Posts filed under ‘Strategic Management’
The Canon of Management Thought
| Peter Klein |
Gordon Smith points us to David Kennedy and William W. Fisher’s edited volume The Canon of American Legal Thought (Princeton, 2006). The volume features the “twenty most important works of American legal thought since 1890.” Click Gordon’s link for the list, which includes a few items familiar to O&M readers (Coase’s 1960 “The Problem of Social Cost”; Calabresi and Melamed’s 1972 “Property Rules, Liability Rules, and Inalienability”; and possibly Macaulay’s 1963 “Non-Contractual Relations in Business”). The more recent stuff is mostly “critical legal theory” (pomo alert!).
So, what are your selections for the canon of management thought? Both books and articles are fair game. (I imagine the after-1890 constraint won’t be binding.) You can include works in organizational economics if you like.
How Does Management Affect Capabilities?
| 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? (more…)
AEA Papers on Organizations
| Peter Klein |
A selection of papers on firms, contracts, organizations, and institutions from this weekend’s American Economic Association meeting in Chicago.
Incomplete Contracts and Ownership: Some New Thoughts
Hart, Oliver (Harvard University)
Moore, John Hardman (University of Edinburgh)
Diversity of Governance Governance-Organization Architecture Linkage: Complementarities and Human Assets Essentiality
Aoki, Masahiko (Stanford University)
Firms, Nonprofits, and Cooperatives: A Theory of Organizational Choice
Herbst, Patrick (Goethe University, Frankfurt)
Prufer, Jens (Goethe University, Frankfurt)
Firm Boundaries in the New Economy: Theory and Evidence
Subramanian, Krishnamurthy (Emory University)
The Golden Decade
| Peter Klein |
Our friends at orgtheory.net are discussing the year 1977, in which several classic works in organization theory were published. I can’t be that precise, but I can vouch for the 1970s — a “golden decade” for organizational economics research. Coase’s “Nature of the Firm” appeared in 1937, of course, but it remained — in Coase’s words — “much cited, little used.” It was only in the 1970s that the modern theory of the firm, or the new economics of organization, emerged. Consider this list: (more…)
Agency Costs in Corporations
| Peter Klein |
Law professors are calling this “the best corporate law cartoon ever.” (Click to enlarge.)
Top Posts of 2006
| Peter Klein |
As 2006 draws to a close we reflect on our most popular posts of the year. (Actually, we’ve only been in operation since April, so these are our most popular posts of all time, but you get the idea.) Here’s the list, followed by some commentary:
1. Is Math More Precise Than Words?
2. Intellectual Property: The New Backlash
3. Dilemmas of Formal Economic Theory
4. We Need Some Economics of Pomo
5. The New Bashing of Economics: The Case of Management Theory
6. Has Corporate Corruption Increased?
7. HRM in Heaven and Hell
8. Yale’s New MBA Curriculum: “Perspectives,” Not Functions
9. Malthus and the “Dismal Science”
10. Formal Economic Theory: Beautiful but Useless?
11. Why Do Sociologists Lean Left — Really Left?
12. The SWOT Model May Be Wrong
13. Multi-Culturality and Economic Organization
14. What Do We Really Know About Organizations?
15. Academic Insults: CCSM Edition
16. A Nobel for Entrepreneurship?
17. Price as a Signal of Quality
18. Economics: Puzzles or Problems?
19. Another Irritating Practice
20. Market-Based Management
Now, we’re talking small numbers here — the Drudge Report we ain’t — so the ranking is highly sensitive to random events, like an incoming link from Marginal Revolution. Nonetheless, some clear patterns emerge. (more…)
96K on the 96th: Happy Birthday, Ronald Coase
| Peter Klein |
Ronald Coase turns 96 today. In honor of his birthday, the Contracting and Organizations Research Institute (CORI), whose mission and programs grow out of Coase’s work, announces the addition of the 96,000th contract to its online, full-text searchable database of contracts. Writes Director Michael Sykuta:
December 29, 2006, marks the 96th birthday of Professor Ronald Coase, the Nobel Prize winning economist whose pathbreaking work on transaction costs and property rights continues to inspire CORI’s vision and programs. Professor Coase has been more than just a intellectual inspiration for CORI, having supported CORI’s early development with contributions of his time and resources and having served on the Academic Advisory Board.
