How Does Management Affect Capabilities?

11 January 2007 at 4:58 pm 24 comments

| Steven Postrel |

What contribution does management make toward producing output? If you watch Federal Express commercials, or read Dilbert, or listen to many technical workers when they talk to each other, the answer is “nothing.” Management is seen as purely an obstruction to the accomplishment of useful work.

If we take “management” as a sociological category, denoting a set of pointy-haired individuals disconnected from actual technical problem solving, then one could perhaps defend this position. But if we think of “management” as a collection of activities and practices, those practices seem essential, and many people, from computer programmers to chemists to special effects wizards, engage in them. But just how does management increase output?

David Hoopes and I have been exploring this question by looking at product-development capabilities in high-tech settings. We began by looking at the role of cross-functional knowledge (or what I later called “trans-specialist understanding”) in product development. Almost everybody who’s looked at product development says that firms with stronger knowledge integration across specialized subgroups perform better with respect to the time, expense, and output quality of their projects. (It’s a little odd that we don’t see some firms with too much integration and some with too little, but that’s a subject for another time.) But just what does this form of shared knowledge do? How does it make projects more effective?

Our first insight was that it would be almost impossible to track which specific pieces of knowledge were used to accomplish which task. Think of the endless set of commonsense facts we take for granted (e.g. “users prefer fewer keystrokes” or “big pills are harder to swallow”) that bear on successful product development. Think of all the technical principles and intuitions, and the meta-principles and pattern recognition that tell us when to apply each one. If we could codify all that, we would also be able to solve the artificial intelligence problem, which seemed a bit ambitious.

Our second insight was that we could circumvent this difficulty by looking at what happens when trans-specialist understanding is missing. It turns out that the main reason why upstream specialist A needs to know something about downstream specialty B is to avoid taking actions in the A domain that screw up B’s problem solving. Classic examples are a designer releasing a design that can’t be manufactured at a profit, a marketer issuing product requirements that can’t be met, or a programmer releasing software that doesn’t work in the user’s actual environment. When one of these incidents occurs (we called them “glitches” in our 1999 Strategic Management Journal paper), the missing knowledge is a finite and specifiable thing which can often be pinpointed by parties on both sides of the interaction. Glitches are discrete events which are usually memorable and consequential; they can potentially be observed with careful interviewing and/or archival research.

We now think these two insights apply not just to the value of trans-specialist understanding, but to all the integrating activities of management. In other words, management’s effect on capabilities is best understood as avoiding incidents of inconsistent behavior. Inconsistent behavior can be seen when effort is stranded (A’s effort only has payoff along with complementary action by B which is not forthcoming), mismatched (e.g., A brings a VCR while B brings DVDs), or frustrated in advance (e.g., A can’t do part of his job without information from B which is not forthcoming). Our glitches generated a lot of stranded and mismatched effort.

Glitches are just one mechanism (or impediment) that leads to inconsistent behavior. We think that a relatively small number of impediment types are the proximate causes of all inconsistent behavior. (So Peter should be happy — we’re doing our bit for reductionism.) In our 1999 paper, we began a list of the ones that had been mentioned in the literature, and, besides glitches, identified cooperation failures (conflicts of interest) and coordination failures (zigging when others zag because all-zig and all-zag are both Nash equilibria). Since then, our empirical work led us to realize that there is at least one more impediment — goal incongruence (people differ in the weightings of objectives they think they’re supposed to be collectively accomplishing).

Our theory says that reducing the frequency and severity of impediments constitutes the only channel by which management, per se, can improve capabilities. If this is correct, an important question is whether there are any other impediments lurking out there besides our current list. Inquiring minds want to know!

Entry filed under: Former Guest Bloggers, Management Theory, Strategic Management, Theory of the Firm.

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24 Comments Add your own

  • 1. Pam Postrel  |  11 January 2007 at 8:21 pm

    I love ya like a brother… oh,yeah, you ARE my brother… but I fear I’m too stupid to get this.

