CHAPTER ONE

Why Managers?

MANAGERS ARE THE BASIC resource of the business enterprise. In a fully automated factory—such as already exists in a few places, modern oil refineries for instance—there may be a few highly skilled technicians and professionals, but almost no other workers at all. But there will be managers! In fact, there will be many more managers than there used to be in yesterday’s factory filled with semi-skilled machine operators. Where the foreman on the assembly line supervises fifty people, managers in automated plants rarely have more than two or three people on their team—and each of them has greater autonomy, more responsibility and far more decision-making power than the foreman in the traditional mass-production plant.

Managers are the most expensive resource in most businesses—and the one that depreciates the fastest and needs the most constant replenishment. It takes years to build a management team; but it can be depleted in a short period. The number of managers as well as the capital investment each manager represents—both in the investment of society’s capital in his education (which runs upward of $40,000 for each college graduate) and in the employer’s direct investment in the managerial job (which in the U.S. today ranges from $50,000 to $500,000 for each managerial job, dependent on industry and function, e.g., whether in the research lab, in manufacturing or in accounting)—are bound to increase steadily as they have increased in the past half century. Parallel with this will go an increase in the demands of the enterprise on the ability of its managers. Today’s manager, even at a fairly low level, is, for instance, expected to know a good deal both about analytical and quantitative methods, and about human behavior; both were “advanced” subjects less than a generation ago. These demands have doubled in every generation; there is no reason to expect a slowing down of the trend during the next decades.

How well managers manage and are managed determines whether business goals will be reached. It also largely determines how well the enterprise manages worker and work. For the workers’ attitude reflects, above all, the attitude of their management. It directly mirrors management’s competence and structure. The workers’ effectiveness is determined largely by the way they are being managed.

During the last quarter century managers everywhere have subjected themselves to a steady barrage of exhortations, speeches, and programs in which they tell each other that their job is to manage the people under them, urge each other to give top priority to that responsibility, and furnish each other with much advice and many expensive gadgets for “downward communications.” But I have yet to sit down with a manager, at any level or job, who was not primarily concerned with upward relations and upward communications. Every vice-president feels that relations with the president are the real problem. And so on down to the first-line supervisor, the production foreman, or chief clerk, all of whom are quite certain that they could get along with their people if only the “boss” and the personnel department left them alone.

This is not a sign of the perversity of human nature. Upward relations are properly a manager’s first concern. To be a manager means sharing in the responsibility for the performance of the enterprise. A person who is not expected to take this responsibility is not a manager. And the individual contributors, the research engineer, the tax accountant, the field salesperson, who are expected to take such responsibility for the results and performance of the enterprise are, in effect, managers even though they are not “bosses,” have no subordinates and manage only themselves.

The Rise, Decline and Rebirth of Ford

The story of Henry Ford, his rise and decline, and of the revival of his company under his grandson, Henry Ford II, has been told so many times that it has passed into folklore. The story is

• that Henry Ford, starting with nothing in 1905, had built fifteen years later the world’s largest and most profitable manufacturing enterprise;
• that the Ford Motor Company, in the early twenties, dominated and almost monopolized the American automobile market and held a leadership position in most of the other important automobile markets of the world;
• that, in addition, it had amassed, out of profits, cash reserves of a billion dollars or so;
• that, only a few years later, by 1927, this seemingly impregnable business empire was in shambles. Having lost its leadership position and barely able to stay a poor third in the market, it lost money almost every year for twenty years or so, and remained unable to compete vigorously right through World War II; and
• that in 1944 the founder’s grandson, Henry Ford II, then only twenty-six years old and without training or experience, took over, ousted his grandfather’s cronies in a palace coup, brought in a totally new management team and saved the company.

But it is not commonly realized that this dramatic story is far more than a story of personal success and failure. It is, above all, what one might call a controlled experiment in mismanagement.

