1 Industry Recipes An Enquiry into the Nature and Sources of Managerial Judgement J.-C. Spender Basil Blackwell
2 Copyright J.-C. Spender 1989 First published 1989 Basil Blackwell Ltd 108 Cowley Road, Oxford, OX4 1JF, UK Basil Blackwell, Inc. 3 Cambridge Center Cambridge, Massachusetts 02142, USA All rights reserved. Except for the quotation of short passages for the purposes of criticism and review, no part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. Except in the United States of America, this book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, re-sold, hired out, or otherwise circulated without the publisher s prior consent in any form of binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser. British Library Cataloguing in Publication Data A CIP catalogue record for this book is available from the British Library. Library of Congress Cataloging in Publication Data Spender, J.-C. Industry recipes: an enquiry into the nature and sources of managerial judgement / J.-C. Spender. p. cm. Revision of thesis (Ph. D.) Manchester Business School, Bibliography: p. Includes index. ISBN Creative ability in business. 2. Entrepreneurship. 3. Uncertainty. I. Title HD53.S dc CIP Typeset in 10½ on 12 pt Baskerville by Photo. graphics, Honiton, Devon Printed in Great Britain by Billing & Sons Ltd, Worcester
3 Contents 1 Introduction 1 2 Classical Management Theory 10 3 Uncertainty and Management s Response 32 4 Research Methodology 63 5 The Iron Founders 83 6 The Dairymen The Forklift Truck Rental Industry Managerial Creativity 171 Bibliography and References 199 Index 215
4 I Introduction This monograph is an extensive revision of my Ph.D. thesis, submitted at the Manchester Business School in The original work, and its reworking for publication here, consists of reflections on a set of personal and intellectual experiences which cannot be separated from those who shared them. Hence this chapter is both a preface, relating some of the history of this work, and an introduction to its principal themes. Since the thesis s completion, I have had many opportunities to learn from others and many second thoughts about the material. I have also had some new ideas about strategic management. Rather than rewrite and enlarge, I have tried to sift the original s main and more interesting points and present them more clearly. Inevitably, working with these ideas for several years has produced a change in emphasis. Hindsight enables me to see more clearly what I was trying to achieve. Implicit in the thesis, but more explicit in this book, are five principal themes: 1 A critical analysis of classical management theory focused on its inability to deal with uncertainty and, in consequence, with managerial creativity. 2 A methodology for investigating how managers deal with uncertainty; by implication a method of measuring the entrepreneur s creative contribution. 3 A redefinition of the organization as a body of limited and contextually specific knowledge. 4 A redefinition of management as the task of creating and manipulating this knowledge-base. 5 The notion that competitive advantage generally lies in this knowledgebase rather than in a tangible resource, no matter how idiosyncratic. It seems obvious that organizations persist only because, somewhere within them, there are people who know what needs to be done. Until recently it has been common to focus on what needs to be known about, and to leave the processes of knowing unexamined. Thus we stress, for example, the need to keep accounts and do market surveys because these have to do with what effective managements know about. We have assumed that once these
5 2 INTRODUCTION facts have been gathered, we can make the necessary decisions. Ever since Simon s well-known critique of rational economic man (1957), much greater attention has been focused on the processes of managerial and organizational thinking. This book follows this more recent tradition. First, I suggest a theory more comprehensive than Simon s, for the concept of bounded rationality is replaced with a more detailed system. Secondly, I propose an empirically researchable model. It is useful, at this preliminary stage of the argument, to distinguish between a manager s knowledge and his skills. Management education tends to focus on knowledge what managers should know about. We see the conventional MBA syllabus covering finance, production, marketing, human relations and so forth. These are the kinds of knowledge with which we judge competent managers must be familiar. If the proficient manager does not know the answers himself at least he knows how to get answers and how to judge their correctness. Management educators are also concerned with helping students acquire managerial skills. Foremost among these are skills with people. Role playing, small group laboratories, team projects and a multitude of other techniques are used to help students to an awareness of the difficulties facing those who interact with and directly manage others. But this book is about another kind of skill, that of dealing with the normally uncertain state of a manager s knowledge. As Simon points out, it is extremely unlikely that organizational decisions are ever taken with full information. However, the manager s awareness of uncertainty in no way diminishes his or her responsibility to decide and act. On the contrary, this defines his or her special purview. It may be argued that managers are involved in a two-step process; rational decision, yes, but prior to decision, a process of dealing with uncertainty through the application of their judgement. There is something here of William James s distinction between a rather academic knowledge about and a more pragmatic knowledge of acquaintance, where the second implies knowing how to apply knowledge in the real context of human activity. Scientists, pilots, engineers, surgeons and all such others who bring their considerable and sophisticated professional knowledge into contact with the world know from their experience that knowledge alone is not enough. The situations they confront are seldom as neat or as readily understood as their textbooks imply. They must learn to temper their perfectly appropriate faith in knowledge with skill in its application, learning how and when to compromise and manipulate their theories to fit their experience of the situation. Likewise we can help students see that finance theory needs to be balanced by skills in dealing with the uncertainties of market behaviour, that production systems theory needs skills in judging the uncertainties of the results of product
