Managing for the Future

Peter Drucker

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136009372
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This wide-ranging, future-oriented book is sure to number among the most important and influential business books of the decade. Drucker writes with penetrating insight about the critical issues facing managers in the 1990s: the world economic order; people at work; new trends in management and the governance of organizations.

Part I Economics

1 The Futures Already Around Us

DOI: 10.4324/9780080938059-1

In five important areas the 1990s will bring far-reaching changes in the social and economic environment, and in the strategies, structure and management of business.

For a start, the world economy will be quite different from what businessmen, politicians and economists still take for granted. The trend towards reciprocity as a central principle of international economic integration has by now become well-nigh irreversible, whether one likes it or not (and I don’t).

Economic relations will increasingly be between trading blocks rather than between countries. Indeed an East Asian block loosely organized around Japan and paralleling the ec and North America may emerge during the decade. Relationships will therefore increasingly be conducted through bilateral and trilateral deals in respect both of investment and of trade.

Reciprocity can easily degenerate into protectionism of the worst kind (that’s why I dislike it). But it could be fashioned into a powerful tool to expand trade and investment, if – but only if – governments and businessmen act with imagination and courage. In any event, it was probably inevitable. It is the response to the first emergence as a major economic power of a non-western society, Japan.

In the past, whenever a new major economic power appeared, new forms of economic integration soon followed (e.g., the multinational company, which was invented in the middle of the nineteenth century – in defiance of everything Adam Smith and David Ricardo had taught – when the United States and Germany first emerged as major economic powers. By 1913, multinationals had come to control as much of the world’s industrial output, (maybe more), as they do now). Reciprocity is the way, for better or worse, to integrate a modern but proudly non-Western country such as Japan (and the smaller Asian ‘tigers’ that are now following it) into a West-dominated world economy.

The West will no longer tolerate Japan’s adversarial trading methods of recent decades – a wall around the home market to protect social structures and traditions, plus a determined push beyond it for world dominance for selected Japanese industries. Yet the Western pattern of an autonomous, value-free economy in which economic rationality is the ultimate criterion, is alien to a Confucian society; is indeed seen by it as cultural imperialism. Reciprocity may make possible close economic relationships between culturally distinct societies.

Into Alliance

Second, businesses will integrate themselves into the world economy through alliances: minority participations, joint ventures, research and marketing consortia, partnerships in subsidiaries or in special projects, cross-licensing, and so on. The partners will be not only other businesses but also a host of nonbusinesses such as universities, health-care institutions, local governments. The traditional forms of economic integration – trade and the multinational company – will continue to grow, in all likelihood. But the dynamics are shifting rapidly to partnerships based neither on the commodity nexus of trade nor on the power nexus of ownership by multinationals.

There are several reasons for this rapidly accelerating trend:

• Many middle-sized and even small businesses will have to become active in the world economy. To maintain leadership in one developed market, a company increasingly has to have a strong presence in all such markets worldwide. But middle-sized and small companies rarely have the financial or managerial resources to build subsidiaries abroad or to acquire them.
• Financially, only the Japanese can still afford to go multinational. Their capital costs them around 5 percent or so. In contrast, European or American companies now pay up to 20 percent for money. Not many investments, whether in organic growth or in acquisitions, are likely to yield that high a return (except acquisitions by management experts such as Lord Hanson or Warren Buffet, who know how to find a healthy but undermanaged business and turn it around). This is especially true of multinational investment, whose risks are increased by currency variations and unfamiliarity with the foreign environment. Financially, it is hard to justify most of the recent acquisitions in America made by European companies. To say that they are ‘cheap’ because of the low dollar is nonsense: the companies acquired, after all, earn in these low dollars. Only a very big and cash-rich company can really still afford today to go the multinational route.
• The major driving forces, however, behind the trend towards alliances are technology and markets. In the past, technologies overlapped little. Electronics people did not need to know much about electrical engineering or about materials. Papermakers needed to know mainly about paper mechanics and paper chemistry. Telecommunications was self-contained. So was investment banking. Today there is hardly any field in which this is still the case. Not even a big company can any longer get from its own research laboratories all, or even most, of the technology it needs. Conversely, a good lab now produces results in many more areas than can interest even a big and diversified company. So pharmaceutical companies have to ally themselves with geneticists; commercial bankers with underwriters; hardware-makers like ibm with software boutiques. The need for such alliances is the greater the faster a technology grows.

Markets, similarly, are rapidly changing, merging, crisscrossing and overlapping each other. They too are no longer separate and distinct.

