Management s New Paradigms SS 2004 Universität Salzburg Gregor König Martin Heimlich Marcus Harringer May 17, 2004 1
Contents 1 Assumptions about the discipline and practice of management 3 1.1 Management is business management..................... 4 1.2 There is, or there must be, one right organization structure......... 4 1.3 The one right way to manage people..................... 6 1.4 Technologies and end uses are fixed and given................ 7 1.5 Management s Scope is Legally Defined.................... 8 1.6 Management s Scope is Politically Defined.................. 9 1.7 The Inside is Management s Domain..................... 9 2
Abstract Peter F. Drucker, in his book, Management Challenges for the 21st Century, provides insightful and timely information for individuals and organizations alike as they work toward common goals in the next one hundred years. Drucker reviews the seven major assumptions that have been held by experts in the field of management for most of the 20th century, and shows why they are now obsolete. He goes on to give new assumptions for the 21st century, ones that are essential for viewing the roles of individuals and management in both profit and not-for-profit organizations. Neither individuals nor organizations can be successful if they stick with the old assumptions, according to Drucker, just as the horse and carriage can no longer compete with the automobile. If Drucker is right, then this has major implications for individuals, organizations, and management consultants who would use process models, personality type theory, and ideas of human consciousness to improve individual, team, and organizational performance. Basic assumptions about reality are the paradigms of a social science, such as management. 1 Assumptions about the discipline and practice of management There is a critical difference between a natural science and a social discipline, according to Drucker. The physical universe displays natural laws that describe objective reality. Natural laws are constrained by what can be observed, and these laws tend to be stable or change only slowly and incrementally over time. A natural science deals with the behavior of OBJECTS. But a social discipline such as management deals with the behavior of PEOPLE and HUMAN INSTITUTIONS. The social universe has no natural laws of this kind. It is thus subject to continuous change; and this means that assumptions that were valid yesterday can become invalid and, indeed, totally misleading in no time at all. What matters most in a social discipline such as management are therefore the basic assumptions. And a change in the basic assumptions matters even more. Drucker identifies the following old assumptions for the social discipline of management. Three Old Assumptions for the Discipline of Management: 1. Management is Business Management 2. There is - or there must be - ONE right organization structure. 3. There is - or there must be - ONE right way to manage people. Four Old Assumptions for the Practice of Management: 1. Technologies, markets and end-users are given. 3
2. Management s scope is legally defined. 3. Management is internally focused. 4. The economy as defined by national boundaries is the ecology of enterprise and management. 1.1 Management is business management When people hear of management they do not even hear the word management ; they automatically hear business management. This assumption regarding the universe of management is of fairly recent origin. Before the 1930s, writers and thinkers like Frederick Winslow Taylor, who invented scientific business management, or Chester Barnard (a president of the new Jersey Bell Telephone Company), all assumed that business management is just a subspecies of general management. Things have changed with the Great Depression(Wall Street stock-market crash of 1929 precipitated the Great Depression) and its hostility to business and its contempt for business executives. Management in the public sector, however, was rechristined, and was called public administration. At the same time and for the same reason the term hospital administration was used for the management of hospitals. Not to be call management was, in other words, political correctness in the Depression Years. By 1950 business had become a good word- larely the result of the performance during Word War II of American business management. Now we are beginning to unmake this sixty-year-old mistake (renaming of business schools). But the assumption that management is business management still persists. It is therefore important to say that management is not business management. 1.2 There is, or there must be, one right organization structure Large cooperations emerged late in the 19th century. Early management scientists, such as Henri Fayol(1841-1925) believed there was a single best way to organize companies. Centralization and vertical integration (buying suppliers) was the theme. World War I showed that centralized structure couldn t work on a massive scale. Immediately after WW-I first Pierre S. Du Pont (1870-1954) and then Alfred Sloan (1875-1966) developed the principle of decentralization. In the last few years teams have become recognized to be the one right organization for most everthing. 4
By now, however, it should have become clear that there is no such thing as the one right organization! What about the end of hierarchy? This is nonsense, since there are always situations which require final decision making. A crisis for example. Other situations, require deliberation and others still require teamwork. There is also a need for a number of different organization structures coexisting sidy by side. Certain forms of research require strict functional organization, other kinds of research, however, require teamworking from the beginning. We can conclude that there is no perfect organization that fits all needs of different companies, but there are indeed some principles of organization. 1. Organization has to be transparent. 2. One person must have the authority to make final decisions. 3. As flat as possible. But these principles don t tell us what to do, but what not to do! However, teams are right for many situations. And there are many ways to go about team organization. The well-equipped future manager will have an invertory of team alternatives in her toolkit. Yet we now practice the most extreme personality cult of CEO superman. Instead of searching for the right organization, management needs to learn to look for the organization that fits the task. 5
1.3 The one right way to manage people This subsection deals with the assumption: There is one right way to manage people - or at least there should be. This assumption was proposed by Douglas McGregor in his book The Human Side of Enterprise in 1960 and by Peter Drucker himself in 1954. In 1962 Abraham H. Maslow disproved this assumption and Peter Drucker admits, that he was wrong. Some other assumptions are based on this (wrong) assumption. One of those covers the topic Management of people. 80 years ago employees were typically full-time workers, which were dependend on the organization concerning their career and living. It was especially true for low-skill or no-skill workers, that they were treated as subordinates Today there is a growing number of part-time employees and individual contractors. There are even people, who work for outsourcing contractors, which means they are no longer in the organization but just work for it. An increasing number of employees are knowledge workers. They are typically highskilled full-timers and are treated as associates. One important fact abaout knowledge workers is, that they know more about their job, than their boss does. Todays superiores have not held the subordinates job, although they did a few decades ago. Knowledge workers still depend on their bosses. Especially when it comes to being hired, fired or promoted. It is the boss task to give a direction and a score for the entire organization. This task is compareable with an orchestra and its conductor. In Peter Drucker s opinion knowledge workers should be managed, as if they were volunteers. The knowledge workers means of production is their knowledge, which makes them mobile. Money is not enough motivation for them, they need a real challenge. Vice versa it can be said, that too less money leads to demotivation. Employees are partners, which makes them equal. They cannot be ordered, but have to be persuaded. This makes management a marketing job which. At the end of the subchapter Peter Drucker even thinks abaout redefining the whole task: Management of people should be Managing for performance. The new starting point would be the definition of the results. One does not manage people. The task is to lead people. And the goal is to make productive the specific strength and knowledge of each individual. 6
