Current Issue • Jan-Jul 2018

The Underappreciated Role of Management

The Underappreciated Role of Management

BY SANJAY KALLAPUR

Professor Sanjay Kallapur underlines the contemporary relevance of the work of business historian Alfred D. Chandler, who showed how management, more than technology, facilitated the rise of large wealth-creating organisations.

Large organisations are the primary locus of wealth generation in modern economies. The late Harvard Business School historian Alfred D. Chandler with his two masterful books, The Visible Hand (1977) and Scale and Scope (1990), was the first to point out the important role of management in the formation of large organisations. Using examples from 19th to mid-20th century business history, Chandler demonstrated that the availability or embrace of technology by itself did not suffice to create profitable and durable organisations. Instead, technology had to be accompanied by investments in the managerial skills of coordination, delegation and evaluation.

The sewing machine, for example, was neither invented by Isaac Merritt Singer, founder of the eponymous company, nor was he the only person to have access to that technology. The technology was available to no fewer than 24 sewing machine manufacturers as a result of a successful patent challenge in 1854. But Singer alone created a sales organisation that ensured a consistently large volume of sales which could then make production economical.

Similarly, the cigarette machine was invented by James Albert Bonsack, but it was James Buchanan Duke, benefactor of the university bearing his name, who commercialised it. Duke built American Tobacco which had a purchasing network, sales organisation and headquarters in New York City to coordinate purchase, production and sales. His company soon came to dominate the cigarette industry.

Managerial activities had to be suited to the technology, however. Duke applied his managerial skills to the cigar industry as well, but hard as he tried, he could not dominate: cigars are hand-rolled one at a time and not suited to mechanisation, and therefore to the scope advantages of coordination.

As these and other examples show, creating the modern industrial enterprise involved three steps: first, an investment in production facilities large enough to reach economical scale; second, investment in marketing, distribution and purchasing to support steady throughput in the production facilities. And third, the creation of a managerial hierarchy, with the related aspects of recruitment, evaluation, control and reward systems, to manage such an organisation.

In his 1977 book, Chandler describes the sophistication of management techniques in great detail. For example, in the 1890s, American Tobacco headquarters in New York would get daily reports from factories, and daily statements of sales by brands and towns. It thereby kept a continuous check on the flow of products from factories to retailers throughout the world. Cost records were detailed enough to show costs per unit running into five decimal points for each brand. Middle managers used comparisons between costs of different factories to evaluate plant managers.

Chandler’s thesis has held up well in the course of subsequent technological changes. In 1987, Nobel Prize winning economist Robert Solow quipped that the computer age was seen everywhere except in the productivity statistics, an observation dubbed the ‘productivity paradox’. As would not surprise followers of Chandler’s work, the resolution to the paradox was that information technology failed to improve productivity until it was accompanied by complementary organisational changes. Brynjolfsson and Hitt (2000, 24) sound like an echo of Chandler when they write: “the business value of computers is limited less by computational capability and more by the ability of managers to invent new processes, procedures and organisational structures that leverage this capability.”

The role of management is underappreciated not just in comparison with that of technology, but also in its own right. This may at first seem counterintuitive. After all, Chandler’s work shows that sophisticated management techniques have been used by world-class companies for over 150 years. Business schools have also been around for almost as long. The University of Pennsylvania started its Wharton School in 1881 and Harvard its Graduate School of Business Administration in 1908. Management consulting has been around at least since University of Chicago Accounting Professor James O. McKinsey started his firm in 1926. One would think that such widespread availability of management knowledge would make good management skills equally accessible to all.

Yet research by the economists Nicholas Bloom, John Van Reenen and their colleagues has shown that there are large and persistent differences among organisations within and across countries in their effective adoption of even basic management techniques such as lean manufacturing, performance monitoring, target setting and talent management. These differences show in performance and strategic success: moving from the bottom 10 percentile to the top 10 percentile of excellence in management practice is associated with a 25% higher growth rate and 75% higher productivity. But achieving operational excellence is a massive challenge for many firms, Sadun, Bloom and Van Reenen (2017) write. Their point is effectively conveyed by their article’s title: “Why Do We Undervalue Competent Management? Great Leadership And Brilliant Strategy Won’t Succeed Without Operational Excellence”. Business schools and businesses alike would do well to focus on the basics of management and the nitty gritty of execution.

For Further Reading

Brynjolfsson, Erik and Lorin M. Hitt(2000). “Beyond Computation: Information Technology, Organisational Transformation and Business Performance.” Journal of Economic Perspectives, 14 (4):23–48.

Chandler, Alfred D. (1977). The Visible Hand: The Managerial Revolution in American Business. Cambridge, Massachusetts: Belknap Press.

——— (1990). Scale and Scope: The Dynamics of Industrial Capitalism. Cambridge, Massachusetts: The Belknap Press.

Sadun, Raffaella, Nicholas Bloom and John Van Reenen (2017). “Why Do We Undervalue Competent Management?Great Leadership And Brilliant Strategy Won’t Succeed Without Operational Excellence.” Harvard Business Review, 95 (5):120–127.

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