Dissecting of the Organization and Management Functions
Dissecting of the Organization and Management Functions
An organization is a corporate enterprise which is created by people and managed by people. Various types of forces act upon it. Economic forces set limits for the management for achievements. They create opportunities for management for the action. But these forces do not by themselves determine the nature of the organization and what it has to do. Management does not adapt the organization to the forces of the market. On the contrary it has to find these forces and has to create them.
It requires enormous efforts on the part of the management and a huge time to bring changes in the basic nature of the organization for ensuring its growth and success. In fact, how the management makes decisions determines whether the organization is going to continue to prosper or to decline, to survive or eventually to perish. And this is true for successive managements of the organization.
Profit and profitability are crucial for the organization. Profitability is not the purpose of but a limiting factor on the organizational activities. Profit is not the explanation, cause, or rationale of the organizational behaviour and decisions, but the test of their validity. All the persons who occupy the directors’ chairs are to be concerned with profitability.
The first test of any organization is not the maximization of profit but the achievement of sufficient profit to cover the risks of economic activity and thus to avoid loss. Further, there is the prevailing belief that there is an inherent contradiction between profit and the organization’s ability to make a social contribution. Actually, an organization can make a social contribution only if it is highly profitable. To put it crudely, a bankrupt organization is not likely to be a good organization to work for, or likely to be a good neighbour and a desirable member of the society. In fact, the primary purpose for the organization is to be to generate profit to cover the risks as well as for the future growth (Fig 1).
Fig 1 Primary purpose for the organization for the profit generation
The purpose of an organization
For knowing what an organization is, it is essential first to understand its purpose. Its purpose must lie outside of the organization itself. In fact, it must be in society since organization is a part of the society. There is only one valid definition of the purpose of the organization is ‘to create a customer’. Markets are not created by the God, nature, or economic forces but by the persons of the organization. The want an organization satisfies may have been felt by the customer before he was offered the means of satisfying it. Like food in a famine, it may have dominated the customer’s life and filled all his time, but it remained a potential want until the action of the organizational persons converted it into effective demand. Only then there has been created a customer and a market.
The want may have been unfelt by the potential customer since no one knew that he wanted steel reinforcement bars or steel rounds until these became available. There may have been no want at all until organizational action created it whether by innovation, by credit, by advertising, or by salesmanship. In every case, it is the organizational action which creates the customer.
It is the customer who determines what the organization is. It is the customer alone whose, willingness to pay for a good or for a service converts economic resources into wealth, things into goods. What the organization thinks it produces is not of first importance, especially not to the future of the organization and to its success. The typical engineering definition of quality is something that is hard to do, is complicated, and costs a lot of money. But this is not the quality, it is incompetence. What the customer thinks he is buying, what he considers value, is decisive since it determines what the organization is, what it produces, and whether it will prosper. And what the customer buys and considers value is never a product. It is always utility, that is, what a product or service does for him. And what is value for the customer is anything but obvious.
The customer is the foundation of the organization and keeps it in existence. He alone gives employment. To supply the wants and needs of a consumer, society entrusts wealth producing resources to the organization.
The entrepreneurial functions
Since the purpose of the organization is to create a customer, it has two basic functions namely (i) marketing, and (ii) innovation. These two functions produce results all the rest constitutes ‘costs’. Marketing is the distinguishing, unique function of the organization. It is set apart from all other human organizations by the fact that it ‘markets’ a product or a service. The organization which fulfills itself through marketing a product or a service is an organization. An organization in which marketing is either absent, or incidental is not an organization.
The marketing is clearly the unique and central function of the organization, and the creation of a customer is the specific job of the organizational management. The basic tools of modern marketing include market research and market analysis, the concept of market standing, pricing policies, the service salesman, parts and service supply to the customer, and installment credit. The organization is to be the buyer for its customers, to design the right products for them, and to develop sources for their production, the principle of ‘your money back and no questions asked’, and the idea of offering a large assortment of products to the customers rather than focusing on a craft, a product category, or a process. The organization is to see the social changes occurring in its environment for creating a new class of potential customers. It has to create a foundation on which the successive management is to build the successful organization.
