9/30/2016

Recap
The phenomenon of management was unknown
by 1850s.
The largest manufacturing company around was a
Manchester, England cotton mill employing fewer
than 300 people.
It had no managers, only first-line supervisors
who were workers themselves, each enforcing
discipline over a handful of fellow proletarians.

Management
and the
Worlds Work

Peter F. Drucker
Presented by:
Vijay Kumar

Recap

Recap

Rarely in human history has any institution emerged as

fast as management or had as great an impact as
quickly.
In less than 150 years, management has transformed
the social and economic fabric of the worlds
developed countries. It has created a global economy
and it has itself been transformed.
Performance of management has converted the work
force from one composed largely of unskilled laborers
to one of highly educated knowledge workers.

Eighty years ago, on the threshold of World War I, when a few people
were just becoming aware of managements existence, most people in
developed countries (perhaps four out of every five) earned their living in
three occupations. There were domestic servants, family farmers, and
blue collar workers in manufacturing industries.
Today domestic servants have all but disappeared. Full-time farmers
account for only 3%5% of the working population even though farm
production is four to five times what it was 80 years ago.
Blue-collar manufacturing employment is rapidly moving down the same
path as farming. Manual workers employed in manufacturing in the
United States now makeup only 18% of the total work force; with
manufacturing production steadily rising and expected to be at least 50%
higher.
The largest single group, more than one-third of the total, consists of
workers whom the U.S. Bureau of the Census calls managerial and
professional.

Recap

Recap

Management has been the main agent of this unprecedented

transformation. For it is management that explains why, for the first
time in human history, we can employ large numbers of
knowledgeable, skilled people in productive work. No earlier
society could do this. Indeed, no earlier society could support more
than a handful of such people because, until quite recently, no one
knew how to put people with different skills and knowledge
together to achieve common goals.
Eighteenth-century China was the envy of contemporary Western
intellectuals because it supplied more jobs for educated people
than all of Europe didsome 20,000 per year. Yet today, the United
States with a roughly comparable population produces nearly one
million college graduates a year, most of whom have little difficulty
finding well-paid employment.
What enables us to employ them is management.

Modern large business can usefully employ up to 10,000 highly

knowledgeable people who possess up to 60 different fields of
knowledge. Engineers of all sorts, designers, marketing experts,
economists, statisticians, psychologists, planners, accountants,
human resources peopleall work together in a joint venture, and
none would be effective without the managed enterprise that is
business.
Though the question of which came firstthe educational
explosion of the last 100 years or the management that could put
this knowledge to productive use is debatable, but The emergence
of management has converted knowledge from a social ornament
and luxury into what we now know to be the true capital of any
economy.
In the modern society of enterprise and management, knowledge is
the
primary
resource
and
societys
true
wealth.

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Training-Management Directed
Development

Recap
Not many business leaders could have predicted this development back in
1870, when large enterprises like those we know today were beginning to
take shape.

At that time, the only large permanent organization around was the army.
Not surprisingly, therefore, its command-and-control structure became
the model for the men who were putting together transcontinental
railroads, steel mills, modern banks, and department stores.

Until World War I, it was thought that it took a long time (Adam Smith said several
hundred years) to develop a tradition of labor and the expertise in manual and
organizational skills needed to produce and market a given product, whether
cotton textiles or violins.

But during World War I, large numbers of totally unskilled, preindustrial people
had to be made productive in practically no time.

The command model remained the norm for nearly 100 years. But it was
never as static as its longevity might suggest.

It began to change almost at once, as specialized knowledge of all sorts

poured into enterprise. The first university-trained engineer in
manufacturing industry was hired in Germany in 1867, and within five
years he had built a research department. Other specialties followed suit,
and by World War I the familiar typical functions of a manufacturer had
been developed: research and engineering, manufacturing, sales, finance
and
accounting,
and
a
little
later,
human
resources.

To meet this need, businesses in the United States and the United Kingdom began
to apply Frederick Taylors principles of scientific management, developed
between 1885 and 1910, to the systematic training of blue-collar workers on a
large scale.