    If you’re suggesting that management serves to ameliorate the above-stated impediments to productivity… well, that’s a lovely concept. In almost 35 years of working, I’ve never seen it.

    Love you.

  • 2. spostrel  |  11 January 2007 at 8:50 pm

    Pam: Hey, this is just like those arguments around the old gold-flecked white Formica table! I’ll bet Debbie wouldn’t agree with you, though.

    Remember–management isn’t a set of people, as I’m defining it here–it’s a set of behaviors or practices. For example, simply telling people when they need to get things done so that all the parts come together is management. Monitoring people to make sure they’re not slacking off, or giving them a kick in the pants, is management. Getting information about what the user wants, or what the downstream process requires, into the production process is management.

    When that stuff doesn’t get done–and we’ve seen it in action at our research sites, as have other people who’ve done simlar studies–things get ugly. (Or check out NASA’s report on the failure of the Mars Climate Observer, if it’s still online.) Moreover, when you compare two competing firms with similarly skilled individuals and resources, but widely divergent performance (which happens frequently), the natural hypothesis to explain the difference is that the interaction among people is different in the two firms. There aren’t a lot of other candidates, frankly. If you want to know why Toyota or Honda at one point could develop cars faster and better than Ford or GM, it’s going to be hard to find something other than management reasons.

    I do concede that your industry may be a little more–how can I put this nicely–eccentric than most, in that the linkage between what you do and the outcome is wildly uncertain. But I bet if you looked at how you make sure your projects come in on time, you’d find that you are engaging in…management.

  • 3. Bill Varney  |  11 January 2007 at 9:07 pm

    Greetings, Mr. Postrel —

    Each day I work closely with your sister Pamela, whom we all love. Naturally, by extension, I love you.

    I must say, you are quite the Guest Blogger. Very impressive, indeed. I’m not sure I can add any impediments to your current list; it seems comprehensive as it is.

    However, have you ever considered writing a treatise on the vendor-client relationship? I have found that what works for me as the best way to increase output and productivity, is to treat those I manage — as I would a client! In fact, I treat everyone like a client, including Pammy, my wife and my son!
    Works for me! Could it possibly be as simple a catching more flies with honey than with vinegar?

    Thanks you and to Pamela for being so generous as to allow me to read your very well-considered blog — there I go again!

    Billl Varney

  • 4. Pam Postrel  |  11 January 2007 at 9:27 pm

    You’re right, of course. I engage in management the whole damn day. That would explain the mild chest pain radiating down my left arm. (only kidding)

    I think it’s time to kick out the center legs on the old Formica table for a little stability!

  • 5. Peter Klein  |  11 January 2007 at 10:52 pm

    I’m enjoying this episode of Family Feud, but let me break in with a question. Steve, you offer a compelling theory of what management _does_. But we still don’t know what management _is_. As you point out in your response to Pam, “management” refers here to organizational practices, not people. And yet, practices are embodied in individuals. Can you share your thoughts on where managerial practices come from — how are they acquired, how they change, and so on? Can a firm buy “management” on the market? Can I acquire superior managerial practices by luring away a few key individuals from a rival firm, or can these practices only be acquired organically, internally, over time? Are the managerial practices that drive differential capabilities explicit or tacit? Can I outsource my firm’s management, as the term is used here, to an arms-length consulting firm, or do I need to keep it in house? Thanks in advance for your reactions.

  • 6. teppof  |  12 January 2007 at 1:01 am

    Peter: You’ve touched on a key issue in collectivist theories, namely, when it comes to practical (though, of course this is theoretical as well) matters such as interventions, change, origins etc – the solutions tend to be at lower levels – collective levels theories can’t provide these answers. Once we dig deeper, beyond proximate causes, we find more ultimate final (and theoretically more satisfactory) ones at lower levels.

  • 7. Chihmao Hsieh  |  12 January 2007 at 1:23 am

    I’ve read the ‘glitches’ piece before, and I’ve read the above, but isn’t management’s role basically to prevent and resolve conflict resulting from interdependent decisions (as ultimately indicated by glitches, ‘stranded’ effort and other impediments) by either using authority to substitute for costly knowledge sharing with specialists, or introducing a corporate culture (represented by shared language) that facilitates knowledge transfer among specialists (a la Nickerson and Zenger, 2004)?

