Corporate Layoffs Occur At Firms That Don’t Prioritize Customer Value Creation.

Recently (Dec 5, 2022), Pepsico announced that it would lay off hundreds of workers “in headquarters roles”. The lay-offs memo was signed by the CEO of PepsiCo Foods North America and the chief human resources officer of Frito-Lay North America. These executives stated their purpose was to “take steps again to simplify the organization so we can operate more efficiently”. Why, one wonders, were they not operating more efficiently prior to this announcement? Presumably, more efficiency is a good thing, and should be sought at all times.

Pepsico is not alone. A December 4, 2022 entry on intellizence.com has a long list of layoffs at companies including H&M (1,500 layoffs), United Furniture (2,700 layoffs), Alphabet (10,000), Hewlett Packard (6,000), Cisco (4,000), Amazon (10,000), Meta (11,000), and Credit Suisse (9,000). The list goes on.

The purpose of a firm is to create value for customers. Bartley J. Madden, in his book Value Creation Principles, expands the idea of purpose to “communicate a vision that can inspire and motivate employees to work for a firm committed to behaving ethically and making the world a better place”. This concept of purpose includes knowledge-building to learn how to serve customers better, and sustaining win-win relationships with all the firm’s stakeholders – including employees, of course. If employees are to be inspired, they should expect to be treated fairly and with respect. They should be treated as individual value creators, empowered, trained, informed, and given the autonomy to make decisions that further value creation for customers.  Fundamental to the Bartley J. Madden vision is long-term sustainability. Value creating firms ignore the demands of Wall Street for quarterly returns and the maximization of shareholder gains, and focus on building the real assets in the firm – through capital investment and innovation projects – that can continue to deliver customer satisfaction for decades and longer. Financial returns are an outcome of this commitment, but do not represent the purpose of the firm. Maximizing shareholder returns does not qualify as a vision in this worldview.

A value creating firm that aims at genuine sustainability adds to its assets when those assets are demonstrated to be value drivers. Madden points to the knowledge-building proficiency of the firm as the critical element in long-term success or failure. Knowledge-building is a learning process: learning what drives value for customers. Customer value is subjective – an experience, a feeling, something that can’t be measured via the standard quantitative metrics. But there is an indicator of customer value that can be relied upon, and that is cash flow. Cash flow is value created in the customer domain flowing back to the corporation as revenues. Customers advance through a value learning cycle that begins with evaluating whether or not any proposition has potential value for them, then comparing it with alternatives, and then arriving at the point of exchange which we can call  “willingness to pay”. If willingness to pay is positive, the firm receives revenue, indicating that the customer has committed themselves to the experience of value in the expectation of satisfaction. If the customer repeats the cycle and buys again, it’s an indicator that the value experienced met their expectations. There’s a second flow of cash to the firm.

There’s a direct connection between cash flow and value creation. Therefore, through experimentation and analytics, a firm can identify its value drivers, those assets most positively and most directly generate customer value. These value drivers can include assets like brands, specialized expertise, technologies that generate desired customer experience (like speed and convenience and ease of use), and highly refined knowledge that defines the firm as the go-to reliable expert. Value drivers can also include human capital – the people who work at the firm, immerse themselves in the knowledge-building process, contribute to its further development, and become value creators in their own right.

So why would a firm lay off hundreds of such people “in headquarters roles”? Presumably, they wouldn’t fire value creators, for that would be depriving customers of value, which is the opposite of the firm’s purpose.

Or is it? In fact, what these layoffs reveal is that customer value was never these firms’ purpose in the first place. In this age of financialization, the purpose of the firm is maximizing its returns to shareholders (who include the CEO and the Board and the rest of the C-Suite, as well as Wall Street and institutional investors, but seldom customers). Those returns are assessed at minimum quarterly and often more frequently. If those returns, or pre-indicators of those returns such as revenues or margins, turn downwards, the stock price can easily decline, slamming the brakes on shareholder returns. An easy fix is to reduce costs, to restore margins and profits, and the easiest cost to reduce in the short term is labor – people. 

