Nothing may seem simpler or more obvious than to know what a company’s business is. A steel mill makes steel; a railroad runs trains to carry freight and passengers; an insurance company underwrites fire risks; a bank lends money. Actually, “What is our business?” is almost always a difficult question and the right answer is usually anything but obvious.
A business is not defined by the company’s name, statutes, or articles of incorporation. It is defined by the want the customer satisfies when she buys a product or service. To satisfy the customer is the mission and purpose of every business. The question “What is our business?” can, therefore, be answered only by looking at the business from the outside, from the point of view of the customer and the market. What the customer sees, thinks, believes, and wants, at any given time, must be accepted by management as an objective fact and must be taken as seriously as the reports of the salesperson, the tests of the engineer, or the figures of the accountant. And management must make a conscious effort to get answers from the customer herself rather than attempt to read her mind.
Shareholder sovereignty is bound to flounder. It is a fair-weather model.
An important ask for top management in the next society’s corporation will be to balance the three dimensions of the corporation: as an economic organization, as a human organization, and as an increasingly important social organization. Each of the three models of the corporation developed in the past half-century stressed one of these dimensions and subordinated the other two. The German model of the “social market economy” put the emphasis on the social dimension; the Japanese one, on the human dimension; and the American one, on the economic dimension.
None of the three is adequate on its own. The German model achieved both economic success and social stability, but at the price of high unemployment and dangerous labor-market rigidity. The Japanese model was strikingly successful for many years, but faltered at the first serious challenge; indeed, it was a major obstacle to recovery from Japan’s recession of the 1990s. Shareholder sovereignty is also bound to flounder. It is a fair-weather model that works well only in times of prosperity. Obviously the enterprise can fulfill its human and social functions only if it prospers as a business. But now that knowledge workers are becoming the key employees, a company also needs to be a desirable employer to be successful.
What does capitalism mean when knowledge governs rather than money?
Within a fairly short period of time, we will face the problem of the governance of corporations again. We will have to redefine the purpose of the employing organization and of its management, to satisfy both the legal owners, such as shareholders, and the owners of the human capital that gives the organization its wealth-producing power, that is, the knowledge workers. For increasingly the ability of organizations to survive will come to depend on their “comparative advantage” in making the knowledge worker productive. And the ability to attract and hold the best of the knowledge workers is the first and most fundamental precondition.
What does capitalism mean when knowledge governs rather than money? And what do “free markets” mean when knowledge workers are the true assets? Knowledge workers can be neither bought nor sold. They do not come with a merger or an acquisition. It is certain that the emergence of the knowledge worker will bring about fundamental changes in the very structure and nature of the economic system.
Unless the power in the corporation can be organized on an accepted principle of legitimacy, it will disappear.
No social power can endure unless it is legitimate power. And no society can function unless it integrates the individual member. Unless the members of the industrial system are given the social status and function that they lack today, our society will disintegrate. The masses will not revolt; they will sink into lethargy; they will flee the responsibility of freedom, which without social meaning is nothing but a threat and a burden. We have only two alternatives: either to build a functioning industrial society or to see freedom itself disappear in anarchy and tyranny.
The new tasks will require a different form of government.
The new tasks all will require more rather than less government. But they will require a different form of government. The greatest threat is damage to the human habitat. Second only to caring for the environment is the growing need for transnational action and institutions to abort the return of private armies and stamp out terrorism.
Terrorism is all the more threatening as very small groups can effectively hold even large countries to ransom. A nuclear bomb can easily be put into a locker or a postal box in any major city and exploded by remote control; so could a bacterial bomb, containing enough anthrax spores to kill thousands of people and to contaminate a big city’s water supply, making it uninhabitable. What is needed to control the threat of terrorism is action that goes beyond any one sovereign state. The design of the necessary agencies is still ahead of us; so is the length of time it will take any of them to develop. It may well take major catastrophes to make national governments willing to accept subordination to such institutions and their decisions.
Government becomes the master of civil society, able to mold and shape it.
Until World War I, no government in history was ever able to obtain from its people more than a very small fraction of the country’s national income, perhaps 5 or 6 percent. As long as revenues were known to be limited, governments, whether democracies or absolute monarchies like that of the Russian czars, operated under extreme restrains. These restraints made it impossible for the government to act as either a social or an economic agency. But since World War I—and even more noticeably since World War II—the budgeting process has meant, in effect, saying yes to everything. Under the new dispensation, which assumes that there are no economic limits to the revenues it can obtain, government becomes the master of civil society, able to mold and shape it. Through the power of the purse, it can shape society in the politician’s image. Worst of all, the fiscal state has become a “pork-barrel state.”
The pork-barrel state thus increasingly undermines the foundations of a free society. The elected representatives fleece their constituents to enrich special-interest groups and thereby to buy their votes. This is a denial of the concept of citizenship—and is beginning to be seen as such.
Any society in the era of the new technology would perish miserably were it to run the economy by central planning.
The new technology will greatly extend the management area; many people now considered rank-and-file will have to become capable of doing management work. And on all levels the demands on the manager’s responsibility and competence, her vision, her capacity to choose between alternate risks, her economic knowledge and skill, her ability to manage managers and to manage worker and work, her competence in making decisions, will be greatly increased.
The new technology will demand the utmost in decentralization. Any society in the era of the new technology would perish miserably were it to attempt to get rid of free management of autonomous enterprise so as to run the economy by central planning. And so would any enterprise that attempted to centralize responsibility and decision making at the top. It would go under like the great reptiles of the saurian age who attempted to control a huge body by a small, centralized nervous system that would not adapt to rapid change in the environment.
It can be said that there are no “underdeveloped countries.” There are only “undermanaged” ones.
Management creates economic and social development. Economic and social development is the result of management. It can be said, without too much oversimplification, that there are no “underdeveloped countries.” There are only “undermanaged” ones. Japan a hundred and forty years ago was an underdeveloped country by every material measurement. But it very quickly produced management of great competence, indeed, of excellence.
This means that management is the prime mover and that development is a consequence. All our experience in economic development proves this. Wherever we have only capital, we have not achieved development. In the few cases where we have been able to generate management energies, we have generated rapid development. Development, in other words, is a matter of human energies rather than of economic wealth. And the generation and direction of human energies is the task of management.
