A New Manifesto for Management

By Professor Sumantra Ghoshal (Sumantra teaches on the Senior Executive Programme)

Why do corporations elicit such powerful love-hate responses? On the one hand, amid the decay of influence and legitimacy of other institutions – such as states, political parties, churches, monarchies or even families – the corporation has emerged as perhaps the most powerful social and economic institution of modern society. Versatile and creative, the corporation is a prodigious amplifier of human effort across national and cultural boundaries. Corporations, not abstract economic forces or governments, create and distribute most of an economy’s wealth, innovate, trade and raise living standards. Historically, they have served as a pervasive force for civilisation, promoting honesty, trust and respect for contracts. As the market sphere has grown to annex areas such as health and sports, companies loom even larger in the lives of individuals. People look to them for community and identity as well as economic well-being.  

Yet, corporations and managers increasingly suffer from a profound social ambivalence. Hero-worshipped by the few, they are deeply distrusted by the many.   People are right in their intuition that something is wrong. But this is not because large corporations or management are inherently harmful or evil. It is because of the deeply unrealistic, pessimistic assumptions about the nature of individuals and corporations that underlie current management doctrine and that, in practice, cause managers to undermine their own worth.

In their day-to-day actions and choices, the hardest driving of today’s managers are conforming to theories to which the real ‘real world’ no longer correspond. To the extent that conformity is unconscious and the assumptions behind the theories untested, the theories are self-fulfilling and therefore doubly debilitating. It is time to expose the old, disabling assumptions and replace them with a different, more realistic set that calls on managers to act out a positive role that can release the vast potential still trapped in the old model.

The new role for management breaks from the narrow economic assumptions of the past to recognise that:

• Modern societies are not market economies; they are organisational economies in which companies are the chief actors in creating value and advancing economic progress

• The growth of firms and, therefore, economies is primarily dependent on the quality of their management

• The foundation of a firm’s activity is a new ‘moral contract’ with employees and society, replacing paternalistic exploitation and value appropriation with employability and value creation in a relationship of shared destiny.

To understand why rethinking is necessary, start by looking at what happened to the corporate world in the last two decades. Driven by vociferous shareholders and global competition, managers have concentrated on enhancing competitiveness by improving their operating efficiencies. Managers have enlisted an array of techniques such as total quality, continuous improvement and process re-engineering to this end.   Firms have cut costs, eliminated waste, focused, outsourced, downsized, let go and generally pared themselves to the bone. The result has been victory – of a sort. Shareholder returns (and senior executives’ pay) have, in many cases, soared. Value has been extracted, but at what price?

Explicit or implicit past contracts with both employees and suppliers were broken. Employee loyalty and commitment have been shattered. So has management confidence in its ability to create instead of cut. Some companies, however, have never accepted this logic of auto-dismemberment. In the United States, companies like GE, Goldman Sachs and Oracle have shown no fear of diversity, no timidity about growth.   Continuously proliferating new products and technologies, they seem unfazed by the things that most companies find so difficult: innovation, organic expansion, creating new businesses. In Europe, BP has spearheaded a fundamental restructuring of the oil industry, elevating itself into the supermajor category. These companies have created more shareholder wealth than most break up artists by marching to a drum that downsizers can’t hear.   They have also grown, expanded their geographic reach, and global market share, and created   an international environment and external reputation that has made them the preferred employers of the best human talent.

Are these exceptions that just prove the rule?   Or do there companies know something that others don’t? The answer is that they have escaped the deadly pincer of dominant theory and practice in which other companies are crushing themselves to bits.

The top jaw of the pincer is the doctrine by which managers run their companies. Two generations of top managers have learned to frame their task through the viewfinder of the three S’s: crafting strategy , designing the structure to fit and locking both in place with supporting systems . In its time, the strategy-structure-systems trilogy was a revolutionary discovery. Invented in the

1920s by Alfred Sloan and others as a technology to support their pioneering strategy of diversification, it served companies well for decades.

But the ‘real world’ changed. The strength – and fundamental weakness of the classic strategy-structure-systems model was the primacy it gave to control.

In the world that today’s companies operate in – a world of converging technologies and markets, swirling competition, and innovation that can outdate established industry structures overnight – machine-like systems of control aren’t helpful. In a situation where the most important corporate resources are not the financial funds in the hands of top management but the knowledge and expertise of the people on the front lines, they are downright unhelpful. To say that they stifle initiative, creativity and diversity is true – but that was their point. They were designed for an organisation man who has turned out to be an evolutionary dead end.

The second jaw of the pincer in which companies are gripped is theory. Instead of providing remedies, academic prescriptions mostly have tightened the squeeze on managers and companies.   They are part of the problem. Consider two strands of theory that have dominated managerial discourse, both academic and practical, for the past decade.

The first is Michael Porter’s theory of strategy, grounded in industrial organisation economics. Crudely, under Porter’s theory, the essence of strategy is competition to appropriate value.   Companies strive to seize and keep for themselves as much as they can of the value embodied in the products and services they deal with, while allowing as little of this value as possible to fall into the hands of others.

