190. Peter Klein: Why Managers Still Matter:

Entrepreneurial businesses embrace adaptiveness and change, and continuous innovation enabled by flexible and responsive organizations, empowered at every level. That doesn’t mean there’s no role for managers. Inside the corporation, entrepreneurial management co-ordinates the business flow of responding to changing customer wants and preferences, so that resources are allocated and reallocated to the production activities that customers value the most. In fact, management is becoming more important, not less. Professors Peter Klein and Nicolai Foss explain entrepreneurial management in their latest book, Why Managers Matter: The Perils of the Bossless Company (, and Peter Klein visits Economics For Business to highlight the key points.

Key Takeaways and Actionable Insights

Management co-ordinates the constant flux of entrepreneurial business.

The essence of the adaptive entrepreneurial organization model is responsive change. Entrepreneurial businesses don’t lock themselves in to 5-year strategies and annual plans. They recognize that markets are in constant flux as a result of changing customer preferences, changing competitive activity, changing technologies, and changing conditions in business channels and in the economy. Change is the normal condition. It’s what Ludwig von Mises termed constant flux.

Management is required inside the firm to adapt and respond to change outside the firm. It’s not possible to manage the change in markets, but it is a necessity to manage resource allocation and productive activities inside the firm.

Management is co-ordination and orchestration, not authority and hierarchy.

We might think of the concept of management in its industrial age guise of authority and hierarchy: some people “higher up” in the organization telling others “lower down” what to do. This kind of hierarchical authority can’t work in the digital network age; it’s too slow to process incoming data from the marketplace and too rigid to quickly or effectively implement newly imagined responses to those incoming data.

But in Professor Klein and Professor Foss’s analysis, management no longer equates to old-fashioned authority and hierarchy. Management is co-ordination: assembling the right resources — both human capital and complementary capital assets such as supportive technologies — in the right combinations (often referred to as “teams” in today’s management language) for the right shared task with the right shared goals. Professor Klein likened this to orchestration — there’s a conductor who guides the orchestra in playing the same symphony together, without telling the individual players how to play their instrument, and leaving the details of implementation to the individuals and their specialized skills.

Some orchestras may have better results than others because their teams have been well-recruited and well assembled and they respond better to management co-ordination. All firms and teams are complex adaptive systems, with emergent outcomes influenced by internal forces, one of which is management.

Management is culture more than authority.

How do managers achieve a better outcome as a result of managing their teams? Professor Klein believes that they institute a successful culture, as opposed to designing an organizational structure. He defines culture in terms of norms, customs and practices — the accepted way (or simple rules) of “how we do things around here”. More specifically, in the customer-centric entrepreneurial firm, “here’s how we plan to facilitate value for our customers around here”. Skilled managers paint the pictures — the “vision”, if you will — in the minds of employees of the customer value standards the firm will achieve, and the customer experiences that the firm will facilitate.

Modern managers are comfortable with and quite expert at adaptation.

The modern managerial culture is a far cry from traditional hierarchical managerial authority. It has the built-in flexibility for adaptiveness to the rapid rate of change in today’s digital business world. A well-functioning management process in a loosely structured organization can change internal production processes, teams and resource allocations in response to external changes in customer demand and marketplace conditions.

In fact, Professor Klein points out, through relevant case studies, such a 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.

In certain cases, management authority can sometimes be a relevant organizational tool, so long as it is applied in a contingent fashion.

The relevance and usefulness of authority varies by circumstance and business situations. Its usefulness is contingent, and managers must be sensitive as to when to apply authority and in what style.

Why Managers Matter identifies two distinct styles of managerial authority, Mark 1 authority and Mark 2 authority. Mark 1 authority is traditional command-and-control, exerted top down — superiors telling subordinates what to do.

Mark 2 authority is exercised through design rather than command: finding the right person for the task, combining the best-qualified people in teams, and giving them a goal with a wide latitude in their process and implementation in achieving the goal.

An important element of the contingent approach is to empathically identify the subjective preferences of employees. Some will respond well to flexible, open-ended direction that enables them to exercise their own initiative. Others might prefer the certainty of clear direction. One type of salesperson might be highly motivated by a 100% commission remuneration plan, another might feel more secure with a base salary with the potential for an achievement bonus upon exceeding quota.

Professor Klein identifies two broad sets of conditions for the exercise of Mark 1 and Mark 2 authority. 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.)

Management is becoming more important, not less.

In a rapidly changing world, where employee attitudes and experiences are very different than in the pre-digital world, and where global markets and their interconnected structures are more uncertain and cyclically unreliable, and where the pace of disruptive technological innovation is accelerating, good management is more important than ever for the success of our economy and our society. Smart managers are needed to find the right balance between operational excellence through established processes and adaptive change through adjustment and experimentation, a balance that business scholars call the ambidextrous organization. It can’t happen without management, and without managers.

