-thirds of the American economy), the increase in productivity has been caused primarily by the replacement of labor by planning, brawn by brain, sweat by knowledge.

The greatest opportunities for increasing productivity are surely to be found in knowledge work itself, and especially in management. The vocabulary of business -- especially of accounting -- in relation to productivity has become so obsolete as to be misleading. What the accountant calls productive labor is manual workers tending machines, who are actually the least productive labor. What he calls nonproductive labor -- all the people who contribute to production without tending a machine -- is a hodgepodge. It includes pre-industrial, low-productivity brawn labor like sweepers; some traditional high-skill, high-productivity labor like toolmakers; new industrial high-skill labor like maintenance electricians; and industrial high- knowledge personnel like foremen, industrial engineers, and quality control men. Finally, what the accountant lumps together as overhead -- the very term reeks of moral disapproval -- contains what should be the most productive resource, the managers, researchers, planners, designers, innovators. It may also, however, contain purely parasitical, if not destructive, elements in the form of high-priced personnel needed only because of malorganization, poor spirit, or confused objectives, that is, because of mismanagement.

We need a concept of productivity that considers together all the efforts that go into output and expresses them in relation to their result, rather than one that assumes that labor is the only productive effort. But even such a concept--though a big step forward--would still be inadequate if its defini- tion of effort were confined to the activities measurable as visible and direct costs, that is, according to the accountant's definition of, and symbol for,

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effort. There are factors of substantial if not decisive impact on productivity that never become visible cost figures.

First there is knowledge--man's most productive resource if properly applied, but also the most expensive one, and totally unproductive, if misap- plied. The knowledge worker is, of necessity, a high-cost worker. Having spent many years in school, he also represents a very high social investment.

Then there is time--man's most perishable resource. Whether men and machines are utilized steadily or only half the time will make a difference in their productivity. There is nothing less productive than idle time of expensive capital equipment or wasted time of highly paid and able people. Equally unproductive may be cramming more productive effort into time than it will comfortably hold--for instance, the attempt to run three shifts in a congested plant or on old or delicate equipment.

The most productive--or least productive--time is that of the manager himself. Yet it is usually the least known, least analyzed, least managed of all factors of productivity.~

Productivity is also a function of the product mix, the balance between various combinations of the same resources. As every manager should know, differentials in the market values of various combinations are rarely proportional to the efforts that go into making up the combinations. Often there is barely any discernible relationship between the two. A company turning out a constant volume of goods with unchanging materials and skills requirements and a constant amount of direct and indirect labor may reap fortunes or go bankrupt, depending on the product mix. Obviously this represents a considerable difference in the productivity of the same re- sources--but not one that shows in costs or can be detected by cost analysis.

There is also an important factor which I would call "process mix." Is it more productive for a company to buy a part or to make it, to assemble its product or to contract out the assembly process, to market under its own brand name through its own distributive organization or to sell to indepen- dent wholesalers using their own brands? What is the company good at? What is the most productive utilization of its specific knowledge, ability, experience, reputation?

Not every management can do everything, nor should any business neces- sarily go into those activities which seem objectively to be most profitable. Every management has specific abilities and limitations. Whenever it at- tempts to go beyond these, it is likely to fail, no matter how inherently profitable the venture.

People who are good at running a highly stable business will not be able to adjust to a mercurial or a rapidly growing business. People who have

On this see my book, The Effective Executive (1966), especially Chapter 1. What Is a Business? 71

grown up in a rapidly expanding company will, as everyday experience shows, be in danger of destroying the business should it enter upon a period of consolidation. People good at running a business with a foundation in long-range research are not likely to do well in high-pressure selling of novelties or fashion goods. Utilization of the specific abilities of the com- pany and its management and observance of these specific limitations is an important productivity factor. Conglomerates may optimize the productiv- ity of capital, but they will have rather low productivity--and inherently poor results--in other equally important areas.

Finally, productivity is vitally affected by organization structure and by the balance among the various activities within the business. If a lack of clear organization causes managers to waste their time trying to find out what they are supposed to do rather than doing it, the company's scarcest resource is being wasted. If top management is interested only in engineer- ing (perhaps because that's where all the top men came from) while the company needs major attention to marketing, it lacks productivity; the resulting damage will be greater than could be caused by a drop in output per man-hour.

These factors are additional to the factors accountants and economists usually consider, namely, productivity of labor, capital, and materials. They are, however, fully as important.

We therefore not only need to define productivity so as to embrace all these factors affecting it, but also need to set objectives that take all these factors into account. We must develop yardsticks to measure the impact on productivity of the substitution of capital for labor, and of knowledge for both--and means to distinguish between creative and parasitical overhead, and to assess the impact on productivity of time utilization, product mix, process mix, organization structure, and the balance of activities.

Not only does individual management need adequate concepts and mea- surements for productivity, the economy needs them. Their lack is the biggest gap in our economic statistics and seriously weakens all economic policy. It frustrates our attempts to fight depression and inflation alike.

The Functions of Profit

Profit is not a cause but a result--the result of the performance of the business in marketing, innovation, and productivity. It is a needed result, serving essential economic functions. Profit is, first, the test of performance --the only effective test, as the communists in Russia soon found out when they tried to abolish it in the early twenties (though they coyly called it the capital fund and avoided the bad word profit until well into the 1950s). Indeed, profit is a beautiful example of what engineers mean when they talk

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of the feedback such as underlies all systems of automated production: the self-regulation of a process by its own results.

Profit has a second function which is equally important. It is the premium for the risk of uncertainty. Economic activity, because it is activity, focuses on the future; and the one thing that is certain about the future is its uncertainty, its risks. The word "risk" itself is said to mean "earning one's daily bread" in the original Arabic. It is through risk-taking that any businessman earns his daily bread. Because business activity is economic it always attempts to bring about change. It always saws off the limb on which it sits; it makes existing risks riskier or creates new ones.

As the Sears story showed, the future of economic activity is a long one; it took fifteen or twenty years for basic Sears decisions to become fully effective, and for major investments to pay off. "Lengthening the economic detour" has been known for a hundred years to be a prerequisite to eco- nomic advance. Yet while we know nothing about the future, we know that its risks increase in geometric progression the farther ahead we commit ourselves to it.

Profit and profit alone can supply the capital for tomorrow's jobs, both for more jobs and for better jobs.

Again it is a definition of economic progress that the investment needed to create new and additional jobs increases.

Today's accountant or engineer does not make a better living than his grandfather on the farm because he works harder. He works far less hard. Nor does he deserve a better living because he is a better man. He is the same kind of human being as grandfather was, and grandfather's grandfa- ther before him. He can be paid so much more and yet work so much less hard because the capital investment in him and his job is infinitely greater than that which financed his grandfather's job in 1900, when grandfather started, capital investment per American farmer was at most S5,000. To create the accountant's or engineer's job, society first invests at least $50,000 in capital and expenses for school and education. And then the employer invests another $25,000 to $50,000 per job. All of this investment that makes possible both additional and better jobs has to come out of the surplus of economic activity, that is, out of profits.

And finally profit pays for the economic satisfactions and services of a society, from health care to defense, and from education to the opera. They all have to be paid for out of the surplus of economic production, that is, out of the difference between the value produced by economic activity and its cost.

Businessmen these days tend to be apologetic about profit. This is a measure of the dismal job they have done explaining profit--above all to themselves. For there is no justification and no rationale for profit as long as one talks the nonsense of profit motive and profit maximization.

The Power and Purpose of Objectives 99

market and customer. Above all, it is a restraint; unless profit is adequate to cover the risks, a company will not be able to attain its objectives.

I do not know how conscious Marks & Spencer's top management was in the early years, the late twenties and early thirties, of the full import of the decisions they then made. There was probably no master plan. But the young key executives who were brought into the firm in those years to take on new jobs such as innovation or the development of productivity objec- tives and standards were fully aware that their company had committed itself to a definition of what its business was--and they knew what the definition entailed. They were highly conscious of the company's social and business objectives. They knew what these objectives meant to each of them individually in terms of performance goals, performance standards, and demands for their own contribution.

Marks & Spencer from the start converted objectives into work assign- ments. It thought through what results and contributions were needed in each objectives area. It assigned responsibility for these results to someone and held him accountable. And it measured performance and contribution against the objectives.

The Lessons

The Marks & Spencer story reaffirms the central importance of thinking through "what our business is and what it should be." But it also shows that this, by itself, is not enough. The basic definition of the business and of its purpose and mission have to be translated into objectives. Otherwise, they remain insight, good intentions, and brilliant epigrams which never become achievement.

The Marks & Spencer story brings out the specifications for objectives. Each of them will be discussed in some detail in the next chapter. But here is the list:

  1. Objectives must be derived from "what our business is, what it will be, and what it should be." They are not abstractions. They are the action commitments through which the mission of a business is to be carried out, and the standards against which performance is to be measured. Objectives, in other words, are the fundamental strategy of a business.
2. Objectives must be operational. They must be capable of being converted into specific targets and specific assignments. They must be capable of becoming the basis, as well as the motivation, for work and achievement.

3. Objectives must make possible concentration of resources and efforts. They must winnow out the fundamentals among the goals of a business so that the key resources of men, money, and physical facilities can be concen- trated. They must, therefore, be selective rather than encompass everything.

4. There must be multiple objectives rather than a single objective.

5. Objectives are needed in all areas on which the survival of the business depends. The specific targets, the goals in any objective area, depend on the strategy of the individual business. But the areas in which objectives are needed are the same for all businesses, for all businesses depend on the same factors for their survival.


Much of today's lively discussion of management by objectives is concerned with the search for the "one right objective." This search is not only likely to be as unproductive as the quest for the philosopher's stone; it does harm and misdirects.

To manage a business is to balance a variety of needs and goals. And this requires multiple objectives.

A business must first be able to create a customer. There is, therefore, need for a marketing objective. Businesses must be able to innovate or else their competitors will obsolesce them. There is need for an innovation objective. All businesses depend on the three factors of production of the economist, that is, on the human resource, the capital resource, and physical resources. There must be objectives for their supply, their employment, and their development. The resources must be employed productively and their productivity has to grow if the business is to survive. There is need, therefore, for productivity objectives. Business exists in society and community and, therefore, has to discharge social responsibilities, at least to the point where it takes responsibility for its impact upon the environment. Therefore objectives in respect to the social dimensions of business are needed.

Finally, there is need for profit--otherwise none of the objectives can be attained. They all require effort, that is, cost. And they can be financed only out of the profits of a business. They all entail risks; they all, therefore, require a profit to cover the risk of potential losses. Profit is not an objective but it is a requirement that has to be objectively determined in respect to the individual business, its strategy, its needs, and its risks.

Objectives, therefore, have to be set in these eight key areas:

--Human Organization
--Financial Resources
--Physical Resources
--Social Responsibility
--Profit Requirements

Objectives in these key areas enable us to do five things: to organize and explain the whole range of business phenomena in a small number of general

The Power and Purpose of Objectives 101

statements; to test these statements in actual experience; to predict behavior; to appraise the soundness of decisions while they are still being made; and to let managers on all levels analyze their own experience and, as a result, improve their performance.

The Basis for Work and Assignments

Objectives are the basis for work and assignments.

They determine the structure of the business, the key activities which must be discharged, and, above all, the allocation of people to tasks. Objec- tives are the foundation for designing both the structure of the business and the work of individual units and individual managers.

Objectives are always needed in all eight key areas. The area without specific objectives will be neglected. Unless we determine what shall be measured and what the yardstick of measurement in an area will be, the area itself will not be seen. (On this see Chapter 39.)

The measurements available for the key areas of a business enterprise are still haphazard by and large. We do not even have adequate concepts, let alone measurements, except for market standing. For something as central as profitability we have only a rubber yardstick; and we have no real tools at all to determine how much profitability is necessary. In respect to innova- tion and, even more, to productivity, we hardly know more than that something ought to be done. In the other areas--including physical and financial resources--we are reduced to statements of intentions; we do not possess goals and measurements for their attainment.

However, enough is known about each area to give a progress report at least. Enough is known for each business to go to work on objectives.

How to Use Objectives

We know one more thing about objectives: how to use them.

If objectives are only good intentions they are worthless. They must degenerate into work. And work is always specific, always has--or should have--clear, unambiguous, measurable results, a deadline and a specific assignment of accountability.

But objectives that become a straitjacket do harm. Objectives are always based on expectations. And expectations are, at best, informed guesses. Objectives express an appraisal of factors that are largely outside the busi- ness and not under its control. The world does not stand still.

The proper way to use objectives is the way an airline uses schedules and flight plans. The schedule provides for the 9 A.M. flight from Los Angeles to get to Boston by 5 P.M. But if there is a blizzard in Boston that day, the

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plane will land in Pittsburgh instead and wait out the storm. The flight plan provides for flying at 30,000 feet and for flying over Denver and Chicago. But if the pilot encounters turbulence or strong headwinds he will ask flight control for permission to go up another 5,000 feet and to take the Min- neapolis-Montreal route. Yet no flight is ever operated without schedule and flight plan. Any change is immediately fed back to produce a new schedule and flight plan. Unless 97 percent or so of its flights proceed on the original schedule and flight plan--or within a very limited range of deviation from either--a well-run airline gets another operations manager who knows his job.

Objectives are not fate; they are direction. They are not commands; they are commitments. They do not determine the future; they are means to mobilize the resources and energies of the business for the making of the future.

Strategies, Objectives, Priorities, and Work Assignments 111

is the anticipated needs of the business, which then have to be projected on the outside, that is, on the market for land, labor, and capital. But the other starting points are these "markets" themselves, which then have to be projected onto the structure, the direction, the plans of the business. It is no longer adequate, as most managers still seem to think, to say, "This is what we need; how much do we have to pay for it?" One also has to say, "This is what is available; what do we have to be, how do we have to behave, to get the fullest benefit?"

Productivity: The First Test of Management's Competence

Attracting resources and putting them to work is only the beginning. The task of a business is to make resources productive. Every business, therefore, needs productivity objectives with respect to each of the three major re- sources, land, labor, and capital; and with respect to overall productivity itself.

A productivity measurement is the best yardstick for comparing manage- ments of different units within an enterprise, and for comparing manage- ments of different enterprises. For productivity includes all the efforts the enterprise contributes; it excludes everything it does not control.

Productivity is the first test of management's competence.

All businesses have access to pretty much the same resources. Except for the rare monopoly situation, the only thing that differentiates one business from another in any given field is the quality of its management on all levels. The first measurement of this crucial factor is productivity, that is, the degree to which resources are utilized and their yield.

The continuous improvement of productivity is one of management's most important jobs. It is also one or the most difficult; for productivity is a balance between a diversity of factors, few of which are easily definable or clearly measurable.

The goal is not to try to find the one perfect productivity measurement, but to use a number of measurements--at least one gains insights that way. Output per man-hour, for instance, is by itself almost meaningless, even though governmental statistics in most countries are based on it. It does not even measure labor productivity. It becomes meaningful only if the figures show output in dollars per man-hour, as well as in units, but also profit per man-hour. In addition, we need figures that show output in units, output in dollars, that is, sales, profits per dollar of wages, and so on:

Similarly, we need to measure productivity in other areas by a number of yardsticks to gain insight and judgment. Labor is only one of the three factors of production. And if productivity of labor is accomplished by mak- ing the other resources less productive, there is actually loss of productivity.

A telling example is the paper industry worldwide. Very few industries


have enjoyed as much of a rise in demand and sales. Few industries can match the technical advances of the paper industry, for instance, the stepup in the speed of paper machines. Since World War II the industry has been enjoying a boom in sales and output. Yet it has been unable, in most years, to produce any but marginal profits--well below what money earns in a savings bank. The break-even point of most up-to-date paper mills is just barely below 100 percent of capacity operations. The explanation for this puzzling phenomenon is a long secular decline in the productivity of capital in the industry. Paper prices have risen faster than the prices for papermak- ing equipment. Yet, where it took 80 cents of capital investment to build productive capacity for a dollar of paper sales forty years ago, it takes today two to three dollars of capital investment to produce one dollar's worth of paper sales. Labor productivity in the paper industry has gone up much faster than in most other industries. The paper industry, in other words, has substituted capital for labor on a massive scale. But the trade-off was a thoroughly uneconomical one. In fact, the paper industry represents a massive triumph of engineering over economics and common sense.

