Job Advice: The Concept of the Corporation Chapter 2

He ends with leadership. He ends with the advice we give to new graduates. Work for a small company first. Your will learn more. You will get a better understanding of the business. You will move into leadership ranks faster.

“A senior executive of one of the big divisions after speaking at length
about the advantages of his centralized organization, concluded by saying that they were attainable only because the smaller decentralized divisions supplied the top leadership,” Drucker noted. It works “very much in the manner in which a big baseball club will get its talents from its small farms, but its revenue from the
big.timers. (127)

Annual Model Year: The Concept of the Corporation Chapter 2

In his autobiography, Sloan presents the annual model change as a way of improving the product. He is a little more or a Taylorist than Drucker.

Drucker argues that it is a way of bringing market forces to bear on units that cannot be decentralized.

We all see what we admire in the picture.

In a note that shows how thoroughly this discussion is rooted in 1946, Drucker notes that few organizations could afford an annual model change. “the annual model is something few industries could have”. (124) Many, many industries run on production cycles that are far shorter than a year. That is one of the changes that has happened in the past 50 years, a change that could not have been managed without software.

Nearing the End: The Concept of the Corporation Chapter 2

As we near the end of this chapter, we’re led through a discussion how centralized firms or units can still be managed in a way that makes them responsive to market forces. It is pretty straightforward but does not really anticipate the argument that markets are merely producers of information and that an individual need not be present at the market to get the information.

Socialist Production: The Concept of the Corporation Chapter 2

Here is the question. Are there forms of production that are capitalist and other forms that are socialist? The answer is probably yes, if you look at the national economic scale.

Does the answer to that question change if you look within a company? In particular, can certain products be only manufactured only by a process that must be considered socialist? Must automobiles be a capitalist product? How about computers? How about software?

Here is the real issue. If decentralization represents modern free enterprise, are there some products that require such a tightly managed, step by step production process that they cannot be produced by a decentralized organization? Is our commitment to free enterprise measured by the amount of parallelism in our production processes?

This probably a moot point but it does suggest one of the boundaries between engineering and political economy, between Taylor and Drucker. “The importance of the question whether decentralization is absolutely more efficient than centralization does not lie, primarily, in its application to business management,” Drucker concludes. “It is actually the question whether a socialist economy can be as efficient economically as a free-enterprise economy.” (p122)

Golden Tower of the Fisher Building: The Concept of the Corporation Chapter 2

Nearing the end of Chapter 2.

If you know Detroit, you know the Golden Tower of the Fisher Building, which is on West Grand Avenue, which is more or less the active and healthy section of downtown. The General Motors building is across the street from it. The Motown artists lived north of it.

I was going to do a bit of a note about how the Fisher Building represented the decentralization of General Motors but that idea fell apart. First, Fisher Body never occupied the Fisher Building. The family build it after they sold Fisher Body to General Motors. (For the record, I worked for Fisher Oldsmobile, which was owned by minor and distant branch of the family.)

Second, Fisher Body was not very decentralized. They had one plant for each of the major GW auto lines, which were all managed out of Detroit. Third it was highly efficient as a centralized unit.

Drucker argues that it was able to survive as a centralized unit because it made a single, simple products. That may be the case or not. There is aways a question of why it existed as a distinct unit at all and was not divided and merged into the different automobile lines.

It was originally an artifact of the early manufacturing process. People bought automobiles without the body and then bought a body later. Certain carriages apparently worked on a similar principle. It survived because it survived because it used a specialized manufacturing technique – stamped sheet metal – that was not common in other parts of the company.

Drucker’s example of Fisher Body may not tell us much about how to a company any more than the Fisher Building tells us much about GM. It is not centralized. It seems to work. It may not be a logical division of the company. It certainly is no longer. It was dissolved in 1984.

Generalizability: The Concept of the Corporation Chapter 2

Things often unfold as you are reading. Details come clear. The kind of process that Drucker is works best in situations where productive process can be isolated in a single unit. These ideas may not be the panacea that Drucker claims.

