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Fredmund Malik

The General Management Functions

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Outline

Management is no matter of ideology, nor is it a question of fashion. Management is a craft - the universal and most important discipline of the 21st century. Fredmund Malik, the leading expert in the field of general management, provides you with the knowledge it takes to be a successful executive and manager, in any position, within any organisation.
Fredmund Malik cuts straight to the core tasks of management, exposing its errors, misunderstandings and uncertainties with surgical precision. He shows what constitutes management - and, above all, what does not. His standard model for right and good management demonstrates how good management works, relating to the leadership of people as well as businesses.
Fredmund Malik's theory is system-oriented and can thus be applied regardless of time or place. It is designed to work in all areas and industries of any society, irrespective of changing trends or national and cultural differences. Taking as his point of departure the consistent traits displayed by complex systems - phenomena that executives and managers are likely to address on a daily basis - Malik sets the standard for sound management in a knowledge-based economy.

Read more about the Malik Management Systems:

Management Is a Craft

The Principles of Effective Management

Tasks of Effective Management

Tools of Effective Management

The Malik Management System and Its Users

The General Management Functions

Management For a New Era

Instructions for Self-Organization

Sovereignty and Leadership through Master Control

Free Download Cybernetics: Background of the Malik Management Systems

Information about the author

Prof. Dr. Fredmund Malik is an orderly professor for corporate management with a teaching license from the University of St. Gallen, an internationally renowned management expert, the founder and chairman of Malik Management, and the creator of the Malik Management Systems® framework. He is also a bestselling and award-winning author of over ten books, including classics like "Managing Performing Living" and "Strategy of the Management of Complex Systems" (in German language), as well as a columnist for opinion-forming media and one of the most distinguished thought leaders in the area of management. As a board member and chairman of several governance bodies at renowned world market leaders, Malik also has broad first-hand knowledge of international corporate governance practice. In the 1990s, Malik was the first macroeconomic thinker - and for a long time the only one - to point out the damaging effects of neoliberalism to society as a whole. He was also the first to criticize the Anglo-Saxon business administration theory with its one-dimensional fixation on shareholder value, which Malik identified as one of the main causes of the global financial crisis. Thanks to his cybernetic methodology and toolset, Malik was one of the first to realize the imminent danger. As his tools enabled him to read the warning signs early on, Malik and his team developed innovative solutions to manage the complexity of today's major challenges. With his cybernetic-based management theory, Malik has been setting standards for Right and Good Management.
His numerous distinctions and awards include the Cross of Honor for Science of Art from the Republic of Austria, 2009, and the Heinz von Foerster Award for Organizational Cybernetics from the German Cybernetic Society, 2010.

The Basic Model of General Management

To demonstrate what general management should be, I use the basic model shown in the following graph. It has proved to be the most comprehensible and useful concept, as it provides an overview of all essential elements and their interaction. It is a wholistic model setting limits to both, the idea of a noncommittal wholism and the reductionism that was taken to extremes over the past years and reached its peak in the shareholder value principle.

The term“general management” in my definition comprises all elements and sets of tasks which are common to all institutions, and which every kind of organization needs in order to function. As such, they also represent the areas where all managers, including specialists, need basic skills. Executives aiming for a career in general management – that is to say, generalists – need comprehensive and detailed knowledge about these subjects. I believe that this also solves latent contradictions between specialists and generalists. Generalists need to specialize as well – but in other fields than specialists do. They specialize in totalities, in the institution as a whole, and most specifically – in line with the definition of management – on shaping, guiding, and developing complex, productive, social systems.

Slogans such as“specialists know more and more about less and less; generalists know less and less about more and more” are good for a joke. They are not really to the point, though. It serves nobody’s interests to belittle these things sarcastically, or play off one side against the other. We need both, specialists and generalists. In the manner suggested here, we can rather precisely define who should know (and be able to do) what, which is also important for training purposes.

Things are quite straightforward at the general management level: every institution operates in an environment in which its purpose must be fulfilled. External conditions must be analyzed and understood, as otherwise it will be impossible to fulfill the business purpose.

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Figure 1: General Management Model

Every institution needs to make its governance decisions depending on its environment. They comprise the basic definition of purpose and the overarching values and rules which are to govern all activities, as well as the relations with key elements of the environment.

