Posts filed under ‘Management Theory’
| Peter Klein |
David Howden’s generous review of Organizing Entrepreneurial Judgment appears in the March 2015 issue of the International Entrepreneurship and Management Journal. Excerpt:
This ambitious book has a three-fold purpose. First, it seeks to clarify “entrepreneurship” in a manner amenable to both modern management and economics literature. Second, it redefines the theory of the firm in order to integrate the role of the entrepreneur more fully and give a comprehensive view on why firms exist. Finally, and most successfully, it sheds light on the internal organization of the firm, and how entrepreneurship theory can augment our understanding of why firms adopt the hierarchies they do. . . .
Organizing Entrepreneurial Judgment is a massive undertaking, and one that ambitiously spans the unnecessary divide between management studies and economics literature. For the scholar seriously contemplating exploiting this gap further, the book is highly recommended. Having thoroughly enjoyed reading this rendition of their entrepreneurial theory of the firm, it is this reviewer’s hope that Foss and Klein continue to carve out this growing niche straddling the two disciplines. Following up with a more direct and focused primer on their firm would be a welcome contribution to further the growing field.
Also, at last November’s SDAE conference, the book received the 2014 FEE Prize for best book in Austrian economics.
We have several new papers coming out that develop, extend, and defend the judgment-based perspective. Details to follow.
| Peter Klein |
Bryan Hong, Lorenz Kueng, and Mu-Jeung Yang have two new NBER papers on strategy and organization using a seven-year panel of about 5,500 Canadian firms. The papers exploit the Workplace and Employee Survey administered annually by Statistics Canada. The data, the authors’ approach, and the results should be very interesting to O&M readers. Here are the links to the NBER versions; there may be ungated versions as well.
Business Strategy and the Management of Firms
NBER Working Paper No. 20846, January 2015
Business strategy can be defined as a firm’s plan to generate economic profits based on lower cost, better quality, or new products. The analysis of business strategy is thus at the intersection of market competition and a firm’s efforts to secure persistently superior performance via investments in better management and organization. We empirically analyze the interaction of firms’ business strategies and their managerial practices using a unique, detailed dataset on business strategy, internal firm organization, performance and innovation, which is representative of the entire Canadian economy. Our empirical results show that measures of business strategy are strongly correlated with firm performance, both in the cross-section and over time, and even after controlling for unobserved profit shocks exploiting intermediates utilization. Results are particularly striking for innovation, as firms with some priority in business strategies are significantly more likely to innovate than firms without any strategic priority. Furthermore, our analysis highlights that the relationship between strategy and management is driven by two key organizational trade-offs: employee initiative vs. coordination as well as exploration of novel business opportunities vs. exploitation of existing profit sources.
Estimating Management Practice Complementarity between Decentralization and Performance Pay
NBER Working Paper No. 20845, January 2015
The existence of complementarity across management practices has been proposed as one potential explanation for the persistence of firm-level productivity differences. However, thus far no conclusive population-level tests of the complementary joint adoption of management practices have been conducted. Using unique detailed data on internal organization, occupational composition, and firm performance for a nationally representative sample of firms in the Canadian economy, we exploit regional variation in income tax progression as an instrument for the adoption of performance pay. We find systematic evidence for the complementarity of performance pay and decentralization of decision-making from principals to employees. Furthermore, in response to the adoption of performance pay, we find a concentration of decision-making at the level of managerial employees, as opposed to a general movement towards more decentralization throughout the organization. Finally, we find that adoption of performance pay is related to other types of organizational restructuring, such as greater use of outsourcing, Total Quality Management, re-engineering, and a reduction in the number of layers in the hierarchy.
| Peter Klein |
Recent posts on strategy and game theory (here and here) generated quite a lot of discussion here and on social media. Avinash Dixit offers more grist for the mill in his December 2014 Journal of Economic Literature essay on Lawrence Freedman’s Strategy: A History (Oxford, 2013). (An ungated version is here.) Dixit’s essay contrasts the economist’s and the historian’s view of strategy — “strategy” being game theory for the former, a broader, interpretive, interdisciplinary exercise for the latter — but the discussion is highly relevant for strategic management. The management literature has traditionally taken a wide, flexible view of “strategy,” closer to the historian’s sense than the economist’s, though that is rapidly changing as game theory becomes more widespread in strategic management research and teaching.
