Posts filed under ‘Management Theory’
Do What Consultants Say, Not What Other Firms Do
| Peter Klein |
McKinsey suggests this strategy: when other firms ignore strategy consultants, earn rents by listening to strategy consultants.
- Companies don’t react to competitive threats in the way management theory says they should, according to a McKinsey Global Survey.
- Instead of undertaking extensive, sophisticated analyses when faced with a competitive threat, most companies assess just a few responses, and they often choose the most obvious one.
- These practices give companies an opportunity to seize a competitive advantage by understanding how their competitors are likely to react to their moves.
The pointer is from the ever-valuable Luke Froeb. Most economists are puzzled management consulting, believing that consultants add little real economic value. I am sympathetic to a signaling explanation with a separating equilibrium in which high-quality firms can afford to signal quality by hiring expensive consultants and low-quality firms cannot. But I haven’t studied this closely. Can anyone recommend literature on the economics of consulting?
Toyota the Innovator
| Peter Klein |
Jim Surowiecki’s latest New Yorker column focuses on Toyota and makes several important points about innovation.
- Process innovation is at least as important as, though less visible than, product innovation.
- Innovation can be an incremental process in which “the goal is not to make huge, sudden leaps but, rather, to make things better on a daily basis.”
- Process innovations often bubble up from the bottom, rather than the top, of the hierarchy.
- Cumulative, bottom-up, process innovation is really hard to imitate. “[T]he fundamental ethos of kaizen — slow and steady improvement — runs counter to the way that most companies think about change. Corporations hope that the right concept will turn things around overnight. This is what you might call the crash-diet approach: starve yourself for a few days and you’ll be thin for life. The Toyota approach is more like a regular, sustained diet — less immediately dramatic but, as everyone knows, much harder to sustain.”
These points are well known in the innovation literature but Surowiecki’s succinct and elegant presentation is well worth a read, even by specialists.
See also Steve Postrel’s earlier post on Toyota.
More Free Stuff: Herbert Simon and Edward Banfield
| Peter Klein |
In my list of Cowles monographs I forgot to include several classics by Herbert Simon, including his 1951 paper “A Formal Theory of the Employment Relationship,” issued by Cowles as a discussion paper in 1950. Here’s the full set of Simon materials at Cowles. Also, from a commentator over at orgtheory.net I learn that several of Edward Banfield’s books, including The Moral Basis of a Backward Society (1958) and The Unheavenly City (1970) are available as PDFs at this site.
Is Management a General Skill?
| Peter Klein |
First Matthew Stewart, now Simon Blackburn — philosophers writing about management without actually knowing anything about management. Muses Blackburn:
People can be persuaded, and ordered, given incentives and penalties, suppressed and killed, but not managed. Human affairs can be administered, but administration is not management. One administers to people and their needs. One tries to manage them by ignoring whichever of their needs is inconvenient and by treating them as a mere means to your own ends. But, mirabile dictu, people treated like that become irritable and subversive and quite quickly unmanageable.
Daniel Davies tries valiantly to deconstruct this passage and concludes, rightly I think, that Blackburn hasn’t the slightest idea what he’s talking about. I find Davies’s own definition of “management” too narrow, focusing on routine administration and small-group leadership but excluding the activities of the general manager, but I think he gets Blackburn right. Philosophers, please stick to examining thyselves!
Occupational Psychosis
| Randy Westgren |
One of the profoundly valuable benefits of recently giving up an administrator’s position is that I have time to read. I sat down with a stack of journals, biographies, fiction, and cookbooks that has grown since last summer. In the first pass through the stack, I found a couple pieces that echo one of the themes of this blog: how our training affects our perceptions of theory, facts, and phenomena.
One piece is an article by two young, interesting colleagues, Brianna and Arran Caza, who write about “Positive Organizational Scholarship” (POS) in the March 2008 issue of the Journal of Management Inquiry . They argue that the bulk of research on organizations, as highlighted by the top-cited articles in three years of ASQ and AMJ, begin with negative framing of organizational issues — what Brianna and Arran call a deficit model approach. They propose the need for research based on positive framing — not exclusively — as necessary to advance theory and practice in the organizational sciences. The POS paradigm is unabashedly post-modern (up periscope!), but it serves us all when alternative lenses are trained on issues that we all observe from our particular perspectives. (more…)
The Nature of the (Law) Firm
| Peter Klein |
Gordon Smith shared an interesting report on a recent Georgetown conference, “The Future of the Global Law Firm.” Apparently there is a healthy literature in legal scholarship examining the boundaries and internal organization of law firms. Writes Gordon:
The participants seem to have reached a few points of consensus. First, the legal profession has changed dramatically in the past two decades and it remains under significant stress, meaning that more change is on the way. Second, the rules that constrain change (e.g., prohibition of non-lawyer ownership, rules relating to conflicts, non-competition rules) should be changed sooner rather than later. Third, the traditional legal form (partnership) is largely irrelevant to the current practice of law, even if law firms want to create an organizational structure that encourages the collegiality of a traditional partnership. Fourth, the law firms that will succeed in the future are those that get the organizational structure right.
