Selling is tied no longer to production but to distribution.
E-commerce is to the information revolution what the railroad was to the industrial revolution. The railroad mastered distance—e-commerce eliminates it. The Internet provides the enterprise with the ability to link one activity to another and to make real-time data widely available, both within the company and to outside suppliers, outside channels of distribution, and customers. It strengthens the move to disintegrate the corporation.
But, the great strength of e-commerce is that it provides the consumer with a whole range of products, no matter who makes them. Examples include Amazon.com and CarsDirect.com. E-commerce separates, for the first time, selling and producing. Selling is tied no longer to production but to distribution. There is absolutely no reason why any e-commerce facility should limit itself to marketing and selling one maker’s products or brands.
The medium not only controls how things are communicated, but what things are communicated.
In health care, information technology has already made a fabulous impact. In education, its impact will be greater. However, attempts to put ordinary college courses on the Internet are a mistake. Marshall McLuhan was correct. The medium controls not only how things are communicated, but what things are communicated. On the Web, you must do it differently.
You must redesign everything. Firstly, you must hold student’s attention. Any good teacher has a radar system to get the class’s reaction, but you don’t have that online. Secondly, you must enable students to do what they can do in a college course, which is to go back and forth. So, online you must combine a book’s qualities with a course’s continuity and flow. Above all, you must put it in a context. In a college course, the college provides the context. In that online course you turn on at home, the course must provide the background, the context, the references.
The truly revolutionary impact of the information revolution is just beginning to be felt. But it is not “information” that fuels this impact. It is something that practically no one foresaw or even talked about fifteen or twenty years ago: e-commerce—that is, the explosive emergence of the Internet as a major, perhaps eventually the major, worldwide distribution channel for goods, for services, and, surprisingly, for managerial and professional jobs. This is profoundly changing economies, markets, and industry structures; products and services and their flow; consumer segmentation, consumer values, and customer behavior; jobs and labor markets.
New and unexpected industries will no doubt emerge, and fast. There is a service waiting to be born.
The things that the proponents of “management audits” talk about—integrity and creativity, for instance—are better left to the novelist.
The “bottom line” measures business performance rather than management performance. And the performance of a business today is largely a result of the performance of management in years past. Performance in management, therefore, means in large measure doing a good job of preparing today’s business for the future. The future of a business is largely formed by present-management performance in four areas:
Performance in appropriating capital: We need to measure the return on investment against the return expected.
Performance in people decisions: Neither what is expected of a person’s performance when he or she is put into the job, nor how the appointment works out, is “intangible.” Both can be fairly easily judged.
Performance in innovation: Research results can be appraised, and then projected backward on the promises and expectations at the time the research effort was started.
Strategies versus performance: Did the things that the strategy expected to happen take place? And were the goals set the right goals in light of actual developments? Have they been attained?
Maximize the wealth-producing capacity of the enterprise.
Ralph Cordiner, CEO of the General Electric Company from 1958 to 1963, asserted that top management in the large, publicly owned corporation was a “trustee.” Cordiner argued that senior executives were responsible for managing the enterprise “in the best-balanced interest of shareholders, customers, employees, suppliers, and plant community cities.” That is what we now call “stakeholders.” Cordiner’s answer still required a clear definition of results and of the meaning of “best” with respect to “balance.” We no longer need to theorize about how to define performance and results in the large enterprise. We have successful examples.
Both the Germans and the Japanese have highly concentrated institutional ownership. How, then, do the institutional owners of German or Japanese industry define performance and results? Though they manage quite differently, they define them in the same way. Unlike Cordiner, they do not “balance” anything. They maximize. But they do not attempt to maximize shareholder value or the short-term interest of any one of the enterprise’s “stakeholders.” Rather, they maximize the wealth-producing capacity of the enterprise. It is this objective that integrates short-term and long-term results and that ties the operational dimensions of business performance—market standing, innovation, productivity, and people and their development—with financial needs and financial results. It is also this objective on which all the constituencies—whether shareholders, customers, or employees—depend for the satisfaction of their expectations and objectives.
Joseph Schumpeter‘s “innovator,” which his “creative destruction,” is the only theory so far to explain why there is something we call “profit.” The classical economists very well knew that their theory did not give any rationale for profit. Indeed, in the equilibrium economics of a closed economic system, there is no place for profit, no justification for it, no explanation of it. If profit is, however, a genuine cost, and especially if profit is the only way to maintain jobs and to create new ones, then capitalism becomes again a moral system.
The weakness on moral grounds of the profit incentive enabled Karl Marx at once to condemn the capitalist as wicked and immoral and assert “scientifically” that he serves no function. As soon, however, as one shifts from the axiom of an unchanging, self-contained, closed economy, what is called profit is no longer immoral. It becomes a moral imperative. Indeed the question then is no longer: “How can the economy be structured to minimize the bribe of the functionless surplus called profit that has to be handed over to the capitalist to keep the economy going?” The question in Schumpeter’s economics is always: “Is there sufficient profit?” Is there adequate capital formation to provide for the costs of the future, the costs of staying in business, the costs of “creative destruction”?
Profit is the ultimate test of business performance.
Profit serves three purposes. One is it measures the net effectiveness and soundness of a business’s efforts. Another is the “risk premium” that covers the costs of staying in business—replacement, obsolescence, market risk and uncertainty. Seen from this point of view, there is no such thing as “profit”; there are only “costs of being in business” and “costs of staying in business.” And the task of a business is to provide adequately for these “costs of staying in business” by earning an adequate profit. Finally, profit ensures the supply of future capital for innovation and expansion, either directly, by providing the means of self-financing out of retained earnings, or indirectly, through providing sufficient inducement for new outside capital in the form in which it is best suited to the enterprise’s objectives.
The traditional theorem of the maximization of profit has to be discarded.
To manage a business is to balance a variety of needs and goals. To emphasize only profit, misdirects managers to the point where they may endanger the survival of the business. To obtain profit today, they tend to undermine the future. They may push the most easily saleable product lines and slight those that are the market of tomorrow. They tend to shortchange research, promotion, and other postponable investments. Above all, they shy away from any capital expenditure that may increase the investment capital base against which profits are measured; and the result is dangerous obsolescing of equipment. In other words, they are directed into the worst practices of management.
Objectives are needed in every area where performance and results directly and vitally affect the survival and prosperity of the business. There are eight areas in which performance and objectives have to be set; market standing, innovation, productivity, physical and financial resources, profitability, manager performance and development, worker performance and attitude, and public responsibility. Different key areas require different emphasis in different businesses—and different emphasis at different stages of the development of each business. But the areas are the same, whatever the business, whatever the economic conditions, whatever the business’s size or stage of growth.