Another thing to be defined is strategy. Decisions must be taken which will determine the institution’s positioning in its respective environment, its field of activity, and the overriding objectives, means, and measures required to fulfill corporate purpose. I am using the term “strategy” in a broad sense, also including goal-setting. Depending on the individual institution, the word“strategy” will be more or less fitting and might have to be adapted; the function it describes, however, is always required.

Further, every institution needs a viable, robust structure which, most importantly, must remain functional under any condition that can realistically be assumed. The structure determines the institution’s functionality and viability. It should make it easy for people to fulfil their tasks successfully.

The next level of general management is culture. It must be aimed at performance, accountability, and effectiveness, and it must be tolerable for people. Treating culture as a special subject does not contradict my above comments on the so-called emergent properties. The fact that culture is emergent does not mean it cannot be described with regard to its content.

At the center of the graph we see the executives who have to make their specific contributions to the design and implementation of strategy, structure, and culture. Their actions are guided by the Standard Model of Managerial Effectiveness, as shown in the right-hand part of the graph.

Elements that are not integral parts of general management, but universally existent, are certain subject-specific or functional areas. They exist in every institution, from a business organization to an opera house.

Every institution has recipients of service. As there are fewer and fewer monopolies, more and more units can be service recipients – or customers. Consequently there are also competitors, and thus a market. Every institution therefore needs to have a certain basic knowledge of customers, market, and marketing. Every institution needs people to deliver its services and to function. We therefore find an HR function in each. All institutions have in common a need for money, so they also need a finance department, and all incur costs, so they need a controlling unit. Finally, we have data in each of them, which calls for a certain basic knowledge of information sciences.

Managers need a minimum of skills in these fields. They do not need to be specialists – they could not specialize in all of these fields. But they should understand them enough to be well-respected discussion partners for specialists rather than being at their mercy.

The Organization’s Environment

“The system always kicks back.”1

Management must have its point of reference in the very environment where the institution needs to function. If you do not understand your organization’s environment you will not stand a chance of practicing right management. Neither will you be able to adapt to that environment, nor to shape it according to your organization’s needs.“Environment” is often understood to be limited to ecological issues. That, however, would not be sufficient for the management of societal institutions.

An individual institution cannot dominate its environment. History has shown that no organization – however powerful in its time – could prevail over its environmental conditions, and in particular over the changes in it, in the long run. Even the largest and most powerful organizations were not able to permanently shape their environment so as to provide favorable conditions for them, even if they enjoyed monopolistic rights.

Reasons lie in the complexity and in the constant change owed to the relentless progression of self-organization The environment isa textbook example of why managers absolutely need to concern themselves with complexity, as well as with complex systems and their regularities. Even those firmly believing in the“keep it simple” principle will have to accept sooner or later that that slogan does not apply to the environment of a business or any other organization.

Model Categories for the Environment

When I talk about“environment” here I refer to anything of importance, or potentially important, for the institution as such – irrespective of whether this is generally known or not, whether it can be known or not. Two seemingly contradictory aspects must be considered: firstly, there are basic limits to the knowledge one can have about one’s environment, implying some clearly defined requirements to management; yet, secondly, it is possible to know more – and above all, more important things – than most managers would think, and more than what is found in most organizations.

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Figure 2: Components of an organization’s environment

The following graph contains the essential components of a company’s environment, structured under two perspectives: the company’s (suppliers, investors, media, etc.) and the functional perspective (spheres of the environment). This graph was developed for the first version of the St. Gallen Management Model and has since proved its validity and usefulness. It explicitly includes what some pseudo-reformers of the shareholder-value principle now consider to be the latest progress in the field: the stakeholder approach. It was already conventional wisdom back then. In management, the same wheels (even useless ones) are reinvented every few years because most people simply do not have a clue about the standard of knowledge.

I have introduced two changes to the original version: firstly, I added the media which have much greater importance today than they used to. Secondly, I highlighted the customers to distinguish them from other stakeholder groups. Customers are doubtless one element in an organization’s environment, but they are not stakeholders.2

Understanding Economic Aspects

The above graphs demonstrate the multidimensionality to be considered in every environmental analysis. In the following paragraphs I will focus on some of the most important economic aspects which in my view are largely unknown or misunderstood. They are immediate causes of the prevalence of wrong management practices. This does not mean that other environmental categories are less important – rather to the contrary.