    Personally, I find that much of the behavior of all bosses as portrayed in Dilbert can be explained away via the ‘Peter Principle’ (note: not called the ‘Peter Klein Principle’), which states that ‘in a hierarchy, every employee tends to rise to his level of incompetence’… after which point s/he is no longer promoted.

    Which says–if I’m not mistaken–that essentially, at equilibrium, organizations are full of nothing but pinheads and idiots.

    Ahhh. If only it made sense to enact a “National Corporate-wide Demotion Day”…

  • 8. jens  |  12 January 2007 at 11:20 am

    steve. how does your theory relate to the understanding of management in terms of measurement and control?
    can “inconsistent behaviour” be measured and prevented in a linear way? or would we rather be talking about organisational processes here in the form of review-loops? would then the role of management be to bring this rhythm of coordinating impulses into an organisation that pull everything together – like in the flex impulse of a muscle – and then release it again – making sure everything flows with the same speed into the same direction?
    would – in a dynamic setting – providing this flex-impulse time and time again be one of the prior tasks of management?
    would this slightly change the way one looks at management and organizations?

  • 9. spostrel  |  12 January 2007 at 1:20 pm

    Peter: 1) Practices are executed by individuals, but need not be “embodied” in individuals. Is English grammar embodied in me? What about a group of people doing the wave at a stadium? Or, to be more germane, what about formal organizational procedures? All of these things require the participation of individuals but are not individual phenomena, any more than a sound wave is the phenomenon of an individual molecule.

    2) How do management practices get started and where do they come from? I’ve never studied this formally, but my sense is that they come from all over the place. Sometimes they’re invented by a committee, and then adapted over time. Other times a consultant cooks something up, or a manager, or an academic (e.g. actiivity-based costing). Practices are copied, they mutate or get changed or garbled.

    3) Can you buy managment practices on the open market? Or by hiring a few key managers away? Are they explicit or tacit? I’m sorry to say that the answer is “it depends.” Clearly, some firms have been able to get significant help in managing their product development processes by hiring IDEO, which has its own set of explicit and implicit management methods for improving innnovation. On the other hand, when Procter & Gamble hires IDEO they bring some of their own well-structured practices as well. And I’d guess that the transaction cost issues differ greatly for different kinds of integrating activities, which means the contractual and/or ownership implications differ too.

    The idea that management, in the sense described in my post, is carried out by an entirely separate group from the people who do actual problem solving is also not true in general. Certainly in smaller firms, or in team-oriented projects at larger firms, a significant managerial burden falls upon the “technical” workers themselves.

    Teppo: David and I think that the range of circumstances and conditions that represent ultimate causes of inconsistent behavior are multifarious and situation-specific, i.e. not easily captured by general theory. They are mostly contextual boundary conditions on things like what resources are available, individual personalities, idiosyncratic path dependencies, and all the other things that originally motivated teaching with the case method. It may be possible to come up with a “discriminating match” between particular impediments and particular managerial cures–what we would call an “engineering science” of organization. But the idea of a general theory that takes into account all these contextual factors and ultimate causes and tells you how to optimally design an organization strikes us as unrealistiic. There is no theory of the optimal airplane or optimal office building and I doubt there will ever be one for organizations.

    Chihmao: I think there are more strings to the managerial bow than just the ones you mention, but that is the sort of action I have in mind for managers. Also, I think we should all go back and reread C. Northcote Parkinson and Laurence Peter every now and then.

    jens: In product development, for example, there are both “linear” control methods (if I understand what you mean) that have to do with fleshing out requirements thoroughly before beginning technical problem solving, specifying time and budget constraints, laying out the critical path, etc. There are also “loopy” control methods which involve keeping things on track, revising assignments and subgoals as new information arises, etc. It’s the art of project management. I kind of like your nerve/muscle analogy, which fits some of these activities.

