Human Resource Management
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THE FRONTIERS OF MANAGEMENT WHERE TOMORROW’S DECISIONS ARE BEING SHAPED TODAY Author:
Peter F. Drucker
Harvard Business School
Reviewed by: Dr Prafulla Kumar Dr. Prafulla Kumar Das is the Professor and Head of Marketing faculty at the Regional College of Management Autonomous, Bhubaneswar under Biju Patnaik Technical University; Orissa, India. He is Ph.D. in Business Administration and submitted the D.Litt. thesis in Business Administration to the Utkal University, Bhubaneswar. He is an accredited management teacher and a life member of All India Management Association (AIMA). Dr. Das has thirty five published/accepted papers and ten are on review. He developed nine case studies which were published in different International and national level journals. Dr. Das has been the reviewer for two national and five international level management journals. He also writes poems and translates poems from other languages like English, Hindi and Bengali. About the Author Peter F. Drucker Management Expert, Author And Teacher, (1909 - 2005) Peter Drucker’s career as a writer, consultant and teacher spanned more than six decades. His groundbreaking work turned modern management theory into a serious discipline, and he influenced or created nearly every facet of its application, including decentralization, privatization, and empowerment, and has coined such terms as the “knowledge worker.” Dr. Drucker cared not just about how business manages its resources, but also how public and private organizations operate morally and ethically within society. He respected the values of education, personal responsibility and businesses’ accountability to society. Dr. Drucker’s true legacy is his insistence on this value system, and its effect on business, society and individual lives. Born November 19, 1909, in Vienna, Drucker was educated in Austria and England and earned a doctorate from Frankfurt University in 1931. He became a financial reporter for Frankfurter General Anzeiger in Frankfurt, Germany, in 1929, which allowed him to immerse himself in the study of international law, history and finance.
Drucker moved to London in 1933 to escape Hitler's Germany and took a job as a securities analyst for an insurance firm. Four years later he married Doris Schmitz and the couple departed for the United States. In 1939, Drucker landed a part-time teaching position at Sarah Lawrence College in New York. He joined the faculty of Bennington College in Vermont in 1942 and the next year put his academic career on hold to spend two years studying the management structure of General Motors. This experience let to his book "Concept of the Corporation," an immediate bestseller in the United States and Japan, which validated the notion that great companies could stand among humankind's noblest inventions. From 1950 to 1971, Drucker was a professor of management at the Graduate Business School of New York University. He was awarded the Presidential Citation, the university's highest honor.
About the Book The lesson of the century with unprecedented disasters and cataclysms like two World Wars and villainous personalities like Stalin, Hitler, Mao and scores of other lesser known almost took the developed world to the point of no return. The ordinary people running everyday businesses took the responsibility to build for tomorrow. The impact of information on organization, the entrepreneurial surge in the US and the success of management were perceived by good many executives as threat. But, the call was for something different, something new and for something better. Capital movements rather than trade in goods and services became the driving force for the world economy. The link between them got loose and unpredictable. The collapse of raw material prices (except petroleum products) in comparison to the manufactured goods and services; rising agricultural output, increased production of forest output and metal and minerals impacted the economies of the USA, Brazil, Japan and India. The surplus production of food grains in most parts of the world except the Soviet Union pulled down the food prices. The startling development of lower raw material consumption for same amount of production of finished goods could be possible for optimal use of raw materials. Manufacturing production got uncoupled from manufacturing employment. The automation of blue collar jobs could be done in spite of rising production. Knowledge workers became the centre of gravity. The income from invisible trade gave rise to ‘symbol’ economy. It was to become the savior of two major economies like the USA and the UK. In fact, American entrepreneurial job machine gave rise to millions of employment when the industrial jobs were fast declining. All jobs were created in small and medium size low-tech or notech businesses. But the job creation in the innovative businesses put the welfare state to uncontrollable government deficit. The inflationary cancer inflicted severe blows to economic, social and political systems. OPEC would fail. Organization of petroleum exporting countries (OPEC) would be trying to maintain the cartel without lowering oil production. But, sectors such as manufacturing and transportation had started consuming less energy in comparison to the GNP growth. The strong OPEC players cut production by 40 per cent to support small players who could sell below the cartel price. The cartel would impair the market share and would permanently distort product
