BSML’s Summary of Principles from:


By Peter F. Drucker


From the BSML Business Wisdom Series


Peter Drucker was labelled “the man who invented management” and one of the greatest thinkers of his time. The Practice of Management is a seminal work.

Its purpose for the former was to “narrow the gap between what can be done and what is being done, between the leaders in management and the average.” For the latter, the aim was to “let them know what management is, what it does and what they can rightfully expect from it.”

Our intention in compiling this summary is to share the wisdom of this great thinker with our clients and prospective clients, to encourage them to read the full work, and to help them use its principles to improve management practices and business performance. We welcome your feedback.

Please feel free to share this document with your colleagues and business partners, who have an interest in the topic.

Nick Bentley, Managing Director, BSML


  1. The nature of management
  2. The nature of a business
  3. Managing a business
  4. Roles in a business
  5. Managing managers
  6. The structure of management
  7. What it means to be a manager
  8. Managing worker and work
  9. Afterword

1. The Nature of Management

1.1 Management defined

1.2 The job of management

1.1 Management defined

Management is the organ of society charged with making resources productive

It is to do with economic advance, human betterment and social justice

The Manager is the dynamic, life giving element in every business

Without his/her leadership, the resources of production remain resources and never become production

The free world and business have an immense stake in the competence, skill and responsibility of management

1.2 The job of management

Management is the organ of the business enterprise and an industrial society (not government, the church or the military)

The reason for having business enterprises is the economic supply of goods and services to customers

The first function of management is economic performance

The jobs of management are :

– Managing a business

– Managing managers

– Managing worker and work

Management has failed if it does not :

– Supply goods and services desired by the consumer at a price the consumer is willing to pay

– Improve or at least maintain the wealth producing capacity of the economic resources entrusted to it

 The ultimate test of management is business performance

2. The Nature of a Business

2.1 What is a business?

2.2 What is your business?

2.3 Your checklist

2.1 What is a business?

The customer alone determines what a business is. Through being willing to pay for a good or service, (he or she) converts economic resources into wealth; things into goods

What the customer considers “value” is decisive and determines what a business is, what it produces and whether it will prosper


Any business has two basic functions


  1. Marketing; and
  2. Innovation


Businesses are set apart from all other human organisations by the fact they market a product or service

The purpose of business is not to maximise profit The purpose of business is to “create a customer”

2.2 What is your business?

What is your business is not determined by the producer, but by the customer


Management must make a conscious effort to get honest answers from the consumer himself rather than attempt to read his mind


That this question is so rarely asked … and so rarely given adequate study and thought is perhaps the single most important cause of business failure


Success rests to a large extent on raising the question clearly and deliberately, and on answering it thoughtfully and thoroughly

2.3 Your checklist

Who is the customer?

– The actual customer and potential customer?

– Where is he/she?

– How does he/she buy?

– How can he/she be reached


What does the customer buy?

– Outcome not input


What is value to the customer?

– What does he/she look for when he/she buys a product?


What will our business be?

– What is the market potential and market trend?

– Expected changes in economic development, fashion, taste or moves from competition?

– Innovations changing customer wants, creating new wants, changing concepts of value?

– Wants that are not currently being adequately satisfied?


What should our business be?

– Are we in the right business?

– Should we change?

– Should we re-define our market?

3. Managing a Business

3.1 The objectives of a business

3.2 Marketing

3.3 Innovation

3.4 Productivity

3.5 Adequacy of profit

3.6 Physical and financial resources

3.7 Achieving balance

3.8 The Sears Story

3.1 The objectives of a business

To manage a business is to balance a variety of needs and goals in 8 areas:

  • Market standing
  • Innovation
  • Productivity
  • Profit
  • Physical and financial resources
  • Manager performance and development
  • Worker performance and attitude
  • Public relations

To manage a business is to balance a variety of needs and goals in 8 areas:

– Organise and explain the whole range of business phenomena in a small number of general statements

– Test these statements in actual experience

– Predict behaviour

– Predict the soundness of decisions when they are still being made

– Enable practising business men to analyse their own performance and, as a result, improve their performance

An enterprise is a community of human beings. Its performance is the performance of human beings

3.2.1 Marketing

“The first man to see marketing clearly was Cyrus McCormick” in 1850. He invented the tools and concepts of modern marketing :


– Market research and market analysis – Market standing

– Pricing policies

– Service salesmen

– Parts and service supply – Instalment credit


Before McCormick, selling was seen as ignoble and parasitical, whereas production was seen as gentlemanly


McCormick saw “marketing as the whole business” (i.e. that it needed to drive all other business functions) and was the “final result” from the customer’s point of view

3.2.2 Measuring market standing

The 7 distinct marketing goals :


  1. The desired standing of existing products in their present market, expressed in dollars and percentage of the market, measured against both direct and indirect competition
  2. The desired standing of existing products in new markets set both in dollars and percentage points and measured against direct and indirect competition
  3. The existing products that should be abandoned – for technological reasons, because of market trend, to improve product mix or as a result of management’s decision concerning what its business should be
  4. The new products needed in existing markets – the number of products, their properties, the dollar volume and the market share they should gain themselves
  5. The new markets that new products should develop – in dollars and percentage
  6. The distributive organisation needed to accomplish the marketing goals and the

pricing policy appropriate to them

  1. A service objective measuring how well the customer should be supplied with what he considers value by the company, its products, its sales and service organisation. It should be measured by regular, systematic and unbiased questioning of the customer.

