“Why Managers Still Matter”

29 September 2014 at 10:02 am 9 comments

| Nicolai Foss |

BxrnIo-CQAA8lk7Here 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.

Entry filed under: - Foss -, History of Economic and Management Thought, Management Theory, Myths and Realities, Strategic Management, Teaching, Theory of the Firm.

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9 Comments Add your own

  • 1. Aidan Walsh  |  29 September 2014 at 11:35 am

    Hi Nicolai and Peter,

    I see that a couple of times lately you have made this point about hierarchy, coordination and speed. I think you are right about the need for managers, but how does that coordination occur? You seem to imply that the decision is centralised in the manager and then articulated from there? What is the mechanism?

    Fast decision-making among individuals is associated with rule-following (the thinking fast part of Kahneman). The same is true for coordinated decision-making in animals (flocking, schools of fish etc). The latest research among birds is that one rule pigeons follow is to follow the rules being followed by more experienced birds: ‘we found that stable, hierarchical pattern of in-flight leadership does not build upon the stable hierarchical social dominance structure evident in the same birds. Instead, in the case of pigeon flocks, the emergence of leadership and dominance hierarchies are each affected by different factors. By ignoring social dominance when in flight, flocks of pigeons potentially make better navigational decisions because leadership can emerge from relevant attributes, such as local experience and route fidelity’ (Nagy, Vásárhelyi, Pettit, Roberts-Mariani, Vicsek, & Biro, 2013)

    Isn’t that a manager? A context dependent leader, in a coordinated decision-making environment. Isn’t this Mary Parker Follett’s theory of the firm: ‘to unite all concerned in a study of the situation, to discover the law of the situation and obey that… The head of the sales department does not give orders to the head of the production department, or vice versa. Each studies the market and the final decision is made as the market demands. This is, ideally, what should take place between foremen and rank and file, between any head and his subordinates.’ (Follett, 1941, pp. 58, 59) ‘I may say to an employee, “Do so and so,” but I should say it only because we have both agreed, openly or tacitly, that that which I am ordering done is the best thing to be done. The order is then a symbol’ (Follett, 1941, p. 65).

    So you are right about the importance of managers but is articulating it as ‘executive authority’ the right phrase? If that was the case, then every decision would have to pass through the manager? How otherwise would any member of the team know that a decision is time sensitive and the manager has some key knowledge?

    Is the manager the person with the knowledge of the rules, the knowledge of some key fact that is needed to decide on which rule to apply? This explains why there is not recourse to management for every decision – because most of the time the rule to be followed is clear and also why and how managers are happy to delegate: ‘[T]he captain of a battleship may sometimes recognize the nature of an observed object less from his direct perception of it than from the response of his ship…’ (Hayek, 1952, 91)

    Kind regards,

    Aidan.

  • 2. Peter Klein  |  29 September 2014 at 1:59 pm

    Aidan, I don’t see any disagreement here. We do not say that all decisions would have to pass through the manager. We say that the manager establishes the rules of the game and has the option to intervene directly when circumstances warrant. This is different from the situation with flocks of birds and the like, which is what people like Kastelle seem to have in mind.

  • 3. Divine Economy Consulting  |  29 September 2014 at 5:18 pm

    The best managers are the ones exercising an active entrepreneurial spirit – they are in tune with the most critical information (internal and external for the firm). The others that are, for whatever reason, in a state of latent entrepreneurship are not as able to make the best decisions. It is an economic decision: the best means is chosen and those who are keenly exercising an active entrepreneurial spirit represent the best means towards the ends chosen by the firm.

  • 4. Tasmyn Nicholls  |  13 October 2014 at 6:32 am

    I agree with this statement simply because the economy as a whole is in desperate need of new innovative ways to empower and motivate employees, specially the new generation being generation Y. As this generation often seeks rapid hierarchical employment and frequent promotions. Therefore getting rid of the idea of one manager in a company and re-establishing an organization with fewer hierarchy management levels, thus empowering employees to make rapid decisions in hope of greater innovation and motivated workforce as a whole, ultimately eliminating inequality. On the other hand, I do however believe that an organization needs to have order and management to run a successful business, in order to avoid chaos. At the end of the day there are many discrepancies about this statement.

  • 5. stevepostrel  |  17 October 2014 at 9:22 pm

    There’s an old game theory piece on “Decentralization, Duplication, and Delay” by Bolton and Farrell that looked at the tradeoff between central planning and markets when the decentralized solution was more likely to be the better of two but was also likely to get settled on more slowly. You could apply the same logic inside the firm and say that fast if suboptimal centralized and imposed decisions might be better at times than slow but optimal ones.

  • 6. Peter Klein  |  17 October 2014 at 10:38 pm

    Yes, I know that paper, thanks. Hadn’t thought to apply it to this case!

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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).