How Crisis Shapes the Corporate Model

29 March , 2009

EVER since the financial crisis broke in earnest last September, history has been mined for nuggets of insight. The Great Depression, the Panic of 1907, Japan’s lost decade of the 1990s, the Swedish banking crash in the late 1990s, and so on. Each time, though, the focus has tended to be on the lessons learned for economic policy and theory.
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The New York Times, 1946

After the Great Depression, the American railroad system was among several forces that helped to build huge and wide-ranging companies.

Let’s try a different lens. How have past crises shaped management thinking and strategy? Innovation in management, after all, is adaptive. Management is not a science, like physics, with immutable laws and testable theories. Instead, management, at its best, is an intelligent response to outside forces, often disruptive ones.

Times of severe economic duress, management experts say, can serve to sharply accelerate trends already under way.

The Depression and its immediate aftermath, they say, was such a catalyst for forces already in motion. The main development, they note, was the rise of the modern multidivisional enterprise like General Electric, DuPont and General Motors. It was made possible by the mature technologies of transportation and communication — railroads, the telephone and the telegraph.

The technologies made it possible to monitor and coordinate business operations as never before. And the Depression made it imperative for managers to achieve efficient economies of scale to tap national markets, ensuring corporate survival amid a downward spiral in total demand.

A modern version of that kind of technology-aided shift in management practice and corporate organization could be in the offing, says John Hagel III, the co-director of the Deloitte Center for Edge Innovation, a research arm of the consulting firm.

The sharp downturn, according to Mr. Hagel, will force companies to go beyond simple cost-cutting to take a hard look at the economics of their businesses. Most companies, he says, are actually bundles of three different businesses: infrastructure management, product and service development and commercialization, and customer relations.

The current crisis, Mr. Hagel says, opens the door to “an unbundling of the corporation” to achieve greater efficiency and profitability. The trend, he notes, is already exemplified by specialist companies that focus on particular infrastructure fields. In logistics, Mr. Hagel says, many companies farm out those chores to Federal Express and U.P.S.; in call centers, he points to Convergys; and in contract manufacturing, to Flextronics.

Of the three business areas, new product development is the one that lends itself not to size, but to small creative teams, and thus is the most difficult for large corporations. Mr. Hagel cites Procter & Gamble as a big company that understands the benefits of unbundling. It has set a goal of getting half its new-product innovations from outside the company, through licensing and collaboration with partners. And P.& G., Mr. Hagel says, has invested heavily in Web technology and clever software to analyze and nurture customer relations.

To Mr. Hagel, such developments look like an Internet-era rerun of the corporate transformation of the 1930s and ’40s. “We’re facing the potential to have that play out again — this time with digital infrastructures that allow companies to organize and manage their activities in new ways,” he said.

Manufacturing innovations and distribution patterns have been powerfully shaped by economic shifts. Japan’s just-in-time, lean manufacturing system, management experts note, was an adaptation to postwar poverty, a shortage of capital and scarce land for factories, while pro-market policies in China and India opened the door to globalization.

There may well be a different pattern of global production and distribution when the world economy emerges from the current crisis, says George Stalk, senior adviser to the Boston Consulting Group. Assuming that long-term oil prices average $80 a barrel or so, and that roads, ports and airports continue to be congested, smaller factories closer to home — in the Midwest or Mexico, for example — may be more economical and flexible than those in Asia. “For a lot of goods, China will no longer be the preferred source,” Mr. Stalk said.

Times of turmoil also bring changes in social attitudes and politics, which ripple into new management practices. Labor unions, for example, rose to prominence during the Depression. Unions brought large companies a needed dose of industrial stability, as the earlier ideological wars between labor and capital receded. If the workers were less likely to be radicals, the days of robber-baron owners were in eclipse as well.

Their power was supplanted by “a new subspecies of economic man — the salaried manager,” wrote Alfred D. Chandler Jr., in his Pulitzer Prize-winning history, “The Visible Hand: The Managerial Revolution in American Business” (Harvard, 1977). Chandler called the model “managerial capitalism,” and the role of management was to balance the interests of a diverse group of stakeholders including workers, government and shareholders.

That model held sway until the 1980s, when the stagnation of economic growth and corporate profits of the 1970s brought a narrowed focus on stock-market returns as the primary measure of management performance. In politics, the Reagan revolution decreed that government was not the solution, but the problem.

TODAY, the pendulum is swinging back to a model in which corporations will be regarded more as social organizations, whose obligations extend well beyond Wall Street, according to Rakesh Khurana, a professor at Harvard Business School. He says that in seeking government aid, the automakers portray themselves as “pillars of their communities and pillars of American manufacturing, not purely economic entities.”

“The narrative for corporate America has changed,” Professor Khurana observed. “Government is not seen in opposition to the firm, but as a partner.”

Such swings, it seems, are the norm historically. “If there’s an ideology of management,” he said, “it is pragmatism.”