Management, has to do with people and getting people together as the first priority. Unfortunately, mechanistic models that assume a behavior has to do only with incentives, profits or value, seem to be the dominating force in the last few years. This article presents an alternative way of looking at organizational decision-making, that is based on (1) effectiveness, which means obtaining specific results, (2) attractiveness, which means satisfying the intrinsic motives of individuals, and (3) unity, which means satisfying transcendent or altruistic motives.
According to the Wikipedia, “Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively.” To be more specific, management is about people before anything else; and about getting people together next. This, to some, may be only too obvious; but more frequently than not, we find in management books, magazines, journals and schools that only a very small percentage of their content is devoted to people. “Business” as such, in terms of product strategies, marketing tools, financial results and financial engineering, takes the driver’s seat. If people are taken into account at all, it is as instruments of a purpose devised by top management, typically expressed in financial terms, and not as subjects of their own life and their own rights who need to fulfill different kinds of motives.
A mechanistic model of organization
A mechanistic model of organization is that of standard, neoclassical economics that is implicit in most analyses. “Firms” are an abstract production function that only indicates the feasible efficient combinations of inputs and outputs. Then, someone (presumably “the owner”) impersonally chooses the combination that maximizes profit and makes all the pertinent decisions. In its crudest version, the standard economic model assumes that all workers sell their labor to the firm at prevailing market prices in a perfectly transparent market where both parties know exactly what they are buying and selling. Thus, there is no need for motivation, monitoring or control.
[ms-protect-content id=”9932″]In a less crude model, but still mechanistic, workers can put in more or less effort, which will result in bigger or smaller efficiency or results. To properly motivate the workers to increase efficiency, then, an incentive system related with those results will push them in the right direction. Of course, the owner is also “spontaneously” motivated with profit maximization.
Interestingly, a version of this mechanistic model was what Taylor put into practice during the early years of the 20th century. With one essential difference: Taylor never based his analyses in economics (he was an engineer, not an economist) or assumed that the production function could be taken as given: in fact his main goal was to increase efficiency (output / input relationships), trying to reach the efficient frontier of that production function. This way, he would contribute to make the surplus much bigger until (in his own words) “it is unnecessary to quarrel over how it shall be divided”.1
For Taylor, then, and for the standard neoclassical model of the firm, things are rather simple: the goal of the firm is that of profit maximizing, and workers can be motivated to pursue that goal through an appropriate system of incentives. To be sure, in modern terms, profit maximization has disappeared from the picture to yield to shareholder value maximizing, that supposedly takes into account both the time-value of money and the expectations about an uncertain future; and incentive systems are much more sophisticated than those used by Taylor, now being based mainly in shareholder value and affecting not only blue-collar workers, but top managers as well.
Unbelievable as it might seem, after a considerable evolution during the last century, we seem to be now back to the beginning, although in a more sophisticated form: shareholder value is all that matters for the firms (witness the solemn declarations of most firms in their annual reports) and compensation is all that matters to employees, mainly top managers. Yet, this is not how human nature is: people do not want only money, neither as employees nor as shareholders (in the double role that many people have: they are employees, but at the same time shareholders in the firms where they have decided to invest their savings).
Shareholder value
Shareholder value as a criterion for decision-making become famous in the 1970’s and 80’s through the work of Al Rappaport2, whose intention was to warn managers about the dangers of focusing in the short-term, looking at the current year profit only, and proposed to look at the long-run effects as well through shareholder value. Later on, Jack Welch, then president of General Electric, promoted the idea to become a tenet of many companies, which now boast of having it as the main goal of the company. Recently, though, he has changed his mind, and speaking to a well-known business magazine he said that this was “the dumbest idea in the world”: shareholder value can never be a criterion for decision-making, or a guide to action; it is only a result.3
It is interesting to note that this last idea was already in Peter Drucker’s in 1954, not with respect to shareholder value, which was not in fashion at that time, but with respect to profit4. Aiming at increasing profit does not provide any guide as to what kind of decisions have to be made specifically; in contrast, wanting to satisfy customer’s needs does.
