Archive for November, 2006

Gourlay on Tacit Knowledge

| Peter Klein |

More on tacit knowledge: Steven Gourlay takes on Nonaka and Takeuchi in the current issue of the Journal of Management Studies (vo. 43, November 2006):

Nonaka’s proposition that knowledge is created through the interaction of tacit and explicit knowledge involving four modes of knowledge conversion is flawed. Three of the modes appear plausible but none are supported by evidence that cannot be explained more simply. The conceptual framework omits inherently tacit knowledge, and uses a radically subjective definition of knowledge: knowledge is in effect created by managers. A new framework is proposed suggesting that different kinds of knowledge are created by different kinds of behaviour. Following Dewey, non-reflectional behaviour is distinguished from reflective behaviour, the former being associated with tacit knowledge, and the latter with explicit knowledge. Some of the implications for academic and managerial practice are considered.

30 November 2006 at 4:57 pm Leave a comment

Travails of Patricia Russo

| Peter Klein |

As a certified Francophile I can make fun of the French without getting in trouble. So I enjoyed a segment on NPR this morning (can’t find it online, unfortunately) about Alcatel CEO Patricia Russo, the only American to head a major French company. Russo, as you may have heard, has caused a stir by refusing to learn French. The NPR segment featured a Russo impersonator being tutored in French culture. Sample:

Tutor: Let us try some word association. When I say “Jerry Lewis,” you say. . . .
Russo: Idiot.
Tutor: Mais non! In France, we say, “genius.” Now, when I say “McDonald’s,” you say. . . .
Russo: French fries.
Tutor: Non! You say, “Hellhole”! Now, “Iraq.”
Russo: Quagmire.
Tutor: Bon! We agree on something!

30 November 2006 at 10:34 am Leave a comment

Management by the Numbers

| Peter Klein |

Many principles of “scientific management,” such as Harold Geneen’s concept of “management by the numbers,” are considered outdated, remnants of the Big Science era of the 1960s and early 1970s (the Cold War, the Apollo Project, conglomerates, etc.). Today’s management theorists and practitioners favor more holistic, less quantitative, and presumably more “dynamic” approaches. Organizations should be flexible, “lean and mean,” and focused on people and processes, not numbers.

The newest issue of Strategic Organization (4:4, November 2006) features a paper challenging this conventional wisdom. In “The Power of Numbers in Strategizing,” Jean-Louis Denis, Ann Langley, and Linda Rouleau defend the use of quantitative analysis.

This article draws on a detailed case study of a complex decision process in a public healthcare system to consider the role and potential power of numbers in strategizing. Because of their association with precision and accuracy, numbers may seem at first sight to be unlikely tools for decision making in contexts characterized by ambiguous goals and diffuse authority. Yet in the case described in this article, managers successfully mobilized a system of numbers to make an extremely controversial strategic decision. . . . Though contested, numbers can under certain conditions come to acquire and provide authority in organizations where power is diffuse. This is most likely when the number systems enable the reconciliation of diverse values and interests, when they are embedded in shared systems of meaning, and when they are coupled with and activated by particular micro-practices that support the legitimacy of their promoters as disinterested advocates for the collective good.

Despite references to “shared systems of meaning,” numbers as social constructs, power relations, “pluralism,” and the like — which might seem to warrant inclusion in our Pomo Periscope series — the paper provides a useful overview of the basic issues and some interesting case discussion.

NB: Watch out for some numbers.

30 November 2006 at 10:17 am 2 comments

Should Business Schools Be Like Medical Schools?

| Peter Klein |

Fabio Rojas at suggests that business schools require more field work. You wouldn’t trust a doctor who graduated from medical school without working on a real patient, so why hire an MBA student who hasn’t performed any “rotations,” in companies or in the business school itself?

Of course, as Fabio acknowledges, this model doesn’t work if business education is primarily a signal, a la Spence. On the other hand, gradute school seems a highly costly and inefficient signaling mechanism — why not just give prospective employees an IQ test? Or, if social networking is important, put students in one-year MBA programs or even shorter mini-programs with tough admission requirements and a lot of social events with alumni and local executives. A much cheaper signaling + networking mechanism, presumably. Any thoughts?

