Posts filed under ‘Management Theory’
Dissing Prahalad
| Peter Klein |
Management theory superstar C.K. Prahalad, having conquered the corporation in Competing for the Future, then turned his attention to global poverty. His plan urged firms to tap into the purchasing power of the world’s poorest consumers, creating large gains for both buyers and sellers. But there are doubters.
C.K. Prahalad’s theory on the purchasing power at the “bottom of the pyramid” (BOP) has a legion of enthusiastic supporters. The BOP argument that savvy multinationals will enrich themselves and the poor by selling to this market is “at best a harmless illusion and potentially a dangerous delusion,” according to Michigan professor Aneel Karnani. His new working paper, Fortune at the bottom of the pyramid: a mirage, is the strongest criticism I’ve seen of Prahalad and his devotees.
This is from Christine Bowers at the World Bank’s PSD Blog. Karani’s paper calls the BOP argument “seductively appealing, [but] riddled with fallacies.” Says Karani:
Not only is the BOP market quite small, it is unlikely to be very profitable, especially for a large company. The costs of serving the markets at the bottom of the pyramid are very high. The poor are often geographically dispersed (except for the urban poor concentrated into slums) and culturally heterogeneous. This increases distribution and marketing costs and makes it difficult to exploit economies of scale. Weak infrastructure (transportation, communication, media, and legal) further increases cost of doing business. Another factor leading to high costs is the small size of each transaction.
Read the paper here.
What Do We Really Know About Organizations?
| Peter Klein |
Recently a prominent economist, having discovered O&M for the first time, emailed me: “So what have we learned about how organizations really, really work in the past decade?”
I was in an airport when I received the query, and didn’t have time to prepare a thoughtful, well-crafted response. Rather than ignore the question, however, I replied with a few off-the-cuff remarks. After reading my remarks, I’d like readers to respond with their own brief thoughts. I.e., if you had to answer this question, quickly, in 250 words or less, what would you have said?
Here’s what I wrote (with a few small touch-ups): (more…)
Take That, Berle and Means
| Peter Klein |
When the Board and senior management of media company VNU agreed to a buyout by a private-equity group headed by Kohlberg Kravis Roberts, shareholders did something usual: they rebelled.
The rebels — including some of the world’s largest mutual funds — proposed their own business plan and new executives, and tried to force the chairman to quit. “We took the initiative to defend long-term shareholders’ interests,” says the group’s leader, Eric Knight, head of New York-based Knight Vinke Asset Management.
After a months-long battle, shareholders eventually won a modest increase of nearly $250 million from the private-equity firms — or 2.5% more than the original deal. But that improvement was less significant than the fact that shareholders had rebelled, proposing a do-it-yourself restructuring plan that competed with a big private-equity offer accepted by management and the board.
So reports the W$J in its last Friday’s issue. The story is pitched as indicating a more-general backlash against LBOs. Warren Buffett is quoted as warning his shareholders against “deal flippers.” However, there is plenty of evidence that LBOs, on average, generate long-term gains, not only for shareholders but also for the economy as a whole. (Look for a major contribution to this literature from my PhD student John Chapman.) And isn’t it ironic to find stockholders taking an active stand against private-equity investors, given Michael Jensen’s warning of the “Eclipse of the Public Corporation”? Maybe the public corporation has life in it still.
Firms, Strategies, and Economic Change
| Peter Klein |
My review of Tony Yu’s Firms, Strategies, and Economic Change: Explorations in Austrian Economics (Edward Elgar, 2005), written for the Quarterly Journal of Austrian Economics, is available for preview here.
Management Styles: Bob Knight vs. Coach K
| Peter Klein |
Two of the most successful US college basketball coaches, Bob Knight and Mike Krzyzewski (Coach K), are as well known for their management styles as for their on-court success. Knight (the legendary Indiana University coach now at Texas Tech.) is the in-your-face, marine-style drill sergeant who tears his players down only to build them back up. Duke’s Krzyzewski (a former Knight assistant) prefers to nurture and encourage his players, trying to establish a caring, family-style atmosphere.