Clearly, the people who have been laid off must not be in value creating jobs. They’re not driving trucks and stocking shelves. So why were they hired in the first place? The reason is that there’s a purpose of management other than creating value for customers. They want to increase their department size, and the number of people they supervise, because the incentive compensation system rewards them for that. It’s an increase in power for managers. They’re short-term thinkers, and they don’t anticipate the layoffs to come; they’ll take the power and compensation increase now, and worry about the layoffs when they come.

That’s why not only the purpose of the firm must be examined to make sure it’s truly oriented to customer value, but also management itself must be reimagined because it is too often not value creating, it’s value destroying. Middle management, especially, is value-destroying. Bart Madden points to the efficient value generation of firms like Nucor in the steel industry, with only 4 layers of management from CEO to the factory floor, and compares it with traditional steel industry competitors who might have as many as 12 layers of management.

When a firm is truly focused on customer value generation, they wouldn’t hire these bureaucratic “headquarters roles” in the first place, and then they wouldn’t resort to layoffs to solve the problem they created for themselves.

Austrian Economics Is On The Right Side.

Iain McGilchrist is a neuroscientist, psychiatrist and philosopher who devoted his research work to illuminating the proposition of hemisphere differences in brain function. We all have a left brain hemisphere and a right brain hemisphere, and they function (or “see the world”) differently. McGilchrist makes long lists of the differences in worldview attributable to the hemispheres.  We can selectively highlight a few here:

The left hemisphere (LH) deals with detail, the local, what’s in the foreground, and easily grasped. The right hemisphere (RH) deals with the whole picture, including the periphery and the background. this local versus global distinction is one of the major differences in the processing of the two hemispheres.

  • The RH is on the lookout for and better st detecting and dealing with what is new. The LH deals with what is familiar.
  • The LH aims to narrow things down to a certainty, while the RH opens them up into possibility. The RH is comfortable with ambiguity and holding pieces of information that appear to have contrary implications, whereas the LH makes an either/or decision in favor of one of them.
  • The LH’s world tends towards fixity and stasis, that of the RH towards change and flow.
  • The RH recognizes uniqueness and individuality. The LH tends towards more generalization.
  • The RH is essential for empathy, and emotional receptivity and expressivity are greater in the RH.

McGilchrist’s thesis is that the left hemisphere and its mode of thinking has become dominant in today’s world, and that dominance is a disaster for civilization. Why? What he calls the left hemisphere world 

  • has lost the broader picture
  • favors data over knowledge
  • has lost the concepts of skill and judgment
  • favors bureaucracy (procedures that are known and predictable)
  • elevates quantity as the only criterion versus quality
  • dismisses common sense
  • discards tacit knowledge
  • has a need for total control
  • has more anger and aggression
  • loses social cohesion
  • is characterized by passive victimhood

In the field of economics, we can clearly see McGilchrist’s left hemisphere versus right hemisphere dominance in action. Mainstream economics, the style that is practiced by government and the Federal Reserve, taught in academia and written about in the New York Times, exhibits a left-hemisphere dominated pattern. Austrian economics is more right-hemisphere, in stark contrast.

mainstream economicsAustrian economics
Principally concerned with mathematicization, modeling, aggregates and related variables (x causes y).Principally concerned with the economic system and its emergence as a result of the purposeful actions of individuals reasoning subjectively.
Empirical, working with data series and tables and numerical outcomes.Verbal and logical, working with language and reason, observing behavior to deduce motivation and purpose.
Captures data in re-usable mathematical symbols and algebraic formulae. Seeks to construct reusable/repeatable models.Deals with uncertainty, dynamics, constant flux, and flow.
Equations are solved, models are completed and self-sufficient. Point predictions.Descriptive and not predictive. Assumes constant change, uncertainty and non-linearity.
Positivist, adopting the methods of physical sciences.Humanist, adhering to the approach of social sciences.
The economy as a machine to be tuned.The economy as a complex adaptive system. Interaction of many components. Emergence.

The focus of Austrian economics on real people, individuals interacting in the pursuit of subjectively-assessed value, creating a dynamic flow of activity of benefit for all contrasts starkly with the mainstream economics focus on mathematical models and solving equations, aggregate quantities like GDP, and unremitting regulation and government intervention aimed at control.

Until we rebuild our institutions from a more balanced perspective, releasing the hold of the left hemisphere on our thinking and behavior, we are condemned to follow the downward spiral into a command-and-control economy.