December 29, 2006, also marks the day the CORI K-Base reached 96,000 contracts, an appropriate milestone on this important day in the history of economic thought and the history of CORI. And we’re not finished growing! In fact, we’re just getting started on a new phase of expansion to make the CORI K-Base an even more valuable resource to reduce the transaction costs of doing research on the economic system and of doing the business of contracting.
Yale’s New MBA Curriculum: “Perspectives,” Not Functions
| Peter Klein |
Several wire stories and bloggers are reporting on Yale’s new first-year MBA curriculum. Increased study-abroad requirements are getting the most attention, but the reorganization of the core curriculum may be more significant. Says Yale:
In the last thirty years, while the management profession has changed significantly, management education has not. Most business school curricula remain compartmentalized by discipline — Marketing, Finance, Economics, and so forth. This model made sense when a successful career was characterized by vertical advancement in a single field within a large, functionally divided corporate bureaucracy. But today, managerial careers cross the boundaries of function, organization, and industry, as well as cultural and political borders. Even managers in large organizations must be entrepreneurial in the sense that their success depends on their ability to synthesize disparate information, analyze competing functional priorities, and draw together and coordinate resources and individuals in a context that is often fluid and decentralized.
Now, [Yale’s School of Organization and Management] is breaking down traditional management disciplines just as contemporary organizations blur the distinctions among management functions. Rather than teaching management concepts in separate, single-subject courses like Finance or Marketing, Yale’s approach teaches management in an integrated way — the way in which most managers must function every day to achieve success.
Make and Buy II
| Peter Klein |
We discussed earlier an emerging literature on dual sourcing or “make-and-buy” decisions. Why do firms simultaneously make a particular input and buy some quantity of this input on the open market? The CCSM featured another paper on this topic, Ranjay Gulati and Phanish Puranam’s “Complementarity and Constraints: Why Firms Both Make and Buy the Same Thing.” (Neither author could make it to Copenhagen, unfortunately, but Tobias Kretschmer gave a fine presentation on their behalf.) The paper presents a simple model in which firms choose plural sourcing because of external complementarities (to mitigate opportunistic behavior from an external supplier or to benchmark the supplier’s performance), capital constraints (that prevent the firm from internalizing all purchases of the input), exit costs (that prevent the firm from outsourcing as much as it would like), and other factors.
A general implication is that theories of optimal or first-best modes of organization may have limited explanatory power in a world of high transaction costs. Seemingly inefficient governance structures may be second-best solutions to capital constraints, regulatory barriers, bargaining problems, and other frictions. Understanding these constraints, and the processes of experimentation, learning, and adaptation that work around them, should be high on the organization theorist’s agenda.
CCSM: Reflections on Day One
| Lasse Lien |
Nicolai recently accused me of being overly positive, and he also committed me to providing real-time reports from the CCSM. So here goes my attempt to display my dark side.
We started out Tuesday with Jay Barney identifying Nicolai’s advantage as his sauce (a TCE sauce, presumably) and advising that the sauce should be bottled (see below). Next the CEO of Lego asked us what would be missed if we — or our organizations — died tomorrow. This produced some unorthodox facial expressions among a lot of the academics present, myself included. Next Peter Lorange of IMD advised businesses to keep things simple, followed by José Santos arguing that firms should become meta-national. I’m not going to take sides, but neither being or becoming meta-national strikes me as particularly simple. This was followed by an over lunch talk by the US Ambassador, a session I couldn’t attend due to neurosis about my own presentation.