Upon pondering these facts, what’s a good management scholar to do? Why, make a leadership case out of them, of course. (more…)
Roundup of Interesting Links
| Peter Klein |
Besides the links in the right-hand-side column below, O&M readers may find the following of interest:
- Work Matters by Bob Sutton, Co-Director of Stanford University’s Center for Work, Technology, and Organization
- Marketing Profs Daily Fix Blog by, you guessed it, a group of marketing professors
- Statistical Modeling, Causal Inference, and Social Science, for the research-methods geek in all of us
- Businesspundit, a general-interest site
Architecture
| Richard Langlois |
I too am at the Academy of Management meeting in Atlanta. And I have already run into Peter and Nicolai more than once.
It occurred to me that I ought to write about whatever important new idea I’ve picked up here. I now think that I see such an idea, and it would come under the heading of architecture. (more…)
Thoughts on Stakeholder Theory
| Peter Klein |
Yesterday I attended the Academy of Management session “Stakeholders: The Keys to Effective Strategy and Performance Measurement.” Panelists included Joe Mahoney, Russ Coff, Christos Pitelis, Tom Donaldson, Amy Hillman, Sybille Sachs, and Kathryn Pavolovich. I’m pretty much an unreconstructed Friedmanite on this issue so I went to raise my consciousness.
What I learned was interesting, but I still have several questions about stakeholder theory, at least in its normative version. (more…)
Attribution Error and Management Fads
| Peter Klein |
James Surowiecki on the changing fortunes of Airbus and Boeing:
What much of the talk about the inherent weakness of Airbus ignores is that, just a few years ago, it was Boeing that looked fundamentally flawed, while Airbus was seen as the future of the industry. . . . The problem with such prognostications is that they infer basic truths about a company’s prospects from its short-term performance. In fact, present success is often determined as much by context and chance as by fundamental viability. . . .
People are generally bad at accepting the importance of context and chance. We fall prey to what the social psychologist Lee Ross called “the fundamental attribution error” — the tendency to ascribe success or failure to innate characteristics, even when context is overwhelmingly important. . . .
Because we underestimate how much variation can be caused simply by luck, we see patterns where none exist. It’s no wonder that management theory is dominated by fads: every few years, new companies succeed, and they are scrutinized for the underlying truths that they might reveal. But often there is no underlying truth; the companies just happened to be in the right place at the right time.
Via Daniel Drezner. N.B.: While I can’t top Nicolai’s restaurant story, I’ll note that I was a college classmate and friend of Surowiecki at UNC-Chapel Hill. I didn’t anticipate Jim would become a brilliant business writer — but then again, who knew I’d turn out to be a brilliant organizational economist? (Insert your own punch line here.)
Strategizing, Disequilibrium, and Profit
| Nicolai Foss |
Stanford University Press has just published John A. Matthews’ Strategizing, Disequilibrium, and Profit. A 14-page sample is available here.
Matthews, who holds the Chair of Strategic Management at Macquarie Graduate School of Management, Sydney, has contributed for many years to what is sometimes called “industrial dynamics,” that is, the strongly empirically oriented intersection between process approaches to economics (evolutionary and Austrian views) and strategic management (mainly the capabilities and resource-based views). Accordingly, the main sources of inspiration for the current book are Schumpeter, who provides the overall dynamic view of the economy as an evolving system; Knight, who contributes a theory of profits, and Penrose who contributes a theory of the firm.
The book may be read as a frontal attack on strategic management’s dominant perspective, the resource-based view. (more…)
Syllabus Bleg
| Peter Klein |
As part of a curriculum review project I’m collecting syllabi for first- or second-year PhD courses in strategy, organization theory, and the economics of organizations. If you have a syllabus you’re willing to share, please send it to me at pklein@missouri.edu. I will discuss broad themes and patterns with my colleagues but will keep details confidential. Thanks!
Fraudulent Management Books
| Peter Klein |
Be careful when purchasing management books in China:
As Chinese economy and private business grow rapidly, books on western company management and leadership strategies have been on the list of top sellers in many bookstores. However, it is discovered recently that a lot of the best-sellers are bogus books.
Execution Ability, a popular series of seven books written by “famous Harvard professor Paul Thomas”, turned out to be bogus. “This professor and his books are now very famous in China,” said Jiang Ruxiang, general manager of Beijing Zion Consulting Co., Ltd. Jiang discovered that there is no such a professor Paul Thomas at all.
