Concept of the Corporation

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:

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 ob

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

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.[feedback welcome]