A century ago, Karl Marx based his confident prediction of the imminent demise of capitalism on the premise that the productivity of capital is bound to go down. This decline was to Marx the basic "contradiction of capital- ism." That the prophecy has not been fulfilled so far is the result of our ability to innovate, that is, to develop new processes and new industries with higher productivity of capital.

But Marx was right in his basic premise: the key to the survival of a business, a company, or an economy is, in the last analysis, productivity of capital. Productivity of capital is the area most companies pay least attention to--if only because so many people mistak- enly think that profitability by itself measures it.

But, as the Marks & Spencer example shows, the productivity of physical resources needs to be measured fully as much, and objectives for each category need to be set. For productivity includes all three factors of pro- duction. The wrong trade-off, that is, an increase in the productivity of one factor of production paid for by a disproportionate drop in another factor results, as the paper industry shows, in a loss of overall productivity.

We do not have one single yardstick. But at least we have a basic concept that enables us to define productivity for the whole business--the economist calls it "contributed value."

Contributed value is the difference between the gross revenue received by a company from the sale of its products or services and the amount paid out for the purchase of raw materials and for services rendered by outside suppliers. Contributed value, in other words, includes all the costs of all the efforts of the business and the entire reward received for these efforts. It accounts for all the resources the business itself contributes to the final product and the appraisal of their efforts by the market.

Strategies, Objectives, Priorities, and Work AssiRnments 113

Contributed value can be used to analyze productivity only if the alloca- tion of costs is economically meaningful. The movement in accounting during the last twenty years from financial accounting and tax accounting to management accounting, while still only in its early stages, is thus a major step toward making business manageable and managed.

Contributed value will not measure productivity resulting from qualita- tive, rather than quantitative, factors. Contributed value is strictly a quan- titative tool. Yet qualitative factors have major impact on productivity. Organization structure, for instance, the utilization of knowledge in the business, or the quality of tomorrow's management are fundamental factors in productivity, over the short or the long range. However, they elude our existing measurements. Finally, contributed value can be used, by and large, only in businesses that make something, that is in manufacturing businesses.

Within these limitations contributed value makes possible the rational analysis of productivity and the setting of goals for its improvement. In particular, it makes it possible to apply such tools as Operations Research to the systematic study of productivity. For these tools aim at working out alternative courses of action and their predictable consequences. The pro- ductivity problem is always one of seeing the range of alternative combina- tions of the various resources, and of finding the combination that gives the optimal ratio of output to cost effort and risk. (On this point see Chapter 40, "The Manager and the Management Sciences.")

Productivity is a difficult concept, but it is central. Without productivity objectives, a business does not have direction. Without productivity mea- surements, it does not have control.

The Social Dimension

Only a few years ago managers as well as economists considered the social dimension so intangible that performance objectives could not be set. We have now learned that the intangible can become very tangible indeed. Such lessons as consumerism, or the attacks on industry for the destruction of the environment, are expensive ways to learn that business needs to think through its impacts and its responsibilities and to set objectives for both.

The social dimension is a survival dimension. The enterprise exists in society and economy. Within an institution one always tends to assume that the institution exists by itself in a vacuum. And managers inevitably look at their business from the inside. But the business enterprise is a creature of society and economy. Society or the economy can put any business out of existence overnight. The enterprise exists on sufferance and exists only as long as society and economy believe that it does a job, and a necessary, useful, and productive one.

Again, many managers will say, "This is big-company stuff." But the

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small company is also an employer, also exists in a community, and also depends on support or at least on sufferance by community and society. It needs social objectives fully as much as the big business--though it may need very different ones.

What such objectives might be will be discussed further on (in the section titled "Social Impacts and Social Responsibilities" on p. 312). But that such objectives need to be built into the strategy of a business, rather than be statements of good intentions, needs to be stressed here. These are not objectives that are needed because the manager has a responsibility to society. They are needed because the manager has a responsibility to the enterprise.

Profit as a Need and a Limitation

Only after the objectives in the above seven key areas have been thought through and established can a business tackle the question "How much profitability do we need?" To attain any of the objectives entails high risks. It requires effort, and that means cost. Profit is, therefore, needed to pay for attainment of the objectives of the business. Profit is a condition of survival. It is the cost of the future, the cost of staying in business.

A business that obtains enough profit to satisfy its objectives in the key areas is a business that has the means of survival. A business that falls short of the profitability demands made by its-key objectives is a marginal and endangered business.

The profitability needed to support the objectives of the business in the seven key areas discussed so far is also the quantitative expression of the profitability needed to fulfill the social and economic function of profit:

--as the "risk premium" covering the costs of staying in business;
--as the source of capital to finance the jobs of tomorrow;
--as the source of capital for innovation and for growth of the economy.

Profit planning is necessary. But it is planning for a needed minimum profitability rather than for that meaningless shibboleth "profit maximiza- tion." The minimum needed may well turn out to be a good deal higher than the profit goals of many companies, let alone their actual profit results.

The Japanese Example

By historical accident the only economy which understands that profit is a minimum rather than a maximum concept is the Japanese economy.

There has been heated discussion whether Japan has a lower cost of capital or a higher cost of capital than the West--the Westerners contend- ing that Japan's cost of capital is lower, the Japanese that it is hi~her. Both


Making Work Productive: Work and Process

Work Is Generic--Skill and Knowledge Are in the "Working, " Not in the Work--The Four Steps Toward Prod uctive Work--The Analysis of Work --Taylor and His Disciples--What Ind ustrial Engineering Is and Is Not-- Focus on the End Product--Laying out "Jobs" Not Part of Work Analysis --Work Ana/ysis Only the First Step--The Principles of Production-- Unique Product Production--Rigid and Flexible Mass Production--Pro- cess Production--What Each Principle Demands

We speak of unskilled work, skilled work, and knowledge work, but this is misleading. It is not the work that is unskilled, skilled, or knowledgeable, it is the worker. Skill and knowledge are aspects of working. The work itself is the same whether it requires no skill or high skill, a lot of knowledge or very little.

To make a pair of shoes one used to have to be "highly skilled." For almost a century now, we have bten able to make shoes practically without skill. It would be no great trick (though probably uneconomical) to auto- mate shoemaking fully so that it requires no manual work. Yet the shoe itself has hardly changed. Nor has the process. It requires the same steps, from preparing leather, to cutting, forming, stitching, and gluing. The steps are being carried out in the same sequence, to the same requirements and standards, and result in the same finished product. The work of shoe- making remains the same, even though tools and skill requirements have changed drastically. Only an expert could tell whether a shoe had been made entirely by hand and with great craft skill or in an entirely automated process.

Making Work Productive: Work and Process 199

This may seem to be quibbling. Yet the realization that work is general and generic and that skill and knowledge are in the working rather than in the work is the key to making work productive. The generic nature of work --certainly as far as manual or any other production work is concerned-- implies that work can be worked on systematically, if not scientifically.

The first step toward making the worker achieving is to make work productive. The more we understand what the work itself demands, the more can we then integrate the work into the human activity we call working. The more we understand work itself, the more freedom we can give the worker. There is no contradiction between scientific management, that is, the rational and impersonal approach to work, and the achieving worker. The two complement each other, though they are quite different.

Whatever study of work has been done so far has confined itself to manual work--for the simple reason that, until quite recently, this was the main work around. In describing what is known about making work pro- ductive, this book, therefore, of necessity, focuses on manual work. But the same principles and approaches also apply to any other production work, e.g., to most service work. They apply to the processing of information, that is, to most clerical work. They even apply to most knowledge work. Only the applications and the tools vary. Precisely because work is general and generic, there is essentially no difference among work the end product of which is a thing, work the end product of which is information, and work the end product of which is knowledge.

Making work productive requires four separate activities, each having its own characteristics and demands.

First, it requires analysis. We have to know the specific operations needed for work, their sequence, and their requirements.

But we also need synthesis The individual operations have to be brought together into a process of production.

Third, we need to build into the process the control of direction, of quality and quantity, of standards, and of exceptions.

Fourth, the appropriate tools have to be provided.

One more basic point needs to be made. Because work is objective and impersonal and a "something"--even if it is intangible, like information or knowledge -- making work productive has to start out with the end product, the output of work. It cannot start with the input, whether craft skill or formal knowledge. Skills, information, knowledge, are tools; and what tool is to be applied when, and for what purpose, must always be determined by the desired end product. The end product determines what work is needed. It also determines the synthesis into a process, the design of the appropriate controls, and the specifications for the tools needed.

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The Analysis of Work

The analysis of work -- known by such names as work study, scientific management, and industrial engineering -- is by now almost a century old. As said earlier, it goes back to Frederick W. Taylor's work in the 1880s on individual manual operations, such as his famous study of shoveling sand in a steel mill. It was essentially completed in its present form shortly after Taylor died during World War I. In those war years and in the period immediately following, Taylor's most productive disciples, Frank Gilbreth and Henry Gantt, added to Taylor's scientific management what might be called the script and the syntax for the analysis of work.

Gilbreth studied, identified, and classified all the motions involved in manual work, such as "lifting," "moving," and "putting down." His Therbligs (Gilbreth spelled backwards), which list the entire range of manual operations, specify how each can best be done, what motion it requires, and how much time it needs, are not, as sometimes has been said, an alphabet. They are more like Chinese ideographs, that is, symbols of a fundamental unit which in themselves contain all the information needed to engineer them.

Gantt, at the same time, addressed himself to the configuration of operations in work. His Gantt Chart, which starts out with the desired end product and then outlines every step needed to attain it, with its place in the sequence and the time needed, created, in effect, a syntax for work.

Not only has the discipline of work analysis been with us for a long time; the practice has become general too. The industrial engineer is a common feature of production work, in the factory, in transportation, and increasingly in clerical work. Industrial engineering is a recognized academic discipline with a tremendous literature of its own. And the impact, as has been said earlier, has been almost overwhelming.

Managers, therefore, tend to believe that they know all they need to know about industrial engineering. They may be excused for believing that the analysis of work is as useful, but also as well known a tool as cost accounting, for instance, and requires very little managing on their part. They are convinced they know the essentials. The analysis of work, they would tell a questioner, consists essentially of the following:

1. Identification of all operations necessary to produce a known end product, a known piece of work.

2. Rational organization of the sequence of operations so as to make possible the easiest, smoothest, and most economical flow of work.

3. Analysis of each individual operation and its redesign so as to make possible its most efficient performance -- including the provision of the appropriate tools, the needed information, and the required materials where and when needed.

4. Integration of these operations into individual jobs.

Making Work Productive: Work and Process 201

And this is actually what, in essence, the books on industrial engineering say and what the courses on this subject teach. It is, however, not -- or at least not truly -- what the analysis of work has to be to be effective.

In the first place, the standard answer omits the first crucial step in work analysis. Work analysis does not begin with identifying operations. It begins with defining the desired end product. As Gantt showed sixty years ago-- and as far too few people have learned since--the analysis of the work has to start with the question "What do we want to produce? What is the work itself? How can the end product be designed so as to make possible the easiest, the most productive, the most effective work?"

Taylor--and this is perhaps the only valid criticism of a great man's work -- may have been responsible for the common failure to see something so obvious, for Taylor always took the end product for granted. His focus was the individual task rather than the joint result.

To start out with the task rather than with the end product may result, however, in beautiful engineering of work that should not be done at all. One cannot, as Taylor did, assume that the end product is rational, systematic, consistent. In most processes it represents little but untested assump- tions, a lot of history, traditions and customs, and geological strata of human errors. Anyone who starts out with an analysis of the final product, the work itself, will soon find himself asking the question "Why do we do this and why do we do that?" Usually there is no answer other than, "We have always done it." What proportion of inefflciency, that is, of lost productivity, can be contributed to the unquestioning acceptance of the final product as given, no one knows, but I have heard experienced industrial engineers put it as high as 30 percent of total cost and total effort -- and I would not consider this estimate improbably high.

The manager, therefore, needs to know that his work analysts have to participate in the design of product and process. Obviously the finished product cannot be engineered primarily to make work easier. Its basic specifications are set by the needs and values of the user and not by those of the producer. But within the restraints set by these basic specifications, there is usually considerable leeway to design a product or service so as to be produced efflciently or ineflficiently, simply or with unnecessary complications, with economy of work or wastefully.

The next -- and much better known -- weakness of the traditional definition of work analysis is that it includes something which does not belong in it. The fourth, and last, step which most managers -- and most industrial engineers, at least in the West -- would include in their definition of indus-

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trial engineering is not truly part of the job. Laying out jobs is no longer analysis. Or rather, the analysis that is required is not that of work, but that of working. And while the industrial engineer has a role to play in this process, it is a totally different role from the one he plays in the analysis of the work (as will be discussed in Chapter 21).

The inclusion of job design in work analysis is responsible in large measure for the traditional resistance to industrial engineering on the part of workers. It is largely responsible for the hostility of the intellectual to modern technology, and to modern industry and organization altogether.

But what is resisted and criticized is a misapplication of work analysis rather than work analysis itself. Taylor is usually blamed for the resulting "dehumanization" of the worker, especially by today's psychologists, but this is unfair and unjust.~

Taylor did not invent the assembly line -- he had, in fact, nothing to do with it. Taylor's aim from the beginning was strictly in accord with the most humanist approach to working. Taylor, as his writings show, knew that making the work productive was but the first step. But he also knew that neither an empty stomach nor a spent and broken body is a good foundation for the full life. Taylor addressed himself to the priority task of creating the economic and physical base for the worker's welfare. It was not an accident that Taylor's most ardent supporter was the greatest American humanist of the early years of this century, Louis 1~. Brandeis, later to become the great liberal Supreme Court justice and the strongest fighter on the Court for human rights and human dignity. It was Brandeis, for instance, who, as Taylor's self-appointed public relations man, coined the term "scientific management" to get attention for Taylor's work. .

The fact remains, however, that scientific management or industrial engineering has been content to stop where Taylor stopped. Few of its scholars and practitioners have concerned themselves with working, i.e., with the synthesis of operations into a job.

The manager needs to know that the logic of work analysis and the analysis of job structure are two different logics. The one is the logic of work; the other the logic of working.

The last and most common misunderstanding of the industrial engineer is the belief that work analysis is the whole job. It is only the first step in

~ To belittle Taylor because in 1880 he did not know post-Freudian psychology is, as I said at another occasion (when I received in 1967 the Taylor Key of the Association for Advancement of Management), somewhat like belittling Isaac Newton for not knowing quantum mechanics or non-Euclidian geometry in 1690.

~ An important exception was one of Taylor's disciples, Allen Mogensen, who, in the 1920s, pioneered what he called "work simplification" -- startlingly similar to what is now being rediscovered as "job enrichment," if not way ahead of it.

Making Work Productive: Work and Process 202

making work productive. Analysis identifies individual specific operations, their sequence, and their interrelationships. It deals with pieces. It is not concerned with the process of production as a whole, with its structures, its economy, or its performance.

The Principles of Production

Production is not the application of tools to materials. It is the application of logic to work. The more clearly, the more consistently, the more rationally the right logic is applied, the less of a limitation and the more of an opportunity production becomes.

This definition implies that there must be principles of production. There must be a small number of basic models, each with its own constraints, its own requirements, its own characteristics. The definition further implies that the more closely a process of production can be designed according to one of these principles, the smoother, the more effective, and the more productive it will be.

Each system of production makes its own demands on management -- in all areas and on all levels. Each requires different competence, skill, and performance. One set of demands is not necessarily "higher" than another, any more than non-Euclidian geometry is "higher" than Euclidian geometry, but each is different. Unless management understands the demands of its system of production, it cannot truly make work productive.

Such understanding is particularly important today when many processes -- in manufacturing as well as in information work -- are moving from one system of production into another. If this move is considered a mere matter of machines, techniques, and gadgets, the enterprise will reap inevitably only the difficulties of the new system. To reap its benefits management must realize that the new system involves new principles, and must understand what these are.

There are four such principles of production known to us so far. Each has been worked out for industrial production, that is, largely for traditional manual work. But each is equally applicable to producing and handling information, that is, to most clerical work. The principles are applicable also to knowledge work, at least to knowledge work concerned with the learning of known knowledge (i.e., already available and learnable) and its application.

The four systems are: (I) unique-product production; (2) rigid mass production; (3) flexible mass production; and (4) process or "flow" production. Each of these four has its own specifications; each makes specific demands on management.