We moved on to a discussion of the scientific progress in strategic management. The presentations here ranged from arguing that by way of analogy we are moving beyond the stage of the standard model of particle physics (the R2 of the standard model is so large that it would take a page or so to write down the number), to Peter Abel telling us that knowledge accumulation in strategic management is not significantly different from zero. We then went into paper sessions, were in my opinion we proved both of these assessments wrong. I cannot summarize all the papers presented in the session, but my feeling is that the average quality of the papers presented was at least as high as in the bigger conferences, such as AoM and SMS, but with a much lower variance. So there goes my attempt to come across as negative. . . .
The Foss Sandwich Shop
| Peter Klein |
Our first report from the CCSM is a humorous one. Jay Barney opened the conference with a plenary address offering an RBV approach to “strategic renewal.” As this was a practitioner-oriented session, and some audience members may have been unfamiliar with the VRIO framework, Jay began by analyzing the “Nicolai Foss Sandwich Shop,” identifying factors that might be sources of sustained competitive advantage. (Best candidate: Nicolai’s great-great-great-grandmother’s secret sauce.)
The example was obviously a joke (Rich Makadok’s attempt to sing the Foss Sandwich Shop jingle helped establish the mood). And yet, later in the afternoon, we discovered from our blog stats page that at least two web surfers had found O&M by searching for “Nicolai Foss sandwich.” Looks like lots of people are after that secret-sauce recipe!
Four Theories of the Firm
| Peter Klein |
This week in my PhD course, “Economics of Institutions and Organizations,” we discussed Bob Gibbons’s paper ”Four Formal(izable) Theories of the Firm” (JEBO, 2005; working-paper version here). Lest readers think I oppose formalization per se, let me take a moment to strongly recommend this paper, which provides an excellent summary and synthesis of several critical issues in the economic theory of the firm. (This review is also pretty good.) While the paper can be read profitably even without working through the mathematical models, Gibbons’s training in formal theory was obviously an asset in sorting out the similarities and differences among theories, harmonizing the diverse and sometimes-confusing terminology in this literature, and identifying the core assumptions of various approaches.
Gibbons distinguishes among four theories of the firm: rent seeking, property rights, incentive systems, and adaptation. Rent seeking is his label for TCE as expressed by Williamson and Klein, Crawford, and Alchian (1978). Students find the formulation of TCE in rent-seeking language, a la Tullock — “individually optimal (but socially destructive) haggling over appropriable quasi-rents” — useful and informative. Gibbons also provides an excellent discussion of the differences between TCE and the property-rights approach, showing that Grossman, Hart, and Moore’s model is not “a formalization of Williamson” (a distinction also emphasized by Williamson in his 2000 JEL piece and by Mike Whinston here and here). (more…)
How Long Is Long, and How Short Is Short?
| Lasse Lien |
Are spells of market leadership long or short? A Chandlerian will argue that they tend to be long, while a Schumpeterian will argue that they tend to be short. But what is long and what is short? This is a special case of a fairly frequent problem in empirical research, in which the ability to decide is limited by the lack of a clear benchmark. In a forthcoming AER paper John Sutton addresses this problem in a way that seems potentially useful in many situations with similar characteristics (testing the RBV is but one example).
What Sutton does is define a benchmark which is neither long or short. How? Essentially he compares the length of actual market leadership spells to what one would expect if market share changes followed a random walk (given the initial market share gap and a measure of the industry specific volatility in market shares). This benchmark is neither long or short in the (more…)
An Organizational Routines Bloffer
| Nicolai Foss |
Here is a blog offer: Teppo Felin and I have written “Organizational Routines: Historical Drift, A Course Correction, and Future Directions,” and if you mail me at njf.smg@cbs.dk, I will be happy to send you a copy. Here is the abstract:
Organizational routines and capabilities have become key constructs not only in evolutionary economics, but more recently also in business administration, specifically strategic management. In this essai we discuss the historical origins of the notion of routines, and highlight some of the theoretical and definitional drift associated with the notion of routines over time. In parallel we also explicate some of the underlying theoretical problems of routines (and related concepts); problems such as the lack of clarity on the origins of routines, and the more general need for micro-foundations. We argue that individual-level considerations deserve more attention in extant work — we in effect call for a course–correction in work on organizational routines — and we argue that evolutionary economics and strategic management should aim to build micro-foundations related to understanding the origins of routines.