192. Mark McGrath on Orientation and the Adaptive Entrepreneurial Method

When firms apply the principles of Austrian economics to business management, we call the result the Adaptive Entrepreneurial Method. It’s adaptive in that it is a continuous learning process, and it’s entrepreneurial in elevating customer value realization as the most important business purpose.

Key Takeaways and Actionable Insights.

The Adaptive Entrepreneurial Business Method

Businesses that follow the adaptive entrepreneurial method put customer value first.

Value in Austrian economics is customer value: contributing to customers’ feelings of being better off as a result of the interaction with an entrepreneurial business or service provider. A useful way to think about value is in terms of alignment and order. A value exchange is a harmonious alignment between customer and entrepreneur, in which both parties benefit and both parties’ interests are served. Order is represented by the customer’s decision, a point of clarity in a world of multiple choices, overlapping preferences and broad-based uncertainty.

Entrepreneurial businesses make value their purpose and identify it in alignment and harmony with customers. Everything else — cash flow, profits, growth — follows.

Entrepreneurial orientation enables the right interpretation of data and information for customer value realization.

Mark McGrath emphasizes the powerful role of entrepreneurial orientation in business success. Orientation is a mindset — a kind of internal operating system — that guides firms to translate information from customers, partners, competitors and the market into an effective, winning vision and mission.

The essence of orientation is learning. Uncertainty is assumed, and orientation is the unique set of filters through which entrepreneurs and management teams process the quantitative and qualitative data that customers and markets present. Mises called it economic calculation: the entrepreneurial capacity for combining a constantly changing stream of information into a business decision. The decisions are always reviewable and revisable; a learning mindset makes entrepreneurs comfortable with frequent decision changes in response to changing information and feedback. Principles — such as the primacy of customer value — remain the same; it’s actions that are adjusted.

Businesses that don’t learn can get locked into models that no longer reflect the realities of the marketplace, and lose their effectiveness.

People, ideas, and things.

Learning, adapting, and changing are difficult capabilities to master. Continuous change can feel disorienting absent the right mindset. How do companies achieve this mastery? Mark McGrath quotes Joh Boyd on the eternal verity of people, ideas, and things — always in that order.

The first critical component are the people engaged in and operating the business. They must be good at change, comfortable with constant flux. They must accept VUCA — volatility, uncertainty, complexity, and ambiguity — as the normal condition. At the same time, management must be conscious of how each new change or wave of change impacts people, and anticipates the effect it will have on them.

In this change-accepting environment, unlimited new ideas can emerge via the creative process. They can be tested, and marketplace results become the yardstick. When new ideas look promising in terms of the results they potentially enable, then things can be changed: capital can be redeployed in new combinations, marketing campaigns can be revised. When people are pre-prepared, smooth transitions are achievable.

Continuous Reorientation And Entrepreneurial Intent.

While entrepreneurial orientation is the firm’s operating system for processing information, it is not fixed. Adaptive firms are continuously reorienting, Active reorientation supports learning, recognizing that all perceptual models are only as good as the moment they were developed. They must be renewed to stay relevant. Challenging assumptions and reframing problems must be continuous in order for firms to thrive and use change to advantage. Effective orientation looks to the future rather than the present, emphasizing agility and avoiding clinging to outdated models.

Reorientation precedes intent and reshapes it. Entrepreneurial intent can be equated to what systems thinkers call vision. A vision is shared and provides a North Star for everyone in the firm, but that doesn’t preclude adjustment in continuous alignment with customers. The vision is to serve customers, and customers are also changing and adjusting. Thinking in terms of intent (rather than, say, implementing a rigid plan) permits greater flexibility in pursuit of the vision.

Entrepreneurial judgment is decision and action.

The theory of entrepreneurship emphasizes judgment — that mysterious-sounding capability of entrepreneurs to make economic calculations from a mix of data and intuition. That can sound like a kind of mulling over of options. But it’s much more active than that. The entrepreneurial method emphasizes deciding and acting. Decisions are recognized as hypotheses; it’s impossible to know exactly what to do, so action-oriented develop hypotheses about what actions could have the effect they desire. The hypotheses are carefully aligned with their intent in order to double-check the logic as far as possible. But the purpose is not to be “right” but to generate feedback information so that alignment can be better informed by reality.