There are two general rules for advancing production performance and

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pushing back limitations: (I) The limitations on production are pushed back further and faster the more consistently and thoroughly the principles pertaining to the system in use are being applied. (2) The systems themselves represent a distinct order of advance, with unique-product production the least advanced, process production the most advanced. They represent different stages of control over physical limitations. This does not mean that opportunities for advance lie everywhere in moving from the unique-product system to the process-production system. Each system has its specific applications, requirements, and limitations.

But we advance to the extent to which we can organize parts of production on the principles of a more advanced system and learn, at the same time, how to harmonize different systems within the same process.

There are also two general rules concerning the demands on management competence made by each system. (I) The systems differ not just in the difficulty of their demands, but in the variety of competence and the order of performance. Management, in moving from one system to another, has to learn how to do new things rather than learn to do old things better. (2) The more we succeed in applying consistently the principles of each system, the easier it becomes for management to satisfy its demands.

Each management has to meet the demands of the system it ought to have according to the nature of its products and process, rather than those of the system it actually uses. Being unable or unwilling to apply what would be the most appropriate system results only in lack of performance; it does not result in lower demands on management, but inevitably increases the difficulties of managing the business.

One case in point is basic steelmaking, which has, in the batch process, primarily a unique-product system. There is probably no industry that has worked harder or more successfully on perfecting a unique-product system. Yet the problems the managements of basic-steel companies face are pro- cess-production problems: high fixed capital requirements and the need for continuous production, resulting together in high break-even points; the need for a high and constant level of business; the need to make basic investment decisions for a long time ahead, etc. As a result the cost struc- ture of the steel industry is that of capital-intensive process production. At the same time the basic-steel industry enjoys few of the economic benefits of process production. The steel industry is thus caught in a perpetual squeeze between the cost characteristics of process production and the revenue characteristics of unique-product production. In periods of very rapid growth and extremely high demand, i.e., in the early stage of industri- alization by and large, it can be very profitable for a few years. But over any extended period of time, steel industry profitability will always be marginal and inadequate to the industry's own needs--until such time as


Worker and Working: Theories and Reality

McGregor's Theory X and Theory Y--The Evidence for "Theory Y"--And Its Weaknesses--Maslow's Criticism--What Is the Manager's Reality?-- Why "the Stick " No Longer Works--"Big Fear" and "Little Fears "--The Overly Potent "Carrot"--The Myth of Antimaterialism--The Demand for "Much More"--And Its Toxic Side Effects--From Master to Manager-- Can We Replace Carrot and Stick.~--Enlightened Psychological Despotism --Why It Will Not Work--What Then Can Work?

Since the writings of the human-relations school first came to the notice of managers around World War II, there has been a proliferation of books, papers, and studies on motivation and achievement, on industrial psychology and industrial sociology, on interpersonal relations at work and on worker satisfaction. Indeed, the literature on managing worker and working, in quantity at least, exceeds the literature in any other management field, including even the management sciences and the computer.

The most widely read and most often quoted of these books is probably Douglas McGregor's The Human Side of Enterprise, ~ with its Theory X and Theory Y. McGregor conducted no original research. He acknowl- edged freely in his book that he had developed no new ideas but had formulated the ideas of others (and especially those I had put forth in three earlier bookst). But his book fully deserves the wide attention it has received. McGregor powerfully presented fundamental choices for managing worker and working. His Theory X--the traditional approach to worker

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and working -- assumes that people are lazy, dislike and shun work, have to be driven and need both carrot and stick. It assumes that most people are incapable of taking responsibility for themselves and have to be looked after. By contrast, Theory Y assumes that people have a psychological need to work and want achievement and responsibility. Theory X assumes immaturity. Theory Y assumes fundamentally that people want to be adults.

McGregor presented these two theories as alternatives and pretended to impartiality. Yet no reader ever doubted--or was meant to doubt -- that McGregor himself believed wholeheartedly in Theory Y.

There is impressive evidence for Theory Y. On most jobs most workers, even those hostile to boss and organization, want to like their work and look for achievement. In most jobs even the most alienated workers manage to find something that gives them satisfaction.

This was first brought out in the late 1940s, when General Motors conducted a large-scale contest on "My Job and Why I Like It" (of which unfortunately few results have been published). Almost 190,000 workers wrote in and discussed their jobs--by far the largest sample of worker attitudes we have ever obtained. Very few were uncritical. But even fewer did not find something that made them like the job, did not mention some challenge in it, some achievement and satisfaction, some true motivation.

Equally convincing are the extensive studies of Frederick Herzberg on knowledge workers (already mentioned in Chapter 16). Herzberg produced example after example that knowledge workers want achievement and will indeed work only if there is achievement in their job. Otherwise they will at best go through the motions.

The most moving statement of Theory Y antedates behavioral science by thousands of years. It is the funeral oration for the fallen Athenians which Thucydides has Pericles deliver in his great history of the Peloponnesian War. What Pericles said, in effect, was that Athens was a Theory Y society as against the Spartans, who were probably the world's most consistent practitioners of Theory X.

Yet things are far less simple than McGregor's followers would make us -- and themselves -- believe. In the first place, we have learned that Theory Y is not by itself adequate. When I first propounded what McGregor later formulated and popularized as Theory Y, I laid great stress on the fact that this was not "permissive." On the contrary, I said that to manage worker and working by putting responsibility on the worker and by aiming at achievement made exceedingly high demands on both worker and manager. McGregor also saw this, though he did not stress it.~

An oversight repaired in his posthumous The Professional Mana8er

(McGraw-Hill, 1967). Worker and Working: Theories and Reality 233

Maslow's Criticism

An ardent enthusiast for Theory Y, the late Abraham H. Maslow, pointed out that the demands are actually much higher than even I had seen. Maslow spent one year working closely with a small company in Southern California which at the time tried to practice Theory Y. In the book he wrote on his experience,~ Maslow pointed out that the demand for responsibility and achievement may well go far beyond what any but the strong and healthy can take. He sharply criticized me and McGregor for "inhumanity" to the weak, the vulnerable, the damaged, who are unable to take on the responsibility and self-discipline which Theory Y demands. Even the strong and healthy, Maslow concluded, need the security of order and direction; and the weak need protection against the burden of responsi- bility. The world is not, Maslow concluded, peopled by adults. It has its full share of the permanently immature.

Of course, Maslow only paraphrased Dostoyevsky's famous legend of the Grand Inquisitor in The Brothers Karamazov. Unlike Dostoyevsky's Grand Inquisitor, Maslow, however, did not conclude that paternalist oppression is the only way to manage and, in fact, the only kindness to man. His conclusion was far more important and far more valid. Maslow--who, until his death a few years later, remained a strong advocate of Theory Y-- concluded that it is not enough to remove restraints. One has to replace the security of Theory X and the certainty it gives by another but different structure of security and certainty. There is need to provide by different means what commands and penalties do under Theory X. Theory Y, in other words, has to go far beyond Theory X. It cannot simply be substituted for it.

This is an important insight. And it is clearly proven by all our experience with Theory Y.

In fact, while Maslow wrote Eupsychian Management. one of McGregor's closest friends and disciples proved Maslow's point. Warren Bennis, himself a distinguished industrial psychologist (and the editor of McGregor's posthumous book, The Professional Manager. mentioned above), attempted in the late sixties to convert the University of Buffalo, in upstate New York, from an old, tired, and rundown school into a major, first-rate university. His approach and that of his colleagues was clearly based on Theory Y--but without giving structure, direction, and security. The result was tremendous excitement but also total failure. Instead of achievement, there was lack of direction, lack of objectives, lack of controls,

Eupsychian Uanagement (Irvin, 1965).

234 M A N A G E M E N T

and frustration--as Bennis (who later became president of the University of Cincinnati) himself recounts.

One conclusion from Maslow's work is that Theory Y is not permissive, as so many of its advocates believe. It is not freedom from restraint. It is not, as its critics contend, indulging the worker, let alone coddling him. It is a stern taskmaster, sterner in many ways than the Theory X which it replaces. It has to achieve what Theory X achieved, and then do a good deal more--or else it will prove too great a burden and will make demands human beings cannot meet.

It has now become clear that Theory X and Theory Y are not, as McGre- gor maintained, theories about human nature (a position never shared by me, by the way). Whether we will ever know enough about human nature to have any theories about it remains to be seen. But so far, the evidence is not at all conclusive.

Everybody knows that there are undoubtedly lazy people as there are undoubtedly energetic ones. Far more important, however, is that ordinary, everyday experience teaches us that the same people react quite differently to different circumstances. They may be lazy and resist work to the point of sabotaging it in one situation. They may be motivated to achievement in another one. It is clearly not human nature nor personality structure that is at issue. Or at the very least, there are different human natures which behave differently under different conditions.

Modern American slang talks of being "turned on" or "turned off" by an assignment, a teacher, a job, or a boss. These terms have been criticized as dehumanizing. They refer to people, it is being said, as if they were electrical appliances. But everyday experience shows that this is exactly how a great many people behave. They react rather than act. The motiva- tion, the drive, the impulse lie outside of them.

But this is not compatible with either Theory X or Theory Y. It implies that it is not human nature but the structure of job and work that, in ef- fect, determines how people will act and what management they will re- quire.

We also now know that individuals can acquire the habit of achievement but can also acquire the habit of defeat. This again is not compatible with either the Theory X or the Theory Y of human nature.

The best-known work in this area has been done by David C. McClelland at Harvard.~ McClelland has taken the position that the desire to achieve is conditioned largely by culture and by experiences, both of which can be changed even in a nonachieving culture such as that of the Indian caste system. The most extensive study of actual worker behavior in large-scale industry, the work which the Canadian-born English psychiatrist Elliott

'See his book, Motlvating Economic Achievement (Free Press, 1969). Worker and Working: Theories and Reality 235

Jaques~ conducted for many years at the Glacier Metal Company in Lon- don (together with the company's chief executive, Wilfred Brown), supports the same conclusion.

What Is the Manager's Reality~

The debate over the scientific validity of Theory X versus Theory Y is, therefore, largely a sham battle. The question the manager needs to ask is not "Which theory of human nature is right?" The question is "What is the reality of my situation and how can I discharge my task of managing worker and working in today's situation?"

The basic fact--unpalatable but inescapable--is that the traditional The- ory X approach to managing, that is, the carrot-and-stick way, no longer works. In developed countries, it does not even work for manual workers, and nowhere can it work for knowledge workers. The stick is no longer available to the manager, and the carrot is today becoming less and less of an incentive.

The stick of the traditional approach to managing worker and working was hunger and fear. Traditionally, all but a handful of men in every society lived at the very margin of subsistence and in imminent threat of starvation. One bad harvest was enough to force an Indian or Chinese peasant to sell his daughters into prostitution. One bad harvest was enough for him to lose the tiny plot of land which was all that stood between him and beggary. Now, even in only moderately affluent countries, there is an economic floor well above subsistence level, even for the very poor. The worker knows today, in every developed country, that he and his family will not starve if he loses his job. He may have to do without a lot of things he would like to have, but he can survive.

Marx's Lumpenproletariat. that is, the unemployables, still exist even in some very rich countries. But Marx's proletariat has disappeared--and with it the stick of Theory X.

Even where fear exists, it has largely ceased to motivate. Instead of motivation, fear is becoming a demotivator. One reason for this is the spread of education, the other reason is the emergence of the society of organiza- tion. The spread of education makes people employable. It gives them a wider horizon. Even poorly educated people in today's society now know of opportunities. In a society of organizations it is possible to gain access to a new job. In a society of organizations there is lateral mobility. Losing one's job is still unpleasant. But it is no longer catastrophe.

'See his books, Changing Culture of the Factory (Dryden Press, 1952), and Equitable Payment: a General Theory of Work, Differential Payment and Individual Progress (Wiley, 1961).

236 M A N A G E M E N T

The English tenant farmer, no matter how accomplished or industrious, who was evicted by his landlord became a "sturdy beggar." There was no other employment for him, except an occasional day of work as a casual laborer helping out with the harvest. Losing one's job was more than a life sentence; it usually condemned a man's children and his grandchildren. It made a man an outcast. Now the man who loses his job registers with the employment exchange for another one. Even at the depth of a serious recession today--e.g., the American recession of 197~1971--there were hardly any long-term unemployed adult male workers.

In addition, there is rising employment security which protects a man in his job. It takes many forms. In Sweden a three-partite board guarantees a man another job and provides for his training and support between jobs (see Chapter 22). In most European (and Latin American) countries, there are legal restrictions on firing. There are seniority provisions which make job security into a right. In the United States, increasingly, income, if not employment, is maintained for long periods through such contractual provisions as supplemental unemployment compensation.

All developed countries are moving toward the system of the modern university, where a faculty member after a few years of service acquires tenure, which all but completely commits his employer to a job for him. At the same time, the faculty member has almost unlimited mobility and can freely move from one university position to another.

Japan has lifetime employment, which binds both employer and worker. Fear of being fired, therefore, does not exist in Japan, at least not in the "modern" sector. This (as the next chapter will discuss) is a major factor in Japan's economic achievement.

The Japanese example also shows that the more fear disappears as a stick, the more counterproductive remnants of fear become. The Japanese worker knows that he is tied to an employer and is unlikely to find other employ- ment if he loses his present job. This makes him dedicated to the welfare of the organization that employs him. But it also makes him resent bitterly any structural change in the economy that might threaten the industry or occupation that employs him--the reason, for instance, for the extremely bad labor relations on the Japanese National Railroads. The Japanese work- er's inability to move also makes him defenseless against the pressure to conform exerted by the organization. This is increasingly unacceptable to the young educated people. Indeed, while still expecting the security of lifetime employment, they increasingly demand for themselves the right to move to another employer. Rousseau pointed out two hundred years ago that the "right to emigrate" is the ultimate safeguard of personal liberty.

Japan, it is reasonable to predict, will move toward a system under which the worker has ~uarantees of income and iob, but also mobilitY. Worker and Working: Theories and Reality 237

Modern behavioral psychology has demonstrated that great fear coerces, while remnants of fear cause only resentment and resistance. Fear in all developed countries has lost its coercive power. The lesser fears that still remain do not motivate. They destroy motivation--precisely because they lack full power and full credibility.

"Big Fear" and "Little Fears"

The "big fear" still motivates where it is truly credible, as is shown by the quite unexpected success which a new approach to "curing" alcoholism has had. Everybody has "known" that the true alcoholic cannot stop drink- ing until he is completely down and out, if then. But a good many employers are now finding that a very large percentage of alcoholic workers do indeed stop drinking--permanently--if told in unequivocal language that they will otherwise be fired and that potential new employers will be told of their problem, so that they are unlikely to find another job.

But, save in such exceptional cases as the alcoholic who knows that he is rapidly becoming unemployable, the big stick, the horrible fear which drove workers yesterday, is no longer available to today's manager in the developed countries, whether the manager likes it or not. It is extremely foolish to try to depend on "little sticks," that is, whatever remnants of fear are still available. To be sure, any organization needs disciplinary devices, but their role and purpose is to take care of marginal friction. They cannot provide the drive. If misused to drive, disciplinary devices can cause only resentment and resistance. They can only demotivate.

The Overly Potent Carrot

The carrot of material rewards has not, like the stick of fear, lost its potency. On the contrary, it has become so potent that it must be used with great caution. It has become too potent to be a dependable tool. The Sunday issue of every newspaper these days contains an article by a learned sociologist or philosopher reporting that people are turning away from material satisfactions. On the front page of the same paper, Sundays and weekdays, there is then always a story that this or that group of workers --teachers or electricians, newspaper reporters or firemen, salesclerks or stevedores--have presented the biggest wage demand ever or have obtained the biggest wage raise ever.

When the youthful rebels against material civilization half a century ago went back to nature, all they needed was a tent or a sleeping bag. These days, turning one's back on material civilization seems to require an $8,000 camper-truck. The youthful rebels of the 1920s played their back-to-nature 238 MANAGEMENT

songs on a ukulele; today we need an electronic guitar to express our rejection of technology. The same European intellectuals who so vocally inveigh against American materialism use the fees they get for their lectures and articles for such nonmaterial satisfactions as a sports car, an airplane trip to a plush resort, or the purchase of a villa on a Mediterranean beach.