There are really two problems for most companies. The first is indeed that a number of productive processes can’t be done in a way that allows for competition between units. The second is that a single product or single production process can’t provide many useful market-based yardsticks for managers beyond cost accounting. We move from return on investment to minimizing cost, which is radical change. We move the market to Frederick Winslow Taylor.

Drucker gives some examples. They may provide models for midsized companies. We shall see.

Motors Holding: The Concept of the Corporation Chapter 2

It costs to balance power. Inequality is free or at least cheap.

General Motors balanced power, got two organization to have the same goals or at least similar goals, with Motors Holding Company. Motors Holding is General Motors venture capital firm. It finances young dealers, looking for the strongest individuals. As it is a unit of GW, it aligns the interest of these dealers with the corporation. When a dealer is having trouble, this unit can go to the units of General Motors as that dealer’s representatives. A manager in General Motors “will be much more willing to accept Motors Holding as unbiased and as likely to be right than he would be
to accept a dealer.” Drucker must be talking about dealers that must small businessmen in deed. A business of two or three people. A salesman, a manager and a mechanic? My olds dealership had 3 salespeople in the 50s. It had a dozen in the 70s.

It is a clever idea but Drucker’s text suggest a few issues. First, the profits of Holding Motors is limited. In effect, GM is paying to balance the goals of dealers with the goals of the company. Second, the dealer is required to buy back shares of the dealership as quickly as possible. It suggests that the dealer may also be paying for this service by not having the same kind of flexibility to negotiate terms.

Dealer Council: The Concept of the Corporation Chapter 2

Drucker spends little time with this. The idea is obvious. GM has a council of 36 dealers that represent the 12,000 in existence in 1946. It’s a good ideas. It helps with the flow of information. It helps GM executives imagine what it is to be a dealer. However, it does not really balance power.

Used cars : The Concept of the Corporation Chapter 2

Apparently General Motors had to develop expertise in the used car market in order to support its dealers. When I worked in the business, that market was international, though confined to North America. Michigan cars were taken to Mexico and sold there, as they were generally in poor shape because of the salt used on the roads in winter. Used Cars from Texas and Florida were brought to Michigan, as they were in better condition and could be sold for more.

Once or twice a month, the used car team appeared at the dealership. They were gypsies of a sort, moving north and south, dealing for cars, and notifiying their carriers when and where to pick up their purchases and deliver their sales. I drove them on and off the trucks, a frightening task, though I don’t recall that I ever dropped a car off the rail. I think I came close on at least one occasion, though.

The used car team communicated with our dealership through a stream of telephone numbers, phone booths I suppose, that they left at the dealership like a trail of bread crumbs. Cell phones and the internet must have made that process much easier.

Good will: The Concept of the Corporation Chapter 2

Drucker spends a bit of space arguing that the repubation of a dealership and its community relations were assets. Is that a new concept in 1946? I can’t believe it is. But it does represent a issue that we will track. The value of a good name.

Dealer Relations : The Concept of the Corporation Chapter 2

Profit comes not only from buying low and selling high but also from increasing turnover and reducing risk. In the auto industry, turnover is connected to the model year and will be dealt with later. The reduction of risk is connected directly to dealer relations and making them feel that their commitment is secure.

I don’t know the kind of dealer that Drucker is describing. I helped the local Oldsmobile dealership move from a 1950s era building to a 1970s. The 70s building was a substantial investment and the owners were quite proud of it. The 1950s, though showing its age, was nice for its time. Judging from old pictures, the original owners clearly felt that they had moved into a new class.

What came before? Was it basically a field and a shack? Drucker is suggesting that dealers may have been little more than an open field because he talks about General Motors guaranteeing that dealer contracts will run for at least 2 years and will give at least three months notice. It seems to me that my dealership could have gotten the kind of loan that they would have needed to build either the 1950s or 1970s facilities on those kind of terms. But perhaps that is what the dealer policies were offering. General Motors had a strong market research group. Drucker hints that they had a strong sense of what the 1950s automarket would look like. The central administration was probably trying to protect their ability to terminate contracts while offering enough security for local dealers to get decent loans.