30 November 2006 at 1:25 am 8 comments

ETP: Special Issue on Family Firms

| Peter Klein |

The latest issue of Entrepreneurship: Theory and Practice (30:6, November 2006) is a “Special Issue on the Theory of the Family Enterprise.” Plenty of fodder for the ongoing discussion of family firms. Here’s the table of contents: (more…)

29 November 2006 at 4:25 pm Leave a comment

Foss, Klein, Kor, and Mahoney on Entrepreneurship

| Nicolai Foss |

As readers of O&M will know, Peter and I are highly sympathetic to subjectivist economics, mainly Austrian economics, and both take an interest in entrepreneurship and the theory of the firm. Yasemin Kor is an expert on the RBV and top management, and former O&M guest blogger Joe Mahoney is, of course, an expert on the RBV and the theory of the firm. This makes, we think, for an excellent author team. Thus, we have collaborated in writing a paper, “Entrepreneurship, Subjectivism, and the Resource-based View: Towards a New Synthesis.” Here is the abstract:

This paper maintains that the consistent application of subjectivism helps to reconcile contemporary entrepreneurship theory with strategic management research in general, and the resource-based view in particular. The paper synthesizes theoretical insights from Austrian economics and Penrose’s (1959) resources approach, arguing that entrepreneurship is inherently subjective and firm specific. This new synthesis describes how entrepreneurship is manifested in teams, and is driven by both heterogeneity of managerial mental models and shared team experiences.


29 November 2006 at 2:42 pm Leave a comment

We Always Suspected It — Part II

| Nicolai Foss |

As we recently noted O&M has had the dubious honour of being included in the set of “heterodox newslettes and weblogs” along with blogs such as “Actuel Marx.” But it gets worse!! O&M has just received mention in Accounts: ASA Economic Sociology Section Newsletter vol. 6, issue 1, Fall 2006 (on p.15). We tremble when we consider what may come next. Honorable mention on webdeleuze? Endorsements from Bob Sutton?

HT to Teppo.

29 November 2006 at 2:24 pm Leave a comment

Even Danes Respond to Incentives

| Peter Klein |

A critical news item for this Danophilic blog. The Telegraph reports, with some alarm, that fewer Danish Christmas trees are being exported to the UK this year.

Increasingly, [British] garden centres have been buying them in wholesale deals with Danish farmers. But last year Danish farmers saw subsidies for growing Christmas trees cut, and the result is that fewer have been exported.

Looks like even Danes respond to economic incentives. I’m sure that Pfeffer, Mintzberg, et al. will have an alternate explanation having nothing to do with the subdidies, however.

29 November 2006 at 12:23 pm Leave a comment

Mechanistic Analogies in Economics

| Peter Klein |

Paul Ormerod, in “The Fading of Friedman” (American Prospect, December 2006), compares the macroeconomic views of Friedman, Keynes, and Hayek and prefers the latter:

Both [Friedman and Keynes] believed that suitably empowered clever chaps could work out rules of behaviour that would smooth the fluctuations of the business cycle. Friedman came up with the rule of an independent central bank controlling the expansion of money at a fixed rate. Keynes essentially thought that if he and other old Etonians were put in charge, everything would be fine. . . . But Hayek sharply disagreed. He believed that there are inherent limits to knowledge in human social and economic systems which no amount of intellect can overcome.

Developments in economics are taking the subject in the direction of Hayek rather than Friedman and Keynes.

These remarks came to mind when I read Monday’s EH.Net review of Harro Maas, William Stanley Jevons and the Making of Modern Economics (Cambridge University Press, 2005). Jevons, in this regard, was the anti-Hayek. (more…)

29 November 2006 at 10:59 am Leave a comment

Patently Absurd: Ham Sandwich Edition

| Peter Klein |

On a day when the scope of patent law is being hotly debated before the Supreme Court, there’s news that McDonald’s has filed a 55-page patent application in Europe and the United States claiming “intellectual property rights” on how to make a hot deli sandwich. . . . 

The application discusses the “simultaneous toasting of a bread component” and inserting condiments into the sandwich with a “sandwich delivery tool.” The filling is placed in the ‘bread component’. The application explains: “Often the sandwich filling is the source of the name of the sandwich; for example, ham sandwich.”

Courtesy of the WSJ Law Blog. Each day I become more of an intellectual property skeptic (1, 2, 3).

The “hotly debated” case mentioned above is KSR International v. Teleflex, one of the most important patent cases to reach the US Supreme Court in years. I’m rooting for KSR.

28 November 2006 at 5:31 pm 2 comments

The Decline of Sociology

| Peter Klein |

Anthony Giddens, writing in the (UK) Guardian, worries that academic sociology “has disappeared from public view.”

Take the debate about globalisation, a debate which is an example of itself, because it is going on all over the world. Haven’t sociologists contributed significantly to this discussion? Indeed they have, but it has been driven far more by economists — such as Joseph Stiglitz — or those in the field of international relations. What about the impact of the communications revolution? Sociologists — notably the Spanish author, Manuel Castells, have written important works on the issue. But I don’t believe sociology has been the main source of contributions to the field.

Giddens suggests that decline of sociology stems from (a) the rise of “market fundamentalism” and (b) “the impotence many people feel in the face of the future.” Both explanations strike me as facile. But perhaps the essay will stimulate a thoughtful response from some of our sociologically inclined readers. (HT: Mark Thoma.)

