Rewriting Management Theory

An excellent provocative piece by Schumpeter in The Economist in December challenged four decades of orthodoxy in management theory. I think he has a point.

Schumpeter claimed that sometime around 1980 – the time of the great wrong turning as far as I am concerned – some sort of consensus emerged in business about the key factors to understand and master. These factors then spawned plenty of literature, even more management good practice and justification for pay rises, and even more obscene invoices from management consultants.

The four pillars are claimed by Schumpeter start with the inevitability of mounting competition. Better information and mobility and fewer business barriers were supposed to drive an age of competition, where you either compete and win or are swiftly devoured. Like the other pillars, this is a convenient story for consultants and senior leaders. They could justify rounds of firing staff, constantly keeping people on age, and vast rewards for staying in business.

But the evidence suggests otherwise. One of the most remarkable trends in the last fifteen years, especially in the US, has been the reduction in competition in most industries, allowing leaders to squeeze margins upwards and enjoy a sustained oligopoly. The Economist argues sometimes that reversing this trend would be an excellent mantra for policymakers, via challenging regulations and other hidden advantages for incumbents.

More and more businesses are built around the logic that sustainable success requires a defensible monopoly. Peter Thiel’s Zero to One argues this, and firms like Google have developed one, and plotted moon-shot investments focused on creating others. Businesses like Tesco, embracing competition while “piling it high and selling it cheap” have become rarer and many have struggled.

The second pillar is that we are in the age of the entrepreneur. Chistensen quotes examples of disruptive innovations and Chan and Mauborgne look for Blue Ocean strategies, and all businesses are told to follow the model of disruption or suffer ignominious deaths.

Well, again, evidence works the other way. Playing defence has worked very well for many – look at pharmaceuticals as an example of a cozy industry that has thrived for a long time by protecting privileged positions and preventing innovation by others. True, Amazon and Apple are great examples of successful disruptors, but the bankruptcy courts hide the bodies of countless failures. An unusual number of the world’s top 100 companies have been in the list for a generation or longer.

The third pillar is the need and inevitability for speed. Technology ups the pace for everyone, and many leaders are constantly stressed. Financial market makers now look to trade in microseconds. Because of competition and entrepreneurs around every corner, the slow will die, or so the theory goes.

On this one, I think the evidence is more mixed, but Schumpeter still has a point. Speed as a goal does not usually work, because someone else will soon run faster. The successful strategy is the one that seeks to control the pace, the one that owns the clock and forces time pressure on others. Time is the strongest weapon of the dealmaker. Pace is something to use or manage, not to seek or to succumb to.

The fourth pillar is the one that has broken most spectacularly recently. We had been led to believe that globalisation was inevitable and irreversible. Successful businesses had to find ways to think global and act local, to satisfy customers in multiple markets and to build flexible supply chains.

Once again, this suited the consultants and megalomaniac bosses, who could exploit larger cakes, greater uncertainty and grander scale. But Trump isn’t the first to signal a pause in the wave of globalisation, and to punish those who may have gone too far too fast and left themselves vulnerable to a backlash.

This belief in perfect markets and structures favouring constant growth and innovation (and rising inequality too) was always rather naïve, as Schumpeter has shown. He also leaves an answered question about what core management theories might replace it?

I have something of an answer, based on one trusted model and one pet idea of my own.

The trusted model is Porter’s five forces. An industry, and many other situations, can be assessed for its attractiveness by analysing the degree of internal competition, the power of buyers and suppliers, the potential for substitution and barriers to entrants.

Essentially, the five forces determine how much gunge is in the works of the perfect model of competition, entrepreneurialism, pace and globalisation. The more gunge, the better the chance of profits for longer.

Some sectors have inherently more gunge than others. Markets like healthcare, where information cannot be perfect, have gunge, and it is a mistake for the state to pretend these can be fully privatised and treated like perfect markets. As Thiel says, it is in the interest of managers to maximise the gunge and for investors to seek out gunge.

There are good ways to create gunge, such as Amazon’s or Google’s network effects. But there are bad ways too. National protection, corruption, excessive regulation and lack of transparency all create gunge, and lobbyists work hard to add to it.

Linked to this but starting from the issue of incentives is something I named the 10,001 customer problem. Many situations have 10,001 customers. I can improve my marketing and pull in more of the 10,000. Or instead I can focus on the one. The one might be an industry regulation, or a key raw material or a tax treatment.

At a micro level, as an individual I can look widely at my productivity, motivating my staff, or at creating something brilliant. Or instead, I could focus solely on keeping my boss off my back. The boss is the one, while everything else is the 10,000. Many people have built a lazy but successful career doing nothing but building boss resilience.

In the same way, a politician can choose to build an authentic platform to benefit the people and then sell it to them. But it might be easier to gerrymander boundaries, restrict voting, peddle a few slogans and put the opposition and antagonistic media in jail. I know the Mr. Putin understands all about the 10,0001 customer problem! Mr. Trump might understand it too: certainly many of his Republican congressmen do.

10,001 is a problem because progress comes from the 10,000, but it is usually easier and more successful to focus on the one. A smart boss will look for gunge and how to grow it, while pretending to support the naïve world of free competition and creativity.

These two related principles might offer part of a rather cynical answer to Schumpeter’s question – but Schumpeter is nothing if he is not cynical, so he might like it. It also shows a way forward. As voters, employees and honest policymakers we can look for ways to force attention on the 10,000 and the removal of gunge. And as individuals, we can preach the same, even do the same when we can, but have half an eye to the one as well.