3.3.1 Innovation

Enterprise is the organ of economic growth

Innovation is “the provision of better and more economic goods and services”

It is not necessary for a business to grow bigger, but it is necessary that it constantly grow better

Innovation may take the form of :


– Lower price

– New or better products (even at a higher price)

– New uses for old products (fridges to Eskimos to keep food cool)

– Design of products, process, distribution or administrative functions

– Advancing the art in any area of the business


Every managerial part of a business should have clear responsibility and definite goals for innovation

3.3.2 Goals of innovation

There are 5 typical innovation goals for any business:

  1. New products or services that are needed to attain marketing


  1. New products or services that will be needed because of

technological changes that may make present products obsolete

  1. Product improvements needed both to attain market objectives

and to anticipate technological changes

  1. New processes and improvements in old processes needed to satisfy market goals eg manufacturing improvements to attain pricing objectives
  2. Innovations and improvements in all major areas of activity – so as to keep up with advances in knowledge and skills

3.4.1 Productivity

Productivity is the balance between all factors of production that will give the greatest output for the smallest effort

It is not output per worker or per hour of work since the hierarchy of productivity goes from brawn to brain :


– Muscle effort

– Mechanical energy

– Planning

– Brain power


Factors affecting productivity are :


– Time (utilisation pace of people and machines – fast, steady or slow)

– Product mix

– Process mix

– Organisation structure (including productive versus parasitic overhead)

3.4.2 Measuring productivity

Productivity measures the competence of management, how well resources are utilised and how much they yield

Economists use “Contributed value” to measure productivity


– The difference between revenue received and the costs of raw materials and services rendered by outside suppliers; or

– The sum of all the resources the business contributes to the final product and the appraisal of that effort by the market

– The goal is maximum output for minimum effort


Productivity improvement opportunities comprise :


– Substitution of capital equipment for labour

– Removing parasitical rather than creative overhead

– Time utilisation

– Product mix

– Process mix

– Contributed value – ratio of contributed value to revenue and ratio of contracted value to profit

3.4.3 The principles of production

Productivity measures the competence of management, how well resources are utilised and how much they yield

Economists use “Contributed value” to measure productivity


– The difference between revenue received and the costs of raw materials and services rendered by outside suppliers; or

– The sum of all the resources the business contributes to the final product and the appraisal of that effort by the market

– The goal is maximum output for minimum effort


Productivity improvement opportunities comprise :


– Substitution of capital equipment for labour

– Removing parasitical rather than creative overhead

– Time utilisation

– Product mix

– Process mix

– Contributed value – ratio of contributed value to revenue and ratio of contracted value to profit

3.4.3 The principles of production

There are 3 systems of production. The principles of each are different

SystemIndustry ExamplesPrinciples
1. Unique product--
- Craft/batchArtwork/sculptureEach product is self contained
- StagedHouse/ship buildingEach stage is self contained
2. Mass production--
- Old styleModel T FordUniform products
- New styleModern productionUniform parts/assembly
3. Process productionOil and gas refiningProcess and product are one

They each have different profiles in terms of volume, cost, quality, cycle time and flexibility

They each put different demands on management

3.4.4 Production demands

SystemAttributesDemand on Management
1. Unique product - Craft/batch - Staged High cost, plant flexibility, short decision spans To get an order, manage technical people
2. Mass production - New styleSupply wants fulfilled cheaply, Wide and flexible product range High capital, investment, continuous activity, inventory riskBuild a distributive organisation, Educate the customer to the range of products Manage schedules and planning Manage all functions co- operatively. Stabilise employment
3. Process productionHighest capital investment, nearly continuous operations, products created by changing the process. Long-term decision spansCreate, maintain and expand a market and find new markets Prevent extreme economic fluctuations
4. Mass production – old styleSupply wants fulfilled cheaply, one product Homogenous partsRestricting variety

3.5 Adequacy of profit

Managing a business must be a creative rather than an adaptive task

Profit is not a cause it is a result – the result of the performance of the business in marketing, innovation and productivity. It is the test of this performance

The first duty of every business is to survive. The guiding principle of business is not the maximisation of profit, but the avoidance of loss

Economic activity focuses on the future and always attempts to bring about change. It saws off the limb on which it sits, making existing risks riskier and creating new ones

Business enterprise must produce, over the long term, a premium to :


– Cover the risks inevitably involved in its operation

– Cover the losses of those businesses that operate unprofitably

– Make a contribution to the social cost of a society (taxes)

– Produce capital for future expansion


It is an absolute necessity to produce, at the very least, the profit to cover its own future risks, the profit to enable it to stay in business and to maintain the wealth producing capacity of it resources

3.6 Physical & financial resources

Every business needs to plan for and properly manage:


– Financial resources

– Physical resource supply

– Facilities

– Capital budgets

– Pricing, dividend, depreciation, replacement, re-investment and tax policy


The other 3 objectives are dealt with in detail in later sections:

– Manager performance and objectives

– Worker performance and attitude

– Public relations

3.7 Achieving balance

Objectives, investment and managed expenditures must be balanced between each other and the short and the long term


– Managed expenditures require long application to be effective

– Sudden cuts may destroy in one day what it took years to build

– One slice of bread every day is better than half a loaf today and none tomorrow

– Tools to help – economic cycles, leveraging past events, trend analysis


Key decisions comprise:


– What should be done in each area, what area to give priority, which to cut first and how far, which to expand first and how far

– What risks to take with the long-run future for the sake of short-term results and what short-term sacrifices to make for long-run results

– What to maintain even in bad times, what to adjust to the times and what to avoid even in a boom.