They analyzed tasks and broke them down into individual, unskilled operations
that could then be learned quite quickly. Further developed in World War II,
training was then picked up by the Japanese and, 20 years later, by the South
Koreans, who made it the basis for their countries phenomenal development.

Management Application to other

Areas

Emergence of Theory Y

During the 1920s and 1930s, management was applied to many more areas and
aspects of manufacturing business.

Moreover, as early as the mid-1920s and early 1930s, some management pioneers
began to question the way that manufacturing was organized.

Decentralization, for instance, arose to combine the advantages of bigness and

the advantages of smallness within one enterprise.

Eventually, they concluded that the assembly line was a short-term compromise
despite its tremendous productivity: poor economics because of its inflexibility,
poor use of human resources, even poor engineering.

Accounting went from bookkeeping to analysis and control.

Planning grew out of the Gantt charts designed in 1917 and 1918 to plan war
production.

So they began the thinking that eventually led to automation as the way to
organize the manufacturing process, and to Theory Y, teamwork, quality circles,
and the information-based organization as the way to manage human resources.

Analytical logic and statistics, which used quantification to convert experience and
intuition into definitions, information, and diagnosis.

Every one of these managerial innovations represented

Marketing similarly evolved as a result of applying management concepts to

distribution and selling.

Management Effects and

Achievements
The powerful effect of these changes became apparent during
World War II.
The Germans were by far the better strategists. And because they
had the benefit of much shorter interior lines, they needed far
fewer support troops and could match their opponents in combat
strength. Yet the Allies wontheir victory achieved by
management.
The United States, with one-fifth the population, had almost as
many men in uniform as all the other belligerents together. Yet it
still produced more war material than all the others taken together.
And it managed to get that material to fighting fronts as far apart as
China, Russia, India, Africa, and Western Europe.
No wonder, then, that by the wars end almost all the world had
become management conscious. Or that management emerged as
a recognizably distinct kind of work.

The application of knowledge to work,

The substitution of system and information for guesswork, brawn, and toil.
Replaced working harder with working smarter. (Frederick Taylors terms)

Broadening the scope of Management

After World War II we began slowly to see that management is not
business management. It pertains to every human effort that brings
together in one organization people of diverse knowledge and skills.
It can be powerfully applied in hospitals, universities, churches, arts
organizations, and social service agencies of all kinds.
The leaders of these third sector institutions became more and
more management conscious.
For even though the need to manage volunteers or raise funds may
differentiate nonprofit managers from their for-profit peers, many
more of their responsibilities are the sameamong them, defining
the right strategy and goals, developing people, measuring
performance, and marketing the organizations services

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Criticism on Management

Criticism on Management

This is not to say that our knowledge of management is

complete. Management education today is on the
receiving end of a great deal of criticism, much of it
justified. What we knew about management 40 years
agoand have codified in our systems of organized
management educationdoes not necessarily help
managers meet the challenges they face today.
Nevertheless, that knowledge was the foundation for
the spectacular expansion the world economy has
undergone since 1950.

As an example, we now have a great need for new accounting

concepts and methods. Experts like Robert Kaplan, in his HBR article
Yesterdays Accounting Undermines Production (JulyAugust
1988), have pointed out that many of the assumptions on which
our system is based are no longer valid.
Accounting conventions assume that manufacturing industry is
central; in fact, service and information industries are now more
important in all developed countries.
Business produces just one product, whereas practically all modern
businesses produce a great many different products.
Cost accounting, that proud invention of the mid-1920s, assumes
that 80% of all costs are attributable to direct manual labor. In
reality, manual labor in advanced manufacturing industries today
accounts for no more than 8%12% of all costs.

Efforts to control criticism

Evolution of Management in
developing world

Efforts to devise accounting systems that will reflect

changes like theseand provide accurate managerial
informationare under way. But they are still in the early
stages.
So are our efforts to find solutions to other important
management challenges:
Structures that work for information-based organizations;
Ways to raise the productivity of knowledge workers;
Techniques for managing existing businesses and
developing new and very different ones at the same time;
Ways to build and manage truly global businesses; and
many more.

Management arose in developed countries.

How does its rise affect the developing world?
Perhaps the best way to answer this question
is to start with the obvious: management and
large enterprise, together with our new
communications capacity, have created a truly
global economy.

