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“A country that has the knowledge workers to design products and to market them will have no difficulty getting those products made at low cost and high quality” — Peter Drucker, Interview: Managing in a Post Capitalist Society


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About management

Selling to the World

“In the global economy, businesses are increasingly forced to shift from being multinational to being transnational. more

bbx Doing business in a Lego World

bbx Top Management: Tasks, Organization, Strategies

Apple ™ exhibits all these dimensions. The path from two-guys in a garage to today

bbx Productivity

bbx “The emerging theory of manufacturing” in Managing for the Future

bbx “The manufacturing paradox” in Managing in the Next Society

bbx Part IV: Productive Work and Achieving Worker in Management, Revised Edition

bbx The section on Productive Work and Achieving Worker in Management: Tasks, Responsibilities, Practices

bbx Productive work and achieving worker

bbx Production systems

bbx The chapter on The Principles of Production in The Practice of Management

bbx Toyota Production System (Beyond Large-Scale Production)

bbx The Toyota Way Fieldbook

bbx The Toyota Way

bbx The Lean Manufacturing Pocket Handbook

bbx The Lean Pocket Guide

bbx Kaizen

bbx Office Kaizen

bbx The Kaizen Pocket Handbook

bbx The Deming’s Dimension

bbx Leadership for Quality (by Joseph Juran)

bbx Juran on Planning for Quality

bbx The Six Sigma Way

bbx Drucker on Asia: A dialogue between Peter Drucker and Isao Nakauchi

bbx Built to Last: Successful Habits of Visionary Companies by Jim Collins and Jerry I. Porras

bbx Good to Great: Why Some Companies Make the Leap … and Others Don’t by Jim Collins




Peter Drucker talks manufacturing in 1999

We can’t build it yet, but the essence of the “postmodern” factory is emerging.

It’s conceptual—the product of four principles and practices that together constitute a new approach to manufacturing.

Each of these concepts is being developed separately, by different people with different starting points and different agendas.

Each concept has its own objectives and its own kinds of impact:

1. Statistical quality control SQC is changing the social organization of the factory.

2. New manufacturing accounting lets us make production decisions as business decisions.

3. The flotilla or module organization of the manufacturing process promises to combine the advantages of standardization and flexibility.

4. Finally, the systems approach embeds the physical process of making things—manufacturing in the economic process of business—creating value.

As these four concepts develop, they are transforming how we think about manufacturing and how we manage it.

Most manufacturing people in the US now know we need a new theory of manufacturing.

Patching up old theories hasn’t worked, and further patching will only push us further behind.

Together, these concepts give us the foundation for the new theory we so badly need.

The social side of SQC

The Japanese owe their leadership in manufacturing quality largely to their post-war embrace of Deming’s and Juran’s precepts.

But, US industry ignored their contributions for 40 years, and is only now converting to SQC, with companies such as Ford, GM, and Xerox among the new disciples.

Western Europe also has largely ignored the concept.

More importantly, even SQC’s most successful practitioners do not thoroughly understand what it really does.

Generally, it’s considered a production tool.

Actually, its greatest impact is on the factory’s social organization.

It’s well known how SQC spots malfunctions, identifies the impact of any process change, and shows how process productivity can be improved.

But these engineering characteristics explain only a fraction of SQC’s results.

They do not explain the productivity gap between Japanese and US factories.

Even adjusting for their far greater reliance on outside suppliers, Toyota, Honda, and Nissan turn out two or three times more cars per worker than comparable US or European plants do.

Building quality into the process accounts for no more than one-third of this difference.

Japan’s major productivity gains are the result of social changes brought about by SQC.

The Japanese employ proportionately more machine operators in direct production work than Ford or GM.

In fact, the introduction of SQC almost always increases the number of machine operators.

This increase is offset many times over by the sharp drop in the number of nonoperators: inspectors, above all, but also the people who do not do but fix—repair crews and “fire fighters.”

In US factories, such nonoperating, blue-collar employees substantially outnumber operators.

In some plants, the ratio is 2:1.

Few of these workers are needed under SQC.

Moreover, first-line supervisors also are gradually eliminated, with only a handful of trainers taking their place.

In other words, not only does SQC make it possible for machine operators to be in control of their work, it makes such control almost mandatory.

No one else has the hands-on knowledge needed to act effectively on the information that SQC constantly feeds back.

By aligning information with accountability, SQC resolves the century-old conflict between the engineering approach of Frederick Taylor’s scientific management (build it into the process) and the human resources approach (build it into the man).

Without SQC’s rigorous methodology, neither scientific management nor assembly-line automation could deliver built-in process control.

Similarly, without SQC information, the human-relations approach fails to distinguish productive activity from busyness,” or whether a proposed modification will truly improve the process or simply make things look better in one corner, only to make them worse overall.

Quality circles, invented here in World War II, have been successful in Japan because they came in after SQC had been established.

As a result, both the quality circle and management have objective information about the effects of workers’ suggestions.

In contrast, most US quality circles have failed despite great enthusiasm, especially on the part of workers.


They were established without SQC, i. e., without rigorous and reliable feedback.

With few exceptions, the US has lacked the methodology to build quality and productivity into the manufacturing process.

Similarly, we have lacked the methodology to move responsibility for the process and control of it to the machine operator.