In business, nothing is ever free.

Losing the Franchise: The Concept of the Corporation Chapter 2

Last year, when General Motors ceased to be General Motors, or at least the General Motors of Peter Drucker, a large number of dealerships lost their franchises. At the time, I remember it being a bit odd that GM could do that unilaterally. Only when I read this did I realize that dealerships were not a franchise arrangement but a sales agreement, a right to sell. Drucker notes that in this kind of arrangement, the small dealers stake their capital, good will, and sacred honor on the manufacturer with little guarantee of stability. It was probably was a decent arrangement in the 50s and 60s when auto sales were climbing. That arrangement changed in the fall of ’73 when the first oil crunch hit.

The 1973 model year had the biggest sales for American manufacturers ever. It never achieved that again. With that fall, when sales stalled before lumbering forward, we saw the first signs that things were never going to be the same again. I was new enough to business to think that the problem was merely the fact that the owners of the dealership were risking their capital on their business. Little did I know that the power relationship with the manufacturer was so unequal.

Thus the world changed.

I’ll take it to my manager: The Concept of the Corporation Chapter 2

We know the little drama. We’re negotiating a deal for a new car with a sales person. The distances between prices offered and asked has narrowed but remains substantial. The sales person then says “I’ll see what I can get from my manager” and leaves the office. After a suitable interval, he or she returns with a grin on the face. “I can give you a great deal” are the first words out of their mouth.

We’ve come to believe that this little act is a piece of performance art, a little attempt to push the customer into the deal. I worked in a dealership for 2 years and generally believe that to be the case. Yet, at the same time, it hints at real conflict between the interest of dealer and manufacturer.

The manufacture wants to sell new cars. This means that they want the used cars to be expensive – high trade-in value to encourage new car sales, high market value to discourage used car sales. The dealer wants used cars to be inexpensive – greater margins on new car sales and a greater opportunity to make profits on used car sales.

This is a difficult problem that can’t be easily solved by having good management policies for the manufacture or better information flow. Policies can blunt the issue to substantial extent but can’t eliminate it. Better information flow only strengthens the manufacturers flow.

During my employment, the information flow was handled by paper and requirements. Once or twice a month, I would have to drive to the district with a pouch of paper that listed the vehicle sales, new and used with prices. In return, I got a check for profits that the manufacturer had held.

Public Relations: The Concept of the Corporation Chapter 2

This is an interesting little section but a little sad. Here, public relations refers to corporate relations with the public, a two-way flow of information, not merely publicity for the company. Drucker seems to think that companies can put together boards that will facilitate that flow. General Motors is trying to do something in Dayton that will involve all local industry.

I know that there are indeed community roundtables and business discussion groups. Information does flow through these methods. But so often, it is really nothing more than opinion surveys and corporate messages. Abstraction upon abstraction with a dose of alienation. Not an easy problem to solve. Not an issue for which Drucker gives a lot of ideas. It is not merely board reform, he notes, because boards of directors are not representational. Members are supposed to think about the good of the organization not the good of the segment that support them. If such is the case, then community relations are clearly an operational activity.

Talent and Leadership : The Concept of the Corporation Chapter 2

It is not Drucker’s view. And it is all the more disturbing when you remove the word “special”, which is easy to do as you read it. The “man with leadership
ability should be separated at a very early stage from the man with special skill and talent.” If read quickly, it suggests that leaders are people without “skill and talent.”

In fact, the problem of developing leaders hits an issue, and hits it hard, that bothers engineers and technical people. Leadership seems to be a general quality, something apart from technical knowledge or skill. How do you develop leadership qualities? Drucker asks, arguing that they include “imagination and understanding.”