Management Theory and the Social Sciences
| Peter Klein |
The theme for the 2007 meeting of the European Academy of Management (Paris, 16-19 May) is “Current Management Thinking: Drawing from Social Sciences and Humanities to Address Contemporary Challenges.”
Researchers in management are invited to join us in Paris to reflect on the roots of Management, both as a scientific discipline and as a practice. In particular, Management’s focus on organisational performance is one of the critical underpinnings that transform the discipline’s borrowings from established social sciences into an autonomous field of academic investigation. This raises questions about the degree of subordination vs. emancipation of Management vis-à-vis the basic disciplines from which it draws.
Of course, the relationship between management theory and its core academic disciplines — economics, sociology, and psychology, primarily, but also history, philosophy, and political science — are key themes of this blog.
Here is the call for papers. Submissions are due 2 January 2007.
Management by the Numbers
| Peter Klein |
Many principles of “scientific management,” such as Harold Geneen’s concept of “management by the numbers,” are considered outdated, remnants of the Big Science era of the 1960s and early 1970s (the Cold War, the Apollo Project, conglomerates, etc.). Today’s management theorists and practitioners favor more holistic, less quantitative, and presumably more “dynamic” approaches. Organizations should be flexible, “lean and mean,” and focused on people and processes, not numbers.
The newest issue of Strategic Organization (4:4, November 2006) features a paper challenging this conventional wisdom. In “The Power of Numbers in Strategizing,” Jean-Louis Denis, Ann Langley, and Linda Rouleau defend the use of quantitative analysis.
This article draws on a detailed case study of a complex decision process in a public healthcare system to consider the role and potential power of numbers in strategizing. Because of their association with precision and accuracy, numbers may seem at first sight to be unlikely tools for decision making in contexts characterized by ambiguous goals and diffuse authority. Yet in the case described in this article, managers successfully mobilized a system of numbers to make an extremely controversial strategic decision. . . . Though contested, numbers can under certain conditions come to acquire and provide authority in organizations where power is diffuse. This is most likely when the number systems enable the reconciliation of diverse values and interests, when they are embedded in shared systems of meaning, and when they are coupled with and activated by particular micro-practices that support the legitimacy of their promoters as disinterested advocates for the collective good.
Despite references to “shared systems of meaning,” numbers as social constructs, power relations, “pluralism,” and the like — which might seem to warrant inclusion in our Pomo Periscope series — the paper provides a useful overview of the basic issues and some interesting case discussion.
NB: Watch out for some numbers.
Foss, Klein, Kor, and Mahoney on Entrepreneurship
| Nicolai Foss |
As readers of O&M will know, Peter and I are highly sympathetic to subjectivist economics, mainly Austrian economics, and both take an interest in entrepreneurship and the theory of the firm. Yasemin Kor is an expert on the RBV and top management, and former O&M guest blogger Joe Mahoney is, of course, an expert on the RBV and the theory of the firm. This makes, we think, for an excellent author team. Thus, we have collaborated in writing a paper, “Entrepreneurship, Subjectivism, and the Resource-based View: Towards a New Synthesis.” Here is the abstract:
This paper maintains that the consistent application of subjectivism helps to reconcile contemporary entrepreneurship theory with strategic management research in general, and the resource-based view in particular. The paper synthesizes theoretical insights from Austrian economics and Penrose’s (1959) resources approach, arguing that entrepreneurship is inherently subjective and firm specific. This new synthesis describes how entrepreneurship is manifested in teams, and is driven by both heterogeneity of managerial mental models and shared team experiences.