Here’s an excerpt from Dixit’s opening, which gives you the flavor:
[Freedman] heads the preface with a memorable quote from Mike Tyson: “Everyone has a plan till they get punched in the mouth.” Later he quotes another fighter, the legendary German Field Marshal Helmuth Karl Bernhard Graf von Moltke: “no plan survived contact with the enemy” (p. 104). The game theorist will respond: “Those plans are not strategies. They are incomplete. They fail to specify any action at the node of the game tree where you get punched in the mouth or meet the enemy army, or in the ensuing subgame.” It would be extreme stupidity, or arrogance tantamount to stupidity, for a boxer not to recognize the possibility of getting punched in the mouth. And although avoiding battle may be an important aspect of military strategy in many situations (see pp. 47–9), every plan should include a provision for action if or when battle commences. Tyson, or Freedman, will probably counter that even if the boxer starts with a complete plan that specifies the action for this contingency, the punch will make him forget the plan and react hot-headedly. Modern game theorists exposed to behavioral ideas will admit some truth in this, and agree that the boxer’s System 2 calculations are likely to fly out of the ring when the punch lands and System 1 instincts will take over. But they will add that that makes it all the more important for the boxer to strategize better in advance—to take actions before getting punched, either to reduce the risk, or to arrange matters in such a way that the anger and instinct (or the prospects of such reactions) are put to more effective use, as with the strategy of brinkmanship. More generally, “the art of creating power” often entails strategic moves like commitments, threats and promises that game theorists have analyzed following Thomas Schelling (1960). And Freedman’s picture of “strategy as a System 2 process engaged in a tussle with System 1 thinking” (p. 605) looks remarkably like Schelling’s (1984, ch. 3) “intimate contest for self-command.”
I have a twofold purpose in constructing the above exchange. One is to highlight the difference between the perspectives of economists and historians in thinking about the same situation. The second is to argue that each has something to learn from the other, and a fuller understanding can result from their dialog. The two perspectives share a lot of middle ground, and have useful complementarities.
The thoughtful essay is well worth reading in its entirety.
| Peter Klein |
We’ve featured some cool vintage diagrams before, such as the New York and Erie Railroad organizational chart and the diagrams of the Mundaneum. Here’s an information flow diagram from 1922, represented as a cutaway view of the Washington Star newspaper offices. As Jason Kottke notes, it provides “a fascinating view of how information flowed through a newspaper company in the 1920s. Raw materials in the form of electricity, water, telegraph messages, paper, and employees enter the building and finished newspapers leave out the back.”
| Peter Klein |
Russ Coff has assembled an impressive list of syllabi and reading lists for PhD courses in strategy, innovation, research methods, and related subjects. Feel free to send him additional suggestions. Many useful references here for faculty and students teaching or taking these courses, and for anybody wishing to learn more about classic and contemporary literature in strategic management research.
| Peter Klein |
A couple of recent NBER papers of interest to O&Mers, one from Doug Irwin, another from Luis Garicano and Esteban Rossi-Hansberg:
Adam Smith’s “Tolerable Administration of Justice” and the Wealth of Nations
Douglas A. Irwin
NBER Working Paper No. 20636, October 2014
In the Wealth of Nations, Adam Smith argues that a country’s national income depends on its labor productivity, which in turn hinges on the division of labor. But why are some countries able to take advantage of the division of labor and become rich, while others fail to do so and remain poor? Smith’s answer, in an important but neglected theme of his work, is the security of property rights that enable individuals to “secure the fruits of their own labor” and allow the division of labor to occur. Countries that can establish a “tolerable administration of justice” to secure property rights and allow investment and exchange to take place will see economic progress take place. Smith’s emphasis on a country’s “institutions” in determining its relative income has been supported by recent empirical work on economic development.
Knowledge-based Hierarchies: Using Organizations to Understand the Economy
Luis Garicano, Esteban Rossi-Hansberg
NBER Working Paper No. 20607, October 2014
We argue that incorporating the decision of how to organize the acquisition, use, and communication of knowledge into economic models is essential to understand a wide variety of economic phenomena. We survey the literature that has used knowledge-based hierarchies to study issues like the evolution of wage inequality, the growth and productivity of firms, economic development, the gains from international trade, as well as offshoring and the formation of international production teams, among many others. We also review the nascent empirical literature that has, so far, confirmed the importance of organizational decisions and many of its more salient implications.
Update: See also Irwin’s article in Monday’s WSJ: “The Ultimate Global Antipoverty Program.”
| Nicolai Foss |
Here is a recent MIT Sloan Management Review piece by Peter and me, “Why Managers Still Matter.” We pick up on a number of themes of our 2012 book Organizing Entrepreneurial Judgment. A brief excerpt:
“Wikifying” the modern business has become a call to arms for some management scholars and pundits. As Tim Kastelle, a leading scholar on innovation management at the University of Queensland Business School in Australia, wrote: “It’s time to start reimagining management. Making everyone a chief is a good place to start.”
Companies, some of which operate in very traditional market sectors, have been crowing for years about their systems for “managing without managers” and how market forces and well-designed incentives can help decentralize management and motivate employees to take the initiative. . . .
From our perspective, the view that executive authority is increasingly passé is wrong. Indeed, we have found that it is essential in situations where (1) decisions are time-sensitive; (2) key knowledge is concentrated within the management team; and (3) there is need for internal coordination. . . . Such conditions are hallmarks of our networked, knowledge-intensive and hypercompetitive economy.