Wednesday, July 08, 2009

Reading :: The Concept of the Corporation

Concept of the Corporation
By Peter F. Drucker

This is actually Peter Drucker's second book, but it's the classic study of GM that began his long string of management publications. I read the 1964 edition, with a 20-year retrospective - the original 18-month study was completed in early 1945, and the manuscript was completed just days after Germany surrendered. The 1964 edition - written three years before The Effective Executive, which revisits many of the concepts of the earlier book - has an introduction and epilogue wrapped around the 1946 text, making it - from my perspective - a time capsule wrapped in a second time capsule. Personally, I found it disorienting to read about the successes of 1945 GM as the GM of 2009 headed into bankruptcy.

The events of 1945 weighed heavily on Drucker's mind, and he repeatedly discusses GM's wartime production as well as those of Nazi Germany and the USSR. He is quite concerned about democracy and capitalism, which, he emphasizes, are certainly not the same thing. But he argues that since the US has cast its lot with the free-enterprise system, "The central questions of American statesmanship must thus be: how does the free-enterprise system function and what are its problems; what can it do, what can it not do; and what are the questions yet to be answered?" (p.15). So he brings the tools of political science to bear on the corporation, the linchpin of the US free enterprise system (at the time). In particular, he attempts a three-level political analysis of GM: (1) the institution as autonomous, "judged in terms of its own purpose"; (2) the institution in terms of how it relates to "the beliefs and promises of the society which it serves"; and (3) "the institution in its relationship to the functional requirements of the society of which the institution is a part" (p.24). He argues against elevating one level over the others, because that's what the Nazis did (p.29); rather, "both our statesmen and our business leaders have to find solutions to the problems of the industrial society which serve at the same time equally the functional efficiency of the corporation, the functional efficiency of society, and our basic political beliefs and promises" (p.29).

So Drucker begins his work of understanding the corporation in political, particularly organizational, terms: the corporation is not raw materials or gadgets, but organization, and even its technical problems are primarily problems of human organization (p.31). And as he was to argue in The Effective Executive, Drucker emphasized that "no institution can possibly survive if it needs geniuses or supermen to manage it" (p.35). The organization, he says, must make average or even under-average people succeed by leveraging their talents, capacities, and initiative (p.36). It must develop independent leaders and balance power and responsibility between central management and local leadership (p.37). In fact, modern industrial enterprises need many more leaders than institutions normally do, he argues (p.37).

GM, he says, achieves this aim partially through decentralization. But Drucker is not talking about the sort of radical decentralization we might see in, for instance, terrorist networks. Rather, he means that GM's divisions were organized as autonomous units (p.47), in a sort of federalist arrangement (p.49) in which division heads "work through and with two closely coordinated committees, one on policy, one on administration" (p.48). This form of decentralization works out to be a set of smaller hierarchies comprising a larger one. Indeed, decentralization "can be applied only where there is at least a rudiment of genuine executive functions" (p.149). Decentralization at GM was not part of a master plan, but it didn't represent muddling through either; it developed through some basic principles and practices (pp.69-70). It resulted in efficiencies at each level (p.109) as well as developing more leaders in each division (p.110). He goes on to argue that decentralization reaches its potential only in a decentralized big business: these have the flexibility to develop, but also more opportunities and resources than small businesses (p.189).

Drucker becomes very interested in meaning as well, meaning as an aspect of autonomy. He retells the experiments in the late 1920s at Western Electric that led to the concept of the "Hawthorne Effect" - but whereas qualitative researchers think of the Hawthorne Effect as demonstrating that any observation can change the work, Drucker argues that the real moral is that productivity and satisfaction increase as long as the worker believes her or his work was receiving attention and recognition. He argues that mass production has largely leached away the positive recognition that workers seek: mass production leads to no completed product (from the worker's perspective), therefore no meaning, no satisfaction, and no "citizenship" (p.135). And, he adds, solutions such as company paternalism and unionism are superficial (p.136). Higher pay doesn't translate into higher satisfaction or lower absenteeism - only reinjecting meaning into work can do that, he suggests.

Drucker goes on to take on Marx, arguing that the contradiction of use-value and profit-value makes no sense (p.190). I'm not sure I grasp the argument he makes here, frankly. But in this discussion, he makes a claim that arrested me simply because it's far less true now than it was: "competition is usually severely limited by geography and communication" (p.204).

In his 1964 epilogue, Drucker amplifies some of his themes. He adds that decentralization, in the sense he uses in the book, makes sense only if the units are distinct businesses within a company; it makes no sense for materials businesses, such as a paper company, to decentralize. He also notes that the book didn't address knowledge workers, which in the intervening 20 years had become the most important group: "the 'knowledge workers' of the professional middle class are doubling in number about every eight years or so. They are rapidly becoming the representative and most important group both in business and in our society" (p.241). He argues that GM was the first large-scale knowledge organization and that "the modern corporation is a knowledge organization" (p.241). And he says that knowledge work has a broad impact: "Automation, for instance, is the substitution of knowledge work for manual work and of perceptual skills for manual skills" (p.242).

Would I recommend this book? Certainly not as your first Drucker book. The concepts are too unformed, the marks of the Second World War are too deep, and the corporation is too new to Drucker at this point. But if you've read some of his other books, this one provides a fascinating view into the study that began forming some of Drucker's most important contributions.


David Ronfeldt said...

Good, interesting review. Thanks for posting.

I'm wondering whether his three levels resembles John Boyd's three levels for analyzing strategy: the physical, the mental, and the moral -- where all three should reinforce each other. Just a passing thought.

My favorite Drucker book is The Post-Capitalist Society (1993), esp. where he observes that the classic nation-state turned into the unwieldy “Megastate” of the twentieth century by taking on excessive social, economic and military duties. To my particular interest, he foresees (p. 171) that: “[T]he post-capitalist polity needs a ‘third sector,’ in addition to the two generally recognized ones, the ‘private sector’ of business and the ‘public sector” of government. It needs an autonomous social sector.”

Clay Spinuzzi said...

I was wondering which Drucker book to pick up next. Post-Capitalist Society it is!