The Engineer in the Enterprise

What the technical person needs to know about American business methods

Dr. Arthur Davidson

Carnegie Mellon University

Pittsburgh, PA 15213

ABSTRACT Those of us with a technical background are more likely than ever before to find ourselves in a non-traditional career, more directly connected to business than in the past. Whether our careers are in a small or large company, government, education, or in self-employment, they will be dominated by the prevailing corporate culture, which can be regarded as an extension of the 18^th century philosophy of Adam Smith combined with F.W. Taylor’s work early in the twentieth century on scientific management. This paper looks critically at this prevailing culture, using statistics, psychology, systems theory, and the theory of knowledge. Internal contradictions will be exposed. How corporate culture might be improved will emerge from a look at Deming’s influence on the interpretation of Smith’s and Taylor’s work.

The Prevailing Ideas about Adam Smith and Frederick Taylor

Adam Smith first published his book The Wealth of Nations in 1776, and his ideas about free markets are built into American culture along with the declaration of independence. The prevailing belief about Smith’s work is that he was an early and ardent advocate of solving social problems with free markets. He is credited with the idea that self-interest would tend to align with societal or national interest, and do so with greatest efficiency. Thus, regulation is to be avoided and government’s job is to make sure that free competition prevails wherever possible, so that the marketplace automatically rewards efficiency and punishes waste. As Smith described it, it is as if an “invisible hand” was regulating the market place for the good of individuals and society.

Smith’s influence is seen today in daily headlines. Some advocate improving public schools by promoting competition between schools. The government is prosecuted a lawsuit against Microsoft for stifling competition in the software marketplace.

Frederick Winslow Taylor was the world’s first management consultant. His name is less well known today than Smith’s, but his influence, again, is all around us, woven into our culture. Taylor, who was trained as a mechanical engineer, had the insight that any kind of work could be studied scientifically and be made more efficient. His methods were first applied in factories: one of his most famous articles is on how to optimize the process of shoveling coal. But his methods have been applied to every and all business processes from factories to offices to restaurants. My favorite example is the American fast food industry. Our fast food restaurants have streamlined the kitchen by using a limited but popular menu. They have eliminated table service and dishwashing. The customer orders and pays in one integrated process with a minimum of fuss. Moreover, the system delivers. The food is cheap and quick and pretty popular. Frederick Taylor could not have done better himself.

The MBO Cycle

Americans took Smith’s concept of an ideal free market, combined it with Taylor’s scientific studies of the work process, and developed Management by Objective (MBO) and the MBO cycle of goal setting, evaluation, and reward. At the end of the 19^th century, organizations were becoming very large, and unwieldy. Managers sought to find a way to impose the discipline of the marketplace on corporate workers. The idea was to reap the benefits of market driven efficiency inside an organization, and not just between different organizations. It was natural to combine Taylor’s analysis of jobs with Smith’s free market ideas, but where does the “invisible hand” come from? What provides the reward and punishment of the market, since inside a company there is no market? The invisible hand comes from management in the form of the MBO cycle, as shown in Figure 1.

Nearly every American company of any size either has a version of the MBO cycle, or strives to implement one. Most employees and managers accept MBO as inevitable, since it is a natural continuation of the practice of grading in school, and has self-consistent logic behind it.

In a typical case, goals are formally set once a year in a one-on-one meeting between the worker and his or her boss. Depending on the employee’s level and education, the boss may impose the goal, or it may be negotiated. Then comes a period of work, again usually one year, but occasionally half a year or less, followed by the evaluation. This evaluation is usually a second meeting, although some companies combine this year’s evaluation with next year’s goals all in one meeting. The goal setting and evaluation are usually treated as personal and confidential.

Management uses the evaluation as the basis for reward and punishment, substituting it for the discipline of a free market. A high evaluation may get the worker a raise, bonus, or promotion. A low evaluation may provide the worker with no raise, or could even put him on probation. Then the cycle repeats. These concepts of high and low evaluations are often put on a numerical scale, so that each employee receives a numerical rating. Some companies use a ranking method, where the evaluation leads to an ordered list of employees, from the most valuable to the least, with no two people at the same rank. Some companies employ both rating and ranking. In any case, an MBO system seeks to take the best of free market entrepreneurism and free market discipline into the interior of an enterprise.

Deming’s Reinterpretation of Smith and Taylor

Deming taught that the organization of business should be analyzed in the light of 4 categories of human knowledge: variation, systems, psychology, and the theory of knowledge. Smith and Taylor, however, were experts in knowledge and systems, but had relatively undeveloped ideas about variation and psychology. Adding in these crucial elements modifies the prevailing MBO synthesis.

Adam Smith, in the prevailing view, is the advocate of free market competition. Adding modern knowledge of psychology and variation makes him appear instead as an advocate of cooperation within a system. Smith himself argued that wealth is created by cooperation. Competition among companies helps to keep prices low, and can aid innovation, but does not itself create wealth. Thus, according to Deming, free market competition is useful when it is carried out among more or less independent systems. Inside a tight system, it is always detrimental. Wealth comes from close cooperation within the system.

Likewise, Taylor attacked the problem of knowledge in business by scientifically examining the physical content of work, and then restructuring it in an optimum way. Deming, with his twentieth century background in variation and psychology, adds to this that there is no optimum; it is always possible to find a better way, if input from the workers themselves is sought. This fits with the results of modern psychology. Where Taylor was content to use dollar incentives, Deming understands that more powerful motivation comes from joy in work, and the knowledge that the job is useful and important.

The new cycle, named after Walter Shewhart who first understood it, is shown in Figure. 2. Instead of setting goals, the work is planned jointly by managers and workers. As the work is done it is studied: Should it be expanded? Sped up? Then instead of manipulating workers with rewards and punishment, management and workers act on the result of study, and begin a new cycle. In the MBO cycle, the loop is set up to control people. In the Shewhart cycle, the loop is set up so that people control the process.

Bibliography

1. The New Economics, W.E. Deming 1994, MIT CAES, ISBN 091137907X

2. The Wealth of Nations, Adam Smith, Prometheus Books, ISBN 0879757051

3. Scientific Management, F.W. Taylor, Dover, ISBN 0486299880

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