The economic revolution which has taken place around the world is, in fact, has a large part of it being a marketing revolution. Creative, aggressive, pioneering marketing is still a rare phenomenon with many of the organizations. Still, a typical attitude of many of the organizations toward marketing is that the sales department is going to sel1 whatever the organization is going to produce. But it is changing now and it is increasingly becoming that it is the job of the organization to produce what the market needs. This changing attitude has a major effect on the economy as much as any of the recent technical innovations has on the economy.
In earlier days selling was not considered as core function of an organization though export sales were considered to be highly valued. In those periods the domestic sale used to be considered as routine matter while the export sales carried with it some hallow around it. Hence export sales carried was handled by persons with very senior positions in the organization. Then there was a shift from this attitude to one which considered marketing as a central organizational function though perhaps not yet as the central function of the organization. After this a shift has taken place towards the marketing approach. Till the market revolution came into picture, organizations were used to be product oriented rather than market-oriented. The organizations learned very fast the economic success of the organization rests squarely on an acceptance of marketing as its first function of business and its crucial task.
Marketing function is so basic that it cannot be considered a separate function (i.e., a separate skill or work) within the organization, on a par with others such as manufacturing or personnel. Marketing requires separate work, and a distinct group of activities. But it is, first, a central dimension of the entire organization. It is the whole organization seen from the point of view of its final result, that is, from the customer’s point of view. Hence, concern and responsibility for the marketing function must permeate all the areas of the organization.
The organizations which are the practitioner of the marketing approach perform well. These organizations are also the best example of the power of marketing. They do not owe their success to technological innovation or product leadership but because they orient themselves to meet the needs of the customer. As a result, these are the organizations who dominate the market.
Switch over to marketing from selling
Despite the emphasis on marketing and the marketing approach, marketing is still a rhetoric rather than reality in many of the organizations. ‘Consumerism’ demonstrates this. For what consumerism demands of the organization is that it actually market. It demands that the organization starts out with the needs, the realities, and the values of the customer. It demands that the organization define its goal as the satisfaction of customer needs. It demands that the organization base its reward on its contribution to the customer. That after several years of marketing rhetoric, consumerism can become a powerful popular movement proves that not much marketing has been practiced. Consumerism is the ‘disgrace of marketing’. But consumerism is also the opportunity of marketing. It forces the organization to become market-focused in their actions as well as in their pronouncements.
Over all, consumerism dispels the confusion which mostly explains why there has been so little real marketing. When the management speaks of marketing, it normally means the organized performance of all selling functions. This is still selling. It still starts out with the organizational products and still looks for the organizational market.
True marketing starts out with the customer, his demographics, his realities, his needs, and his values. It does not ask with what the organization wants to sell. Instead it asks what the customer wants to buy. It does not say what the product or service of the organization does. Instead it talks about the satisfactions which the customer looks for, values, and needs. Indeed, selling and marketing are adversaries rather than identical or even complementary.
There are always, one can assume, be need for some selling. But the aim of marketing is to make selling redundant. The aim of marketing is to know and understand the customer so well that the product or service fits him and sells itself. Ideally, marketing is the result in a customer who is ready to buy. All that is needed then is to make the product or service available, i.e., logistics rather than salesmanship, and statistical distribution rather than promotion. Organizations are a long way from this ultimate. But consumerism is a clear indication that the right motto for organizational management increasingly is to be, ‘from selling to marketing’.
Tool for the economic growth and development
Marketing alone does not make an organization. In a static economy there is only the middleman (a broker) of a static society who receives his compensation in the form of a fee, or a speculator who creates no value. An organization can exist only in an expanding economy, or at least in one which considers change both natural and acceptable. And hence the organization is the specific tool of growth, expansion, and change. Hence, the second function of the organization is innovation which is the provision of different economic satisfactions.