position. The developed world would be ending up buying costlier but politically safer sources of hydrocarbon. Compulsion would force reduced consumption. The multinationals would resort to systems decisions. That would take away jobs from the country. Currency fluctuation would take away earning from the subsidiary to future growth markets. But, economic realities would be forcing the multinational to become transnational. Political realities would force them become more nationalist, more protectionist and more chauvinistic. It is a tested wisdom that if a company is not trading currencies or commodities, it would lose heavily. Businesses, therefore, would learn to protect themselves against foreign exchange dangers through hedging. But, hedging cannot protect profit margin. Internationalizing company finances would be the best way for a purely domestic operator to protect it. Multinational might take the route to speculation. While floating exchange rates were supposed to be dependent upon the balance of trade, Governments would impose discipline to manage manipulation. Despite all the free-trade rhetoric, protectionism has been an American phenomenon. American ‘multi-nationalism’ expanded manufacturing job market and offered jobs to people till 1982 recession. But, the artificially appreciated dollar took the toll. Safe-guarding competitive economic strength has been a legitimate concern for the policy makers. It is to be put into the policy making process. It would not be surprising if increased protectionism found place for foreign position into policy making process. French Government priority to entrepreneurship, venture capital for starting business in Germany, British proposal for Government aid for starting enterprises would be some of the points to ponder. But providing jobs to people needs low-tech or no-tech business. So, defending, subsidizing and bailing out heavily unionized smoke-stack companies would continue. In the US, over 6, 00,000 industrial units were starting every year. Out of that only 1.5 per cent was high-tech. More people would prefer unglamorous, challenging jobs with good career opportunities in low or middle-tech companies, mostly in the government sector. High-tech provides imagination and would remain unprofitable for a long-time. On the other hand, Germany’s per capita industrial exports were four times that of the United States and two times that of Japan. It was much more balanced without being dependent on fewer industries. It had a booming job market and substantial entrepreneurial surge. All these were accomplished with almost no inflation, low interest rates, and low budgetary deficit. It had surging trade and payment surplus. The culture of apprentice training was for simultaneous practical and theoretical learning. Government was supportive. But these apart, the overriding urge for making industries competitive in the world market should be learnt from them. When one turns attention to Japan, the Japanese consider business a commitment. Life-long employment, commitment to supplier till the article exists, investment on people’s training, and importance to age for superior positions among equals are some of the factors to consider. Manufacturer taking care of distributor as well as supplier, and finding a joint venture would be some of the issues to keep in mind. Modern prophets of management like Schumpeter and Keynes shaped the thinking of economic theory as well as economic policy for the twentieth century. Although they had different political opinions, they were not antagonists to each other. Keynes was passionately attached to free market economy. He desired to keep politicians and governments out of business. Schumpeter, on
the other hand, was a believer of intelligent monopoly. He paid importance to asking right questions than getting right answers. Both Schumpeter and Keynes saw different economic realities and defined economics differently. Schumpeter was of view that the modern economy was always in dynamic disequilibrium and profit would fulfill an economic function. While Marx was of opinion that profit was the surplus value stolen from the workers, Schumpeter’s ‘The theory of economic development’ showed that only the innovators made genuine profit. His famous phrase ‘Creative destruction’ considered capital formation and productivity to maintain wealth producing capacity of an economy. Between Keynes and Schumpeter, Keynes was clever and brilliant whereas Schumpeter had the necessary wisdom. Marshall and Sloan laid down basic rules for picking right people. Those were:
No business to complain. If a person did not perform, the manager made a mistake; Responsible people in the organization were to perform; Decisions on people would better be done well; and It would be wise to assign jobs to someone whose behavior and habits were known.