– Where to raise expenditures first if business gets better, where to cut if it turns down

3.8 The Sears story

  • Richard Sears gave the company its name. But it was not he who made it into a modern business enterprise. He was a shrewd speculator, buying up distress merchandise and offering it one batch at a time through spectacular advertising

  • Julius Rosenwald drove the distribution revolution from 1895 to 1925. He found the customer (the farmer), analysed the market (isolated, inaccessible, distinct, untapped), developed new channels (mail order), new offerings (farm merchandise in high volume, at low price, with a guarantee of regular supply and money back guarantee), new promotion and ordering (mail order catalogue)

  • Otto Doering designed and built the first mail order plant in Chicago in 1903, 5 years before Henry Ford’s production line. In fact Henry Ford copied him!

  • General Robert E Woods 1925 to 1954 identified the “urban market” and switched Sears’ emphasis to retail stores, equipped to serve both the mobilized farmer and city population. Innovations included new sources of supply (new product design for the mass market and new volume manufacturers), store managers (manager development due to shortage of people), retail selling processes, new organisation and compensation (which enabled 700 stores to be controlled centrally, but run locally in its distinct market), selection of store locations, architecture and physical appearance inside (which transformed the shopping experience and habits of American people and design of towns)

4. Roles in a Business

4.1 The Chief Executive

4.2 The Board

4.3 The manager

4.4 The supervisor

4.5 The professional employee

4.6 The Ford story

4.1 The Chief Executive

The bottleneck is at the head of the bottle.


There is no job that needs to be organised as carefully and as systematically as that of the chief executive. The job has to be planned and the work has to be performed according to plan


Three distinctive characters – the thought man, the man of action and the front man


The chief executive job in every business (except the smallest) cannot properly be organised as the job of one man. It must be the job of a team of several men acting together


If the chief executive gets a salary several times as large as the salaries paid to the number 2, 3 and 4 men, you can be pretty sure that the firm is badly managed… top management is a team … which needs a captain … pay levels should be similar


There has to be clearly assigned responsibility for the objectives in the 8 key areas of business performance … but the management team should have as few as possible members… but more than two

4.2 The functions of a Board

The board is an organ of review, appraisal and appeal. Only in a crisis does it become an organ of action – and only then to remove existing executives that have failed, or replace executives who have resigned, retired or died


Its functions comprise :


– Review and approval of the decision of what the company’s business is and what it should be; the objectives the company has set for itself and the measurements of progress towards those objectives, profit planning, capital investment policy, managed expenditure budget, management rewards, tools and methods to strengthen the organisation and direct it towards its objectives

– Appeal as Supreme Court in respect of organisation problems

– Appraisal of the spirit of the organisation, utilising the strengths of people and neutralising their weaknesses, developing tomorrow’s managers


The Board must be detached from operations and must view the company as a whole, using over-all patterns, concepts and principles


It will be stronger and more effective if it is genuinely an “outside” board, comprised of people who are likely to see things differently, to disagree and to question the assumptions on which the executive team act.

4.3 The manager

A manager’s job exists because the task facing the enterprise demands it.

His job :


– Has its own necessity; it must have its own authority and its own responsibility

– Has duties upwards to help his superior achieve his unit’s objectives, to the enterprise to help it achieve its objectives and to his subordinates to achieve their objectives

– Should always embody the maximum challenge, carry the maximum responsibility and make the maximum contribution. Contribution should be visible and measurable

– Should be directed and controlled by the objectives of the organisation, not his boss. It is the duty of the superior to help him achieve his objectives

– Should be organised into team tasks, where it becomes too big


The span of managerial responsibility is determined by how many people a manager can “assist” and is determined by the extent to which assistance and teaching are needed. It is theoretically around 100 and should generally be a few more to avoid taking over their jobs and breathing down their necks


Normal span of control assumes a supervisory/delegation model and is 6 or 7.This creates levels on levels, stifles development and erodes the manager’s job

4.4 The supervisor

The role of the supervisor, foreman, chief clerk or section manager should be no different to a manager, since he has the same functions, but is often artificially constrained to being smaller than an economic unit


The supervisor is the management’s errand boy, who cannot make a decision, who is always wrong and who has to be by-passed to get anything done


The only way to solve this is to set the job up properly. The supervisor needs :


– Clear cut objectives, focused directly on the objectives of the business

– Knowledge of the company’s operations, structure, goals and performance

– Responsibility and resources to achieve his unit’s objectives

– Promotional opportunities and a rational promotion system based on clear performance standards (70% see no opportunities for promotion)

– Status – management status to represent his men upwards

– Supervisors should be promoted from the rank and file


Management development therefore must start with supervisors, by providing :


– Genuine management jobs

– Control over activities and personnel to discharge his responsibilities

– Technical trainers or job instructors to assist and become his replacement

– A much larger unit to enable proper management of all dimensions

4.5 The professional employee

There are 3 types of “workers” – management, ordinary workers and individual professional contributors (the professional employee)


Whilst a manager is responsible for a component of the business, the professional employee is responsible for his own contribution based on professional standards, rather than contribution to business results


His responsibility and authority is not managerial, but that of the teacher


He has 5 needs if he is to be an effective and productive member of the enterprise :


– He must be a professional, yet make a contribution to the enterprise and know what it is

– Have opportunities for promotion as a professional and individual contributor, since professionals often don’t make good leaders or managers, often preferring to work alone or in small teams

– Have financial incentives for improved performance, since specialist technical knowledge is as important to an organisation as generalist skills

