The Practice of Management

Peter Drucker

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781136356216
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

This classic volume achieves a remarkable width of appeal without sacrificing scientific accuracy or depth of analysis. It is a valuable contribution to the study of business efficiency which should be read by anyone wanting information about the developments and place of management, and it is as relevant today as when it was first written. This is a practical book, written out of many years of experience in working with managements of small, medium and large corporations. It aims to be a management guide, enabling readers to examine their own work and performance, to diagnose their weaknesses and to improve their own effectiveness as well as the results of the enterprise they are responsible for.

Part I: Managing a Business

Chapter 4: The Sears Story

DOI: 10.4324/9780080942360-6

What is a business and how it is managed – Unexplored territory – Sears, Roebuck as an illustration – How Sears became a business – Rosenwald’s innovations – Inventing the mail-order plant – General Wood and Sears’s second phase – Merchandise planning and manager development – T. V. Houser and the challengers ahead.

How to manage a business would seem to be of such importance as to insure a veritable flood of books on the subject. Actually there are almost none.

There are hundreds, if not thousands, of books on the management of the various functions of a business: production and marketing, finance and engineering, purchasing, personnel, public relations and so forth. But what it is to manage a business, what it requires, what management is supposed to do and how it should be doing it, have so far been neglected.^*

* The only exception I know of is the short essay by Oswald Knauth: Managerial Enterprise (New York: Norton, 1948). See also Joel Dean’s Managerial Economics (New York: Prentice-Hall, 1951). Though Dean is concerned mainly with the adaptation of the economist’s theoretical concepts and tools to business management, the book, especially its earlier, general parts, is required reading for any manager.

This oversight is no accident. It reflects the absence of any tenable economic theory of business enterprise. Rather than start out theorizing ourselves, we shall therefore first take a good look at the conduct and behaviour of an actual business enterprise. And there is no better illustration of what a business is and what managing it means, than one of America’s most successful enterprises: Sears, Roebuck and Company.^†

† For the data on Sears I have drawn heavily on Emmet & Jeuck: Catalogues and Counters; a History of Sears, Roebuck & Co. (Chicago: University of Chicago Press, 1950), one of the best company histories written so far. For the interpretation of these data I am alone responsible, however; and I also bear sole responsibility for the analysis of Sears’s present position.

Sears became a business around the turn of the century with the realization that the American farmer represented a separate and distinct market. Separate, because of his isolation which made existing channels of distribution virtually inaccessible to him_ distinct, because of his specific needs which, in important respects, were different from those of the city consumer. And while the farmer’s purchasing power was individually low, it represented a tremendous, almost untapped, buying potential in the aggregate.

To reach the farmer a new distribution channel had to be created. Merchandise had to be produced to answer his needs and wants. It had to be brought to him in large quantities, at low price, and with a guarantee of regular supply. He had to be given a warranty of reliability and honesty on the part of the supplier, since his physical isolation made it impossible for him to inspect merchandise before delivery or to seek redress if cheated.

To create Sears, Roebuck as a business therefore required analysis of customer and market, and especially of what the farmer considered ‘value’. Furthermore, it required innovation in five distinct areas.

First, it demanded systematic merchandising, that is, the finding and developing of sources of supply for the particular goods the farmer needed, in the quality and quantity he needed them and at a price he could pay. Second, it required a mail-order catalogue capable of serving as adequate substitute for the shopping trips to the big city the farmer could not make. For this reason the catalogue had to become a regular publication rather than an announcement of spectacular ‘bargains’ at irregular intervals. It had to break with the entire tradition of mail-selling and had to learn not to high-pressure the farmer into buying by exaggerated boasts, but to give him instead a factual description of the goods offered. The aim had to be to create a permanent customer by convincing him of the reliability of the catalogue and of the company behind it; the catalogue had to become the ‘wish book’ for the farmer.

Third, the age-old concept of ‘caveat emptor’ had to be changed to ‘caveat vendor’ – the meaning of the famous Sears policy of ‘your money back and no questions asked’. Fourth, a way had to be found to fill large quantities of customer orders cheaply and quickly. Without the mail-order plant, conduct of the business would have been physically impossible.

Finally, a human organization had to be built – and when Sears, Roebuck started to become a business, most of the necessary human skills were not available. There were, for instance, no buyers for this kind of an operation, no accountants versed in the new requirements of inventory control, no artists to illustrate the catalogues, no clerks experienced in the handling of a huge volume of customer orders.

Richard Sears gave the company his name. But it was not he who made it into a modern business enterprise. In fact, Sears’s own operations could hardly be called a ‘business’. He was a shrewd speculator, buying up distress-merchandise and offering it, one batch at a time, through spectacular advertising. Every one of his deals was a complete transaction in itself which, when finished, liquidated itself and the business with it. Sears could make a lot of money for himself. But his way of operation could never found a business, let alone perpetuate it. In fact, he would have been forced out of business within a few years, as all the many people before him had been who operated on a similar basis.

