C H A P T R 7 THE OBJECTIVES OF A BUSINESS The fallacy of the single 0bjective—The eight key areas 0f busi• ness enterprise—"Tangible" and "intangible" 0bjectives—How tO set objectives——The IOW state Of the art and science Of measure- ment—Market standing, lnnovation, productivity and "Contrib ・ uted VaIue"—The physical and financial resources HOW much Profitability?—A rational capital-investment policy—The remain ・ ing key areas ・ Most 0f today's lively discussion Of management by objectives is concerned with the search for the one right objective. This search iS not only likely t0 be as unproductive as the quest for the philoso- pher's stone; it iS certain tO dO harm and tO misdirect. TO emphasize only profit, for instance, misdirects managers tO the point where they may endanger the survival 0f the business. TO obtain profit today they tend t0 undermine the future. They may push the most easily saleable product lines and slight those that are the market of tomorrow. They tend t0 short ・ change research, pro- motion and the other postponable investments. Above all, they shy away from any capital expenditure that may increase the invested ・ capital base against which profits are measured; and the result iS dangerous obsolescence Of equipment. ln Other words, they are directed intO the worst practices Of management. TO manage a business is tO balance a variety 0f needs and goa . This requires judgrnent. The search for the one objective is essen ・ tially a search for a magic formula that will make judgment un ・ necessary. But the attempt to replace judgment by formula is always

356 THE PRACTICE OF MANAGEMENT president in name but not in fact. While the executive vice-president had had to make all the decisions and take んⅡ responsibility, 丘 n authority and its symbols were ⅵⅡ vested in a president who guarded his rights jealously, though he had abdicated in e 飛は . Everything that could have been done ten years earlier to secure to the company the benefit 0 ー the dead man's strength and safeguard れ against his weaknesses would have required clear establishment Of the man's authority and responsibility as the top man. Then constitutional safeguards—team organization 0 ー the top job; assignment 0f the objective-formulating part of the job to the vice-presidents operating as a planning committee, or federal de- centralization Of product businesses—could have been provided. This analysis thus revealed that removal the president was the first thing that had to be done—and once that was done the problem could be solved. The second step in the definition of the problem is to determine the conditions for its solution. The objectives for the solution must be thought through. ln replacing the deceased executive vice-president the objectives for the 91u on of the problem were fairly obvious. lt had to give the company an effective tOP management. lt had t0 prevent a recurrence 0f one-man tyranny. And it had tO prevent the recurrence of a leaderless interregnum; it had tO provide tomorrow's top managers. The 6 t objective ruled out the solution most favored by some of the vice-presidents: an informal committee Of functional vice-presidents working loosely with the nominal president. The second ruled out the solution favored by the Board chairman.• recruitment of a successor to the executive vice ・ president. The third objective demanded that, whatever the organization of top management, federally decentralized product businesses had tO be created [ 0 train and test future top managers. The objectives should always reflect the objectives of the busi- ness, should always be focused ultimately on business performance and business results. They should always balance and harmonize the immediate and the long-range future. They should always take intO account both the business as a whole and the acuvities needed tO run it. At the same time the rules that limit the solution must be thought through. What are the principles, policies and rules of conduct that have to be followed? lt may be a rule of the company never to b0 な ow more than half its capital needs. lt may be a principle never 【 0 hire a man from the outside without first considering all inside