SQC makes it possible to attain both traditional aspirations: high quality and productivity on the one hand, work worthy of human beings on the other.

By fulfilling the aims of the traditional factory, it provides the capstone for the edifice of twentieth-century manufacturing.

New manufacturing economics

Bean counters have been blamed for all the ills that afflict US manufacturing, but they will have the last laugh.

In the factory of 1999, manufacturing accounting will play a bigger role than ever, but the beans will be counted differently.

New manufacturing accounting—more accurately, “manufacturing economics”—will differ radically from traditional cost accounting.

Its aim is to integrate manufacturing with business strategy.

Developed in the 1920s by GM, GE, and Western Electric (AT&T’s manufacturing arm), manufacturing cost accounting, not technology, gave these companies the competitive edge that made them world leaders.

Following World War II, cost accounting became a major US export.

But by that time, cost accounting’s limitations were becoming apparent.

Four are particularly important:

1. Cost accounting is based on the realities of the ‘20s, when direct, blue-collar labor accounted for 80% of all manufacturing costs other than raw materials.

Consequently, it equates “cost” with direct-labor costs.

Everything else is lumped into overhead.

Today, a plant where direct labor costs run as high as 25% is a rare exception.

Even in automobiles, direct-labor costs in up-to-date plants are down to 18%, and 8% to 12% is fast becoming the industrial norm.

Yet, cost-accounting systems based on direct-labor costs carefully, indeed minutely, distribute the remaining costs—80% to 90%—by ratios that everyone knows are purely arbitrary and totally misleading: directly proportional to a product’s labor costs or dollar volume.

2. The benefits of a change in process or in method are primarily defined in terms of labor-cost savings.

If other savings are considered at all, it is based on the same arbitrary allocation by which costs other than direct labor are accounted for.

3. Like a sundial, which shows the hours when the sun shines but gives no information on a cloudy day or at night, traditional cost accounting measures only the costs of producing.

It ignores the costs of nonproducing, whether they result from machine downtime or from quality defects, scrap, or rework.

It assumes the manufacturing process turns out good products 80% of the time.

But, we now know that even with the best SQC, nonproducing time consumes far more than 20% of total production time (in some plants, it’s 50%), and costs just as much as producing time in wages, heat, lighting, interest, and even raw materials.

4. Manufacturing cost accounting assumes the factory is an isolated entity.

Cost savings in the factory are “real”; the rest is “speculation.”

It can hardly justify a process improvement, let alone a process innovation.

Automation shows up as a cost, but almost never as a benefit.

All of this we have known for almost 40 years, and for 30 of these, accounting scholars, government accountants, industry accountants, and accounting firms have worked hard to reform the system.

They have made substantial improvements, but since the reform attempts tried to build on the traditional system, the original limitations remain.

The benefits of automated equipment, we now know, lie primarily in the reduction of nonproducing time by improving quality setting it right the first time and by sharply curtailing machine downtime for product changeover—gains cost accounting does not document.

Out of these frustrations came Computer-Aided Manufacturing International, or CAM-I, a cooperative effort by automation producers, multinational manufacturers, and accountants to develop a new cost-accounting system.

The CAM-I work started in 1986, and it soon became apparent that the traditional accounting system had to be replaced.

Labor costs are clearly the wrong units of measurement, but—and this is a new insight-so are all other elements of production.

The new measurement unit has to be time.

The costs for a given period of time must be assumed to be fixed; there are no variable” costs.

Even material costs are more fixed than variable, since defective output uses as much material as good output does.

The only thing that is both variable and controllable is how much time a given process takes.

And “benefit” is whatever reduced that time.

In one fell swoop, this insight eliminates the first three of cost accounting’s four traditional limitations.

For example, finished-goods inventory, an “asset” that costs nothing because it doesn’t absorb labor, is now seen as a “sunk cost” tying down expensive money and absorbing time.

The new accounting measures these time costs against the benefits of finished-goods inventory (quicker customer service, for instance).

Yet, manufacturing accounting still faces the challenge of eliminating the fourth limitation of traditional cost accounting: its inability to account for the impact of change—the return on an investment in automation, or the risk in not making an investment to speed up production hangovers.

In-plant costs and benefits of such decisions can now be worked out with considerable accuracy, but the business consequences are indeed speculative.

One can only say, “Surely, this will help us get more sales,” or “If we don’t do this, we risk falling behind in customer service.”

But, how do you quantify such opinions?

Cost accounting’s strength has always been that it confines itself to the measurable and thus gives objective answers.

But if intangibles are brought into its equations, cost accounting will only raise more questions.

How to proceed is thus hotly debated, and with good reason.

Everyone agrees that these impacts have to be integrated into the measurement of factory performance.

One way or another, new accounting will force managers, both inside and outside the plant, to make manufacturing decisions as business decisions.

Flotilla flexibility

Henry Ford’s epigram, “The customer can have any color as long as it’s black,” actually meant that flexibility costs time and money, and the customer won’t pay for it.

Manufacturing people today still tend to think like Henry Ford: you can have either standardization at low cost or flexibility at high cost, but not both.

The factory of 1999, however, will be based on the premise that you not only can have both, but also must have both—and at low cost.

But to achieve this, the factory will have to be structured quite differently.