It was Julius Rosenwald who made a business enterprise out of Sears in the ten years between 1895 when he took control, and 1905 when the Chicago mail-order plant was opened. He made the analysis of the market. He began the systematic development of merchandise sources. He invented the regular, factual mail-order catalogue and the policy of ‘satisfaction guaranteed or your money back’. He built the productive human organization. He early gave to management people the maximum of authority and full responsibility for results. Later he gave every employee an ownership stake in the company bought for him out of profits. Rosenwald is thus the father not only of Sears, Roebuck but of the ‘distribution revolution’ which has made over twentieth-century America and which is so vital a factor in our economic growth.

Only one basic contribution to the early history of Sears was not made by Rosenwald. The Chicago mail-order plant was designed by Otto Doering in 1903. It was, five years before Henry Ford, the first modern mass-production plant, complete with breakdown of all work into simple repetitive operations, assembly line, conveyor belt, standardized, interchangeable parts – and, above all, with planned plant-wide scheduling.^*

* There is indeed a persistent legend at Sears that Henry Ford, before he built his own first plant, visited and carefully studied the then brand-new Sears mail-order plant.

It was on these foundations that Sears had grown by the end of World War I into a national institution with its ‘wish-book’, the only literature, outside of the Bible, to be found in many farm homes.

The second phase in the Sears story begins in the mid-twenties. Just as the first chapter was dominated by one man, Julius Rosenwald, the second chapter was dominated by another. General Robert E. Wood.

By the mid-twenties, when Wood joined Sears, the original Sears market was changing rapidly. The farmer was no longer isolated; the automobile had enabled him to go to town and to shop there. He was no longer a distinct market but was, largely thanks to Sears, rapidly assimilating his way of life and his standard of living to those of the urban middle classes.

At the same time a vast urban market had come into being that was, in its way, as isolated and as badly supplied as the farmer had been twenty-five years earlier. The low-income groups in the cities had outgrown both their subsistence standards and their distinct ‘lower-class’ habits. They were fast acquiring both the money and the desire to buy the same goods as the middle and upper classes. In other words, the country was rapidly becoming one big homogeneous market – but the distribution system was still one of separate and distinct class markets.

Wood had made this analysis even before he joined Sears. Out of it came the decision to switch Sears’s emphasis over to retail stores – equipped to serve both the motorized farmer and the city population.

Again a whole series of innovations had to be undertaken to make this decision possible. To the finding of sources of supply and to the purchase of goods from them, merchandising had to add two new major functions: the design of products and the development of manufacturers capable of producing these products in large quantity. ‘Class market’ products – for instance, refrigerators in the twenties – had to be redesigned for a ‘mass market’ with limited purchasing power. Suppliers had to be created – often with Sears money and Sears-trained management – to produce these goods. This also required another important innovation: a basic policy for the relations between Sears and its suppliers, especially those who depended on the company’s purchases for the bulk of their business. Merchandise planning and research and the systematic building of hundreds of small suppliers capable of producing for a mass market had to be invented – largely by T. V. Houser, for many years the company’s merchandising vice-president. They are as basic to mass distribution in Sears’s second phase as mail-order house and catalogues were in its first. And they are as distinct a contribution to the American economy.

But to go into retail selling also meant getting store managers. Mail-order selling did not prepare a man for the management of a retail store. The greatest bottleneck for the first ten or fifteen years of Sears’s retail operation, that is almost until World War II, was the shortage of managers. The most systematic innovations had to be in the field of manager development; and the Sears policies of the thirties became the starting point for all the work in manager development now going on in American industry.

Expansion into retail selling also meant radical innovations in organization structure. Mail-order selling is a highly centralized operation – or at least it has always been so in Sears. But retail stores cannot be run from headquarters two thousand miles away. They must be managed locally. Also only a few mail-order plants were needed to supply the country; but Sears today has seven hundred stores, each with its own market and its own locality. A decentralized organization structure, methods of managing a decentralized company, measuring the performance of store managers and maintaining corporate unity with maximum local autonomy – all these had to be created to make possible retail selling. And new compensation policies had to be found to reward store managers for performance.

Finally, Sears had to turn innovator in respect to location, architecture and physical arrangement of the stores. The traditional retail store was unsuited for the Sears market. It was not just a matter of putting the Sears store on the outskirts of the cities and of providing it with an adequate parking lot. The whole concept of the retail store had to be changed. In fact, few people even at Sears realize how far this innovation has gone and how deeply it has influenced the shopping habits of the American people as well as the physical appearance of our towns. The suburban shopping centre, touted today as a radical innovation in retail selling, is really nothing but an imitation of concepts and methods developed by Sears during the thirties.