Dominance with leadership in

Technology

Dominance without technological

leadership but with Management

In the past, starring roles in the worlds economy were always

based on leadership in technological innovations.
Great Britain became an economic power in the late eighteenth and
early nineteenth centuries through innovation in the steam engine,
machine tools, textiles, railroads, iron making, insurance, and
international banking.
Germanys economic star rose in the second half of the nineteenth
century on innovation in chemistry, electricity, electronics, optics,
steel, and the invention of the modern bank.
The United States emerged as an economic power at the same time
through
innovative
leadership
in
steel,
electricity,
telecommunications, electronics, automobiles, agronomy, office
equipment, agricultural implements, and aviation

But the one great economic power to emerge in this century, Japan,
has not been a technological pioneer in any area. Its ascendancy
rests squarely on leadership in management.
The Japanese understood the lessons of Americas managerial
achievement during World War II more clearly than we did
ourselvesespecially with respect to managing people as a
resource rather than as a cost.
They adopted (and adapted) organization theory to become the
most thorough practitioners of decentralization in the world. (PreWorld War II Japan had been completely centralized.) And they
began to practice marketing when most American companies were
still only preaching it.
Japan also understood sooner than other countries that
management and technology together had changed the economic
landscape.

9/30/2016

Consequence of the technological and

informative model that made to Education as
major Management Challenge for developing
countries

Dominance without technological

leadership but with Management
The mechanical model of organization and technology
came into being at the end of the seventeenth century
when French physicist, Denis Papin, designed a
prototypical steam engine.
It came to an end in 1945, when the first atomic bomb
exploded and the first computer went on line.
Since then, the model for both technology and
organizations has been a biological one
interdependent, knowledge intensive, and organized by
the flow of information.

One consequence of this change is that the industries that

have been the carriers of enterprise for the last 100 years
are in crisis. And this is true even where demographics
seem to be in their favor.
For example, countries like Mexico and Brazil have an
abundant supply of young people who can be trained easily
for semiskilled manual work. The mechanical industries
would seem to be a perfect match. But as mechanical
production is antiquated unless it becomes automated
that is, unless it is restructured around information.
For that reason alone, education is perhaps the greatest
management challenge developing countries face

Consequence of the technological and

informative model that made to Education as
major Management Challenge for developing
countries
Another way to arrive at the same conclusion is to look at a second
fact with which developing countries must reckon: the developed
countries no longer need them as they did during the nineteenth
century.
Japans leading management consultant, Kenichi Ohmae, has said,
that Japan, North America, and Western Europe can exist by
themselves without the two-thirds of humanity who live in
developing countries.
It is a fact that during the last 40 years the countries of this socalled triad have become essentially self-sufficient except for
petroleum.
They produce more food than they can consumein glaring
contrast to the nineteenth century. They produce something like
three-fourths of all the worlds manufactured goods and services.
And they provide the market for an equal proportion

Consequence of the technological and

informative model that made to Education as
major Management Challenge for developing
countries
During the last 200 years, no country has become a major economic

power by following in the footsteps of earlier leaders. Each started

out with what were, at the time, advanced industries and advanced
production and distribution processes. And each, very fast, became
a leader in management. Today, however, in part because of
automation information and advanced technology, but in much
larger part because of the demand for trained people in all areas of
management, development requires a knowledge base that few
developing countries possess or can afford.
How to create an adequate managerial knowledge base fast is the
critical question in economic development today. It is also one for
which we have no answer so far.
My point of view is that we can achieve that with education.

Consequence of the technological and

informative model that made to Education as
major Management Challenge for developing
countries

This poses an acute problem for developing

countries, even very big ones like China and India.
They cannot hope to become important
economic powers by tracking the evolution of
enterprise and managementthat is, by starting
with nineteenth and early twentieth-century
industries and productive processes based mainly
on a manual work force.
Demographically they may have no choice, of
course. And maybe they can even begin to catch
up. But can they ever get ahead? I doubt it.

