Book: Concept of the Corporation

Peter Drucker's "Concept of the Corporation"

This briefing document summarizes the key themes and most important ideas presented in excerpts from Peter Drucker's "Concept of the Corporation." Written after extensive study of General Motors (GM) in the 1940s, the book analyzes the structure, management, and societal impact of the large modern corporation, using GM as a primary case study. The excerpts provided focus on the nature of the corporation as an organization for production, its role as a social institution, economic policy in an industrial society, decentralization, and the challenges of wartime conversion.

I. The Corporation as an Organization for Production:

• The Problem of Leadership: Drucker argues that no institution can survive if it needs geniuses or supermen to manage it. Effective leadership must be organized and composed of average human beings. He emphasizes the importance of training and selecting leaders within the organization: "It is typical of the most successful and the most durable institutions that they induce in their members an intellectual and moral growth beyond a man's original capacities." (p. 28) He also notes the increased demand on leaders due to modern industrial and technological conditions.
• Decentralization as a Solution: A significant portion of the excerpts discusses decentralization, particularly as implemented by General Motors. Drucker presents GM's structure as an "essay in federalism" (p. 41), aiming to combine corporate unity with divisional autonomy and responsibility.
• Aims of Decentralization: GM's executives viewed decentralization as a way to achieve speed in decision-making, avoid conflict between divisions, ensure fairness in dealing among executives, and foster management development.
• Mechanisms of Decentralization: This involved dividing the company into largely self-governing divisions responsible for their production and sales, with a central management focused on overall policy, coordination, and long-term strategy. Central management retains the absolute power to remove divisional managers.
• The "Sloan Meetings": These regular meetings between central and divisional management served as crucial platforms for communication, coordination, and resolving conflicts. Drucker highlights their informality and the encouragement of open discussion. "Decentralization means the absence of 'edict management' in which nobody quite knows why he does what he is ordered to do. Its place is taken by discussion and by results which are public and which are arrived at as a result of the experiences of all the people concerned." (p. 48)
• Base Pricing and Competitive Market Standing: Drucker notes that GM uses base pricing as an objective yardstick for measuring the efficiency of its divisions and for making policy decisions. This system allows for comparisons and identifies areas needing improvement.
• Decentralization as a Model?: Drucker poses the question of whether GM's decentralization can serve as a model for other industries, noting that the success depends on various factors and that "the competitive market check" (p. 115) remains crucial.
• How Well Does It Work?: Drucker acknowledges potential problems with decentralization, including the risk of local despotism and the need for a strong central authority to provide unity and direction. He stresses that it requires a delicate balance and a continuous effort to maintain its effectiveness.

II. The Corporation as a Social Institution:

• American Beliefs and the Corporation: Drucker examines the relationship between the corporation and fundamental American beliefs, such as individual opportunity, equality, and dignity. He notes the rise of the "employee society" and the corporation's increasing role in providing livelihood, social status, and recognition.
• The Foreman and the Worker: The excerpts discuss the changing roles and challenges faced by the foreman and the worker in the modern industrial setting. The foreman's traditional authority is being eroded, and the worker in mass production faces the issue of "monotony" (p. 130) and a potential decline in individual opportunity. Drucker emphasizes the need to integrate workers into the industrial community and address their concerns beyond just wages.
• Dignity and Status: Drucker argues that industrial society must provide dignity and status for all its members, including workers. He points out the failure of paternalism and the need for corporations to understand and address the social and psychological needs of their employees. "The demand for status and function as an individual means that in the modern industrial society the citizen must obtain both standing in his society and individual satisfaction through his membership in the plant, that is, through being an employee. Individual dignity and fulfillment in an industrial society depend upon the plant community." (p. 140)

III. Economic Policy in an Industrial Society:

• The "Curse of Bigness": Drucker addresses the societal anxieties surrounding the size and power of large corporations, including concerns about monopoly and social stability. He argues that while "Big Business" is an inherent feature of modern industrial technology, its function and responsibilities need to be clearly defined and understood in relation to the larger society.
• Production for "Use" or for "Profit"?: Drucker explores the tension between these two concepts as driving forces in economic policy. He suggests that while profit is a necessary motive, production must ultimately be oriented towards fulfilling the needs and demands of society.
• Capitalism in One Country: Drucker reflects on the nature of American capitalism, contrasting it with other systems and emphasizing the American belief in a free-enterprise economy. He notes the challenges of maintaining this system in the face of the rise of large corporations and the need to ensure its continued function for the benefit of society.

IV. How Well Does It Work? The Conversion to War Production:

• The Challenge of Peacetime to Wartime Conversion: Drucker examines how General Motors successfully converted its massive production capacity from peacetime automobile manufacturing to wartime armament production after the outbreak of World War II.
• Central Management's Role: Despite the decentralized structure, central management played a crucial role in setting overall goals, allocating resources, and coordinating the conversion process across different divisions.
• Divisional Autonomy in Execution: The individual divisions retained significant autonomy in figuring out how to meet the wartime production demands, leveraging their existing expertise and adapting their processes.
• Labor Supply and Bottlenecks: Drucker highlights the challenges of labor shortages and material bottlenecks during the conversion and how GM addressed these issues through planning and coordination.
• Implications for Decentralization: The successful wartime conversion further validated the effectiveness and flexibility of GM's decentralized management structure in adapting to significant changes and complex demands.

V. The Small Business Partner:

• The Dependence of Dealers: Drucker examines the relationship between General Motors and its independent dealerships. He notes the dealer's significant dependence on the manufacturer for products, financing, and overall market conditions.
• Potential for Conflict: The inherent power imbalance creates the potential for conflict between the manufacturer's interests and the dealer's individual business needs. Drucker touches upon the efforts to establish fair and stable franchise relationships.

Conclusion:

The excerpts from Peter Drucker's "Concept of the Corporation" provide a valuable insight into the functioning and societal role of the large modern corporation in the mid-20th century, using General Motors as a prime example. Key takeaways include the importance of organized leadership, the benefits and challenges of decentralization, the need to understand and address the social and human dimensions of industrial work, and the crucial role of corporations in the broader economic and social fabric. Drucker's analysis highlights the complexities of managing large organizations and their profound impact on society, raising questions that remain relevant for understanding corporations today.

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