Archive for May, 2011

More on ACAC

| Peter Klein |

About a decade ago I served a term as a Senior Economist with the Council of Economic Advisers. The Junior Economist assigned to work with me was a young Harvard PhD student named Dan Elfenbein. Dan turned out to be not only the brawn, but the brains of the partnership as well. (He may have had me in the looks department too.) Dan has gone on to do great things at Washington University and I was delighted to see him receive the ACAC Best Paper Award yesterday for his joint work with Anne Marie Knott, “No Exit: Failure to Exit under Uncertainty.” Here’s the abstract:

Delayed exit is a substantial economic problem. Studies indicate if VCs exited ventures optimally, returns would triple, and if corporations divested underperforming business units, shareholder wealth would increase 13.6%. A prevalent explanation for delayed exit is behavioral biases associated with escalated commitment. In general however exit will exhibit inertia even absent bias. This arises both from decision maker efforts to avoid Type I error while discovering the long run prospects of an endeavor (passive learning) and from the option value of exit. Solutions to exit delays differ depending upon which source predominates, yet empirical tests to date have not disentangled the relative importance of these sources. We characterize exit delay in the population of U.S. banks between 1984 and 1997, and examine its causes. We find that a substantial proportion of exit occurs beyond “rational” benchmarks that incorporate option value. While the bulk of this delay appears to represent efforts to minimize Type I error, there is also evidence of the behavioral biases associated with escalated commitment.

As noted by Bill Bogner at the awards seminar, this makes Dan the only two-time winner of this important award.

Also at ACAC: A fascinating address by Joel Baum about the intellectual history of two strands of literature, one on competitive advantage and one on network advantage. It turns out these strands share a common intellectual heritage, one I’ll have more to say about later. (Hint: the University of Vienna plays a critical role.) Rebecca Henderson also gave an excellent talk about the role played by relational contracts within firms (from a joint research project with Bob Gibbons, the leading authority on relational contracting). Relational contracts are often seen as more flexible and adaptive than formal contracts but, as Rebecca pointed out, it is difficult for managers to implement strategic changes when they cannot commit to explicit rewards and punishments — hence relational contracting may impede the adoption of superior work practices (such as the Toyota Production System). Look for a forthcoming Gibbons-Henderson paper in Organization Science spelling this out.

19 May 2011 at 10:44 am 2 comments

ACAC 2011

| Peter Klein |

The Atlanta Competitive Advantage Conference, otherwise known as ACAC, starts tomorrow. I’m there, along with former O&M guest bloggers Joe Mahoney, Steve Postrel, and Russ Coff, and a whole bunch of interesting and important people in strategy, organization theory, entrepreneurship, innovation, HRM, and more. Check out the program, as well as the main site with information about past and future events. Besides the workshops and paper sessions there are special events like a symposium with Jay Barney on the RBV after 20 years and keynotes from Rebecca Henderson and Joel Baum. The only thing ACAC needs is a spokesperson — I think Gilbert Gottfried might be available.

16 May 2011 at 8:52 pm Leave a comment

Gulf & Western and the Mob

| Peter Klein |

As a fan of the Godfather films, and a student of conglomerate diversification in the 1960s and 1970s, I’m surprised that I didn’t know, until today, about the connections between Gulf & Western CEO Charles Bluhdorn and the mafia. Paramount, the studio that made Godfather I and II, was at that time a Gulf & Western subsidiary (along with dozens of companies in industries ranging from auto parts to clothing, books, financial services, mining, sugar, cigars — you name it). Gulf and Western was at that time organized as a holding company, or what Williamson calls an “H-form” firm, not a more tightly integrated “M-form,” or multidivisional organization. H-form subsidiaries are operated as highly autonomous units, with little interference from company headquarters, so one wouldn’t expect Bluhdorn to have had much day-to-day contact with Paramount executives.

But apparently he intervened quite a lot. Today’s WSJ featured a piece on Hollywood in the late 1960s and early 1970s, what some regard as a Golden Age of American cinema (besides Godfather, think Chinatown, Nashville, The Conversation, Rosemary’s Baby, etc. — all Paramount films). Evidently Bluhdorn was substantially involved with the production of Godfather, helping make casting decisions and even firing (and re-hiring) producer Al Ruddy. Why such close concern? Paramount executive Peter Bart thought that Bluhdorn had “the mind of a criminal” and was involved with “financiers who had close ties to the mob community.” One of these, I learn from a 2009 Vanity Fair article, was Michele Sindona, a mob-connected banker who died (by poisoning) in an Italian prison. Initially, the Mafia wanted the film scrubbed — unwanted attention and all that — but then relented and helped with production. Several mobsters acted as extras while others helped behind the scenes. A few of the major players, such as Al Lettieri, who played Sollozzo, and Gianni Russo, who played Carlo, were mob connected. Here’s how Russo described getting his part: “Charlie Bluhdorn had a lot of good friends. So I had some people call him and say, ‘You know, this guy Gianni Russo is a very close friend of ours.’”

