02 November 2009

Place Holder

I'm feeling some internal pressure building up to blog (or maybe even write) about how Harvard Business School destroyed American business. Basically, it's a story of two post-war trends. First, a belief in planning -- the more massive the better -- as the answer to every problem. Second, the decision of the large foundations -- Ford, Carnegie and Rockefeller -- to pour money into management education so long as it looked "social scientific."

It turned out that these trends left management a little up in the air. Isn't wasn't quite clear what we should be teaching. As a result, a lot of schools hired psychologists and sociologists and focused on what we call micro management (yes, really). Basically, this was human resource management. The problem is that it's never been possible to convincingly (i.e., scientifically) show that any particular hr technique leads to better firm performance. Basically, hr (also called organizational behavior) focused on reducing absenteeism and turnover while increasing what's called "organizational citizenship behavior, which is doing things for your employer that aren't, technically, your job. For example, the person who takes it upon herself to empty and clean the lunch room refrigerator is demonstrating OCB. Frankly, it's all sort of a mess of warring medium-term theories and we can't even say with certainty that employee satisfaction is a good thing for the company.

This left Harvard with a problem. HBS does not see itself as being in the business of churning out middle managers and vice presidents of human resources. It sees itself as being in the business of turning out CEOs whose value is in their ability to lead their company to sustained high returns. Before the focus on planning and scientification, they did this by hiring retired CEOs to come in and tell war stories to the graduating MBA students. This is probably as good a way of teaching strategic management as any, and survives today in the Harvard case study method. But it's very ad hoc and highly unscientific.

The other problem facing Harvard was that there's no obvious place for economists in this new management education. Economists are social scientists, but they assume that over time there are no meaningful firm level differences. All firms, in the long run, are fungible in economic theory. So it's not just that economists don't have much to say about the proper strategy to pursue to obtain sustained high returns, it's that they don't think that there can be any such thing.

All this came to a head in the person of a economics student at HBS name Michael Porter. Porter was studying IO (industrial organization) economics, which is the branch of economics that advises policy makers on how the legal environment should be structured to promote competition within industries, and thus avoid sustained high returns. Porter, true to his training, accepted that firms within the industry would, in the long term, all look identical and thus there was no point on wasting time on firm strategy. But he turned IO economics on its head and started educating executives on how to use lobbying and industry-level devices (e.g., trade associations and collective bargaining agreements to reduce competition within the industry and block entry, allowing all of the established firms in the industry to share sustained high returns. Basically, the Porter school (Porter, by the way, would object to this as an overly simplified summary of his views) teaches that the most important strategic decision made in business is about what industry to enter, after which there isn't much any individual firm can do to set itself apart from its competition. After that, all you can do is work together with your "competition" to try to rig the game at the industry level.

Porter's success at Harvard, and Harvard's success at educating CEOs, seems to me to explain much of what we've witnessed over the last few decades. (Porter published his early and most influential work in the late 70s and early 80s.) The co-dependent corporate state and the corrupt bargains struck by management, labor and government owe quite a bit to the presence, at the top of the corporation, of CEOs educated to think that management consists of rigging the game.


Harry Eagar said...

From the point of view of the managed (never something likely to worry the Harvard Graduate School of Business), the great failing (or one of them) was its enthusiasm for driving down wages to coolie levels.

Labor discipline, they called it in the '80s.

I met the dean in the '70s and while I've forgotten his name, I thought he was an idiot. It was all about service industries then.

Products? We doan need no steenking products.

David said...

Actually, the more common complaint is that management ignores services in favor of manufacturing. For example, just today I received an email for a talk that complained that:

The service sector is the largest part of the US economy and is predicted to be even larger in the future. The field of management has long been focused on the manufacturing sector and largely ignores the unique managerial challenges of service organizations.

Anonymous said...

Hello from Russia!
Can I quote a post "No teme" in your blog with the link to you?

David said...

Okay, I suppose,

Harry Eagar said...

I have no problem with paying attention to services, but the dean wrote a book about that and included railroads.

While railroads do provide a service, most people treat them as heavy industry.

Anyhow, by his definition, almost everything was service.

David said...

Actually, some marketers argue that all businesses should see/position themselves as providing a service.

Harry Eagar said...

True, but then it becomes odd that one would select out 'service businesses' as the future of the economy.

I don't think the Harvards thought these things through very carefully.