Pension Fund Socialism challenge for

Management in developed countries

The problems and challenges discussed so far are largely internal to management
and enterprise. But the most important challenge ahead for management in
developed countries is the result of an external change that I call pension fund
socialism.
I am referring, of course, to the shift of the titles of ownership of public companies
to the institutional trustees of the countrys employees, chiefly through their
pension funds.
Socially this is the most positive development of the twentieth century because it
resolves the Social Question that vexed the nineteenth centurythe conflict
between capital and laborby merging the two.
But it has also created the most violent turbulence for management and managers
since they arose a century ago. For pension funds are the ultimate cause of the
explosion of hostile takeovers in the last few years; and nothing has so disturbed
and demoralized managers as the hostile takeover.
In this sense, takeovers are only a symptom of the fundamental questions pension
fund socialism raises about the legitimacy of management: To whom are
managers accountable? For what? What is the purpose and rationale of large,
publicly owned enterprises?

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Pension Fund Socialism challenge for

Management in developed countries

Pension Fund Socialism challenge for

Management in developed countries

In 1986, the pension funds of Americas employees owned more than 40%
of U.S. companies equity capital and more than two-thirds of the equity
capital of the 1,000 largest companies.
These figures mean that pension funds are now the primary suppliers of
capital in the United States. Indeed, it is almost impossible to build a new
business or expand an existing one unless pension-fund money is
available.
In the next few years, the funds holdings will become even larger, if only
because federal government employees now have a pension fund that
invests in equity shares. Thus, by the year 2000, pension funds will hold at
least two-thirds of the share capital of all U.S. businesses. Through their
pension funds, U.S. employees will be the true owners of the countrys
means of production.
The same development, with a lag of about ten years, is taking place in
Great Britain, Japan, West Germany, and Sweden. It is also starting to
appear in France, Italy, and the Netherlands.

This startling development was not foreseen, but it was inevitable

the result of several interdependent factors. First is the shift in
income distribution that directs 90% or so of the GNP in developed
countries into the wage fund.
Indeed, economically the rich have become irrelevant in
developed countries, however much they dominate the society
pages and titillate TV viewers.
Even the very rich have actually become much poorer in this
century if their incomes are adjusted for inflation and taxation.
To be in the same league as the tycoon of 1900, todays superrich person would need a net worth of at least $50 billion
perhaps $100 billionand income to match. A few Arab oil sheiks
may qualify, but surely no one in a developed country

Pension Fund Socialism challenge for

Management in developed countries

Failure of tycoons

At the same time, wage earners real incomes

have risen dramatically.
The American industrial workers real income and
purchasing power have grown more than 20
times larger, even though the number of hours
worked has dropped by 50%.
The same has occurred in all the other
industrially developed countries.
It has happened fastest in Japan, where the real
income of industrial workers may now be as
much as 30 times what it was 80 years ago

Demand for this income is essentially limitless because we

are again in the midst of an intensively creative period.
In the 60 years between 1856 and World War I, a technical
or social innovation, entrepreneurial business tycoons were
needed to finance whole industries out of their private
pockets.
Technical and social innovations are coming just as fast
today. And the effect of all this energy is that companies
and countries require enormous amounts of capital just to
keep up, let alone move aheadamounts that are several
orders of magnitude larger than those the tycoons had to
supply
80
years
ago.

Failure of tycoons

Failure of tycoons

Indeed, the total pretax incomes of Americas 1,000 highest

income earners would be barely adequate to cover the
capital needs of the countrys private industry for more
than three or four days.
This holds true for all developed countries.
In Japan, for instance, the pretax incomes of the countrys
2,000 highest income earners just about equals what the
countrys private industry invests every two or three days.
These economic developments would have forced us in any
event to make workers into capitalists and owners of
productive resources. That pension funds became the
vehiclerather than mutual funds or direct individual
investments in equity as everyone expected 30 years ago.

As a result of this demographic shift that has

raised life expectancies in developed countries
from age 40 to the mid-and late-70s.
The number of older people is much too large,
and the years during which they need an income
too many, for them to depend on support from
their children. They must rely on monies they
themselves have put aside during their earning
yearsand these funds have to be invested for
long stretches of time.