Today’s factory is a battleship.

The plant of 1999 will be a flotilla,” consisting of modules centered either around a stage in the production process, or around a number of closely related operations.

Although overall command and control will still exist, each module will have its own command and control.

Each, like ships in a flotilla, will be maneuverable, both in its position in the entire process and its relationship to other modules.

The organization will give each module the benefits of standardization, and at the same time, give the whole process greater flexibility.

It will allow rapid changes in design, rapid response to market demands, and low-cost production of specials in fairly small batches.

No such plant exists today.

No one can yet build it.

But many manufacturers, large and small, are moving toward the flotilla structure.

A big impetus was GM’s failure to get a return on its massive 30+ billion investment in automation.

GM, it seems, tried to use new machines to improve its existing process, but the process became less flexible and less able to accomplish rapid change.

Meanwhile, Japanese automakers and Ford were spending less and attaining more flexibility.

In these plants, the line still exists, but it is discontinuous rather than tightly tied together.

The new equipment is used to speed changeovers in jigs, tools, and fixtures.

The line has acquired the flexibility of batch production without losing its standardization.

No longer an either/or proposition, the two have been melded together.

An “average” balance between standardization and flexibility, however, does nothing very well.

It simply results in high rigidity and big costs for the entire process, as apparently happened to GM.

What is required is a reorganization of the process into modules, each with its own optimal balance.

Moreover, the relationships between these modules may have to change whenever the product, process, or distribution changes.

This will require more than a fairly drastic change in the factory’s physical structure.

Above all, it requires different communication and information.

Instead of each department reporting separately upstairs what upstairs has asked for, in the factory of 1999, each will have to think through what information they need from whom.

A good deal will flow sideways and across department lines, not upstairs.

The factory of 1999 will be an information network.

Consequently, all the managers in the plant will have to know and understand the entire process, just as the destroyer commander has to know and understand the tactical plan of the entire flotilla.

They must think and act as team members, mindful of the performance of the whole.

Above all, they will have to ask: “What do the people running the other modules need to know about the characteristics, the capacity, the plans, and the performance of my unit?

And what, in turn, do we need to know about theirs?”

Systems integration

The last of the new concepts transforming manufacturing is systems design, in which the whole of manufacturing is seen as an integrated process that converts materials into goods; that is, into economic satisfactions.

Marks & Spencer, the British retail chain, designed the first such system in the 1930s.

Marks & Spencer designs and tests the goods it has decided to sell, designates one manufacturer to make each under contract, works with them to produce the right quality at the right price, and organizes just-in-time (JIT) delivery to its stores.

The entire process is governed by a meticulous forecast of customer demand.

In the past ten years, such systems management has become common in retailing.

In the early 1920s, Henry Ford decided to control the entire process supplying his gigantic River Rouge plant.

He built his own steel mill, glass plant, railroad, rubber plants, etc.

But, instead of building a system, he built a conglomerate, an unwieldy monster that was expensive, unmanageable, and horrendously unprofitable.

In contrast, the new manufacturing system is not “controlled” at all.

Most of its parts are independent—independent suppliers at one end, customers at the other.

Nor is it plant centered.

It sees the plant as little more than a wide place in the manufacturing stream.

Planning and scheduling start with shipment to the final customer, just as they do at Marks & Spencer.

Delays, halts, and redundancies have to be designed into the system—a warehouse here, an extra supply of parts and tools there, and even a stock of old products occasionally demanded by the market.

These are necessary imperfections in a continuous flow that is governed and directed by information.

What has pushed American manufacturers into such systems design is the trouble they encountered when they copied Japan’s JIT methods, a scheme founded in social and logistic conditions unique to that country and unknown here.

Company after company found that JIT delivery of supplies and parts created turbulence throughout their plants.

And while no one could figure out what the problem was, one thing that became clear was that with JIT deliveries, the plant no longer functions as a step-by-step process that begins at the receiving dock and ends when finished goods move into the shipping room.

Instead, the plant must be redesigned from the end backwards and managed as an integrated flow.

By and large, American and European manufacturing plants are neither systems designed nor systems managed.

Few have enough knowledge about what goes on in their plants to run them as systems.

JIT delivery, however, forces managers to ask systems questions: Where in the plant do we need redundancy?

Where should we place the burden of adjustments?

What costs should we incur in one place to minimize delay, risk, and vulnerability in another?

As soon as we define manufacturing as the process that converts things into economic satisfactions, it becomes clear that producing does not stop when the product leaves the factory.

Distribution and service are still part of the production process and should be integrated with it, coordinated with it, and managed together with it.

Caterpillar, for instance, can supply any replacement part anywhere in the world within 48 hr.

Companies like this are still exceptions, but they must become the rule.

If manufacturing is a system, every decision in a manufacturing business becomes a manufacturing decision.

Every decision should meet manufacturing’s requirements and needs, and in turn, should exploit the strengths and capabilities of a company’s particular manufacturing system.

Full realization of the systems concept in manufacturing is years away.

It may not require a new Henry Ford, but it will certainly require very different management and very different managers.

Each will have to know and understand the manufacturing system.

We might well adopt the Japanese custom of starting all new management people in the plant and in manufacturing jobs for the first few years of their careers.

