El caso de la comunidad Sepur Zarco como experiencia exitosa

“The First Function of Management is Economic Performance”. Management failed if it did not produce goods and services at a price that the customer was willing to pay. In doing so it must “maintain the wealth producing capacity… entrusted to it” (1954:7). Production at the right price satisfied the customer’s wants, maintained profit, and replenished production capacity.

Drucker saw the American free market society as dependent on the above happening to ensure its survival (1954:6-7). He noted that in the last few years’ productivity had become topical, but was little known and difficult to measure. It was the balance of all factors of production. It was different from the traditional standards of output per worker hour, because in a modern economy

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increase in productivity could never be achieved by muscle effort, only by substituting muscle with something else. One of the substitutes was capital equipment. The economist Kuznets established the benefit of equipment substitution through studies showing the direct relationship between increased productivity and investment in capital equipment in the United States. Kuznets’ work relegated into a secondary position the traditional economist’s view that

productivity was related to increased capital formation (ibid:39-40). The publication that Drucker made reference to could not be found, but other works by the Russian-born American Nobel Laureate confirm his authority on the relationship between productivity and capital investment, such as his 1953 book Economic Change – Selected Essays in Business Cycles, National Income

and Economic Growth.

Drucker defined productivity as the ability to produce more or better than all the inputs (ibid:12) or “the greatest output for the smallest effort” (ibid:39). It was results rather than effort (ibid:42). The principles of production were of serious concern not just to manufacturers, but to all

businesses including distribution, and even advertising as identified by Harvard’s McNair (ibid:41). See also his many publications including his book Readings in Marketing McNair & Hansen 1949. As with the other functions of the business, production was affected by the structure of the enterprise (ibid:43). But before objectives could be set for production the

principles of production needed to be examined. Here Drucker’s views had changed since he first wrote about the principles of production and praised Ford and Taylor as the great innovators “of

the worker as an automatic standardized machine” (1950:102 & 286). Production management as

practised fifty to sixty years ago was now hopelessly out of date as management had learned that the first principle of production is to bring the machines to the work, rather than the work to the machines.

Drucker’s correction was that, the organisation of production had to move away from the two blind spots of Scientific Management. The first was that of breaking work down into the simplest

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operation to be carried out by separate workers. The second was derived from Taylor’s most valuable insight “the divorce of planning from doing”. But importantly, Drucker concluded that it did not follow that the planner and the doer had to be different people (1954:277-278).

For Drucker, since Taylor evolved the principles of Scientific Management, which was further developed by Fayol, Gantt, Frank, and Lillian Gilbreth, few new insights had emerged despite incredible efforts; the exception was Hopf and the further work of Lillian Gilbreth (ibid:275). It was the two blind spots that produced worker resistance to changes that prevent increased productivity (ibid:279). In relation to organising work Juran was credited with examining the assumption that man was a badly designed machine (ibid:281). (See Quality Control Handbook by Juran et al 1951, and the Revised Editions by Juran et al 1962)

(i) Automation

Drucker observed that the new mass production technology of twenty years previous was being replaced by a new principle of production, Automation, which he likened to a new Industrial Revolution (ibid:20). However like all revolutions he saw it as gradual, as people had yet to be trained in sufficient numbers. The old would continue as in the New York garment industry, which still operated in a similar fashion to the first Industrial Revolution of about 1750 (ibid:104). Automation was a technology. Like every other technology it was a system based on concepts where its technical elements are the results not the cause. Automation was based on three concepts. The first was Metaphysical, which is based upon the belief that behind the flux of phenomenon there are basic patterns of stability and predictability. The second was based upon the nature of work. It was not focused on skill as the integrating principles, as was the early individual production; nor upon Ford’s mass production, which was focused for its organisation principles on the product. Its focus was on the process as an integrated and harmonious whole. The aim was for the best process that fulfils the criteria of producing goods in the greatest variety,

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at the lowest cost, with the least effort, all at the greatest stability. Possibly the more rigid the process, the greater may be the variety of goods produced. The third concept was that what was significant must be pre-established. This then was used to act “as a pre-set and self-activating

governor of the process” it was setting up of the process that produces the planned result. The

mechanics of control were secondary to the technology of Automation (ibid:18-19). “It is

applying logic to work” (ibid:93). It made Decentralisation more essential to give managers

flexibility and autonomy (ibid:21).