  • 10. jens  |  12 January 2007 at 3:48 pm

    thanks steve.
    i think it is the heart muscle…

  • 11. Rick Ericson  |  12 January 2007 at 7:05 pm

    I like the phrased use by the folks at Strategic Decisions Group – “management is in the decision business.” Among the decisions routinely made by senior management are large, longer-term, risky, mostly irrevocable commitments of business resources to various initiatives. Whether those decisions turn out well or not tends to be quite pivotal in determining whether a business creates value for its owners or not. That’s a function of management, not tied to any one department or technical skill set, that ties rather directly to business results

  • 12. spostrel  |  12 January 2007 at 7:23 pm

    Rick: You’re absolutely right about that. My post was about how management affects capabilities, but management includes strategic decision making as well (a good thing since that’s what I teach). I don’t think there’s too much of a puzzle about how strategic decisions can affect firms’ performance, although there is a puzzle as to how much we can attribute superior decisions to skill versus luck.

  • 13. Chihmao Hsieh  |  13 January 2007 at 2:00 am

    Perhaps I can try to re-frame Rick Ericson’s point and ask the gallery for feedback.

    But first, a preface: I tend to look at the matter of the creation of value as the matter of solving valuable problems with valuable solutions. Whether the problem is found first, followed by successful search for a valuable solution, or whether an invention is first considered, followed by successful search for the valuable problem it can solve, is irrelevant. Value creation requires matching valuable problem to valuable solution.

    The difficulty with references to ‘problems’ and ‘solutions’ is that it’s unclear when you have one and when you have the other. Take EBay. The most basic of problems it solves is the case of inefficient markets. So EBay’s solution basically was ‘construct an electronic auction system’ (my term, just for illustration). But wait. Is ‘constructing an electronic auction system’ the solution, or is it another problem? At times I have the darnedest time with students who can’t understand why I might refer to that as ‘another problem,’ whereas they see it as ‘the solution.’

    My approach is that management for any given firm has a basic problem (that they frame), and what is best termed their ‘solution’ is represented by all the concrete, actionable choices that are selected to solve that problem. Anything else ‘in the middle’ is best described as ‘sub-problems.’

    Given the above, my interpretation on Ericson’s comment is that senior management ultimately is in charge of making those decisions only related to selecting or formulating sub-problems. Senior-level managers don’t bother themselves with making the concrete, actionable choices… which tend to be the small, shorter-term, less ambiguous ones.

    My understanding is that Yale’s MBA is attempting to produce managers who are more comfortable with the solution end. They want managers who have had their brains (re-)wired enough to run a one-man fully-integrated firm if they had to, capable of not only formulating the most basic of problems, but also relatively* comfortable (if not absolutely capable) of selecting decisions and making choices at the most concrete, actionable level… across all functional areas concurrently.

    * = ‘relative’ compared to the traditional MBA

  • 14. Bo  |  13 January 2007 at 1:53 pm

    I like this discussion very much because it attempts to be practically oriented. However, I fear that much of the discussion still revolves around our academic understanding of what management is (or isn’t) and what capabilities etc are (or aren’t).
    This, in turn, seems to be true also for the academic MBA programs where we tend to believe that we can programme individuals to become good managers (whatever that is).

    But what exactly is “management”? We can agree that different levels of management may exist in different organizations but then what? Does a level of management (say senior level) constitute a generic category of management across all organizations? I think not and so there is vast heterogenerity across not only levels within organizations but also across organizations. Moreover, is “management” tied to a position (political/power based or hierarchical) within an organization or is it more likely to be the outcome of certain individuals combined efforts? I guess the heart of my question has to do with a) how do we define management and b) is management an independent or dependent variable? I would argue that management could as well be thought of as an outcome – in which case the question is not how management affects capabilities but rather how capabilities affect management..After all, when things go wrong (ex post) management takes the blame and we talk about “poor management” or inadequate management etc…food for thought..

