Customer Reviews

Concept of the Corporation

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REVIEW: This book has had a tremendous impact on management thinking and practice worldwide. As the first book to take an analytical study of a business corporation (GM) from the inside, many consider it to be the catalyst of the management boom that followed. It is certainly the first book to examine the business corporation as a social structure that brings together human beings for economic and social needs. The book is also a sort of bridge from Drucker's more political and social writings in "The End of Economic Man" and "The Future of Industrial Man" to his later more managerial writings. It is credited with having established management of organizations as a discipline and a distinct field of study. However, as a book originally published in 1946, is it still relevent and worth reading today? Yes, but not for everyone.

Drucker raised many new issues and concepts basic to organizations. For example, he touched upon: dignity and status of the worker, corporate purpose, corporate contribution to and harmonization with community, management compensation and succession, worker training and development, workers as resources not costs, etc. Since new ideas will tend to seep into the popular consciousness over time, many of the ideas he introduced have long since become popularized and accepted (e.g. the benefits of decentralization, suggestion plans, and reengineering). However, there are also a number the concepts which are not fully appreciated today or which we tend to just give lip service. For example, the basic concept of corporations as both economic and social institutions is still not fully appreciated or understood (neither by those on the "right" or the "left"). For me, the book was worth the read for these insights alone. In summary, I very much recommend this book if you've read some of Drucker's other writings and are interested in reading Drucker's founding writings on the corporation as both an economic and social organization. One option you may want to consider is to skip Part II which mostly discusses GM decentralization as a model.

STRENGTHS: Great thinking and understanding from Drucker on corporations as social structures. First thorough analytical look at a business corporation from the inside. Important economic concepts explained too (e.g. monopoly, profit motive).

WEAKNESSES: Some parts are rambling and others more concise. Part II of the book (more specific to 1940s GM and decentralization) is more outdated. Never a graph or equation to help understanding.

WHO SHOULD READ THIS BOOK: Those interested in understanding corporations as both economic and social organizations.

FOR SIMILAR/RELATED TOPICS, CONSIDER: Any of Peter Drucker's other books still in print. "My Years with General Motors" by Alfred Sloan. "Maslow on Management" by Abraham Maslow. "First Break All the Rules" by M. Buckingham & C. Coffman.

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Peter F. Drucker was born in 1911 and is the Grandmaster in the field of management. He is the most influential thinker on this subject of the 20st century and has published mountains of books and articles. (In short, he is "the man"!) This book, which is based on 18 months of research and study of the General Motors Corporation, was originally published in 1946. It consists of 4 parts (`chapters'), each consisting of 1-to-5 chapters (which Drucker gives numbers and titles.)

This `Transaction' edition includes an additional 1993-introduction and an additional 1983-preface, in which Drucker discusses the impact of this landmark-book. "Concept of the Corporation is credited with having established management as a discipline and as a field of study." However, the does not completely agree: "It established organization as a distinct entity, and its study as a discipline. ... And Concept of the Corporation thus became the first attempt to show how an organization really works and what its challenges, problems, principles are." He also discusses the fact that his book was not well received by the people of General Motors, which was at the time of the original publication the undisputed worldwide leader in the automobile industry and the world's biggest manufacturing company: "And a main reason, I now realize, was precisely that I treated General Motors (GM) as a prototype, as an `organization', and its problems therefore as problems of structure, if not of principle, rather than as the way GM does things."

The first part of this book - Capitalism in One Country - consists only of 1 chapter and sets the background scene for his study. It discusses the belief of the American people in a free-enterprise economic system, the interrelationship between industrial society and "Big Business" (which Drucker terms `corporation'), whereby in the early 20th century the large corporation had become America's representative social institution, and the social and political analysis of an institution. This analysis has to take place at three levels: The corporation has to "be organized in such as way as to be able itself to function and to survive as an institution, as to enable society to realize its basic promises and beliefs, and as to enable society to function and to survive."

The second part of the book - The Corporation as Human Effort - consists of 5 chapters and discusses GM's relatively modern organization model. In the first chapter the first law of the corporation/institution is detailed, which is "to produce goods with the maximum economic return." But Drucker is quick to emphasize that the essence of the corporation is social, that is human, organization: "... modern production ... is based on principles - organization not of machines but of human beings." He continues with the consequences of this fact, the dependence on the solution of the three interdependent problems: "The distribution of power and responsibility, the formulation of general and objective criteria of policy and action, the selection and training of leaders - these are the central questions of corporate organization." In the second chapter GM's basic and universally valid concept of decentralization is described. So how well does decentralization work? This is discussed in the third chapter, whereby the conclusion is mostly positive. The fourth chapter is a very unusual one, it discusses the relationship between big business (GM in this instance) and its small business partner (the automobile dealer). Drucker realizes that GM has very well established principles, which are primarily based on the resolution of conflicts in harmony. However, with respect to the big-small business relationships, there is still a lot of work left to do in other branches of America's economy. In the final chapter, the question is asked whether decentralization can be used as a model. In GM decentralization is not seen as a technique of top management, but as a basic principle of the industrial order.