There is not one shred of evidence for the alleged turning away from ma- terial rewards. On the contrary, affluence means that everybody believes that material rewards are and should be within his easy reach. Samuel Gompers, the long-time head of the American labor movement, used to define the aims of a labor union in one word: "more." He would surely have to change this today to "much more." Antimaterialism is a myth, no matter how much it is extolled. So far, at least, the reality is tremendous and steadily ris- ing material expectations, i.e., expectations for more goods and services.

This is not confined to the capitalist world. It has become the massive reality of communist societies as well. In the thirties Stalin did not hesitate to cut back drastically on the people's diet when Russia had a bad harvest. His successors, in 1972, faced by a much less poor harvest, instead dipped deeply into Russia's strategic gold reserves to buy grain from the arch- enemy, the United States. Mao, in the years of the Great Cultural Revolu- tion in the sixties, thundered against "economism," i.e., against material incentives and rewards. By the early seventies the emphasis in China had shifted to heavy stress on such capitalist incentives as bicycles and sewing machines as rewards for performance.

The demand for much more is obviously going to run ultimately into the finite limitations of the earth's resources and the need to preserve the environment. What we experience today may therefore indeed be the final frenzied agony of the "material civilization." But, at least for the foreseeable future, this will mean above all an even faster shift from goods to services as carriers of satisfaction, and with it, from material-intensive to labor- intensive (and especially knowledge-labor-intensive) wants and purchases. It is most unlikely, for the foreseeable future, to alter the basic characteris- tics. On the contrary; that rising raw-material prices and ecology costs will push up the cost of goods is almost certain to add fuel to the fire of demands for more, much more, monetary rewards.

It is precisely the rising level of material expectations that makes the carrot of material rewards less and less effective as a motivating force and as a managerial tool.

The increment of material rewards capable of motivating people to work has to become larger. As people get more they do not become satisfied with a little more, let alone with less. They expect much more. This is, of course, one of the major causes of the relentless inflationary pressures that besiege every major economy today. Whereas a 5 percent wage boost was, a short Worker and Working: Theories and Reality 239

few years ago, a major satisfaction, the teamsters--or the teachers or the physicians--now demand 40 percent and expect 20 percent.

This may be a manifestation of Maslow's rule that the closer a need comes to being satisfied, the larger an increment of additional gratification will be required to produce the same satisfaction. But the demand for more and much more of material satisfactions has also been accompanied by a change in values that does not fit Maslow's scheme at all. Economic incentives are becoming rights rather than rewards. Merit raises are always introduced as rewards for exceptional performance. In no time at all they become a right. To deny a merit raise or to grant only a small one becomes punishment. The same is true of Japan's semiannual bonus.

But whatever the explanation, the result of the increasing demand for material rewards is rapidly destroying their usefulness as incentives and managerial tools. The manager must try to deemphasize the role of material rewards rather than use them as a carrot. If only very large--and steadily larger--increments have an incentive effect, then using material incentives becomes self-defeating. The expected result in terms of motivation will be obtained, but the cost will be so high as to exceed the benefits. The cost will eat up the additional productivity. This is, of course, what has been happen- ing with respect to material incentives for managers (e.g., stock option or extra compensation plans) as well as with respect to material incentives for all other classes of workers.

That inflation has become the central problem of the developed econo- mies is, in terms of traditional or Keynesian economic theory, pure paradox. Inflation should not occur under conditions of high productive capacity and high productivity. Instead it is the norm. The reason is the totally unex- pected size of economic appetites, the totally unexpected potency of material rewards. The result, however, is that to enable economy, society, and enterprise to survive, managers must try to curb and to contain eco- nomic incentives rather than rely on them. The economic incentive that has a true carrot effect is "too much." Only economic rewards that fall well below the threshold of motivational effectiveness are likely to be defensible economically and in terms of productivity and contribution.

This also means that the social side effects of the carrot are reaching toxic proportions. A potent medicine always has side effects; and the larger the dosage, the greater the side effects. Material incentives and rewards is a very strong medicine indeed, and becoming more potent. It therefore is bound to have potent side effects, which become more pronounced and more dangerous as the dosage required for effectiveness increases. In particular (as said before in Chapter 16) the more total income goes up, the more powerful does dissatisfaction over relative compensation become. As all our studies show--beginning with the GM contest "My Job" in the late forties 240 M A N A G E M E N T

--there is no more powerful disincentive, no more effective bar to motiva- tion, than dissatisfaction over one's own pay compared to that of one's peers. Once people's incomes rise above the subsistence level, dissatisfaction with relative incomes is a far more powerful sentiment than dissatisfaction with one's absolute income. The "sense of injustice," as Edmond Cahn, the American legal philosopher, convincingly argued, is deeply ingrained in man. Nothing is as likely to offend the sense of injustice as dissatisfaction with relative economic rewards in an organization. An organization is a redistributive economy (see Chapter 16); relative economic rewards are therefore power and status decisions on the worth of a person or a group.

Reliance on the carrot of economic rewards therefore runs the risk of alienating both the recipient and all others. It runs the risk of dividing the group against itself while uniting it against the system, i.e., against the employing institution and its management.

Clearly no deemphasis of material rewards is likely. Managers face in- stead the tremendous challenge of finding some means to relate the growing emphasis on "much more" to economic reality, i.e., to productivity and profitability. Material rewards are too potent to be relied on as the main positive motivator. This can only mean growing inflationary pressures-- and growing dissatisfaction.

This applies to managers as well as to blue-collar workers. There is little doubt that managerial carrots have grown into seven-course Victorian meals, e.g., from small bonuses to massive stock option plans. (This also raises serious problems of social responsibility, which will be discussed in Chapter 28.) With respect to managerial incentives, we are moving from more to much more. At the same time there is growing evidence that inequalities in managerial incentives--real or fancied--are more demotivat- ing than the rewards themselves satisfy and motivate.

The limitations of the effectiveness of carrot and stick apply with particu- lar force to two groups in the work force: the new breed of manual workers and knowledge workers.

In managing manual workers, the manager in the developed country more and more has to deal with men (and to a lesser extent with women) who (as said in Chapter 15) start out as "losers," feel rejected, feel already defeated. These are people who have been driven all their lives and yet have not achieved. But losers always learn one thing, and that to perfection: resistance against being driven. They may not be able to achieve, but they know how to sabotage.

The best text on this is not a learned study by a professor Or psychology but a best-selling humorous novel of the twenties, The Good Soldier Schweik. by the Czech writer Jaroslav Hasek. Schweik, one of the world's defeated, the archetypal dro~)out. sinde-handedlv stultifies and frustrates Worker and Working: Theories and Reality 241

the whole Theory X apparatus of the mighty army of a great power, pre-World War I Austria-Hungary. He does nothing overt. He knows how to sabotage.

To drive the new breed of manual workers therefore will not be success- ful. Hunger and fear no longer dominate them as they did their grandpar- ents. But their very failure has made them impervious to pressures.

The knowledge worker will not produce if managed under Theory X. Knowledge has to be self-directed and has to take responsibility.

Fear is altogether incompatible with the production of knowledge. It may produce efforts and anxieties. It will not produce results. And fear inhibits learning, a basic finding of modern behavioral psychology. Rewards and reaffirmation will produce learning. In anything that has to do with knowl- edge, fear will produce only resistance.

Theory X assumes a "master." But in a society of organizations there are no masters. The manager is not a master. He is a superior, but he is a fellow employee. For the first time in history there is a society which lacks masters.

This is not the case in communist societies, which have assiduously worked at replacing the old masters with new masters. The role of the Communist party in a communist state is to be a master. It is in crisis precisely because even under communism a modern society becomes a society of organizations and as such requires managers and cannot tolerate masters.

The manager, not being a master, lacks both the master's authority and the master's credibility. The master's power is independent of the support he receives, either from his servants or from society around him. One can kill a master, but one cannot oust him. But, as the sixties amply showed, e.g., in the case of countless university presidents, even the chief executive of an organization can be ousted, precisely because he is a fellow employee. The authority he exercises is not his own, and cannot survive a challenge.

In terms of the ancient law of master and servant, the chief executive officer of the largest corporation is a fellow servant. Others may be subordi- nate in rank, but they are equal in law. They are not the chief executive's servants, they are his fellow workers.

This is much more than a semantic shift. It means that neither stick nor carrot will actually work if used by a manager, no matter how well they used to work for the master of old.

Can We Replace Carrot and Stick?

Can we replace the carrot of monetary rewards and the stick of fear with a new carrot and a new stick appropriate to the new managerial reality? ~ fter all, carrot and stick have worked for an amazingly long time. One

242 M A N A G E M E N T

does not lightly toss out the tradition of the ages. Over the millennia during which working and worker have been managed, society has changed funda- mentally. Yet managing worker and working has shown amazing continu- ity. The same Theory X principles that were applied to managing worker and working in the building of the great pyramids of Egypt still inform the organization of worker and working in the modern mass-production plant.

Henry Ford's best-known epigram is "History is bunk." Ford was a bold innovator in organizing work, in marketing, and in economics, but when it came to managing worker and working he was completely the prisoner of history and a traditionalist.

The traditional way of managing working and worker cuts across all of man's cultures. There is no great difference between West and East, between pagan antiquity and Christendom, between China and the Occident, be- tween Inca Peru and Mogul India. Nor does the organization of society itself seem to make much difference.

In that respect the Marxist analysis has altogether failed. The factory and office in Soviet Russia or in the Soviet satellites in Europe are organized no differently from the wicked capitalist West. Nor, all evidence clearly shows, is the worker any more achieving or the bosses any less the bosses. The same applies to the far more imaginative Yugoslav experiment of direct worker control of individual businesses, to direct worker ownership, to ownership by a cooperative, and so on.

We therefore know Theory X management. What to put in its place is --or so it seems--largely guesswork and speculation. Surely it would be the better part of wisdom to try to maintain the essence of Theory X by substituting "modern" drives for the old driving force of fear and money. What we need, one might argue, is to find the organizational equivalent to the gasoline engine which replaced the horse--but to keep the wheeled vehicle.

Not only managers ask this question. The labor unions are perhaps even more eager to keep the Theory X structure. The unions, after all, have a stake in the coercive relationship between master and servant of Theory X; if there were no master, what, indeed, would the union's role be? Also labor leaders derive their pride and sense of mission from opposition to Theory X, know how to behave under it, and have its rhetoric down pat.

When the younger workers in some General Motors plants began to talk about humanizing the assembly line, the greatest resistance did not come from General Motors management. It came from the United Automobile Workers' leadership, which insisted on talking about money, pensions, hours off, coffee breaks--and so on. The UAW leaders, in other words, insisted, against their own members, on maintaining and even strengthening a Theory X management on the part of the company. Worker and Working: Theories and Reality 243

To look for a new set of drives to take the place of the old carrot and stick seems not only rational but tempting. Such replacement drives are indeed being offered managers in the form of a new "enlightened psycholog- ical despotism."

Most, if not all, of the recent writers on industrial psychology profess allegiance to Theory Y. They use terms like "self-fulfillment," "creativity," and "the whole man." But what they talk and write about is control through psychological manipulation. They are led to this by their basic assumptions, which are precisely the Theory X assumptions: man is weak, sick, and incapable of looking after himself. He is full of fears, anxieties, neuroses, inhibitions. Essentially he does not want to achieve but wants to fail. He therefore wants to be controlled. Indeed, for his own good he needs to be controlled--not by fear of hunger and incentive of material rewards but through his fear of psychological alienation and the incentive of "psycho- logical security."

I know that I am oversimplifying. I know that I am lumping under one heading half a dozen different approaches. But they all share the same basic assumptions, those of Theory X, and they all lead to the same conclusions. Psychological control by the superior, the manager, is possible; and psycho- logical control by the superior, the manager, is "unselfish" and in the worker's own interest. By becoming his workers' psychological servant, however, the manager retains control as their "boss."

This is "enlightened" whereas the old carrot-and-stick approach may be condemned as crassly coercive (and is condemned as such by the psycholo- gists). But it is despotism nonetheless. Under this new psychological dispen- sation, persuasion replaces command. Those unconvinced by persuasion would presumably be deemed sick, immature, or in need of psychotherapy to become adjusted. Psychological manipulation replaces the carrot of financial rewards; and empathy, i.e., the exploitation of individual fears, anxieties, and personality needs, replaces the old fear of being punished or of losing one's job.

This is strikingly similar to the eighteenth-century philosopher's theory of the enlightened despot. As in modern organization today, affluence and education--in this case, the affluence and rising education of the middle class--threatened to deprive the sovereign of his carrot and stick. The philosopher's enlightened despot was going to maintain absolutism by re- placing the old means with persuasion, reason, and enlightenment--all in the interest of the subjects, of course.

Psychological despotism, whether enlightened or not, is gross misuse of psychology. The main purpose of psychology is to acquire insight into, and mastery of, oneself. Not for nothing were what we now call the behavioral sciences originally called the moral sciences and "Know thyself" their main

244 M A N A G E M E N T

precept. To use psychology to control, dominate, and manipulate others is self-destructive abuse of knowledge. It is also a particularly repugnant form of tyranny. The master of old was content to control the slave's body.

We are concerned, however, here neither with the proper use of psychol- ogy nor with morality. But can the Theory X structure be maintained through psychological despotism? Can psychological despotism work?

Psychological despotism should have tremendous attraction for manag- ers. It promises them that they can continue to behave as they have always done. All they need is to acquire a new vocabulary. It flatters them. And yet managers, while avidly reading the psychology books and attending psychological workshops, are shying away from trying the new psychologi- cal Theory X.

Managers show sound instincts in being leery. Psychological despotism cannot work any more than enlightened despotism worked in the political sphere two hundred years ago--and for the same reason. It requires uni~er- sal genius on the part of the ruler. The manager, if one listens to the psychologists, will have to have insight into all kinds of people. He will have to be in command of all kinds of psychological techniques. He will have to have empathy for all his subordinates. He will have to understand an infinity of individual personality structures, individual psychological needs, and individual psychological problems. He will, in other words, have to be omniscient. But most managers find it hard enough to know all they need to know about their own immediate area of expertise, be it heat-treating or cost accounting or scheduling.

And to expect any large number of people to have "charisma"--whatever the term might mean--is an absurdity. This particular quality is reserved for the very few.

Managers should indeed know more about human beings. They should at least know that human beings behave like human beings, and what that implies. Above all, like most of us, managers need to know much more about themselves than they do; for most managers are action-focused rather than introspective. And yet, any manager, no matter how many psychology seminars he has attended, who attempts to put psychological despotism into practice will very rapidly become its first casualty. He will immediately blunder. He will impair performance.

The work relationship has to be based on mutual respect. Psychological despotism is basically contemptuous--far more contemptuous than the traditional Theory X. It does not assume that people are lazy and resist work, but it assumes that the manager is healthy while everybody else is sick. It assumes that the manager is strong while everybody else is weak. It assumes that the manager knows while everybody else is ignorant. It assumes that the manager is right, whereas everybody else is stupid. These are the assumptions of foolish arrogance.

Worker and Working: Theories and Reality 245

Above all, the manager-psychologist will undermine his own authority. There is, to be sure, need for psychological insight, help, counsel. There is need for the healer of souls and the comforter of the afflicted. But the relationship of healer and patient and that of superior to subordinate are different relationships and mutually exclusive. They both have their own integrity. The integrity of the healer is his subordination to the patient's welfare. The integrity of the manager is his subordination to the require- ments of the common task. In both relationships there is need for authority; but each has a different ground of authority. A manager who pretends that the personal needs of the subordinate for, e.g., affection, rather than the objective needs of the task, determine what should be done, would not only be a poor manager; no one would--or should--believe him. All he does is to destroy the integrity of the relationship and with it the respect for his person and his function.

Enlightened psychological despotism with its call for an unlimited supply of universal geniuses for managerial positions and its confusion be.ween the healer's and the manager's authority and role is not going to deliver what it promises: to maintain Theory X while pretending to replace it.

But what then can work?

It is not simply McGregor's Theory Y. The manager must indeed assume with Theory Y that there are at least a substantial number of people in the work force who want to achieve. Otherwise there is little hope. Fortunately the evidence strongly supports this assumption. The manager must further accept it as his job to make worker and working achieving. He must be willing, as a result, to accept high demands on himself, his seriousness, and his competence. But the manager cannot assume, as Theory Y does, that people will work to achieve if only they are given the opportunity to do so. More is needed--much more--to make even the strong and healthy accept the burden of responsibility. The structure we need cannot depend on driving the worker; neither carrot nor stick is dependable any more. But the structure must also provide substitutes to the weak--and not only to them --for Theory X's security of command and of being looked after.