Another example is a book titled “No excuse”, with fake American writer and fake New York Times review as “The most perfect reading for company employee training”. It was the best-selling management book in 2004 with sales of 2 million copies. . . .
Examples of [fake] “honors” include “2003 No. 1 sales on Amazon”; “Endorsed by U.S. Land, Navy and Air Forces.”; “Every U.S. government employee has a copy”, etc.
HT: JC Spender.
Business Ethics and Bioethics
| Peter Klein |
Just as business schools are increasingly emphasizing business ethics and corporate social responsibility (not everyone thinks this is wise), the biological and medical sciences are increasingly emphasizing bioethics. Yet bioethics courses at US universities are usually offered by the philosophy or religious studies departments, or by professional philosophers or theologians in university-wide centers, not by regular faculty in the biology or pharmacology departments. Why? I can think of at least three explanations:
1. Business schools are more serious about ethics than are biology or pharmacology departments, and hence more willing to devote resources to hiring ethicists and creating ethics programs.
2. Business schools are trendy and shallow, using management professors to teach “ethics lite” or “pop ethics” courses rather than outsourcing this material to the academic units where it belongs.
3. Bioethics problems are subtle and complex (Is an embryo a person?). Business-ethics problems are mundane and straightforward (Should you lie to your shareholders?). Philosophers are needed for the former, but not for the latter.
What do readers think?
New Paper by Tan and Mahoney: Integrating TCE, RBV, and Agency Theory
| Peter Klein |
Are transaction cost economics, the resource-based view of the firm, and agency theory substitutes or complements? Most applied studies in organizational economics use one or another framework to explain the phenomenon in question; relatively few studies incorporate multiple frameworks, and even fewer attempt to distinguish among them empirically.
A new paper by Danchi Tan and Joe Mahoney, “Why a Multinational Firm Chooses Expatriates: Integrating Resource-Based, Agency and Transaction Costs Perspectives” (Journal of Management Studies, May 2006), takes the middle approach, developing a new framework that incorporates key elements of TCE, RBV, and AT to explain multinational firms’ decisions to staff their foreign subsidiaries with expatriates or host country nationals. (more…)
Interesting New Paper by JC Spender
| Nicolai Foss |
One of the puzzles of business administration/management is that the fields of entrepreneurship and strategic management have existed, and continue to exist, in such relative separation. Intuitively, one would think of entrepreneurship — the identification and seizure of new opportunities for profit — as constituting the core of the strategic management field. This, however, is not the case. However, there are various indications that strategic management scholars are about to develop interest in entrepreneurship (e.g., work by Kim and Mahoney, Alvarez and Barney).
One specific indication is an excellent and highly recommended recent paper by JC Spender, “The RBV, Methodological Individualism, and Managerial Cognition: Practising Entrepreneurship.” Here is the Abstract:
If we consider Schumpeter’s methodological individualism and entrepreneurship, the ‘managerial cognition’ arguments can contribute new insights to the RBV discourse. I open by examining the links between resource inputs and firm outputs , and argue the types of rents implied by the RBV cannot arise or be sustained if these links are logical and explainable. The only rents then available are Marshallian quasi-rents arising from information asymmetry or the Ricardian rents from initial allocation, i.e., those of Porter’s analysis. Today’s RBV lacks the components necessary to create and manage the value at the core of Barney’s VRIO model. Causal ambiguity or uncertain inimitability might imply sustainable rents but clearly do not explain how the arise, any more than asserting the firm has dynamic capabilities does. To illustrate how value might be created and brought into the analysis, I look at Penrose’s model of managerial learning, primarily as an accessible instance of the epistemological approach proposed by Austrian economists such as Hayek, Kirzner, and Schumpeter. This concept of value creation parallels the sense-making concepts of the managerial cognition literature. I conclude that an alliance of BPS and MOC approaches can complement and so complete the RBV, synthesizing notions of value creation, heterogeneous and immobile resources, and endogenous growth into a dynamic theory of the firm. It balances rational choice and Schumpeterian entrepreneurship. To wrap this argument up, I discuss the theoretical and practical implications of the amended RBV.