MANAGERS MUST MANAGE 3 Finally, the manager has responsibilities downward, 【 0 his subordinate managers. He has first t0 make sure that they know and understand what is demanded of them. He has to help them set their own objectives. Then he has [ 0 help them to reach these objectives. He is therefore responsible for their getting the t001S , the s ね圧 , the information they need. He has to help them with advice and counsel. He has, if need be, to teach them [ 0 dO better. Ⅱ a one ・ word definition of this downward relationship be needed, assistance ” would come closest. lndeed, several successful ( 0 ーれ・ panies—-notably lnternational Business Machines (IBM)—have de ・ fined the manager's J0b in relation to his subordinates as that Of an asristant" tO them. Their jobs are theirs—by objective necessity. Their performance and results are theirs, and so is the responsibility. But れ is the duty of the superior manager to help them all he can tO attain their objectives. The Catholic Church is customarily considered tO exercise authoritarian ( on [ r01 over its priests. A Bishop can appoint a priest to a parish (though he cannot remove him except for cause and after a hearing). The Bishop can set up new parishes and abolish or merge existing ones. But he cannot tell a parish priest what to do; that is determined objectively by the nature of the job and laid down in the charter 研 the Church, canon Law. Nor can the Bishop himself exercise the functions of the parish priest; as long as the parish has a duly appointed priest the authority and the responsibility of the offce are exclusively his. ln theolo each priest holds 0 伍 ( e by delegation through Apostolic Succession; in law he has 0 ロ & nal and 50 厄 authority grounded in the objective requirement of his function and limited on け by the limits his ん n ( ⅱ on. The objectives of a managerial unit should always and exclusively consist Of the performance and results it has [ 0 contribute 【 0 the success 0f the enterprise. They should always and exclusively focus upward. But the objectives Of the manager whO heads the unit in ・ clude what he himself has to do to help his subordinate managers attain their objectives. The vision Of a manager should always be upward—-toward the enterprise as a WhOle. But his responsibility runs downward as well—to the managers on his team. That his relationship toward them be clearly understood as duty rather than as supervision iS perhaps the central requirement for organizing the manager's i0b effectively.

MANAGEMENT BY OBJECTIVES AND SELF-CONTROL 129 the pr0Ject engmeer's J0b by the contribution he, his engineers and draftsmen make to the engineering department The objectives of the general manager of a decentralized division should be defined by the contribution his division has to make to the obJectives of the parent company. This requires each manager to develop and set the objectives of hiS unit himself. Higher management must, of course, reserve the power t0 approve or disapprove these objectives. But their develop ・ ment is part Of a manager's responsibility; indeed, it is his first responsibility. lt means, too, that every manager should responsibly participate in the development of the objectives of the higher unit Of which his is a part. TO ・ give him a sense of participation" (to use a pet phrase Of the "human relations" jargon) is not enough. Being a manager demands the assumption Of a genuine responsibil ・ ity. Precisely because his aims should reflect the objective needs of the business, rather than merely what the individual manager wants, he must commit himself to them with a positive act of assent. He must know and understand the ultimate business goals, what is expected 0f him and why, what he will be measured against and hOW. There must be a "meeting of minds" within the entire manage ・ ment of each unit. This can be achieved only when each of the contributing managers is expected tO think through what the unit objectives are, is led, in Others words, tO participate actively and responsibly in the work 0f defining them. And only if his lower managers participate in this way can the higher manager know what tO expect Of them and can make exacting demands. ThiS is so important that some of the most effective managers I know go one step further. They have each Of their subordinates write a "man- ager's letter" twice a year. ln this letter tO his superior, each manager 6 t defines the objectives of his superior's job and of his own job as he sees them. He then sets down the performance standards which he believes are being applied to him. Next, he lists the things he must d0 himself to attain these goals and the things within his own unit he considers the major obstacles. He lists the things his superior and the company d0 that help him and the things that hamper him. Finally, he outlines what he proposes t0 d0 during the next year t0 reach his goals. Ⅱ his supenor accepts this statement, the "manager's letter" becomes the charter under which the manager 0Derates.