It is not enough for the organization to provide just the economic goods and services. It is required to provide better and more economic ones. It is not necessary for the organization to grow bigger, but it is necessary that it constantly grow better. Innovation results in a lower price, the set of values with which the economist is most concerned, for the simple reason that it is the only one that can be handled by quantitative tools. But the result may also be a new and better product, a new convenience, or the definition of a new want.
The most productive innovation is a different product or service creating a new potential of satisfaction, rather than an improvement. Typically this new and different product costs more, yet its overall effect is to make the economy more productive.
The price of the product is only one of the measurement of the value of an innovation, or of economic process altogether. People may relate price to unit output. But that is hardly adequate. What is really needed is a value measurement which measures the economic value given to the customer. For this the customer is the only judge and he alone knows his economic reality.
Innovation can be termed as finding new uses for old products. A salesman who is able to sell refrigerators in the Iceland to prevent food, from freezing is an innovator similar to ha one who has developed a new process or invented a new product. Selling of a refrigerator in Iceland to keep food cold is finding a new market while selling a refrigerator to keep food from getting too cold is truly creating a new product. Of course, technologically it is only the same old product, but economically there is innovation.
Technically innovation is not an invention. It is a term of economics and not of technology. Non-technological innovations such as social or economic innovations are equally important as the technological innovations. The way the invention of steam engine was an important invention in the field of transport, some of the non-technological innovations such as letter of credit (mobilization of purchasing power through bank credit), insurance (application of probability mathematics to the physical risks of economic activity), limited liability, hire purchase (installment credit) etc. had as much to do with the rise of modern economy.
In an organization, innovation can no more be considered a separate function than marketing. It is not confined to engineering or research but extends across all parts of the organization, all its functions, all its activities. It cannot be confined to manufacturing activities of the organization. Innovation in distribution is equally important as innovation in manufacturing.
The leadership in innovation with respect to product and service has traditionally been focused in one functional activity which is responsible for nothing else. This is mainly true in a large manufacturing organization such as a steel plant or a chemical plant. Similarly, in an insurance company there can be a special department charged with leadership responsibility for the development of new kinds of coverage, while there may be other such departments with responsibility of innovations in the organization of sales, the administration of policies, the settling of claims, and in investing the company’s funds though all these are the insurance company’s business.
But the best way to organize for systematic, purposeful innovation is as a part of the organizational activity rather than as functional work. At the same time, every department of the organization is to have responsibility for innovation and definite innovation goals. It should be responsible for contributing to innovation in the organizational product or service. In addition, it is to strive intentionally to advance the skill in the particular area in which it is engaged such as selling or accounting, quality control or personnel management etc.
Innovation is defined as the task of endowing human and material resources with new and greater wealth-producing capacity. It is very important for developing countries since these countries have the resources but still they are poor since they lack the capacity to make these resources wealth-producing. They can import technology. But they have to produce their own social innovations to make imported technology work.
Innovation is thus crucial to economic development. Indeed, economic development of the organization is, above all, a management task. Management is to convert society’s needs into opportunities for making the organization profitable business. This is what the definition of innovation. Management is to be conscious of the new needs of the society since the new needs demand the innovation in the organization.
Utilization of resources
There is a necessity for the organization to utilize productively the wealth producing resources to discharge its purpose of creating a customer. This is the administrative function of the organization. In its economic aspect it is called productivity. The higher is the productivity, better is the utilization of the resources. Inadequate productivity brings several problems to the organization. But actually very little is known about the productivity.
