Strategy (90 page)

The most mature formulation of the thesis came in 1967 with Galbraith's
The New Industrial State
, at almost the last point when it could carry conviction. He had been influenced by Berle and Means and, as acknowledged in later editions of the book, Burnham. Galbraith reported on the declining influence of stockholders and the growing influence of the experts in development, production, and management—which he labeled the “technostructure.” Power no longer resided with “anonymous shareholders or in a board of directors that is now largely subservient to senior management.” It resided with “the association of men of diverse technical knowledge, experience or other talent which modern industrial technology and planning require. It extends from the leadership of the modern industrial enterprise down to just short of the labor force and embraces a large number of people and a large variety of talent.” Yet only a small segment of this new class actually wielded power at the commanding heights of organizations. In doing so they might reflect broader interests and attitudes, but their basic responsibility was to the interests of the organization upon which they depended for their livelihood. The key texts were not always clear on this point. Galbraith's technostructure covered a large number of people. Burnham seemed to point to chief executives, but his analysis risked tautology as managers became defined essentially as those who wielded power.

In this scheme, planning played a decisive role. It was the means to overcome the laws of supply and demand. Despite suffering through association with Soviet economic organization, the necessity for a forward look and
preparation for coming problems and opportunities was accepted by Western governments and companies. Only by planning could priorities be set and functions coordinated. Size and planning were now essential to ensure continual technological advances. “It is a feature of all planning that, unlike the market, it incorporates within itself no mechanism by which demand is accommodated to supply and vice versa. This must be deliberately accomplished by human agency.”
⁴
This was a time of fear of unconstrained market forces and optimism about the rational exercise of control over human affairs, informed by the miserable experience of the 1930s.

One of the first academics to explore what it meant to manage a modern corporation was Peter Drucker. His background was cosmopolitan. Born in Austria, he arrived in the United States in 1937, via England, to get away from the Nazis. A 1942 book on
The Future of Industrial Man
, which inclined to managerialism, was noticed by General Motors, and Drucker was invited to undertake what was described as a “political audit” of the company. He was given full access, including to Alfred Sloan. For eighteen months he attended meetings, interviewed employees, and analyzed all the inner workings of the company. He viewed the company as a distinctive sort of power structure, not at all, as had been assumed, like a large army with the chief executive cast as the general, issuing commands. At least as far as Drucker was concerned,
The Concept of the Corporation
was the first book to consider business as an organization and “management” as “a specific organ doing a specific kind of work and having specific responsibilities.”
⁵
He was later proud to be “credited with having established management as a discipline and as a field of study” and, even more important, “organization as a distinct entity, and its study as a discipline.”
⁶

In a 1954 book,
The Practice of Management
, he noted how the managers had become “a distinct and leading group in industrial society,” displacing capital when it came to a relationship with labor. Nonetheless, it remained “the least known and least understood of our basic institutions.” At the time (he later broadened the scope), he linked management specifically to business enterprises, which meant that it would be judged by economic performance—outputs rather than professional inputs. He was skeptical of scientific management, for good results might be achieved by intuition and hunch. Moreover, while he acknowledged Taylor's contribution, Drucker blamed Taylor for separating planning from doing. This reflected a “dubious and dangerous philosophical concept of an elite which has a monopoly on esoteric knowledge entitling it to manipulate the unwashed peasantry.” This elitist philosophy led Drucker to class Taylor with “Sorel, Lenin and Pareto.” It was wise to plan before doing, but that did not mean that different people
need be involved, with some giving orders and others doing what they are told.
⁷
In strategic terms he recognized the limits of managers, unable to “master” the environment as they were “always held within a tight vice of possibilities.” The job of management was “to make what is desirable first possible and then actual.” The keystone of his philosophy was to seek to alter circumstances by “conscious directed action.” To manage a business was to “manage by objectives.” In this respect he understood that whatever the long-term vision, it had to be translated into proximate and credible goals when it came to implementation.
⁸
Drucker's philosophy was therefore rationalist—set ends, find means—but took due account of the complexities of both organizational structures and business environments. From the start he saw the dangers if companies paid insufficient attention to their staff. Later on he became more enthusiastic about the rhetoric of “empowerment,” though he always recognized that management required someone to take decisions and be accountable, and so in that respect had to be top down.

These two books (followed by many more) set Drucker up as the first contemporary management theorist. He became a consultant to leading companies, such as Ford and General Electric. Yet General Motors gave
The Concept of the Corporation
, and thereafter Drucker himself, a frosty reception. In some respects this was surprising: he accepted the virtues of large corporations and the inefficiency of small businesses, and praised General Motors's decentralized structure to the point of urging it as a model for others to follow. The reason for the reaction, Drucker concluded, was that senior managers disliked even constructive criticism (for example, of their tendency to take short-term profits rather than make long-term investments). They were wedded to a set of successful and durable core principles that had served them well and had been elevated to much more than an expedient response to circumstances. “The GM executives, for all that they saw themselves as practical men, were actually ideologues and dogmatic, and they had for me the ideologue's contempt for the unprincipled opportunist.” Their differences were also relevant to the two large and contentious issues that had shaped general management thinking during the first half of the century—antitrust and the “labor question.”