220 THE PRACI ・ ICE OF MANAGEMENT centers 0 [ information and decision way 0 but cutting across functional lines. Similar centers Of information and decision ・ making must alSO be established outside the production organization in any business using modern technology for the mass manufacture Of parts with assembly intO diversified or using process prOductiOll. TO design a product is no longer a 」 Ob which starts in the engmeer- ing department, after which the plant tools uP' after which the sales department goes tO work pushing the product• lt is a team effort in which marketeers, production people and engineeß work together right from the start—again a "task force" concept. This requires that instead Of organizing the work along lines 0 [ functional centralization, it must be organized in decentralized' though still functional, units which have the maximum 0 { information and de- cision, and the broadest possible scope. The compromise between broad scope and small size that has tO be found for the decentralized functional unit should in practice be largely determined by the number 0f levels 0f management required. ldeally every functional manager should himself report [ 0 the general manager Of a federal unit or product business. At the most there should be one level between—no ーれ ore. The reason for this is that every manager will, in a well-run enter- prise, participate responsibly in the determination Of the objectives of the unit that is headed by his immediate superior. He will de- rive the objectives Of the unit he manages directly from those Of the next-bigger unit. Thus, a functional manager WhO reports tO the manager 0f a federal unit will himself take active part in deyel ・ oping the objectives Of a business and will therefore focus the functional objectives Of hiS own unit on business ends. The manager one level below will also be actively engaged in the setting of ob ・ jectives that directly reflect genuine business goals. But one levei further down—where there are tWO levels between functional man- ager and federal unit or product business—all the objectives the manager deals with are functional. They can hardly bear much closer relationship t0 the business 0bJectives which they must help attain than a literal prose translation Of a lyric poem will bear tO the original. The biggest decline in the performance of functional

232 THE PRACI ・ ICE OF MANAGEMENT and serious causes Of trouble. Yet' this stage has no name Of its own 、 it is not even usually recognized as a specific stage. For want Of a better 記 rm I would call it the / 砒・ハど d と霓 5. The fair-sized business is distinguished from the small business ⅲ two ways. ln the first place the top operating j0b has become a full ・ time assignment. And the over-all business obJectives can no longer be set by the man wh0 holds the t0P operating j0b. Setting objectives may indeed still be carried on as a part-time j0b; the treasurer, for instance, may handle it in addition tO his financial duties. But it is usually better in the fair-sized business tO organize objective-setting as a separate function' tO be discharged' for in ・ stance, by the functional managers meeting regularly as a planning commrttee. The fair-sized business therefore always has t0 have a chief- executive team. lt always has a problem 0f the relationship 0f functional managers t0 top management, though the problem is still small. lt iS at this stage that a deCiSiOn has tO be made concerning WhiCh 0f the principles of organization structure apply. The small business is, as a rule, is organized functionally; and there is no diffculty in meeting the requirement that functional managers report directly tO the manager Of a genuine business. ln the fair-sized business the federal principle 0f organization becomes both applicable and ad ・ vantageous. Finally, in the fair-sized business we encounter for the first time the problem 0f organizing technical specialists. "Staff services" by and large are still unknown (with the exception perhaps 0f a per ・ sonnel department). But technical specialists are needed in many areas. Their relationship tO functional and top management and tO the objectives 0f the business therefore have t0 be thought through. The next stage is the g どとれど . lts characteristic is that either 0 れ e or the Other Of the chief-executive JObs has tO be organized on a team basis. Either the top action j0b or the j0b 0f setting over-all objectives is t00 big for one man and has tO be split. Sometimes one job becomes a full-time job for one man and a part-time job for several other people. There may, for instance, be a president who, full-time, is the

CHIEF EXECUTIVE AND BOARD 179 Since this has happened not only in this country but in e other—if our information accurate, even in Russia—・ it suggests that the erosion of the Board of Directors is 月 0 [ an accident but rooted in profound causes. Some of these are: the much-publicized divorce Of ownership from control which makes it absurd that the business enterprise be directed by the representatives of the share. holders; the complexity modern business operations; and, perhap most important, the diffculty of finding good men with the time to sit on Boards and to take their membership seriously. But there are real functions which only a Board of Directors can discharge. Somebody has to approve the decision what the com- pany's business is and what れ should . Somebody has to glve final approval to the objectives the company has set for itself and the measurements it has developed [ 0 judge its progress toward these objectives. Somebody has to 100k critically at the profit planning Of the company, its capital ・ investment poli and its managed-ex ・ penditures budget. Somebody has to discharge the final judicial function in respect t0 organization problems, has to be the "Supreme Cou れ . " Somebody has to watch the spirit of the organization, has tO make sure that れ succeeds in utilizing the strengths of people and ln neutralizing their weaknesses, that it develops tomorrow's man ・ agers and that its rewards tO managers, its management tools and management methods strengthen the organization and direct it toward its objectives. The Board cannot and must not 反 the governing organ that 【 he law considers れ tO be. lt iS an organ Of review, Of appraisal, 0f ap. peal. Only in a crisis does れ become an organ Of action—and then only tO remove existing executives that have failed, or tO replace executives WhO have resigned, retired or died. Once the replacement has been made, the Board again becomes an organ 0f review. Those members of the chief-executive team who are charged with responsibility for company 0bJectives must work directly with the Board. 0 れ e way to achieve this in the large company (applied in several 0f our large businesses with good results) is the formation of Board committees in each major area Of objectives, With the ( om ・ pany omcer charged with primary responsibility in that area, acting as the committee's secretary or chairman. But no matter hOW 0 zanized in concrete detail, the Board should have direct access tO