The difficulty is that, in this view, the interests of the company are incompatible with those of society. For society, the freer the competition among companies, the better. But for individual firms, the purpose of strategy is precisely to restrict the play of competition to get as much as possible for themselves. To do their jobs, managers must prevent free competition, at the cost of social welfare. The destruction of social welfare is not just a coincidental by-product of strategy; it is the fundamental objective of profit-seeking firms and, therefore, of their managers.

The second influential strand of theory addresses a very basic question. Why do companies exist? The answer provided by most economists is so straightforward that it appears compelling; companies exist simply because markets fail. Accept this and it’s only a short step towards the dangerously misleading belief that markets represent some sort of ideal way to organise all economic activities. According to ‘transaction-cost economics’, the dominant branch of theorising on this subject, a company is an inferior substitute for markets. Oliver Williamson, a key contributor to one strand of this theory, refers to companies as the organising means “of last resort, to be employed when all else fails”. Markets fail, Williamson presumes, because people are weak. It is only because we, as humans, are limited in our ability to act rationally and because at least some of us are prone to acting ‘opportunistically’ that we need organisations to save us from ourselves.

Unfortunately, the practical consequence of these two theories is to make managers not architects but wreckers of their own corporations. What they have in common, apart from their narrow, instrumental and largely pessimistic view of human enterprise, is an emphasis on static rather than dynamic efficiencies. Static efficiency is about exploiting available economic options as efficiently as possible – making the economy more efficient by shifting existing resources to their highest-valued use.   Dynamic efficiency comes from the innovations that create new options and new resources – moving the economy to a different level.

When in a hole, the first thing to do is to stop digging. The outlines are beginning to take shape of a different management model, based on a better understanding of both individual and corporate motivation. If downsizing, cost-cutting, and ‘getting lean and mean’ were the mantras of the past decade, the desire for growth and renewal will be the major concern of the next.

Start by turning the conventional justification for the existence of the company around: markets begin where firms leave off. As Nobel laureate Herbert Simon has put it, modern societies are not primarily market but organisational economies. That is, most of their value is created not by individuals transacting
autonomously in the market, as in the economists’ ideal, but by organisations involving people acting collectively, with their motives empowered and their actions co-ordinated by their companies’ purpose.
Far from destroying social welfare, the rise of the corporation over the past century has coincided with a sustained and unprecedented improvement in living standards, fuelled by the ability of companies to enhance productivity and create new products and services. Indeed, the clearest evidence for Simon’s
contention lies in a strong positive correlation between the relative prosperity of an economy and its quotient of large, healthy companies. Growing, efficient companies help create growing, efficient
economies. Not only is the premise of a fundamental conflict between corporate well-being and social welfare wrong; the reality is exactly the reverse.

In terms of static efficiency, much of what happens inside a company is inefficient. That’s its point. It exists precisely to provide a haven and (temporary) respite from the laws of the market in which humans can combine to do something that markets aren’t very good at: innovating. Companies create fresh value for society by developing new products and services and finding better ways for providing existing ones.

Markets relentlessly force the same companies eventually to ‘hand off’ most of the newly created value to others, increasing, not diminishing, social welfare. In this symbiotic coexistence, they jointly drive
the process of ‘creative destruction’ that the Austrian economist Joseph Schumpeter identified 60 years ago as the engine of economic progress.

Reversing the logic prises companies from the crushing hold of the pincer, with liberating effect for their managers and employees. The difference between old and new is not just economic but also philosophical. In an organisational economy in which the essence of the company is value creation, the corporation and society are no longer in conflict. They are interdependent, and the starting point is a new moral contract between them.  In this framework, management too wins back its legitimacy: not only is the ‘destroy it to save it’ nightmare banished, but the success of the company and the economy as a whole can be seen to depend on how well management does its job.   Individual inventors and entrepreneurs develop new products and, sometimes, new businesses. A vast majority of new products and new businesses, however,
are created by established organisations.

Managers build organisations, the embodiments of an economy’s social capital – a factor that is beginning to be recognised as perhaps the key driver of economic growth. As companies change focus from value appropriation to value creation, facilitating co-operation among people takes precedence over enforcing compliance, and initiative becomes more valued than obedience. The manager’s primary task is redefined from institutionalising control to embedding trust, from maintaining the status quo to leading change. As opposed to being the designers of strategy, managers take on  the role of establishing a sense of purpose within the company. Defined in terms of how the company will create value for society, purpose allows strategy to emerge from within the organisation, from the  energy and alignment created by that sense of purpose. As opposed to playing with the boxes and lines that represent the company’s formal structure, managers focus on building the core organisational processes that would release the entrepreneurs held hostage in the frontline units of that structure, integrate the resources and capabilities across those units to create new combinations of resources and knowledge, and create the stretch that would drive the whole organisation into continuously striving for new value creation. And, from being the builders of systems, managers transform into the developers of people, helping each individual in the company become the best he or she can be. The three S’s of strategy, structure and systems that were at the core of the managerial role give way to the three P’s: purpose, process and people.