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Focus on worker ownership rather

then Pension fund Socialism

That modern society requires an identity of interest between enterprise and

employee was seen very early, not only by pre-Marxist socialists like Saint-Simon
and Fourier in France and Robert Owen in Scotland but also by classical
economists like Adam Smith and David Ricardo.
Attempts to satisfy this need through worker ownership of business thus go back
more than 150 years. Without exception, they have failed.
In the first place, worker ownership does not satisfy the workers basic financial
and economic needs. It puts all the workers financial resources into the business
that employs them. But the workers needs are primarily long-term, particularly
the need for retirement income many years hence. So to be a sound investment
for its worker-owners, a business has to prosper for a very long timeand only
one business out of every 40 or 50 ever does.
Worker ownership also destroys companies in the end because it always leads to
inadequate capital formation, inadequate investment in research and
development, and stubborn resistance to abandonment of outmoded,
unproductive, and obsolete products, processes, plants, jobs, and work rules.

Focus on worker ownership rather

then Pension fund Socialism
And yet, worker ownership of the means of production
is not only a sound concept, it is also inevitable. Power
follows property, says the old axiom.
Since property has shifted to the wage earners in all
developed countries, power has to follow.
Yet unlike any other worker ownership of the means of
production, pension fund socialism maintains the
autonomy and accountability of enterprise and
management, market freedom, competition, and the
ability to change and to innovate.

Worker ownership and hostile

takeover
Whether
hostile
takeovers
benefit
shareholders is a hotly debated issue. That
they have serious economic side effects is
beyond question. Hostile takeovers still
remains to be a major fair for managers of
United States.

Focus on worker ownership rather

then Pension fund Socialism
Zeiss Optical Works, the oldest worker-owned business
around, lost its leadership position in consumer optics to
the Americans and the Japanese for just this reason.
Time and again, Zeisss worker-owners preferred
immediate satisfactionhigher wages, bonuses, benefits
to investing in research, new products, and new markets.
Worker ownership underlies the near collapse of industry in
contemporary Yugoslavia. And its shortcomings are so
greatly hampering industry in China that the countrys
leaders are trying to shift to contract management, which
will expand managerial autonomy and check the power of
work councils and worker-owners.

Failure of Pension Fund Socialism

But pension fund socialism does not function fully as yet. For
instance, that a pension fund must invest no more than a small
fraction of its assets, 5% perhaps, in the shares of its own company
or of any one company altogether.
We still have to solve the basic sociopolitical problem: how to build
the accomplished fact of employee ownership into the governance
of both pension funds and businesses.
Though Pension funds are the legal owners of the companies in
which they invest. But they not only have no ownership interest;
as trustees for the ultimate beneficiaries, the employees, they also
are legally obligated to be nothing but investors, and short-term
investors at that.
That is why it is worker ownership that has made the hostile
takeover possible. For as trustees, the pension funds must sell if
someone bids more than the market price.

Responsibility of Management
Law says management is solely accountable to the shareholders
whatever their wishes, even if those represent nothing more than
short-term speculative gains and asset stripping.
But the law was written for early nineteenth-century business
conditions, well before large enterprise and management came into
being.
And while every free-market country has similar laws, not all
countries hold to them.
In Japan, for instance, custom dictates that larger companies exist
mainly for the sake of their employees except in the event of
bankruptcy; and Japanese economic performance and even
Japanese shareholders have surely not suffered as a result.
In West Germany too, large enterprises are seen as going
concerns, whose preservation is in the national interest and comes
before shareholders gains.

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Accountability of Management

Interest of Shareholders

Both Japan and Germany have organized an extralegal but

highly effective way to hold business managements
accountable, however, in the form of the voting control
exercised by the big commercial banks of both countries.
No such system exists in the United States (or the United
Kingdom), nor could it possibly be constructed. And even in
Japan and Germany, the hold of the banks is weakening
fast.
So we must think through what management should be
accountable for; and how and through whom its
accountability can be discharged. The stockholders
interest, both short-and long-term, is one of the areas, to
be sure. But it is only one.

One thing is clear to anyone with the slightest

knowledge of political or economic history:
the present-day assertion of absolute
shareholder sovereignty is the last hurrah of
nineteenth century.
Though it violates many peoples sense of
justice.