6 THE PRACTICE OF MANAGEMENT establish team work and harmonize the goals 0f the individual ⅵ山 the C01 第一 0 Ⅱ weal. The only principle that can d0 this is management by objectives and self-control. lt makes the common weal the aim Of every man ・ ager. lt substitutes for control from outside the more exact ・ ing and more effective control from the inside. lt motivates the manager tO action not because somebody tells him tO dO something or talks him into doing it, but because the objective needs 0f 5 task demand it. He acts not because somebody wants him tO but because he himself decides that he has to-—he acts, in 0ther words, as a free 1 an. The word "philosophy" is tossed around with happy abandon these days in management circles. I have even seen a signed by a vice-president, on the "philosophy 0f handling purchase requisitions" ()s far as I could figure out philosophy" here meant that purchase requisitions had tO be in triplicate). But management by objectives and self-control may legltimately be a " philos ・ ophy" 0f management. Ⅱ rests on a concept 0f the J0b 0f manage- ment. lt rests on an analysis Of the specific needs Of the management group and the obstacles it faces. lt rests on a concept Of human action, human behavior and human motivation. Finally, it applies tO every manager, whatever his level and function, and tO any business enterpnse whether large or small. It insures performance by converting 0bJective needs int0 personal goals. And this is gen ・ uine freedom, freedom under the law.

