Tuesday, December 23, 2008

Managing Our Way to Economic Decline

This is an article in the Harvard Business Review, written by Robert H. Hayes, published in 1980, and reissued in 2007, with a sidebar note by the author.

I can't get access to the full article, but a summary is here. It tends to confirm what I intuit from very limited information. Excerpt:
This new management orthodoxy includes three general categories:

1) financial control focused on profit centers and short-term measurements such as ROI, referred to as management by the numbers, or managerial remote control.

2) corporate portfolio management including quick paybacks and an unwillingness to assume risk, and

3) market-driven behavior that places emphasis on marketing products that are relatively easy to make, rather than making innovative marketable products.

American managements' short-term, control oriented mentality has biased investments towards imitative rather than innovative product designs. In addition, American managers have tended to choose backward integration (or make rather than buy) that in many cases has prevented innovation by locking their companies into outdated technology. Their unwillingness to assume risk has caused a lack of investment in the new manufacturing processes needed to maintain a competitive edge.


Part of the problem was created by the increase in the percentage of corporate Presidents with finance and legal backgrounds and the increase in managers hired from outside the company. Hayes and Abernathy refer to them as pseudoprofessionals. These are people who have no special expertise in any particular industry or technology, but run the company using financial controls, portfolio concepts and a market-driven, follow-the-leader strategy. They attempt to simplify and quantify complicated business situations at the profit center level. This over simplification and emphasis on the separate parts of the company creates a serious problem. Someone at a higher top management level needs to integrate all aspects of the business situation to make informed decisions. Someone who understands the company and the industry, someone who has a holistic or systems view. Someone who can lead innovation and value creation where it did not exist before. Pseudoprofessionals can not do this.
An amusing sidenote is that the editor of the Harvard Business Review writes:

Editor’s Note: This 1980 article, with its scathing and richly documented criticism of U.S. managers’ focus on short-term financial gain at the expense of long-term competitiveness, sent shock waves through American business when it was first published. The inroads that European and Japanese companies have made into traditional U.S. industrial strongholds since then prove its prescience.

Many of the problems raised by the authors have been addressed over the years, as Harvard Business School’s Robert H. Hayes notes in a sidebar written for this issue. But the original article’s call for self-examination and action is still relevant today, as U.S. companies face similar uncertainty and emerging competition—this time from China, India, and other developing economies.

But the sidebar really says that the original criticism have now become the orthodoxy (i.e., orthodox criticism) after initially generating a lot of controversy. Even if some of the issues were addressed after 1980 when the article was written, American management relapsed during the 90s, and has fallen even further behind. Excerpts:
Rereading “Managing Our Way to Economic Decline” 27 years after it appeared, I am struck by how mainstream its assertions and recommendations appear today. Being at the forefront of technology, looking beyond short-term financial results when evaluating investments, focusing on key businesses rather than assembling and managing corporate portfolios, and having managers who understand and are deeply involved in the details of their companies now sound like clichés. So why did the article attract so much attention—worldwide—when it was published? And why did it generate heated criticism?...........

Our call to get back to basics became American managers’ mantra of the 1980s. For a while, companies focused on improving quality, responsiveness, and technological innovation, and America’s competitive situation slowly improved.

Then, the get-rich-quick, bubble mentality of the late 1990s took over, and managers turned their attention from the mundane pursuit of operating excellence to panning for gold in the business opportunities that the “new economy” had created. A few of those opportunities proved profitable, but most did not, and, in the interim, America’s international competitiveness deteriorated anew. So perhaps another call to get back to basics is in order.

Today, however, a mastery of the old basics no longer suffices, because fundamental changes in the world economy have added more items to the list....

PS: If Harvard Business Review publishes an article pointing out the problems with management, then how is it part of the problem? I guess the answer lies in where did the "new management orthodoxy" come from in the first place?