The crisis of innovation in business schools and consultancies: Adrian Wooldridge

In the thriving world of management advice, the once-vibrant industry has hit a stagnation, lacking the innovation and intellectual vigour of past decades. Despite a surge in management consultants and business professors, the output remains disproportionately low. Rooted in the maturity of the industry and a penchant for overgrowth, business schools and consultancies grapple with ethical compromises and a retreat from the bold ideas that once fueled their success. The current complacency in leading U.S. companies contributes to the stagnation, highlighting the urgent need for fresh perspectives and innovative management strategies to navigate the evolving challenges of today’s business landscape.

Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.

By Adrian Wooldridge

Management advice is one of the world’s most successful industries. Business schools have turned into the training ground of the new elite. Management consultancies bestride the world dispensing advice. In 2023, the US alone had more than two million management consultants and almost 115,000 business professors.

Yet this multibillion-dollar industry has lost the intellectual momentum and edge that it had during the 1980s and 1990s, when business schools and management consultancies reverberated with new thinking, and businesspeople hyperventilated over every new issue of the Harvard Business Review. Michael Porter redesigned strategic thinking by applying economic theory to business conundrums. Michael Hammer re-engineered the corporation for the age of smart machines. Gary Hamel and C. K. Prahalad anatomized the core competences of the corporation while Christopher Bartlett and Sumantra Ghoshal offered multinationals advice on how to restructure themselves for a new age of hyper-globalization.

Both the ideas and excitement have long since evaporated. The last flurry of new thinking arguably came in the early 2000s with the invention of Agile in the tech world (teams got into regular “scrums” to innovate and fix things) and the discovery of new markets in the emerging world (Prahalad argued that there was a “fortune at the bottom of the pyramid” if you could learn how to sell to the poor by, for example, selling small packets of washing powder). Since then, little or nothing.

The biggest new idea that is doing the rounds — stakeholder capitalism — is neither new nor, strictly speaking, an idea. In 2019, the Business Roundtable declared portentously that “for long-term success companies must deliver for all stakeholders.” But critics of Anglo-Saxon capitalism have been making similar arguments since the invention of the limited liability company in the middle of the 19th century. And the Roundtable’s statements did not address the questions that a real theory would have to confront: Who exactly is a “stakeholder”? How do you make trade-offs between different constituencies? And what does stakeholder theory mean for, say, executive pay? Most companies continued just as before, certainly when it came to executive remuneration, while sprinkling their annual reports with saccharine phrases about “purpose.”

Why is so much “input” (all those professors and consultants) leading to so little “output”? Part of the answer lies in the maturity of the industry. There are only so many ideas that you can have about managing people or resources, and many of the best were generated long ago. Two management thinkers — Gary Hamel and Michele Zanini — have produced an “S” curve diagram of management innovation (based on research conducted with Julian Birkinshaw of London Business School). It takes off slowly in the 1880s with scientific management, profit sharing and R&D labs, accelerates from the 1920s to the 2000, and then flattens out.

A combination of maturity and over-ripeness has gummed up the two great engines of the management industry. Business schools have imported all the defects of the surrounding academic environments — specializing in walled off sub-disciplines such as marketing, on the one hand, and windy statements about the evils of capitalism, on the other. Consultancies became so obsessed with growth that they compromised their ethics (McKinsey once advised Johnson & Johnson to turbocharge growth in the opioid market by targeting “high abuse-risk patients”) and are now trying to compensate by engaging in woke-washing (McKinsey’s various websites are compendiums of the latest woke fads).

A second explanation lies in the reversal of many of the trends that drove the management boom of the 1980s and 1990s. Whatever the world is today it is certainly not “borderless,” as Kenichi Ohmae predicted. The reigning management gurus of the golden age also pushed neoliberalism too far: Michael Jensen’s “agency theory” encouraged CEOs to demand ever more ludicrous rewards while Michael Hammer’s reengineering theory encouraged companies to “downsize” almost as a routine. No wonder today’s management theorists prefer to stick to the small scale.

Michele Zanini presents a particularly intriguing explanation of what is going on: consolidation and complacency. The management boom took off in the United States in the 1980s because American companies were “getting hammered” by foreign competitors, particularly from Japan. They had no choice but to think about new ways to organize themselves or produce things. People got excited about Tom Peters’ work on excellence or Jensen’s theory of the firm because they saw them as ways of reviving organizations that might otherwise be doomed (In Search of Excellence, co-written by Peters and Robert Waterman, sold 3 million copies within four years and Jensen’s article, co-written with William Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” became one of the most cited articles in the history of economics.

By contrast, today’s leading US companies are fat and happy. Not only has American capitalism seen off the threat from Japan. US companies dominate their respective markets not just in tech but also in manufacturing and retail. The Economist calculates that, since 1990, the average age of companies in the Fortune 500 has increased from 75 to 90.

These incumbents focus on fine-tuning their management machines with incremental ideas or on defending their walls by buying up rivals rather than on the wholesale rethinking of markets. Zanini argues that they tolerate management bloat (those ever-expanding HR departments) because they are making such healthy profits.

Does the stagnation of management ideas matter? We have already conceded a downside to the golden age. Reengineering and agency theory had serious downsides. Faddism disorientated many employees. I nevertheless think that the great stagnation is a problem. Researchers led by Nicholas Bloom of Stanford University and John Van Reenen of the London School of Economics estimate that better management accounts for roughly a quarter of the 30% productivity advantage of US over European companies. General Motors crushed Ford in the 1920s and 1930s because it invented a new management idea — the multidivisional firm (that is giving different divisions within GM responsibility for different cars). And Toyota in turn crushed General Motors because it listened to ideas about “total quality management.” The best management gurus such as Peter Drucker have shown a genius not only for identifying management problems but also for helping to solve them.

The business world has no shortage of challenges and changes that demand serious thought. The reversal of globalization is forcing changes in everything from strategy to organization. The revival of industrial policy is compelling firms to engage with politics in a way they have not needed to since the 1970s. Some Asian companies threaten to become global challengers to the West in the way that Japanese companies did in the 1980s. And AI promises to rewrite some of the fundamental rules of business.

The biggest danger of not producing new ideas is that we will revert unthinkingly to old ideas: Multinational companies, for example, will revert to the national fiefdoms of the 1970s despite the information revolution or rely on the old technique of employing retired politicians to give them political advice despite the volatility created by populism. AI is spreading scientific management techniques to knowledge workers — break work down into distinctive tasks, make liberal use of sticks and carrots and monitor everything the worker does — despite ample evidence that, over the long-term, scientific management lowers both morale and productivity. The only way to escape being trapped by old thinking is to produce some new thinking. The sooner the better.

Read also:

© 2024 Bloomberg L.P.

Visited 683 times, 7 visit(s) today