Sep 6, 2013 - The TMF emphasizes people and their capabilities over resources. A firm is .... 'theory of the firm', presuming it comprises manager-âemployee ...
Business Strategy seminar -‐ September 2013 JC Spender LUSEM, ESADE, & UCS (http://jcspender.com) This note outlines some of the ideas and arguments in my two forthcoming books: Business Strategy: Managing Uncertainty, Opportunity, and Enterprise (OUP) – see http://ukcatalogue.oup.com/product/9780199686544.do#.Uij-‐G2Rt6Xp1 -‐ and, with Bruce Strong as co-‐author: Strategic Conversations: Creating and Directing the Entrepreneurial Workforce (CUP). What I am I trying to do? There are several answers. One, to continue the evolution of the business strategy field -‐ my locus academicus for over 40 years -‐ by offering a subjective approach that prioritizes managerial creativity and judgment over ‘strategic analysis’ or any ‘business strategy theory’. Another is to take seriously Coase’s 1937 questions about the ‘nature of the firm’ and argue that strategizing is the practice of creating a firm rather than merely assuming its nature and theorizing its direction (the view bureaucratic or micro economic theories offer us). Of all people, strategists cannot take the firm’s existence for granted. I am also offering a critique of the micro economic ‘theory of the firm’ for offering only a trivial place for managers -‐ as rational computational devices. To the contrary, taking Knightian uncertainty seriously, I argue managerial (entrepreneurial) judgment is the true source of economic profit and thus the true nature of the firm. Hence my label ‘theory of the managed firm’ (TMF), where ‘managed’ stakes a fundamental place for managerial judgment. This opens the way to serious discussion about ‘humanizing’ the firm and business ethics. Note also my earlier Industry Recipes: The Nature and Sources of Managerial Judgement (Blackwell 1989) -‐ pdf available on my website. The sequence of ideas is (a) Knightian uncertainty, (b) human imagination and judgment, (c) constraints to the imagination, (d) entrepreneurial opportunity-‐space, and (e) persuasion and aligning the judgments of others to help articulate the entrepreneurial idea into the opportunity-‐ space. Put differently, if we presume the business world uncertain and that successfully engaging its uncertainties is the only path to profit, then the entrepreneur needs both an idea and the help of others to do what s/he cannot. Henry Ford needed designers, production workers, and salespeople of many types. Steve Jobs needed Tim Cook, Jony Ive, and others. Strategizing must leverage the entrepreneurial idea into the creative work of supporters. The result is ‘a firm’ -‐ a people-‐packed creative collaborative activity with a history, not the arid abstraction implied in much management theorizing. The TMF emphasizes people and their capabilities over resources. A firm is people working together; it has no other ontology. Economists miss the phenomena of interest when they presume the firm a ‘bundle of resources’ for, as Penrose insisted; resources have no value in and of themselves. The management team’s knowledge of how to put them to use is strategic. Strategic work comprises both rational decision-‐making -‐ potentially doable by computers, ‘big data’, and expert systems -‐ and indexical (situated) acts of imagination that prove necessary to 1 A longer (45 minutes) version of the ESADE interview at http://www.youtube.com/watch?v=XBh30fRkffg
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execute purposive practice, for explicit instructions cannot ever be sufficient to determine practice in an uncertain world. The entrepreneur creates the firm’s vitality – as opposed to its design and production processes -‐ by harnessing the practical imagination of others to her/his project. This is a mode of human subjugation that cannot be understood in rational, mechanical, or exchange terms or as the exercise of naked power in Weberian terms. Coase intuited answers to his own questions about the nature of the firm when he pointed to the private firm as a context of subjugation. Its precise nature can be examined, in part, through a consideration of charisma and persuasion -‐ but also through the evolution of corporate and labor law that limits the entrepreneur’s freedom of action. The entrepreneur has options, but they are not boundless. The entrepreneur’s tools must range from rational instruction to rhetorical persuasion within a historically evolving set of legal, technological, temporal, religious, geophysical, etc. constraints. In the background is a historically informed understanding of how the legitimated context of entrepreneurial authority has evolved to become (a) our socio-‐economy’s engine, and (b) insulated from the broader socio-‐economy’s democratic processes. There are no ‘citizen’s rights’ within a firm. The challenge is to understand how citizens are persuaded to give up their rights and work within the firm’s a-‐social context. It follows many OB theorists miss the phenomena of interest when they miss that firms exist and persist only because entrepreneurs transform otherwise free citizens into profit-‐generating tools – judgment generating cogs. Whyte had it right2. The TMF treats the firm’s engaged peoples’ indexical acts of judgment -‐ only