It was because of the antitrust issue that General Motors was anxious about Drucker's notion that big businesses were “affected with the public interest.” He also got embroiled in a critical strategic issue directly linked to antitrust. He shared the view of some managers that Sloan's decision to keep market share below 50 percent to avoid further antitrust suits had removed the incentive to grow and was draining the company of initiative. One proposal was to accept a split, following the Standard Oil example. A new company
could be created around Chevrolet, the largest division, which could readily survive on its own. Senior management, however, strongly objected to this idea.

With regard to the labor problem, Drucker observed the dire legacy of the sit-down strikes of 1937, including years of “sniping and backbiting,” and how this prevented the management and unions getting together to find common solutions in a spirit of understanding and sympathy. Too many in management were prepared to see workers as an almost subhuman race, while the workers saw management as fiends.
⁹
Drucker was unimpressed by the unions, but the company had failed to integrate workers by providing them with more status and opportunities. The dominant assembly-line methods did not make the most of their creativity. The shift to war work had shown how workers could take responsibility, learn, and improve methods and product quality. So he urged that they should be seen as a “resource rather than a cost.” He encouraged the idea of the “responsible worker” with a “managerial aptitude” and a “self-governing plant community.” When Charles Wilson became chief executive of General Motors, he was interested in exploring this idea, but the main union, the UAW, objected on the familiar grounds of blurring the necessary divisions between management and labor.

One result of the company's irritation with
The Concept of the Corporation
, according to Drucker, was that Alfred Sloan determined to write his own book “to set the record straight.”
¹⁰
The actual origins of Sloan's book,
My Years with General Motors
, which appeared two decades after
Concept
, were actually quite different. Indeed Drucker's claim so incensed John McDonald, Sloan's cowriter, that he set down to correct this misrepresentation and to tell of the struggle to get the book published.
¹¹
McDonald, a former Trotskyist writing for
Fortune Magazine
and an early publicist for game theory, was specializing in “strategic situations where individuals, institutions, and groups of various kinds interacted independently and thought in ways—both cooperatively and non-cooperatively—that escaped common classical economic and decision theory.” As he worked with Sloan in the early 1950s on an article on these lines about General Motors, the two realized that there was sufficient material for a book.
¹²
They worked together on this project for the rest of the decade but on completion, publication was blocked by General Motors' corporate lawyers.
¹³
Their concern was that the U.S. Government might use the documents cited in the book as the basis for an antitrust action. It took five years and a civil lawsuit filed by McDonald before
My Years with General Motors
was finally published, to great acclaim in January 1964.

Their research assistant was Alfred D. Chandler, Jr., a young historian who came from a well-connected family, linked to the mighty DuPonts
(who provided his middle name). He was also great-grandson of Henry Poor, of Standard & Poor, whose papers provided the basis of his Ph.D. and stimulated his interest in business organization. As did Drucker, who influenced his thinking, Chandler felt proper attention should be given to how businesses organized themselves. It was necessary to move beyond the opposing stereotypes of “robber barons” or “industrial statesmen” to more rounded and subtle depictions. In 1962, while Sloan's account was still blocked, Chandler described General Motors's corporate history in his book
Strategy and Structure. Strategy
was not a word used by Drucker, other than a single reference to the distinction between strategic and tactical decisions in
The Practice of Management
. Neither did the word appear in
My Years with General Motors
, despite McDonald being a great aficionado of strategy.

Chandler's use can be compared with that of Edith Penrose, who was thinking about organizations along very similar lines at the same time. She is now often credited with the creation of “resource-based” business strategy in her 1959 book
The Theory of the Firm
.
¹⁴
Yet she did not use the term
strategy
except in a more traditional sense when referring to “successful empire-building entrepreneurs” who were “aggressive and clever in the strategy needed to bargain with and successfully out-maneuver other businessmen.” So it was Chandler who gave the concept of strategy prominence in a business setting. It was, however, a particular sort of strategy that he highlighted. He had picked up the concept when teaching the “basics of national strategy” at the U.S. Naval War College in Rhode Island in the early 1950s.
¹⁵
He defined strategy in terms of planning and implementation, as “the determination of the basic long-term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.”
¹⁶

Thus, from the start, strategy was established as a goal-oriented activity, geared to the long term and closely linked with planning. This approach flowed naturally from Chandler's particular focus on internal organizational response to market opportunities, and again this had a continuing influence on the way that strategy was understood in its early business incarnations. It was not linked to problem-solving or competitive situations in which a variety of outcomes was possible. This focus was expressed in Chandler's formula that strategy led to structure, the “design of organization through which the enterprise is administered.” Chandler's innovation was to see strategy in how management addressed issues of diversification and decentralization. His big theme was the multidivisional structure, also lauded by Drucker and for which Sloan took credit.
¹⁷
Management consultants—including
McKinsey, which was advised by Chandler—encouraged other companies to follow this model.

The advantage of the multidivisional structure, the so-called M-form, in Chandler's view lay in the separation of strategic from tactical planning. It “removed the executives responsible for the destiny of the entire enterprise from the more routine operational activities and so gave them the time, information, and even psychological commitment for long-term planning and appraisal.”
¹⁸
By avoiding the distractions of second-order issues, the corporate headquarters could formulate policy, evaluate performance, and allocate investment, while stopping heads of units from distorting general strategy for parochial reasons.