Interest of Shareholders

Interest of shareholders and

Managements Accountability

Large enterprise, can do its economic jobincluding

making profits for the shareholdersonly if it is being
managed for the long run. Investments, whether in
people, in products, in plants, in processing, in
technology, or in markets, require several years of
gestation before there is even a baby, let alone fullgrown results.
Altogether far too much in societyjobs, careers,
communitiesdepends on the economic fortunes of
large enterprises to subordinate them completely to
the interests of any one group, including shareholders.

How to make the interests of shareholdersand this

means pension fundscompatible with the needs of the
economy and society is thus the big issue pension fund
socialism has to resolve. And it has to be done in a way
that makes managements accountable, especially for
economic and financial performance, and yet allows them
to manage for the long term.
How we answer this challenge will decide both the shape
and place of management and the structure, if not the
survival, of the free-market economy.
It will also determine Americas ability to compete in a
world economy in which competitive long-range strategies
are more and more the norm.

Management: A very few essential

Principals

Management: A very few essential

Principals

Finally, what is management? Is it a bag of

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

1.
2.

Management is about human beings. Its task is to make people capable

of joint performance, to make their strengths effective and their
weaknesses irrelevant.
Because management deals with the integration of people in a common
venture, it is deeply embedded in culture. What managers do in West
Germany, in Britain, in the United States, in Japan, or in Brazil is exactly
the same. How they do it may be quite different. Thus one of the basic
challenges managers in a developing country face is to find and identify
those parts of their own tradition, history, and culture that can be used
as building blocks.
The difference between Japans economic success and Indias relative
backwardness, for instance, is largely explained by the fact that Japanese
managers were able to plant imported management concepts in their
own cultural soil and make them grow. Whether Chinas leaders can do
the sameor whether their great tradition will become an impediment
to the countrys developmentremains to be seen.

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Management: A very few essential

Principals
3. Every enterprise requires simple, clear, and unifying
objectives. Its mission has to be clear enough and big
enough to provide a common vision. The goals that
embody it have to be clear, public, and often
reaffirmed.
What we really mean by this is the commitment
throughout an enterprise to some common objectives
and common values.
Without such commitment there is no enterprise;
there is only a mob. Managements job is to think
through, set, and exemplify those objectives, values,
and goals.

Management: A very few essential

Principals
4. It is also managements job to enable the
enterprise and each of its members to grow
and develop as needs and opportunities
change. This means that every enterprise is a
learning and teaching institution. Training and
development must be built into it on all
levelstraining and development that never
stop.

Management: A very few essential

Principals

Management: A very few essential

Principals

5. Every enterprise is composed of people with different skills

and knowledge doing many different kinds of work. For that
reason, it must be built on communication and on
individual responsibility.
Each member has to think through what he or she aims to
accomplishand make sure that associates know and
understand that aim.
Each has to think through what he or she owes to others
and make sure that others understand and approve.
Each has to think through what is needed from othersand
make sure that others know what is expected of them.

6. Neither the quantity of output nor the bottom line is by

itself an adequate measure of the performance of
management and enterprise. Market standing, innovation,
productivity, development of people, quality, financial
resultsall are crucial to a companys performance and
indeed to its survival.
In this respect, an enterprise is like a human being. Just as
we need a diversity of measures to assess the health and
performance of a person, we need a diversity of measures
for an enterprise.
Performance has to be built into the enterprise and its
management; it has to be measuredor at least judged
and it has to be continuously improved.

Management: A very few essential

Principals
7.Finally, the single most important thing to
remember about any enterprise is that there are
no results inside its walls. The result of a business
is a satisfied customer.
The result of a hospital is a healed patient.
The result of a school is a student who has
learned something and puts it to work ten years
later. Inside an enterprise, there are only cost
centers.
Results exist only on the outside.

Conclusion
About management, as about any other area of human
work, much more could be said. Tools must be
acquired and used. Techniques and any number of
processes and procedures must be learned.
But managers who truly understand the principles
outlined above and truly manage themselves in their
light will be achieving, accomplished managers
The kind of managers who build successful, productive,
and achieving enterprises all over the world and who
establish standards, set examples, and leave as a legacy
both greater capacity to produce wealth and greater
human vision.