Automation might be mass production with a conveyor belt, or the organisation of cheque clearing without the ‘push button’. Drucker predicted that just as many of the pundits of the 1930s were wrong when they forecast that mass production would throw people out of work; Automation (ibid:17) would have a similar effect of producing more job opportunities, not less. It would also accelerate the upgrading of workers skills with more managers and technicians needed. Drucker also questioned pundits’ forecast that businesses would have to be bigger and concluded that in some instances smaller units may be pertinent. The production of raw steel was given as an example. The fashionable pundit prediction that Drucker challenged, was that the increase in capital would be tremendous. His view was that capital might increase but the force is ‘brain power’ (ibid:20-21). [Idea: Decades later, in the 1990s, Drucker identified brainpower as the new capital ‘brain power’ that replaces ‘muscle’ to increase productivity (ibid:40)]. But what was certain was that Automation would change the nature of work (ibid:279). For Juran Automation was also the integration of “quality” but although Juran was mentioned in the text, Drucker missed that essential linkage (1962: Chapter 22 Juran et al)

Drucker’s position in Concept was that, while knowing little about production, he believed that a new theory of mass production technology was required, which focused on the individual worker and tapped into his imagination. From this position two things had changed. First Drucker had found the new technology which would produce continuous opportunities for decades to come.

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“… in the consistent application of the new mass production principle and secondly in the application of the principles of Automation” (ibid:105). The second change was that while

Drucker still did not claim to have production expertise, he had now acquired the knowledge to define the principles. He could now tell the managers that to adequately discharge their jobs they would have to understand the principles of production as being “an understanding that efficient

production is a matter of principles rather than of machines and gadgets” (ibid:105).

Drucker set down what knowledge managers would need to acquire about the principles of productivity. To date there were three or maybe four basic systems of industrial production (i) unique production – e.g. as a battleship or skyscraper; (ii) mass production – old style, e.g. the production of uniform products; (iii) mass production – new style in which diverse production was assembled from uniform parts; (iv) process production – e.g. an oil refinery or chemical works. Each of the systems had their own basic principles that made specific demands on management. There were two rules of application: (i) the more vigorously and completely the set of particular principles were applied the more effective they were; (ii) each principle of productivity had its own requirements, application and limitations. These were least advanced in unique production and most advanced in process industries. Each had its applicability and progress from the least to the most advanced might not be possible. There were a further two general rules for managers: (i) when moving from one system to another, new things had to be learned rather than emphasis being placed on doing old things better; (ii) the better managers performed, the easier the demands of the principles were to meet (ibid:93-99). The manager had two basic productive sources, equipment and human resources. In fact only one was primary, the human resource, since it alone could make equipment productive. Therefore, a job must be engineered (ibid:284-90).

Organising people for work, which is the manager’s greatest productive resource, will be examined in a following section.

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Drucker concluded that the manager needed to set objectives for productivity as in any other key function of the business. That equipment was required for manufacturing and almost all other activities of a business was a fact. Therefore the manager should see the limitation of the physical equipment as a trigger for the need for initiative to create new opportunities rather than accept the initial limitations as a constraint. But this demanded initiative, and was not supporting

“management by drives”, which Drucker identified as common in the manufacturing function. “Management by drives” was where resources were committed impulsively without any planning or forethought (ibid:92). This was not managing the situation. This was not an action of

competence.

Of performance, productivity measurement was the only method of comparing the performance of managers in different units of the enterprise and outside [Idea: later became Benchmarking]. Production measurement measured the yield of the utilisation of the resources. The consistent improvement of productivity was management’s most important job. [Idea: This is Kaizen see IBM] Productivity was also an area where a variety of factors make clear measurement difficult. Drucker used as a basic concept, Contributed Value [Idea: ‘Added Value’ or ‘Value Added’], which for the first time provided a tool for setting goals for productivity improvements. The use of ‘Contributed Value’ should make possible the use of ‘Operational Research’ and ‘Information Theory’ as being able to identify alternative actions and predict their outcomes (ibid:69, 70 & 363). With these new principles of production, and the emergence of better techniques for setting objectives for productivity and progressive production alternatives were emerging for production.

Drucker noted that Automation had been discussed almost exclusively as a production principle; however, in his view, it was a principle of work in general. The production manager would now have to be able to think across the other objectives of the business and integrate his speciality within the whole. This was a practical application of Wertheimer’s Gestalt. Now the production manager’s vision would not only have to be from management’s view point but also from the

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customer’s viewpoint, with regard for the external providers of distribution, materials, and customer services (ibid: 71 & 363-364). [Idea: Outsourcing].

(ii) Profit

Profit received extensive examination in Society. Drucker started from his established position that “the guiding principle of business economics … it is the avoidance of loss” the reason being that this enabled a business to fulfil its first duty, to survive (ibid:44). The ‘profit motive’ of the classical economists was rejected (ibid:34). What Drucker was not making clear was that no-one would enter into business merely to avoid loss. The presumption was that, once in business, avoiding loss when the ‘business cycle’ is in the downturn, is the guiding principle.

A decision about the nature of business started with profit and profitability but it was not the cause of the business but the result. The result was the consequence of the performance of the business of the marketing, innovation and productivity. Drucker’s thesis was that MbO was the integration of all functions of the business together with measurement, which was also a major function in itself. But profit was the only possible test, as Communist Russia discovered when they tried to abolish it in the 1920s (1954:44) only for it to be reinstated later as the first law of Russian management (1954:380-381)

But Drucker argued profit could not be a reason for the business because it would misdirect managers and endanger the long-term survival of the business. A management approach of ‘short term’ profit as being the single objective was flawed as it misdirected and harmed the business as the long-term essentials of research and replacement of obsolete equipment were neglected. It directed management towards the worst practice, that of short-term expediency (1954:59). [Idea: short-termism].