– His job must be that of a professional and he must not be “supervised”, but a great deal demanded of him

– Have professional recognition inside the enterprise and in the larger community

4.6 The Ford story

Henry Ford wanted no managers. Consequently he :


  • Misdirected his managers
  • Set up their jobs improperly
  • Created a spirit of suspicion and frustration
  • Mis-organised his company
  • Mis-developed management people


It was the absence of management which transformed Ford ‘s market share from 67% of the automobile market in the 1920s to 20% fifteen years later


Fundamental to Henry Ford’s misrule was a systematic, deliberate and conscious attempt to run a billion dollar business without managers and with himself as sole decision maker

5. Managing Managers

5.1 The art of managing managers

5.2 Management by objectives and self-control

5.3 The spirit of an organisation

5.4 Developing managers

5.1 The art of managing managers

Managers are the basic resource of the business and enterprise – the scarcest, fastest to depreciate and in constant need of replenishment.


It takes years to build a management team, but it can be destroyed in a short period of misrule


How well managers are managed determines whether business goals will be reached. For the worker’s attitude reflects above all the attitude of its management. It directly mirrors management’s competence and structure. The worker’s effectiveness is determined largely by the way he himself is managed.


The 6 requirements of managing managers :


– Management by objectives and self control

– The proper structure of the manager’s job (see 4.3)

– The right spirit of the organisation

– Chief executive and board of directors (organ of government) (see 4.1 & 4.2)

– Provision for tomorrow’s managers

– Sound structural principles of management organisation


The only choice management has is whether to do these jobs right or not

5.2.1 Management by objectives and self control

Any business must build a true team and weld individual efforts into a common effort. They must pull in the same direction, and their contribution must fit together to produce a whole – without gaps, friction and unnecessary duplication of effort


The performance of the manager must be derived from the performance goals of the business, his results must be measured by the contribution they make to the success of the enterprise


Management by objectives requires major effort and special instruments, for business contains three powerful factors of mis-direction :


– Specialised work – concerned with their own craft, trade secrets and domain

– Hierarchical structure – loose confederation of functional empires focused inward

– Differences in vision and work compared to the organisation – loss of the common goal


The different objectives of the 3 stone cutters :


– I am making a living

– I am doing the best job of stone cutting in the entire country

– I am building a cathedral

5.2.1 Management by objectives and self control

Every manager should be free to decide what he has to do, if he is to be truly accountable for his own results. He should act as a free man


Performance aims upwards, so the manager should be part of the objective setting at the level above and understand the objectives of his superior’s job and of the organisation


The manager must set the objectives of his unit himself, with the help of his own managers, and so on down the management hierarchy – this enables management by self control, rather than management by domination


Self control motivates and creates a desire to do the best, deliver higher performance and have a broader vision


Each manager must have the information he needs to measure his own performance. This information should go to the manager, not his superior.


Reports should be simple and not an instrument of morality, a substitute for judgement or an instrument of control from above


He must clearly understand the ultimate business goals, what is expected of him and why, what he will be measured against and how

5.3.1 The spirit of an organisation

Management by objectives tells a manager what he ought to do. It is the spirit of the organisation that determines whether he will do it.


It is the spirit that motivates, that calls upon a man’s reserves, dedication and effort, that decides whether he will give his best or do just enough to get by.


The purpose of an organisation is to make common men do uncommon things. Good spirit requires that there be full scope for individual excellence. The test of good spirit is performance, not conformance. The creation of energy… energy turned out that is larger than the sum of the efforts put in. This requires morality … emphasis on strength, stress on integrity and high standards of justice and conduct … practices … tangible behaviour.


The 5 areas to ensure the right spirit comprise :


– High performance requirements; no condoning of poor or mediocre performance; rewards must be based on performance

– Each management job must be a rewarding job in its own right, rather than just a step up the ladder

– There must be a rational and just promotional system

– Management needs a “charter” spelling out clearly who has the power to make life-and-death decisions affecting a manager; and there should be a higher court of appeal

– In its appointments, management must demonstrate that it realises that integrity is the one absolute requirement of a manager

5.3.1 The spirit of an organisation

Management by objectives tells a manager what he ought to do. It is the spirit of the organisation that determines whether he will do it.


It is the spirit that motivates, that calls upon a man’s reserves, dedication and effort, that decides whether he will give his best or do just enough to get by.


The purpose of an organisation is to make common men do uncommon things. Good spirit requires that there be full scope for individual excellence. The test of good spirit is performance, not conformance. The creation of energy… energy turned out that is larger than the sum of the efforts put in. This requires morality … emphasis on strength, stress on integrity and high standards of justice and conduct … practices … tangible behaviour.


The 5 areas to ensure the right spirit comprise :


– High performance requirements; no condoning of poor or mediocre performance; rewards must be based on performance

– Each management job must be a rewarding job in its own right, rather than just a step up the ladder

– There must be a rational and just promotional system

– Management needs a “charter” spelling out clearly who has the power to make life-and-death decisions affecting a manager; and there should be a higher court of appeal

– In its appointments, management must demonstrate that it realises that integrity is the one absolute requirement of a manager

5.3.2 Principles associated with spirit

Performance – managers should not be driven, but they should drive themselves; mediocre performance cannot be condoned; the better a man is the more mistakes will he make; whenever a man’s failure can clearly be traced to management’s mistakes, he has to be kept on the payroll