What would such an organization look like? And how would it work? Fortunately we do not have to speculate. Some such organizations--though certainly not examples of Theory Y--exist and can be examined.

The Manager and His Work 399

The task of creating a genuine whole also requires that the manager in every one of his acts consider simultaneously the performance and results of the enterprise as a whole and the diverse activities needed to achieve synchronized performance. It is here, perhaps, that the comparison with the orchestra conductor fits best. A conductor must always hear both the whole orchestra and, say, the second oboe. Similarly, a manager must always consider both the overall performance of the enterprise and, say, the market research activity needed. By raising the performance of the whole, he cre- ates scope and challenge for market research. By improving the perfor- mance of market research, he makes possible better overall business results. The manager must simultaneously ask two double-barreled questions: What better business performance is needed and what does this require of what activities? And: What better performances are the activities capable of and what improvement in business results will they make possible?

The second specific task of the manager is to harmonize in every decision and action the requirements of immediate and long-range future. He cannot sacrifice either without endangering the enterprise.~ He must, so to speak, keep his nose to the grindstone while lifting his eyes to the hills--which is quite an acrobatic feat. Or, to vary the metaphor, he can afford to say neither "We will cross this bridge when we come to it," nor "It's the next hundred years that count." He not only has to prepare for crossing distant bridges--he has to build them long before he gets there. And if he does not take care of the next hundred days, there will be no next hundred years-- there may not even be a next five years. Whatever the manager does should be sound in expediency as well as in basic long-range objective and princi- ple. And where he cannot harmonize the two time dimensions, he must at least balance them. He must calculate the sacrifice he imposes on the long-range future of the enterprise to protect its immediate interests, or the sacrifice he makes today for the sake of tomorrow. He must limit either sacrifice as much as possible. And he must repair as soon as possible the damage it inflicts. He lives and acts in two time dimensions, and he is responsible for the performance of the whole enterprise and of his own component in it.

The Work of the Manager

Most managers spend most of their time on things that are not "manag- ing." A sales manager makes a statistical analysis or placates an important customer. A foreman repairs a tool or fills out a production report. A manufacturing manager designs a new plant layout or tests new materials.

~ On this see also Chapters 4 and 10.

400 M A N A G E M E N T

A company president works through the details of a bank loan or negotiates a big contract--or spends hours presiding at a dinner in honor of long- service employees. All these things pertain to a particular function. All are necessary and have to be done well.

But they are apart from the work which every manager does whatever his function or activity, whatever his rank and position, work which is common to all managers and peculiar to them. We can apply to the job of the manager the systematic analysis of scientific management. We can isolate that which a man does because he is a manager. We can divide it into its constituent operations. And a man can improve his performance as a manager by improving his performance of these constituent activities.

There are five basic operations in the work of the manager. Together they result in the integration of resources into a viable growing organism.

A manager, in the first place, sets objectives. He determines what the objectives should be. He determines what the goals in each area of objectives should be. He decides what has to be done to reach these objectives. He makes the objectives effective by communicating them to the people whose performance is needed to attain them.

Second, a manager organizes. He analyzes the activities, decisions, and relations needed. He classifies the work. He divides it into manageable activities and further divides the activities into manageable jobs. He groups these units and jobs into an organization structure. He selects people for the management of these units and for the jobs to be done.

Next, a manager motivates and communicates. He makes a team out of the people that are responsible for various jobs. He does that through the practices with which he works. He does it in his own relations to the men with whom he works. He does it through his "people decisions" on pay, placement, and promotion. And he does it through constant communication, to and from his subordinates, and to and from his superior, and to and from his colleagues.

The fourth basic element in the work of the manager is measurement. The manager establishes yardsticks--and few factors are as important to the performance of the organization and of every man in it. He sees to it that each man has measurements available to him which are focused on the performance of the whole organization and which, at the same time, focus on the work of the individual and help him do it. He analyzes, appraises, and interprets performance. As in all other areas of his work, he communicates the meaning of the measurements and their findings to his subordinates, to his superiors, and to colleagues.

Finally, a manager develops people, including himself.

Every one of these categories can be divided further into subcategories, The Mana~er and His Work 401

and each of the subcategories could be discussed in a book of its own. Moreover, every category requires different qualities and qualifications.

Setting objectives, for instance, is a problem of balances: a balance be- tween business results and the realization of the principles one believes in; a balance between the immediate needs of the business and those of the future; a balance between desirable ends and available means. Setting objec- tives clearly requires analytical and synthesizing ability.

Organizing, too, requires analytical ability. For it demands the most economical use of scarce resources. But it deals with human beings, and therefore stands under the principle of justice and requires integrity. Analytical ability and integrity are similarly required for the development of people.

The skill needed for motivating and communicating is primarily social. Instead of analysis, integration and synthesis are needed. Justice dominates as the principle, economy is secondary. And integrity is of much greater importance than analytical ability.

Measuring requires, first and foremost, analytical ability. But it also demands that measurement be used to make self-control possible rather than abused to control people from the outside and above--that is, to dominate them. It is the common violation of this principle that largely explains why measurement is the weakest area in the work of the manager today. As long as measurements are abused as a tool of control (for instance, as when measurements are used as a weapon of an internal secret police that supplies audits and critical appraisals of a manager's performance to the boss without even sending a carbon copy to the manager himself) measuring will remain the weakest area in the manager's performance.*

Setting objectives, organizing, motivating and communicating, measur- ing, and developing people are formal, classifying categories. Only a mana- ger's experience can bring them to life, concrete and meaningful. But be- cause they are formal, they apply to every manager and to everything he does as a manager. They can therefore be used by every manager to appraise his own skill and performance and to work systematically on improving himself and his performance as a manager.

Being able to set objectives does not make a man a manager, any more than the ability to tie a small knot in a confined space makes a man a surgeon. But without ability to set objectives a man cannot be an adequate manager, just as a man cannot do good surgery without tying small knots. And as a surgeon becomes a better surgeon by improving his knot-tying skill, so a manager becomes a better manager by improving his skill and performance in all categories of his work.

I'On this see also Chapter 39.

402 M A N A G E M E N T

The Manager's Resource: Man

The manager works with a specific resource: man. And the human being is a unique resource requiring peculiar qualities in whoever attempts to work with it.

"Working" the human being always means developing him. The direc- tion which this development takes decides whether the human being--both as a man and as a resource--will become more productive or cease, ulti- mately, to be productive at all. This applies, as cannot be emphasized too strongly, not alone to the man who is being managed but also to the manager. Whether he develops his subordinates in the right direction, helps them to grow and become bigger and richer persons, will directly determine whether he himself will develop, will grow or wither, become richer or become impoverished, improve or deteriorate.

One can learn certain skills in managing people--for instance, the skill to lead a conference or to conduct an interview. One can set down practices that are conducive to development--in the structure of the relationship between manager and subordinate, in a promotion system, in the rewards and incentives of an organization. But when all is said and done, developing men still requires a basic quality in the manager which cannot be created by supplying skills or by emphasizing the importance of the task. It requires integrity of character.

There is tremendous stress these days on liking people, helping people, getting along with people, as qualifications for a manager. These alone are never enough. In every successful organization there is one boss who does not like people, who does not help them, and who does not get along with them. Cold, unpleasant, demanding, he often teaches and develops more men than anyone else. He commands more respect than the most likable man ever could. He demands exacting workmanship of himself as well as of his men. He sets high standards and expects that they will be lived up to. He considers only what is right and never who is right. And though often himself a man of brilliance, he never rates intellectual brilliance above integrity in others. The manager who lacks these qualities of character-- no matter how likable, helpful, or amiable, no matter even how competent or brilliant--is a menace and should be adjudged "unfit to be a manager and a gentleman."

What a manager does can be analyzed systematically. What a manager has to be able to do can be learned (though perhaps not always taught). But one quality cannot be learned, one qualification that the manager cannot acquire but must bring with him. It is not genius; it is character.

414 M A N A G E M E N T

manager works and who constitute his unit and his team. It goes also for his upward relationships. The only area in which I would strongly counsel to keep rather tight limits on the span of managerial relationships are the sideways relationships. A managerial job, ideally, should have a small number of sideways relationships--every one of them of prime importance, both for the functioning of the entire organization and for the achievement of the manager's own function and objectives. It is not only that these are time-consuming relationships. If there are too many, they will be treated superficially, will not be thought through, and will not be worked at. And the common weakness of many organizations is, by and large, the lack of adequate concern for, and adequate work on, sideways relationships.

Defining a Manager's Job

A manager's job is defined in several ways.

  1. There is first the specific function, the job itself. This should always be a permanent, continuing job, one that is considered, in the light of the est available knowledge at the time, to be needed for a good long time to ome. An example would be manager of market research or manufacturing anager. Both obviously are jobs which will have to be done for the oreseeable future.

  2. But the functional definition of the job, which is what is expressed in the typical job description or position guide, does not define the specific contribution which a specific manager is expected to make. While the function is, at least in intent, permanent, there are assignments "here and now" which are what the enterprise and the manager's boss should hold the man accountable for. They contribute the second definition of a managerial position and job.

As I have said elsewhere, every manager should ask himself the question at least once a year, and always when taking on a new job: "What specific contribution can I and my unit make which, if done really well, would make a substantial difference to the performance and results of my company?"~

The position guide and job description are, so to speak, the mission statement of a managerial job. They correspond to the definition of "what is our business and what should it be" for the enterprise as a whole. The assignments are the objectives and goals and therefore need specific targets, a deadline, a clear statement of who is accountable, and a built-in measure- ment by feedback from results.

It is the mark of a performing manager that these assignments always exceed the scope of the job as outlined in the job description. One can only codify what has already been done; and a job description is codification.

~ In my book, The Effeclive Executive.

Design and Content of Managerial lobs 415

What needs to be done to make the future always exceeds and goes beyond what has been done in the past.

3. A managerial job is defined by relationships--upward, downward, and sideways.

4. It is finally defined by the information needed for the job and by a manager's place in the information flow.

Every manager should ask himself: "What information do I need to do my job and where do I get it?" He should make sure that whoever has to provide that information understands the manager's needs -- not only in terms of what is needed but also how it is needed.

This is particularly important today, when "management information" means increasingly "computer." The basic problem with the computer in business is not that computer technicians do not understand the managers' needs. It is that the managers do not take the time and trouble to think through their needs and to communicate them to the computer people.~ How the computer people satisfy the needs of the manager is their business. What the needs are is the manager's business. To expect the computer people to define the information needs of the managers is abdication.

Managers need to think through the question "And who depends on information from me, and in what form, upward, downward, and sideways?"

Each of these four definitions of the managerial job is only a partial definition. All four are needed to define the manager's job--just as one triangulates a position on a map.

These four definitions which "triangulate" a manager's job are the manager's own responsibility. He should be expected to write his own job description; to work out his own proposal for the results and contributions for which he and his unit should be accountable; to work out and think through his relationships; and finally to define both his information needs and his information contribution. Indeed, responsibility for thinking through the four dimensions of his job is a manager's first responsibility, of which he should never be relieved. His superior has both the duty and the responsibility to approve or to disapprove what the individual manager proposes. But the responsibility for thinking and proposing is the manager's. There is no difference between a "managing" job, i.e., one with direct responsibility for the work of other people, and a job as a career professional.

The Manager's Authority

That each manager's job be given the broadest possible scope and author- ity is nothing but a rephrasing of the rule that decisions be pushed down

~ On this see also Chapters 38 and 40.

416 M A N A G E M E N T

the line as far as possible and be taken as close as possible to the action to which they apply. In its effects, however, this requirement leads to sharp deviations from the traditional concept of delegation from above.

What activities and tasks the enterprise requires is worked out at the top. The analysis begins with the desired end product: the objectives of business performance and business results. From these the analysis determines step by step what work has to be performed.

But in organizing the manager's job we have to work from the bottom up. We have to begin with the activities on the "firing line"--the jobs responsible for the actual output of goods and services, for the final sale to the customer, for the production of blueprints and engineering drawings.

The managers on the firing line have the basic management jobs--the ones on whose performance everything else ultimately rests. Seen this way, the jobs of higher management are derivative, are, in the last analysis, aimed at helping the firing-line manager do his job. Viewed structurally and or- ganically, it is the firing-line manager in whom all authority and responsibil- ity center; only what he cannot do himself passes up to higher management. He is, so to speak, the gene of organization in which all higher organs are prefigured and out of which they are developed.

Quite obviously there are real limits to the decisions the firing-line manager can or should make, and to the authority and responsibility he should have.

He is limited as to the extent of his authority. A production foreman has no business changing a salesman's compensation. A regional sales manager has no authority in somebody else's region, etc. A manager is also limited with respect to the kind of decision he can make. Clearly, he should not make decisions that affect other managers. He should not alone make decisions that affect the whole business and its spirit. It is only elementary prudence, for instance, not to allow any manager to make by himself and without review a decision on the career and future of one of his subordi- nates.

The firing-line manager should not be expected to make decisions which he cannot make. A man responsible for immediate performance does not have the time, for instance, to make long-range decisions. A production man lacks the knowledge and competence to work out a pension plan or a medical program. These decisions certainly affect him and his operations he should know them, understand them, indeed participate as much as is humanly possible in their preparation and formulation. But he cannot make them. Hence he cannot have the authority and responsibility for them; for authority and responsibility should always be task-focused. This applies all through the management hierarchy up to the chief executive himself.

There is one simple rule for setting limitations on the decisions a manager


From Middle Management to Knowledge Organization

Middle Management's Predicted Demise--And the Middle Management Boom--The Needed Correction--The Danger of Overstaffing--The Need for "Weight Control"--Sloughing Off the Old--Where the Growth Oc- curred--The Emergence of the Knowledge Professional--The Social Struc- ture of Traditional Middle Management--The European Tradition--The New Middle Manager: Middle Rank but Top-Management "Impacts"-- The Knowledge Organization--Middle-Management Job Design--The Needfor Clear Decision Authority--Top Management's Role in the Knowl- edge Organization--Middle Managers: "Juniors" and "Colleagues" Rather Than "Subordinates

In the early fifties when computer and automation were the headline makers, the imminent demise of middle management was widely predicted. By 1980, we were told by a number of experts, middle management would have disappeared. All decisions would be made by the computer or by top management on the basis of a "total information system."

Very few predictions have been disproven so fast and so completely. At the very time the predictions were being widely publicized, the middle- management boom began. And it kept going for twenty years. Indeed, the fifties and the sixties might have been called the era of middle management. No other group in the work force, in all developed countries, has been growing as fast.

There was, indeed, during this period, a powerful force at work reducing the number of middle-management jobs. It was not, however, the computer, automation, or any other new technology. It was the press of mergers,

444 M N A G E M E N T

takeovers, and acquisitions, especially in the U.S. and in Great Britain. It resulted in consolidating or closing countless sales and accounting offices --and with it the abolition of middle-management positions by the score. Yet despite this force--which reached hurricane strength in the late sixties in the English-speaking world--the demand for middle-rank managerial people grew steadily except in periods of economic recession as in Great Britain in the late sixties and in the U.S. in 1970-71. And in companies not directly affected by mergers or acquisitions, or in public-service institutions, the demand grew spectacularly.

The same rapid expansion in the middle ranks has occurred in Japan. Middle management in Japan is synonymous with "university graduates on

From Middle Management to Knowledge Organization 445

the payroll." And that number in Japan--and especially the number of university graduates working for business--has increased even faster than the Japanese economy. Indeed, the words "salary man," the Japanese term for the middle group, has become a slogan.

These examples actually understate the growth rate of middle management. During the period in which middle management was expected to disappear, the center of economic gravity and growth shifted to industries that have a much higher ratio of middle managers in their employ than have the industries which dominated the business scene in 1950. The symbol of economic dynamism in the United States economy of 1970 was no longer General Motors. It was IBM. And at IBM, or at any other computer manufacturer, the middle group is far bigger than in traditional manufacturing industries such as automobile or steel. The same is true of the pharmaceutical companies which grew so rapidly in the twenty years between 1950 and 1970.

Outside of manufacturing industries the growth has been even more rapid. It has been particularly pronounced in the nonbusiness service institutions. The prototype is the hospital.