Latent Variables and Structural Equations Modeling
| Peter Klein |
Among my PhD students I note an increasing interest in structural equations modeling (SEM), particularly for working with latent variables. One student’s dissertation uses SEM to study the effect of the institutional environment on entrepreneurship, treating entrepreneurship as a latent variable and using measures of new business starts, patent filings, and the like as the corresponding manifest variables. Another student is using SEM to examine free-riding among members of a large cooperative, with various observable behaviors serving as indicators for the latent variable free-riding.
More generally, SEM is becoming a standard tool in management, where abstract concepts like trust, knowledge, capabilities can (potentially) be modeled as latent variables in a system of equations. Indeed, when I visited Nicolai in his office in Copenhagen a couple of weeks ago, the first thing I noticed on his desk was a LISREL manual, prominently displayed on the corner. (He assures me it is not for show.) (more…)
Foss and Foss RAE Paper Published Online
| Nicolai Foss |
My paper with Kirsten Foss, “The Limits to Designed Order: Authority Under ‘Distributed Knowledge’ Conditions,” Review of Austrian Economics 19: 261-274 (2006) has just been published online on the Springer site. Here is the Abstract:
We examine the argument, put forward by modern management writers and, in a somewhat different guise by Austrian economists, that authority is not a viable mechanism of coordination in the presence of “distributed knowledge” (which corresponds to Hayek’s treatment of the use of dispersed knowledge in society). We define authority and distributed knowledge and argue that authority is compatible with distributed knowledge. Moreover, it is not clear on theoretical grounds how distributed knowledge impacts on economic organization. An implication is that the Austrian argument that designed orders are strongly constrained by the Hayekian dispersed knowledge (Hayek, Kirzner, Sautet) is less decisive than it has usually been taken to be. The positive flipside of this argument is that Austrians confront an exciting research agenda in theorizing how distributed knowledge impacts economic organization.
Information versus Knowledge
| Peter Klein |
Here’s a fascinating symposium from the April 2005 issue of EconJournalWatch on the distinction between information and knowledge in economics. The contributors are Brian Loasby, Thomas Mayer, Bruce Caldwell, Israel Kirzner, Leland Yeager, Robert Aumann, Ken Binmore, and Kenneth Arrow. (Via Jeff Tucker)
George Gilder on the Evolutionary Metaphor
| Peter Klein |
Returning to our previous discussion of teleology in social-science explanation, the current issue of National Review has an essay by George Gilder, co-founder of the pro-ID Discovery Institute, summarizing his complaints about the neo-Darwinian model. (The electronic version is behind a subscription firewall, but a copy is here.) This passage caught my eye:
Turning to economics in researching my 1981 book Wealth & Poverty, I incurred new disappointments in Darwin and materialism. Forget God — economic science largely denies intelligent design or creation even by human beings. Depicting the entrepreneur as a mere opportunity scout, arbitrageur, or assembler of available chemical elements, economic theory left no room for the invention of radically new goods and services, and little room for economic expansion except by material “capital accumulation” or population growth. Accepted widely were Darwinian visions of capitalism as a dog-eat-dog zero-sum struggle impelled by greed, where the winners consume the losers and the best that can be expected for the poor is some trickle down of crumbs from the jaws (or tax tables) of the rich.
In my view, the zero-sum caricature applied much more accurately to socialism, which stifles the creation of new wealth and thus fosters a dog-eat-dog struggle over existing material resources. (For examples, look anywhere in the socialist Third World.) I preferred Michael Novak’s vision of capitalism as the “mind-centered system,” with the word itself derived from the Latin caput, meaning head. Expressing the infinite realm of ideas and information, it is a domain of abundance rather than of scarcity. . . . Ultimately capitalism can transcend war by creating rather than capturing wealth — a concept entirely alien to the Darwinian model.
Leaving aside that Darwin copied Spencer, rather than vice-versa (though Spencer may have been misinterpreted), Gilder correctly notes an analogy between evolutionary explanations in biology — in which outcomes are the result of blind, purposeless forces — and evolutionary models in economics and sociology, in which human agency, too, seems to get short shrift. (more…)
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