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Despite the difficulty in defining profit, without it, the essential rationale for the survival of the business disappeared. Profit, according to Drucker, served three purposes: (i) it was the ultimate test of business performance; (ii) it was the “risk premium” for ‘being in’ and ‘staying in’

business. When profit was viewed as such there are no such things as profits, only costs; (iii) it supplied future capital for expansion and innovation through two sources: (a) retained profit and (b) through attracting external capital. This reference to external capital was a change in

Drucker’s previous position when capital could come only from the enterprise’s self-generated funds of profit. However as before, the target was that the minimum profit level had to ensure the survival and the prosperity of the enterprise (1954:73-74).

Having argued the necessity of profit, Drucker was left with two dilemmas: the first was the need for higher profits for the survival of a progressive economic society, and second the resistance to adequate levels of profit from the public and the hostility of the workers to profit (1954:309-311). In Drucker’s view the ownership of small shareholdings would not change the worker’s resistance to profit (1954:310). This attitude stems from the enterprise having its origins in the economic sphere. Drucker referred to Society and his article The Employee Society (January 1953) in which he examined the consequences of American society becoming an employee society during the last fifty years. He noted that the majority of people expected to spend their working life employed, which had changed social values and demands. The age of the manager had caused the formation of another basic institution the Unions. The emergence of the employee society had created a tremendous challenge and opportunity.

Drucker believed that the current perception was that the enterprise existed in two economic systems, internal, and external. The worker believed that he operated in the internal system which converted in practice to his wages. The enterprise believed that it operated in an external system which was represented by what it received for its products, which were market determined. The

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manager’s perception of the enterprise was that internally there were only costs, while externally were the results (1954:264-265), which created the profit or surplus essential for survival.

Drucker’s conclusion was that the worker was opposed to the idea that profit was produced by the enterprise. The worker’s belief was based upon the ancient superstition that as the producer ‘he’ produces profit. The reality was that it was “the purpose of the business to create a customer” and that this market maintained employment. If this could be accepted then the outcome was harmony between employer and employee (1954:265, 310-311). Profit sharing might strengthen the

message that performance created employment and income. But in Drucker’s experience, income was what employees want most, rather than profit incentives.

The first responsibility of the enterprise to society was to operate at a profit because it was the “wealth creating” and “wealth producing” organ of society. Only slightly less important than profit is growth, by productivity. It was because of the importance of profit and its dependence upon productivity that Drucker saw them as integrated (1954:380). Drucker’s conclusion was that the deep-seated hostility to profit was a threat to the social and economic systems of America and that management has the responsibility to overcome the problem (1954:382). What Drucker was arguing was that job insecurity was the worker’s first fear. The workers believed that it was in their interest not to increase production because the maximum output equated to fewer workers to produce for a finite demand. Drucker’s counter to this argument was that more productivity produced more goods, either resulting in lower prices or a better product. Both outcomes result in growth in the economy creating more demand and causing job security rather than reducing it. The next argument in the worker position was that if they did increase productivity then the profit from so doing was not theirs, nor did they have any interest in the profit. Drucker’s counter argument was that without profit there was no job security for the worker; therefore their resistance to higher productivity and profit was exacerbating their greatest fear, that of unemployment.

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When Drucker wrote that there were two basic productive sources, equipment and human

resources, and concluded that only the human resource could make equipment productive, he was emphasizing the dependence of the enterprise on believing that the workers want to work. But the argument did not stop at this essential fact of life of the enterprise. By motivating the worker to achieve improved productivity only part of the complex equation was satisfied. Drucker

continued that equipment, as a component of productivity, needed to be considered in a structured rather than an intuitive manner. New tools were available as exposed by Kuznets who had made the consideration of equipment as a replacement for labour a reality for measuring productivity. We were now moving to the next key idea of “Managers must Measure” and to answer the question of “How Can We Measure?” This was the topic of the next section, which will also consider with others the work of Dean in his 1951 book Managerial Economics on the

measurement of equipment and capital costs. Dean extended the traditional boundaries for what was measured. He considered that only running costs were being measure and not related capital costs. Additionally he extended the parameters that measured the declared profit. Also Juran’s contribution on profit was through increased productivity, which was based upon reducing defective work by ‘quality control’. Each gain he regarded as “gold in the mine”.

Drucker’s linking of automation and profit had originality. His ideas on automation were an important record of the work of others. The importance was that it gave the general management reader accessibility to a new emerging principle of management. That Drucker missed the significance of Juran’s work on quality control was not surprising as it followed Drucker’s previous declaration in Concept that he was not an expert in production methods. But, because