6 3 INTRODUCTION development, that market research must be tempered by nose for customers changing tastes, and so forth. In this book I argue that these skills become progressively more important as we approach the governance of the firm as a whole. Senior managers obviously require knowledge. They must have skills with people, bureaucracies, markets, products, technology, money and all the other components of the managerial condition. They must also have the emotional and psychological capacity to be effective leaders. I explore the idea that they need, in addition to the daunting list above, some special cognitive skills which, following Locke, I call judgement The thesis was written as a critical response to my experience of teaching Business Policy and Strategy. I had come to the Manchester Business School as a mature student with experience as an engineer, salesman, manager, banker and entrepreneur. My teaching in the UK began long before I completed my thesis, and was augmented by a semester at Kent State University in Ohio, in the company of Professor Child of Aston University. John Child and I both began our working lives at Rolls-Royce, only to become fascinated by organizations and their management. Our time together at Kent State was germane to my intellectual development. Together we visited other US business schools and shared many hours of discussion about management theory and teaching. As my teaching experience grew, I became convinced that our Theories were not taking management s creative contribution into adequate account, especially when it came to the obviously poorly defined area of corporate strategy. Indeed, our theories seemed to push managers out of the analysis and so completely contradict my experience. I still thought management s inputs were crucial. I began to look for a new approach to entrepreneurship, by which I meant more than the simple psychological disposition or get-upand-go which causes individuals to make risky decisions or set up in business. I wanted to investigate the successful entrepreneur s intellectual talents for spotting a business opportunity and knowing how to exploit it. My experience was of entrepreneurs who were successful, seemingly because they had created a sense of certainty about what they were doing. I wanted to tell students about business the way I had experienced it myself, as an activity that many people engaged in but few really mastered, an art form through which a small number of creative people shape many others lives. Missing this aspect of management s activity, I believed, we were bound to produce sterile theory and alienate ourselves from our most important audiences, practising and aspiring managers. The literature on entrepreneurship and leadership seemed to offer little insight so I turned to organization and information theory. Eventually I began
7 4 INTRODUCTION to argue that the idea of management means nothing without its corresponding theory of the organization. Every concept of organization defines the activities of the managers within. The firm and its management are complementary images. In due course I saw that the technical problem of defining managerial creativity is to develop a testable theory of the business that has a place for this kind of entrepreneurial input. Our concept of theory derives largely from the physical sciences. This is what gives theory its empirical nature, shifting the emphasis from the abstraction of what is said to the tangible experience that is predicted. A theory is strong when it successfully predicts future observations. Much recent theorizing about governing a business focuses on predicting the results of management s choices of strategy and structure. Structure, the corporation s internal resource dispositions and controls, and strategy, the corporation s chosen external market relationships, become the principal causes whose effects need to be forecast. The manager s place in this kind of theory is to analyse the firm s resources and environment, discover the structural and strategic options available and choose appropriately. This is widely known as a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats). The manager is treated as a decision-making black box automaton rather than as the lively entrepreneurial creator of the business. Indeed, the better the theory of how strategy and structure should be matched, the more firmly it proscribes management s choices. The manager is no longer part of the decision; he is simply the theory s instrument. His only options are to follow the theory s dictates or to make an error. Others have protested this picture of the manager grinding out the custom-fitted organisation (Lawrence & Lorsch 1969). My protest is similar to that of the astronauts in Tom Wolfe s Right Stuff. I believe real businesses need constant creative input just as Wolfe s astronauts argued that spaceresearch vehicles need human pilots/scientists rather than electronic or dumb cargoes. Paradoxically, a business actually operates in an even more uncertain environment than a spacecraft, so the need for human pilots/ceos (Chief Executive Officers) is in fact far greater. There is a sense in which all theory is prescriptive, for it predicts. Unpredictive and unprescriptive theory is probably non-theory. If we have difficulty it is likely that it is because we theorize about the wrong things. Thus I believe the prescriptive kind of thinking noted and criticized above is not a fault of theory, but an unintended result of the way we interpret classical management theory. Defining managers as rational decision-makers is a misinterpretation which leads, inter alia, to a lack of respect for managers as well as to a misunderstanding of their real contribution to the firm. As a corollary, there is also the ever vital issue of managerial
