Why Managers Matter Archives

Is there a role for managers in the fast response, rapid change, constant flux VUCA world of business in the digital era? Yes, and they’re more important than ever.

Entrepreneurs invented management for the same reason they pursue innovation of all kinds: to address a need. In the nineteenth century, entrepreneurs created a brand-new form of customer capitalism. They introduced railroad systems, telegraphic communications, mass production and mass distribution, and created huge factories and global supply chains for the first time. The orchestration of these systems to assemble the right combination of inputs and bring them together at the right time, organize the new high speed manufacturing capacity, and to get the output distributed to warehouses, shops, and homes across the newly expanding geography of America represented new levels of complexity that no-one had ever before encountered.

It was a problem to be solved. And so, the entrepreneurs – Rockefeller, Vanderbilt, Carnegie, Roebuck, and many, many more – invented management structures and management processes to solve it. Their management systems were world-changing innovations just as much as their new products and services were. Alfred Chandler, the foremost business historian of the era, called it a management revolution.

The companies Chandler chronicled were market-driven and customer centric. Rockefeller’s Standard Oil brough cheap illumination to America’s new homes, extending days and improving both productivity and the quality of family life. Roebuck’s Sears, Roebuck & Co catalog brought a vast, unprecedented selection of items to those same homes much the same as amazon does today (except that Sears, Roebuck extended credit – “Send no money until delivery!”)

These management models extended into the twentieth century, without much structural change, but the transition from entrepreneurial business owners to salaried professional executives brought a lot of deterioration in the ways in which the models were operated. The new breed of executives turned inwards, examining the efficiency of internal processes more than the effectiveness in the delivery of customer experiences. Cost reduction through process management became the holy grail.

In a self-defeating manner, the executives built bureaucracies to police the internal processes, in layers of management, new compliance functions in legal, finance and HR departments, and a generalized move towards the sclerosis of command-and-control and away from the free-flowing delivery of customer value.

At the beginning of the 21^st century, businesses are discovering that the command-and-control approach of bureaucratic management can’t function in the fast-moving innovation environment of the digital age. The new approach is the Adaptive Entrepreneurial Value Model. Value is the singular focus: that’s value for customers, not to be confused with or intertwined with value for stakeholders or shareholders. The value customers experience is an outcome of the corporation’s singular focus on customers. Entrepreneurial means business conducted with an entrepreneurial orientation, always aiming at improving customers lives, always sensitive to the condition that they’re looking for increased value tomorrow even though they might feel satisfied today, and always exploring and experimenting in the pursuit of innovation.

And adaptive means willing and eager to change in response to new data and new information, about customer preferences, competition, business conditions, regulation, new business partner opportunities, or any and all elements of change that signal an opening for profitable adjustment.

The era of adaptiveness foretells the end of the era of bureaucratic management hierarchies – but not of management per se. The command-and-control format for management doesn’t fit the high-response world of adaptation to new market data, nor do tools like 5-year strategic plans and annual operating plans and budgets. But that does not mean that all firms should radically decentralize and eliminate management in favor of self-organizing agile teams and A.I algorithms. Experimental trials of such approaches, such as holocracy at Zappos and the “bossless” organization at Valve, have ended badly.

In fact, managers are more important than ever – just not in the old command and control way. Rather they are now coordinators and orchestrators, enabling adaptiveness rather than impeding it. This kind of management is a tricky expertise to get right – but it’s vital, and it offers great opportunities to those who can excel in the role.

Peter Klein, who is Professor of Entrepreneurship, and Chair of the Department of Entrepreneurship and Corporate Innovation at Baylor University, is the co-author of Why Managers Matter, a management manifesto that bucks some of the current trendy thinking about lean, flat, leaderless organizations.

A well-functioning management process can change internal production processes, teams and resource allocations as needed in response to external changes in customer demand and marketplace conditions. Professor Klein’s advice is to distinguish between circumstances that call for Mark 1 management (exercising managerial authority and giving instructions) or Mark 2 management (indirect guidance through organizational design).

When there is a high degree of interdependence between people, teams, and tasks, such that it is critical that tasks are highly coordinated, completed at the same time and combined in a highly specific fashion, then management intervention is required, and it will include Mark 1 elements. When production is more modular, when tasks and projects can be completed interdependently, then Mark 2 management can be exercised through a decentralized, flat, and culturally aligned organization. (Professor Klein cited the example of the type of higher education institution where he works; all the professors can design and teach their classes, do their research, and publish their papers and books with a high degree of autonomy.)

He points out, through relevant case studies, that a flexible corporate management structure can be better at adaptation than, for example, a network of independent contractors and suppliers that would be challenged to orchestrate responsive changes to an external change, since each would have a different experience and process it through a different cultural orientation. They wouldn’t co-ordinate as well or as quickly as internally managed teams.

So, management isn’t dead in the digital age. In fact, it’s returning to the co-ordination and orchestration role that Rockefeller and Carnegie and their compatriots originally intended for it – but working with a different set of production machinery.

Entrepreneurial businesses embrace adaptiveness and change, and continuous innovation enabled by flexible and responsive organizations, empowered at every level. That doesn’t mean there’s no role for managers. Inside the corporation, entrepreneurial management co-ordinates the business flow of responding to changing customer wants and preferences, so that resources are allocated and reallocated to the production activities that customers value the most. In fact, management is becoming more important, not less. Professors Peter Klein and Nicolai Foss explain entrepreneurial management in their latest book, Why Managers Matter: The Perils of the Bossless Company (Mises.org/E4B_190_Book), and Peter Klein visits Economics For Business to highlight the key points.

