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ManagementintheSecondMachineAge

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Published:May 12, 2014 /Summer 2014 / Issue 75

TECHNOLOGY

Managementin
theSecond
MachineAge
Future leaders will succeed by being
entrepreneurial and by rethinking the balance
between nancial and social goals.
by Tim Laseter

Thedeveloped
worldstands
atthecuspofa
major

Illustration by Lars Leetaru

transformationunlikeanythingexperienced
sincetheGildedAge.Thatperiod(thename
wascoinedbyMarkTwainandhisneighbor
CharlesDudleyWarnerintheir1873satireof
thetimes)offeredimmenseeconomic
expansionandwealthcreationintheUnited
States,butitalsoledtoamajordisruptionin
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theoccupationalmixofthecitizenryandan
associatedsetofsocialupheavals.
Entrepreneursbuiltcolossalbusinesseswhile
laborersshiftedfromfarmstofactories.
ErikBrynjolfssonandAndrewMcAfeeofMIT
havecoinedanewtermforthecomingerain
thetitleoftheirlatestbook,TheSecond
MachineAge(W.W.Norton,2014).They
chronicletheadvanceofMooreslaw(the
seeminglyinexorabledoublingof
microprocessorpowerevery1.5totwoyears
overthelasthalfcentury)asityields
technologicaladvancessuchasautonomous
carsthateasilyconquerthecomplextaskof
driving.
Moreimportantly,theauthorsnotethat
respectedscholarsasrecentlyas2004had
highlighteddrivingasanexampleofatasktoo
complicatedforcomputersandinherently
requiringhumancapacity.Evenacasualscan
ofthetraditionalmediauncoversfurther
examplesofthisferociousprogress,including
robotsthatcanrun,developedforthemilitary,
andacomputerprogramthatinferred
Newtonssecondlawofmotionfromthe
movementofadoublependulumadevice
thatcreatesachaoticpatterntothehuman
eye.
Althoughnoonecanconfidentlypredicthow
thisnewagewillunfold,mosteconomiststake
anoptimisticviewtheybelievethatthe
positiveeconomiceffectswilloffsetthe
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inevitabledisruptionofemployment:Thosein
traditionalbluecollaroccupationsarefacing
dislocationascomputerstakeoverjobslike
truckdriving,factorywork,callcenter
support,andevenburgerflipping.Butjustas
ourrural,agrariansocietyeventuallysettled
intoanurban,manufacturingeconomy,this
disruptionwillultimatelyyieldastronger
economyandbetterstandardofliving.
Theobvioushistoricaltransitionoffarmto
factoryoffershope,butitmissesalessobvious
transformationthatoccurredoverthelast
century.AfreshlookattheU.S.censusdata
revealsthatthebigshiftinthe20thcentury
wasntallaboutlabor.Infact,therewasahuge
shiftintomanagerialoccupations.Andtoday
itsnotjusttheworkingclassthatfaces
disruption,butthemanagerialclassaswell.
Businessestodayaredrawinguponsmart
machinesusingstatisticalmodelstocull
valuableinsightsfromtheexabytesofnew
digitalinformationcreateddaily.Machines
suchasIBMsJeopardywinningWatsonare
beingtrainedtodisplacehighlytrainedexperts
asdisparateasmedicaldiagnosticians,
financialadvisors,andprofessionalchefs.
Smartermachineswillreducethenumberof
traditionalmanagementjobsinthesecond
machineageandforceachangeinboththe
practiceandphilosophyofmanagementfor
themillennialspoisedtobecomethenext
generationofmanagers.

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AnexaminationoftheGildedAgeofferstwo
lessonsforthecomingdisruption.First,
managersmustbecomeentrepreneurialagain:
Numbercrunchingcomputerswillreplace
numbercrunchingmanagers.Second,thenew
generationofmanagersmustaddressthe
socialchallengesoftheemergingdisruption.
UnliketheentrepreneursoftheGildedAge,
theyshouldincorporateasocialmissioninto
theirdefinitionofbusinesssuccess,rather
thanmakingphilanthropicgesturesfollowing
theachievementofsuccess.

