Below is a part of a coursework I did for uni, reviewing the development of management theories. It was interesting to read and write about it, so I thought I'd share it.
Development of management theories
While management thought can be said to date back to the ancient civilisations (e.g. the building of the pyramids in Ancient Egypt) (Hatch, 2012), it is only fairly recently that management has truly established itself as a discipline. In order to have a good understanding of the evolution of management thought, it is crucial to put it into historical context, and in the perspective of the broader development in Western thought (management as we know it mainly being a Western artifact until the second World War). The paper has decided to review the development of management theories over time by correlating them to the course of development of ideas in the Western world over the history. Only in this way it can be truly understood how management theories have developed to become what they are at the present moment. It will be discussed not only how the development of society has shaped management discipline but also how the different management theories have influenced the world we live in.
The context of development of management thought
The emergence of modern economics starting from Adam Smith’s “An Inquiry into the Nature and Causes of the Wealth of Nations” in the second half of the eighteenth century, has set an important milestone for development of European thought. The work of Adam Smith has laid the basis of understanding the benefits of separation of duties and of specialisation, laying an important basis for how generations to come were to think about distribution of work, and by extension, management. Along the lines put forward by Adam Smith, economies increasingly evolved from then established mercantilist thinking towards what was to become modern capitalism.
The nineteenth century saw the emergence of limited liability companies, which was made possible starting with the creation of the general limited-liability law for manufacturing companies in the state of New York in 1811 and of Limited Liability Act in the UK in 1854 (The Economist, 1999). In its Dec. 18, 1926 edition, The Economist elevated the anonymous inventor of the limited liability company at the same level as other pioneers of the Industrial Revolution, such as Watt and Stephenson. The limited liability company was pivotal in the process of establishing the role of manager by creating an independent entity in the society in form of a company, and separating liability from shareholders. Some decades later, during the 1870’s and 1880’s, the USA saw the emergence of Big Business, the large-scale business corporation. This has brought to another level the concept of both specialisation, but also the concept of bureaucracy and management. Inevitably, the rise of the modern corporation has created an unprecedented need for bringing management to another level. Furthermore, the emergence of publicly traded corporation has brought another significant change, in form of clear separation between ownership and management. Unlike family businesses, publicly traded large corporations have very fragmented ownership. Unlike owners in family businesses, which would typically be actively involved in the workings of the company, by being CEO or holding other important management functions, the publicly traded corporation would exhibit a completely different situation. The concept of shareholding and ownership (in the traditional sense of the word) begin to be very different. Although the shareholders can and would inevitably exert influence over the company, the managers would be the ones truly responsible for the fate of the company.
Foundation of modern management theories
Taylor is the founder of scientific management (Locke, 1982). The emergence of scientific management as formulated by Taylor is in the context of the philosophical currents of positivism and rational thought in the Western mainstream as well as changing and modernisation of business environment. The emergence of Taylor’s “scientific” management is placed in a period where the general public was enamoured with science; in order to be able to appeal to the public, anything had to be labelled as “science” (Triebwasser, 1998). Taylor’s scientific management has exerted powerful influence, leading to adoption by significant figures such as Lenin, Stalin and Henry Ford (Hatch, 2012). Henry Ford’s Ford Model T is a hallmark of wholesale adoption of Taylor’s model. Peter Drucker (1976), one of the most important management scholars of the second half of the 20th century, referred to Taylor as being “the first man in history who actually studied work seriously”. Taylor also advocated the existence of “one best way” of doing a job (Taylor, 1912), a principle further emphasized by the Gilbreths for the bricklaying process in the construction industry. As a part of increasing globalisation, Taylorism was adopted in Japan in 1912.
Moving to the middle of the twentieth century, Henri Fayol, a French engineer who, according to himself, managed to turn around the French mining and metallurgical combine “Comambault”, “solely with the application of a new way of running the company” (Verney, 1925, p. 8). Fayol identified five central elements in management: planning, organizing, command, coordination and control (Wren, 2001). Due to his background in mining, one of the points powerfully stressed by Fayol is the criticality of planning in organisations, both short-term and long-term (Wren, 2001). Fayol is famously quoted to have said “The best of plans cannot anticipate all unexpected occurrences which may arise, but it does include a place for these events and prepare the weapons which may be needed at the moment of being surprised” (Fayol, 1949). A crucial observation made by Fayol is that people in the organisation are more important than the organisation, its structure and composition, and that their personality can make the difference between a bad and an excellent organisation (Fayol, 1949). All these management practices emerged in industrial context, based on Fayol’s experiences with coal mines and iron and steel production. They have however been widely applied.
The development of management as a separate discipline has deeply influenced the development of society. As such, it created a new class of people. Previously, the categories of people in society were the blue collar workers, the white collar workers, the bourgeoisie (the owners of means of production), as well as the aristocracy. Gradually, with the dilution of the concept of ownership of means of production, the old category of people, the bourgeoisie has been replaced by this new category, namely the managers. The managers came as a new category to the middle and upper classes, in spite of not owning the means of production and at the same time not being part of aristocracy either.
