Community: The Concept of the Corporation Chapter 3

A student of mine, who has been my regular discussant on the community nature of business, has just returned to his home to take charge of an educational institution. He participated in the group as a high school student and is looking forward to leading it. It gave him, and a large group of other students, a new perspective of themselves. It is clear that as a leader, he hopes to expand that role.

He’s going to an organization that is in pretty good shape. No debts. No major problems. He needs to update the group’s technology but that is a fairly trivial issue. Yet, he’s going into it with hope, with a desire to do something new, to do the kinds of things that were one important to him.

Imperfection: The Concept of the Corporation Chapter 3

Imperfection. Drucker is talking about the need to understand the importance of the imperfect nature of society while supporting its goals. He has an interesting phrase. “Nothing is more contemptible than the sum resignation to the inevitable imperfections of society which in all ages has characterized the Philistines. (So long as the Philistines are a literary society, the provides a metaphor for a certain type of action, his insight is fine. Should there be a Philistine Anti-defamation organization, then he is in trouble.)

He writes about American society as dualist, as both pragmatic and realistic, but he is really talking about hope. We are best when we are a hopeful people, when we expect good, when we see the thing with feathers that hovers in the air, when we know that it has a substance.

Take America Back: The Concept of the Corporation Chapter 3

Drucker notes that Americans have a fluid connection to their society. In Germany, he could find people who despised the Nazis but loyally fought for their country in the second world war. He sees Americans as loyal to this combination of pragmatism and idealism. The loyalty produces the “take it back” mentality, the idea that the institutions of society no longer meet the goals of society and hence need to be reclaimed by those tho really understands those goals. In the 1960s, the left made those claims. It is now the right raising that issue. And so things progress.

Corporation as Social Institution: American Beliefs: The Concept of the Corporation Chapter 3

Drucker argues that American society has its foundation in Christian theology. While this claim has certain truths, in that the individuals who established that society and indeed the people who ran it through Drucker’s time, had that foundation, I wonder if this idea limits the usefulness of Drucker’s analysis. The challenge that this idea presents is the confusion that American society promotes Christianity or Protestantism or that it should do so or that it fails to do so. But if you back away from that controversy, you see a foundation for society that is easy to miss if you just claim that the founders were merely rational humanists of the enlightenment or that the 19th century leaders were merely following the logical steps of capitalism.

There is nothing in capitalism that calls for ethics. Indeed, the idea that the buyer should beware is only to prevalent. But there are indeed forces that demand that business transactions be ethic. It is easy to dismiss some of these forces as naive or quixotic but they are sincere, as Drucker notes, and see the gap between the ideal and the present reality. They are seen in business organizations, in business schools, in groups of business people who lunch together just to understand others better.


As I have noted before, The Economist ran an article on Drucker, as this is the centenary of his birth, and noted that he “asked the right questions.” They did not say that he provided the right answers. I suspect Drucker’s insistence on the Christian foundation of American Society gave them pause. It only gets more prevalence as his writings progress.

Happy 4th: The Concept of the Corporation Chapter 2

At long last, we are done with Chapter 2, which is really Section 2. Two more are left. Have a happy 4th of July. If you were do it in a Druckerian manner, you would do it in a decentralized fashion. You make the potato salad. Someone else should do the hot dogs.

The rightness of the cause: The Concept of the Corporation Chapter 2

Drucker is very confident in his ideas, especially if we remember that the Cold War is just starting at that we won’t see the failures of Communist production for another 40 years. I remember walking through an abandoned factory and apartment complex in Kiev. It occupied a huge block (150 yard by 400) with train tracks running through the middle. Bland, faceless and uninteresting. It was especially awful if you compared it with the apparatchik housing up the hill. Only a handful of people still lived there. They still had line up for the single grocery store in the corner of the area that had once served 10,000 people. It would be, I suppose, an example that Drucker would identify as the failure of centralized management.

Then again, there are parts of Detroit that look much the same way. He writing at time when Detroit is on the top of the economic pile.

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.