Additional Resources

Peter Klein’s book page:

Why Managers Matter: The Perils of the Bossless Company by Peter Klein and Nicolai Foss:

Public Affairs book page:

Business As A Flow Requires New Management Techniques

There are many calls to recognize that we are in a new age of business. It’s variously been called the age of agile, the digital age, and the fourth industrial revolution – and there are no doubt a few more such terms being bandied about. All these terms are illustrative of a need felt by business theorists to identify boundaries – beginnings and ends, where one thing starts and another terminates. We must, we are told, stop doing one thing and start doing another.

There’s an entirely different and better approach to managing business in a dynamic, complex ever-changing environment and that is the approach framed by Austrian economics: business as a flow. It’s always been complex, always been dynamic, always been changing. It’s just the way business writers describe it and classify it and think about it that has been static. Austrian economists have a better perspective.

Business is a flow, inside an evolving ecosystem

There is no beginning, and no causality for the current state. The system (what systems thinkers call a complex adaptive system or CAS) causes itself. We are all in the flow, the constant flux. There is no snapshot, only constant motion. Firms are CAS embedded in the CAS of the market embedded in the CAS of the economy. The constant motion of flow and change is the normal mode.

Management technique has not been able to keep up. Management technique prefers the static constructs of strategy and plans and structure. Strategy is an attempt to freeze business dynamics and specify how to act amidst constraints that can be identified, written down, and mathematicized. In reality, there is no time for planning or to make a plan, and no time for strategy in the sense of preparing a strategy document. Management technique is not well-aligned with reality.

Strategic orientation is a selection mechanism.

Businesses select the information they prefer to process and their ways of processing it, and they select the interactions with the environment that they choose to monitor and process. Selection mechanisms are dangerous and sub-optimal. They may select the wrong items, or mis-weight them, or mis-process them. They can’t get it right. Strategy is a loser before it leaves the starting gate.

The Austrian mental model for business is experimentation and exploration.

Rather than strategic selection mechanisms, the implication of business as a flow – embracing the reality that the future is unpredictable and there are many potential futures – is to keep the firm in constant motion. This means continuously searching the business model design space for new ways to operate. A business is a portfolio of experiments. The flow is to run as many experiments as possible, read the results quickly, and reorient to the next new way of operating.

The business mode for experimentation is action.

If experimentation has been well-adapted, the firm will have a wide range (but not an unlimited range) of experiments to run (ideally non-correlated) and the mode is not to analyze or strategize or plan but to act and implement. The goal is optionality – as many options available as possible. Action must be prized and promoted above analysis.

Firms need tight, fast feedback loops to read the experiments quickly.

The US Marine Corps  – an institution for operating in highly dynamic and uncertain environments – has a system of After Action Review (AAR). After a mission (a form of experiment) has been completed, participants and managers (i.e. officers and staff) gather to identify accurately “what happened”. The AAR is factual. There is no place for rank or personal criticism. Only for facts. Once the facts are agreed, then some deduction can be applied (why did that happen?) Firms should adopt the same practice. Feedback loop information must flow quickly through all levels and divisions without restriction. The result must be better alignment of the actions of the firm (or the military unit) with the reality of the external environment.

The only planning is discovery.

Planning tries to predict and control. Neither of these is possible amidst constant flow. The alternative is finding out what works and betting more on it. It’s the mode of explore and expand: keep running experiments, discovering what happened, and reallocating resources to what works by removing them from what doesn’t work.

There is a requirement to remove all barriers to change. 

Firms must accept and embrace mutation. The shared mental model must include “no barriers to change”. Businesses can create measurements for how well barrier removal has been accomplished – e.g., surfacing problems is a rewarded activity, response to problems raised is fast, the portfolio of experiments is reviewed and revised quickly, action is taken quickly. These are the measurements that matter.

Sometimes, some level of repeatable patterns can be combined with change. 

The firm may develop a reliable, repeatable revenue stream that emerges from one or more of the experiments. It can develop a management frame for continuing and maintaining the reliable revenue stream, recognizing that the reliability is short-term only, while exploring in other parts of the firm. They can do both. This duality is, by definition, inefficient. Efficiency is not a useful goal. It can be a cost-improvement strategy for the reliable revenue stream businesses but not for the firm as a whole.

Management technique is trying to catch up with business-as-a-flow.

Most of business-as-a-flow contradicts the management techniques and strategy approaches taught in business schools and advocated in the “great man / great woman” style of business biographies. Management technique needs to catch up, even while business stays in motion. Complexity theory has replaced management theory.