8 5 INTRODUCTION responsibility. Managers make enabling and disabling choices about other people s lives for which they must be held responsible. If managers seem to make no personal or creative input, they can defend their actions, however objectionable or damaging, by pointing to objective facts and bureaucratic rules. Theorists, writers, researchers and teachers of management know perfectly well that managers make an impact. The problem is to find an appropriate way of capturing that impact and relating it to the straw man of the black box model. Rather than attempt to develop a completely new theory, we can grow new theoretical variants in the crevices created when we effectively critique old theory. The black box rational model is the target of much criticism. In fact these criticisms have inspired most of the important developments in managerial theorizing since the classicists laid our discipline s foundations at the turn of the century. Thus one now obvious weakness with classical thinking is the unreality of the assumption that the necessary data is, in fact, available. Managers find that the data has not been collected, is stored in an inaccessible place, is temporarily unavailable or is simply incorrect. Murphy s Law is at work, corrupting management s database. Trite as this kind of informational defect is, it provides the clue to an alternative line of thought. If our theory acknowledges information defects, and deals with them explicitly, it creates a new theory with a different place for the entrepreneur. Instead of being the person disposed to irrationality or to taking decisions which can be rationally shown to be risky, the entrepreneur is redefined as the person having a particular talent for making good decisions in the absence of the necessary data. These are dangerous intellectual waters, so I was fortunate that the doctoral programme at Manchester had a strong methodological coursework component. This went far beyond statistics to cover sociology, psychology, field research methods and, most important to me, philosophy. As my interest grew, I began to see how epistemology, by providing ways of analysing the structure of knowledge, could be harnessed to analysing the task of overcoming defects in the managers data. The first step of my research was into information defects and into grasping how these relate to uncertainties. Then the processes by which managers overcome these uncertainties were categorized. I began to argue for a cognitive model of entrepreneurship whose essence is uncertainty resolution. This definition of managerial creativity became the core of the thesis. It has an honourable history in the older managerial literature. But it does not sit too well with modern writing on entrepreneurship because it forces a distinction between real entrepreneurs who create a business
9 6 INTRODUCTION concept and then, maybe, a successful business, and those second-raters who merely copy and start a business by implementing someone else s business concept. This problem can be turned into an opportunity. Clearly we cannot hope to develop a predictive theory by explaining creativity as a response to uncertainty. But the notion of the entrepreneur copying and thereby sharing the burden of having to overcome data defects leads to a testable hypothesis. Having worked in several different industries before I began my research work, I already suspected that managers often deal with the problems that uncertainty creates in ways that are characteristic of that industry part of what experienced managers take uncritically as professional common sense. I now focused on this body of knowledge what everyone who knows this industry understands and gave it the name industry recipe. This has not suited everybody. No better alternative has yet appeared, though frame, paradigm, organizational culture and business idea have been variously used by others since. I wanted a term that was loose and ambiguous, open to some re-interpretation, able to adapt itself to the specifics of situations much as a creative chef adapts to missing ingredients. Later I discovered others, principally the interpretive sociologist Alfred Schutz, had used the term in similar ways. Part of the problem is of analytic level. I needed a clear distinction between the firm and its industry. The industry recipe is not the knowledge that is both necessary and sufficient for the firm. For the manager responsible for thinking out what to do about the firm s problems, the industry recipe deals with uncertainties of many types in addition to suggesting appropriate corporate structures and strategies. My hypothesis was that managers drew on this body of knowledge to cope with defective data about their company s situation. But this gave them only part of the answer. There were still sufficient specifics to make their personal contribution important. In the sense of my previous definition of entrepreneurship, I imply managers are often being unenterprising in copying others solutions rather than creating new answers for themselves. Inasmuch as the recipe is like a comprehensive theory, those managers adopting it would seem to approach the decisionmaking automata I criticize above. In fact, I hypothesized that this would be found to be an over-simplification which I could only explore once I had identified a recipe. I hoped that I could elicit several recipes, and that I would see that they were significantly different from theories. Ultimately, as will be seen, recipes are merely suggestive about the consequences of following them, though they also imply cautions against ignoring them. But they say nothing about the consequences of following different lines of action. They are more like road maps which show only the correct route; once off that
