In Aberrant Capitalism, Steve Denning and I chart the ascent, dominance and now decline of managerialism, the approach to running business corporations through bureaucratic systems of management control. Happily, we see the end of the managerial age and the dawn of a new post-managerial era.
Aberrant Capitalism begins with a quote from economist Ludwig von Mises:
Those who confuse entrepreneurship and management close their eyes to the economic problem. The capitalist system is not a managerial system; it is an entrepreneurial system.
Ludwig von Mises (Human Action 1949)
Business has been confused about this problem for over 100 years. In the golden age of entrepreneurial capitalism, which we can locate in the second half of the nineteenth century, at least in the US, the great corporations were led by entrepreneurs, not managers. The unicorns of their time, these fast-growing corporations harnessed new technologies on behalf of customers to elevate the quality of life. The entrepreneurial leaders of the time saw the market-generating potential of steam engines, railroads, electricity distribution grids, oil refining, long-distance communications, mass manufacturing, packaged food, and advertising. They turned these inventions into commercial innovations and built an audience of happy customers enjoying new experiences ranging from affordable illumination to trans-continental travel. The range of goods and services available to customers expanded, quality went up, and prices went down.
This was a pre-managerial age. The individual owners and founding partners of the great corporations were visionaries who imagined a great and happy future of high achievement and fulfilling lives for Americans. John D. Rockefeller of Standard Oil, for example, consciously aimed at producing and distributing “the best illuminator in the world at the lowest price” because “we are refining oil for the poor man, and he must have it cheap and good[1]”. He viewed the kerosene he manufactured as a civilizer, “promoting among the poorest classes …a host of evening occupations, industrial, educational and recreative …(carrying) more cheap comfort into more poor homes than almost any discovery of modern times” (The Myth of the Robber Barons, Burt Folsom)
This is the entrepreneurial mindset: placing the highest priority on customer needs and devoting the entire supply chain to their purpose. Standard Oil required staffing and organization, of course. Rockefeller paid higher than market wages and gave long vacations so that he could attract the right people and then delegate responsibility to them. He knew that good work and good ideas were priceless.
In the twentieth century, the entrepreneurs exited their businesses due to old age or death or via a sale. Professional managers took over, ushering in the managerial age. They changed the function of management from the mass production and mass distribution that made civilizing innovations and the experience of well-being available to all. They focused instead on control, which is a benefit for managers, not for customers. The tools of control included:
Central planning: managers believed that business plans and resource allocation decisions should be made by a planning and budgeting committee or group following the direction of the top officers of the company. There were some feedback loops, but they were slow and data science was not far advanced and so the feedback was low in information and high in noise. Nevertheless, central planning advanced, even though CEO’s like Reginald Jones of GE admitted that he “could not achieve the necessary in-depth understanding” of his own planning department’s plans. (Aberrant Capitalism, p37)
Hierarchy: The transmission mechanism for the centrally-developed plans was hierarchy. The top officers told the VPs reporting to them, who communicated to their directors and managers, and front-line employees. Dissent (which we might also call creativity or what John D. Rockefeller called good ideas) was discouraged. Hierarchy was the reason for slow, noisy feedback.
Bureaucracy: To administer both the implementation of plans and the management of the hierarchical organization, management introduced bureaucracy, which had, hitherto, been a method of government rather than business. The purpose of bureaucracy was not customer service or satisfaction, or even an observable contribution to corporate profits, but compliance with rules and regulations. There are no rewards in bureaucracy for initiative or innovation. The goal is not to adapt to changes in the marketplace, but to try to constrain the marketplace to follow the bureaucracy’s rules.
Financialization: Over the course of the twentieth century, managers became more reliant upon the financial sector for debt and credit, and delegated some of their control powers as part of the trade. The short-termism of quarterly earnings targets, the allocation of funds to share buybacks and dividends rather than to R&D investments, and the adoption of the mantra of shareholder maximization – which stands in sharp contrast to the customer-first ethic of entrepreneurship – are all consequences of ceding primacy to the financial sector.
