Welcome to Daya Pertiwi Foundation, we are developing of people's economy and the environment preservation since 1977
Sent: 01 October 2012

Why Assumptions Matter

A natural science deals with the behavior of OBJECTS. But a social discipline such as management deals with the behavior of PEOPLE and HUMAN INSTITUTIONS.
What matters most in a social discipline such as management are therefore the basic assumptions. And a CHANGE in the basic assumptions matters even more.
Since the study of management first began-and it truly did not emerge until the 1930s – TWO SETS of assumptions regarding the REALITIES of management have been held by most scholars, most writers and most practitioners:
One set of assumptions underlies the DISCIPLINE of management:
Management is Business Management.
There is-or there must be-ONE right organization structure.
There is-or there must be-ONE right way to manage people.

Another set of assumptions underlies the PRACTICE of Management:
Technologies, markets and end-users are given.
Management"s scope is legally defined.
Management is internally focused.
The economy as defined by national boundaries is the "ecology" of enterprise and management.

For most people, inside and outside management, this assumption is taken self-evident. Indeed management writers, management practitioners and the laity do not even hear the word "management"; they automatically hear BUSINESS MANAGEMENT.
The first conclusion of this analysis of the ASSUMPTIONS that must underlie Management to make productive both its study and its practice is therefore:
Management is the specific and distinguishing organ of any and all organizations.

The One Right Organization

From the very beginning more than a century ago, the study of organization has rested on one assumption:
There is-or there must be-one right organization.

What is presented as the "one right oganization" has changed more than once. But the search for the right organization has continued and continues today.
There are indeed some "principles" of organization.

One is surely that organization has to be transparent. People have to know and have to understand the organization structure they are supposed to work in, and what the results of the organizations are. This sound obvious-but it is far too often violated in most institutions (even in the military).
Another principle I have already mentioned: Someone in the organization must have the authority to make the final decision in a given area. And someone must clearly be in command in a CRISIS. It is also a sound principle that authority be commensurate with responsibility.

It is a sound principle that one person in an organization should have only one "master". It is a sound, structural principle to have the fewest layers, that is, to have an organization that is as "flat" as possible-if only because, as Information Theory tells us. ‘every relay doubles the noise and cuts the message in half’. But these principles do not tell us what not to do. They do not tell us what will work. They tell us what unlikely to work.

One implication: Individuals will have to be able to work at one and the same time in different organization structures. For one task they will work in a team. But for another task they will have to work-and at the same time-in a command and control structure. The same individual who is a "boss" within his or her own organization is a "partner; in an alliance, a minority participation, a joint venture and so on. Organizations, in other words, will have to become part of the executive"s toolbox.

One area in which research and study are particularly needed is the Organization of Top Management.
Management needs to learn, to look for, to develop, to test
The organization that fits the task.

The One Right Way to Manage People

In no other area are the basic traditional assumptions held as firmly-though mostly subconsciously-as in respect to people and their management. And in no other area are they so totally at odds with reality and so totally counterproductive.
‘There is one right way to manage people-or at least there should be.”

This assumption underlies practically every book or paper on the management of people.

I became an immediate convert-Maslow"s evidence is over whelming. But to date very few people have paid much attention. On this fundamental assumption that there is-or at least should be-one and only one right way to manage people, rest all the other assumptions about people in organizations and their management. One of these assumptions is that the people who work for an organization are employees of the organization, working full-time, and dependent on the organization for their livelihood and their careers. Another such assumption is that the people who work for an organization are subordinates. Indeed, it is assumed that the great majority of these people have either no skill or low skills and do what they are being assigned to do.

Even if employed full-time by the organization, fewer and fewer people are "subordinates"-even fairly low-level jobs. Increasingly they are "knowledge workers". And knowledge workers are not subordinates; they are "associates". For, once beyond the apprentice stage, knowledge workers must know more about their job than their boss does-or else they are no good at all. In fact, that they know more about their job than anybody else in the organization is part of the definition of knowledge workers.

To be sure, these associates are "subordinates" in that they depend on the "boss" when it comes to being hired or fired, promoted, appraised and so on. But in his or her own job the superior can perform only if these so-called subordinates take responsibility for educating him or her, that is, for making the "superior" understand what market research or physical therapy can do and should be doing, and what "results" are in their respective areas. In turn, these "subordinates" depend on the superior for direction. They depend on the superior to tell them what the "score" is.