In a follow-up email, Gordon explains that the organizational features being challenged include the partnership model, the up-or-out “Cravath system,” and the outsourcing of routine services (e.g., electronic discovery) to places like India. Gordon recommends Laura Empson’s Managing the Modern Law Firm for an overview of the issues. I said I thought there was some work by economists and management scholars on the economic organization of the law firm (and professional services firms more generally), but couldn’t come up with much, aside from a series of interesting papers by Luis Garicano and Thomas Hubbard (here, here, and here). Any suggestions from our readers? Is the persistence of the partnership form, for example, mainly the result of arcane professional-ethics rules or is there an underlying efficiency rationale? If consulting firms can have IPOs, why not law firms?
Authors@Google
| Peter Klein |
From Marshall Jevons I just learned about the Authors@Google lecture series. Lots of good stuff there. The O&M crowd may especially enjoy the talks by Ian Ayres, Larry Lessig, Bob Litan, Richard Florida, John Searle, Daniel Solove, Steven Pinker, Robert Frank, Don Tapscott, Bill Easterly, and Tom Perkins.
Update: If you like this sort of thing check out TED as well (thanks to Art Carden for the pointer). The first person I saw when I visted the site yesterday was Yochai Benkler, whose book The Wealth of Networks I happen to be reviewing for The Independent Review.
A Really Old Family Firm
| Peter Klein |
One advantage of the public corporation over the family-owned firm is longevity: few family firms last beyond two or three generations. Saturday’s WSJ profiled an interesting exception: Marchesi Antinori Srl, a wine business founded by Giovanni di Pietro Antinori in 1385 and run today by Piero Antinori, 26 generations later. Some of the Antinoris’ unusual business practices:
The Antinoris have flourished in part because of their willingness to flout conventional wisdom over how a family company should be run. Instead of creating clear lines that separate the family’s interests from the company’s, the Antinoris blur the two beyond recognition. The Marquis, his wife and their youngest daughter still live on the top two floors of the 15th-century Palazzo Antinori, a few steps from the Florence cathedral, where the family has resided for the past five centuries.
The business is still run on the palazzo’s bottom two floors, and the three daughters are top executives. . . .
Though the company has a six-person board of directors — including two non-family members — the Marquis says it only meets “for formalities.” The real board meeting, he says, “happens every Sunday, when we sit down to lunch.” That often takes place in one of the family’s nearby vineyards, either in the hills of Chianti, or along the Tuscan coast.
Instead of focusing on quarterly results, the Antinoris plan far into the future, laying the foundations for a company their grandchildren can run. They have been wary of following popular business trends. The family is suspicious of growing too much, which they say can compromise quality and run a company into debt.
One should be wary of drawing strong inferences from a sample of one. Of course, as Herbert Simon once noted, a sample of one is infinitely more informative than a sample of none.
Here is the Antinori wikipedia page. are some older posts on family firms.
Accounting and Modern Management
| Peter Klein |
In assessing the role of accountants during the industrial revolution, historians generally have been guided by Sidney Pollard’s interpretation expressed in The Genesis of Modern Management (1965). Pollard contended that early industrial accounting exhibited a marked confusion between capital and revenues. This confusion suggested to him that early industrialists were more concerned with calculating and extracting interest on their investments rather than maximizing their rate of return. Thus, Pollard concluded, these early entrepreneurs apparently lacked the true profit motive possessed by modern capitalists.
David Oldroyd’s book seeks to test these contentions by subjecting the financial accounts of three northern [coal] estates to detailed analysis in four specific areas: the performance of contracts, investment planning, labor management, and managerial behavior. . . .
The result is a discussion of early industrial entrepreneurship that is both revealing and nuanced. For example, Oldroyd shows that an extensive network of contracts regulated the exploitation of the Durham and Northumberland coalfield. These contracts covered a myriad of circumstances involved in both the underground mining and aboveground transportation of minerals. A typical enterprise might need to contract the leasing or subcontracting of a mine, aboveground “wayleaves” to transport coal across neighboring properties, the shipment of coal to London or other ports, and the off-loading of coal at the point of sale. In all of these areas, accounting records carefully quantified not only total production and transport, but very often unit costs as well. Oldroyd therefore concludes that, contrary to Pollard, accounting was an essential and extremely adaptable tool promoting economic efficiency during this era.
