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Federal Decentralization: Requirements

As a minimum the unit must contribute a profit to the company rather than merely contribute to the profit of the company.

Federal decentralization has stringent requirements. Federal decentralization is applicable only where a company can truly be organized into a number of genuine “business.” This is its basic limitation. As a minimum the unit must contribute a profit to the company. And it must be a genuine profit determined by the objective judgment of the marketplace.

Federal decentralization will work only if the top-management job is clearly defined and thought through. Federalization, if properly applied, makes top management capable of doing its own job precisely because it does not have to worry about operations, but can concentrate on direction, strategy, objectives, and key decisions for the future. The federal principle demands great responsibility from the operating units, the autonomous businesses. They are given the maximum of autonomy; and this requires that they assume the maximum of responsibility. Federal decentralization requires centralized controls and common measurements. Both the managers of the autonomous businesses and top management must know what is expected of each business, what is meant by “performance,” and what developments are important. To be able to give autonomy one must have confidence. And this requires controls that make opinions unnecessary. A federal unit of a company is autonomous, but it is not independent and should not be. Its autonomy is a means toward better performance for the entire company.

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Federal Decentralization: Strengths

The greatest strength of the federal principle is that it alone of all known principles of organization prepares and tests people for top-management responsibility at an early stage.

In “federal decentralization” a company is organized int a number of autonomous businesses. Each unit has responsibility for its own performance, its own results, and its own contribution to the total company. Each unit has its own management which, in effect, runs its own “autonomous business.”

In a federally organized structure, each manager is close enough to business performance and business results to focus on them. The federal principle therefore enables us to divide large and complex organizations into a number of businesses that are small and simple enough that managers know what they are doing and can direct themselves toward the performance of the whole instead of becoming prisoners of their own work, effort, and skill. Because management by objectives and self-control become effective, the number of people or units under one manager is no longer limited by the span of control; it is limited only by the much wider span of managerial responsibility. The greatest strength of the federal principle is, however, with respect to manager development. This by itself makes it the principle to be used in preference to any other.

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The Federal Principle

Federalism relieves top management from operating duties and sets it free to devote itself to its proper functions.

What the enterprise needs is a principle that gives both the center and the parts genuine managerial functions and powers. This principle is federalism, in which the whole of the enterprise is conceived as made up of autonomous units. The federal enterprise and all its units are in the same business. The same economic factors determine the future of the whole as well as of all units; the same basic decisions have to be made for all of them; the same kind and type of executive is needed. Hence the whole requires a unified management in charge of the basic functions: the decision what business the enterprise is in, the organization of the human resources, and the selection, training, and testing of future leaders.

At the same time, each unit is a business by itself. It produces its own products for a distinct market. Each unit must, therefore, have wide autonomy within limits set by the general decisions of the management of the whole. Each unit has to have its own management. The local management will be primarily an operating management; it will be concerned mainly with the present and immediate future rather than with basic policy. but within a limited scope it will have also to discharge real top-management functions.

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Characteristics of Organizations

Organization is a tool. As with any tool, the more specialized its given task, the greater its performance capacity.

Organizations are special-purpose institutions. They are effective because they concentrate on one task. If you were to go to the American Lung Association and say, “Ninety percent of all adult Americans suffer from ingrown toenails; we need your expertise in research, health education, and prevention to stamp out this dreadful scourge,” you’d get the answer: “We are interested only in what lies between the hips and the shoulders.” That explains why the American Lung Association or the American Heart Association or any of the other organizations in the health field get results.

Society, community, family, have to deal with whatever problem arises. To do so in an organization is “diversification.” And in an organization, diversification means splintering. It destroys the performance capacity of any organization—whether business, labor union, school, hospital, community service, or church. Because the organization is composed of specialists, each with his or her own narrow knowledge area, its mission must be crystal clear. The organization must be single-minded, otherwise its members become confused. They will follow their specialty rather than applying it to the common task. They will each define “results” in terms of that specialty, imposing their own values on the organization. Only a clear, focused, and common mission can hold the organization together and enable it to produce results.

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Hierarchy and Equality

One hears a great deal today about “the end of hierarchy.” That is blatant nonsense.

To attack industrial society, as would the sentimental equalitarian, because it is based on subordination instead of on formal equality is a misunderstanding of the nature of both industry and society. Like every other institution that coordinates human efforts to a social end, the corporation must be organized on hierarchical lines. But, also, everybody from the boss to the sweeper must be seen as equally necessary to the success of the common enterprise. At the same time, the large corporation must offer equal opportunities for advancement. This is simply the traditional demand for justice, a consequence of the Christian concept of human dignity.

The demand for equal opportunities is not, as is often mistakenly assumed, a demand for absolute equality of rewards. On the contrary, equal opportunities automatically assume an inequality of rewards. For the very concept of justice implies rewards graduated according to unequal performance and unequal responsibility.

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Limits of Quantification

Quantification for most of the phenomena in a social ecology is misleading or at best useless.

The most important reason why I am not a quantifier is that in social affairs, events that matter cannot be quantified. For example, Henry Ford’s ignorance in 1900 or 1903 of the prevailing economic wisdom that the way to maximize profit was to be a monopolist—that is, to keep production low and prices high—led him to assume that the way to make money was to keep prices low and production high. This, the invention of “mass production,” totally changed industrial economics. It would have been impossible, however, to quantify the impact even as late as 1918 or 1920, years after Ford’s success had made him the richest industrialist in the United States, and probably in the world. He had revolutionized industrial production, the automobile industry, and the economy in general, and had, above all, completely changed our perception of industry.

The unique event that changes the universe is an event “at the margin.” By the time it becomes statistically significant, it is no longer “future”; it is, indeed, no longer even “present.” It is already “past.”

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The Right Organization

The only things that evolve by themselves in an organization are disorder, friction, malperformance.

The pioneers of management a century ago were right: organizational structure is needed. The modern enterprise needs organization. But the pioneers were wrong in their assumption that there is—or should be—one right organization. Instead of searching for the right organization, management needs to learn to look for, to develop, to test, the organization that fits the task.

There are some “principles” of organization. One is that organization has to be transparent. People have to know and have to understand the organization structure they are supposed to work in. Someone in the organization must have the authority to make the final decision in a given area. It also is a sound principle that authority be commensurate with responsibility. It is a sound principle that any one person in an organization should have only one “master.” These principles are not too different from the ones that inform an architect’s work. They do not tell him what kind of building to build. They tell him what the restraints are. And this is pretty much what the various principles of organization structure do.

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The Management Letter

Managing managers requires special efforts not only to establish common direction, but to eliminate misdirection.

Setting objectives is no important that some of the most effective managers I know have each of their subordinates write a “manger’s letter” twice a year. In this letter to his superior, each manager first defines the objectives of his superior’s job and of his own job as he sees them. He then sets down the performance standards that he believes are being applied to him. Next, he lists the things he must do to attain these goals—and the things within his own unit he considers the major obstacles. He lists the things his superior and the company do that help him and the things that hamper him. Finally, he outlines what he proposes to do during the next year to reach his goals. If his superior accepts this statement, the “manager’s letter” becomes the charter under which the manager operates.

Mutual understanding can never be attained by “communications down,” can never be created by talking. It can result only from “communications up.” It requires both the superior’s willingness to listen and a tool especially designed to make lower managers heard.

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