Number-crunching
computers will replace
number-crunching
managers.
The Rise of the Manager
The1920censusoftheU.S.documentedthe
occupationalmixofits41millionworking
citizenswithinahierarchydefinedbyindustry
androle.Forexample,12.8millionpeople
wereemployedinthemanufacturingand
mechanicalindustriesandnearly11million
wereemployedinagriculture,forestry,and
animalhusbandry.Thoseresultsalready
reflectedacriticaleconomictransitionfrom
the1910census.Merelyadecadeearlier,more
U.S.workers12.7million,representing
nearlyathirdofthepopulationhadbeen
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employedinagriculture,forestry,andanimal
husbandry.Butduringtheseconddecadeof
the20thcentury,manufacturingemployment
grew21percentintheUnitedStateswhilethe
moretraditionalagriculturerelatedsegment
dropped13percent.Ofcourse,weallknow
thatoverthefollowingcenturyU.S.
employmentinmanufacturingcontinuedto
grow,thenultimatelywanedastheU.S.
economyshiftedtoservicesinthe1980s.
Thatstheconventionalwisdom,butitmisses
animportantreality.Alookatthelatest
occupationalcensusdatashowsamore
fundamentalshift.ThemodernU.S.economy
isntbasedsomuchonserviceasitison
management.At38percentoftotal
employment,management,professional,and
relatedoccupationswasthelargest
occupationalemploymentcategoryforthe
142.5millionpeopleclassifiedbythe2012
census.Accountingformorethan30percent
ofemploymentacenturyago,thefarming,
fishing,andforestryoccupationscategory
nowaccountsforlessthan1percentof
employmentandissubsumedunderthe
broadercategoryofnaturalresources,
construction,andmaintenanceoccupations,
whichinaggregateaccountsforonly9percent
ofemployment.
Infairness,thelargemanagementcategory
includesprofessionalsandthoseworkingin
financialoperations.Thesubcategoryof
managerialoccupationstotalsonly16
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millionpeopleofwhich1.5millionare
classifiedaschiefexecutives.Butletsput
thatintoperspective:Chiefexecutivesnow
outnumbertheentireU.S.workforceof
farmers,fishermen,andforestersbyabout50
percent.

Lessons of the Gilded Age


IntheGildedAge,therereallywereno
professionalmanagersrunningbusinesses.
Instead,entrepreneurswithnoformal
educationinmanagementusedtheirintuition
tobuildbusinessempiresbaseduponcreative
ideas.ConsiderthecaseofAndrewCarnegie.
BorntoaworkingclassScottishfamily,
CarnegiefirstworkedinaPittsburghcotton
factory12hoursaday,sixdaysaweek,atage
13beforebecomingatelegraphmessenger
boyatage15andeventuallyatelegraph
operatoratage18.Fromthere,headvanced
throughtherailroadindustryandbegan
accumulatingwealththroughsavvyinvesting.
Heturnedhisattentiontothesteelindustryin
1864andeventuallybuiltabusinessempireby
adoptingthevastlymoreefficientBessemer
steelmakingprocessandverticalintegration.
Bytheendofthe19thcentury,theU.S.
dominatedglobalsteelproductionand
Carnegieranthelargestandmostefficient
steelcompanyintheworld.
Carnegiefacedachallenge,however.His
empirehadscaledbeyondhispersonal
capacitytomanageit.U.S.financierJohn
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Pierpont(J.P.)Morganofferedasolution:a
transferofpowerfromownerentrepreneurs
toprofessionallymanaged,publiclytraded
companies.In1901,Morganmerged
Carnegiessteelempirewithotherplayersto
formtheUnitedStatesSteelCorporation.Now
theworldsrichestman,the66yearold
Carnegieturnedhisattentionfulltimeto
philanthropy.Headvocatedfor,and
demonstratedbyexample,thegospelof
wealth,arguingthattherichhadamoral
obligationtousetheirwealthforthegoodof
society.Overthecourseofhislifetime,
CarnegieultimatelygaveawayUS$350
million,partofwhichwenttofundmorethan
2,800publiclibraries.
Noticingthatagrowingnumberofhis
graduateswereenteringtheworldof
commerce,thepresidentofDartmouth
College,WilliamJewettTucker,approached
DartmouthalumnusEdwardTuckwiththe
ideaofcreatingthefirstgraduateschoolin
commerce.Tuck,asuccessfulbanker,donated
severalhundredthousanddollarsworthof
railroadstockin1900tofoundtheAmosTuck
Schoolinhonorofhisfather.In1908,Harvard
inventedthemasterofbusiness
administrationdegreeandcreatedthe
HarvardGraduateSchoolofBusiness
Administrationwithafacultyof15,attracting
80students.
FrederickW.Taylor,thefatherofscientific
management,playedaroleatbothTuckand
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Harvardintheirearlyyears.Borntoawealthy
Quakerfamily,Taylordecidedtoforgoa
plannedpathfromPhillipsExeterAcademyto
Harvardin1874andinsteadstartedhiscareer
asamanufacturinglaborer.Headvanced
throughaseriesofpositionswhilepursuinga
degreeinmechanicalengineeringand
ultimatelybecamethechiefengineerof
MidvaleSteel,acompanywithonlyasingle
plant,butoneknownforananalytic
managementstyle.Taylorappliedhisown
analyticskillstodefinetheonerightwayto
doeachandeverytask,whichledtoadoubling
ofworkerproductivity.In1890,hebegan
consultingtoshowothercompanieshowto
drivesuchworkerproductivity.Andby1911,
hehadcodifiedhisphilosophyinThe
PrinciplesofScientificManagement.During
histimeasaconsultant,Tayloralsoconducted
researchatDartmouthandservedasa
professoratthenewTuckSchool.Inaddition,
thedeanofthenewHarvardBusinessSchool
recruitedTaylortocreateafoundational
courseinmanufacturingandindustrial
organization,furtherestablishingthe
importanceoftheanalyticapproachto
management.
Thisfocusonquantificationprovidedneeded
controltothenewempiresthathadexceeded
themanagerialcapacityoftheir
entrepreneurialfounders.Whilesuccessful
entrepreneurslikeCarnegieturnedtheir
attentiontophilanthropy,legionsofless
talentedbutprofessionallytrainedmanagers
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amasseddataanddependedonanalysisto
makeupfortheirlackofcreativeinsight.Their
numbersbased,yetsimplistic,searchforbest
practices(tousethemodernjargon)squeezed
outcreativityandignoredthedisruptive
effectsthatthisimpersonalmindsethadon
laborers.Perhapsthetransitionfromowner
entrepreneurstoprofessionalmanagerswas
inevitableinaneradrivenbyphysicallabor
andscaleeconomies.However,returningto
moderntimesandlookingahead,afocuson
thenumbersmeansmanagementwill
increasinglybesubsumedbycomputers.
Futuremanagerswillneedtousetheir
creativitytochallengetheconstraintstoboth
commercialsuccessandsocialwelfare.