Appraisal – Insistence on high goals and high performance requires that a man’s ability to set goals and attain them be systematically appraised; appraisal should always be the direct responsibility of his manager and should always focus on proven performance; appraisal that focuses on “potential”, on “personality”, on “promise” – on anything that is not proven or provable – is an abuse; a man should never be appointed to a managerial position if his vision focuses on people’s weaknesses rather than on their strength; if a manager lacks in character and integrity, he destroys people, he destroys spirit, and he destroys performance


Reward – performance over and above should always be rewarded while being made; this builds spirit and performance; delayed compensation is like buying loyalty; loyalty can only be earned

5.3.2 Principles associated with spirit (cont.)

Promotion – over-emphasis on promotion frustrates and demoralises; every management job itself should be rewarding and satisfying; the salary structure should offer rewards for extraordinary performance that are comparable to rewards or promotion … up to two promotional steps; people need rewards of prestige and pride; promotion should not be entirely from within


Management charter – a manager should know who makes “life and death” decisions. He should know that decisions in respect of his job and work have been safeguarded against one man’s arbitrariness or lack of judgement … spite, bias or stupidity


Who not to appoint to management jobs – someone who … lacks character and integrity …focuses on weaknesses rather than strengths …asks who is right, rather than what is right? …considers intelligence more important than integrity … is afraid of subordinates … does not set high standards for his own work.

5.4 Developing managers

The prosperity, if not the survival of any business, depends on the performance of its managers of tomorrow. There is also a responsibility to society and the individual

Manager development is not – promotion planning, finding back-up men for top management vacancies, development of the “chosen few”.


Promotion must be based on actual performance rather than subjective “promise” or “potential”, for no one can or should predict future performance of an individual


Manager development must be the development of the entire management group, challenging all to growth and development. It must be dynamic, qualitative and focus on the needs of tomorrow.


Development is always self-development and the responsibility rests with the individual, his abilities, his efforts


Every company can provide systematic development challenges to its managers – based on systematic appraisal of performance, placement where he can make the greatest contribution and analysis of what he has to learn to overcome his weaknesses to fully realize his strengths. Development may be another job, formal schooling, a special assignment.


Manpower planning should ensure development is effective and aligned to the business objectives and what the business will be in the future

6. The Structure of Management

6.1 The importance of structure

6.2 Building the structure

6.3 Principles for service staffs

6.4 The importance of common citizenship

6.5 The challenges of growth

6.1 The importance of structure

Performance depends on proper organisation.


The wrong structure will seriously impair business performance.


Structure needs to be carefully designed based on 3 techniques :


– Activity analysis – what work has to be performed, what belongs together, what emphasis each activity needs, what is no longer needed, what new functions will be needed in the future

– Decision analysis – what decisions are needed to achieve objectives, what kind of decisions are they (policy, strategic, tactical, cross unit recurrent or rare), at what level of the organisation should they be made (as low and as close to the action as possible), what activities are affected by them, who should participate or be consulted beforehand and who should be informed afterwards?

– Relations analysis – what activities and contributions overlap upwards, sideways and downwards (upwards first, then sideways, then down)

6.2.1 Building the structure

There are 3 fundamental requirements for structure :


– Organised for business performance – direct and simple, focused on business not bureaucratic performance, future needs rather present (growing new products, not resting on current ones)

– Least possible number of management layers (Catholic church has 3 – the Pope, Bishop, priest)

– Enable training and testing of tomorrow’s top managers through whole business responsibility


There are 2 structural principles


– Federal decentralisation – autonomous product businesses (each with its own market, product, P&L responsibility)

– Functional decentralisation – integrated units with maximum responsibility for a major and distinct stage in the business process

– Both are needed in every business; federal is the more productive

6.2.2 Federal decentralisation

Characteristics :


– Units vary significantly in size

– They have a market and product(s) of their own

– They must contribute profit to the parent, rather than contribute to the profit

– Performance is determined by the final judgement of the market place


Pre-requisites :


– Strong parts and a strong centre

– Many autonomous units, as small as possible, but supporting full management

– Potential for growth

– Scope and challenge to the job – opportunity for innovation

– Units should sit side by side, with their own job, market and product


Benefits :


– Focuses the vision and efforts of managers directly on business performance and results

– Reduces the danger on focusing on the old and easy rather than the new and coming (facts are not hidden in “overhead”)

– Management by objectives becomes fully effective, performance is transparent and managerial responsibility is clear

– Manager development is more effective

– Managers can be tested at a relatively low level by giving them autonomy

6.2.3 Functional decentralisation

Characteristics :


– Knowledge and competence based (rather than market and product)

– Theoretically based on distinct, specialised skills around a stage in the business process.

– Skills, abilities and temperaments are in fact diverse and are not a grouping of related skills (sales – selling, market research, pricing, customer service, advertising, product development; engineering – innovation, manufacturing, maintenance; accounting – management information, financials and tax, record keeping, custodial). All different!

– Has to be used in all organisations sooner or later – better later


Weaknesses :


– Specialists can be narrow in vision, skills and loyalties

– Objective setting and measurement is based on professional standards rather than success of the business

– It adds layers to management – three tiers in a functional unit destroys focus on organisational performance

– A Manager cannot be tested in business performance as he does not have full responsibility for results

– Becomes a stepping stone for promotion as the job is narrow


Functional skills are best put nearest the work to be done (machines to the work, rather than work to the machines), and organised in series on one same level


Functional managers are best reporting direct to general managers to maximise alignment to business objectives

6.3 Principles for Service Staffs

Large and very large organisations face a danger that their functional or service staffs will become empires, which will detract from business performance


The role of a service function should be to :


– Support the chief executive by considering the business as a whole and thinking through the impact of business decisions on the area for whose results it is primarily responsible.