Enjoy!
Economics of Department Stores
| Peter Klein |
Speaking of diversification, decentralization, and the effective use of local knowledge, Lynne Kiesling offers some interesting commentary on the economics of department stores. Department stores have been doing well in the last few years. Notes Lynne:
A retail business model originating in the late 19th century, the department store for decades epitomized elegance, convenience, ubiquity of options. Then in the 1990s the department store fell on hard times as nimble, smaller retailers struck better production and/or procurement contracts, had more direct contact with the preferences of consumers, or were able to offer niche products to enable consumers to craft their own, individual, modern images. . . .
I am not convinced that the large department store that is managing many brands and a national image can be more nimble than a specialty store, and nimbleness is what a department store will require to become a successful complex adaptive system.
Again, we have a problem of selective intervention. Imagine a department store that operates like a shopping mall, providing space and transaction management for individual vendors, and centralizing particular functions (marketing, sales, customer support) only when doing so generates net gains. Amazon.com and Ebay have shown how such a model can work in virtual space. If equally decentralized, why can’t a department store be as good — as a complex adaptive system — as a set of specialty retailers?
An RBV Approach to Conglomerate Diversification
| Peter Klein |
The resource-based view of the firm has spawned a vast literature on corporate diversification. Inspired by Penrose (1959) and Rumelt (1974), this literature has emphasized the benefits of related diversification over expansion into industries that are not good fits for the firm’s current portfolio of resources. Unrelated or conglomerate diversification is typically viewed, within the RBV, as an anomaly, either a mistake (as in the conglomerate merger wave of the 1960s) or pure luck (those few conglomerates, such as GE, that are consistently high performers). Of course, relatedness is difficult to define and measure consistently, and the kinds of relatedness that presumably matter for firm performance are not captured well by conventional measures of inter-industry relatedness (see this paper for details). There is evidence that conglomerate diversification can add value by creating internal capital markets (see here and here), but this approach has little to do with resources and capabilities. (more…)
Another Cost of Selective Intervention: Convincing the Market
| Peter Klein |
Nicolai blogged recently on Williamson’s concept of the “impossibility of selective intervention.” Williamson asks why a large firm cannot do everything a collection of small firms can do and more. In princple, a set of projects could be combined into a single firm, with the firm’s management promising not to interfere with individual projects unless doing so would generate net gains. In this way, a firm could have responsibility an almost unlimited set of projects, each of which would be at least as profitable as it would be as a standalone entity. What, then, explains the limits to the firm?
Williamson’s answer has to do with the difficulties of making such a commitment credible. Project managers will not believe the firm’s promise not to interfere and will take value-reducing actions to protect their own returns and asset values. (Williamson identifies “asset malutilization” and “accounting contrivance” as specific problems; see Nicolai’s post for details.)
A story in today’s W$J on Blue Moon beer raises another issue. Even if central managers can convince division heads or project managers that they will not engage in opportunistic behavior, they may be unable to convince buyers, suppliers, or other market participants. Here’s an example: Blue Moon is a popular “craft,” or niche, beer that appeals to high-end, quality-conscious consumers. Such beers are typically produced locally, in small quantities, and marketed as “micro-brews.” The Journal piece explains how Blue Moon’s marketing department goes to great lengths to hide the fact that the beer is actually made by Molson Coors, North America’s third-largest brewer. A similar example is Chipotle, a restaurant chain popular with the young and trendy (and the not-so-young and even-less trendy — I love it!), which before going public was majority owned by McDonald’s. The fact that such niche products would be regarded, by their target demographic, as “tainted” were their parentage known, suggests that market participants do not believe that corporate parents can manage small subsidiaries without interference. The market, it seems, agrees with Williamson that selective intervention is a “myth.”
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