understandable in terms of the precise detail of their situation – as axiomatic. It is an indexical or ‘practice-‐theory’ that guides practice rather than prescribes it. It pins down and simplifies the actor’s view of the business situation without ever fully determining her/his action. The TMF proposes a judgment-‐ centered subjective discourse that is complementary to the rationalist discourse that dominates the strategy field. It has major methodological implications. It is easy to forget our rationalist theorizing inevitably depends on our opinions rather than on objectively established facts. We make these into axioms as we construct our theories. Historians of science, such as Kuhn, have shown how scientific discourse is opened to paradigm shifts as underlying axioms are modified or replaced. Since the strategizing process is especially sensitive to the assumptions strategists make about their firm’s situation we need a methodological discourse about these that balances or complements the objectivist rationalist one. The TMF is my offering. The complexities here are fundamentally epistemological -‐ turning on the distinction between a positivist objective science and a constructivist subjectivist one, and their relationship. Most of my writings touch on these matters but in these books I have tried to be non-‐academic and avoid the scholarly arguments that seem to interest few but are germane to my labors. In Business Strategy I used two rhetorical devices to skirt them. First I develop the notion of ‘opportunity space’. In an uncertain world we are immersed in a ‘primal soup’ of opportunities to apply our judgment in the pursuit of profit -‐ a trivial observation. (I reject the notion that entrepreneurship is superior 2 Whyte, William H. (1956). The Organization Man. New York: Doubleday & Co.
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awareness of these opportunities or their creation, as if they stood outside us, objectively.) Engaging uncertainty requires ‘an idea’ that brings an opportunity into view. It is then not an abstraction but more like intentionality, an indexical pointing to a particular context of possibility -‐ the opportunity-‐space. The idea creates all of what is known about the opportunity which is otherwise ‘unformed’ and ‘un-‐articulated’ and beyond reach. Saying something about it ‘pins it down’ and brings it into reach. On TV we sometimes see painters talk about their work. They are often interesting but ultimately uninformative, unable to explain ‘causally’ why a particular painting is the way it is. They do not paint by numbers; the picture is its own best explanation -‐ what you see is what you get, or alternatively, if any painting could be explained the actual artifact would be redundant, merely photographic perhaps. Likewise saying that almost everyone is interested in new ways of communicating does not comprise a business plan for Facebook. ‘Pinning down’ may not matter if the entrepreneur’s judgment is sufficient on its own to lead to successful practice. Picasso neither explained nor apologized as he painted. In contrast, we know Zuckerberg engaged others from the beginning. Saying something relevant becomes pivotal if others are to be harnessed to the entrepreneur’s project -‐ as Picasso depended on his paint suppliers, lithographers, and ceramicists. This is where the Business Strategy book comes in. It is a handbook for the strategizing practice of pinning down entrepreneurial ideas and the opportunity-‐ spaces into which they can be projected so that others can help the entrepreneur. In Chapter 2 I illustrate this by turning some ‘strategy tools’ upside down. In the beginning there was SWOT. It helps the strategist look at the world through her/his own intentions and sense the acts of judgment needed to arrive at reasoned practice. A strength to one firm may not be a strength to another; likewise the other categories. As Penrose told us, it all depends on the firm itself (its management team). Then there is the process of integration, bringing the categories together into generative activity. Rather than proposing a general theory of the firm, irritating the academics who demand better metrics, predictability, and empirical support, tools like SWOT or the Balanced Scorecard propose a language to help a particular strategist pin down the particular opportunity space into which her/his judgment can be ‘thrown’ (in Heidegger’s sense). It also helps the entrepreneur integrate others into grasping and shaping the firm’s possibilities. How does this work? SWOT, for example, provides a language the entrepreneur can use to communicate her/his idea (vision) -‐ showing others what should be considered strengths or weaknesses and so on. But, as we know, it is a limited language. Other ‘strategy tools’ provide other languages. The BCG matrix provides a language for differentiating the opportunities in the firm’s investment portfolio and managing the flow of funds between them. My book discusses a dozen ‘consulting tools’. They typically suggest a four-‐term language to describe situations – as does the Balanced Scorecard. Porter’s framework provides 5 terms, and other tools are worth examining. These languages can be used to sketch the firm’s ‘business model’, pointing to what is strategic and how it should be interpreted.
