CHAPTER TWENTY-SEVEN

Management as a Liberal Art

THREE FOREIGNERS—ALL AMERICANS—are thought by the Japanese to be mainly responsible for the economic recovery of their country after World War II and for its emergence as a leading economic power. Edwards Deming taught the Japanese statistical quality control and introduced the “quality circle.” Joseph M. Juran taught them how to organize production in the factory and how to train and manage people at work. What is now the “latest” import from Japan and the “hottest management discovery”—the “just-in-time” inventory delivery system (the Japanese word for it is Kanban )—was introduced to Japan by Juran, who had been instrumental in developing it for America’s World War II production effort.

I am the third of these American teachers. My contribution, or so the Japanese see it, was to educate them about management and marketing. I taught them that people are a resource rather than a cost, and that people therefore have to be managed to take responsibility for their own as well as for the group’s objectives and productivity. I taught them that communication has to be upward if it is to work at all. I taught them the importance of structure but also that structure has to follow strategy. I taught them that top management is a function and a responsibility rather than a rank and a privilege. And I also taught them that the purpose of a business is to create a customer, and that a business only exists in contemplation of the market.

All these things the Japanese could have learned from my books and they have, indeed, been my most avid readers—some of my management books have sold proportionately many more copies in Japan than they have in the United States. But my real impact in Japan was through the three- to four-week seminars that I ran in Japan every other year from the late 1950s to the mid-1980s for top people in government and business. My effectiveness in these seminars did not, however, rest on my knowledge of management techniques. It rested squarely on my interest in Japanese art and my acquaintance with Japanese history.

This interest of mine began as a result of a purely accidental visit to a Japanese art exhibition way back in 1934 when I was a young bank economist in London. My fascination with Japanese art, which resulted from this visit, led me to ask, What in their history, society, and culture explains the ability of the Japanese to have anticipated, sometimes centuries earlier, the most recent trends in Western modern art, beginning with impressionism and progressing through expressionism and cubism to abstract art?

Thus I found myself soon face-to-face with a mystery, a still largely unexplained mystery: How did the Japanese, alone of all non-Western people, manage to build a modern nation and a modern economy on technology and institutions imported from the West, and yet, at the same time, maintain their basic national identity and integrity? At first glance, nothing that the Japanese did in the late nineteenth century appeared different from what anybody else did at the time. The new kingdoms in the Balkans such as Bulgaria, the South American republics, or Persia similarly imported a broad range of Western institutions—a parliament and a navy modeled after the British, an army modeled after Prussia, a constitutional monarchy and government ministries modeled after Germany, universal education (again on the German model), universities modeled after America, banking modeled after France and Germany, and legal codes copied from the Germans, Swiss, and French. Yet only in Japan did these foreign imports “take.” Moreover, they flourished as effective modern institutions and, at the same time, served to maintain a Japan as distinct, as clearly identified, and as cohesive as it had been when it was totally isolated from intercourse with the foreign world.

I have always been attracted to the unexpected success; in my experience, it holds the key to understanding. It occurred to me that there had been no more unexpected or more unique success than that of the Japanese after the Meiji Restoration of 1867. But I soon realized that this had not been the first such Japanese achievement. The Japanese had had a very similar success twelve hundred years earlier when they adopted the institutions and the religions of what was then the world’s most advanced civilization, the China of the T’ang Dynasty, and used them to create a totally different and uniquely Japanese government, society, culture, religious life, and art. And they repeated this success on a lesser scale several times during their subsequent history. The more I explored the issue, the more mystified I became. What did, however, become increasingly clear was that the Japanese achievement rested on a unique ability to use imported tools, whether social institutions or material techniques, to embody Japanese values and to achieve Japanese objectives.

And so, when I first found myself working with senior executives in Japanese government and business, it came naturally to me to lead off with the question “How can your values, your traditions, your culture and its beliefs be used to perform the objective, impersonal tasks of a modern economy and to harness modern technology for social and economic performance?” In my earlier books, I had pointed out that although unemployment insurance in the West, originally a British invention, protected the worker’s income, it did not satisfy the worker’s need for psychological and social security. This, I had argued, required employment security as well. I had argued further that the need for security required gearing wage and employment policies to the family life cycle and its needs. Finally, however, I had pointed out that flexibility in labor costs was equally essential.

Thus, because I knew a little Japanese history, I was able to help the Japanese leaders who participated in my seminars to work out the combination of high employment security, high labor-force flexibility, and a wage structure in tune with the family cycle and its needs—the combination that has since become known in the West as lifetime employment and which, for thirty years, has given Japan, in all its earlier history until World War II a country of violent class wars and bloody worker revolts, unprecedented industrial cooperation and harmony. Similarly, the one reason that the “marketing concept” I presented in my seminars has “taken” in Japan—whereas in the United States, the country of its birth, it is still being preached rather than practiced—is surely that marketing as a technique could be embedded in the deeply rooted Confucian ethics of mutual relationships. A sale to a customer thus creates a “relationship,” and with it a permanent commitment.

These days I am always being asked to explain the success of the Japanese, especially as compared with the apparent malperformance of American business in recent years. One reason for the difference is not, as is widely believed, that the Japanese are not profit conscious or that Japanese businesses operate at a lower profit margin. This is pure myth. In fact, when measured against the cost of capital—the only valid measurement for the adequacy of a company’s profit—large Japanese companies have, as a rule, earned more in the last ten or fifteen years than comparable American companies. And that is the main reason the Japanese have had the funds to invest in global distribution of their products. Also, in sharp contrast to governmental behavior in the West, Japan’s government, especially the powerful Ministry of International Trade and Industry (MITI), is constantly pushing for higher industrial profits to ensure an adequate supply of funds for investment in the future—in jobs, in research, in new products, and in market development.