He presents two ideas, though neither seems to be especially convincing. One is to rotate promising people through different units of the corporation. The second is to use the central staff to train individuals. Both seem to be mechanical solutions to a problem that resists such an approach. “the question of specialist versus generally educated person is not a problem that is unique to the big-business corporation.” He admits. “It is part of the debate on vocational versus liberal education that has been agitating the educational world for a long time.” But Drucker thinks that corporations may be able to solve the problem more easily than educational institutions.

We shall see.

Executive Isolation : The Concept of the Corporation Chapter 2

Isolation. How could they think like that? How could they make such a decision? How stupid are they?

Common questions that employees ask about management. All start from a rather nasty point of view but they get at a real problem. Executives have to isolate themselves from lower level workers, customers, suppliers and the general public. Drucker blames this problem on social isolation but it has a deeper cause, though a cause that may not have been as obvious in Drucker’s day. A fundamental issue is that of abstraction. Anyone who makes decisions from large amounts of information must traffic in abstractions. Abstractions inevitably hide information.

Drucker does see imagination as the cure for isolation and it is a good choice of word. It is the ability to make an accurate mental image from the material before you. Human contact is one way of getting that point of view for it can inculcate empathy, the ability to feel as others do. Still, the ability to imagine how others are thinking is not as easy as merely sharing conversation with different people about homes and children. It is one step, but not the last one. How do you tell the story of someone you don’t know well. Every narrative ultimately is a tale about the storyteller. It takes a lot of effort to understand that opinions, approaches and even conceptions that differ from our own can be honestly held.

I would have thought that Drucker, which his concern for metaphysics, would have thought more deeply about this.

ReConversion : The Concept of the Corporation Chapter 2

Drucker clearly loves the story of how GW converted to war production and then reconverted to civilian production. An example of decentralization at work. No unified plan for the company, Drucker claims, but a series of principles that the company attempted to use to shape its approach to the war. This section largely deals with the relation between central and divisional management, which is Drucker’s chief concern, and it largely presents the story as successful. The company did what it did and started reconversion to a peace time economy in the spring of 1943.

It is hard to read this without thinking of the stories of war fraud. The Truman Commission. All My Sons. Still, the most interesting point to me is one that is unexamined. In the section about reconversion, the central management decides on a major expansion program even though they anticipate that the domestic demand for automobiles will be of short duration. What did they foresee for the post-war years? Did they know that most of the productive capacity of the world would have been bombed to pieces? Did they anticipate the GI bill, or the Cold War? This seems unlikely. Why did they make such plans? General Motors faced its greatest crisis of the first half century in the 1922 post war recession. Drucker is writing as if that event never existed.

War Conversion : The Concept of the Corporation Chapter 2

The Gospels are rarely considered as a source of wisdom for military planning. “What king,” says the book of Luke, “going to make war against another king sitteth not down first and consulted whether he be able with ten thousand to meet him that cometh against him with twenty thousand?” (Luke 14:31, In case you have any interest).

Drucker is more than passing familiar with the Bible but he does not make the connection with this idea as he describes how General Motors prepared for the war. It is, of course, a planning problem that requires lots of information. The senior management began working on war plans in January 1941, about 6 months after the US military starting making their plans. They looked at it systematically, a decided two things:

• First, they would bid only on difficult and critical tasks, a strategy that would allow them to learn the most from the war.
• Second, their ability to take war work would be limited by the amount of labor in the 20 areas of the country in which their plants were located. They completed their plans by January 1942 and identified the limits of work for each division.

Most of the research on General Motors war conversion deals with those labor issues. They see it as expanding the bureaucratic management of labor and the rise of human resource departments. All of that is fine but I am reminded that the mathematician Karl Pearson got involved in the first world war because the British government needed a survey of available labor. He had the staff able to handle it. What tools and technologies were needed by GM in 1942?

Fireflies: The Concept of the Corporation Chapter 2

It was a short week and hot. Summer is here and with it came the fireflies. As you walk home, you can see them hovering near the shrubs. They will be here for 4 weeks, maybe 5. They like hot weather but will be driven off by the oven of July. Or they will have mated by then and retired to air-conditioned hovels in the earth to raise their kids.