Alliances, while needed, are anything but easy. They require extreme – and totally unaccustomed – clarity in respect of objectives, strategies, policies, relationships, and people. They also require advance agreement on when and how the alliance is to be brought to an end. For alliances become the more problematic the more successful they are. The best text on them is not to be found in a management book; it is in Winston Churchill’s biography of his ancestor the first duke of Marlborough.

Reshaping Companies

Third, businesses will undergo more and more radical restructuring in the 1990s than at any time since the modern corporate organization first evolved in the 1920s. Only five years ago it was treated as sensational news when I pointed out that the information-based organization needs far fewer levels of management than the traditional command-and-control model. By now a great many – maybe most – large American companies have cut management levels by one-third or more. But the restructuring of corporations – middle-sized ones as well as large ones, and, eventually, even smaller ones – has barely begun.

Businesses tomorrow will follow two new rules. One: to move work to where the people are, rather than people to where the work is. Two: to farm out activities that do not offer opportunities for advancement into fairly senior management and professional positions (e.g., clerical work, maintenance, the ‘back office’ in the brokerage house, the drafting room in the large architectural firm, the medical lab in the hospital) to an outside contractor. The corporation, in stock market jargon, will be unbundled.

One reason is that this century has acquired the ability to move ideas and information fast and cheaply. At the same time the great nineteenth-century achievement, the ability to move people, has outlived its usefulness; witness the horrors of daily commuting in most big cities and the smog that hovers over the increasingly clogged traffic arteries. Moving work out to where the people are is already in full train. Few large American banks or insurance companies still process their paperwork in the downtown office. It has been moved out to a satellite in the suburbs (or farther afield – one insurance company ships its claims by air to Ireland every night). Few airlines still locate their reservations computer at the main office or even at the airport.

It may take another ‘energy crunch’ for this trend to become a shock wave. But most work that requires neither decision making nor face-to-face customer contact (and that means all clerical work) will have been moved out by the end of the decade, at least in Western countries; Tokyo and Osaka will take a little longer, I suspect.

(What, by the way, does this mean for the large cities, the children of the nineteenth century’s transport revolution? Most of them — London, Paris, New York, Tokyo, Frankfurt – successfully made in this century the transition from manufacturing centre to office centre. Can they make the next transition – and what will it be? And is the worldwide urban real-estate boom that began in eighteenth-century London at last nearing its end?)

The trend toward ‘farming out’ is also well under way, even in Japan. Most large Japanese hospitals are today cleaned by the local affiliate of the same maintenance contractor that services most American hospitals. Underlying this trend is the growing need for productivity in service work done largely by people without much education or skill. This almost requires that the work be lodged in a separate, outside organization with its own career ladders. Otherwise, it will be given neither enough attention nor importance to ensure the hard work that is needed not just on quality and training, but on work-study, work-flow, and tools.

Finally, corporate size will by the end of the coming decade have become a strategic decision. Neither ‘big is better’ nor ‘small is beautiful’ makes much sense. Neither elephant nor mouse nor butterfly is, in itself, ‘better’ or ‘more beautiful’. Size follows function, as a great Scots biologist, D’Arcy Wentworth Thompson, showed in his 1917 classic On Growth and Form.

A transnational automobile company such as Ford has to be very large. But the automobile industry also has room for a small niche player like Rolls-Royce. Marks & Spencer, for decades the world’s most successful retailer, was run as a fair-sized rather than as a large business. So is Tokyo-based Ito-Yokado, arguably the most successful retailer of the past decade. Successful high-engineering companies are, as a rule, middle-sized. But in other industries the middle size does not work well: successful pharmaceutical companies, for instance, tend to be either quite large or quite small. Whatever advantages bigness by itself used to confer on a business have largely been cancelled by the universal availability of management and information. Whatever advantages smallness by itself conferred have largely been offset by the need to think, if not to act, globally. Management will increasingly have to decide on the right size for a business, the size that fits its technology, its strategy and its markets. This is both a difficult and a risky decision – and the right answer is rarely the size that best fits a management’s ego.

The Challenge to Management

Fourth, the governance of companies themselves is in question. The greatest mistake a trend-spotter can make – and one, alas, almost impossible to prevent or correct – is to be prematurely right. A prime example is my 1976 book The Unseen Revolution. In it I argued that the shift of ownership in the large, publicly held corporation to representatives of the employee class – i.e., pension funds and unit trusts – constitutes a fundamental change in the locus and character of ownership. It is therefore bound to have profound impact, especially on the governance of companies: above all, to challenge the doctrine, developed since World War II, of the self-perpetuating and professional management in the big company; and to raise new questions regarding the accountability and indeed legitimacy of big-company management.