Ultimately, all environmental influences manifest themselves in the economic sphere. This is true for all companies, even if for some organizations it may be limited to the expenses required to achieve their purpose as well as the financial resources available for it. Whether we like it or not, it is a fact. Therefore, a profound understanding of economic functions and interrelations must be at the heart of right management.

The prevailing theories of economy are largely useless for managing an organization. They mainly deal with specific questions, use rather incomprehensible language, and in most cases have little practical relevance. Even the underlying assumptions have little in common with the reality of management. Some are downright and dangerously misleading.

Examples include the much-propagated neo-liberal ideas and the New Wealth theory so popular in the United States. It is just as faulty as the New Economy“theory” was back then. We are left with amazement. How could such nonsense ever be adopted, even advocated with dogmatic fervor, by nearly all economists, media, consultants, and many managers? I have opposed them from the very beginning.

Neoliberal Misconceptions

Neoliberalism, which emerged and came into vogue after the collapse of communism, is a travesty of liberalism. A unique chance was wasted: the chance of convincing the world of the merits of a truly liberal economic and societal system. The protagonists of neoliberalism do not miss a chance to tell everyone about the beauty of their ideology. What they actually do is spread delusions, ideas that no true liberal has ever vindicated, thus creating disappointment and a new anti-business attitude in the population.

I am being very frank about this precisely because I am a firm proponent of a free enterprise economy and because I am in favor of using the market as a coordinating mechanism, wherever it functions or can be made to function.

Instead of admitting to these errors and correcting them, as true liberals would, the discussion fatally resembles the rearguard battles of neomarxism. As a result, the theory loses all power of persuasion. Its proponents will achieve the exact opposite of what they are aiming for: they will pave the way for a revitalization of socialist ideas, as is already happening in many countries.

Whereas during the Second World War, politics was (mis)perceived to be the universal remedy, now it is the economy. Neoliberalism has led to an economization of society – a very simplistic, reductionist form of economization. True liberalism, however, is not an economic buta societal theory. At its core are not economic factors, least of all financial ones such as profit. True liberalism is a theory on society, and its chief value is individual freedom. The great liberal economists would not have accepted today’s version of neoliberalism, with shareholder value and value creation as central themes. Nor would they have spoken of deregulation, because they knew very well that the highest liberal value, individual freedom, cannot be achieved without rules. They would have resorted to“re-regulation”, for their goal would have been to replace the wrong rules with right ones, rather than doing away with rules as such.

It was this profound understanding of a well-functioning free society from which liberal thinkers such as Friedrich von Hayek, Ludwig von Mises, Wilhelm Röpke, and long before them the Scottish moral philosophers, deduced what functions the business sector had to fulfill in such a society, and what criteria should consequently guide the handling of economic affairs. This thought has completely been lost to the proponents of neoliberal positions, in particular to most officers of trade associations and most business lobbyists. Also, what business people and managers have to say about neoliberalism rarely reveals much expertise.

The starting point must be society, not business. Without a functional society there can be no functional economy and thus no functional economic institutions. In a decayed society there may be much wheeling and dealing but no corporate management. In my experience most people understand this fairly well.

One of the things often described badly and incorrectly is the market. We are incessantly told what a great and beneficial thing the free market economy is. Those telling us so are either talking from a privileged position or have not really understood the principle. None of the true liberal economists, least of all Friedrich von Hayek, believed the market to be a good solution – or even a possible solution – to all economic and societal coordination and regulation problems. On the contrary, they consistently worked from the insight that the market isa poor solution, always pointing out that all other solutions known are even worse, and often they went in search of better ones. That has given them credibility and authority.

Anyone claiming that a market can create a maximum of growth and national product is wrong. Friedrich von Hayek, in my view the sharpest of all liberal thinkers, put it very clearly:“Of course the so-called ‘maximum’ we can achieve in this (market-driven) manner cannot be defined as a sum of certain quantities of goods …”3

Whoever fails to see the deficiencies of the market runs the risk firstly of overexerting it, secondly of blocking the search for better solutions wherever they could exist, and thirdly of further increasing the widespread ignorance of economic issues. A case in point is the view that the market effectively corrects the errors in the management of large corporations.

It is simply naive of neoliberals to maintain that the market will “take care of everything”. As indispensable as the market may be, neoliberalism overvalues its potential. The market does not bring about economic performance, it does not even prevent mistakes, it only punishes them. Also, it does not correct mistakes in the usual sense of the word, it merely brings in the undertaker after the patient has died. These methods are too crude for modern society. Therefore, right and good management is required not only to manage organizations well, but also to compensate for the inherent systemic shortcomings of the market. I will explain this in greater detail later.