Action — the implementation of decisions — is an experiment, a test of the hypothesis. Action produces interaction (with customers, with retailers, with competitors, with the changing market environment) and thereby provides new information in the form of feedback, which might indicate the need to change actions next time.

The number of hypotheses and tests can be narrowed; what’s important is that they reflect as wide a range of perspectives as possible — from those at the front line interacting with customers, whether in person or at the call center or online, from engineers and operatives, from finance and HR, and from all relevant points of view. The more diverse the range of perspectives, the more likely it is that different angles of view will provide new insights and illuminate blind spots. Make sure that internal communications are organized so as to make it possible for all perspectives — including dissenting Cassandras – to be recognized and acknowledged.

Candid self-assessment of people in business leadership roles is a good place to start the adaptive entrepreneurial journey.

Some elements of the adaptive entrepreneurial model require the discarding of standard ways of managing. For example, many businesses spend considerable time and effort developing plans that lock in budgets and resource allocations, and don’t make allowance for constant adjustment and change. It’s useful to take inventory of these practices and question whether they can be abandoned or reformed in pursuit of agility.

Additional Resources

The “Adaptive Entrepreneurial Method” Graphic (PDF): Mises.org/E4B_192_PDF1

“Destruction and Creation” by John Boyd (PDF): Mises.org/E4B_192_PDF2

Mark J. McGrath on LinkedIn: Mises.org/E4B_192_LinkedIn

“Orientation: Bridging The Gap In The Austrian Theory of Entrepreneurship” (AERC 2022) by Mark J. McGrath and Hunter Hastings (PDF): Mises.org/E4B_192_PDF3

This Is Value Entrepreneurship – The Business Method Fueled By Entrepreneurial Economics.

Entrepreneurship is the business driver – of revenue and growth, of the customer base and customer loyalty, of innovation, of cost reduction, of everything about business that constitutes success. It’s true of businesses of every scale – every firm must be entrepreneurial to succeed.

Value is the purpose of entrepreneurship. On the Mises Institute Economics For Business (E4B) website you’ll learn deep insights about value – that it’s not a thing but a feeling, that it’s the outcome of a learning process, that you can’t put a price on it, but people will pay for an expectation of value. There’s a lot to learn about value.

Combining the two in Value Entrepreneurship provides you with an understanding and a toolset to pursue new value for customers at every scale, in every firm, via every project, process and job. Value Entrepreneurship is the business system fueled by entrepreneurial economics.

Let’s first examine and prepare for entrepreneurship. Entrepreneurship is action. While MBA programs may focus on strategy and planning and finance, E4B’s alternative approach emphasizes action. Entrepreneurial action can be broken down into two components – the decision to act and the action itself.

The decision is a hypothesis. There is more uncertainty in business than can ever be resolved. You are never certain. The most you can expect is to narrow down your choices of possible actions to a small number. You develop a hypothesis of what could work based on two inputs. First, an analysis of whatever information or data is available to you that tells you something about prevailing market conditions and constraints. And second, the synthesis of your data-based conclusions with your instinct and intuition, your assessment of dynamics and what might change in the future, as well as your creativity and ideas. From analysis and synthesis, you generate hypotheses of all the things you could do that are aligned with your intent, and choose as many of those as you’re capable of implementing – that’s your capacity, which might be governed by available funding, staffing or capital goods such as your AWS service agreement.

With the decision made, you act. Decisions are hypotheses and actions are experiments. The purpose of an experiment is to generate learning. Find out what works and what doesn’t, so that you can do more of what works and abandon what doesn’t. If you run as many experiments as possible, the fittest business strategy will emerge. Complex systems theory refers to this process as explore and expand. That’s what entrepreneurship consists of: exploration followed by expansion.

We learn because action generates interaction – with customers, retailers, markets, competition, media, and the entire business ecosystem. Interaction, in turn, generates a feedback loop. Customers buy or don’t buy. They enjoy their experience, or they don’t. Or, most likely, they partially enjoy it but there are some drawbacks that the entrepreneurial business can respond to and rectify if they can properly gather the right knowledge.

