If extensive knowledge is possible, then bosses might be able to manage big companies well. If not, then centrally planned companies will be inefficient. Sure, perhaps competition will eventually weed out egregious incompetence, but market forces might not grind so finely as to eliminate all inefficiency
Pointer from Mark Thoma.
I cannot emphasize enough how much I agree with this. Because I spent 15 years in business, I got an opportunity to see large organizations close up. I saw that in a large business, the top management cannot keep track of more than about three major initiatives at a time. I saw that compensation systems have to be frequently overhauled, because employees learn to game any system that stays in place for more than a couple of years. I saw the “suits vs. geeks” divide, as specialists in information technology or financial modeling had difficulty communicating with executives who had only general knowledge.
The notion of large, efficient organization is an oxymoron. If you think that large corporations have overwhelming advantages, then you have explained why IBM still dominates the computer industry, while Microsoft and Apple never really got amounted to much of anything. I like to say that if you are afraid of large corporations then you have never worked for one.
Of course, large corporations do exist. That is because as clumsy as they are, they can still be less clumsy than the alternative, which is to break a corporation into a network of contractually related divisions. Nobel Laureate Oliver Williamson tried to address the issue of when to expect a market and when to expect a hierarchy. His answers do not really speak to me, but I do not claim to have better ones.
I do think that government often tilts the scale in favor of large organizations. The high fixed cost of regulatory compliance is one factor. Government has been a key customer in industries like aerospace, information technology, and finance, and the fixed costs of selling to government are very high, because of all of the hoops that you have to jump through.
Two quick comments:
1. I think the clumsiness of large firms is mitigated a bit by a legitimate advantage they possess in HR. Name recognition and greater opportunities for advancement attract more candidates, allowing them to pick from a deeper labor pool. The result is that you generally have smarter, more competent, more knowledgeable people than those in equivalent positions in a small firm. Nonetheless, I still agree with the gist of what you’re saying.
2. Regarding selling to the government, personal connections play a big role, too. Much gets made of the revolving door between, say, the Fed and Wall Street. In my experience working for a government contractor, there’s a revolving door between many government agencies and the vendors that serve them as well.
I agree with the post and Jeff’s comments. I’ve recently moved to a small company after 30 years with Fortune 50 firms, the last 10 in senior positions. In general the quality of people is a little higher in larger firms (although plenty of nepotism), since the pay, prestige and “perceived” job security is somewhat higher. They’re also very good at marketing and brand awareness, which at least to some extent makes their direct sales activity somewhat easier. Finally, they are perceived by clients as the less risky choice for large projects or purchases, given the widespread belief in their large capacity as well as their deep pockets should legal action ultimately become necessary. Large contracts are seldom broken down and awarded piece-meal, both to consolidate the supply chain (lessening the client’s internal cost to manage the contract) and to have “one throat to choke” in the event of a problem.
But large firms are intensely frustrating, often soul-destroying places to work. In my particular case, I’ve usually worked for divisions that weren’t “core” to the parent company which meant that executive leadership had essentially no idea how to manage or support us. They would typically impose the same processes and toolsets in use by the rest of the company (often of very poor quality in their own right) which were wholly unsuitable for us, and in turn severely hampered our ability to win work and / or execute it at good margins. In many cases, the executive lacked the ability to even properly measure our business results. I know that sounds ludicrous; it’s Business 101. Yet the internal accounting is often so convoluted that it’s useless for management purposes, and the executive had such a poor understanding of the business that they constantly imposed the wrong metrics. The right metrics are there, but they’re buried in an avalanche of useless crap autogenerated by whatever the company’s accounting platform spits out.
Also, large firms are dominated by centralized “support” services that in effect make business decisions that are best left to the actual business units where the P&L actually resides. This arises from the fact that the leadership of the support units resides in close physical proximity to the company’s executives (CEO, COO and CFO), and have the opportunity to continually lobby for their own particular pet programs. I lost track of the number of initiatives that were going to cut 15% from our overhead with no impact on business ops; I’m pretty sure that if I added them all up we should have cut our overhead by 100%! (/sarc off). But no one ever really measures the impact of these initiatives; sometimes they try but the measurement of such things is very problematic and always neglects unforeseen consequences, especially on things like morale and productivity. Typically, such initiatives merely disperse the cost of performing a given task from the centralized support service (where the reduction can be quantified) to the business units (where it can’t).
Further, executives are in my experience very poorly trained to actually manage a large company. They impose organizational structures (various forms of the matrix are the best example) which they do not really understand, and they don’t “sweat the details” when designing such structures. In many cases they inadvertently design conflict into the fabric of the structure itself, providing contrary incentives for middle managers.