Another misperception: no true liberal has ever demanded egoism as neoliberals do. It is nothing but a myth that Adam Smith has advocated it.4 Liberalism is not based on human egoism, and it does not depend on it to work. On the contrary, it is the only system explicitly giving people the freedom to behave exactly as they wish, and pursuing exactly the goals they choose. True liberals, however, uphold something that has often been mistaken: that within the order recommended by them, including the legal system, even those behaviors considered most harmful, will ultimately turn out to be to the benefit of society.5 Or, to put it in simpler terms: liberalism is a system in which bad people can do least harm.

True liberalism does not call for profit either, let alone profit maximization, not even profit orientation. Market economy and capitalism are not defined through profit at all but through liquidity: whoever is able to pay the bill at maturity will remain in the game. Creditors do not care where the funds come from.

Finally, one last misunderstanding: true liberalism does not demand we subordinate all our goals to the economy. No one has put this more clearly than Friedrich von Hayek: ultimately, all goals are of a noneconomic nature.“The ultimate goals which rational beings seek to attain through their actions are never of an economic nature. Strictly speaking, there is no ‘economic motive’ but only economic factors conditioning our striving for other ends.” What in ordinary language is misleadingly called the“economic motive” merely refers to the desire for general opportunity, the desire for power to achieve unspecified ends.6 We could probably turn many influential opponents into proponents of a free economic system if we ceased to demand they subordinate everything to pure economic reason, which justifiably meets with rational and emotional reluctance. What liberalism does demand is that each and everyone be responsible for their actions. That principle must apply to managers as well.

New Economic Understanding Needed?

The answer is Yes. Not only are many neoliberal positions highly questionable. The entire understanding of economic prevailing today is fundamentally wrong, with very few exceptions. For instance, it is still very much based on the barter principle, although to this date nobody has been able to furnish evidence of the existence of a barter economy for any period of history.

My following remarks are oriented by the views of Gunnar Heinsohn and Otto Steiger, who made a very strong case in demonstrating that for all intents and purposes what we currently have is not a theory on economics;7 so far it is only a theory on the productive use of assets. Whereas real economic activity requires ownership, not for its use but for its value as a collateral.8

Want or Must? Debt Pressure as a Driver of Economic Activity

Every day we are faced with smart theories about business and economics. Most are outdated before long, or in conflict with other expert statements. To keep a cool head amid the swirl of contradictory comments and suggestions, it is useful to keep in mind a few basic truths of economics.

Why does man work? Why is there such a thing as economic activity? Why is it done in a certain way? And why was it clear and noticable from the very start that the talk about the New Economy was just that: idle talk?

Psychological Reasons?

Working and economic activity are commonly explained with certain forms of human striving and wanting: man – so we are told – wishes to satisfy certain needs. As a consumer, man strives for benefit or the fulfilment of wishes. As an entrepreneur, man wishes to achieve profit or growth, or both. As an employee, man works because he or she was motivated. As a manager, man feels called upon to be innovative. Obviously, then, psychological elements must be considered the drivers of economic activities.

Not only does this sound plausible, it is established theory. But is it really true? Do subjective elements of wanting, wishing, and aspiring account for the pressures in the economic system? Why, then, do we not face up to those pressures instead of evading them? The answer usually given is, because of competition. Can that be the whole truth?

Economic Activity is Driven by Constraint

One aspect is often disregarded or underestimated: a major reason why people work and why companies do business is not because they wish to work or do business, but because they have to. They act under constraint.

Where does this constraint come from? It follows from the simple fact that people and companies have undertaken obligations which have been defined with regard to scope and time, and which they are forced to fulfill. Or, put in simpler terms: they have liabilities. The constraint they face is a result of debt agreements they have previously concluded, and any failure to fulfill those contracts will lead to compulsory orders, seizures, and ultimately bankruptcy. Not too long ago we used to have bonded labor.

Part of the debt obligations is undertaken voluntarily, and could thus have been prevented. The respective purchasing acts, such as installment or credit card purchases, could have been postponed. Once these obligations have been generated, though, they take their grim effects in that their fulfillment is compulsory, and it exceeds the obligation originally entered into in that it includes the interest agreed.