The Unseen Revolution may be the best book I ever wrote. But it was prematurely right, so no one paid attention to it. Five years later the hostile takeovers began. They work primarily because pension funds are ‘investors’ and not ‘owners’ in their legal obligations, their interests, and their mentality. And the hostile takeovers do indeed challenge management’s function, its role and its very legitimacy.

The raiders are surely right to assert that a company must be run for performance rather than for the benefit of its management. They are, however, surely wrong in defining ‘performance’ as nothing but immediate, short-term gains for shareholders. This subordinates all other constituencies – above all, managerial and professional employees – to the immediate gratification of people whose only interest in the business is short-term payoffs.

No society will tolerate this for very long. And indeed in the United States a correction is beginning to be worked out by the courts, which increasingly give such employees a ‘property right’ in their jobs. At the same time the large American pension funds (especially the largest, the funds of government employees) are beginning to think through their obligation to a business as a going concern; that is, their obligation as owners.

But the raiders are wrong also because immediate stockholder gains do not, as has now been amply proven, optimize the creation of wealth. That requires a balance between the short term and the long term, which is precisely what management is supposed to provide, and should get paid for. And we know how to establish and maintain this balance.

The governance of business has so far become an issue mainly in the English-speaking countries. But it will soon become an issue also in Japan and West Germany. So far in those two countries the needed balance between the short term and the long has been enforced by the large banks’ control of other companies. But in both countries big companies are slipping the banks’ leash. And in Japan pension funds will soon own as high a proportion of the nation’s large companies as American ones do in the United States; and they are just as interested in short-term stock market profits. The governance of business, in other words, is likely to become an issue throughout the developed world.

Again, we may be further advanced towards an answer than most of us realize. In a noteworthy recent article in the Harvard Business Review, Professor Michael C. Jensen, of the Harvard Business School, has pointed out that large businesses, especially in the United States, are rapidly ‘going private’. They are putting themselves under the control of small number of large holders; and in such a way that their holders’ self-interest lies in building long-term value rather than in reaping immediate stock market gains. Indeed, only in Japan, with its sky-high price/earnings ratios, is a public issue of equity still the best way for a large company to finance itself.

Unbundling too should go a long way toward building flexibility into a company’s cost structure, and should thus enable it to maintain both short-term earnings and investments in the future. Again the Japanese show the way. The large Japanese manufacturing companies maintain short-term earnings (and employment security for their workers) and long-term investments in the future, by ‘out-sourcing’. They buy from outside contractors a far larger proportion of their parts than Western manufacturers usually do. Thus they are able to cut their costs fast and sharply, when they need to, by shifting the burden of short-term fluctuations to the outside supplier.

The basic decisions about the function, accountability and legitimacy of management, whether they are to be made by business, by the market, by lawyers and courts, or by legislators — and all four will enter the lists – are still ahead of us. They are needed not because corporate capitalism has failed but because it has succeeded. But that makes them all the more controversial.

The Primacy of Politics

Fifth, rapid changes in international politics and policies, rather than domestic economics, are likely to dominate the 1990s. The lodestar by which the free world has navigated since the late 1940s, the containment of Russia and of communism, is becoming obsolescent, because of that policy’s very success. And the other basic policy of these decades, restoration of a worldwide, market-based economy, has also been singularly successful. But we have no policies yet for the problems these successes have spawned: the all-but-irreversible breakup of the Soviet empire, and the decline of China to the point where it will feature in world affairs mainly because of its weakness and fragility.

Besides, new challenges have arisen that are quite different: the environment; terrorism; third-world integration into the world economy; control or elimination of nuclear, chemical, and biological weapons; and control of the worldwide pollution of the arms race altogether. They all require concerted, common, transnational action, for which there are few precedents (suppressing the slave trade, outlawing piracy, the Red Cross are the successful ones that come to mind).

The past 40 years, despite tensions and crises, were years of political continuity. The next ten will be years of political discontinuity. Save for such aberrations as the Vietnam era in the United States, political life since 1945 has been dominated by domestic economic concerns such as unemployment, inflation or nationalization/privatization. These issues will not go away. But increasingly international and transnational political issues will tend to upstage them.

So?

The trends that I have described above are not forecasts (for which I have little use and scant respect); they are, if you will, conclusions. Everythin...

Table of contents

• Cover Page
• Half Title Page
• Series
• Title Page
• Copyright Page
• Contents
• Preface
• Acknowledgements
• Interview Notes on the Post-Business Society
• Part I. Economics
• Part II. People
• Part III. Management
• Part IV. The Organization
• Afterword The 1990s and Beyond
• Index