The productivity of the knowledge worker is likely to become the center of the management of people, just as the work on the productivity of the manual worker became the center of the managing people a hundred years ago, that is, since Frederick W. Taylor. This will require, above all, very different assumptions about people in organization and their work:

One does not ‘manage’ people.
The task is to lead people.
And the goal is to make productive the specific strengths
and knowledge of each individual.

Another critical implication is that the starting point for management can no longer be its own product or service, and not even its known market and its known end-uses for its products and services. The starting point has to be what customers consider value. The starting point has to be the assumption- an assumption amply proven by all our experience- that the customer never buys what the supplier sells. What is value to the customer is always something quite different from what is value or quality to the supplier.

Management, in other words, will increasingly have to be based on the assumption that neither technology nor end-use is a foundation for management policy. They are limitations. The foundations have to be customer values and customer decisions on the distribution of their disposable income. It is with those that management policy and management strategy increasingly will have to start.

Management"s Scope is Politically Defined

It is generally assumed in the discipline of management-and very largely still taken for granted in the practice of management-that the domestic economy, as defined by national boundaries, is the ecology of enterprise and management-and of non businesses as much as of businesses.
This assumption underlies the traditional "multinational".

Post WW-II industries such as the pharmaceutical industry, or the information industries, are increasingly not even organized in "domestic" and "international" units as GM and Allianz still are. They are run as a worldwide system in which individual tasks, whether research, design, engineering, development, testing and increasingly manufacturing and marketing, are each organized "transnationally".

The scope of management can no longer be politically defined. National boundaries will continue to be important.
But the new assumption has to be:
National boundaries are important primarily as restraints. The practice of management-and by no means for businesses only-will increasingly have to be defined operationally rather than politically.

Management must focus on the results and performance of the organization. Indeed, the first task of management is to define what results and performance are in a given organization-and this, as anyone who has worked on it can testify, is in itself one of the most difficult, one of the most controversial, but also one of the most important tasks. It is therefore the specific function of management to organize the resources of the organization for result outside the organization.

The new assumption-and the basis for the new paradigm on which management, both as a discipline and as a practice has to be based-is therefore:
Management exists for the sake of the institution"s results. It has to start with the intended result and has to organize the resources of the institution to attain these results. It is the organ to make the institution, whether business, church, university, hospital or a battered women"s shelter, capable of producing results outside of itself.

The center of a modern society, economy and community is not technology. It is not information. It is not productivity. It is the manage institution as the organ of society to produce results. And management is the specific tools, the specific function, the specific instrument to make the institution capable of producing results.

This, however, requires a FINAL new management paradigm:
Management"s concern and management"s responsibility are everything that affects the performance of the institution and its results-whether inside or outside, whether under the institution"s control or totally beyond it.

Almost a hundred years ago it first became clear that the legal definition was not adequate to manage a major enterprise.
The Japanese are usually credited with the invention of the "Keiretsu", the management concept in which the suppliers to an enterprise are tied together with their main customer, for example, for planning, product development, cost control and so on. Keiretsu is not based on a partnership of equals. It is based on the dependence of the suppliers. It is based on power.

Increasingly, however, the economic chain brings together genuine partners, that is, institutions in which there is equality of power and genuine independence.

Global Competitiveness

All institutions have to make global competitiveness a strategic goal. No institution, whether a business, a university or a hospital, can hope to survive, let alone to succeed, unless it measures up to the standards set by the leaders in its field, anyplace in the world. Low labor productivity endangers a company"s survival. But low costs no longer give enough of a cost advantage to offset low labor productivity.

The same is true for all areas: design, marketing, finance, Innovation-that is, for management altogether. Performance below the world"s highest standards stunts, even if the costs are very low and even if government subsidies are very high. And "Protection" can no longer protects, no matter how high the custom duties or how low the import quotas.

Strategy, therefore, has to accept a new fundamental. Any institution-and not just business-has to measure itself against the standards set by each industry"s leader anyplace in the world.

The Growing Incongruence Between Economic Reality and Political Reality

The final fundamental on which to base strategy in the period of worldwide structural change and uncertainty is the growing incongruence between economic reality and political reality.