INDEX 403 Reports and procedures, of, 3- 5 Resistance t0 profi 【 , 3 巧 - 引 8 Resist0flex Corporation, 引 3 fn ・ our ( : financial, objectives, setting, 73 ・ 76 : human and material, - : manager's, man as, 348 ・ 349 : objectives, setting, 73 ・ 76 : wealth- producing, productive utilization, 4 ト 46 ; worker as, 263 ・ 2 Responsibility: enterprise ' 3 need for, 3 -304 : management, 5 Manage ・ ment; supervzsor, 32632 町 worker, 304 ・ 3 Reuther, WaIter, 3 Reward, compensation as, 巧ト巧 3 Richardson, F. L. W ” 256 血 . 00 vel % Franklin D ” 9 0 nw d , Julius, 29 , 30 , 3 町 34 , 4 Schumpeter, Joseph A. , Scientific management, ー 0 , ー 66 , 280 ・ 286 ; applica tion t0 analysis and organization 0f work, 294 ・ 295 ; Aut0 ・ ma tion and, 286 ・ 287 ; blind spots, 282 ・ 286 : ( on pts , basic, 2 -28 divorce Of planning from doing, 284 ・ 285 ; rmpact, world-wide, 28 町 sta 部【 ion since early ー 920 ' 5 , 28 ト 282 Sears, Richard, 29 , 35 a , Roebuck and Company, 74. 巧 5 , 4 , 巧 7 , , 2 , 0 , 2 い . 276 : management story, 27 ・ 33 If - ( 0nt21 : management by, ロ 9 , 以ト 6 ; reports and procedures, use, 3 ・ 5 ; through measurements. 0- 3 Service work: organizing, 243-245 : a 他 , central-offce, 240 ・ 243 Share ownership, P26[ ・ sharing and, 3 巧 - 引 8 SIoa れ , AI 記 P ” Jr. , 3 , 7 , 8 Small business, 23 central-offce service a , 24 family owned, 236-237 : growth, problem, 245 ・ 25 町 how big is big?, 8 ・ 23 idyllic, myth 0f' 7 ・ 8 ; management problem, 38 ; number Of em oyees れ 0 ( ・ rion, 9 , 引 : problems' 236-238 Smith, Adam, 3 5 i 引 impact, business decisions, 3 ・ Society, enterprise and, 38 ト 383 Socony ・ Vacuum Oil Company, 4 Solutions: alternative, developing, 359 ・ 362 ; best, finding, 362 ・ 364 Spa 【 , Thomas, 274 Standard 0 ⅱ Company 0 [ New Je , 時 3 , 4 Stanford Research lnsti 【第磐 Strategic decisions, 352-53 Succession Of chief executive, ー 69770. Supervisor, 引 9 ・ 28 : job requirements, 325-328 ; management status. 324 ・ 32 needs 0f, 322-325 ; objective for de• partment, 3 -323 : place 0f, 9 : pro- motion opportunities f0 ら 32 ナ 4 : responsibilities, 320 ・ 32 Swope, Charles, 8 Symptoma tic diagnosis, decision ・ mak ・ 354 TacticaI decisions, 35 ト 35 TangibIe b ⅲ Obj [ ⅳ 8. 64 TayIor, Frederick W ” , 8 28 第 , 284 , 285 Team organization, chief executive' 0- 3- 5 : organizing• 6 ・巧 8 Technocracy, T h れ 0 訂 , new, Automation Tes ting, top [ 0m0 な OW ' 204 ・ 205 Time: dimension, in ー 4 ・ 16 ; factor ⅲ productivity, 44 : mana ・ g ' 3 own, using, 346 ・ 347 ; span 0f business objectives, 84-86 Tomorrow's managen 370-378 ; but 0 new man, 373 ・ 374 ; decision-making and, 368 ・ 3 : demand$ new' 376 372 : education: general' for 山 0 young, 375-376 : manager• for the 麒・ in tegri ty 0f perienced, 376-378 : character, 378 ; intuitive exit the, 374 ; preparation' 374 ・ 378 ; tasks, new, 372 ・ 373 Training, top managers' tomorrow ・町 ま 04 ・ 205 Union Carbide and C - tion, 4 , 3 Union relations, objectives ー 0 ら 8 ・ 84

THE SMALL, THE LARGE, THE GROWING BUSINESS 233 chief action executive. But both the manufacturing vice-president and the sales vice-president may spend a considerable part of their time as top action Officers in addition tO their functional duties. Similarly, there may be an executive vice-president concerned full time with over-all objectives. Or ()s is quite usual) the chairman of the Board, semi-retired from active executive offce, may spend practically full time on objectives. At the same time the company s treasurer, itS chief engineer and itS personnel vice-president may all spend a large part Of their time on setting objectives for the company ・ ln the large business the federal principle of management organi- zation iS always the better one. ln most large businesses it is the only satisfactory one. This rmses a problem 0 [ the relationship be ・ tween tOP management and the autonomous managers Of federal businesses. The last stage of business size is the どヴ耘 g どと″れど . lt is characterized first by the fact that b0th the action and the over-all objective ・ setting part Of the chief-executive JOb must be organized on a team basis. And each jOb requires the full-time services 0 [ several people. Secondly, it can only be organized on the federal principle Of management structure. The business iS t00 big and t00 complex t0 be organized any other way. FinaIIy, the organiza ・ tion Of the chief executive and its relationship tO operating manage ・ ment tend tO become major problems which engage the attention and energy of top-management people before everything else. lt in the very large business that systematic organization Of the chief- executive jOb is bOth most diffcult and most needed. 日 0 Big T00 Big? There may be yet another stage: the れ襯 0 加 g とり big しど . How big can a very large business grow? What is the upper limit of manageable business organization? IS there such a limit? There iS little reason tO believe that mere size alone is against the public interest. Ⅱ need not lead t0 monopoly. lt need not curtail SOCial or economic mobility (indeed, the fastest turnover in our economy is among the smallest and the hundred largest companies). The very large business, contrary to folklore, does not inhibit the