The third part of the book - The Corporation as a Social Institution - consists of 3 chapters. The first chapter starts off with a discussion on American beliefs in which, Drucker believes, the corporation plays a large role. "It is characteristic of the American tradition that its political philosophy sees social institutions as a means to an end which is beyond society." He explains the impact this (the promise of justice or of equal opportunities and the promise of status and function as an individual) has on the corporation, which was still a relatively new phenomenon in the 1940s. He discusses opportunities, dignity and status, assembly line "monotony", unionism. The second chapter describes the new industrial middle class of "foreman" who, through the introduction of big business, now lacks equal opportunities as well as status and function. In the third chapter Drucker emphasizes that the bad relations between labor and management in the automobile industry provide the perfect example to discuss "the absence of a workable solution of the twin problems of equal opportunities and of status and function of the worker". This study took place during war and post-war years and the differences in the relationship between labor and management during these 2 periods are extremely well exposed. There are some great comments with respect to labor relations and the so-called "wage issue".

The final part of the book - Economic Policy in an Industrial Society - consists of 3 chapters. The first chapter has the strange title of The "Curse of Bigness". First the relationship between corporation and society is discussed. "Whatever the terminology, the large corporation is a tool and organ of society" and "modern industrial society must organize its economy in the large units of Big Business." It is important to note that Drucker in 1946 already recognizes that "bigness" in itself is not in conflict with the requirements of social stability and social functioning. The second chapter also has a strange title - Production for "Use" or for "Profit" - which sounds like both a contradiction and a conflict in one sentence. Drucker notes that "Production for Profit" is the principle of rationality and efficiency on which the corporation must base itself and that the demand "production for use" thus asserts a conflict between the needs of society and those of the corporation. He discusses the profit motive, the lust of power, and the market before turning to social needs and the individual wants. The final chapter covers the touchstone of America's economic system and the focus of economic policy, which full employment, and touches upon some of the greatest challenges to government and business. "The first problem of a full-employment policy is to generate capital-goods production during a cyclical depression." In the short section on the employment fund Drucker really that he is almost 50 years ahead of his time. There is also a magical piece on the "five pillars on which an economic policy for a free-enterprise society rests."

This edition also includes a 1983 epilogue, which discusses the impact of this book. "Concept of the Corporation had an immediate impact on American business, on public service institutions, on government agencies - and none on General Motors!" It explains the main reasons for why the book was totally unacceptable to most GM executives, and above all to Alfred Sloan. Drucker mentions the accompanying letter, in which he urges for "serious reconsideration of a number of other GM policies, precisely because they had been successful for twenty years." I would like to see the accompanying letter included in future versions of this book.

I find it incredibly difficult to review books by Peter Drucker, you always feel that you let the `Master' down. This book is a true classic and I am happy that I finally made time to read it. (Yes, yes, I should have done years ago.) I believe that it gives a great insight of the position of Big Business in society, whereby General Motors' policies, which was at the time the world's largest manufacturing company, are used as an example. However, readers interested in just GM itself are better served by Alfred P. Sloan's autobiography `My Years with General Motors'. Even 60 years after its original publication date the book is still very relevant and Drucker shows his credentials as visionary. The book is not just relevant for business people; it is also useful for people involved in government and policy-setting. (This book deserves six-stars, fantastic!)

Business primarily functions to make a profit. However, due to the permanent and integral role that the corporation plays in modern industrial society, there exists a corresponding level of duty and responsibility toward society at large. Peter Drucker's goal is to articulate the management practices that made General Motors so successful. In this manner GM's efforts could be communicated and duplicated to ensure continued success for American industry and capitalism in general.

After World War II capitalism and communism began to compete for the hearts and minds of the world. This placed an onerous burden on capitalist countries. This burden largely fell upon America. America must demonstrate that capitalism is in fact the best economic system in terms of both efficiency and social equity. Drucker also realized that only an objective yardstick for measuring success would prove the intrinsic worth of capitalism. Conceding that perfection is unattainable, Peter Drucker nonetheless maintains that the harmonious integration of the corporation into the social fabric depends at the very least on its ability "to realize society's promises and society's beliefs" (117).

In America, this means that the corporation must appeal to and in some degree satisfy the basic American beliefs in individuality and opportunity. Those duel beliefs later served and were substantiated by historian John Kindgon. For the capitalist system to succeed it is imperative for the corporation to parallel these beliefs by promoting the role of justice as the means for recognizing equality of opportunity. This notion differs from communism's belief in equality of rewards.