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Chapter 3 considers the tools proposed by economists. I look first at principal-‐agent theory. Contrary to the general understanding of Jensen & Meckling’s 1976 paper, under conditions of uncertainty there can be no rigorous solution to the monitoring, incentive, and loss allocations. In most of the literature on the principal-‐agent relationship, going back millennia to the Bible, Talmud, Muquaddimah, and great books of social wisdom, ‘the solution’ is an indexical practice as the principal and agent discover each other’s individuality over time and adjust their relation; nor is that a final solution, as end-‐period games remind us. Principal-‐agent theory is a powerful putative ‘theory of the firm’, presuming it comprises manager-‐employee relationships. It provides insights into the judgments entrepreneurs must make about those they depend on, helping fashion a language the entrepreneur might use to achieve ‘alignment’. Transactions cost theory likewise proves no determining conclusions, providing a financial language of cost comparisons an entrepreneur might use while negotiating relationships with other entities. These initial chapters of Business Strategy are very suitable as a strategy course book and are easily supplemented by cases found readily on the Internet. There is an Appendix on case teaching. The later chapters are for more thoughtful and mature students, especially practicing managers. They generalize the process of constructing the opportunity space and go beyond the tool approach of the earlier chapters. The business model is an idiosyncratic constructed language that gives the firm an identity and its context. Second, it carries implicit indexical knowledge about how to populate the opportunity space. It is an appropriate language that ‘pins things down’. In Chapter 5 I discuss how the entrepreneur constructs and uses this language to (a) harness the judgments of others to the firm’s objectives, and (b) direct their activities. It includes an analysis of ‘natural’ languages that unlike ‘formal’ languages communicate more than mere facts (data). We know data cannot carry its own meaning, facts do not speak for themselves. Rather, meaning is what we ‘add in’ imaginatively to transform data into the information that intersects our practice. Human communication is much more complicated that most ‘communication theory’ allows. On the other hand a great deal is known about how people persuade others -‐ the art called rhetoric that was central to the education of leaders for thousands of years. Managing is a talking game. Just as data differs from meaning so classical rhetoric stands on distinguishing logos, ethos and pathos. Persuasive talk calls for entrepreneurs to interplay these different modes of discourse. But rhetoric should not be confused with a communication theory. It is often defined as the task of choosing the best means of persuasion in a particular situation; a practice that is inherently indexical -‐ and contingent on the audience too. So it is better to think of the persuasion situation as an opportunity space bounded by rhetorical constraints, the rhetor’s challenge being to negotiate it to best effect. Business Strategy’s final Chapter 6 examines some ancillary issues including the history of the private sector (and of the private firm’s personhood), the nature and impact of technology, and management education and entrepreneurial self-‐preparation. Strategic Conversations is an even more practicing management oriented work (Bruce is a full-‐ time high-‐level consultant). From an academic point of view it opens out Chapters 4 and 5 of Business Strategy and offers a set of management tools. The seminar will follow the ideas described -‐ Knightian uncertainty, imagination, constraints, opportunity space, and persuasion. September 6, 2013
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