Indeed, we might go even further and require managers throughout the company to rotate into factory assignments throughout their careers—just as army officers return regularly to troop duty.

Manufacturing is the integrator that ties everything together.

It creates the economic value that pays for everything and everybody.

Thus, the greatest impact of the manufacturing systems concept will not be on the production process.

As with SQC, its greatest impact will be on social and human concerns—on career ladders, for instance, or more important, on the transformation of functional managers into business managers, each with a specific role, but all members of the same production and the same cast.

Surely, the manufacturing businesses of tomorrow will not be run by financial executives, marketers, or lawyers inexperienced in manufacturing, as so many US companies are today.




The Future Of Manufacturing

Publication Date 9.21.1998


An exclusive interview with Peter Drucker.

By Patricia Panchak

Sidebar: “Altogether, there are no more service industries in the traditional sense.

There are only production industries.

And to the extent that they apply principles of production (see The Practice of Management and the section on Productive Work and Achieving Worker, chapters 15 - 23 of Management: Tasks, Responsibilities, Practices) that traditionally were considered manufacturing, they become competitive and successful.”

— Peter Drucker —

Peter F. Drucker needs no introduction.

After more than half a century of staying several steps ahead of current management thinking, his status as a highly sought-after speaker, writer, and scholar is near-legendary.

Among other things, he is credited with establishing the study of management as a discipline; with anticipating the information-based economy; and with describing — well before it happened — the reengineering revolution that swept through the corporate world in the 1990s.

For manufacturing executives, Drucker’s The Emerging Theory of Manufacturing (Harvard Business Review, May-June 1990) is particularly notable.

In it, Drucker specifies “the ‘postmodern’ factory of 1999,” describing with alarming accuracy the transformation that manufacturing throughout the world is now experiencing.

In sum, he writes: “Statistical Quality Control is changing the social organization of the factory.

The new manufacturing accounting lets us make production decisions as business decisions.

The ‘flotilla,’ or module, organization of the manufacturing process promises to combine the advantages of standardization and flexibility.

Finally, the systems approach embeds the physical process of making things, that is, manufacturing, in the economic process of business, that is, the business of creating value.”

Here, with characteristic intellectual vigor, Drucker expands upon his prescient theory and, in so doing, sets new standards for manufacturing management.

IW: Do you agree with IW’s basic assumption that manufacturing is the most important part of any world-class economy?

Drucker: No and yes.

If you define manufacturing as the production of things — and even if you extend the traditional definition to embrace the entire system of bringing a product to market, as IW does — I would strongly disagree.

But I emphatically agree if you extend the definition to read “the systematic process of production” — whether the end product is a “thing” turned out in a factory, an “intangible” such as software, or a “service,” such as a mutual-fund share.

Traditional manufacturing is likely to become less and less important to a developed country’s health — and actually in the emerging economies as well — even though, as is almost certain, its volume will continue to go up, and go up fast (as it has in agriculture) while its contribution to employment and gross domestic product [GDP] shrinks.

Systematic production, however, will steadily become more and more important and more and more central.

Let me explain: Manufacturing in the traditional definition, that is, making goods in a factory, has been shrinking worldwide for many years, and will continue to shrink.

By the year 2015 or 2020, the volume of goods produced by traditional manufacturing worldwide will probably be at least twice what it is today.

But in the U.S., employment in traditional manufacturing, already down to no more than one-sixth of the labor force, will have shrunk to no more than one-tenth.

And the share of manufacturing in GDP, which is still around 15% or so, will have shrunk to 5% to 7%.

In that sense, traditional manufacturing in the U.S. is almost exactly where farming was around 1950.

Farming still employed roughly one-fifth of the U.S. workforce, and produced something like one-tenth of GNP.

Today, farming employs no more than 3% of the workforce and produces no more than some 2% to 4% of GDP.

But farming production in the U.S. has increased almost sevenfold since 1950.

If we redefine manufacturing as “the systematic process of production,” manufacturing is indeed the most important part of any world-class economy.

The most important technical change in the last 30 or 40 years is that of the process of production, first developed in traditional manufacturing and now embracing more and more of the economy.

It is becoming the process of production.

It does not necessarily produce goods.

But the new “goods” — goods still usually classified as “services” — increasingly are being organized on the principles of production that were first developed in manufacturing.

IW: Has the difference between a manufacturing company and a service company become so small as to be insignificant?

Or do the two types of companies still differ significantly?

Please explain.

Drucker: Again, the answer is both yes and no.

The difference is still tremendous.

And the difference is not in the process of production but in the basic theory behind it — and that may be as important as the system of production, or even more important.

What we call a “service company” does not, as a rule, see production as the process that adds value.

It basically starts out with customers and service.

The traditional manufacturing company still looks on the physical process of production as its center.

But this will have to change.

Increasingly traditional manufacturing companies will see the process of production as the means to an end rather than as the end itself.

The service companies — or most of them — are changing so fast that the distinction between manufacturing company and service company is becoming totally meaningless.

Producing software — we still classify it as a service industry, but it is a production industry.

And the more it is being organized on a systematic process of production, the more productive and the more successful it is.

Handling thousands, if not millions, of credit cards — we call it a service industry.

But it is clearly a production process.

So, of course, is check clearing.

So is the handling of insurance claims.

Altogether, there are no more service industries in the traditional sense.

