The Role of Management in Economic Growth

Invention does not necessarily lead to innovation. In the first century  AD, Heron of Alexandria invented the aelopile, which was arguably a steam engine, since it converted steam into rotary motion; but it was basically a curiosity, and never put to practical use. The Chinese were the world’s technological leaders from about 500 AD to 1500 AD; but they also failed to put many of their inventions to commercial use.

Knowledge is always highly specialized. By itself, it yields noth- ing. Humphry Davy invented the carbon filament lamp in 1800, but it was not until 1879 that Thomas Edison, after experimenting with thousands of filaments, came up with a carbon filament in an oxygen-free bulb which had long life and commercial applicability. As Schumpeter said, innovation is about  new  combinations. Who puts this knowledge together and brings useful products and services to market? It’s entrepreneurs and managers, harnessing the skills of exceptionally talented individuals. Without manage- ment, there may be invention, but there is unlikely to be innova- tion. It is the entrepreneurs and managers who together perform the orchestration functions necessary to create new services and products that buyers want. In short, it is management and the organizations that they build that make knowledge useful and that make skilled workers productive. Frequently, the entrepreneurial and the managerial functions morph into each other, with man- agers playing a fundamental role in transforming inventions into innovation.

Early management systems and organizational structures were based on the Prussian Army, and sometimes the Church. Such emulation was not out of awestruck admiration. It was simply because that was all there was around to use as a model. Not surprisingly, fairly rigid hierarchies and command-and-control structures came to characterize the first large business organiza- tions. These early organizations, nevertheless, sufficed to build the railroads, steel mills, banks, automobile manufacturers, big department stores, and telephone companies in the early twenti- eth century. The command model remained dominant for almost another century. Industrial enterprises were shaped along func- tional lines, with separate departments for finance, manufacturing, and marketing. In the intervening years, some amount of decen- tralization came to be employed and divisions with independent profit centers emerged at DuPont, General Motors, and several other large US enterprises; but these organizations, nevertheless, maintained deep hierarchies.

Reflections on the past remind us that management and orga- nization lie at the heart of the performance of both individual enterprises and national economies. The purpose of organization is to facilitate collective effort, and to orchestrate cospecialized assets. We have been taught the virtues of the price system in achieving some level of coordination and  response  to  changing  technolo- gies and market circumstances (Hayek, 1945). But it is not just traders and arbitrageurs who respond to market signals. It is also business enterprises. The business enterprise and its management are fundamental to economic response. They effectuate the deploy- ment and redeployment of resources in response to price signals. This is often overlooked. An economy with a competitive mar- ket structure will not spawn the creation of viable enterprises unless there are exceptionally capable entrepreneurs and managers orchestrating necessary responses.

In this chapter, I identify enterprise capabilities that are needed (in both the small and large company context) to succeed in an open and competitive economy. This genre, called “dynamic capa- bilities”, is advanced not only as a descriptor of the managerial skills and organization structures which must exist for superior enter- prise performance, but also as the outline for a possible new theory of the business enterprise, or at least a theory of the economic function of the manager in a market-based economy.

Source: Teece David J. (2009), Dynamic Capabilities and Strategic Management: Organizing for Innovation and Growth, Oxford University Press; 1st edition.

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