Key Takeaways and Actionable Insights

Management co-ordinates the constant flux of entrepreneurial business.

The essence of the adaptive entrepreneurial organization model is responsive change. Entrepreneurial businesses don’t lock themselves in to 5-year strategies and annual plans. They recognize that markets are in constant flux as a result of changing customer preferences, changing competitive activity, changing technologies, and changing conditions in business channels and in the economy. Change is the normal condition. It’s what Ludwig von Mises termed constant flux.

Management is required inside the firm to adapt and respond to change outside the firm. It’s not possible to manage the change in markets, but it is a necessity to manage resource allocation and productive activities inside the firm.

Management is co-ordination and orchestration, not authority and hierarchy.

We might think of the concept of management in its industrial age guise of authority and hierarchy: some people “higher up” in the organization telling others “lower down” what to do. This kind of hierarchical authority can’t work in the digital network age; it’s too slow to process incoming data from the marketplace and too rigid to quickly or effectively implement newly imagined responses to those incoming data.

But in Professor Klein and Professor Foss’s analysis, management no longer equates to old-fashioned authority and hierarchy. Management is co-ordination: assembling the right resources — both human capital and complementary capital assets such as supportive technologies — in the right combinations (often referred to as “teams” in today’s management language) for the right shared task with the right shared goals. Professor Klein likened this to orchestration — there’s a conductor who guides the orchestra in playing the same symphony together, without telling the individual players how to play their instrument, and leaving the details of implementation to the individuals and their specialized skills.

Some orchestras may have better results than others because their teams have been well-recruited and well assembled and they respond better to management co-ordination. All firms and teams are complex adaptive systems, with emergent outcomes influenced by internal forces, one of which is management.

Management is culture more than authority.

How do managers achieve a better outcome as a result of managing their teams? Professor Klein believes that they institute a successful culture, as opposed to designing an organizational structure. He defines culture in terms of norms, customs and practices — the accepted way (or simple rules) of “how we do things around here”. More specifically, in the customer-centric entrepreneurial firm, “here’s how we plan to facilitate value for our customers around here”. Skilled managers paint the pictures — the “vision”, if you will — in the minds of employees of the customer value standards the firm will achieve, and the customer experiences that the firm will facilitate.

Modern managers are comfortable with and quite expert at adaptation.

The modern managerial culture is a far cry from traditional hierarchical managerial authority. It has the built-in flexibility for adaptiveness to the rapid rate of change in today’s digital business world. A well-functioning management process in a loosely structured organization can change internal production processes, teams and resource allocations in response to external changes in customer demand and marketplace conditions.

In fact, Professor Klein points out, through relevant case studies, such a management structure can be better at adaptation than, for example, a network of independent contractors and suppliers that would be challenged to orchestrate responsive changes to an external change, since each would have a different experience and process it through a different cultural orientation. They wouldn’t co-ordinate as well or as quickly as internally managed teams.

In certain cases, management authority can sometimes be a relevant organizational tool, so long as it is applied in a contingent fashion.

The relevance and usefulness of authority varies by circumstance and business situations. Its usefulness is contingent, and managers must be sensitive as to when to apply authority and in what style.

Why Managers Matter identifies two distinct styles of managerial authority, Mark 1 authority and Mark 2 authority. Mark 1 authority is traditional command-and-control, exerted top down — superiors telling subordinates what to do.

Mark 2 authority is exercised through design rather than command: finding the right person for the task, combining the best-qualified people in teams, and giving them a goal with a wide latitude in their process and implementation in achieving the goal.

An important element of the contingent approach is to empathically identify the subjective preferences of employees. Some will respond well to flexible, open-ended direction that enables them to exercise their own initiative. Others might prefer the certainty of clear direction. One type of salesperson might be highly motivated by a 100% commission remuneration plan, another might feel more secure with a base salary with the potential for an achievement bonus upon exceeding quota.

Professor Klein identifies two broad sets of conditions for the exercise of Mark 1 and Mark 2 authority. When there is a high degree of interdependence between people, teams and tasks, such that it is critical that tasks are highly coordinated, completed at the same time and combined in a highly specific fashion, then management intervention is required and it will include Mark 1 elements. When production is more modular, when tasks and projects can be completed interdependently, then Mark 2 management can be exercised through a decentralized, flat and culturally aligned organization. (Professor Klein cited the example of the type of higher education institution where he works; all the professors can design and teach their classes, do their research, and publish their papers and books with a high degree of autonomy.)

Management is becoming more important, not less.

In a rapidly changing world, where employee attitudes and experiences are very different than in the pre-digital world, and where global markets and their interconnected structures are more uncertain and cyclically unreliable, and where the pace of disruptive technological innovation is accelerating, good management is more important than ever for the success of our economy and our society. Smart managers are needed to find the right balance between operational excellence through established processes and adaptive change through adjustment and experimentation, a balance that business scholars call the ambidextrous organization. It can’t happen without management, and without managers.

Additional Resources

Peter Klein’s book page: Mises.org/E4B_190_Klein

Why Managers Matter: The Perils of the Bossless Company by Peter Klein and Nicolai Foss: Mises.org/E4B_190_Book

Public Affairs book page: Mises.org/E4B_190_PA

Posts

Co-ordination And Orchestration: The New Role For Management In The Digital Age.

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