The world economy is increasingly becoming global. National boundaries are impediments and cost centers. Business-and increasingly many other institutions as well - can no longer define their scope in terms of national economies and national boundaries. They have to define their scope in terms of industries and services worldwide.

But at the same time, political boundaries are not going to go away. In fact, it is doubtful that even the new regional economic units, the European Economic Community, the North American Free trade Zone (NAFTA) or Mercosur, AFTA, the proposed economic community in South Africa, will actually weaken political boundaries, let alone to overcome them.

One Cannot Manage Change

One cannot manage change. One can only be a head of it.
We do not hear anymore about "overcoming resistance to change", which ten or fifteen years ago was one of the most popular topics of management books and management seminars. Everybody has accepted by now that "change is unavoidable". But this still implies that change is like "death and taxes": It should be postponed as long as possible, and no change would be vastly preferable.

But in a period of upheavals, such as the one we are living in, change is the norm. To be sure, it is painful and risky, and above all it requires a great deal of very hard work. But unless it is seen as the task of the organization to lead change, the organization – whether business, university, hospital and so on-will not survive. In a period of rapid structural change, the only ones who survive are the Change Leaders.

It is therefore a central of 21st century challenge for management that its organization become a change leader. A change leader sees change as opportunity. A change leader looks for change, knows how to find the right changes and knows how to make them effective both outside the organization and inside it.
This requires:
1. Policies to make the future.
2. Systematic methods to look for and to anticipate change.
3. The right way to introduce change, both within and outside the organization.
4. Policies to balance change and continuity.
It is with these four requirements for being a change leader that this chapter concerns itself.

Change Policies

There is a great deal of talk today about "the innovative organization". But making an organization more receptive to innovation-even organizing it for innovation-is not nearly enough to be a change leader. It might even be a distraction.

The first policy – and foundation for all the others – is to abandon yesterday. The first need is to free resources from being committed to maintaining what no longer contributes to performance, and no longer produces results. In fact, it is not possible to create tomorrow unless one first sloughs off yesterday. To maintain yesterday is always difficult and extremely time-consuming.
The first change policy, therefore, throughout the entire institution, has to be Organized Abandonment.

Abandonment is the right action if a product, service, market or process "still has a few good years of life". It is these dying products, services or processes that always demand the greatest care and greatest efforts. They tie down the most productive and ablest people. But also we almost overestimate how much "life" there is still in the old product, service, market or process. Usually they are not "dying"; they are dead.

A product, service, market or process should be abandoned if the only argument for keeping it is: "It"s fully written off". To treat assets are being fully written off has its place in tax accounting, but nowhere else. For management purposes there are no "cost-less assets". There are only "sunk costs", the economist"s term for buildings and other fixed investments. The question is never: "What have they cost?" The question is: "What will they produce?" And assets that no longer produce except in accounting terms, that is, assets which produce only because they appear not to "cost" anything, are not assets. There are only sunk costs.

The third case where abandonment is the right policy-and the most important one-is the old and declining product, service, market or process for the sake of maintaining which, the new and growing product, service or process is being stunted or neglected.
How to act on abandonment is thus the second question. It is as important as the first one. It is actually more controversial and more difficult. The answer should therefore always be tested on a small scale or piloted.

Organized Improvement

The next policy for the change leader is organized improvement, what the Japanese call "Kaizen". Whatever an enterprise does internally and externally needs to be improved systematically and continuously: product and service, production processes, marketing, service, technology, training and development of people, using information. And it needs to be improved at a preset annual rate: In most areas, as the Japanese shown, an annual improvement rate of 3 percent is realistic and achievable.

However, continuing improvement requires a major decision. What constitutes "performances" in a given area? If performance is to be improved-and that is, of course, what continuous improvement aims at-we need to define clearly what "performance" means.

Exploiting Success

The next policy that the change leader needs to develop is the exploitation of success.
Problems cannot be ignored. And serious problems have to be taken care of. But the change leader, enterprises have to focus on opportunities. They have to starve problems and feed opportunities.

Creating Change

The last policy for the change leader to build into the enterprise is a systematic policy of INNOVATION, that is, a policy to create change. It is the area to which most attention is being given today. It may, however, not be the most important one-organized abandonment, improvement, exploiting success may be more productive for a good many enterprises. And without these policies-abandonment, improvement, exploitation-no organization can hope to be a successful innovator.