The first Ford failed because of his firm conviction that a business did not need managers and management. All it needed, he believed, was the owner with his “helpers.” The only difference between Ford and most of his contemporaries in business, in the U.S. as well as abroad, was that Henry Ford stuck uncompromisingly to his convictions. The way he applied them—e.g., by firing or sidelining any one of his “helpers,” no matter how able, who dared act as a “manager,” make a decision, or take action without orders from Ford—can only be described as a test of a hypothesis that ended up by fully disproving it.

In fact, what makes the Ford story unique—but also important—is that Ford could test the hypothesis, in part because he lived so long, and in part because he had a billion dollars to back his convictions. Ford’s failure was not the result of personality or temperament but first and foremost a result of his refusal to accept managers and management as necessary and as grounded in task and function rather than in “delegation” from the “boss.”

GM—The Countertest

In the early twenties, when Ford set out to prove that managers are not needed, Alfred P. Sloan, Jr., the newly appointed president of General Motors, put the opposite thesis to the test. GM at that time was almost crushed by the towering colossus of the Ford Motor Company and barely able to survive as a weak number two. Little more than a financial speculation, stitched together out of small automobile companies that had been for sale because they could not stand up to Ford’s competition, GM did not have one winning car in its line, no dealer organization, and no financial strength. Each of the former owners was allowed autonomy, which in effect meant that he was allowed to mismanage his former business his own way. But Sloan thought through what the business and structure of GM should be and converted his undisciplined barons into a management team. Within five years GM had become the leader in the American automobile industry and has remained the leader ever since.

Twenty years after Sloan’s success, Henry Ford’s grandson put Sloan’s hypothesis to the test again. The Ford Motor Company by then was nearly bankrupt: the entire billion dollars of cash assets it had held in the early twenties had been poured into paying for the deficits since. As soon as young Henry Ford II took over in 1946, he set out to do for his company what Sloan had done for GM two decades earlier. He created a management structure and a management team. Within five years the Ford Motor Company regained its potential for growth and profit, both at home and abroad. It became the main competitor to General Motors and even outstripped GM in the fast-growing European automobile market.

The Lesson of the Ford Story

The lesson of the Ford story is that managers and management are the specific need of the business enterprise, its specific organ, and its basic structure. We can say positively that enterprise cannot do without managers. One cannot argue that management does the owner’s job by delegation. Management is needed not only because the job is too big for any one person to do alone, but because managing an enterprise is something essentially different from managing one’s own property.

Henry Ford failed to see the need to change to managers and management because he believed that a large and complex business enterprise “evolves” organically from the small one-man shop. Of course, Ford started small. But the growth brought more than a change in size. At one point quantity turned into quality. At one point Ford no longer ran “his own business.” The Ford Motor Company had become a business enterprise, that is, an organization requiring different structure and different principles—an organization requiring managers and management.

Legally, management is still seen as delegation from ownership. But the actual doctrine that is slowly evolving is that management precedes and indeed out-ranks ownership, at least in the large enterprise. Even total ownership of such an enterprise is dependent on proper management. If the owner does not subordinate himself to the enterprise’s need for management, his ownership—while legally unrestricted—will in fact be curtailed, if not taken away from him.

This idea was probably first laid down as an emerging legal doctrine by the U. S. Air Force in the early fifties in dealing with Howard Hughes and the Hughes Aircraft Company. Hughes owned the company, lock, stock, and barrel. He refused to let professional managers run it and insisted on running it himself the way Ford, thirty years earlier, had run the Ford Motor Company. Thereupon the Air Force, the company’s main customer, gave Hughes an ultimatum: either you put your shares into a trust and let professional management take over, or we put the company into bankruptcy and force you out altogether. Hughes retained ownership title through one of his foundations but relinquished control entirely.