Possibly, the main reason why shareholder value has become so popular is that microeconomic theory is able to show that such a goal maximizes social welfare5. But if the profit maximization hypothesis has been severely criticized since long as being “too difficult, unrealistic and immoral”6, current formulations based on firm’s value can be criticized as unrealistic as well. According to Senge, for instance, by maximizing profit in the short run one can ignore all the complex feedback dynamics. “This is why manipulating profits over the short term is much easier than building wealth over the long term. Thus, whether intended or not, firm value maximization will almost always become, by default, short-term profit maximization”7. This would, of course, go directly against Rappaport’s original idea of avoiding shortsightedness.
The humanistic view
Mayo and Roethlisberger were prominent among the people that contributed to show that the Taylor approach was misguided. In Fact, Taylor, tried to find through engineering analyses mechanistic relationships between inputs (work hours) and outputs (product units); and Mayo, Roethlisberger and their associates showed in the famous Hawthorne Experiments8 that this was just impossible, i.e., that the productivity and the total production that could be obtained from a worker depended very much on a complex series of social and psychological factors that cannot be taken into account by a production function.
A few years later, Chester I. Barnard9 analyzed organizations in a more structured, rational way. Barnard asked himself why most organizations were rather short-lived, and concluded that the key variables for a firm to survive were two variables: effectiveness and efficiency.
His concept of effectiveness was the commonly held notion that an action is effective if it achieves the desired goal. But his definition of efficiency substantially differs from the concept commonly held. Typically, we think of efficiency (and we have done so at the beginning of this article in the context of the Taylor approach to management) as an output / input relationship: an action that we take is efficient if, given the input (say, direct labor hours) produces an output (say, units of product) that is the maximum possible given the technology available; or that given the output, it consumes the minimum inputs necessary. In contrast, Barnard defined an organizational action as being efficient whenever it satisfied the motives of the individuals that belonged to the organization. He looked at organizations as cooperative systems; and, from this point of view, the organizational goal must be a composite of the individual’s objectives. The organizational action is then effective if it achieves the (explicit) organizational goal, and it is efficient if the motives of the individuals participating in the organizational action are satisfied.
Typically, when we think of an organization, we think about its employees as members of that organization. Customers are obviously important, but we typically don’t think of them as belonging to the organization. However, the group of people that are most interested in the organizational goal (what the organization has to achieve) is precisely the customers. Thus, customers can sometimes be included as part of the cooperative effort that represents the organization.10
Individual motives
Individual motives are then important for organizational survival. A classical distinction coming from the middle of the 20th Century is the one between extrinsic and intrinsic motives, extrinsic motives being those related with the rewards external to the action (money, status, and so on), and intrinsic motives being those that have to do with the action itself. Ryan and Deci (2000)11 summmarize it and distinguish between “intrinsic motivation, which refers to doing something because it is inherently interesting or enjoyable, and extrinsic motivation, which refers to doing something because it leads to a separable outcome.” They also take into account that intrinsic motivation may have an hedonic component of enjoyment, while at the same time there is a normative intrinsic motivation out of a sense of obligation (see also Osterloh and Frey, 200312 , Pérez López,199313 and Rosanas 200814 ). For our purposes here, it is important to distinguish between thoso two types of motives. So, we will reserve the word “intrinsic” for those motives that have to do with the action itself, with its hedonic component, and, following Pérez López and Rosanas, we will call the type of motives related with obligation to other people “transcendent”. Actually, the trichotomy is a formal distinction: the extrinsic motives operate on the external consequences (to the individuals) of the action, the intrinsic motives on the consequences on the acting individuals themselves, and the trascendental motives on other people (mainly, customers and employees).
Effectiveness
An organization needs to have a set of goals (perhaps somewhat implicit) because otherwise the members of the organization would not know what to do. These goals are then subdivided along organizational lines to every individual working in the organization. The degree to which the goals (essentially quantitative) are achieved is called effectiveness. Effectiveness is important for the survival of any organization: without achieving a minimum of objectives, possibly measurable goals, the cooperation has no purpose.