The economic growth experienced during the early 20th century became possible only through improvements in business organization modeled after Henry Ford's assembly line, which efficiently organized and combined the efforts of different specialists into one cohesive effort. The general message was that the whole was in fact worth more than the sum of its parts. This accomplishment was primarily attributable to improvements in organization and marshalling talent and resources. Drucker describes the new decentralized model of corporate success, "The teamwork organization of management, the assistance rendered by the service staffs, and the constant check against base price, market quota, and consumer's opinion make it possible for ordinary human beings to run this enormous machine" (79). This approach necessarily focuses on the preeminence of human capital, and the need for greater social organization to maximize profits.

Drucker believes that business is ultimately about people, not resources, and managing people so that they give forth their greatest potential effort. Promotion should be based on performance, ability, and character. Management may use price elasticity to determine what proportion of profits should be divided into wage increases or decreases in pricing. Drucker believes that leadership must be cultivated from within the corporation, and whose facilitation should include early testing and training glued together with a cultural espirit. Most importantly, imagination and a great understanding of the big picture in regards to the corporation's functioning must be taught. Finding common grounds for self-interest and building from that best solves conflict, such as that between management and worker's unions.

In conclusion, Drucker believes that the corporation is here to stay in the service of mankind, "The central problem of all modern society is not whether we want Big Business but what we want of it, and what organization of Big Business and of the society it serves is best equipped to realize our wishes and demands" (18). Drucker's uniqueness stems from his belief that the social and political components of modern industrial society are just as important than the much-touted economic component. The responsibility placed on modern industrial society is to create harmony by correlating our political beliefs with what is best for the corporation and the individual. The corporation's role to play is big, as it is the "representative institution of American society." Ultimately, government must create policy that encourages capital expenditure, rather than consumer consumption, resulting in a harmonious balance between increased corporate profits and maximum social good through high employment.

Peter Drucker and the curse of self-interest

This book presents Peter Drucker' s vision of how the free enterprise system should function in an industrial society. He wrote this book in 1946 after he completed a one-and-a-half year study of General Motors (GM) carried out at the request of its CEO Alfred Sloan. To the great surprise and dismay of GM half the book is devoted to the responsibility of a large company for contributing to fulfil the expectations of all members of society at large, the citizens.
Peter Drucker considers that there must be a harmony between the objectives of a company, of the economic system, of the government and of the objectives of the citizens. If there are fundamental conflicts between these objectives the free enterprise cannot survive.
People want to have a job, be respected, and not experience discrimination or insecurity. Drucker refers to these four factors as: "function", "status", "equal opportunity" and "full-employment". The reality is that many people are unemployed, do not feel respected, experience discrimination and live with the fear of becoming unemployed. That was the case in 1946 and is still the case in 2006.
Peter Drucker identifies as one of the main causes of the harmony problem the "laissez faire" concept of economists that suggests that this harmony is automatic if the market can function without any interference of government. He writes: "the laissez-faire economists made the fatal mistake of considering harmony as established automatically instead of as the final and finest fruit of statesmanship". This fallacy is nowadays referred to as the simplified "Washington consensus". This "laissez faire" fallacy, after Marxism as a doctrine has probably caused the most unnecessary suffering in the world.
Drucker writes that the system should be organised such that the corporation "fulfils automatically its social obligations in the very act of seeking its own self-interest". "An industrial society based on the corporation can only function if the corporation contributes to social stability and to the achievement of its social aims independent of the good will or social consciousness of individual corporate managements".
Peter Drucker brilliantly presents how harmony can be achieved. He proves that the free enterprise system is the only system that can fulfil the expectations of all people, if they want to make material progress. However the problems are still with us. No government has produced the "finest fruit of statesmanship". It has not been possible to design a system that transforms self-interest into harmony. Self-interest has to be combined with a concern for the well being of others. Readers wanting to explore this idea further should read "Ethics for the New Millennium" by the Dalai Lama about "Universal Responsibility", and "The essential David Bohm" by Lee Nichol about overcoming self interest through dialogue.
Peter Drucker recognised the problem in his epilogue written in 1983: "In practice governments have collapsed into impotence" and more constructively: "there are social needs which the government cannot take care of". Even if harmony is the responsibility of government the problems can only be solved together with business.
If GM instead of neglecting the views of Peter Drucker had embraced them GM would not be in the trouble GM is to day.

FOCAL POINTS OF BOOK:

American society-and society in all other advanced countries as well as from Japan to Soviet Russia-has increasingly become a society of big, organized power centers: government agencies and hospitals, large universities and research laboratories, trade unions( which by the way were fundamental in building America's middle class, and they have a vital role today in preserving the American dream for working families) and armed services, in addition to the Big Businesses.