The next case also concerns Howard Hughes. As all but complete owner of one of America’s major airlines, TWA, he, it is alleged, subordinated TWA’s interests to those of other companies of his. For an owner this is perfectly legitimate behavior; he is supposed to do with his property as he pleases. But TWA management sued Hughes for $150 million in damages. It lost the suit only in 1973 in the Supreme Court—having won it in two lower courts—on a technicality; the Supreme Court ruled that this was a matter for the Civil Aeronautics Board over which the ordinary courts had no jurisdiction. But the principle that even the owner has to act as a manager, at least in a large company, was not disputed.

Genetically, so to speak, management did not evolve out of the small owner-managed firm and as a result of its growth. From its very beginning, management was designed for enterprises that were large and complex.

The large American railroad which covered vast distances—and which wrestled with the complex interplay between the engineering task of building a railbed, the financial task of raising very large sums of capital, and the political-relations tasks of obtaining charters, land grants, and subsidies—was the first enterprise that can be called “managed.” Indeed, the management structure designed shortly after the Civil War for the first long-distance and transcontinental American railroads has essentially remained unchanged to this day. In continental Europe, at about the same time, management was designed for the first banks founded expressly to be national rather than local banks. And in faraway Japan, the builders of the so-called “Zaibatsu” (the great business groups) of the Meiji Period—Mitsui, Sumitomo, and Iwasaki’s successors at Mitsubishi—using traditional Japanese approaches in a new manner, also fashioned a management system for the large and complex enterprise.

It was not until thirty or forty years later, some time around the turn of the century, that the concept of management was transferred from the enterprise that started out large to the enterprise that had grown large. At about that time, Andrew Carnegie and John D. Rockefeller, Jr., introduced management into the steel and petroleum industries respectively. A little later still, Pierre S. du Pont restructured the family company (E.I. du Pont de Nemours & Co.) and gave it a management, both to make it capable of growth and to preserve family control. The management structure Pierre du Pont built in his family company between 1915 and 1920 became, a few years later, the starting point for the General Motors structure of “professional management” after the du Ponts had acquired control of the near-bankrupt and floundering automotive conglomerate and had put Alfred P. Sloan, Jr., in as president.

Management as a “Change of Phase”

The change from a business which the “boss” can run with “helpers” to a business enterprise that requires a management is what the physicists call a “change of phase” such as the change from fluid to solid. It is a leap from one state of matter, from one fundamental structure, to another. Sloan’s example shows that the change can occur within one and the same organization. But Sloan’s restructuring of GM also shows that the job can be done only if basic concepts, basic principles, and individual vision are changed radically.

One can compare the business which the older Ford tried to run and the business which Sloan designed to two different kinds of organisms—the insect, which is held together by a tough, hard skin, and the vertebrate animal, which has a skeleton. The English biologist D’Arcy Thompson showed that animals supported by a hard skin can reach only a certain size and complexity. Beyond this, a land animal has to have a skeleton. Yet the skeleton has not genetically evolved out of the hard skin of the insect; it is a different organ with different antecedents. Similarly, management becomes necessary when a business reaches a certain size and complexity. But management, while it replaces the “hard-skin” structure of the owner, is not its successor. It is, rather, its replacement.

When does a business reach the stage at which it has to shift from “hard skin” to “skeleton”? The line lies somewhere between 300 and 1,000 employees in size. More important, perhaps, is the increase in complexity of the business; when a variety of tasks have all to be performed in cooperation, synchronization, and communication, a business needs managers and a management. Otherwise, things go out of control; plans fail to turn into action; or, worse, different parts of the plans get going at different speeds, different times, and with different objectives and goals, and the favor of the “boss” becomes more important than performance. At this point the product may be excellent, the people able and dedicated. The boss may be—indeed often is—a man of great ability and personal power. But the business will begin to flounder, stagnate, and soon go downhill unless it shifts to the “skeleton” of managers and management structure.

Henry Ford wanted no managers. But the only result was that he mismanaged, misdirected, and misorganized his company and stunted or broke management people. The only choice for an institution is between management and mismanagement. But managers are inevitable. And the job of management cannot be evaded. Whether it is being done right or not will determine largely whether the enterprise will survive and prosper or decline and ultimately fall.