Management Slack: Nobel prize-winning economist Oliver Williamson used this term to describe the discretion acquired by management organizations to use resources for their own benefit rather than for the customer or for company profits. The range of slack is wide, from oversized offices and managerial perks, to lavish salaries and pension, to the use of corporate jets. Williamson suggested that managers would deliberately add costs to hire unnecessary staff because the increased size of a department would result in more prestige and power for the department head. Management slack became a form of insider self-dealing: more for the managers and less for customers, investors and employees.
The late twentieth century demise of big, bureaucratic corporations like GE and IBM can be attributed to internal developments along these lines: the accumulation of greater weight of bureaucratic, hierarchical management eventually over-burdens the creative engineers, operators and salespeople. They can no longer function as well as they need to for the benefit of customers.
What will change in the 21st century
The end of the managerial era is a consequence of the new business models that are made possible by digital enablement. Customers are now directly connected to the firm – think of amazon or Airbnb as examples – in such a way that their wants, desires and preferences are instantly and effectively implemented. The customer is the boss, not in the sense of sitting atop an authority hierarchy, but in the sense of controlling the fate and operations of the firm. Economists have always recognized this role for customers in theory: here’s a passage from economist Ludwig von Mises in 1949:
The real bosses, in the capitalist system of the market economy, are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses. They are full of whims and fancies, changeable and unpredictable. They do not care a whit for past merit. As soon as something is offered to them that they like better or that is cheaper, they desert their old purveyors. With them nothing counts more than their own satisfaction.
This is a passage of incredible vision. It has taken 75 years for business practice to catch up to Mises’ theory of the market system. The mechanisms for the catch-up are digital enablement of the direct connection to the customer, A.I. processing of the resulting data flow, and the interconnection of people and functions in the firm who can respond to the insights from the data flow with hyper-personalized service and precise targeted innovation.
In this digitally enabled world, there are three new dimensions of the economist’s “boss customer”:
The customer can command and receive a personalized experience.
The old management method was to try to predict what customers might want in the future, by asking them questions about their dissatisfaction with today. But customers are not in a position to imagine and design the future; they don’t have the expertise or the information.
The new method is to deduce the customer’s preferred personalized experience from their present-day behavior: the searches they conduct, the purchases they make, the websites they visit, their offline behavior as they work, shop and travel. All these activities generate behavioral data, and hyper-automation can instantly energize a supply chain to deliver on the needs highlighted by the resultant data patterns. It is digitized customer behavior data that provides the energy for the system, not their expressed attitudes or opinions.
The customer can add many layers of expectation to their desired experience.
Through their behavior, customers can express not only what they want but many other dimensions of how they want it: where and when and how fast, in what kind of packaging, using what kind of delivery method, accompanied with what level of messaging, with what kind of service wrapper (e.g. insurance), with what kind of return policy and what level of ease-of-return process. These and many more expectations are to be met, or the customer might look to alternatives on all those dimensions. The customer is the selection engine for best service and best experience, and operates with the confidence that alternatives are available.
The customer is the creator of value in the new value system.
The hyper-personalized experience plus the continuous layering and raising of expectations constitute value for the customer. It’s an ever-changing value benchmark because the customer is able to change it. They feel that they can always raise the bar.
So now, when we talk about value creation, we must reverse the mental flow model that that term usually suggests. Value creation, traditionally, has been defined as firms creating value for customers. Today and tomorrow, customers will create value in their personalized experiences, based on their own requirements and expectations.
The role of the digitally- enabled firm is facilitation, making the value experience easier, more convenient and closer to expectations. The concept of ’the digital friend”, a digitally enabled brand that knows the customer well and demonstrates empathy via a hyper-personalized experience, will be the model for value facilitation.
Central facilitation replaces central control.
Traditional management is a control concept. In this concept, resource allocation is controlled through the planning process, and then hierarchical organization structures and the command authority of title and position are deployed to ensure that subordinate employees follow orders to deploy the resources through implementation. Value creation resides in the plan, and the role of implementers is simply to ensure that value is not eroded through imperfect action.
This control-through-command won’t survive. The customer now commands. The structure of the firm must be flat and networked so that the customer’s commands can flow to where they can influence internal functions. Those functional centers respond to the customer, not to an authority structure.
The post-managerial era has arrived, only 75 years after economists predicted it.
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