But be a successful change leader an enterprise has to have a policy of systematic innovation. It makes the entire organization see change as an opportunity.
Change and Continuity The traditional institution is designed for continuity. All existing institutions, whether businesses, universities, hospitals or churches, therefore have to make special efforts to be receptive to change and to be able to change. It also explains why existing institutions face resistance to change. Change for the traditional institution is, so to speak, a contradiction in terms.

Change leader are, however, designed for change. And yet they still require continuity. People need to know where they stand. They need to know the people with whom they work. They need to know what they can expect. They need to know the values and the rules of organization. They do not function if the environment is not predictable, not understandable, not known.

Change and opportunities are thus poles rather than opposites. The more is an institution is organized to be a change leader, the more it will need to establish continuity internally and externally, the more it will need to balance rapid change and continuity.

One way is to make partnership in change the basis of continuing relationships. This is what the Japanese "Keiretsu" has done with respect to the relationship between supplier and manufacturer, and what is now adopted fast in American business through "Economic-Chain Accounting".

Information is particularly important when the change is not a mere improvement, but something truly new. It has to be a firm rule in any enterprise that wants to be successful as a change leader, that there are no surprises. Above all, there is need for continuity in respect to the fundamentals of the enterprise: its mission, its value, its definition of performance and results. Precisely because change is a constant in the change leader"s enterprise, the foundations have to be extra strong.

Finally, the balance between change and continuity has to be built into compensation, recognition and rewards.

Making the Future

One thing is certain for developed countries-and probably for the entire world: We face long years of profound changes. The changes are not primarily economic changes. They are not even primarily technologies changes. They are changes in demographics, in politics, in society, in philosophy and, above all, in worldview. Economic theory and economic policy are unlikely to be effective by themselves in such a period.

Information Challenges

A new Information Revolution is well under way. It has started in business enterprise, and with business information. But it will surely engulf ALL institutions of society. It will radically change the MEANING of information for both enterprises and individuals. It is not a revolution in technology, machinery, techniques, software or speed. It is revolution in CONCEPTS. It is not happening in Information Technology (IT), or in Management Information System (MIS), and is not being led by Chief Information Officers (CIOs). It is led by people on whom the Information Industry tends to look down: accountants. But an Information Revolution has also been going on in information for the individual. Again it is not happening in IT or MIS, and not led by CIOs. It is a print revolution. And what has triggered these information revolutions and is driving them is the failure of the "Information Industry"-the IT people, the MIS people, the CIOs-to provide information.

The new information revolutions focus on the “I”. They ask, “What is the MEANING of information and its PURPOSE?”.

From the “T” to the “I” in “IT”

The computer would, in short order, revolutionize the work of top management. It would, we all agreed, have its greatest and earliest impacts on business policy, business strategy and business decisions.

We could not have been more wrong. The revolutionary impacts so far have been where none of us then anticipated them: on OPERATION.
But the computer and the information technology arising from it have so far had practically no impact on the decision whether or not to build a new office building, a school, a hospital or a prison, or on what its function should or could be. They have had practically no impact on the decision of the equipment manufacturer concerning which markets to enter and with which products, or on the decision of a major bank. For top management tasks, information technology so far has been a producer of data rather than a producer of information-let alone a producer of new and different questions and new and different strategies.

The people in Management Information System (MIS) and in Information Technology (IT) tend to blame this failure on what they call the "reactionary" executives of the "old school". It is the wrong explanation. Top executives have not use the new technology because it has not provided the information they needed for their own tasks. The data available in business enterprise are, for instance, still largely based on the early 19th century theorem that lower costs differentiate businesses and make them compete successfully. MIS has taken the data based on this theorem and computerized them. They are the data of the traditional accounting system. Accounting was originally created, at least five hundred years ago, to provide the data a company needed for the preservation of its assets and for their distribution if the venture were liquidated.

But, as we began to realize around the time of World War II, neither preservation of assets nor cost control is a top management task. They are OPERATIONAL TASKS. A serious cost disadvantage may indeed destroy a business. But business success is based on something totally different, the creation of value and wealth. This requires risk-taking decisions: on the theory of the business, on business strategy, on abandoning the old and innovating the new, on the balance between immediate profitability and market share. These decisions are the true top management tasks.

