orgtheory.net

b-schools don’t make managers anymore

New Republic has an interesting article on the shift in b-schools from management to consulting:

But some of the people I spoke to asked a slightly different question: Even if you could reclaim a chunk of those blue-collar jobs, would you have the managers you need to supervise them?

It’s not obvious that you would. Since 1965, the percentage of graduates of highly-ranked business schools who go into consulting and financial services has doubled, from about one-third to about two-thirds. And while some of these consultants and financiers end up in the manufacturing sector, in some respects that’s the problem. Harvard business professor Rakesh Khurana, with whom I discussed these questions at length, observes that most of GM’s top executives in recent decades hailed from a finance rather than an operations background. (Outgoing GM CEO Fritz Henderson and his failed predecessor, Rick Wagoner, both worked their way up from the company’s vaunted Treasurer’s office.) But these executives were frequently numb to the sorts of innovations that enable high-quality production at low cost. As Khurana quips, “That’s how you end up with GM rather than Toyota.” 

And:

The new managerial class tended to neglect process innovation because it was hard to justify in a quarterly earnings report, where metrics like “return on investment” reigned supreme…

The country’s business schools tended to reflect and reinforce these trends. By the late 1970s, top business schools began admitting much higher-caliber students than they had in previous decades. This might seem like a good thing. The problem is that these students tended to be overachiever types motivated primarily by salary rather than some lifelong ambition to run a steel mill. And there was a lot more money to be made in finance than  manufacturing. A recent paper by economists Thomas Philippon and Ariell Reshef shows that compensation in the finance sector began a sharp, upward trajectory around 1980.

My take: It’s not clear to me that this is such a bad thing. It really depends on what you think about the modern American economy. If, like Jerry Davis, you think that transition to securitized virtual firms is bad, then this is just another symptom of the problem. If you think that the economy is now different and America’s advantage is in financial machinery, then maybe it’s ok. Either way: who *is* training the managers? Our products have been getting better over time – who’d doing that? Is it all foriegn firms?

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Written by fabiorojas

December 24, 2009 at 12:47 am

5 Responses

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  1. The long run trend is towards more abstract representations of value. Aside from the gut reactions that finance is “icky”, it’s not obvious that this is bad–though they do seem to do a better job of extracting rents than creating value.

    The manufacturing workforce has collapsed as manufacturing output has exploded. Managers are needed less, and their skills can’t be taught in a classroom. China, Brazil, etc. are all also slashing manufacturing jobs.

    These corporate stereotypes are also out of date. GM and Ford actually have good cars now. Toyota is dealing with various troubles–among them, a shift in the price of the yen which slashed profits, for which they were unhedged. They haven’t done the M&A of VW or the financing options of GM. They could use a few more finance/design types in upper management.

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    Thorfinn

    December 24, 2009 at 4:02 am

  2. The economy is different because of search engines, cell phones and easy organizers (PIMs, calendars, address books, social networking, and spreadsheets). Not financial machinery. People used networking shortcuts to financial wisdom.

    In this new economy, the cost of networking action has fallen greatly, whereas the cost of developing a solid abstract representation has remained the same or increased, in many instances.

    One sees this in the pharma field especially, where double blind studies are avoided and self-funded “investigations” are the norm. Firms won’t let genetically modified seeds be tested independently, and so on.

    Statistical literacy may improve again, but for now it’s the pits.

    Like

    Tony

    December 24, 2009 at 6:21 am

  3. Finance has a limit ito size of economy it can take up. It is also not a high employer.
    Unless the USA rebalances, it’s econmy will remain sickly.

    Like

    Thabo Mophiring

    December 24, 2009 at 11:18 am

  4. 2 basic problems with an “advantage in financial machinery”:

    1) In the medium term, financial management moves to where the capital is, not vice versa. It’s nice to imagine that globalisation “makes it all different” but there’s very little evidence for that. If more and more of the value chain is sited in East Asia (or wherever), more and more of the finance industry will move there too.

    (Economists don’t see this as a problem, but that’s because they don’t actually believe in national economies… whether or not you have that luxury depends on the job that you hold…)

    2) The latest financial crisis, just like many before, highlights Minsky’s notion, encapuslated by Thabo Mophiring above that there’s a limit to the percentage of an economy that can be occupied by the finance sector before said economy becomes inherently unstable… It’s probably going to take the next big crisis before people get wise to this, but just because it takes people time to catch on to reality doesn’t mean one shouldn’t think about the implications. In a darkly comic kind of way, this is one of the ways (1) actually occurs. Alternative finance centres get their start from local capital right after the “masters of the universe” have imploded for the nth time…

    Like

    Metatone

    December 25, 2009 at 1:58 pm

  5. Balance is the key…
    Nice Post

    Like

    Sretno

    December 27, 2009 at 4:36 am


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