That brings us to the second part of Value Entrepreneurship – the value part. We just referred to the customer’s experience. That’s what value is – an experience, subjectively felt and evaluated by customers. Value is formed and experienced entirely in the customer’s domain. As you’ll appreciate as you enter more deeply into this way of thinking, the customer is the driver of your business. Customers are the sole determinants of business success or failure. They determine what gets produced by buying or not buying – by not buying, they ensure that production stops and business resources are redeployed to new uses. 

Customers are always evaluating, and thereby producing value. They do this from the context of their own system. Let’s take an example of a consumer household and its systems (although we must emphasize that the value entrepreneurship model applies equally to the world of B2B, not just B2C). Let’s take one sub-system: food and nutrition for the family. There’s a system of deciding what to eat and drink, there’s a system of shopping, whether online or offline or both, there’s a system of storage, perhaps involving freezing, refrigeration, and room temperature. There’s a system of preparation and cooking, involving a lot of home appliances. There’s a system of cutlery and place settings, and another for washing these. Taken altogether, it’s a complex system. And it may be continuously changing. What if the family Is becoming more conscious about healthy eating? What if they start substituting lower-calorie foods for higher-calorie versions? What if they start reading ingredient labels? What if they buy more fresh food and less manufactured food? What if they discover new preparations like blenders? 

We can see the physical manifestations of these changing experiences in the market. The periphery of the supermarket where the fresh foods are sold becomes bigger and the center contracts. Healthy cookbooks appear on amazon and social media. Fresh fruit appears in more convenient packaging and new varieties flourish. New brands of healthier crackers and desserts abound.

The point about value is that it is formed in the customer’s system, that system is complex, and it’s always changing. The role of the value entrepreneur is to observe the system, understand the system, fit into this system and make a contribution. It’s possible to identify gaps, maybe gaps the customer is not even aware of. Most importantly, there’s the potential to identify the system the customer will prefer and move to in the future, ideally before they get there themselves. This is value innovation – imagining and inventing the future. Whether in the present or the future, the entrepreneur’s contribution is to help the customer to feel satisfied that they’re making the best choices within their own system. Their system is life, and entrepreneurs help make the system work for them.

Entrepreneurs and entrepreneurial businesses facilitate this feeling of value – make it possible, make it robust, make it repeatable. They are rewarded by customer purchases, and value flows back to the firm as cash flow, to be reinvested in more production and more innovation. The value entrepreneurship loop is continuous. 

191. Allen Mendenhall: Putting Humanness and Ethics Back Into Business Economics

We are living through a particularly bad moment in history for free markets and capitalism. Government, not business, is promoted as the solution to all problems. Young people have never known any other environment, and one of the consequences is the skepticism about capitalism that they learn in school, college, and university. One solution to this problem lies in better business education — shaping how young minds think about business by shedding light on the social and individual benefits of capitalism that might otherwise be deliberately shadowed by misinformation and misdirection.

Allen Mendenhall is leading the way with a new business curriculum at Troy University.

Key Takeaways and Actionable Insights

There are unmerited concerns among young people today about the ethics of capitalism and business.

Business is too often cast as the “bad guy” in the movie of life. Business is portrayed as exploitative and greedy, and businesspeople as self-serving. Historical scandals like Enron and WorldCom are cited as case studies. But this presentation is a caricature; there’s no evidence to support it. Business is the essential component of the capitalist system that has raised standards of living and quality of life all over the globe and especially in the West, where markets are somewhat freer.

Business didn’t have the same bad rap in the past. In the nineteenth century, there was a great celebration of the civilization-advancing commercial republic powered by the protestant work ethic. The image of the businessperson was a positive trope — it was a good role to be a businessperson creating value for others. Businesspeople were the good guys. They innovated, collaborated and served. We’ve lost that imagery.

A lot of the unmerited concern emanates from educational institutions, especially universities.

Who is teaching young Americans to be skeptical about capitalism and business? A large portion of the blame goes to educational institutions, and especially universities. There’s an anti-business and anti-capitalism bias among the teaching profession in higher education that is communicated to students.

In this academic anti-business campaign, there’s a special role for economists, who have dehumanized economics by trying to make it a mathematical science. All their equations and computer models have the effect of taking humanness — the role of subjectivism, individual preference, and individualized emotion — out of economics. They try to reduce human behavior to a predictive data-driven algorithm.