Top management in the hospital--however one defines it--has not grown. There is still the hospital administrator, perhaps with an assistant in the larger hospital. There are in the community hospitals, the trustees, and there is a medical director. Rank-and-file employment in terms of number of employees per patient day has gone down rather than up. It is in the kitchen, in maintenance, and in the other rank-and-file areas that hospitals have become somewhat less labor-intensive. But the middle ranks --technicians, engineers, accountants, psychologists and social workers-- have exploded. They have grown at least fourfold--in some big teaching hospitals even faster.

The Needed Correction

Growth at such rates always overshoots the target. It is bound to be disorderly and wasteful. There is overstaffing because it is the fashion to go in for this or that activity whether needed or not. There is overstaffing because times are good and it is easier to accede to a demand for more people than to fight it. And in such a period of explosive growth no one pays much attention to the organization of the work. Yet expansion of such magnitude is always qualitative change rather than mere additional quan- tity. If the work and its organization are not studied and changed, waste, duplication of effort, and organizational obesity follow.

Examples of wasteful overstaffing in the middle ranks abound. The worst are some American defense projects. To design the Mirage fighter, the best

446 M A N A G E M E N T

military plane of the 1950 1970 period, the French employed some seventy engineers and designers who did the job in record time. A comparable American development might have been staffed with three thousand engi- neers and designers and have taken four times as long and, in the end, might have come out with an inferior design at infinitely greater cost.

But there are examples of blatant overstaffing in private industry too. It is quite unlikely that IBM, in its rapid expansion, could have put to produc- tive work all the masses of middle-management people it hired, on the basis of their college diplomas as a rule rather than for proven performance or because the need for their services had been clearly established.

The middle-management boom therefore had to lead, like any other boom, to a "middle-management depression." At the first significant eco- nomic setback there had to be a sharp correction. This came first in Great Britain, where the fairly sharp recession of the late sixties coincided with a peak in mergers and takeovers, resulting in layoffs of middle-rank execu- tives and professionals. In the United States, in the 1970/71 recession, the reaction was far milder: it consisted of a sharp two-year curtailment of college recruiting for management and professional positions, with very few layoffs of middle-management people already on the payroll (except in the particularly distressed aerospace and defense industries). And Japan, when scared by President Nixon's trade and economic offensive in 1971, also reacted by curtailing temporarily new hiring.

Such a reaction, however painful, is fundamentally healthy. It always goes too far, of course. But at least it forces management to think through what the work is and what it needs. Such thinking is particularly important with respect to middle-management work. There are few areas where over- stafflng does as much damage as in the middle-management group. It costs a great deal more than money. It costs performance and motivation.

The Danger of Overstaffing

Knowledge work--that is, the specific work of middle managers--should always be demanding. It should be lean, and err, if at all, on the side of understaffing. An overstaffed middle-management organization destroys motivation. It destroys accomplishment, achievement, and satisfaction. In the end, it destroys performance.~

The middle-management boom and the resulting overstaffing, especially in larger companies, did indeed undermine morale and motivation. Over- staffing is a main reason for the dissatisfaction and disenchantment of so many of the young middle-rank people, managers and career professionals,

~ On this see especially the two books by Frederick Herzberg: Work and the Nature of Man (World Publishing Co., 1966) and The ~otivation to Work (Wiley, 1959).

From Middle Management to Knowledge Organization 447

whom business, governments, school systems, and hospitals recruited in such large numbers during the fifties and sixties. They are well paid and well treated; but there is not enough for them to do, not enough challenge, not enough contribution, not enough accomplishment, and too much sheer busyness. There are too many bodies busily "interacting" with each other rather than doing their own work. When the able young educated people, e.g., the brightest graduates of the leading American business schools, are asked to explain their growing preference for a job in a small company or in the medium-sized city administration, they always say, "At least I'll have something to do."

The first lesson is to keep the middle ranks lean. "What really needs to be done?" is the first question. And the second and equally important one is "What no longer needs to be done and should be cut back or cut out?" The first lesson is the need for weight controL

In particular this means that a new middle-management activity should, as a rule, be sanctioned only if an old one is sloughed off or, at least, pruned back. The middle-management budget is predominately an "administered expense" (see Chapter 9) and needs to be constantly watched to make sure that good, performing people are allocated to opportunities, to results, and to making the future rather than wasted on problems, busyness, and on defending the past.

What needs even more thought and attention is, however, the work of middle management and its organization. The expansion of the middle ranks not only produced a qualitative change--it was itself produced by a change in the nature of the middle-management function.

Middle management will, it is safe to predict, continue to expand. But future growth will have to be directed, controlled, managed. It will have to be based on an understanding of the changing nature of middle management and of the resulting need for change in function, relationship, and structure.

Where the Growth Occurred

The middle management of forty years ago has not disappeared. Rather it has grown, and quite substantially. There are today proportionately more plant managers around, more district sales managers, and more branch managers in banks than there were before World War II.

But the real growth of middle-rank people in management jobs has been in manufacturing engineers and process specialists; in tax accountants and market analysts; in product and market managers; in advertising and pro- motion specialists. It has been in a host of functions which, a generation ago, were hardly known. The new middle managers are the knowledge profes- sionals (see Chapter 30).

The traditional middle manager is essentially a commander of men. The


new middle manager is essentially a supplier of knowledge. The traditional middle manager has authority downward, over the people who report to him. The new middle manager essentially has responsibility sideways and upward, that is, to people over whom he exercises no command authority.

Above all, the traditional middle manager's job is largely routine. He did not make decisions. He carried them out. At the most, he implemented them and adapted them to local conditions. His job was to keep running a system that he had neither designed nor was expected to alter.

This underlay, of course, the traditional definition of a manager as some- one who is responsible for the work of others rather than responsible for his own work. It also underlay the traditional social structure of manage- ment outside the U.S. and Japan, especially in Europe.

In the United States and Japan top management has traditionally been recruited from middle management, that is, from people who worked their way up in the business. In European countries this was not the pattern. In England there was--and to some extent still is--a tremendous gulf between managers and "the board," that is, top management. Even in large compa- nies the board was until recently recruited from people who had never discharged operating management functions, if not from people who had never worked in a business, such as distinguished former public servants. In Holland top management, even in the large and professionally managed companies, rarely comes out of operations. In the large French company all positions in top and senior management are typically held by graduates of the Grandes Ecoles. Most of them, especially top-management people, make their careers in government and then move directly into senior man- agement jobs in business. Operating managers who come up in the business are normally considered unfit for top jobs, even if they are university graduates. The Germans tend to draw a sharp line between Fuhrung. i.e., top management, and Leitung, operating management.*

Georg Siemens, the founder of the Deutsche Bank (see Chapter 29 and especially Chapter 49), became the head of a major financial institution as a young government lawyer barely thirty, without experience in the banking business. His youth was exceptional; his lack of business preparation and operating knowledge was not.

That this social structure could work--and work very well in many cases

ýThe semantic hurdle the word "management" has faced outside of the United States is a eesult. In most European languages--and thirty years ago even in British English--there is one term comprising the totality of the management group. There are separate terms for the people at the top and for the people in the middle. And since "management" is usually being translated into these languages with the word that connotes the operating, middle-management people, the people at the top, such as the German Unternehmer, tended to conclude that management was concerned with routine operations rather than with crucial decisions and that, therefore, management was for "them" and not for "us.

From Middle ManaRement to Knowledge Organization 449

--shows that the European view of the traditional middle manager as being concerned with routines rather than with decisions, and with maintenance of going operations rather than with direction, had a good deal of substance.

The Decision Impact of the New Middle Manager

But as the new middle people are knowledge professionals, their actions and decisions are intended to have direct and major impact on the business, its ability to perform, and its direction.

Here are some fairly typical examples.

The product manager in companies such as Procter & Gamble's soap and detergent business, in Unilever's food business, or in the radio and TV business of Philips of Holland, is definitely middle management by rank and compensation. He has no command authority. The work is being carried out by people who report to their respective functional bosses, the manufac- turing manager, the sales manager, the head of the chemical and develop- ment laboratories, and so on. But he is held responsible for the development, the introduction, and the perforrnance of a product in the marketplace. He decides very largely whether a new product should indeed be developed. He decides what its specifications should be. He determines its price. He de- cides where and how to test-market it. And he decides the sales goals. He does not have any direct command authority and cannot issue an order. But he controls directly a major determinant of performance and success for a branded consumer product, the advertising and promotion budget.

The quality control engineer in a machine tool company also has no command authority and has no one, except junior quality engineers, reporting to him. But he decides the design and structure of the manufacturing process. His quality control standards largely decide the costs of the manu- facturing process and the performance of the manufacturing plant. The m.anufacturing manager or the plant manager does indeed make the decisions. But the quality control man can veto them.

The tax accountant also has no command, can give no orders, and often has no one reporting to him except his secretary. Yet, in effect, he has a veto power over even top-management decisions. His opinion on the tax conse- quences of a course of action often determines both what a company can do and how it must do it.

The industry specialist in a large commercial bank, e.g., the man who is the expert on retail trade, is not supposed to make loans on his own authority. But the lending officers, in turn, are not supposed to make loans to a retail chain without his approval. And when a retail store customer of the bank gets into difficulties, it is the retail specialist who takes over. The retail specialist in the bank is also expected to determine on his own respon-


sibility and based on his own knowledge whether the bank should, at anygiven time, expand or contract its lending to retail stores. He is expected to determine what the criteria for loans to retail stores should be. And if he sees a loan to a retail chain which, to him, seems dubious, he is not expected to go "upstairs." He picks up the telephone and calls the lending officer in charge of the account. He cannot "order" the lending officer to call the loan or to cut it back. Still, the lending officer, who may well outrank the retail-trade specialist will not say, "I was advised by the special- ist to cut back this loan." He will say, "I was told by the specialist."

The product manager at Procter ~ Gamble, the quality engineer, and the tax accountant are not "line" managers. But neither are they "staff." Their function is not advice and teaching. They do "operating" work. Yet they have top-management impacts even though they are not top management in rank, compensation, or function.

To be sure, they cannot make some of the key decisions--what our business is and what it should be; what its objectives are; what the priorities are and should be; where to allocate key resources of capital and people. But even with respect to these decisions they contribute the essential knowl- edge without which the key decision cannot be made, at least not effectively. And the key decisions cannot become effective unless these new middle managers build them into their own knowledge and work on their own responsibility and on their own authority. In an earlier chapter (Chapter 30) it was argued that the knowledge professional is a manager even though no one reports to him. Now we see that in his impacts and responsibilities he is top management even though he may be five or six organizational levels down.

The Knowledge Organization

Middle management has not disappeared, as was predicted. Indeed not even the traditional middle manager has disappeared. But yesterday's mid- dle management is being transformed into tomorrow's knowledge organiza- tion.

This requires restructuring individual jobs, but also restructuring the organization and its design. In the knowledge organization the job, all the way down to the lowest professional or managerial level, has to focus on the company's objectives. It has to focus on contribution, which means that it has to have its own objectives. It has to be organized according to assignment. It has to be thought through and structured according to the flow of information both to and from the individual position. And it has to be placed into the decision structure. It can no longer be designed, as was the traditional middle-management job, in terms of downward authority alone. It has to be recognized instead as multidimensional.

From Middle Mana~ement to Knowledge Organization 451

Traditionally, middle-management jobs have been designed narrowly. The first concern has been with the limits on a middle manager's authority. In the knowledge organization we will instead have to ask, "What is the greatest possible contribution this job can make?" The focus will have to shift from concern with authority to stress on responsibility.

The Need for Clear Decision Authority

The knowledge organization demands clear decision authority. It de- mands clear thinking through what decision belongs where (see Chapter 42). The knowledge organization is far more complex than the simple "line" organization it is replacing. Unless decision authority is clearly spelled out, it will tend to become confused.

The knowledge organization is also designed to take greater risks. Opera- ting no longer is a "routine" in which the norms are clear. It is a decision- making organization rather than one that has no other function than to keep the machinery running at a preset speed and for already known results. Things, therefore, will go wrong, and in unexpected ways. And unless authority to change the decision is built into the decision itself, malfunction is bound to result.

In the knowledge organization of the new middle management any pro-

452 M A N A G E M E N T

gram, any project, and any plan will have to ask and answer the question"Who has the authority to change the plan?" And this will lead to far greater devolution of authority to middle people than even the American middle management tradition ever envisaged. Even line managers will need more rather than less authority in the knowledge organization.

Top Management's Role in the Knowledge Organization

In the knowledge organization, top management can no longer assume that the "operating people" do as they are being told. It has to accept that the middle ranks make genuine decisions. But the operating organization can also no longer assume that it can do its job in isolation from top management. It must understand the top-management decisions. Indeed middle management in the knowledge organization must take responsibility for "educating" top management. Top management must understand what the knowledge organization tries to do, what it is capable of doing, and where it sees the major opportunities, the major needs, the major challenges to the enterprise. Finally, middle management must insist that top manage- ment make decisions on what the business is and what it should be, on objectives, strategies, and priorities. Otherwise the middle ranks cannot do their own job.

Top management needs to know the knowledge organization and to understand it. It needs to establish communication with it. The traditional American assumption that the people in top management know the middle manager's job because they have been through it is no longer ~oin~ to be

From Middle Mana~ement to Knowledge Or~anization 453

valid. Even the men who have risen into top management through the middle-management organization can no longer expect to have been ex- posed directly to more than a small sample of the functional work of the knowledge organization. And some of the most important areas of middle management will no longer prepare and test a man for top-management positions.

Indeed the most capable men in such areas will not even want to get into top-management work but will prefer to stay in their specialty. The computer specialist wants, as a rule, to stay within his specialization and work on information and information technology. Equally, most researchers want to stay in research, whether in physical and technical fields, in research on people, or in economic research.

But the assumption that underlies the traditional European approach is also becoming invalid. Middle managers in knowledge organizations can no longer be taken for granted and be treated with condescension as people who, after all, do only routine tasks and only carry out and implement top-management decisions and orders. If it wants to be effective, top management therefore needs to establish team work with, and communications from and to, the knowledge organization.

The most important "public" in the knowledge organization for top management -- and the one that most needs a relationship to top management -- are the younger and highly specialized knowledge workers. They most need a "godfather" (see Chapter 20). They are least likely to understand what top management is trying to do, least likely to see the business whole, least likely to focus themselves on company objectives and performance. Yet they are likely, because of their knowledge, to have impact early in their careers. In any business of any size or complexity the top-management group needs to organize its relationship to these younger knowledge professionals.

Each member of the top-management team might sit down a few times a year with a group of younger knowledge people and say to them, "I have no agenda. I have nothing I want to tell you. I am here to listen. It is your job to tell me what you think we in top management need to know about your work and how you think we can make it most productive. It is your job to tell me where you see the problems and opportunities for this company and to tell me what we in top management do to help you in your job and what we do that hampers you. I shall insist on only one thing: that you have done your homework and that you take seriously your respansibility to inform and to educate."

But altogether in the knowledge organization it becomes a top-management job to mobilize, to organize, to place, and to direct knowledge. Knowledge people -- and that means managers and career professionals in today's


organization -- cannot be seen and treated as inferiors. They are rank, pay, authority. But they are juniors and colleagues rather that subordinates.

"Management" means, in the last analysis, the substitution of thought for brawn and muscle, of knowledge for folkways and superstition, and of cooperation for force. It means the substitution of responsibility for obedi- ence to rank, and of authority of performance for authority of power. The knowledge organization, therefore, is what management theory, manage- ment thinking, management aspirations have been about, all along. But now the knowledge organization is becoming accomplished fact. The tremen- dous expansion of managerial employment since World War II converted the middle ranks into knowledge professionals--that is, people paid for putting knowledge to work and to make decisions based on their knowledge which have impact on performance capacity, results, and future directions of the whor enterprise. The task of making management in the middle ranks truly effective and achieving has barely begun. It is a central task in managing managers.


The Spirit of Performance

To Make Common Men Do Uncommon Things--The Tesf Is Performance, Not Good Feelings--Focus on Strength--Practices, Not Preachments--The Danger of Safe Mediocrity--What "Performance" Means--What to Do with the Nonperformer--"Conscience"Decisions--Focus on Opportunity-- "People"Decisions: The Controlofan Organization--Integrity, the Touch- stone

The purpose of an organization is to enable common men to do uncommon things.