10 7 INTRODUCTION route they offer the traveller no guidance. In this respect theory is much more powerful and comprehensive. Despite Popper s protests to the contrary, a well formed theory is logically complete, with this very completeness rendering entrepreneurial input or subjective interpretation unnecessary. A recipe, by contrast, is open, incomplete, ambiguous and in need of interpretation before it can be used as a guide to the firm s action even within its own rationality. It is much more like a local culture. Indeed the industry recipe is the business-specific world-view of a definable tribe of industry experts, and is often visibly articulated into its rituals, rites of professional passage, local jargon and dress. Cultural anthropology has helped us understand that other peoples often behave differently for reasons that are perfectly understandable once they are explained. People we may think of as primitive are often living out cultures as richly complex and sophisticated as our own, and so deserve our respect. Indeed, they often display a greater understanding of their society than we do of our own. Similarly, industry recipes are perfectly comprehensible from their adoptees viewpoint. Yet they deal with only part of the perceived uncertainties. The managerial task of dealing with those remaining is clear. The methodological position is one of respect for management and for its creative contribution. But once we, as uninvolved observers who need not accept the local culture, analyse the recipe s structure and content, we are able to consider it against the wider socioeconomic background. Towards the end of this book I argue that, irrespective of the theoretical implications, the recipe should prove to be a useful analytic device for both practising managers and industry analysts. They could use it, for instance, to diagnose corporate performance, measure the fitness of the firm for its industry, guide strategic thinking and evaluate the appropriateness of mergers, etc. It suggests a different type of corporate history which focuses on the recipes senior management adopt to guide their decision-making (Grinyer & Spender 1979). It is also a training tool for raising the level of managements awareness above what they uncritically take to be the selfevident truths of the situation (Spender 1983). But observing the power that the relevant industry recipe had over the managers in my research sample gave me a sense of closure on this line of research. I could not see that it led anywhere else. It had little value for that substantial majority of business academics who search for those predictive theories that ignore managerial creativity. Although the industry recipe provided an interesting context for longitudinal methods, research was hobbled by the difficulty of operationalizing the recipe as a body of knowledge. In the absence of a strong theory of managerial cognition, how
11 8 INTRODUCTION could one know the recipe was adequately complete except by observing its use? How could one validate a proposed recipe? How could one relate events unconsidered within the recipe to its subsequent development? I see the industry recipe as part of a particular firm s response to the varying competitive conditions, work practices, technologies, public policies, legislation, and so forth prevailing at the time. With the considerable benefit of hindsight, academic research may well reveal which of the many obvious changes occurring at any particular time lead to responses which eventually find their way into the recipe. My research was not directed towards this objective. I was interested in the practicality of my new analytical concept, the industry recipe. I also believe managers differ from academic researchers, for they must respond to their present. For this reason, I have not provided data about what has happened since the 1970s in the industries I examined. I see such data as irrelevant to an understanding of the recipes used at the time of my research. Sometime after this research was complete I began to hear about expert systems. I saw that I had made a crude attempt to codify what might now be called the industry s strategic knowledge-base. This book s methodology section is about doing what is now called knowledge engineering. The recipe is not a theory; it is actually a primitive knowledge-base for an as yet unspecified expert system. Like most practical expert systems, the recipe is advisory rather than prescriptive. It offers managers support without relieving them of their responsibilities. In the same way that expert systems demand interaction with those they support, the recipe leaves a place for the manager s creative contribution. There is an exploding interest in all types of expert systems, from those that relieve us of mind-dulling repetitive work to those that act as tentative but portable encapsulations of extremely scarce expert knowledge. Senior managers are clearly experts, and senior management decision support is clearly one of the most exciting areas for expert system development. I have hopes that the research covered here can make a contribution in this new field. Several other people, who knew as little as I did of uncertainty or of expert systems, have to answer for the fact that they encouraged me to press ahead, both with the original research and with this rewrite. I am moved by their faith in me. John Child became a demanding external examiner yet remains a friend. He was largely responsible for getting me going again after our time at Kent State. He also brought my ideas to the attention of his research students, especially Gerry Johnson and Homa Bahrami. Both have since encouraged me most persistently. Peter Grinyer showed great generosity as we worked together at the City University Business School. We
12 9 INTRODUCTION were able to use earlier versions of these ideas in a study of change in a 200-year-old engineering company (Grinyer & Spender 1979). David Weir was my internal thesis supervisor, a severe critic and a fast friend. He was also instrumental in getting me to rework this material after a difficult period at UCLA. John Grant and unknown others shepherded the original thesis to the 1980 A. T. Kearney Award. Dan Schendel and Chuck Hofer, who have earned an important place in our discipline s history with their determination to codify the strategy and policy area, were persistently supportive. All these, and others, set me a fine example of academic collegiality which I want to acknowledge here and hope to repay to future students of our subject. My thanks to them all. J.-C. Spender University of Glasgow Note to the Reader Throughout this book I have used the masculine pronouns, he, him, his, wherever the alternatives he or she etc. would be clumsy and would interfere with readability. However, the masculine pronouns should always be understood in their generic, not in their gender-specific, senses.