The basic decisions underlying the expansion into retail stores were taken in the mid-twenties; the basic innovations had been made by the early thirties. This explains why Sears’s volume of business and its profits grew right through depression, World War II and post-war boom. And yet, almost thirty years after these basic decisions were taken, they are still not fully carried through into practice.

Merchandise planning – the systematic design of quality goods for mass distribution, the systematic development of mass producers for them – has still to be applied to the women’s fashion field. The traditional production organization for women’s fashions – the New York ‘Garment District’ – simply does not go with mass-distribution requirements. And while Sears has been able to transform other equally traditional industries to mass production and mass distribution – and is doing so today with singular success in Latin America – it has either been unable or unwilling to change the production system of women’s fashion goods.

Another area in which the transition has not yet been completed is that of public relations. Sears, under Julius Rosenwald, pioneered in public relations; and everyone at Sears considers it a vitally important area. Yet, although it was basic to the analysis that underlay the expansion into retail stores that the Sears market had become urban, at least in its shopping habits, Sears’s public relations are still focused primarily on ‘Sears, the farmer’s friend’. In view of the reality of the Sears market, this can only be considered an agrarian nostalgia unsuited to the needs of the business.

General Wood retired from the chairmanship of Sears in the spring of 1954, and T. V. Houser took his place. This well symbolizes the end of an era for Sears, which now faces new problems and new opportunities.

For the automobile that changed Sears’s market once seems to be about to change it again. In most of our cities driving has become so unpleasant, and parking so difficult, that the automobile is rapidly ceasing to be an aid to the shopper and is becoming its own worst enemy. At the same time, the typical Sears customer, the housewife, tends more and more to be employed and at work during shopping hours. Or else she has small children and nobody to leave them with when she goes shopping.

If this interpretation is correct, Sears needs as searching an analysis of market and customer as was made in the two earlier turning points in its history. New objectives will have to be developed. A new type of distributive organization might be needed in which the local store becomes headquarters for order-taking salesmen, travelling (perhaps with a sample car) from house to house. Such a development might well be foreshadowed in the growing volume of door-to-door sales during the last few years. This change would almost certainly require new concepts of organization, new compensation policies and new methods. It would create a new problem of finding the right personnel as difficult as was finding retail store managers twenty years ago. Servicing the Sears products in the customer’s home might well become of central importance – perhaps eventually as important as was the original money-back warranty of forty years ago. The bulk of customer buying might again shift to catalogue buying – though no longer by mail – either from a travelling salesman or over the telephone. And this in turn would require a technological change in the mail-order plant which, to this day, operates almost unchanged from the basic pattern developed fifty years ago by Otto Doering. The filling of customers’ orders whether received by mail, by telephone or through salesmen would appear to demand a fully automatic plant based on a radical application of the principles of Automation and feed-back.

Even in merchandising there might be need for new objectives; for today’s most important customer – the young married mother and housewife, who often holds down a job as well – is in many ways as distinct a market as the American farmer ever was in the days of his most complete isolation.

Once again, in other words, Sears may have to think through what its business is, where its markets are, and what innovations are needed.

Chapter 5: What is a Business?

DOI: 10.4324/9780080942360-7

Business created and managed by people, not by forces – The fallacy of ‘profit maximization’ – Profit the objective condition of economic activity, not its rationale – The purpose of a business: to create a customer – The two entrepreneurial functions: marketing and innovation – Marketing not a specialized activity – The General Electric solution – The enterprise as the organ of economic growth – The productive utilization of all wealth-producing resources – What is productive labour? – Time, product mix, process mix and organization structure as factors in productivity – The function of profit – How much profit is required? – Business management a rational activity.

The first conclusion to be drawn from the Sears story is that a business enterprise is created and managed by people. It is not managed by ‘forces’. Economic forces set limits to what management can do. They create opportunities for management’s action. But they, by themselves, do not determine what a business is or what it does. Nothing could be sillier than the oft-repeated assertion that ‘management only adapts the business to the forces of the market’. Management not only finds these ‘forces’; management creates them by its own action. Just as it took a Julius Rosenwald fifty years ago to make Sears into a business enterprise, and a General Wood twenty-five years ago to change its basic nature and thus ensure its growth and success during the depression and World War II, it will take somebody – and probably quite a few people – to make the decisions that will determine whether Sears is going to continue to prosper or will decline, whether it will survive or will eventually per...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Contents
• Preface
• INTRODUCTION: THE NATURE OF MANAGEMENT
• PART I. MANAGING A BUSINESS
• PART II. MANAGING MANAGERS
• PART III. THE STRUCTURE OF MANAGEMENT
• PART IV. THE MANAGEMENT OF WORKER AND WORK
• PART V. WHAT IT MEANS TO BE A MANAGER
• CONCLUSION: THE RESPONSIBILITIES OF MANAGEMENT
• Selected Bibliography
• Index