Management thought after WW2
The great economic expansion in much of the world during the decades following the Second World War was followed by an expansion of tertiary education as well as an explosion in business degree teaching (Schofer et al, 2005). During this time, a large number of theories have resulted from the great amount of research done in business and management. Of particular importance has been the materialisation of the concept of strategic management in the 20th century, building further upon the management theory proposed by Fayol in the context of mining industry. Harvard professor Michael Porter has made great contributions, among others by his Five Forces model (Porter, 1979) and drawing the link between competitive advantage and strategy (Porter, 1996). Kaplan and Norton’s Balanced Scorecard (1996) has further contributed by providing a tool which would enable systematically measuring of not only financial performance but of a much broader array of factors, such as Learning and Growth, Business Processes and Customer Perspective, in order to build the company’s performance systematically starting from the strategy. Although the model has subsequently been criticized for its complexity, this has been an important step in order to move modern management fom solely relying on financial measurements and more onto a path where a more sustainable and long-term approach is taken.
Along with increasing globalisation, non-Western management thinking started to strongly influence Western management. Most notably, after it emerged from the second World War, Japan has made great advances, and has established itself as powerful and influential player in the global economy. As Japanese companies have developed and began to conquer what was earlier assumed to be an exclusively Western-dominated corporate world, Japanese management thought has increasibly gained . Important management influences which came from Japan are improvement philosophies such as Lean and Just-in-Time. It was famously believed that Japanese cars would never become able to be competitive on the American market, USA being the first country to mass-produce cars. Toyota’s subsequent success in the American market has proved this assumption wrong, and has attracted considerable attention to Toyota Production System, which emphasizes Just-in-Time and LEAN philosophies being adopted as management practices in USA and around the world.
In the decades of the second half of the 20th century, there appears to be a convergence of management thought on basis of its fundamental assumptions (Ghoshal, 2005). All of the management thought seems however to be building on the same fundamental assumptions. These fundamental assumptions are grounded in the philosophy that defined the western thought, liberalism. Management thought has inevitably been greatly influenced by the developments in thinking about the other social sciences, particularly economics. It is critical to emphasize that although social sciences are fundamentally different from natural sciences, the former has adopted methods and patterns from the latter without proper concern to their unfitness to social sciences. One of the main pitfalls in economics is, as characterised by Milton Friedman - representing the Chicago school of economics - that theories in social sciences, unlike those in natural sciences, have a tendency to be self-fulfilling (Gergen, 1973). The fundamental assumption which economics was built upon is the liberalist point of view, essentially the gloomy theory that humans act purely in self-interest (Ghoshal, 2005). Another key fundament of economics is the assumption that the humans are rational and act in order to maximise benefits. Although this particular notion has been disproved many times, it seems that it still persists if one looks at economics theories widely used. This is a fundamentally wrong assumption to build upon in social sciences (Ghoshal, 2005). American economist Milton Friedman (2002, p. 133) has encapsulated this concept in saying “Few trends could so thoroughly undermine the very foundation of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible”. Interestingly, even at the heart of scientific management, Taylor believed that the improvements in productivity gained by techniques such as uniform work practices and inventory control systems would result in managers being able to pay higher wages, while lowering production costs, leading thus to benefits to both society and the factories (Hatch, 2012).
Future of management thought
A basic assumption in the discipline of management is a widespread foundation concept that the role of the manager is to create shareholder value. However, this belief should not remain unquestioned (Ghoshal, 2005). An important argument is a basic misunderstanding. Unlike in many small businesses, typically in large companies, shareholders cannot be said to be owners of the company in the same sense as owning a physical object. A more accurate description of the relationship of the shareholders with the company is that the shareholders would be entitled to a certain part of the cash flow and earnings of the company. The shareholders will not exercise owner power in the classical sense of the word. Instead, shareholders would actually be able to switch company (switch ownership) sith much less costs (much easier) than, e.g. employees of the company. Considering these, there can not be any basis for asserting the principle of shareholder value maximisation (Ghoshal, 2005). In the future development of the management discipline, this basic assumption needs to be challenged. Perhaps, a more valuable paradigm wherethrough management can be seen and interpreted is creating value for the employees and the society in general through creating performance for the company.
Globalisation is naturally another factor which is likely to significantly influence the development of management theories over the next decades. The rising economic power of the China may be a precursor of a world in which management thought (and business thought in general) is less characterised by Western influence but increasingly shaped by a multi-polar world. The example of Japan in previous decades may just have been a preview of how a non-Western power can influence Western business thinking. It is quite likely that history will repeat itself, however in a much greater scale.
Another trend that seems to be distinguishing itself from other influences in management is that there is a constant tendency to build flatter, decentralized structures, which are more agile and can better adapt to the changing needs of the environment. Kira (2003) notes that “the industrial work system is based on centralization, standardization and specialization, whereas the post-industrial system is founded in decentralization, diversity, and generalization”. This may in the future contribute to a major shift in organizational thinking. Nevertheless, it is important to note that such a change cannot occur without changing the basic assumptions which management thinking is based on so far. Positivist, natural science-inspired models may no longer be appropriate to understand and tackle this new paradigm shift towards a decentralized, diverse and organic reality. Management theory may thus need to undergo a fundamental metamorphosis in order to suit the realities of the new business environment.
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