Drucker has returned to planning, which is the great contradiction of his writings. He doesn’t like it in governments. He likes it in companies. He sees way in which management is starting to displace the market but he has yet made no comment about it. There are still enough market indicators guiding their decisions.

We are clearly at a cusp with this company, the start of the evening when the fireflies appear. General Motors already has the ethos that I will be tracing in the modern workplace. It already has much of the mechanism for gathering and using data –facts – that software will support. It is clearly all handled by hand at this point, and there are few companies with the resources to do that kind of work. We will see how they start to build that structure.

Organic Growth: The Concept of the Corporation Chapter 2

Perhaps I was too cynical yesterday. Perhaps I was too impressed with the similarities in language between Hard Times and Concept of the Corporation. In fact, I’ve been in organizations run by opinions and know the frustrations of dealing with demons.

Drucker balances the insistence of fact against the idea that General Motor’s decentralization was not imposed by a dictatorial power but grew naturally and adjusted to needs of people and organizations.

Human organizations often have to take detours, he notes. “Being human they run never aspire to perfection and must thus make imperfection workable. Being human they also have to reckon with the very considerable differences of temperament, ability and rhythm between individuals.”

This split, which marks the difference between the human and the absolute, is the issue that makes Drucker interesting.

Gradgrind: The Concept of the Corporation Chapter 2

Drucker is clearly not Charles Dickens. And Dickens clearly is not the ancestor of Drucker, though the two have a number of things in common, especially a deep appreciation for human frailty.

This is the section that is the guidelines for Gradgrind in Dickens’s Hard Times.
'NOW, what I want is, Facts. Teach these boys and girls nothing but Facts. Facts alone are wanted in life. Plant nothing else, and root out everything else. You can only form the minds of reasoning animals upon Facts: nothing else will ever be of any service to them. This is the principle on which I bring up my own
children, and this is the principle on which I bring up these children. Stick to Facts, sir!'


Drucker says the same idea: “Objective criteria of cost and efficiency, of return on the invested capital, and of competitive standing in the market, General Motors aims at the elimination of personal and subjective elements in the relationship between boss and subordinate, central management and divisional management.” (75)

Drucker is arguing that business decisions need to be make on hard data, especially market share and return on investment. By making decisions on hard numbers, everyone knows what they have to do and how they be judged. This kind of operation makes the atmosphere of the company more pleasant for the management. (and of course Drucker is only talking about management).

“In fine, this objective yardstick should not only make possible informal and friendly personal relations, a spirit of teamwork and a free and frank discussion. It should also—at least, that is what the people in General Motors claim— make the organization of management as a team on a federal basis natura1 and almost inevitable by erecting strong barriers of fact against action based on nothing but seniority and rank.” (71)

Freedom and Informality: The Concept of the Corporation Chapter 2

This chapter begins with a disturbing thought. It claims that GM was once an informal and relaxed company. I have gotten used to the idea that GM was once the largest defense contractor and that Detroit was once the wealthiest city in the country, though I suspect that claim wilts a bit when you look at New York carefully. Still, the GM I knew in my youth was not a bastion of casual activity.

Still, that is what Drucker claims: “There is little emphasis on title, rank or formal procedure. Indeed, the one thing that is most stressed by all executives is the “informality” that exists in the relationships among the members of this group and in the division of their work.” (p 63)

It is a description that reminds me of the early days of Silicon Valley, when news reports were full of casual clothes and undisciplined hours. At the time, I thought that this approach came from a combination of California weather and money from the military industrial complex. In fact, it probably had more to do with the fact that the reporters were describing engineering complexes rather than production facilities. Engineers have a different relationship to their tools than workers.

Still, this picture of Detroit in the 1940s is not Detroit in the 1970s. If it was true, and I will assume that it was, Drucker is clearly using it to claim that the management of General Motors was a good. It was a good place to work, he is saying, so the management must be good.