  • 15. Twill00  |  14 January 2007 at 1:34 pm

    Nice –

    “…we don’t see some firms with too much integration…”

    You probably haven’t properly defined over-integrated then. Integration has to do with the flow of information. A firm with “too much integration” would probably be one of two types.

    First, where management took too long to make decisions because there were too many factors to be considered, and so on. Analysis-paralysis. Or where nothing could ever change or improve in one area because it would negatively impact a nearby area.

    Second, where the level of innovation was low because the level of cross-training was too high. If everyone has to know everything about the methods and thinking of all the other departments, then the speed of adaptation slows to a crawl. Lots of European firms like this.

    Notice that both of the above are management failures, and the first one could actually look like its opposite – no integration and no communication. Very much like the left-right scale where far left and far right are nearly indistinguishable.

  • 16. Rick Ericson  |  18 January 2007 at 11:32 pm

    Regarding trans-specialist understanding, it seems to me that management has a big role in determining the extent to which it is achieved. Among the prerogatives at the top would be to make decisions about how the organization is designed and how departments work together and so on – whether the they’re all in the same location, for example, or whether cross-pollenization is encouraged through other means. It seems to me that leadership of high-tech manufacturers today would have this on their minds as they think about how to configure the organization for advantage, just as I imagine Henry Ford must have. Systems for training and knowledge management are a big deal in consulting firms, as an example. But, like so many things, they don’t get done without leadership commitment.

    It continues to strike me that these matters (like trying to reduce impediments and increase goal congruence) are one among about a zillion examples of things within the ordinary purview of management authority. I’m not really following why this subject matter rises to the level of calling into question what it is that management does. On the contrary, it seems like their job descriptions just put them in a position where they can take concrete actions to enable a certain fluidity in communication, a congruence of efforts, adaptability, all kinds of stuff. Or they can mess it up. Being the “deciders,” their roles seem definitionally decisive.

  • 17. Rick Ericson  |  19 January 2007 at 12:33 am

    Let me also try to respond more directly to the original call for input – which was to provide other examples of impediments. I have some HR-centered ideas on that:

    1) Lack of staff engagement or motivation seems like a possible impediment. Let’s say you already have impediments of a given magnitude; that people have a long list of reasons for not communicating and coordinating better, and they are correct because the organization and its processes are in fact unhelpful to this key task. Management can take action to hunt down the actual impediments and try to remedy them directly. Or not. It might instead focus on getting people to make more effort to coordinate better on their own. They might try to do this by taking various actions meant to increase the level of “engagement” that people feel in their work, and to encourage them to devote their discretionary efforts more heavily in favor of the company. Pay could even be involved. If people are more strongly engaged, their energy and even altruism may simply overcome glitches or goal incongruences or other impediemnts to a greater extent. So, a poor level of employee engagement could be a kind of impediment, perhaps one that is distinct from the list you provided.

    2) Regarding goal congruence, people might be incongruent not only in the goals themselves but in their time frames and risk tolerances. Many initiatives require time and commitment, for uncertain results. If you are someone who discounts heavily for time or risk, you’ll discount the payoffs from a given initiative. Maybe this is just another dimension of goal incongruence.

    3) Some people are better at communicating and overcoming glitches than others, particularly within technical functions. Some people are more likely than others to make a sow’s ear into a silk purse. If you have a pack of poor communicators in each of the departments between whom coordination is very important, you’re worse off. Again without really reducing organizational impediments, a company might get better results by being better at identifying those technical functions in which coordination and communication are pivotal and then hiring appropriately. So, “wrong people” or “poor selection” could be an impediment distinct from the other classes of glitch.

    Overall, I think the fact that people are just differently endowed and differently inclined may be a general place to look for impediment or advantage, as a potentially separate matter from the list of impediments you cited. In any event, It seems like it would affect the chances that trans-specialist understand would go missing.

  • 18. spostrel  |  19 January 2007 at 5:37 pm

    Rick: The argument that management doesn’t add anything productive is not mine. But it has a lot of currency among technical folks (read programmers like Paul Graham or drug developers’ comment threads on Derek Lowe’s In the Pipeline blog for a flavor of this). Also Dilbert of course. But mostly I just used it as a provocative lead to try to get people to drill down and focus specifically on what management does to make things go or not go. Managers do a ziilion things, but what we’re looking for is a small number of problems they solve.