What was needed was to define information; what was needed was new concepts. So is the one new era-and the most important one-in which we do not as yet have systematic and organized methods for obtaining information: information on the OUTSIDE of the enterprise. These new methods are very different in their assumptions and their origins. Each was developed independently and by different people. But they have two things in common. They aim at providing information rather than data. And they are designed for top management and to provide information for top management tasks and top management decisions.
It is generally accepted now that education technology is due to profound changes and that with them will profound changes in structure. Long distance learning, for instance. It is becoming clearer everyday that this technical changes will-indeed must-led to redefining what is meant by education. One probable consequence: The center of gravity in higher education must shift to the continuing professional education for adults during their entire working lives. This, in turn, is likely to move learning off campus and into a lot of new places: the home, the car of the commuter train, the workplace, where small groups can meet after hours.

The Information Enterprise Need

We can already outline the major parts of the information system enterprises need. In turn, we can begin to understand the concepts likely to underlie the enterprise that executives will have to manage tomorrow.

From Cost Accounting to Result Accounting

In Fact, many businesses have already shifted from traditional cost accounting to activity-based costing. It was first developed for manufacturing where it is now in wide use. It is now rapidly spreading to service businesses and even to non-businesses, for example, universities. Activity-based costing represents both a different concept of the business process and different ways of measuring.

Traditional cost accounting measures what it costs to do something, for example, to cut a screw thread. Activity-based costing also records the cost of not doing. Which traditional cost accounting cannot and does not record, often equal and sometimes even exceed the cost of doing. Activity-based costing therefore gives not only much better cost control; increasingly, it gives result control.

Traditional cost accounting assumes that a certain operation-for example, heat treating-has to be done and that it has to be done where it is being done now. Activity-based costing asks, "Does it have to be done? If so, where is it best done?". Activity based costing integrates what were once several procedures-value analysis, process analysis, quality management and costing-into one analysis.

Using that approach, activity-based costing can substantially lower manufacturing costs-in some instances by a full third. It greatest impact, however, is likely to be in services.

From Legal Fiction to Economic Reality

Knowing the cost of operations, however, is not enough. To compete successfully in an increasingly competitive global market, a company has to know the costs of its entire economic chain and has to work with other members of the chain to manage costs and maximize yield.
Information for Wealth Creation Enterprise paid to create wealth, not to control costs. But that obvious fact is not reflected in traditional measurements. To do that requires four sets of diagnostic tools: foundation information, competence information, and resource allocation information. Together they constitute the executive"s tool kit for managing the current business.

Competence Information

Core competencies are different for every organization; they are, so to speak, part of an organization"s personality. But every organization-not just business-needs one core competence: innovation. And every organization needs a way to record and appraise its innovative performance. In organizations already doing that, the starting point is not the company"s own performance. It is a careful record of the innovations in the entire field during a given period. Which of them were truly successful? How many of them were ours? Is our performance commensurate with our objectives? With the direction of the market? With our market standing? With our research spending? Are our successful innovations in the areas of greatest growth and opportunity? How many of the truly important innovation opportunities did we miss? Why? Because we did not see them? Or because we saw them but dismissed them? Or because we botched them? And how well do we do in converting an innovation into a commercial product? A good deal of that, admittedly, is assessment rather than measurement. It raises rather than answer questions, but it raises the right questions.

Resource Allocation Information

The last area which diagnostic information is needed to manage the current business for wealth creation is the allocation of scarce resources: capital and performing people. Those two convert into action all the information that management has about its business. They determine whether the enterprise will do well or poorly.

In addition, a capital-appropriation requires specific deadlines: When should we expect what results? Then the results-successes, near successes, near failures, and failures need to be reported and analyzed. There is no better way to improve an organization"s performance than to measure the results of capital spending against the promises and expectations that led to its authorization.
Capital, however, is only one key resource of the organization, and it is by no means the scarcest one. The scarcest resources in any organization are performing people.

Where the Results Are

Those four kinds of information (foundation information, competence information, and resource allocation information) tell us only about the current business. They inform and direct tactics. For strategy, we need organized information about the environment. Strategy has to be based on information about markets, customers and non-customers; about technology in one"s own industry and others, about worldwide finance, and about the changing world economy. For that is where the results are. Inside an organization there are only cost centers. The only profit center is a customer whose check has not bounced.
These are beginnings. These are first attempts to organize "Business Intelligence", that is, information about actual and potential competitors worldwide.

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