– Enable the operational manager to do a better job (and gauge its own performance by the performance of the manager it serves)


Service functions should not :

– Have authority – line, functional or advisory – over operating managers

– Hold power over promotions in operating managers

– Work out policies, procedures or programmes for operating managers (these are training opportunities for new managers)

– Push towards uniformity of methods, tools and techniques at the expense of innovation

6.4 The importance of common citizenship

Common citizenship is required to combat functional clannishness and product- business parochialism


This is achieved in 3 ways :


– Certain decisions are reserved for top management (business mission, price ranges, borrowing)

– Systematic promotion across departmental and unit lines (one ladder of promotion; not ladders within ladders)

– Adherence to company principles (common purpose, aims, beliefs), which should be clearly spelled out and strictly observed


Symptoms of mal-organisation include :


– Structural principles not being observed (too many levels of management)

– Poor or confused objectives

– Failure to remove poor performers

– Over-centralisation

– Lack of proper activity analysis

– Co-ordinators, expediters, assistants (frictional overhead)

– Go through channels, co-ordinating committees, incessant meetings, full time liaison men

– Lopsided age structure- too old (no past promotional paths) or too young (no future ones)

6.5.1 The challenges of growth

Growth is the result of success and its normal cause is able and competent management at a given scale of operation. The problem of size is changing from one size to another


The first requirement of successful growth is willingness and ability to change the structure, and the attitude and behaviour of top management


The first person to change must be the CE, who must let go intellectually and emotionally of the old and familiar way of operating and “get some time for thinking”


Operating and middle management have to change as much – they must grow their competence, vision, skills or they will become a bottleneck which stifles, frustrates and crushes the men under them. Changes in decision timescales, objectives, management relations, communications, behaviours and competencies are required


Frameworks are needed to understand where we are and how to get to the next stage, since each stage is distinct and not part of a continuum

6.5.2 The four stages of growth

Business typeProblemsGrowth Requirement
Small One man entrepreneurship Limited management organisation/ competence/ narrow vision and experience Family loyalties/preferences CE not a full time role, so may control an operational functionAdd a level of management
between CE and workers Outside
viewpoints on board Management
changes, merger or acquisition
Fair-sizedCE job is full time Overall business objectives cannot be set by the CE alone Organising technical specialists and their relationship to functional and
top management
Chief executive team Federal rather than functional organisation
applicable and advantageous
Management development
LargeCE role too big/complex for one person Ingrown, inbred, self satisfied management Functional empiresCE role split Challenge to managers by dividing
the business federally
Small, aligned service staffs
Very largeToo many management levels/ co- ordinators, committees, meetings Inbreeding, loss of esprit de corps Over diversity of markets/productsCommon citizenship Hire new
blood from outside Splitting
the business

7. What it means to be a manager

7.1 Responsibilities of management

7.2 Fundamental tasks

7.3 Key functions of the manager

7.4 What makes a manager?

7.5 Making decisions

7.6 The manager of tomorrow

7.1 Responsibilities of management

Relationship to the outside – to customer and market, labour unions, social, economic and technological forces in society


Enterprise is an organ of society and serves a social function – power over people and resources, employment, prosperity, wealth creation and protecting the environment


Requirements on managers are therefore around public good, ethical standards of conduct, to restrain self interest and authority so as not to infringe on the common wellbeing and freedom of the individual


The enterprise must itself demand that management think through its public responsibilities and behaviour, to convert threats to the enterprise’s freedom, from communities and government, into opportunities for sound growth; public good is in the enterprise’s own self interest.

7.2 Fundamental tasks

  1. Creating a true whole that is larger than the sum of its parts :


– A productive entity that turns out more than the sum of the resources put in

– Balancing and harmonising the 3 major functions of the business enterprise (managing the business, managing managers and managing workers and work)

– Making sound decisions

– Achieving synchronised performance from the enterprise’s diverse activities

– Asking what better performance is needed and from what activities

– Supplementing strengths and minimising weaknesses


  1. Harmonising in every decision and action the requirements of immediate and long range future


– Keeping his nose to the grindstone, whilst lifting his eyes to the hills

– Being sound in expediency as well as long range objective and principle

– Carefully calculating the sacrifice on the future to protect immediate interests, against the sacrifice he makes today for the sake of tomorrow

– Limit sacrifice and repair the damage it inflicts as soon as possible

7.3 Key functions of the manager

  1. Set objectives by balancing results and principles, immediate and future

needs, desirable ends and available means, analysis and synthesis, determining what the objectives should be, what has to be done to reach the objectives, communicating them


  1. Organise through analysis of activities, decisions and relations, classification of the work, division into manageable jobs, grouping into an

organisation structure, people selection and placement, the most economical use of scarce resources, integrity and justice, people development


  1. Motivate and communicate through relationships, creating teams

and teamwork, incentives and rewards for successful work, promotion policy, constant communication, integration, synthesis and justice,


  1. Measure by establishing measures that are focused on the performance of

the whole organisation and at the same time the individual’s work, analysis of performance, appraisal and communicating findings to the worker and superior


  1. Develop people by helping them develop themselves, training them, bringing out their strengths, modelling integrity, making them stronger

7.4 What makes a manager?

Integrity and character

Working for the good of the enterprise

Considering his boss’s problems and considering what he can do to contribute to the success of his boss

Ability to motivate, guide, and organise people to do their work

Skill in communication and getting his thinking across, as well as skill in finding what other people are after

Achievement of results – by planning, thinking before acting, setting objectives, systematically solving recurrent problems

Sound appraisal of his staff to enable decisions on salary, promotion, training and work allocation

Education – giving others vision and the ability to perform

In the final analysis, it is vision and moral responsibility that define the manager

7.5.1 Making Decisions

Whatever a manager does, he does through making decisions. The most important decisions are strategic – those which impact performance


Strategic decisions at senior management level include those on objectives and means, productivity, organisation design, capital expenditure. Strategic decisions at operational management level include sales districts, training, plant layout, maintenance and flow


The most common mistake in management decisions is the emphasis on finding the right answer rather than the right question.