    As far as the knowledge selection problem goes, I have a 2002 paper in Organization Science where I discuss the role of management in avoiding glitches, which includes selecting people with the proper degree of knowledge specialization and trans-specialist understanding. A key issue is that trans-specialist understanding is very expensive, so you want to be sure to invest in it only when necessary (which the paper tries to identify). On the other impediments you discuss, motivation would fall under cooperation problems (private motivation differs from what is optimal for the firm); different time frames and risk preferences, if privately motivated would be cooperation problems; and if due to ambiguity in organization-level marching orders would be goal ambiguity problems.

  • 19. ABSOLOM NDUNA  |  24 January 2007 at 2:10 pm

    it seems we all have a universal understanding, that management is only of importance when things go wrong especially amongst’technical people.

  • 20. Kevin Carson  |  15 February 2007 at 4:45 pm

    Sorry for the late comment–I only found your excellent blog in the past few days.

    It seems to me that a lot of the management functions, regardless of how they’re “embodied,” presuppose a particular organizational form that should not by any means be accepted as simply given. Many of the management functions are ways of coping with agency problems that only exist in the first place because the dominant organizational size has grown far beyond optimum level–i.e., far beyond what it would be in a free market if all the inefficiency costs of large size were internalized, and if large size were not suited for exercising special privileges created by the state. In other words, many of these functions are a way of (to quote Drucker) “doing well what ought not be done at all.” As one of Ursula LeGuin’s characters said of a professional army, it’s the most efficient way of getting a lot of people to do something they have no rational interest in doing, given the substitution of extrinsic for intrinsic motivation.

    The dominant organization has grown to the point that the cost of aggregating information from its component parts almost (if not altogether) exceeds the value of the benefit from aggregating the information.

    In a free market, technical labor would probably be best performed by self-directed peer groups, and be integrated with other functions by market contract rather than hierarchy. It would resemble a lot of Tom Peters’ more extravagant rhetoric, with the difference that it wouldn’t take place as Peters imagines it as a simulated market within a corporate framework of finance, branding and IP. Rather, it would look a lot more like the P2P capitalism of Eric Raymond (or the P2P libertarian socialism of Michel Bauwens, for that matter).

  • 21. spostrel  |  15 February 2007 at 7:51 pm

    Kevin: In what way is firm size as we see it today not a function of a free market? I know that the market is subject to regulation, but I don’t think there is good evidence that these restrictions actually explain the sizes of existing firms. Regulatory fixed costs might point in that direction, but I’d need a lot of evidence to convince me that firms would be much smaller absent regulation.

    In some cases, regulations act to make firms smaller, as when labor regulations are only imposed on firms with more than ten employees or family workers are exempted. My understanding is that many Italian firms are limited in size for precise this reason.

    Firm sizes probably have a lot more to do with fully exploiting assets such as brand names, reputations, technologies, and capital stocks without having these assets excessively depreciated by users who are not under the control of the asset owner. If I own a brand name and try to rent it out to lots of small players, each one has an incentive to free-ride by not fulfilling the brand promise. I can get much better control over such behavior by only letting the brand be exploited by employees whose incentives I control and whom I can easily get rid of. (Franchises are interesting examples of getting around this, but not everything can be controlled adequately by franchise contracts.)

    Capital equipment is another good example. I don’t see semiconductor fabs working real well if each worker and engineer were a free agent with a separate contract. And that’s ignoring the transactions costs of arranging such an array of contracts.

  • 22. Kevin Carson  |  15 February 2007 at 10:48 pm

    “In what way is firm size as we see it today not a function of a free market?”