To make these possible, it would be necessary to think through the assignment. Looking at potentially qualified people, thinking hard on these candidates, discussing them with several people who worked with them and making sure the appointees understood their jobs were some of the things to keep in mind. For measuring white-collar productivity, the ratio between the units of output and the number of white collar employees in the payroll might be crude but effective. The role of supervisors in an organization owing to automation would be declining. Changes in industrial relations, diminishing authority and growing generation gap would also play their roles. Companies were to devise training programs on the eve of changes in: technology, industrial relations and demographics. In the highly competitive environment, executive compensation would be the greatest obstacle to limit wage/ salary increase. Resentment in union ranks and even among professionals and managers led to their leaving the organization. The executive compensation was without adding a single unit in added production. In the US, the blue collar employees earned about $50,000 a year. It was almost equal to the after-tax compensation for engineers and middle level managers in unionized mass production units. In order to keep the employees young companies needed to develop policies. Satisfying legal imperatives for keeping aging executives, and the demographic imperative of creating promotional opportunities for the younger people would need imagination and creativity. It would be necessary to devise pathways for keeping an enterprise healthy through performance, productivity and challenge. Paying for the professional schooling would become the call of the hour. As costs were rising faster, financing professional education would be increasingly difficult. A fairly small portion or 5 per cent of the graduate’s earning above the median income - should be adequate to support a professional school and should give it the necessary financial independence. With the growth in professional education, there would be a growing mismatch between jobs and people. Qualifications, expectations and value of people for employment would be changing. Individual jobs and organizational structures would be changing owing to the change in technology. Shifts in population and age structure would have greater impact on the mismatch between jobs and labor
supply. Emergence of entrepreneurial people to promote innovation would force companies to create new structure, new relationship and new policies. Overall, employers would have to learn that jobs are products and are both marketed and purchased. Quality education would emerge as the new growth area. It would expect changes in economic rewards after a half century of steady decline. The fundamental change in the economic position of the low skilled was the central social event of the century. It gave a run to the industry’s most pampered darlings, the MBAs from prestigious B-Schools for five years to exceed the total compensation package to a blue-collar worker. But, things were changing. Although knowledge and skill is no guarantee to success but without it, failure is practically certain. Switching to knowledge-work and movement to new technologies would increasingly be determined by knowledge and skill. The systematic application of management theory other than public sector would be found at the Mayo Clinic. The most management conscious institutions were found to be military, modern university and hospital. But in a society of organizations, managing became a key social function and the key differential organ of the society. In new pluralism, all institutions are for single purpose - for trained and educated people. One would question the legitimacy of power and the right of employees as owners. Precisely, the success of management did not change the work of management. Rather, it greatly changed the meaning of management. It would be important to have control over staff work. Corporate service staffs analyzed, planned and supplied knowledge. They designed policy and gave advice. But, the staff-work should be limited to few tasks of high priority for being effective. The true results of staff-work would be: effective and productive operating people. In the ICT driven environment, middle management instead of shrinking is getting buoyed over thirty years. The growth has been healthy in some organizations. Like inflation, it pushed for rapid growth to become obese. It was planned not to fill vacancies coming out of retirement, death or resignation. The other way to reduce middle management was to go for job enlargement. It would be necessary to ask promotion hanky people: Are they really ready for promotion? Management would need information-based organization. Organizations like Citibank, Massey Ferguson were reshaping their managerial structure around the flow of information. The structure was flat with fewer levels of management. They could cut seven out of twelve levels. The information-based organization was disciplined with decisive leadership. It respected performance and demanded self-discipline. The focus on capital formation and productivity would be tantamount to accepting that the interests of the enterprise and the interests of workers were identical. It could be seen as a denial to union’s very reasons for existence. Modern society required strong management. It also needed an organ such as labor union. But to become a dynamic, effective, and legitimate organ, the labor union would have to remain relevant. The productivity in smoke stack industries in America must improve considerably. The compensation was double that of Japan or Germany. So, profitability and competitiveness got a beating. The labor leaders agreed in principle. But, they were not prepared to talk what they practiced over the years. If they did not accept restructuring, there would be definite disappearance of jobs and with them, labor unions.