No organization can depend on genius; the supply is always scarce and unreliable. It is the test of an organization to make ordinary human beings perform better than they seem capable of, to bring out whatever strength there is in its members, and to use each man's strength to help all the other members perform. It is the task of organization at the same time to neutral- ize the individual weaknesses of its members. The test of an organization is the spirit of performance.

The spirit of performance requires that there be full scope for individual excellence. The focus must be on the strengths of a man--on what he can do rather than on what he cannot do.

"Morale" in an organization does not mean that "people get along to- gether"; the test is performance, not conformance. Human relations that are not grounded in the satisfaction of good performance in work are actually poor human relations and result in a mean spirit. And there is no greater indictment of an organization than that the strength and ability of the outstanding man become a threat to the group and his performance a source of difficulty, frustration, and discouragement for the others.


Spirit of performance in a human organization means that its energy output is larger than the sum of the efforts put in. It means the creation of energy. This cannot be accomplished by mechanical means. A mechanical contrivance can, at its theoretical best, conserve energy, but it cannot create it. To get out more than is being put in is possible only in the moral sphere.

Morality does not mean preachments. Morality, to have any meaning at all, must be a principle of action. It must not be exhortation, sermon, or good intentions. It must be practices Specifically:

  1. The focus of the organization must be on performance. The first requirement of the spirit of organization is high performance standards, for the group as well as for each individual. The organization must inculcate in itself the habit of achievement.

    But performance does not mean "success every time." Performance is rather a "batting average." It will, indeed it must, have room for mistakes and even for failures. What performance has no room for is complacency and low standards.

  2. The focus of the organization must be on opportunities rather than on problems.

  3. The decisions that affect people: their placement and their pay, promo- tion, demotion and severance, must express the values and beliefs of the organization. They are the true controls of an organization.

  4. Finally, in its people decisions, management must demonstrate that it realizes that integrity is one absolute requirement of a manager, the one quality that he has to bring with him and cannot be expected to acquire later on. And management must demonstrate that it requires the same integrity of itself.

The Danger of Safe Mediocrity

The constant temptation of every organization is safe mediocrity. The first requirement of organizational health is a high demand on performance. Indeed, one of the major reasons for demanding that management be by objectives and that it focus on the objective requirements of the task is the need to have managers set high standards of performance for themselves.

This requires that performance be understood properly. Performance is not hitting the bull's-eye with every shot--that is a circus act that can be maintained only over a few minutes. Performance is rather the consistent ability to produce results over prolonged periods of time and in a variety of assignments. A performance record must include mistakes. It must in- clude failures. It must reveal a man's limitations as well as his strengths. And there are as many different kinds of performance as there are different human beings. One man will consistently do well, rarely falling far below Managerial Skills

Managing is specific work. As such it requires specific skills.

Among them are:

--making effective decisions; --ommunications within and without the organization; --the proper use of controls and measurements; --the proper use of analytical tools, that is, of the management sciences.

No manager is likely to master all these skills. But every manager needs to understand what they are, what they can do for him, and what, in turn, they require of him. Every manager needs basic literacy with respect to essential managerial skills. 37

The Effective Decision*

The Japanese Way~The Essentials--Facts or Opinions?--What ~s the Appropriate Measurement?--The Need for Dissent and Alternutives--The Trap of "Being Right"--Is a Decision Necessary?--Who ~as to Do the Work?--The Right and the Wrong Compromise--The Feedback--Deci- sion-making Is Effective Action

Executives do many things in addition to making decisions. But only execu- tives make decisions. The first managerial skill is, therefore, the making of effective decisions. There are countless books on the techniques of decision-making. Com- plex logical and mathematical tools have been deve}oped for the decision- making process. But there is little concern with the essential process itself. What is a "decision"? What are the important elements in it?

The only people who have developed a systematic and standardized approach to decision-making are the Japanese. Their decisions are highly effective. Yet their approach violates every rule in the books on decision- making. Indeed, according to the books, the Japanese should never be able to arrive at a decision, let alone an effective one. It might, therefore, be fruitful to take a look at the Japanese way of decision-making in order to find out what the elements of the process are.

This chapter draws heavily on my earlier book, The Effective Executive.

466 M A N A G E M E N T

How the Japanese Make Decisions

If there is one point on which all authorities on Japan are in agreement, it is that Japanese institutions, whether business or government agencies, make decisions by consensus. The Japanese, we are told, debate a proposed decision throughout the organization until there is agreement on it. And only then do they make the decision.

This, every experienced Western manager will say with a shudder, is not for us, however well it might work for the Japanese. This approach can lead only to indecision or politicking, or at best to an innocuous compromise which offends no one but also solves nothing. And if proof of this were needed, the American might add, the history of President Lyndon B. John- son's attempt to obtain a consensus would supply it.

But what stands out in Japanese history, as well as in today's Japanese management behavior, is the capacity for making 180-degree turns--that is, for reaching radical and highly controversial decisions. Let me illustrate:

No country was more receptive to Christianity than sixteenth-century Japan. Indeed, the hope of the Portuguese missionaries that Japan would become the first Christian country outside of Europe was by no means just wishful thinking. Yet the same Japan made a 180-degree turn in the early seventeenth century. Within a few years it completely suppressed Christian- ity and shut itself off from all foreign influences--indeed, from all contact with the outside world--and stayed that way for 250 years. Then, in the Meiji Restoration of 1867, Japan executed another 180-degree turn and opened itself to the West--something no other non-European country managed to do.

Toyo Rayon (Toray), the largest Japanese manufacturer of man-made fibers, made nothing but rayon as late as the mid-1950s. Then it decided to switch to synthetic fibers. But it did not phase out rayon making, as every Western company in a similar situation has done. Instead, it closed its rayon mills overnight, even though, under the Japanese system of employment, it could not lay off a single man.

As late as 1966, when I discussed this matter with its officials, the Minis- try of International Trade and Industry was adamantly opposed to any Japanese companies going multinational and making investments in manu- facturing affiliates abroad. But three years later, the same ministry officials, working for the same conservative government, had turned around com- pletely and were pushing Japanese manufacturing investments abroad.

The key to this apparent contradiction is that the Westerner and the Japanese mean something different when they talk of "making a decision." In the West, all the emphasis is on the answer to the question. Indeed, our The Effective Decision 467

books on decision-making try to develop systematic approaches to giving an answer. To the Japanese, however, the important element in decision- making is deJ~ning the question. The important and crucial steps are to decide whether there is a need for a decision and what the decision is about. And it is in this step that the Japanese aim at attaining consensus. Indeed, it is this step that, to the Japanese, is the essence of the decision. The answer to the question (what the West considers the decision) follows from its definition.

During the process that precedes the decision, no mention is made of what the answer might be. This is done so that people will not be forced to take sides; once they have taken sides, a decision would be a victory for one side and a defeat for the other. Thus the whole process is focused on finding out what the decision is really about, not what the decision should be. Its result is a meeting of the minds that there is (or is not) a need for a change in behavior.

All of this takes a long time, of course. The Westerner dealing with the Japanese is thoroughly frustrated during the process. He does not under- stand what is going on. He has the feeling that he is being given the runaround.

To take a specific example, it is very hard for a U.S. executive to under- stand why the Japanese with whom he is negotiating on, say, a license agreement, keep on sending new groups of people every few months who start what the Westerner thinks are "negotiations" as if they had never heard of the subject. One delegation takes copious notes and goes back home, only to be succeeded six weeks later by another team of people from different areas of the company who again act as if they had never heard of the matter under discussion, take copious notes, and go home.

Actually--though few of my Western friends believe it--this is a sign that the Japanese take the matter seriously. They are trying to involve the people who will have to carry out an eventual agreement in the process of obtaining consensus that a license is indeed needed. Only when all of the people who will have to carry out the agreement have come together on the need to make a decision will the decision be made to go ahead. Only then do negotiations really start--and then the Japanese usually move with great speed.

There is a complete account of this process at work--though it does not concern a business decision. The account deals with the decision to go to war against the United States in 1941.~

When the Japanese reach the point we call a decision, they say they are

~ See Japan 's Decis~on for War, Records of the 1941 Policy Conferences, translated and edited by Nobutaka Ike (Stanford University Press, 1967). 468 M A N A G E M E N T

in the action stage. Now top management refers the decision to what the Japanese call the "appropriate people." Determination of who these people are is a top-management decision. On that decision depends the specific answer to the problem that is to be worked out. For, during the course of the discussions leading up to the consensus, it has become quite clear what basic approaches certain people or certain groups would take to the prob- lem. Top management, by referring the question to one group or the other, in effect picks the answer--but an answer which by now will surprise no one.

This referral to the appropriate people is as crucial as the parallel decision in the U. S. political process which baffles any foreign observer of American government--the decision to which committee or subcommittee of the Congress a certain bill is to be assigned. This decision is not to be found in any of the books on U. S. government and politics. Yet, as every Ameri- can politician knows, it is the crucial step which decides whether the bill is to become law and what form it will take. For each committee--the one on Agriculture, for instance, or the one on Banking and Finance--has its own well-known point of view, its own "constituents" to whom it is willing to listen, and its own preferences, taboos, and sacred cows.

What are the advantages of this process? And what can we learn from it?

In the first place, it makes for very effective decisions. While it takes much longer in Japan to reach a decision than it takes in the West, from that point on they do better than we do. After making a decision, we in the West spend much time "selling" it and getting people to act on it. Only too often either the decision is sabotaged by the organization or, what may be worse, it takes so long to make the decision truly effective that it becomes obsolete, if not outright wrong, by the time the people in the organization actually make it operational.

The Japanese, by contrast, need to spend absolutely no time on selling a decision. Everybody has been presold. Also, their process makes it clear where in the organization a certain answer to a question will be welcomed and where it will be resisted. Therefore, there is plenty of time to work on persuading the dissenters, or on making small concessions to them which will win them over without destroying the integrity of the decision.

Every Westerner who has done business with the Japanese has learned that the apparent inertia of the negotiating stage, with its endless delays and endless discussion of the same points, is followed by a speed of action that leaves him hanging on the ropes.

It may take three years before a licensing agreement can be reached, during which time there is no discussion of terms, no discussion of what products the Japanese plan to make, no discussion of what knowledge and help they might need. And then, within four weeks, the Japanese are ready

The Effective Decision 469

to go into production and make demands on their Western partner for information and people which he is totally unprepared to meet. Now it is the Japanese who complain, and bitterly, about the "endless delay and procrastination" of the Westerner. For they understand our way of making a decision and acting on it no better than we understand their way of considering a decision and acting on it.

The Japanese process is focused on understanding the problem. The desired end result is action and behavior on the part of people. This almost guarantees that all the alternatives will be considered. It rivets management attention to essentials. It does not permit commitment until management has decided what the decision is all about. Japanese managers may come up with the wrong answer to the problem (as was the decision to go to war against the United States in 1941), but they rarely come up with the right answer to the wrong problem. And that, as all decision-makers learn, is the most dangerous course, the irretrievably wrong decision.

Above all, their system forces the Japanese to make big decisions. It is much too cumbersome to be put to work on minor matters. It takes far too many people far too long to be wasted on anything but truly important matters leading to real changes in policies and behavior. Small decisions, even when obviously needed, are very often not being made at all in Japan for that reason.

With us it is the small decisions which are easy to make--decisions about things that do not greatly matter. Anyone who knows Western businesses, government agencies, or educational institutions knows that their managers make far too many small decisions as a rule. And nothing causes as much trouble in an organization as a lot of small decisions. Whether the decision concerns moving the water cooler from one end of the hall to the other or the phasing out of one's oldest business makes little emotional difference. One decision takes as much time and generates as much heat as the other.

To contrast the Japanese approach and the Western approach, let me illustrate: I once watched a Japanese company work through a proposal for a joint venture received from a well-known American company, with whom the Japanese had done business for many years. The Orientals did not even discuss the joint venture at the outset. They started out with the question "Do we have to change the basic directions of our business?" As a result, a consensus emerged that change was desirable; management decided to go out of a number of old businesses and start in a number of new technologies and markets; the joint venture was to be one element of a major new strategy. Until the Japanese understood that the decision was really about the direction of the business, and that there was need for a decision on that, they did not once, among themselves, discuss the desirability of the joint venture or the terms on which it might be set up.

In the West we are moving in the Japanese direction. At least, this is what 470 M A N A C E M E N T

the many task forces, long-range plans, strategies, and other approaches are trying to accomplish. But we do not build into the development of these projects the selling which the Japanese process achieves before the decision. This explains in large measure why so many brilliant reports of task forces and planners never get beyond the planning stage.

Facts or Opinions~

A decision is a judgment. It is a choice between alternatives. It is rarely a choice between right and wrong. It is at best a choice between "almost right" and "probably wrong"--but much more often a choice between two courses of action neither of which is provably more nearly right than the other.

Most books on decision-making tell the reader: "First find the facts." But managers who make effective decisions know that one does not start with facts. One starts with opinions. These are, of course, nothing but untested hypotheses and, as such, worthless unless tested against reality. To deter- mine what is a fact requires first a decision on the criteria of relevance,

The Effective Decision 471

especially on the appropriate measurement. This is the hinge of the effective decision, and usually its most controversial aspect.

But also, the effective decision does not, as so many tests on decision- making proclaim, flow from a "consensus on the facts." The understanding that underlies the right decision grows out of the clash and conflict of divergent opinions and out of the serious consideration of competing alter- natives.

To get the facts first is impossible. There are no facts unless one has a criterion of relevance. Events by themselves are not facts.

Only by starting out with opinions can the decision-maker find out what the decision is all about. People do, of course, differ in the answers they give. But most differences of opinion reflect an underlying--and usually hidden --difference as to what the decision is actually about. They reflect a differ- ence regarding the question that has to be answered. Thus to identify the alternative questions is the first step in making effective decisions.

Conversely, there are few things as futile--and as damaging--as the right answer to the wrong question.

The effective decision-maker also knows that he starts out with opinions anyhow. The only choice he has is between using opinions as a productive factor in the decision-making process and deceiving himself into false objec- tivity. People do not start out with the search for facts. They start out with an opinion. There is nothing wrong with this. People experienced in an area should be expected to have an opinion. Not to have an opinion after having been exposed to an area for a good long time would argue an unobservant eye and a sluggish mind.

People inevitably start out with an opinion; to ask them to search for the facts first is even undesirable. They will simply do what everyone is far too prone to do anyhow: look for the facts that fit the conclusion they have already reached. And no one has ever failed to find the facts he is looking for. The good statistician knows this and distrusts all figures--he either knows the fellow who found them or he does not know him; in either case he is suspicious.

The only rigorous method, the only one that enables us to test an opinion against reality, is based on the clear recognition that opinions come first-- and that is the way it should be. Then no one can fail to see that we start out with untested hypotheses--in decision-making, as in science, the only starting point. We know what to do with hypotheses. One does not argue them; one tests them. One finds out which hypotheses are tenable, and therefore worthy of serious consideration, and which are eliminated by the first test against observable experience.

The effective decision-maker therefore encourages opinions. But he in- sists that the people who voice them also think through what it is that the

472 M A N A G E M E N T

"experiment"--that is, the testing of the opinion against reality--would have to show. The effective executive, therefore, asks, "What do we have to know to test the validity of this hypothesis?" "What would the facts have to be to make this opinion tenable?" And he makes it a habit--in himself and in the people with whom he works--to think through and spell out what needs to be looked at, studied, and tested. He insists that people who voice an opinion also take responsibility for defining what factual findings can be expected and should be looked for.

Perhaps the crucial question here is "What is the measurement appropri- ate to the matter under discussion and to the decision to be reached?" Whenever one analyzes the way a truly effective, a truly right, decision has been reached, one finds that a great deal of work and thought went into finding the appropriate measurement.

The Need for Dissent and Alternatives

Unless one has considered alternatives, one has a closed mind. This, above all, explains why the Japanese deliberately disregard the second major command of the textbooks on decision-making and create discussion and dissent as a means to consensus.

Decisions of the kind the executive has to make are not made well by acclamation. They are made well only if based on the clash of conflicting views, the dialogue between different poi~lts of view, the choice between different judgments. The first rule in decision-making is that one does not make a decision unless there is disagreement.

Alfred P. Sloan, Jr., is reported to have said at a meeting of one of the GM top committees, "Gentlemen, I take it we are all in complete agreement on the decision here." Everyone around the table nodded assent. "Then," continued Mr. Sloan, "I propose we postpone further discussion of this matter until our next meeting to give ourselves time to develop disagree- ment and perhaps gain some understanding of what the decision is all about."