Productivity means that balance between all the factors of production which give the highest output for the smallest effort. This is quite different from productivity per employee or per hour of work. It is at best distantly and vaguely reflected in such traditional standards which presume that the employees are the only productive resource and manual work the only real effort. Increased productivity in a present day environment is not due to the employees but due to several other factors. Examples are technology, automation etc. At least as important, though unnoticed until very recently, is the increase in productivity achieved by knowledge, which has resulted in a shift from labourers to knowledge workers, such as managers, technicians, and professionals.
A little reflection will show that the rate of capital formation, to which economists give so much attention, is a secondary factor. In the present day environment the prime factor is that the organization needs knowledge workers who can plan, design and carry out the conceptual, theoretical, and analytical tasks and who work with imagination and vision, education, and theoretical and analytical skills.
However, the above is only a part of the increase in productivity through the substitution of brain for brawn. At least as important is the contribution made through the direct change of the character of work from one requiring the manual labour, skilled and unskilled, of many people, to one requiring theoretical analysis and conceptual planning without any investment in capital equipment.
The productivity has a direct link with the reliance on knowledge based activities than the reliance on manual skill. The increase in productivity can be achieved today primarily by the replacement of labour by planning, brawn by brain, sweat by knowledge. The greatest opportunities for increasing productivity are surely to be found in knowledge work itself, and especially in management. Today, the most productive resources are the managers, researchers, planners, designers, and innovators. It may also, however, contain purely parasitical, if not destructive, elements in the form of high-priced personnel needed only because of mal-organization, poor spirit, or confused objectives, that is, because of mismanagement.
Organizations today need a concept of productivity which considers together all the efforts that go into output and expresses them in relation to their result, rather than one that assumes that labour is the only productive effort. But even such a concept (though a big step forward) is still be inadequate if its definition of effort is confined to the activities measurable as visible and direct costs, that is, according to the accountant’s definition of, and symbol for, effort. There are factors of substantial if not decisive impact on productivity that never become visible cost figures.
First there is knowledge which is the most productive resource if properly applied, but also the most expensive one and totally unproductive, if misapplied. The knowledge worker is, of necessity, a high-cost worker. He also represents a very high investment.
Then there is time which is the most perishable resource. Whether men and machines are utilized steadily or only half the time can make a difference in their productivity. There is nothing less productive than idle time of expensive capital equipment or wasted time of high1y paid and able people. Equally unproductive may be cramming more productive effort into time than it will comfortably hold. The most productive or least productive time is that of the manager himself. Yet it is usually the least known, least analyzed, least managed of all factors of productivity.
Productivity is also a function or the product mix, the balance between various combinations of the same resources. As people of the organization are aware that the differentials in the market values of various products are rarely proportional to the efforts which go into manufacturing of those products. Frequently, there is hardly any visible relationship between the two. An organization producing a constant volume of products with unchanging materials and skills requirements and a constant amount of direct and indirect labour can gain enormous fortunes or go totally bankrupt, depending on the product mix. Obviously this represents a considerable difference in the productivity of the same resources, but not one which shows in costs or can be detected by cost analysis.
There is also an important factor which can be called the ‘process mix’. It may be more productive for an organization to buy a part or to make it, to assemble its product or to contract out the assembly process, to market under its own brand name through its own distribution channels or to sell to independent wholesalers using their own brands. The management is to consider what is good for the organization. The requirement is that it is to be the most productive utilization of the specific knowledge, ability, experience, and the reputation of the organization.
It is not practical for the organizational management to do everything, nor there is a necessity for the management to carry out of all those activities which may seem objectively to be profitable. Every management has specific abilities and limitations. Whenever it attempts to go beyond these, it is likely to fail, no matter how inherently profitable the venture.
People who are good at running a highly stable organization are normally not been able to adjust to a volatile or a rapidly growing organization. People who have grown up in a rapidly expanding organization are likely to be in danger of destroying the organization when it enters upon a period of consolidation. People good at running a manufacturing organization are not likely to do well in a trading organization. Utilization of the specific abilities of the organization and its management and observance of these specific limitations is an important productivity factor. Corporations may optimize the productivity of capital, but they are likely to rather low in productivity in many of the equally important areas.