The process for good decision making has 5 steps :


– Defining the problem

– Analysing the problem

– Developing alternative solutions

– Deciding on the best solution

– Converting the decision into effective action

7.5.2 Defining the problem

Finding the right question, setting objectives and determining the rules are the first phase.

Nothing is as useless or dangerous as finding the right answer to the wrong question! Too much time can never be spent on this phase


2 steps to defining the problem


  1. Find the critical factor (the real problem, not symptoms)-the element that has to be changed before anything else can be changed, moved or acted upon. This is done by two simultaneous processes :


  • Isolating the critical factor using the principal of virtual motion (what will happen in time, if we continue exactly as we are?)
  • Isolating the problem by projecting backwards to the start and asking what could we have done or not done when the problem first appeared?


  1. Determine the conditions for its solution – the objectives for the solution must be thought through and must reflect the objectives of the business and be focused ultimately on business performance and business results


  • What are the principles, policies and rules that have to be followed?
  • What can the solution not be based on given these principles?
  • What changes will be required to accepted policies or practices?

7.5.3 Analysing the problem

Analysing the problem is about :


  1. Classifying the problem and
  2. Finding the facts


Classifying clarifies who must make the decision, who must be consulted and who informed.


Classification alone can show who has to do what in order to convert the decision into effective action.


There are 4 principles of classification :


  1. Futurity – the time-span over which the business is committed to a course of action and the speed with which the decision can ne reversed
  2. Impact – of the decision on other areas and functions
  3. Number of qualitative considerations that enter into it
  4. Uniqueness or periodicity of the decision

Finding the facts requires knowing what information do I need to get to make this particular decision? It is about relevance and validity of data, testing the validity of the approach, and defining the unknown. Much information is incomplete, so guesses often have to be made

7.5.4 Developing alternative solutions

Alternative solutions are in effect our only tool to mobilise and to train the imagination.

They force us to bring our basic assumptions to the conscious level, examine them and test their validity

We all have infinitely more imagination than we ever use

We should seek to embrace all possibilities, as well as extremes, and challenge traditional ways of doing things

One possible option should always be considered – taking no action at all

7.5.5 Finding the best solution

There are 4 criteria for picking the best from among the possible solutions :


  1. Risk
  • Appraise the odds
  1. Economy of effort
  • Greatest results with least effort


  1. Timing
  • When changing the vision, be ambitious and present the big picture
  • When changing habits, start slow and modestly


  1. Resource limitations
  • Means
  • People


It is not solving a problem that which works on paper, but fails in practice

7.5.6 Making the decision effective

A great deal of time is spent on “selling” solutions. It is wasted time.

It is not enough that someone buys a solution, they must make it their own. It must become “our” solution

The people who carry out a decision, should always participate in the work of developing alternatives, as this will reveal points that the manager may have missed, spotting hidden difficulties and uncovering available, but unused resources

To convert a solution into action requires that people understand what change of behaviour is expected of them and what change of behaviour to expect in the behaviour of others.


What they have to learn is the minimum necessary to make them able to act in the new way. The principle of effective communication is to convey only the deviation or exception

Precisely because the decision affects peoples work, it must :


– Help them achieve their objectives and assist them in their work

– Contribute to them performing better, more effectively and with a greater sense of achievement

7.5.7 New tools in decision making

Operations research tools provide systematic, logical and mathematical analysis and synthesis.


These business modelling tools (which BSML build) are useful in :


  • analysing the problem and developing alternative courses of action
  • finding patterns in the behaviour of the business and its environment
  • making accessible understanding of vision, sparking imagination,
  • assessing availability and quality of information, business resource requirements and impact of given actions
  • tying together the work of each function of the business and showing total impact
  • helping others understand actions and associations
  • putting tools in everyone’s reach

These tools, however, do not help define the problem, determine the solution and make a decision effective

7.6 Tasks of the manager of tomorrow

  1. Manage by objectives, patterns and systems
  2. Take more risks and for a longer period ahead
  3. Make strategic decisions
  4. Build an integrated team
  5. Communicate information fast and clearly
  6. See the business as a whole and integrate his function with it
  7. Relate his product and industry to the total environment, including seeing economic, political and social developments on a worldwide scale and to integrate worldwide trends into his own decisions

8. Managing worker and work

8.1 Employing the whole man

8.2 Organising for peak performance

8.3 Motivating for peak performance

8.4 The IBM Story

8.1 Employing the whole man

Human resources – resource or human?


– Resources are utilised.

– Humans can decide whether to work or not. They have the ability to co-ordinate, integrate, judge and imagine. Productivity is an attitude, so people must be motivated.