In business firms, specifically, perhaps one of the most important dimensions of the quantitative goals is, of course, value added, which (imperfectly) measures the creation of economic value by the firm. Value added is then “split” between salaries (to employees) and profit (to stockholders).
Other types of organizations may have different quantitative goals. Thus, a political party may have as a goal the number of votes obtained in an election, a hospital the number of cured people, and a church the number of the faithful that regularly attend the religious services. The value added, however, is always important in any organization, because it conditions survival: no organization can survive indefinitely with a negative value-added every year.
Obviously, a positive value-added is a very minimum condition, because the salaries of employees have to be paid in order to keep them collaborating with the organization: an organization of “volunteers” is very difficult to run and very unstable through time. The willingness to participate in the organization depends partly on receiving an adequate compensation. Thus, value added is the “fund” created to satisfy extrinsic motives on the part of employees.
Attractiveness
The mechanistic model of the organization that we have presented at the beginning would stop here. Other motives don’t exist in its context, so there is no need to satisfy them. But this is contrary to fact: intrinsic and transcendent motives not only exist, but that they are important, and can become a crucial building block of an organization. Actually, this is expanding the concept of efficiency in Barnard into two: the efficiency to satisfy intrinsic motives, and the efficiency to satisfy transcendent motives.
It would seem only too obvious that, typically, employees like the kind of work for which they are adequate (not necessarily the one they actually do), enjoy the activities related with this type of work, and want to learn more to self-actualize as professionals. If all this happens, an indirect consequence is that they become even more valuable in pure economic terms at the same time. But no doubt, good professionals like by itself a job that is attractive to them given their knowledge and their abilities, that is challenging, and where they can expect to make progress. And people seldom (if ever) do a good job at anything that they do not like or do not feel particularly adequate for.
Attractiveness, then, becomes the second consideration in satisfying the motives of individuals giving them a job that is attractive and where they can develop as professionals and learn for the future. But although this is necessary, it is not sufficient. If it were, anarchism would have been a big success as a practical way of handling organizations: just give each and all employees the kind of job they like, and live them alone. We all know that this does not happen.
Unity We can now close the circle by including in our analysis what we have called the transcendent motives, i.e., the kind of motives that have to do with caring about what happens to other people.
This has two different aspects. First, we consider transcendent motives towards customers. If employees of a given firm do not care about customer satisfaction and care only about doing a product that is technically perfect, meets some specifications, or about collecting their incentive, customers will be satisfied only by chance. The goal(s) of the firm reflect only imperfectly (sometimes very imperfectly) the interests and wishes of the customers; and, then, if employees are not genuinely interested in finding out which ones these are and in doing what they can to fulfill them, this simply won’t happen. There is an enormous difference between obtaining quantifiable results, perhaps technically perfect, and actually satisfying the needs of the customers.
Second, we consider other employees. Active cooperation is needed to achieve any worthy objective: that is the foundation of organization. But you cannot obtain collaboration by decree, by any rules or by any incentive system: employees have to have the will to cooperate with each other, i.e. they have to be willing to contribute to achieve the goals of the other individuals. Extrinsic or intrinsic motives are not enough to achieve that: transcendent motives are necessary. Employees have to identify with the needs of the customers and with the efforts of the other employees. This is what we call “unity”.
Three criteria for decision-making
Effectiveness, attractiveness and unity, the three qualities that we have seen an organization should have to survive in the long run, constitute thus at the same time three criteria for decision-making in an organization in the short-run. For the sake of concreteness, suppose a business firm has to make an important decision in terms of accepting or rejecting an order that one of its customers may be willing to place.
The typical analysis of such a decision in a business course has to do with the criterion of effectiveness only, which usually means calculating the impact of the decision in the profit (or value-added) of the firm. This is a very operational concept, not without uncertainties, of course, but which can be calculated taking those uncertainties into account.