This is from James Jaffe’s EH.Net review of David Oldroyd’s Estates, Enterprise and Investment at the Dawn of the Industrial Revolution (Ashgate, 2007). Interesting fodder for business historians and specialists in contracting and organization. And here are some previous posts on accounting (1, 2, 3, 4, 5, 6).
Choice Architecture
| Steve Phelan |
Interesting article by Thaler and Sunstein in the LA Times on “choice architecture” and the concept of “libertarian paternalism”:
the organization of the context in which people make decisions. Choice architects are everywhere. If you design the ballot that voters use to choose candidates, you are a choice architect. If you are a doctor and must describe the alternative treatments available to a patient, you are a choice architect. If you design the form that new employees fill out to enroll in the company healthcare plan, you are a choice architect. If you are a parent, describing possible educational options to your son or daughter, you are a choice architect. If you are a salesperson, you are a choice architect (but you already knew that).
AND
The libertarian aspect of the approach lies in the straightforward insistence that, in general, people should be free to do what they like. They should be permitted to opt out of arrangements they dislike, and even make a mess of their lives if they want to. The paternalistic aspect acknowledges that it is legitimate for choice architects to try to influence people’s behavior in order to make their lives longer, healthier and better.
Hmmm….is this freedom (of choice)? How would we build a practice of choice architecture?
Jeffrey Pfeffer in the Lion’s Den
| Nicolai Foss |
Management theory heavy-weight and über-econ-basher Jeffrey Pfeffer (cf. these posts) makes an appeareance in the Fall 2007 issue of . . . the Journal of Economic Perspectives — admittedly a rather “open” journal, but still one of the house journals of the American Economic Association. (more…)
No Country for Old Probability Theorists
| Peter Klein |
I finally got around to seeing No Country for Old Men, which I enjoyed despite unrealistically high expectations (movies too suffer from the winner’s curse). Javier Bardem’s Anton Chigurh surely belongs with Darth Vader, Hannibal Lecter, Dr. Christian Szell, Nurse Ratched, and Max Cady on the list of all-time great movie villains. The movie is in one sense a meditation on the role of chance in human affairs, so naturally I started thinking about risk, uncertainty, choice, delegation, and other issues near and dear to our organizational hearts.
Chigurh, the cold-blooded killer, likes to flip a coin before deciding whether to kill someone, forcing the victim to call the toss. This reminded me that risk and Knightian uncertainty aren’t mutually exclusive determinants of economic outcomes. Entrepreneurs choose to invest in risky projects, but project selection itself reflects the bearing of Knightian uncertainty. Richard von Mises gives the example of champagne bottles that burst while in storage with predictable frequencies. The champagne producer can quantify the risks associated with bottling and storage. But the choice of producing one variety or another, hiring one type of laborer or another, and even being in the champagne business at all, involves another kind of uncertainty, one that cannot be described with mathematical precision. The decision to enter the champagne business involves Knightian uncertainty, but once that decision has been made, some of the variation in outcome can be characterized as probabilistic risk. Think of it in terms of mixed strategies; the specific move is random, but the decision to play a mixed strategy is not. Likewise, Chigurh can hardly claim that his victims’ deaths are random. A coin flip determines their fate, but he chooses to flip the coin — and that choice cannot be explained by a known probability distribution. (more…)
Debt Bites Back
| Steve Phelan |
A nice cartoon presentation of the debt crisis by the Wasington Post that you might want to use in your classes.
Two questions:
1) Is the story essentially correct or is it overly damning?
2) What are the organizational implications of this story – for institution and policy building?
We can only assume that all sorts of “corrective” measures will be planned and taken in the immediate future. I believe we should be getting involved in the debate by honing our theoretical position. We are watching economic history in the making.
Big Think in Management Research
| Peter Klein |
Greg Clark’s A Farewell to Alms has received a lot of attention in the econo-blogosphere. I haven’t read the book and don’t have much to say about it but you can read as much as you like from Cowen, McCloskey, DeLong, Caplan, Kling, and others. One of the most interesting reviews, to me, is this one by Robert Margo of Boston University. Margo admires the book but dislikes this genre, what he calls “Big Think.”
“Big Think” refers to the genre of economic history that asks The Big Question. Why England and not China? Do institutions “matter” or is it something else, or many things? Why is the United States rich and Bolivia poor?