THE CORPORATION AS HUMAN EFFORT

Harmony Out Of Conflict:

Harmony can always be achieved if there is at least one area where the self-interest of the one is identical with the self-interest of the other. Then cooperation can be anchored in the joint pursuit of this common interest, to which the other and divergent interests can be subordinated.


THE CORPORATION AS A SOCIAL INSTITUTION

The American Beliefs:

It is, for instance, certainly true that the United States will not be a perfect democracy as long as Social, Economic and Justice gaps continue to exist.


Are Opportunities Shrinking?

However great the advantage which the character of modern industrial enterprise and of modern technology gives to the formally trained man over the man who has picked up his education in the shop or office, we certainly suffer from a tremendous overvaluation of the formal education offered today and of the diploma as a proof of attainment or ability. Opportunities to acquire a formal education must be provided by those willing and able to carry the extra work involved but not able to carry the financial burden of an education through the normal channels.


Dignity and Status in Industrial Society:

The essence of "independence" is a social and psychological satisfaction which cannot be replaced by economic satisfaction alone. It is perhaps the biggest job of the modern corporation as the representative institution of industrial society to find a synthesis between justice and dignity, between equality of opportunities and social status and function.


Assembly Line Monotony:

But real creative ability-ability to live largely in a world based on ones own inner resources-is the rarest quality in the world. For as very old wisdom has it, a man who works only for a living and not for the sake of the work and of its meaning is not and cannot be a citizen.


The Wage Issue:

Wages are determined not by the policies of labor and management but by objective economic facts of productive efficiency of labor, price for the product, and the size of its market at a given price. This means that wages are capable by and large of being determined objectively; they should not and need not be a contentious issue. But unless two contending parties of equal weight have a principle decision in common, their bargaining is not likely to end in peace and harmony but in deadlock, frustration, mutual recrimination, and bitterness.


Economic Policy In an Industrial Society

The " Curse Of Bigness":

Whatever the terminology, the large corporation is a tool and organ of society. Finally, there is the question whether the free enterprise system, an economy based on politically uncontrolled corporations, motivated by the desire to make profits, and regulated by a competitive market, can satisfy society's demand for stable, expanding employment- politically the most important question today.


Production for "Use or for "Profit"?:

Profit is thus an inevitable risk premium and the basis of all economic activity, whether capitalist, socialist, or cave man. The sole source of capital is profit. Capital formation will have to be based on the one resource which, instead of being destroyed by being used, reproduces itself, namely profit.


The Lust For Power:

We must harness the lust for power to a social purpose.


Is Full Employment Possible?:

Expansion

The main source of future expansion must be the accumulate reserves of created capital, that is, profits, and the initiative and imagination of the country's inhabitants.


GENERAL MOTORS REVISITED:

Decentralization will work only where the central corporate management has available adequate information and dependable knowledge regarding the company's businesses. Information and knowledge set the limits to decentralization. One cannot successfully decentralize what one cannot control through impersonal, indirect information. Responsibility without competence does damage. Responsibility without competence is irresponsibility.


MY CONCLUSIONS:

Even six decades after its original publication date the book is still very relevant and Drucker shows his credentials as a visionary and a futurist. It is clear that GM, at which time Alfred P. Sloan was at the helm, pooh poohed on Drucker's landmark research. Concept of the Corporation had an immediate impact on American business, on public service institutions, and on government agencies.

To understand that the modern large corporation is the representative institution of our society; that is above all an institution, that is, a human organization and not just a complex of inanimate machines; that it is based upon a concept of order rather than upon gadgets; and that all of us as consumers, as workers, as savers, and as citizens have an equal stake in its prosperity, these are the important lessons we have to learn. To make it possible for this social institution to function efficiently and productively to realize its economic and social potential and to resolve its economic and social problems, is our most urgent task and our most challenging opportunity .

"The Concept of the Corporation" was researched and written at the end of World War II when the author was a consultant at General Motors. The book analyzes the system of decentralized management that allowed GM -- then the largest company on earth -- to remain market-sensitive and relatively nimble in spite of its gargantuan size. The book also makes a sustained, sophisticated argument that mass-production capitalism is compatible with full employment and the values of American democracy. The discussion of GM's wartime conversion programs is insightful, as is the critique of labor policies that treated workers as glorified machines rather than human beings. But while the book was prophetic, it reflects the concerns and issues of the mid-1940s, when the future of free markets was problematic. In the end, "The Concept of the Corporation" is a work of industrial sociology and political philosophy. Business students in 2011 shouldn't turn to it expecting a "how to" book on corporate management.

Since it has only words, no graphics. it is really hard to read through. but I have to say, i's opion is great