There are only production industries.

And to the extent that they apply principles of production that traditionally were considered manufacturing, they become competitive and successful.

IW: Please comment on how the new manufacturing has affected the traditional manufacturing industries: automobile, steel, food, pharmaceutical.

Drucker: The new manufacturing — maybe I should call it the switch from manufacturing to production — is rapidly transforming the traditional industries.

In steel, which is perhaps the most representative industry of the peak age of traditional industrialization, the shift is from the now-antiquated integrated steel mill to the minimill, which is basically a shift from production based on machinery to production based on information.

Let me explain: What characterizes the minimill is the restructuring of the entire process around information.

This, then, made possible (a) total automation — the specs of the order program the entire process; and (b) the cut in the number of people employed by some 80% or more and their conversion from manual workers putting to work mostly brawn (and a little skill) into knowledge workers running an automated process through its controls.

The pharmaceutical industry learned that long ago.

It has become a systems-based production industry in which the starting point is not making the stuff but serving the health service.

And perhaps the greatest change has been in the traditional industries that serve the infrastructure, whether they are the makers of heavy earthmoving equipment such as Caterpillar, the makers of locomotives such as GE, the makers of container ships, and so on.

They have been restructured as systems companies in which the starting point is not making goods but service to enable the customer to get the fullest benefit from the goods.

The automobile industry has not yet learned that; it will have to or it will become a declining and money-losing industry.

The automobile industry may be today’s most antiquated industry precisely because until very recently it could operate the way it had been operating since William Durant [formed] General Motors in 1908 and first designed the modern automobile company.

That no longer works — and you can be reasonably sure that in the next 10 to 15 years the automobile industry will change more drastically than it has in the last 70 or 80 years.

It will become an industry that focuses on service — marketing the car, servicing the car, servicing and selling the used car — rather than on the traditional profit center, which is making the new car.

IW: In The Emerging Theory of Manufacturing, you present “four principles and practices that together constitute a new approach to manufacturing.”

Would you add any principles and practices today that are of equal importance to the four presented in 1990?

Drucker: No, I would not.

But I would elaborate on them.

In the almost 10 years since 1990, we have learned a great deal.

IW: What, for instance?

Would you change any of the principles?

Drucker: I would add that we have begun — and so far only begun —to develop the tools to make these principles operational.

IW: For example?

Drucker: I wrote then that “manufacturing accounting still faces the challenge of eliminating the fourth limitation of traditional cost accounting: its inability to bring into measurement of factory performance the impact of manufacturing changes on the total business — the return in the marketplace of an investment in automation, for instance, or the risk in not making an investment that would speed up production changeovers.”

We are not quite there yet.

But we have moved much faster in the last eight or nine years than I would have thought possible in 1990.

One example is economic-chain accounting, which is rapidly coming in, and which enables an enterprise to see the total costs and their yields throughout the entire economic process from supplier to ultimate consumer.

Traditional accounting still is based on the legal entity, the “firm.”

But even General Motors, at the peak of its power around 1970 when it produced about 70% of everything that went into a GM car, accounted for no more that one-tenth of what the ultimate consumer paid for the finished car.

And GM had no idea where the other 90% went, nor had any control over it.

This is being changed rapidly as economic-chain accounting enables an enterprise to know the entire cost stream from supplier until ultimate consumer (and perhaps even until the car is scrapped), and to move costs to where they produce the most yield.

IW: To what extent have companies throughout the world adopted the principles you present in The Emerging Theory of Manufacturing?

Drucker: Some companies have gone very far.

It is my understanding that a good many of the units of GE and a good many U.S. machine-tool companies have developed, quite independently, production as a system rather than production as a series of separate, discrete, and independent events.

But so have a good many nonmanufacturing businesses, e.g., some leading-edge hospitals.

I think the model is still the one that is a hundred years old.

In his 1912 testimony before the U.S. Congress, Frederick W. Taylor said that the Mayo Clinic was the one example of systematic scientific management.

It probably still is.

And what Taylor meant is that the Mayo Clinic succeeded in having a team of 10 exceedingly highly qualified specialists work together under a leadership defined by the individual patient’s needs — but work together in an organized and systematic process.

That is still what the Mayo Clinic does.

I know of no other business that yet has come remotely close to this example of production as a process.

IW: Many management experts suggest that Taylor’s theories are no longer valid.

Please explain.

Drucker: Contrary to what they may say, manufacturing is still totally based on Taylor.

Deming’s Total Quality Management, for example, is pure Taylor — and runs exactly the same autocratic top-down way Taylor ran his Scientific Management.

However, in respect to knowledge work and the knowledge worker we need to know what Taylor did in respect to manual work and the manual worker more than a hundred years ago.

We know that it has to be quite different and even know in what respect: All work on the productivity of manual work asks how should the work be done.

It never asks what should the task be.

And that question must be the starting point of any work on the productivity of the knowledge worker.

By the way, the people who say that Taylor has ceased to be valid have never read him.

They do, for instance, credit him with the invention of mass production — and a) that came only during World War I after his death; and b) he was violently opposed to its basic principles when they were first being discussed around 1914.

IW: Are these theories of production valid descriptions of the approach manufacturers in other regions of the world have been following during the same time periods?

Drucker: Geography has little to do with this.