Finally, productivity is critically affected by organization structure and by the balance of the various activities within the organization. If a lack of clear system or procedure causes people to waste their time trying to find out what they are supposed to do rather than doing it, the scarcest resource of the organization gets wasted. If top management is interested only in certain field of activity, while the organization needs major attention in other areas then the organization lacks productivity, then the resulting damage is more than what is normally caused by a drop in output per man-hour. These factors are additional to the factors accountants and economists usually consider, namely, productivity of labour, capital, and materials. They are, however, fully as important.
Hence, there is not only necessity to define the productivity so as to include all those factors which are affecting it, but also need to set objectives which take all these factors into account. It is necessary to develop yardsticks to measure the impact on productivity of the substitution of capital for labour, and of knowledge for both, and also means to distinguish between creative and parasitical overhead, and to assess the impact on productivity of time utilization, product mix, process mix, organization structure, and the balance of activities.
Not only does individual management need adequate concepts and measurements for productivity, the organizational economy needs them. Their lack is the biggest gap in our economic statistics and seriously weakens all economic policy for the organization. It frustrates the attempts of the management to prepare the organization for fighting of depression and inflation alike.
The profit functions
Profit is not a cause but a result. It is the result of the performance of the organization in marketing, innovation, and productivity. It is a needed result, serving essential economic functions
Profit is, first, the test of performance. Profit is indeed a good example of what engineers mean when they talk of the feedback which underlies all systems of automated production, which is the self-regulation of a process by its own results.
Profit has a second function which is equally important. It is the premium for the risk of uncertainty. Economic activity, because it is activity, focuses on the future. The one thing which is certain about the future is its uncertainty, its risks. It is through risk-taking through which a management functions. Since the organizational activities are economic they always attempt to bring about change. These activities always make existing risks riskier or create new ones.
The future of an economic activity is usually a long one. It normally takes fifteen or twenty years for basic decisions to become fully effective, and even longer for the major investments to pay off. Yet while people know nothing about the future, they know that its risk increase in geometric progression the farther ahead we commit ourselves to it. Profit and profit alone can supply the capital for tomorrow’s jobs, both for more jobs and for better jobs. Again it is a definition of economic progress that the investment needed to create new and additional jobs increases.
Organizational management is to have a feeling of guilt or if the organization fails to produce a profit appropriate to the economic and social functions which profit, and only profit, can develop. After all, the organization has social responsibility which it can fulfill if there is adequate profit which is obtained through its operation. Hence, profit is the responsibility of the organization management. It is its first responsibility. The organization which fails to produce an adequate profit endangers both the integrity of the resources entrusted in its care and the capacity of the organization to grow.
At the very least, an organization needs a minimum of profit which is the profit required to cover its own future risks, the profit needed to enable it to stay in the market and to maintain intact the wealth-producing capacity of its resources. This required minimum profit affects the organizational behaviour and organizational decision, both by setting limits and by testing their validity. Management, in order to manage, needs a profit objective at least equal to the needed minimum profit, and yardsticks to measure its profit performance against this requirement.
Management of the organization follows from the analysis of its activity as the creation of a customer through marketing and innovation which always is to be entrepreneurial in character. There is need for administrative performance. But it follows the entrepreneurial objectives. The structure follows the strategy. Further managing of an organization is to be a creative rather than an adaptive task. The more a management creates economic conditions or changes them rather than passively adapts to them, the more it manages the organization.
The analysis of the nature of an organization also shows that management, while ultimately tested by performance alone, is a rational activity. Concretely this means that the organization is to set objectives which express what is desirable of attainment rather than aim at the accommodation to the possible. Once objectives have been set by fixing management’s sights on the desirable, the question can be raised what concessions to the possible are to be made. This requires management to decide what business the organization is engaged in, and what organization it is to be engaged in.