One of the principal reasons for the success of Japanese business is that Japanese managers do not start out with a desired profit, that is, with a financial objective in mind. Rather, they start out with business objectives and especially with market objectives. They begin by asking “How much market standing do we need to have leadership?” “What new products do we need for this?” “How much do we need to spend to train and develop people, to build distribution, to provide the required service?” Only then do they ask “And how much profit is necessary to accomplish these business objectives?” Then the resulting profit requirement is usually a good deal higher than the profit goal of the Westerner.

Second, Japanese businesses—perhaps as a long-term result of my management seminars twenty and thirty years ago—have come to accept what they originally thought was very strange doctrine. They have come to accept my position that the end of business is not “to make money.” Making money is a necessity of survival. It is also a result of performance and a measurement thereof. But in itself it is not performance. As I mentioned earlier, the purpose of a business is to create a customer and to satisfy a customer. That is performance and that is what a business is being paid for. The job and function of management as the leader, decision maker, and value setter of the organization, and, indeed, the purpose and rationale of an organization altogether, is to make human beings productive so that the skills, expectations, and beliefs of the individual lead to achievement in joint performance.

These were the things which, almost thirty years ago, Ed Deming, Joe Juran, and I tried to teach the Japanese. Even then, every American management text preached them. The Japanese, however, have been practicing them ever since.

I have never slighted techniques in my teaching, writing, and consulting. Techniques are tools; without tools, there is no “practice,” only preaching. In fact, I have designed, or at least formulated, a good many of today’s management tools, such as management by objectives, decentralization as a principle of organizational structure, and the whole concept of “business strategy,” including the classification of products and markets.

My seminars in Japan also dealt heavily with tools and techniques. In the summer of 1985, during my most recent trip to Japan, one of the surviving members of the early seminars reminded me that the first week of the very first seminar I ran opened with a question by a Japanese participant, “What are the most useful techniques of analysis we can learn from the West?” We then spent several days of intensive work on breakeven analysis and cash-flow analysis: two techniques that had been developed in the West in the years immediately before and after World War II, and that were still unknown in Japan.

Similarly, I have always emphasized in my writing, in my teaching, and in my consulting the importance of financial measurements and financial results. Indeed, most businesses do not earn enough. What they consider profits are, in effect, true costs. One of my central theses for almost forty years has been that one cannot even speak of a profit unless one has earned the true cost of capital. And, in most cases, the cost of capital is far higher than what businesses, especially American businesses, tend to consider as “record profits.” I have also always maintained—often to the scandal of liberal readers—that the first social responsibility of a business is to produce an adequate surplus. Without a surplus, it steals from the commonwealth and deprives society and the economy of the capital needed to provide jobs for tomorrow.

Further, for more years than I care to remember, I have maintained that there is no virtue in being nonprofit and that, indeed, any activity that could produce a profit and does not do so is antisocial. Professional schools are my favorite example. There was a time when such activities were so marginal that their being subsidized by society could be justified. Today, they constitute such a large sector that they have to contribute to the capital formation of an economy in which capital to finance tomorrow’s jobs may well be the central economic requirement, and even a survival need.

But central to my writing, my teaching, and my consulting has been the thesis that the modern business enterprise is a human and a social organization. Management as a discipline and as a practice deals with human and social values. To be sure, the organization exists for an end beyond itself. In the case of the business enterprise, the end is economic (whatever this term might mean); in the case of the hospital, it is the care of the patient and his or her recovery; in the case of the university, it is teaching, learning, and research. To achieve these ends, the peculiar modern invention we call management organizes human beings for joint performance and creates a social organization. But only when management succeeds in making the human resources of the organization productive is it able to attain the desired outside objectives and results.

I came to this thesis naturally, for my interest in management did not start with business. In fact, it started when I decided to become a writer and teacher rather than continue a promising career as an investment banker. My interest in modern organization, in business and management, began with an analysis of modern society and with my conclusion, reached around the time World War II began, that the modern organization and especially the large business corporation was fast becoming the new vehicle of social integration. It was the new community, the new order of a society in which the traditional vehicles of integration—whether small town, craft guild, or church—had disintegrated. So I began to study management with an awareness of economic results, to be sure, but also searching for principles of structure and organization, for constitutional principles, and for values, commitments, and beliefs.

There is a good deal of talk these days of the “culture” of a company. But my book, The Practice of Management, published more than thirty years ago, ends with a chapter on the “spirit” of an organization, which says everything to be found in such current best-sellers as In Search of Excellence. From the beginning I wrote, taught, and advised that management has to be both outside-focused on its mission and on the results of the organization, and inside-focused on the structure, values, and relationships that enable the individual to achieve.

For this reason, I have held from the beginning that management has to be a discipline, an organized body of knowledge that can be learned and, perhaps, even taught. All of my major books, beginning with Concept of the Corporation (1946) and Practice of Management (1954) and progressing through my most recent one, Innovation and Entrepreneurship (1985), have tried to establish such a discipline. Management is not, and never will be, a science as that word is understood in the United States today. Management is no more a science than is medicine: both are practices. A practice feeds from a large body of true sciences. Just as medicine feeds off biology, chemistry, physics, and a host of other natural sciences, so management feeds off economics, psychology, mathematics, political theory, history, and philosophy. But, like medicine, management is also a discipline in its own right, with its own assumptions, its own aims, its own tools, and its own performance goals and measurements. And as a separate discipline in its own right management is what the Germans used to call a Geisteswissenschaft—though “moral science” is probably a better translation of that elusive term than the modern “social science.” Indeed, the old-fashioned term liberal art may be the best term of all.

(1985)