Motivation and growth always come from within. A job should always challenge the worker

– Humans work in groups; relationships are important. A person’s strengths, initiative, responsibility and competence must be brought into harmony with the group and organisation


Demands of the enterprise on the worker


– Willing dedication, – it is a peculiarity of man that he yields best to high demands

– Willingness to accept change – change must appear rational and an improvement, and must not be so rapid or great as to obliterate the psychological landmarks which make a worker feel at home – his work, his relations with fellow workers, his skill, prestige and social standing


The worker’s demands on the enterprise


– Economic returns, returns as an individual, a person, a citizen

– Fulfilment of status and function in his job, realisation of promises including justice through equal opportunity for advancement, his work is meaningful and serious, high standards of performance and competence in the ways his work is organised, visible signs of management’s concerns for good work

8.2 Organising for peak performance

Peak performance rather than happiness or satisfaction is the goal. To get there the following need to be done :


– Engineering each individual job for maximum efficiency – human work needs integration, systematic analysis of constituent motions, logical sequencing, making it easier, faster, more effortless, making a whole out of many things – to judge, to plan and to change. This also applies to automation where a number of operations are integrated into a whole. The work of a surgeon is the best example.

– Improvements in performance come from improvements in the individual motions

– Work needs to be laid out systematically and in a logical flow

– The job should constitute a distinct stage or step so that the result can be seen

– The job should always depend for its speed and rhythm on the performance of the man, without pressure

– Each job should embody some element of skill, challenge or judgement

– The more manual skill is required, the fewer steps; the more judgement the more basic steps

– Conflict between group/social cohesion and the performance of the job should be avoided, so the group must be organised to work together rather than competitively

– Correct placement makes people productive and should be continually reviewed.

– Temporary/utility men do a better job and have greater job satisfaction, less fatigue, because they get to move from operation to operation, get variety and add value

8.3 Motivating for peak performance

Responsibility is the key to motivation. It does not matter whether the worker wants responsibility or not. The enterprise must demand it of him. The 4 ways of reaching a responsible worker are :


– Careful placement

– High standards of performance

– The information needed to control himself

– Opportunities for participation that will give him managerial vision


Nothing challenges men so effectively to improved performance as a job that makes high demands on them. Nothing gives more pride of workmanship and accomplishment

Workers must drive themselves. The only way to do this is to focus their vision on a high goal.

Objectives can be set meaningfully if some challenge to skill and judgement is built into the job. To measure work against objectives requires access to information

Participation enables understanding of managerial vision and sense of pride in accomplishment of the right objectives. Organising social and community activities enables the development of management skills

8.4 The IBM story

IBM in the 1950s became a world leader in the production and export of office machines. It did this by applying the following principles in its management of workers and work :

– Having a policy of stable employment, through managers taking responsibility for the development of new markets, new users and new uses. This had the impact of workers


  • Not fearing for their job security
  • Not worrying about working themselves out of a job
  • Not resisting change

– Each job was systematically designed to be big, a complete stage and to contain a challenge to judgement and an opportunity to influence the speed and rhythm of a man’s work. This resulted in :

  • Increase in workers’ pride in the job
  • A constant increase in productivity
  • Instituting job instructors, which delivered training and prepared foremen for manager jobs

– Workers were involved in planning and design of the product, the production process and their own job. This resulted in :

  • Superior design, easy change management and increased worker satisfaction

– Production norms and incentive pay were replaced by salaries. Workers determined with their supervisors where they should best be placed, training needs and the speed and flow of work that would give the most production

9. Afterword

  • This summary provides a useful starting point to examine management practices
  • Since 1954, there have been similar works to diagnose the health of organisations and identify what it is to be an excellent organisation or management team
  • The BSML wisdom series will explore the best of these in 2014.
  • Please feel free to share this document with your colleagues and business partners
  • BSML has its own proprietary business excellence toolkit, which was refreshed in 2013 and will be available to clients in 2014. Please contact us to find out more
  • After all …

“The ultimate test of management is business performance, and whilst a business does not need to get bigger, it always needs to get better”

Peter Drucker (per the Drucker Institute)

Peter F. Drucker was a writer, professor, management consultant and self-described “social ecologist,” who explored the way human beings organize themselves and interact much the way an ecologist would observe and analyze the biological world.

Hailed by BusinessWeek as “the man who invented management,” Drucker directly influenced a huge number of leaders from a wide range of organizations across all sectors of society. Among the many: General Electric, IBM, Intel, Procter & Gamble, Girl Scouts of the USA, The Salvation Army, Red Cross, United Farm Workers and several presidential administrations.

Drucker’s 39 books, along with his countless scholarly and popular articles, predicted many of the major developments of the late 20th century, including privatization and decentralization, the rise of Japan to

economic world power, the decisive importance of marketing and innovation, and the emergence of the information society with its necessity of lifelong learning. In the late 1950s, Drucker coined the term “knowledge worker,” and he spent the rest of his life examining an age in which an unprecedented number of people use their brains more than their backs.

Throughout his work, Drucker called for a healthy balance—between short-term needs and long-term sustainability; between profitability and other obligations; between the specific mission of individual organizations and the common good; between freedom and responsibility.

Driven by an insatiable curiosity about the world around him—and a deep desire to make that world a better place—Drucker continued to write long after most others would have put away their pens. The result was a ceaseless procession of landmarks and classics: Concept of the Corporation in 1946, The Practice of Management in 1954, The Effective Executive in 1967, Management: Tasks, Responsibilities, Practices in 1973, Innovation and Entrepreneurship in 1985, Post-Capitalist Society in 1993, Management Challenges for the 21st Century in 1999.

In 2002, he received the Presidential Medal of Freedom, the nation’s highest civilian honor. He died in November 2005, just shy of his 96th birthday.


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