But this calculation is sufficient only if the other two criteria are invariant with the alternatives of decision, i.e., if attractiveness and unity are not affected by the decision. In general, it will not be the case. In terms of attractiveness, for instance, it can be small or even negative in cases where a given order is a routine job, boring for most people and where they will learn close to nothing; or, on the other hand, in a different order, it may be something challenging, doable but not trivial, where people can develop their abilities and thus increase their distinctive competence: attractiveness is then highly positive.
Something similar happens with unity. An order may promote cooperation and contact with the customers that will develop identification with their problems and teamwork, or it may be again some routine work that promotes bureaucratic behavior and following only standard procedures.
Mission and unity
These principles should translate in a sense of mission. The word “mission”, which has a religious and military origin, and which is currently used and abused in management practice as a set of nice words, essentially should mean the reason for the efforts of the firm. Going back to Barnard’s efficiency, the sense of mission means to satisfy the motives of the customers and of the employees. Which is a two-way street: you need to satisfy the needs of the customers (external mission) in order to be viable as a firm and be able to satisfy the motives of the employees, and you need to satisfy the motives of the employees (internal mission) in order to have them identified with the objectives of the organization, which should be its external mission.
Final comments
If taken seriously, these concepts and principles (effectiveness, attractiveness, unity and internal and external mission) would change the way every manager makes decisions. It is a different way of seeing the world of management, of the objectives that organizations should have, and a more complete frame of mind for approaching all of them. At the same time, it provides a built-in ethical component, badly needed today in time of crisis and scandals, because it takes into account systematically the interests of other people in every decision.
About the author
Josep Mª Rosanas Martí is a Nuclear Engineer (UPC, Barcelona, 1969), MBA (IESE Business School, 1971) Ph.D. in Accounting and Information Systems (Northwestern University, 1976). He has been a Professor of Accounting and Control at IESE Business School since 1971. In 1990-94, he took an extended leave of absence to become one of the founding members and a Vice-Rector of Universitat Pompeu Fabra (Barcelona). He is the holder of a “Crèdit Andorrà” Chair in Markets, Organizations and Humanism, and the author of several books and articles on accounting and control, ethics and humanism.
Notes
1. From testimony of Frederick W. Taylor at hearings before the Special Committee of the House of Representatives to Investigate Taylor and Other Systems of Shop Management, January, 25, 1912, pp.1387-89.
2. Creating shareholder value : the new standard for business performance, New York, 1986, The Free Press.
3. Financial Times, March, 12, 2009
. 4. In The Practice of Management, New York, Harper & Row, 1954, p.35.
5. See, for example, Jensen (2000) for a brief statement of the argument: “Value Maximization, Stakeholder Theory and the Corporate Objective Function”, in M. Beer and N. Nohria, eds., Breaking the Code of Change, Boston, Harvard Business School Press.
6. Anthony, R. N. (1960), “The Trouble with Profit Maximization: It Is Too Difficult, It Is Unrealistic, It Is Immoral”, Harvard Business Review, 38(6), 126-134
7. Senge, P. (2000), “The Puzzles and Paradoxes of How Living Companies Create Wealth”, in M. Beer and N. Nohria, eds., Breaking the Code of Change, Boston, Harvard Business School Press.
8. See, for instance, Elton Mayo (1933), “The human problems of an industrial civilization”, New York, The MacMillan Company.
9. Barnard, Chester (1938) The Functions of the Executive, Boston, Harvard University Press.
10. Barnard, ibid., p.69
11. Ryan, R.M. and Deci, E.L. (2000), “Intrinsic and Extrinsic Motivations: Classic Definitions and New Directions”, Contemporary Educational Psychology 25, 54-67. 12. Pérez López, J.A. (1993), Fundamentos de la dirección de empresas, Madrid, Rialp. 13. Rosanas, J. (2008), “Beyond Economic Criteria: A Humanistic Approach to Organizational Survival”, Journal of Business Ethics, DOI 10.1007/s10551-006-9341-9ld. 14. Osterloh, M. and Frey, B.: 2003, Corporate Governance for Crooks? The Case for Corporate Virtue, Working paper ISSN 1424-0459, Institute for Empirical Research in Economics, University of Zurich.
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