    Well, the single biggest state intervention was probably the “internal improvements” of the 19th century (especially the railroad), that first led to industrial firms serving a national market. On this, I’m following Chandler. The process was continued by the government-subsidized civil aviation and highway systems of the 20th century. Subsidized transportation infrastructure makes distribution costs artificially low, and market areas artificially large. The same might be said of the government role in creating centralized communications infrastructure (the Bell patent system and AT&T, the global satellite telecom system, DARPA and the internet, etc.).

    Patents, especially the pooling of patents, played a large role in the cartelization of industry.

    Tax policy and direct subsidies both encourage more capital-intensive forms of production (the depreciation allowance, and subsidies to R&D and technical education), and the predominance of a more capital-intensive mode of production serves as a market entry barrier.

    The state also subsidizes the operations by which mergers take place: the interest deduction for corporate debt, and the capital gains exemption of security transactions involved in mergers.

    But transportation subsidies and IP are probably the two biggies. I suspect the economy would be decentralized beyond recognition if patents were abolished and transportation were funded with cost-based user fees.

    Of course, all this involves a large helping of counter-factual speculation (or pulling it out of my hiney, in less charitable terms), so I can understand your skepticism.

  • 23. Richard Makadok  |  16 February 2007 at 3:28 am

    Hi, Steve.

    Apologies for the late response — I’ve been so deep into my own research for the last month that I’ve had no chance to log on and read the blog.

    I’ve been a very big fan of your paper on this topic ever since I saw you present it at ACAC last year. It’s really a great and highly insightful paper, and I’m sure it will have huge impact. I strongly recommend it to all of the blog readers. (I’ve also been saying for years — over Steve’s protests — that he’s the smartest person in the strategy field.)

    So, here’s a few scattered comments and questions…

    1.) Prior to reading this blog posting, I had simply thought of this paper as a general theory of inter-departmental screw-ups. I had not thought of it as a theory of how management creates value. That’s an interesting, and very ambitious, re-framing. Actually, I think it might be more accurate to say that it’s a theory about how management CAN create value, not about how management actually DOES create value. (After all, those Dilbert cartoons about the futility and counter-productivity of management still do ring true to most folks…) In other words, this paper delimits the upper limit of what management can hope to accomplish — the upper limit of potential value-creation by management. In this sense, it can provide an absolute benchmark by which to measure the performance of management, independent of all other inputs that might contribute to overall firm performance. That’s a very nice contribution, and very much needed. After all, it’s been 70+ years since the field of management began with Hawthorne and Taylor and Barnard and all that, and it’s a bit surprising that we’ve gotten along for all this time with no such theory of the potential value of management, and with no such benchmark for evaluating management’s contribution to firm performance. And perhaps it’s even more surprising that nobody has noticed that it’s been missing for all this time.

    2.) That said, it is still (at least at this stage) ONLY a theory of the POTENTIAL value created by management, not the ACTUAL value created by management. Undoubtedly, this is a necessary first step toward the latter goal — it would probably be impossible to develop a theory of actual value creation without first knowing what the potential for value creation is. But it is still just a first step. (I guess this is perhaps a kinder, gentler way of making the same point that Pam made above in her comment #1.) In order to get from here to a theory of the actual value created by management, we would next need to postulate: (a) what concrete actions do managers actually take to prevent or alleviating these coordination problems and inter-departmental screw-ups, (b) what might prevent, impede, or discourage managers from taking those actions, and (c) if those actions are taken, what makes them effective or ineffective.

    3.) Now, to say that this is a theory of the value created by management sounds awfully close to saying that this is a theory of the firm. After all, if there is a situation where management could potentially create value by preventing or alleviating the sort of coordination problems that you identify, then that value certainly is not going to be created without a firm — or, to be more precise, without the two parties submitting themselves to the authority of some third party (this is the point of Joe Mahone’s 2001 Journal of Management article — what I’ve been calling the “Mahoney conjecture”). And conversely, nature abhors a vacuum: When there is such a potential for management to create value, there must also be a potential gain to trade (i.e., the potential for someone who fulfills the role of management to appropriate some portion of the value he/she would create), which someone should sooner or later step in to exploit. So, is this also a theory of the firm?