The heritage of economics is humanizing.

The mathematical approach to economics is not the tradition of the Austrian school approach, which embraces a humanizing perspective. Commerce cultivates virtue; the pursuit of honorable profit leads businesses to act with good faith and integrity in joining with partners to produce products and services that are valued and welcomed by customers because they serve their ends in their search for betterment in their lives.

The concept of honorable profit is often alien to students, and requires new learning: that profit is an emergent result of all the detailed interactions of individuals in a market, sending price signals to producers to indicate what society wants them to produce. Profit is a result of these signals indicating that society wants the producers to continue offering their goods and services.

Understanding value is central to understanding the ethics of capitalism.

The emergence of profit is an outcome of the generation of value for customers. Value is central to the ethics of business, and Professor Mendenhall’s new course at Troy University places it squarely in the center. Value is subjectively determined by the customer, and the purpose of business is to help them realize the value they seek with the right products and services responsive to their wants, preferences and goals.

But here’s where the plot twists. The big corporate business community — representing less than 1% of businesses by count but the biggest proportion of GDP by dollar revenues – has been incentivized by Wall Street to pursue shareholder value (goosing stock prices) and stakeholder value (the diversion of value away from customers in favor of non-customer interest groups). Value for customers and even profit now takes a back seat to supposedly serving constituencies such as climate activists, victim groups, and, of course, government. Stakeholder value can act as cover for the CEO who fails to generate profit: they can claim to be focused on socially more important things.

The generation of value for customers, guided by the confirmation signal of profit, is no longer primary — except in Professor Mendenhall’s Troy University curriculum.

The perspective of entrepreneurship can help students appreciate ethical business.

While young people express disdain and distrust for capitalism, they often have a more positive attitude about the concept of entrepreneurship. They realize that entrepreneurs are problem solvers, and that they add value to people’s lives. People benefit from the risks entrepreneurs take and the personal sacrifice they make. Entrepreneurial innovation makes lives better.

Students appreciate this, and can even identify some corporate CEO’s to whom they are willing to grant ethical approval — individuals such as John Mackey or Richard Branson. And many young people see entrepreneurship as aspirational — they want to start their own businesses and make a lot of money (i.e., profit!). Looking at business from an entrepreneurial perspective generates more positive attitudes, and we can show that all businesses started entrepreneurially, and are sustained by their continuing entrepreneurial performance, i.e., profitably delivering value for customers. If there are questions about corporate ethics, they relate to their non-entrepreneurial functions — such as HR (whence a lot of corporate wokeness emanates), legal (the people who write the opaque and deceptive terms and conditions that justify surveillance), finance (directing activities like stock buybacks that divert value from customers), and compliance (keeping corporations closer to government and more distant from markets).

Part of Allen’s approach to his students is to teach the entrepreneurial mindset — not just for business, but for life in general. He calls it “unleashing the inner entrepreneur” and includes what he calls “the economics of your dreams”, the secret of win-win, the creativity of the market, the entrepreneurial principles of career building, starting a profitable business, and character and leadership.

He also covers personal finance skills — developing knowledge of stocks and bonds and mutual funds and other financial instruments, insurance, retirement planning (even at age 18!), investing, spending, and, of course, personal management of student loans. It’s the entrepreneurial approach to life.

We should develop a new value proposition for business schools as humanness schools.

Business schools today are part of the problem. They don’t focus enough on how business can be the catalyst for positive change. They should be committed to solving problems affecting not just business, but humanity as a whole. But reading business school leaders’ and graduates’ speeches and their books demonstrates that they’re not trying to help humanity as a whole but a few selected businesses and a few particular industries. They’re not dedicated to helping ordinary people, as they should be.

Allen’s new curriculum aims to redress that imbalance.

Additional Resources

AllenMendenhall.com

“Corporate Wokeness Hurts The Groups It Purports To Help” (AEIR) by Allen Mendhall: Mises.org/E4B_191_Article1

“Troy professor: Students ‘very enthusiastic’ over anti-woke business scholars program” (Yellowhammer News) by Dylan Smith: Mises.org/E4B_191_Article2

Allen Mendenhall on Fox Business—”Ending Wokeism in the Corporate World”: Mises.org/E4B_191_TV

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

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 21st 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 ModelValue 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.