Update: Brayden’s head is spinning. 

28 November 2006 at 3:46 pm 1 comment

Co-Authors From Hell

| Nicolai Foss |

Casual empiricism seems to indicate that co-authorship is constantly gaining ground vis-a-vis sole authorship (anyone who knows of any solid studies of social science authoring practice?). There are numerous forces that positively influence the choice of teaming up with other scholars for the purpose of writing books and articles, such as career concerns (writing with a Big Guy), hierarchical concerns (writing with a Local Big Guy may help your chances of promotion), political calls for co-authorship between academia and industry, and, of course, team-based benefits, such as exposure to new perspectives, effort sharing, the social experience, etc.

It is well known that there is a significant latent moral hazard problem in connection with teams (cf. this paper). But of course there is also a potentially heavy adverse selection problem. It does matter which type you pick to co-author a paper with. I have been involved in numerous co-authored paper projects, and usually I have been lucky with my co-authors. Indeed, Kirsten, Peter, Keld, Torben, Teppo, Joe, and Yasemin are exemplary and excellent co-authors.

But I certainly haven’t always been lucky. (more…)

28 November 2006 at 9:11 am Leave a comment

Economics of Department Stores

| Peter Klein |

Speaking of diversification, decentralization, and the effective use of local knowledge, Lynne Kiesling offers some interesting commentary on the economics of department stores. Department stores have been doing well in the last few years. Notes Lynne:

A retail business model originating in the late 19th century, the department store for decades epitomized elegance, convenience, ubiquity of options. Then in the 1990s the department store fell on hard times as nimble, smaller retailers struck better production and/or procurement contracts, had more direct contact with the preferences of consumers, or were able to offer niche products to enable consumers to craft their own, individual, modern images. . . .

I am not convinced that the large department store that is managing many brands and a national image can be more nimble than a specialty store, and nimbleness is what a department store will require to become a successful complex adaptive system.

Again, we have a problem of selective intervention. Imagine a department store that operates like a shopping mall, providing space and transaction management for individual vendors, and centralizing particular functions (marketing, sales, customer support) only when doing so generates net gains. and Ebay have shown how such a model can work in virtual space. If equally decentralized, why can’t a department store be as good — as a complex adaptive system — as a set of specialty retailers?

27 November 2006 at 11:12 pm 2 comments

New Edition of Menger’s Principles

| Peter Klein |

The Mises Institute has produced a new edition of Carl Menger’s path-breaking Grundsätze der Volkswirtschaftslehre [Principles of Economics], originally published in 1871. Menger’s Principles not only introduced the concept of marginal analysis, it presented a radically new approach to economic analysis, an approach that still forms the core of the Austrian theory of value and price.

The new edition includes Hayek’s introduction to the 1934 English edition and a new foreword by yours truly. The book itself continues to be availble in a free online edition.

27 November 2006 at 1:09 am Leave a comment

An RBV Approach to Conglomerate Diversification

| Peter Klein |

The resource-based view of the firm has spawned a vast literature on corporate diversification. Inspired by Penrose (1959) and Rumelt (1974), this literature has emphasized the benefits of related diversification over expansion into industries that are not good fits for the firm’s current portfolio of resources. Unrelated or conglomerate diversification is typically viewed, within the RBV, as an anomaly, either a mistake (as in the conglomerate merger wave of the 1960s) or pure luck (those few conglomerates, such as GE, that are consistently high performers). Of course, relatedness is difficult to define and measure consistently, and the kinds of relatedness that presumably matter for firm performance are not captured well by conventional measures of inter-industry relatedness (see this paper for details). There is evidence that conglomerate diversification can add value by creating internal capital markets (see here and here), but this approach has little to do with resources and capabilities. (more…)

24 November 2006 at 12:33 am 10 comments

Students as Editors!?!?! A Law Journal Bleg

| Nicolai Foss |

My employer, Copenhagen Business School, has recently decided to adopt a “Top 60 Journals” list. It contains the usual suspects (SMJ, AMJ, ASQ, Org. Science, etc.) and a number of lesser journals, including some distinct outliers (such as Scandinavian Journal of Management :-)). It has now been proposed by the Dean that the list be used in connection with promotions; for example, a Full Professor must, according to the proposal, have at least one article published in a Top 60 journal. An extremely modest requirement, one would think. Not so. (more…)

22 November 2006 at 2:16 pm 3 comments

A New Institutional Thanksgiving

| Peter Klein |

Tomorrow we Americans celebrate the traditional Thanksgiving meal. As we gather for family, feasting, and fellowship, let us remember the real leitmotif of the Thanksgiving drama: property rights.