And finally, executives almost always think that they need to “do something” when in fact the company would be far better off if they did nothing at all. There is a constant stream of exhortations, announcements, changes in strategic direction, consolidation, new markets being pursued, demands for “cross-selling”, etc. Of course some of this makes sense, but in my view such decisions are best left to the business units themselves. Hire good people to run each individual business (and each subunit), make sure they have the knowledge and skills necessary for their task, give them clear goals, hold them accountable for results, support and develop them when asked to do so, and then leave them alone to do their freaking job. How hard can that be?
And finally, executives almost always think that they need to “do something” when in fact the company would be far better off if they did nothing at all.
So true in my experience.
Ken R,
Very good comment. And I not only agree, but also have experienced many of the kinds of flaws you highlight here. But for each flaw that you (and Dr. Kling) highlight, there is a known treatment, if not a full remedy. For example, the last paragraph of your comment begins with:
“And finally, executives almost always think that they need to “do something” when in fact the company would be far better off if they did nothing at all.”
You are correct. And it applies to government “executives” to an even greater degree than business executives. I recommend Eli Goldratt’s “The Goal“, as a rewarding read for you and others. It has been around for a long time, so it’s inexpensive. It is a story, an easy read (not technical). And it starts with just your premise – a “manager” who thinks he has to “do something” simply because he’s the one who has the power to do something. But the story continues by explaining why some executives think “they need to do something” and why they are provably wrong in doing so. I highly recommend it.
To the larger issue …
Hayek is absolutely right. Dr. Kling (and perhaps you), not so much. And I suspect Dr. Kling’s “errors” in this as being attributable to not fully accepting Hayek being absolutely right (rather odd).
Beginning with Dr. Kling’s, “The notion of large, efficient organization is an oxymoron.” That statement is incorrect, simply because it is absolute – explicitly that “large” and “efficient” are mutually exclusive concepts with respect to managed organizations. I would certainly agree that large AND efficient business organizations may be rare, but not nearly so rare as one might think. There are all manner of examples of “bad” management. You and Dr. Kling referenced several.
But in all cases that you and Dr. Kling and I might cite, and that have been experienced/observed by others including myself, the “bad management” is reflective and a direct result of management/managers who think their job and role is to control (everything). The central flaw is the myth that centralized control can ever be efficient. Hayek’s lesson is that no one person can possibly have the knowledge to efficiently control everything, even if their designated/assumed power ostensibly allows them to control.
But good managers know that as well. First and foremost, they know and fully appreciate the limits of their own knowledge – that they have knowledge limitations, even if their apparent power vastly exceeds those knowledge limitations. And they only act within the limits of their knowledge, completely irrespective of their assigned/assumed power.
By the way, that characteristic – having the self-control to only act within the awareness of the limitations of one’s own knowledge, irrespective of power – is called leadership. That applies in government as well as business. There are lots of folks with power in both regimes, but much smaller sub-set of them could be considered leaders as I’ve described here.
A book that influenced my perspective on this is one that was a required text in a graduate management course at Santa Cruz many years ago. It is Gerald Weinberg’s, “Becoming a Technical Leader – An Organic Problem Solving Approach”. At the very beginning of Weinberg’s book, he states (I’m paraphrasing):
“Leadership is the act of creating and maintaining an environment where people are empowered.”
Leaders, or “good managers” if you prefer, create and maintain environments. And those environments are where people (other than themselves, with the appropriate specific knowledge) are maximally empowered to act on their knowledge.
“Bad managers” – non-leaders, or even “anti-leaders” – are easily recognizable as those who rely solely on their assigned/assumed power, rather than their knowledge, or the knowledge of anyone else, in an effort to “control”. Bad managers fail to recognize the limits of their own knowledge, and only attempt the expand their own power, and exclude the knowledge of others. Again, true in government as well as business.
But true leaders can and do exist, in both regimes – completely irrespective of largeness. You can easily identify them. They exert their power to control environments only – and that solely in the interest of empowering others. They avoid directly exerting control on people or situations or anything else they know they do not understand and cannot possibly have knowledge of.
A correction …
It was at Santa Clara, not Santa Cruz (sheesh.)
I’m surprised to not see references to http://en.wikipedia.org/wiki/Theory_of_the_firm Coaseian or otherwise.
Technical personnel do not have difficulty communicating with upper management. Upper management has difficulty comprehending complex subjects.
You’re welcome.
I have model in my head where there is an optimal size for producing a good or service. Scale can help in certain ways fixed costs are important on some business not so important in others.