Reviewers should be upfront about their ex ante biases. Here is one of mine: I do not care for Big Think. The Big Question per se is not the problem — in economics, there is nothing more important. For me, the problem with Big Think is that it is inherently Too Big. One cannot hope to answer The Big Question by tackling it head on. One must break The Big Question into a great many very tiny precisely posed questions, and get the answers to them right. In economic history we are still _very_ far from completing this task even for a country whose economic history is as well-worn as the United States. Big Think is a Big Distraction from our true purpose in life. (more…)
Nietzsche and Contemporary Philosophy
| Peter Klein |
“Nietzsche is peachy,” according to a bumper-sticker I once saw. Nietzsche is sometimes cited in management research as an authority on power, complexity, time, or relativism (e.g., Singer, 1994; Kilduff and Mehra, 1997; Mainemelis, 2001). But what did Nietzsche really say about these things? What are his main contributions to philosophy? Professional philosophers can’t seem to agree, as witnessed in this roundtable conversation with Peter Bergmann, Teodor Münz, Frantisek Novosád, Paul Patton, Richard Rorty, Jan Sokol, and Leslie Paul Thiele. Bergmann calls Nietzsche “the culture hero of modernism, a cultural revolution comparable to the Reformation or the Enlightenment. His critique of herd values is reflected in the posture of the avant-garde: elitist to the present, democratic to the future.” But Nietzsche was no nihilist, says Sokol; he was rather “an excessively sensitive person horrified by a world where nothing has rules and stands for nothing.”
All agree that Nietzsche bears no personal responsibility by the appropriation of his ideas by German nationalists, but Schrift notes that Nietzsche “chose to write in a style that invites misunderstanding — his use of metaphor, dissimulation, and hyperbole in particular, all make it easier for his words to be taken to mean something other than what he might have intended.” A warning to those of us who like jargon and are guilty of bad academic writing. (HT: 3quarks)
If Einstein Wrote a Management Book
| Peter Klein |
It might look like this (via Newmark). Einsteinisms like “imagination is more important than knowledge,” “not everything that can be counted counts, and not everything that counts can be counted,” and “whoever is careless with the truth in small matters cannot be trusted with important matter” are pithy, to be sure, but not very operational. And Einstein did not seem to understand economics very well.
Langlois Economics of Organization Course
| Peter Klein |
Don’t you wish you could sign up? Fortunately the reading list and slides are available to all. And check out this great homework assignment.
Inputs and Outputs
| Peter Klein |
In academia we measure outputs, not inputs. Promotion, tenure, and other rewards are based on publications, grants, teaching evaluations, and so on, not effort. So why do we talk so much about inputs? He’s in his office all the time! I get emails from her at 3:00am! Whenever I see him he’s typing at the computer! Even economists, who rightly reject the labor theory of value, talk this way. What gives?
I like the way Kieran puts it:
You have time to blog? I work so hard I couldn’t possibly fit that sort of frivolous nonsense into my day. You have time to watch television? I don’t even own a TV. (I am happy to see this one is now very nearly a cliché.) You go jogging in the morning? How do you find the time? You have time to shower afterward? Personal grooming distracts from the research effort. You walk to the other end of the building to use the bathroom? I specifically requested that my office have the toilet seat model of the Aeron chair installed. A real time saver, that one. You have small children? Actually, why am I even wasting my time talking to you right now? Goodbye.
It seems to me that very nearly all of this sort of guff is pure posturing, net of a very small kernel of obvious truth about not whiling away the weeks playing gin rummy or watching movies to the exclusion of all else. (more…)
Adoption and Diffusion of Organizational Innovation
| Peter Klein |
Most theories of organizational form are framed in comparative-static, equilibrium terms. What organizational forms — degree of vertical integration, use of incentive pay, assignment of decision rights, and the like — are “optimal” in given circumstances (transactional attributes, industry conditions, legal or political environments)? There are lots of theoretical and empirical studies on these questions. And yet, we know relatively little about how new organizational forms emerge and how existing organizations change. Is change explained best in a comparative-statics framework — some underlying condition changed, leading firms to jump from the previously optimal, equilibrium form to a new, equilibrium form? Or is some kind of experimental, evolutionary, or institutional model required?
A new paper by Lisa Lynch, “The Adoption and Diffusion of Organizational Innovation: Evidence for the U.S. Economy,” addresses these questions empirically:
Using a unique longitudinal representative survey of both manufacturing and non-manufacturing businesses in the United States during the 1990’s, I examine the incidence and intensity of organizational innovation and the factors associated with investments in organizational innovation. Past profits tend to be positively associated with organizational innovation. Employers with a more external focus and broader networks to learn about best practices (as proxied by exports, benchmarking, and being part of a multi-establishment firm) are more likely to invest in organizational innovation. Investments in human capital, information technology, R&D, and physical capital appear to be complementary with investments in organizational innovation. In addition, non-unionized manufacturing plants are more likely to have invested more broadly and intensely in organizational innovation.
See also this paper on the evolution of contractual practices in US agriculture.
Law of Unintended Consequences
| Steve Phelan |
Nice post by Alex Tabarrok on the law of unintended consequences. He concludes by saying:
Does the law of unintended consequences mean that the government should never try to regulate complex systems? No, of course not, but it does mean that regulators should be humble (no trying to remake man and society) and the hurdle for regulation should be high.
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