In all periods for the last, oh, make it 150 years, a small group of enterprises have been pioneers — and in all countries.

In the 1830s a German manufacturer, the first non-British firm to build locomotives, invented apprenticeship.

Henry Ford copied it almost a hundred years later.

But when Ford invented mass production in the early years of this century, it was adopted rapidly by a few companies both in Europe and Japan.

It is industries rather than countries that change.

In that sense, geography is not the main determinant.

In an industry, one company changes and achieves major competitive advantage.

Others in the same industry then follow.

For example, 80% or so of Japanese industries are still woefully backward, woefully antiquated, and totally noncompetitive.

They have been shielded from competition.

But the 20% that are in the world economy are quite different.

The industry that has applied principles of production the most is the pharmaceutical industry.

There are several reasons.

One, all along it was way ahead of the traditional mechanical mass-production industries.

It did not begin, after all, until well after World War II.

And from the beginning it was not focused primarily on making things but on inventing things; that is, research on the one hand and marketing on the other.

And it did not market goods, even though it sold goods and got paid for them.

It marketed therapies — concepts.

At the same time, the world’s construction-equipment industry has been forced to change dramatically simply because it has been forced to start out with what the customer pays for, which is not equipment but the uninterrupted use of equipment.

It has been forced to become a service industry in which manufacturing has been redefined as the support of service rather than as making goods.

Altogether, the greatest impact on manufacturing industries has been that the power has shifted to distributors and retailers.

And that, in turn, is forcing the makers of things to change and become suppliers of services.

It is not that the service industries are becoming like manufacturing industries, though they are.

The real change is that more and more the so-called manufacturing industries are redefining themselves as service in which the profit center is a service — making things is a cost center.

IW: In your work you talk about how human-resource management has changed.

How is that reflected in the New Manufacturing?

Drucker: The change is not primarily a change in technology.

It is primarily a change in social organization.

The mass-production revolution, on which most manufacturing has been based until now, considered the human being as servant to the machine and totally controlled by it.

It also was based on the assumption that the machine produces while the human being is unskilled and basically programmed by the machine.

Increasingly, machines are tools to the human being.

Increasingly, the human being does not work in mass production but in what might be called “team production.”

And that means that increasingly the producing human being is a knowledge worker.

Workers, as they did before the Industrial Revolution, own the means of production.

The means is between their ears.

They can take it with them whenever they leave — and increasingly workers know that, and therefore have mobility.

They are, in fact, not employees but paid volunteers.

This [implies] a totally new social organization.

Also, more and more of the so-called production is not necessarily done under the same roof, within a factory.

It is being outsourced; it is done by temps; it is done by people who work on contract, whether full-time or part-time; it is done by people who work at home.

The social organization of the traditional factory assumed a homogeneous mass of anonymous workers who needed the jobs far more than the jobs needed them.

The new production must assume a highly diverse work population, wherein workers are needed more by the production process than they need the jobs.

And instead of one system of organizing people for production, we will have an enormous amount of diversity — teams are just one example.

IW: What do you see as the future of teams: on the factory floor, in management, in traditional whitecollar functions?

Drucker: I am always amazed that nobody seems to realize that teams have totally failed where everybody thought they would be most needed and most effective: in the top management job.

Never before in many decades have we had such an extreme cult of personality and such extreme absence of teamwork as in the top management job.

We are now going for the single and almost absolute monarch — the Bill Gateses or Jack Welches — with a concentration of power and visibility in one person that has never been seen before, at least not since the 1920s.

As regards teamwork further down, the record is mixed.

I probably was the first advocate of teams — going back to 1953, when the very term was unknown.

But what we have now is largely a misunderstanding.

It is based on the belief that there is only one kind of team — and that’s the most difficult one, what I would call the “jazz combo” team.

In fact, there are at least three and probably six or seven different kinds of teams.

And each of them has its strengths, and each of them has its limitations.

We are already beginning to see a backlash against teams as the latest fad.

It will take another 10 or 15 years for us to learn to use teams properly.

The now-fashionable team in which everybody works with everybody on everything from the beginning rapidly is becoming a disappointment.

It takes years to develop such a team and to make it work.

And there are very real problems.

The biggest of them is to whom the individual team member is accountable.

Here is the engineer who is made a member of a team.

Who is his boss?

The head of engineering?

Or the head of the team?

Who appraises his or her performance?

Who decides on his or her performance?

On his or her compensation?

These are not trivial problems.

They go to the very heart of the organization.

They can be resolved.

They need to be resolved.

We do need teams for the simple reason that more and more of the people in the workforce are high-grade specialists.

And specialized knowledge contributes only in teamwork with other specialists, with their specialized knowledge.

IW: What will be the biggest change in the world of work as we move toward the knowledge era?

Drucker: That in every organization we will have to be able to be organized for three different tasks.

We need hierarchy.

To talk of the death of hierarchy is nonsense.

In a crisis there has to be somebody who makes the final decision.

If the ship goes down, the captain does not call a meeting.

He gives an order — or everybody else perishes.

You have to know who the person is, who has the right to be obeyed.

This will become more important rather than less important as we enter a period of rapid change.

But then the same person also will have to act as a team leader and in other situations will have to act as a team member and partner.