As Ben Powell reminds us:

Many people believe that after suffering through a severe winter, the Pilgrims’ food shortages were resolved the following spring when the Native Americans taught them to plant corn and a Thanksgiving celebration resulted. In fact, the pilgrims continued to face chronic food shortages for three years until the harvest of 1623. Bad weather or lack of farming knowledge did not cause the pilgrims’ shortages. Bad economic incentives did.

In 1620 Plymouth Plantation was founded with a system of communal property rights. Food and supplies were held in common and then distributed based on “equality” and “need” as determined by Plantation officials. People received the same rations whether or not they contributed to producing the food, and residents were forbidden from producing their own food. Governor William Bradford, in his 1647 history, Of Plymouth Plantation, wrote that this system “was found to breed much confusion and discontent and retard much employment that would have been to their benefit and comfort.” The problem was that “young men, that were most able and fit for labour, did repine that they should spend their time and strength to work for other men’s wives and children without any recompense.” Because of the poor incentives, little food was produced.

Faced with potential starvation in the spring of 1623, the colony decided to implement a new economic system. Every family was assigned a private parcel of land. They could then keep all they grew for themselves, but now they alone were responsible for feeding themselves. While not a complete private property system, the move away from communal ownership had dramatic results.

Tom Bethell, author of the highly recommended The Noblest Triumph: Property and Prosperity through the Ages, provides a more detailed account here.

Update: Don’t miss Murray Rothbard’s typically insightful and engaging account, from volume 1 of his Conceived in Liberty.

22 November 2006 at 1:15 am 2 comments

Newsflash: University Presidents Make Good Money

| Peter Klein |

The Chronicle of Higher Education has released its annual executive compensation report. Most of the contents are behind a subscription firewall. Fortunately, Richard Vedder has summarized the key results. Among them:

The findings continue trends in the last few years: compensation is up, and increased use of non-traditional forms of pay are evident — performance pay, deferred compensation, and other perks. The prosperity of higher ed is continuing to show up in the pay of the leaders of our institutions.

Moreover, two other trends appear to be continuing:

1. Salaries in research universities are rising much faster than in liberal arts colleges or schools with modest graduate work.

2. Presidential salaries are growing faster than those of mainline employees, including faculty, at least at the more prestigious institutions, not to mention the employment income of ordinary Americans.

Vedder follows with some pointed questions. (more…)

21 November 2006 at 12:06 pm Leave a comment

Microfoundations of Microfinance

| Peter Klein |

As argued here in a series of posts, theoretical and empirical evidence on microfinance is rather scant. Here is a paper on group lending, providing experimental evidence on the effect of group size and social ties on repayment. Group lending performs well in a variety of (stylized) settings. The paper, by Klaus Abbink, Bernd Irlenbusch, and Elke Renner (Economic Inquiry, October 2006), is worth a read. (Working paper version here.)

21 November 2006 at 12:46 am Leave a comment

Another Cost of Selective Intervention: Convincing the Market

| Peter Klein |

Nicolai blogged recently on Williamson’s concept of the “impossibility of selective intervention.” Williamson asks why a large firm cannot do everything a collection of small firms can do and more. In princple, a set of projects could be combined into a single firm, with the firm’s management promising not to interfere with individual projects unless doing so would generate net gains. In this way, a firm could have responsibility an almost unlimited set of projects, each of which would be at least as profitable as it would be as a standalone entity. What, then, explains the limits to the firm?

Williamson’s answer has to do with the difficulties of making such a commitment credible. Project managers will not believe the firm’s promise not to interfere and will take value-reducing actions to protect their own returns and asset values. (Williamson identifies “asset malutilization” and “accounting contrivance” as specific problems; see Nicolai’s post for details.)

A story in today’s W$J on Blue Moon beer raises another issue. Even if central managers can convince division heads or project managers that they will not engage in opportunistic behavior, they may be unable to convince buyers, suppliers, or other market participants. Here’s an example: Blue Moon is a popular “craft,” or niche, beer that appeals to high-end, quality-conscious consumers. Such beers are typically produced locally, in small quantities, and marketed as “micro-brews.” The Journal piece explains how Blue Moon’s marketing department goes to great lengths to hide the fact that the beer is actually made by Molson Coors, North America’s third-largest brewer. A similar example is Chipotle, a restaurant chain popular with the young and trendy (and the not-so-young and even-less trendy — I love it!), which before going public was majority owned by McDonald’s. The fact that such niche products would be regarded, by their target demographic, as “tainted” were their parentage known, suggests that market participants do not believe that corporate parents can manage small subsidiaries without interference. The market, it seems, agrees with Williamson that selective intervention is a “myth.”

20 November 2006 at 3:45 pm Leave a comment

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Our Recent Books

Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).

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