Sloan was anything but an "intuitive" decision-maker. He always empha~ sized the need to test opinions against facts and the need to make absolutely sure that one did not start out with the conclusion and then look for the facts that would support it. But he knew that the right decision demands adequate disagreement.

Every one of the effective presidents in American history had his own method of producing the disagreement he needed in order to make an effective decision. Washington, we know, hated conflicts and quarrels and wanted a united Cabinet. Yet he made quite sure of the necessary differences of opinion on important matters by asking both Hamilton and Jefferson for their oDinions.

The Effective Decision 473

There are three reasons why dissent is needed. It first safeguards the decision-maker against becoming the prisoner of the organization. Every- body always wants something from the decision-maker. Everybody is a special pleader, trying--often in perfectly good faith--to obtain the decision he favors. This is true whether the decision-maker is the president of the United States or the most junior engineer working on a design modification.

The only way to break out of the prison of special pleading and precon- ceived notions is to make sure of argued, documented, thought-through disagreements.

Second, disagreement alone can provide alternatives to a decision. And a decision without an alternative is a desperate gambler's throw, no matter how carefully thought through it might be. There is always a high possibil- ity that the decision will prove wrong--either because it was wrong to begin with or because a change in circumstances makes it wrong. If one has thought through alternatives during the decision-making process, one has something to fall back on, something that has already been thought through, studied, understood. Without such an alternative, one is likely to flounder dismally when reality proves a decision to be inoperative.

Both the Schlieffen Plan of the German Army in 1914 and President Franklin D. Roosevelt's original economic program in 1933 were disproved by events at the very moment when they should have taken effect.

The German Army never recovered. It never formulated another strate- gic concept. It went from one ill-conceived improvisation to the next. But this was inevitable. For twenty-five years no alternatives to the Schlieffen Plan had been considered by the General Staff. All its skills had gone into working out the details of this master plan. When the plan fell to pieces, no one had an alternative to fall back on. All the German generals could do, therefore, was gamble--with the odds against them.

By contrast, President Roosevelt, who, in the months before he took office, had based his whole campaign on the slogan of economic orthodoxy, had a team of able people, the later "Brains Trust," working on an alterna- tive--a radical policy based on the proposals of the old-time Progressives, and aimed at economic and social reform on a grand scale. When the collapse of the banking system made it clear that economic orthodoxy had become political suicide, Roosevelt had his alternative ready. He therefore had a policy.

Above all, disagreement is needed to stimulate the imagination. One may not need imagination to find the one right solution to a problem. But then this is of value only in mathematics. In all matters of true uncertainty such as the executive deals with--whether his sphere be political, economic, social, or military--one needs creative solutions which create a new situa- tion. .~nd this means that one needs imagination--a new and different way of perceiving and understanding.

474 M A N A G E M E N T

Imagination of the first order is, I admit, not in abundant supply. But neither is it as scarce as is commonly believed. Imagination needs to be challenged and stimulated, however, or else it remains latent and unused. Disagreement, especially if forced to be reasoned, thought through, docu- mented, is the most effective stimulus we know.

The effective decision-maker, therefore, organizes dissent. This protects him against being taken in by the plausible but false or incomplete. It gives him the alternatives so that he can choose and make a decision, but also ensures that he is not lost in the fog when his decision proves deficient or wrong in execution. And it forces the imagination--his own and that of his associates. Dissent converts the plausible into the right and the right into the good decision.

The Trap of "Being Right"

The effective decision-maker does not start out with the assumption that one proposed course of action is right and that all others must be wrong. Nor does he start out with the assumption "I am right and he is wrong." He starts out with the commitment to find out why people disagree.

Effective executives know, of course, that there are fools around and that there are mischief-makers. But they do not assume that the man who disagrees with what they themselves see as clear and obvious is, therefore, either a fool or a knave. They know that unless proven otherwise, the dissenter has to be assumed to be reasonably intelligent and reasonably fair-minded. Therefore, it has to be assumed that he has reached his so obviously wrong conclusion because he sees a different reality and is con- cerned with a different problem. The effective executive, therefore, always asks, "What does this fellow have to see if his position were, after all, tenable, rational, intelligent?" The effective executive is concerned first with understanding Only then does he even think about who is right and who is wrong.~

Needless to say, this is not done by a great many people, whether execu- tives or not. Most people start out with the certainty that how they see is the only way to see at all. As a result, they never understand what the decision--and indeed the whole argument--is really all about.

The American steel executives have never asked the question "Why do these union people get so terribly upset every time we mention the word 'featherbedding'?" The union people in turn have never asked themselves

~ This, of course, is nothing new. It is indeed only a rephrasing of Mary Parker Follett (see her Dynamic Administration, ed. by Henry C. Metcalf and L. Urwick [Elarper ~ Row, 1941]), who in turn only extended Plato's arRuments in his rreat dialoRue on rhetoric, the Phaedo. The Effective Decision 475

why steel managements make such a fuss over featherbedding when every singJe instance thereof they have ever produced has proved to be petty, and irrelevant to boot. Instead, both sides have worked mightily to prove each other wrong. If either side had tried to understand what the other one sees and why, both would be a great deal stronger, and labor relations in the steel industry, if not in U.S. industry, might be a good deal healthier.

No matter how high his emotions run, no matter how certain he is that the other side is completely wrong and has no case at all, the executive who wants to make the right decision forces himself to see opposition as his means to think through the alternatives. He uses conflict of opinion as his tool to make sure all major aspects of an important matter are looked at carefully.

Is a Decision Necessary?

There is one question the effective decision-maker asks: "Is a decision really necessary?" One alternative is always the alternative of doing noth- ing.

One has to make a decision when a condition is likely to degenerate if nothing is done. This also applies with respect to opportunity. If the oppor- tunity is important and is likely to vanish unless one acts with dispatch, one acts--and one makes a radical change.

Theodore Vail's contemporaries agreed with him as to the degenerative danger of government ownership; but they wanted to fight it by fighting symptoms--fighting this or that bill in the legislature, opposing this or that candidate and supporting another, and so on. Vail alone understood that this is the ineffectual way to fight a degenerative condition. Even if one wins every battle, one can never win the war. He saw that drastic action was needed to create a new situation. He alone saw that private business had to make public regulation into an effective alternative to nationalization.~

At the opposite end there are those conditions with respect to which one can, without being unduly optimistic, expect that they will take care of themselves even if nothing is done. If the answer to the question "What will happen if we do nothing?" is "It will take care of itself," one does not interfere. Nor does one interfere if the condition, while annoying, is of no importance and unlikely to make much difference.

It is a rare executive who understands this. The controller who in a financial crisis preaches cost reduction is seldom capable of leaving alone

ýSee also ChaDter 13 476 M A N A G E M E N T

minor blemishes, elimination of which will achieve nothing. He may know, for instance, that the significant costs are in the sales organization and in physical distribution. And he will work hard and brilliantly at getting them under control. But then he will discredit himself and the whole effort by making a big fuss about the "unnecessary" employment of two or three old men in an otherwise efficient and well-run plant. And he will dismiss as immoral the argument that eliminating these few semipensioners will not make any difference anyhow. "Other people are making sacrifices," he will argue. "Why should the plant people get away with inefficiency?"

When it is all over, the organization will forget that he saved the business. They will remember, though, his vendetta against the two or three poor devils in the plant--and rightly so. De minimis non curat praetor (The magistrate does not consider trifles) said the Roman law almost two thou- sand years ago--but many decision-makers still need to learn it.

The great majority of decisions will lie between these extremes. The problem is not going to take care of itself; but it is unlikely to turn into degenerative malignancy either. The opportunity is only for improvement rather than for real change and innovation; but it is still quite considerable. If we do not act, in other words, we will in all probability survive. But if we do act, we may be better off.

In this situation the effective decision-maker compares effort and risk of action to risk of inaction. There is no formula for the right decision here. But the guidelines are so clear that decisian in the concrete case is rarely difficult. They are:

--act if on balance the benefits greatly outweigh cost and risk; and --act or do not act; but do not "hedge" or compromise.

The surgeon who takes out only half the tonsils or half the appendix risks as much infection and shock as if he did the whole job. And he has not cured the condition, has indeed made it worse. He either operates or he doesn't. Similarly, the effective decision-maker either acts or he doesn't act. He does not take half-action. This is the one thing that is always wrong.

Who Has to Do the Work?

When they reach this point, most decision-makers in the West think they can make an effective decision. But, as the Japanese example shows, one essential element is still missing. An effective decision is a commitment to action and results. If it has to be "sold" after it has been made, there will be no action and no results--and, in effect, no decision. At the least, there may be so much delay as to obsolete the decision before it has become truly effective. The EffPctive Decision 477

The first rule is to make sure that everyone who will have to do something to make the decision effective--or who could sabotage it--has been forced to participate responsibly in the discussion. This is not "democracy." It is salesmanship.

But it is equally important to build the action commitments into the decision from the start. In fact, no decision has been made unless carrying it out in specific steps has become someone's work assignment and responsi- bility. Until then, there are only good intentions.

This is the trouble with so many policy statements, especially of business: they contain no action commitment. To carry them out is no one's specific work and responsibility. No wonder that the people in the organization tend to view these statements cynically if not as declarations of what top manage- ment is really not going to do.

Converting a decision into action requires answering several distinct questions: "Who has to know of this decision?" "What action has to be taken?" "Who is to take it?" "And what does the action have to be so that the people who have to do it can do it?" The first and the last of these are too often overlooked--with dire results.

A story that has become a legend among management scientists illus- trates the importance of the question "Who has to know?" A major manu- facturer of industrial equipment decided to discontinue one model. For years it had been standard equipment on a line of machine tools, many of which were still in use. It was decided, theref~re, to sell the model to present owners of the old equipment for another three years as a replacement, and then to stop making and selling it. Orders for this particular model had been going down for a good many years. But they shot up temporarily as former customers reordered against the day when the model would no longer be available. No one had, however, asked, "Who needs to know of this deci- sion?" Therefore nobody informed the clerk in the purchasing department who was in charge of buying the parts from which the model itself was being assembled. His instructions were to buy parts in a given ratio to current sales--and the instructions remained unchanged. When the time came to discontinue further production of the model, the company had in its ware- house enough parts for another eight to ten years of production, parts that had to be written off at a considerable loss.

Above all, the action must be appropriate to the capacities of the people who have to carry it out.

A chemical company found itself, in the early sixties, with fairly large amounts of blocked currency in two West African countries. To protect this money, it decided to invest in local businesses which would contribute to the local economy, would not require imports from abroad, and would, if successful. be the kind that could be sold to local investors if and when 478 M A N A G E M E N T

currency remittances became possible again. To establish these businesses, the company developed a simple chemical process to preserve a tropical fruit which is a staple crop in both countries and which, up until then, had suffered serious spoilage in transit to its markets.

The business was a success in both countries. But in one country the local manager set the business up in such a manner that it required highly skilled and, above all, technically trained management of the kind not easily avail- able in West Africa. In the other country the local manager thought through the capacities of the people who would eventually have to run the business and worked hard at making both process and business simple and at staffing from the start with nationals of the country right up to the top.

A few years later it became possible again to transfer currency from these two countries. But though the business flourished, no buyer could be found for it in the first country. No one available locally had the necessary managerial and technical skills. The business had to be liquidated at a loss. In the other country so many local entrepreneurs were eager to buy the business that the company repatriated its original investment with a sub- stantial profit.

The process and the business built on it were essentially the same in both places: But in the first country no one had asked, "What kind of people do we have available to make this decision effective? And what can they do?" As a result, the decision itself became frustrated.

All this becomes doubly important wherr people have to change behavior, habits, or attitudes if a decision is to become effective action. Here one has to make sure not only that responsibility for the action is clearly assigned and that the people responsible are capable of doing the needful. One has to make sure that their measurements, their standards for accomplishment, and their incentives are changed simultaneously. Otherwise, the people will get caught in a paralyzing internal emotional conflict.

Theodore Vail's decision that the business of the Bell System was service might have remained dead letter but for the yardsticks of service perfor- mance which he designed to measure managerial performance. Bell manag- ers were used to being measured by the profitability of their units, or at the least, by cost. The new yardsticks made them accept rapidly the new objec- tives.

If the greatest rewards are given for behavior contrary to that which the new course of action requires, then everyone will conclude that this con- trary behavior is what the people at the top really want and are going to reward.

Not everyone can do what Vail did and build the execution of his deci- sions into the decision itself. But everyone can think through what action commitments a specific decision requires, what work assignment follows from it, and what people are available to carry it out.


"minimizing risk" or even on "eliminating risk" as the goal and ultimate purpose of its work.

To try to eliminate risk in business enterprise is futile. Risk is inherent in the commitment of present resources to future expectations. Indeed, economic progress can be defined as the ability to take greater risks. The attempt to eliminate risks, even the attempt to minimize them, can only make them irrational and unbearable. It can only result in that greatest risk of all: rigidity.

The main goal of a management science must be to enable business to take the right risk. Indeed, it must be to enable business to take greater risks --by providing knowledge and understanding of alternative risks and alternative expectations; by identifying the resources and efforts needed for desired results; by mobilizing energies for contribution; and by measuring results against expectations, thereby providing means for early correction of wrong or inadequate decisions.

All this may sound like mere quibbling over terms. Yet the terminology of risk minimization does induce a decided animus against risk-taking and risk-making--that is, against business enterprise--in the literature of the management sciences. Much of it echoes the tone of the technocrats of a generation ago. For it wants to subordinate business to technique, and it seems to see economic activity as a sphere of physical determination rather than as an affirmation and exercise of responsible freedom and decision.

This is worse than being wrong. This is-lack of respect for one's subject matter--the one thing no science can afford and no scientist can survive. Even the best and most serious work of good and serious people--and there is no lack of them in the management sciences--is bound to be vitiated by it.

The second requirementfor a management science is. then, that it take its subject matter seriously.

What Managers Need to Know

But managers too share in the blame for the gap between the potential and the actual contribution of the management sciences. And by and large, the manager's share may be the greater one, and the contribution he needs to make--and has not made--the truly crucial need of management science and management scientist.

However, the management scientist's typical complaint about the manager is, bluntly, nonsense. It is the complaint that the manager does not bother to learn management science and remains ignorant. To demand of any tool user that he understand what goes into the making of the tool is admission of incompetence on the part of the tool maker. The tool user,

The Manager and the Management Sciences 513

provided the tool is made well, need not, and indeed should not, know anything about the tool.

The basic problem is much more serious than the unwillingness of managers to learn a few mathematical techniques. Managers, by and large, have failed to take managerial responsibility for management scientists and management sciences. They have refused to accept the fact that the manage- ment scientist, like any other high-grade specialist, depends on the manager for his direction and his effectiveness. They have left the management sciences unmanaged--and are therefore largely responsible for their degenerating into a box of tricks, a "management gadget bag" of answers to nonexisting questions in many cases.

Managers, despite all their apparent enthusiasm for the management sciences when they first made their appearance, have not, as a rule, thought through what the management sciences should or could contribute.

We know, by and large, what managers need: a systematic supply of organized knowledge for the risk-making and risk-taking decisions of busi- ness enterprise in a complex and rapidly changing technology, economy, and society.

Tools for the measurement of expectations and results: effective means for common vision and communication among the many functional and professional specialists, each with his own knowledge, his own logic, and his own language, whose combined efforts are needed, however, to make the right business decisions, to make them effective, and to produce results.

Managers need something teachable and learnable if only because our world needs far too many people with managerial vision and competence to depend on the intuition of a few "natural-born" geniuses; and only the generalizations and concepts of a discipline can really be learned or taught.

This becomes clear when one looks at the few places where management sciences have produced results. In every single case this is not because the management scientists have done anything they are not doing every place. It is because managers have asked the right questions and have managed the management sciences.

One example is a large manufacturer with a broad product line, selling directly to the public through thousands of outlets, such as department stores, discount chains, and hardware stores. Its executives came to their management scientists and said, "Everybody in this industry knows that extending credit to wholesalers and retailers is the way to get sales. And everybody also knows that there is a point where the additional credit risks outbalance the additional sales. Are these the right assumptions on which to base our selling and credit policies?" The management scientists came back six months later and said, "No, these are the wrong assumptions. What everybody knows is, as so often happens, not true. What is true is that