13 2 Classical Management Theory 2.1 Introduction In this chapter I begin assembling the hypothesis that I eventually test in the field research. Uncertainty resolution is theory construction. So my ultimate objective is to build and test a theory of strategic management as a process of theory construction. I argue that theory is required to make sense of the world, and that managers are often without appropriate theory. But managements problems are also highly varied. Some of the activities for which they are responsible may be readily modelled. Many of the classic operational research applications fall into this category. But this monograph focuses on determining the firm s strategy. I argue that the task of creating or choosing strategy is at the other extreme, a wicked problem that can scarcely be framed, let alone modelled. In this area managers are so short of theory, and their firms circumstances are so contextually specific, that to understand and control what is happening managers must build the theories they use. In Section 2.2 I begin the task of revealing the theories of management implicit in classical management theory. This is defined broadly to include the work of Adam Smith, Max Weber, Henri Fayol, and Frederick Taylor as well as that of the post-war Human Relations movement and the Contingency Theorists. My purpose is to reveal these theorists axiomatic presuppositions, their basic building blocks, rather than their work s finer points, weaknesses and implications. If, as I assert, this book is about practical management it is reasonable to ask why the reader must be dragged through this dusty literature. The most important part of the answer is that these writers thoughts live on in our everyday managerial practice. In this case at least, a knowledge of history is a floodlight on the present. In detail, this analysis will also reveal why classical theory still forms the backbone of managerial theory, and is still the basic substance of most management education programmes. We see first that many of the everyday ideas that managers bring to their sense of their function and to their theory-building are derived from these early writings,
14 11 CLASSICAL MANAGEMENT THEORY even though they may be unaware of it. Second, we see that classical theory is perfectly adequate for framing the theoretical problems with which most of today s researchers are struggling. Classical management theory successfully spells out the issues with which a manager s constructed theory of the situation must deal. In particular, classical theory spells out most of the terms and topics that must be brought together in any comprehensive theory of management. While job definition, co-ordination, direction, motivation and profit and so forth are familiar, the terms strategy and policy are vague and are used very wildly. Part of my purpose in analysing classical theory is to show that policy differs from strategy, and that both can be adequately defined. Theories develop, and are replaced, because criticism shows them to be flawed. New theory starts out as an answer to particular previously noted defects. Classical theory has many weaknesses, yet it has survived decades of criticism. In Section 2.16 I look at these criticisms. My purpose is to identify and frame the particular weakness that my new theory will address. It is directed at classical theory s inability to handle the uncertainty in management s information about the firm. I then review the meaning of policy and strategy in the light of these criticisms. This sets the scene for Chapter The Background One tradition of organizational theorizing, dating back beyond Adam Smith s Wealth of Nations and the beginnings of micro-economics, treats the firm as an independent entity operating in a social or economic market environment. Smith s theorizing separates two elements, firms (suppliers) and markets. The firm is an atom operating within a market-place made up of firms and, possibly, other types of atoms such as public institutions. The theory links the market at one level with the firm at another. A second, quite different tradition of organizational theorizing, found in Weber (1969), Taylor (1967) and Fayol (1949), treats the firm itself as the larger context, the atoms being the individuals or work groups who make up the firm. While Smith deals with individuals, he does not obviously propose a theory of how they come together into a firm. This second kind of theory separates firms and their constituent individuals and deals with how team members with varying skills can be organized to produce a coherent response..