Discussion on management as a liberal art teaches the World that people are profit centers. The communication must also be upward. It came naturally to Drucker to use value, traditions, culture and beliefs to form objectives of modern economy. He did not accept management as a science although it was fed by it. The stock-market maneuvering to take over, merge, or split a publicly held company would face determined opposition from board of directors and management. It was unknown in 1970s and 1980s. Unless management invited, companies did not go for acquisition. The lure of rapid growth or diversification put them to this greed. The structural changes within the economy, corporate capitalism and inflation contributed to the greed. The sources of cash, the lure of easy money, the dangers of defensiveness, and the demise of corporate guardians would need deliberations. Companies were to be protected from hostile takeovers. It would be necessary to follow five rules of successful acquisitions. At first, the acquiring company should think what it can contribute to the business it is acquiring. Secondly, whether it has the common core of unity with the acquired unit? Thirdly, the people of the acquirer company should respect the product, the market and the customer of the acquired company. Fourthly, within one year, the acquiring company must be able to provide top management to the new entity and within the first year of merger, managers of both the companies should receive substantial promotions across their lines. Larger companies could also pursue innovation. Merck, Citibank and 3M were the examples. In telecommunications, automobile, manufacturing, banking and finance, medicine, bio-genetics, bioengineering, and bio-physic, innovations were going at a high speed. To compete in this environment, companies would need large sums of money. Contrary to their proclamations, most companies failed to grow at the rate of 10 per cent. The challenge would be to have quality human resource, especially among managers and professionals. Opportunities would knock even stagnating industries. But, it would only knock on doors of those who deserved it. It was found that automation in manufacturing paid off within three years. It enabled manufacturing to compete lowcost foreign players by reducing the cost of not doing. Knowing what additional revenues automation might make requires market study. It requires a change from the focus on the cost per piece produced to total cost on manufacturing process. Thomas Watson, Sr. built IBM. He did not attain personal success until he was sixty. His tabulating machine and time clock achieved him moderate success. His attention to data and information made possible aerial bomb, and anti-craft gun. Watson’s computing machine was native to America. The visionary like him is difficult to come by in modern times. There is learning for everyone from ‘the lessons of the bell break up’. Anti-trust motions against IBM and AT&T forced them take critical decision of putting a phone in every room. Such reforms were to come to the market. Ten years after the anti-trust liquidation, AT&T brought back its technological leadership. Andrew Carnegie and Julius Rosenwald contributed to social responsibility of wealth and business. Rosenwald saw the need of competence, productivity and income through scientific farming. William C Norris looked at long lead times, willingness to experiment, and leaving the business in the case of non-result as a contribution of research and development. Reindustrializing America
would be for preparing America to compete internationally. The social responsibility of business would be creating capital to finance tomorrow’s jobs. The demand for capital formation would be as great today as it was 100 years ago. Although the first social responsibility of business would be to make enough profit to cover the future costs, proper social responsibility of business would be to turn a social problem to economic opportunity. Management was increasingly becoming an agent of social innovation. Researchers worked as a team to bring diverse skills and disciplines under science and technology research. The concept of ‘lab without wall’ functioned within a central strategy and under overall central direction. Karl Marx had the reasons to dismiss peasant as hopelessly ignorant and unproductive. It was proved through rise in firm productivity. During last 50 years, management, as a discipline, became a generic function of the society. It became global to make individual strength - knowledge productive and individual weaknesses - irrelevant. Everybody became specialized. It would be pertinent to mention Bismark. He created social innovation through health insurance, old age pension and insurance for workmen’s compensation against industrial accidents. Those were to prevent a class war that threatened the social fabric.