Involuntary Obligations and Compulsory Supererogation

By far the larger part of debt contracts, however, is concluded involuntarily. All productions and all the work must be prefinanced. There will not be buyers before something has been produced, or salaries before the work has been completed. Producing something before buyers are found means that loans must be taken out. Waiting for the salary to arrive at the end of the month means having to incur debts, which today is done by using a credit card, the modern (and much more expensive) equivalent of what used to be running up a bill at the corner store. Prefinancing leads to compulsory debt contracts, and thus to additional costs in the form of interest rates.

People are not only buyers and sellers, consumers and producers, employees and employers, as economic theories would make us believe. Above all, they are debtors and creditors. No matter what the aim, intention, or motivation – a debtor is forced to generate not only the loan itself, delivering a performance which he otherwise might not have delivered; in addition, he needs to perform in excess of that, to the extent that the interest incurred can be covered. This cause of economic rush and pressure is rarely mentioned – which is remarkable, in particular as we have the highest debt, both in absolute and relative terms, that ever existed at a global level. This driver of economic activity is totally independent of psychological motives and other aims, wishes or intentions.

The sum of all contractual obligations, multiplied with the respective interest rate, equals the sum of the minimum economic performance required to prevent ruin. This is the cause of growth in the business sector, the cause of rush, stress, and anxiety – and at the same time, of performance, productivity, and innovation. This cause is entirely independent of psychological motives. Of course, psychological elements like greed or a relentless pursuit of profit may aggravate the situation.

If successful performance cannot be achieved the debt must be liquidated. If debtors fail to pay, creditors must write off the bad debts. The fact that there will previously be a legal seizure of assets, bringing the debtor down to subsistence level, usually does not help either party.

Economic growth is a consequence of debt previously incurred. If it decreases or even turns negative there will be less national product and income, but not only that: a much more dangerous effect, although rarely considered, is the resulting need for value adjustment in companies’ balance sheets.

Thus, the market is not only the place where supply and demand meet. It is also – and primarily – the place where manufacturers in debt attempt to raise what they need in order to cover their debt: money. This phenomenon could be observed in all cases where illusions of an infallible financial system have collapsed.

The problem is not in people’s exaggerated standards of consumption. They can lower those standards, in particular those concerning everyday needs, and they will when they have to. What they cannot lower is the debt previously incurred and which relentlessly grows due to compounded interest, irrespective of how people do economically.

It does not matter whether a company (or the persons representing it) is or wants to be more productive – financial obligations are objective obligations, and so are the respective interest burdens.

The Circle Is Incomplete

The immediate cost of production flows back to the market in the form of operating cost. Thus, production seemingly creates its own purchasing power and demand. It is seemingly so because every production and, generally speaking, every economic activity needs to be prefinanced as explained before. From a macroeconomic perspective, however, the money (or capital) needed for prefinancing can never be existent. In other words, the economy as a whole is permanently in debt.

Double-entry bookkeeping – the business administration viewpoint that is occasionally used to explain economic phenomena – is dangerously misleading in this case. The costs of prefinancing, risks and profits are calculated and booked but do not actually exist in the supply and demand cycle. They appear to exist as economic realities; in truth, however, they are a fiction of accountancy. Invariably and exclusively these costs can only be covered by running in debt. What this implies is that production cannot – and never could – create its own demand, as maintained by the common theories.

As I said before, the legal obligations taken on voluntarily and involuntarily and the interest loads associated with them are the crucial drivers of dynamics and pressures.

These considerations are based on the so-called debitistic economic view which, to my knowledge, was first developed by Gunnar Heinsohn9 and subsequently refined by him and his colleage Otto Steiger10 as well as by Paul C. Martin.11 This implies a series of consequences:

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Corporate Policy and Corporate Governance

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Strategy

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Structure

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Culture

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Executives

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Innovation and Change

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Implementation

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Epilog – Management Responsibility and Management Ethics

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Annotation

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Imprint

All rights reserved. No part of this book may be used or reproduced in any manner.
Translated by Jutta Scherer, JS textworks, Munich, Germany.
Copyright © 2012 Campus Verlag GmbH, Frankfurt am Main. Cover design: Campus Verlag GmbH, Frankfurt am Main. Illustrations: Alex van de Hoef, Dreieich
Conversion by Koch, Neff & Volckmar GmbH,
KN digital – die digitale Verlagsauslieferung, Stuttgart

ISBN: 978-3-593-41734-9

www.campus.de