    4.) If this is a theory of the firm, then that doesn’t necessarily mean that it’s a completely new and independent theory of the firm. So, is it? Or is it merely old wine in new bottles — i.e., new labels applied to ideas that we’ve seen before? For example, trans-specialist understanding (TSU) sounds to me like it might be a relationship-specific asset. Does this theory “map onto” previous theories of the firm in some way? See Bob Gibbons’s recent paper “Four Formal(izable) Theories of the Firm” (JEBO, 2005) for an inventory of possibilities to map onto.

    Anyway, kudos again on a great paper. I look forward to seeing it continue to develop and evolve. Please let me know if you think there’s anything I might be able to do in order to help that process along.

    Rich Makadok

  • 24. spostrel  |  16 February 2007 at 8:13 pm

    Rich: You’re making me blush. Your payment is in the mail.

    Just to be clear, the theory discussed in this post comes from joint work with David Hoopes; we have a draft of a paper on “An Engineering Science of Capabilities.” The modeling paper to which you refer is my attempt to formalize some of the ideas in the joint paper. Let me respond a bit to your comments.

    On 1) and 2) You have it exactly right that this is a normative theory of what managers might be able to do to make for more effective capabilities. (BTW, they do other things besides this, too, such as figure out ways to deploy capabilities.) Our analogy is to engineering problems, such as designing engines. The laws of thermodynamics give a theroetical maximum efficiency for an engine. Actual engine designs fall far short of that theoretical maximum because of waste heat radiation, friction within the engine, material flexing, and all the other sources of energy losses.

    The idea is to develop some science about each of these kinds of losses. Such engineering science will never be able to replace the art and craft of design itself, which encompasses complex contextual factors and endless possibilites for interaction among the parts of whatever is designed. But it provides very useful guidance to anyone trying to practice the craft of design.

    I’m perfectly comfortable with this kind of theory. If managers are really good at understanding this engineering science of capabilities already, and they are motivated to apply it, then we have a good positive description of the world. To the extent that they do not, we have a chance to improve the world, or at least consulting opportunities.

    In terms of the concrete actions managers can take to deal with the identified impediments to capability, these are pretty well known. (In keeping with the family theme from Pam #1, my father was wont to answer questions about what he did at work with “I talked on the telephone and wrote with a pencil.”) Without getting too granular, we have some basic actions: Informing some agents about the actions of other agents, setting down schedules and milestones, translating information from one domain to another, publicly articulating goals, monitoring agents for shirking or effort distortion, rewarding or punishing agents, resolving disputes, etc.

    As for why they don’t always do a good job of this, maybe it’s our field’s fault, because no one has yet developed a theory that makes it easy enough to figure out when to intervene and which way to intervene. Or maybe it’s the fallen nature of humanity, or the fact that the managers themselves are subject to the same individual and collective foibles as those they manage (“Who will guard those selfsame guardsmen?”)

    3) and 4) This is a theory of management, not a theory of the firm, if you mean an explanation of firm boundaries as laid out in the Coase-Williamson-Grossman&Hart-Hart&Moore-etc. tradition. Boeing engages in heavy-duty management of its component vendors, who are separate firms; Toyota does the same with its suppliers. Conversely, units within a single firm may interact in a much more arms-length way without significant management integration effort.

    There is definitely some overlap with older work in all this. If I go back and read Barnard, for example, I’m struck by similarities to some of these ideas. Trans-specialist understanding, though, need not be relationship-specific (that’s a contingency that might be of great importance in setting up one’s knowledge accumulation path, though).

    I think the novelty of our approach is in a) focusing sharply on the integrating role of management, b) looking at integration failure and finding regularities there instead of looking at integration success, c) trying to be very precise and specific about the symptoms of integration failure, and d) trying to focus on a small number of proximate causal mechanisms for those failures. Those features make it possible to reason carefully about, and even model, how integration does or doesn’t make things better.

    I will look at Gibbons’s aritcle again. It’s a good idea to see if there’s some kind of mapping between us and him or not.

    Thanks for commenting!

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