These are three different functions to be discharged by the same person as the situation demands it.

And so far I know very few people who have learned which role they play, and how to play it, and under what conditions.

Equally rare are the people who realize that it is their job to make it clear to their associates what role they are playing in a different and given situation.

IW: How does production manage the workforce as it moves beyond the walls of its organization to form as-needed partnerships for strategic purposes?

Drucker: The key is the word “partnership.”

These are partners.

And all partners are equal no matter how much money they have and how big they are.

One does not begin with the question “What do I want?”

and then “How do I persuade these people?”

One begins with the question “What do they want?”

and “How can this be made to fit into our common purpose?”

IW: Do you agree with our basic assumption that there’s been phenomenal growth in the presence of government, both U.S. and internationally, in the last half of the 20th century?

Drucker: Absolutely.

The idea that government is shrinking is pure delusion.

The more we have privatized, that is, moved out of government being the “owner,” the more we have moved into government being the “regulator.”

And the trend is still accelerating.

One of my oldest complaints is that executives do not understand how government and the political system work.

They believe in lobbying — and that’s stupid.

If you have to lobby, it only proves that you have not done your homework.

The few executives and the few businesses that have tried to understand the values of a political system and of a political elite don’t need to lobby.

They see government as a market, and it is their job to understand the market and to satisfy it.

IW: Lately, there has been a movement in some nations to reduce the role of government.

What do you foresee in the first part of the 21st century — a still greater role in corporate affairs, or less?

Drucker: What nation are you talking about — China?

Even there the shift is not toward reducing the role of government, but toward changing it from ownership to regulation.

Ownership has been proven to be a very poor way to control the economy.

It makes for a nonperforming economy.

It also makes for government being controlled by industry.

Privatization strengthens government.

It does not reduce its role.

It increases it.

It frees it from having to worry about keeping people employed and managing them; about financing a business; about making it profitable (which government-owned industries rarely are).

It enables government, therefore, to control and to regulate business and industry.

Privatization is not a movement toward reduced government.

We have learned that the Marxist idea that government controls by ownership has been proven to be as much of a misunderstanding as most of the rest of Marxism.

We are now learning — Hitler learned it long ago, all of 70 years ago, in fact — that the most effective way to control industry is not by owning it, but by regulating it.

And this is what all governments are doing.

Copyright© 1998 Penton Media, Inc.

All rights reserved.

See updated article




The Manufacturing Paradox

In the closing years of the twentieth century, the world price of the steel industry’s biggest single product—hot-rolled coil, the steel for car bodies—plunged from $460 to $260 a ton.

Yet these were boom years in America and prosperous times in most of continental Europe, with automobile production setting records.

The steel industry’s experience is typical of manufacturing as a whole.

Between 1960 and 1999, both manufacturing’s share in America’s GDP and its share of total employment roughly halved, to around 15 percent.

Yet in the same forty years manufacturing’s physical output doubled or tripled.

In 1960, manufacturing was the center of the American economy, and of the economies of all other developed countries.

By 2000, as a contributor to GDP it was easily outranked by the financial sector.

The relative purchasing power of manufactured goods (what economists call the terms of trade) has fallen by three-quarters in the past forty years.

Whereas manufacturing prices, adjusted for inflation, are down by 40 percent, the prices of the two main knowledge products, health care and education, have risen about three times as fast as inflation.

In 2000, therefore, it took five times as many units of manufactured goods to buy the main knowledge products as it had done forty years earlier.

The purchasing power of workers in manufacturing has also gone down, although by much less than that of their products.

Their productivity has risen so sharply that most of their real income has been preserved.

Forty years ago, labor costs in manufacturing typically accounted for around 30 percent of total manufacturing costs; now they are generally down to 12-15 percent.

Even in cars, still the most labor-intensive of the engineering industries, labor costs in the most advanced plants are no higher than 20 percent.

Manufacturing workers, especially in America, have ceased to be the backbone of the consumer market.

At the height of the crisis in America’s “rust belt,” when employment in the big manufacturing centers was ruthlessly slashed, national sales of consumer goods barely budged.

What has changed manufacturing, and sharply pushed up productivity, are new concepts.

Information and automation are less important than new theories of manufacturing, which are an advance comparable to the arrival of mass production eighty years ago.

Indeed, some of these theories, such as Toyota’s “lean manufacturing,” do away with robots, computers, and automation.

One highly publicized example involves replacing one of Toyota’s automated and computerized paint-drying lines by half a dozen hair-dryers bought in a supermarket.

Manufacturing is following exactly the same path that farming trod earlier.

Beginning in 1920, and accelerating after the Second World War, farm production shot up in all developed countries.

Before the First World War, many Western European countries had to import farm products.

Now there is only one net farm importer left: Japan.

Every single European country now has large and increasingly unsalable farm surpluses.

In quantitative terms, farm production in most developed countries today is probably at least four times what it was in 1920 and three times what it was in 1950 (except in Japan).

But whereas at the beginning of the twentieth century farmers made up the largest single group in the working population in most developed countries, now they account for no more than 3 percent in any developed country.

And whereas at the beginning of the twentieth century agriculture was the largest single contributor to national income in most developed countries, in 2000 in America it contributed less than 2 percent to GDP.