14 May 2011 at 11:21 pm 4 comments

Frank Knight and the Austrians

| Peter Klein |

At this year’s Austrian Scholars Conference I gave a presentation playfully titled “Frank H. Knight: The Forgotten Austrian.” The title was tongue-in-cheek, of course, as Knight was no Austrian. Though friendly with Hayek personally, Knight was a harsh critic of Austrian capital theory, particularly as formulated by Böhm-Bawerk and Hayek. (Knight conceived capital as a permanent fund of value, with interest determined by the technical marginal productivity of capital, rejecting notions of production structures and time preference.) Knight was also a key developer of perfect competition theory — anathema to Austrians — though mainly to illustrate the importance of uncertainty, not to serve as a welfare bechmark.

Still, there are many interesting similarities between Knightian and Austrian economics. Regular readers of O&M already know that Mises’s approach to entrepreneurship, uncertainty, and the firm is basically the same as Knight’s. Knight rejected positivism, calling it “the emotional pronouncement of value judgments condemning emotion and value judgments” (Knight, 1940). He often sounded  like a Misesian praxeologist: “If anyone denies that men have interests or that ‘we’ have a considerable amount of knowledge about them, economics and its entire works will simply be to such a person what the world of color is to the blind man” (Knight, 1956). Indeed, critics dismiss Knight’s epistemological writings as “extended Austrian-style disquisitions on the foundations of human knowledge and conduct and the like” (LeRoy and Singell, 1987) — the ultimate insult! (more…)

12 May 2011 at 2:34 pm 3 comments

Economist Quote of the Day

| Peter Klein |

Arthur Goldhammer on the upcoming French elections:

This will be Dominique Strauss-Kahn’s challenge, since he will be running, if he runs, in part on his credentials as an economist. He has to make sure that this word means something other than “scold” or, worse, “tool of capital.”

I would imagine that heading the IMF is not a particularly popular launching point for the Presidency either. In other countries being a leader of the Socialist Part might hurt but, well, this is France.

10 May 2011 at 11:56 am 4 comments

The Organizational Structure of Al Qaeda

| Peter Klein |

Speaking of organizational structure, here’s former O&M guest blogger Craig Pirrong on Al Qaeda:

There is a concerted effort underway to portray Bin Laden as exerting operational control over Al Qaeda, based on material collected during the raid on his compound. Color me skeptical.

First, it’s hard to imagine how he could exercise any control at anything but the broadest strategic and conceptual level while he was relying on couriers to communicate with subordinates. Second, this hierarchical model is contrary to virtually all that has been written about Al Qaeda going back to its early days: the organization has been consistently portrayed as networked and distributed rather than hierarchical. Indeed, the conventional characterization of Al Qaeda represents it as more of a franchise operation in which the franchisees have considerable autonomy.

But let’s assume for a moment that the organization was hierarchical, and that operational elements required direction and approval from Bin Laden to implement any attack. If that’s true, we may have actually done ourselves a disservice by killing Osama. For it would be almost trivially simple to get inside AQ’s OODA (“observe, orient, decide, and act”) loop and disrupt and destroy its operations. Even if we didn’t know what AQ was up to, we could disrupt their plans just by mixing (randomizing) our strategies, by unexpectedly changing up the way we do things. If response to such changes required the locals carrying out missions to report back to OBL via a painfully slow communications system, await a decision, and wait for the decision to be couriered back, they would be unable to do anything serious. In this case, killing OBL would free the locals to be more flexible and responsive — and hence more dangerous. It would permit AQ to become more of a network, less predictable, and more able to adapt to our moves.

I too doubt this emerging meme on OBL as operational figure, perhaps for somewhat different reasons: I assume that any official information about the operation and its significance is primarily propaganda, not transparent disclosure. Naturally the Administration would want to exaggerate the significance of Bin Laden’s, um, “retirement.”

9 May 2011 at 5:30 pm 4 comments

Google as Emergent Organization?

| Peter Klein |

People are going to do what they are going to do, and you’re there to assist them. They don’t need me, they are going to do it anyway. They are going to do it for their whole lives. Maybe they could use a little help from me. At Google, we give the impression of not managing the company because we don’t really. It sort of has its own borg-like quality if you will. It sort of just moves forward.

This quote from Google CEO Eric Schmidt is getting some buzz (e.g., Phil Bowermaster, via Ewin Barnett). It gives the impression of a wikified firm, or an emergent organization (to use Hayekian terminology). Indeed, Google makes extensive use of teams, information sharing, and delegation, and the firm has a fairly flat organizational structure. The “Ten Golden Rules” internal document, written in 2005 by Schmidt and Hal Varian (and quoted in the Google HBS case), says “the role of the manager is that of an aggregator of viewpoints, not the dictator of decisions.” But there are decisions, and management, like George W. Bush, is the Decider. As with 3M, Google allows engineers to spend 20 percent of their time on their own projects. Still, these projects are subject to approval and monitoring. After all, the Borg believe in tight coordination!

8 May 2011 at 11:26 pm 6 comments

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
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