1.4 Technologies and end uses are fixed and given In the early days of the Industrial Revolution it was true that each industry had its own unique technology. As examples the textile and chemical industry can be mentioned. Technologies and End Uses were fixed and given. Werner Siemens was the first one, who realized that and invented the research lab in 1869. He hired scientists who invented what is today known as electronics. In these days outside technology had no impact on the industry. Today these assumpions are no longer true. Industries have become dependent on different technologies. This can be seen regarding the pharmaceutical industry, which is dependent on genetics, medical electronics, microbiology, and so on. Technologies do not run in parallel lines any more, the constantly criss-cross. For Werner Siemens the assumption was true, that the own research lab produces everything exclusively for the own company or industry. But taking the Bell Labs as an example it can be seen, that things changed. The Bell Labs were founded in 1920 and until the 1960ies their concept worked well. They were able to produce everything for their telephone system. But then they invented the transistor. They had not enough use for it and sold the technology for a very low price. Today we know that all modern electronic companies are based on the transistor. Today all new telephone inventions like fiber glass and digital switching come from outside industries. According to Peter Drucker the assumpion End uses are fixed and given is not true. Since the invention of plastic after World War II enduse is obviously no longer tied to a certain product. Another assumption is made about the Want. It can be reached by various means, so the want itself has to be unique, not the means. No technology pertains to any industry and all technologies are capable to be important to any industry. There is not one given enduse for any product and no use is going to be linked to any one product. 7
1.5 Management s Scope is Legally Defined This is another old assumption that is presented in this chapter. Of course this idea is implied by the command and control structure found in many companies today. According to Drucker the popular opinion that management s scope is limited by the border of the enterprise is outdated and he mentions some examples of a different management strategy, the so called Keiretsu: 1. General Motors (GM) was founded in the year 1910 by William C. Durant. Different to common practices, at least back then, he achieved this by buying up other small automobile manufactures. He did not stop at buying up car builders but also integrated most of its suppliers into GM. By the end of this process GM produced 70% of all the parts built into its cars itself. This enabled Durant to become the market leader by having a decicive advantage through joint planning, development and cost control from the very first planning stage of a product to its delivery to the customer. To keep the sub-companies competitive, all of them had to sell at least 50% of their products outside of the GM company. This ensured on the one hand side that the quality stayed at a high level and on the other side that they produced at reasonable costs. 2. Another Keiretsu is Sear Roebuck which was the biggest retailer of appliances and hardware in the USA in the 1920s. Once again the strategy differs from its predecessors. Suppliers where not bought as a whole, but only bound through small minority stakes and additional contracts. 3. The Marks & Spencer company which sells virtually everything (clothing, food, furniture,...) extended Sear s management strategy in the way that its suppliers where only attached via contracts. The Japanese gracefully embraced this form of business management in the 60s and are responsible for the name Keiretsu. Drucker proposes that the Keiretsu is still not the way things should be done because it is based on power and does not live up to the requirements posed upon modern enterprises. Today the distinction between suppliers and customers has become difficult since companies engaged more and more in cooperations as equal partners. So he gives an outline what modern management should be like: The new assumptions on which management both as a discipline and as a practice, will increasingly have to base itself is that the scope of management is not legal. It has to be operational. It has to embrace the entire process. It has to be focused on results and performance across the entire economic chain. 8
1.6 Management s Scope is Politically Defined Drucker demonstrates this assumption by presenting the following two management structures: Multinationals: National boundaries equal management boundaries, this is the underlying assumption which led to the so called Multinationals: Multinationals basically consist of two or more separate companies located in different countries. The only things they share are the name and the bank account. Drucker mentiones Fiat as an example: Before World War I Fiat had a department in Italy and one in Austria. The Italian had an italian management, italian employees, bought all its supplies in Italy and sold all of its products in Italy. The same was true for the austrian department, only the other way around. So when Austria and Italy became enemies during the war, both companies kept on working, just as if nothing has happened. Transnational: Today the most common form of international enterprises is the Transnational. In contrast to the Multinational the individual tasks (research, design, engeneering,...) are organized in a worldwide structure. For example a pharmaceutical company has 10 labs in 10 different countries, but they all report to one research director in the headquarters. Also the labs may be scattered around the globe. Countries became cost centers, not a unit for organization, strategy and production. Drucker s new paradigm is: National boundaries are important primarily as restraints. The practice of management and by no means for businesses only will increasingly have to be defined operationally rather then politically. 1.7 The Inside is Management s Domain Drucker is not very fond of a distinction between management and entrepreneurship. According to him both a management, which does not learn to innovate, and an entrepreneur, who does not learn how to manage his company, won t last very long. He states that results of any institution exist only on the outside, so management has to organize the resources for results outside the organization. The final new paradigm Drucker presents in this chapter is: Management s concern and management s responsibility are everything that affects the performance of the institution and its results whether inside or outside, whether under the institution s control or totally beyond it. 9