Manufacturing is unlikely to expand its output in volume terms as much as agriculture did, or to shrink as much as a producer of wealth and of jobs.

But the most believable forecast for 2020 suggests that manufacturing output in the developed countries will at least double, while manufacturing employment will shrink to 10-12 percent of the total workforce.

In America, the transition has largely been accomplished already, and with a minimum of dislocation.

The only hard-hit group have been African-Americans, to whom the growth in manufacturing jobs after the Second World War offered quick economic advancement, and whose jobs have now sharply fallen.

But by and large, even in places that relied heavily on a few large manufacturing plants, unemployment remained high only for a short time.

Even the political impact in America has been minimal.

But will other industrial countries have an equally easy passage?

In Britain, manufacturing employment has already fallen quite sharply without causing any unrest, although it seems to have produced social and psychological problems.

But what will happen in countries such as Germany or France, where labor markets remain rigid and where, until very recently, there has been little upward mobility through education?

These countries already have substantial and seemingly intractable unemployment, e. g., in Germany’s Ruhr and in France’s old industrial area around Lille.

They may face a painful transition period with severe social upheavals.

The biggest question mark is over Japan.

To be sure, it has no working-class culture, and it has long appreciated the value of education as an instrument of upward mobility.

But Japan’s social stability is based on employment security, especially for blue-collar workers in big manufacturing industry, and that is eroding fast.

Yet before employment security was introduced for blue-collar workers in the 1950s, Japan had been a country of extreme labor turbulence.

Manufacturing’s share of total employment is still higher than in almost any other developed country around a quarter of the total—and Japan has practically no labor market and little labor mobility.

Psychologically, too, the country is least prepared for the decline in manufacturing.

After all, it has owed its rise to great-economic-power status in the second half of the twentieth century to becoming the world’s manufacturing virtuoso.

One should never underrate the Japanese.

Throughout their history they have shown unparalleled ability to face up to reality and to change practically overnight.

But the decline in manufacturing as the key to economic success confronts Japan with one of the biggest challenges ever.

The decline of manufacturing as a producer of wealth and jobs changes the world’s economic, social, and political landscape.

It makes “economic miracles” increasingly difficult for developing countries to achieve.

The economic miracles of the second half of the twentieth century—Japan, South Korea, Taiwan, Hong Kong, Singapore—were based on exports to the world’s rich countries of manufactured goods that were produced with developed-country technology and productivity but with emerging-country labor costs.

This will no longer work.

One way to generate economic development may be to integrate the economy of an emerging country into a developed region—which is what Vicente Fox, the new Mexican president, envisages with his proposal for total integration of “North America,” i. e., the United States, Canada, and Mexico.

Economically this makes a lot of sense, but politically it is almost unthinkable.

The alternative—which is being pursued by China—is to try to achieve economic growth by building up a developing country’s domestic market.

India, Brazil, and Mexico also have large enough populations to make home-market-based economic development feasible, at least in theory.

But will smaller countries, such as Paraguay or Thailand, be allowed to export to the large markets of emerging countries such as Brazil?

The decline in manufacturing as a creator of wealth and jobs will inevitably bring about a new protectionism, once again echoing what happened earlier in agriculture.

For every 1 percent by which agricultural prices and employment have fallen in the twentieth century, agricultural subsidies and protection in every single developed country, including America, have gone up by at least 1 percent, often more.

And the fewer farm voters there are, the more important the “farm vote” has become.

As numbers have shrunk, farmers have become a unified special interest group that carries disproportionate clout in all rich countries.

Protectionism in manufacturing is already in evidence, although it tends to take the form of subsidies instead of traditional tariffs.

The new regional economic blocks, such as the European Union, NAFTA, or Mercosur, do create large regional markets with lower internal barriers, but they protect them with higher barriers against producers outside the region.

And non-tariff barriers of all kinds are steadily growing.

In the same week in which the 40 percent decline in sheet-steel prices was announced in the American press, the American government banned sheet-steel imports as “dumping.”

And no matter how laudable their aims, the developed countries’ insistence on fair labor laws and adequate environmental rules for manufacturers in the developing world acts as a mighty barrier to imports from these countries.

Managing in the Next Society




Abandoned factories

abandoned factories

Distressed locations

distressed locations

evolution of refrig

Victims of success

The shakeout

Organization as a destabilizer

Who innovates?

economic content

Knowledge system view and knowledge work as a system

The learning society is taking over ::: Learning

School and education as society’s center

The competitive knowledge economy

What needs doing around here?
A local view from Google Earth

local business

Along the road to Terra Alta

topics and time periods

List of topics in this Folder

TLN Keywords: tlnkwproduction


“The greatest danger in times of turbulence is not turbulence; it is to act with yesterday’s logic”. — Peter Drucker

The shift from manual workers who do as they are being told — either by the task or by the boss — to knowledge workers who have to manage themselves ↓ profoundly challenges social structure

Managing Oneself (PDF) is a REVOLUTION in human affairs.” … “It also requires an almost 180-degree change in the knowledge workers’ thoughts and actions from what most of us—even of the younger generation—still take for granted as the way to think and the way to act.” …

… “Managing Oneself is based on the very opposite realities: Workers are likely to outlive organizations (and therefore, employers can’t be depended on for designing your life), and the knowledge worker has mobility.” ← in a context




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