Creating the Future


Taylormisusedthetermscientific,andfrankly
sodomanyscientiststoday.Theytendto
equatesciencewithmath,employinga
reductionistmindsetthatseekstoquantify
everything.However,atrulyscientificmethod
appliesahypothesisdrivenapproachdesigned
toeliminateflawedtheories.Notheorycan
everbeprovedthroughthescientificmethod
onlytestedanddisprovedorcorroborated.As
scientificphilosopherKarlPopperfamously
putit,Nomatterhowmanyinstancesof
whiteswanswemayhaveobserved,thisdoes
notjustifytheconclusionthatallswansare
white.
Scientiststendtodeveloptheoriesthatexplain
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howthingscametobe.Forexample,theyuse
Darwinstheoryofevolutiontoexplainhow
peoplecametocooperatewithoneanother,
andthebigbangtheorytoexplainwhystars
formedintheuniverse.Sciencealsodepends
oncontrolledexperimentstotesttheories.For
example,anumberofexperimentsoverthe
past50yearshaveprovidedevidence
confirmingAlbertEinsteinsgeneraltheoryof
relativity,andrecentexperimentsatthe$9
billionLargeHadronColliderinSwitzerland
haveuncoveredevidenceoftheexistenceof
theHiggsboson,afundamentalparticle
impliedbythestandardmodelofquantum
physics.
Management,ontheotherhand,doesntspend
alotoftimeworryingabouthowthingscame
tobeanddoesnthavetheluxuryof
performingcontrolledexperiments.Abusiness
strategyoffersthemanagerialequivalentofa
scientifictheory.Managersneedtodevelop
hypothesesofwhatwillworkinthefuturein
ordertosetthecompanyscurrentstrategic
direction.Insteadofsimplytesting
hypotheses,managementmustcreatethe
future.Thefuturecantbecreated(oreven
uncovered)bysimplyexaminingthepast,even
withthemassivecomputerpoweremployedin
bigdataanalyses.Thestrategicanswercant
befoundinthenumbers,noteveninthat
centraltooloftheMBA:thenetpresentvalue
calculation.Atthesametime,managerscant
runacompanybasedonasetofuntested
hypotheses:Therightbusinessstrategy
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requirescreativityandanalysis.
Thebestmanagersusetheirintuitiontoform
hypothesesbasedonabeliefaboutwhy
somethingoccurs,notjustbasedondata
demonstratingcorrelation.Weuncovernovel
patternsbyhypothesizingrootcauses,
effectivelytappingstrategicmodelstoexplain
whyaparticularpatternmightemerge.Those
strategiesneedtobeexplicitlyarticulatedand
testedbeforepursuingaction.Associal
psychologistKurtLewinproclaimed,Theres
nothingsopracticalasagoodtheory.
Computerscananalyzemassivequantitiesof
dataanddiscoverpatternsbydrawingon
inferentialstatistics.Butevenbigdata
computersdontformthehypothesesneeded
todevelopnewstrategiesdesignedtobreak
existingconstraintsandcreatenewbusiness
models.Accordingly,managerswhoseekto
breakconstraintsandembraceahypothesis
drivenapproachwillnotfaceextinctionbut
willinsteadcreatethefuture.

Breaking Constraints
ConsiderthecaseofTaiichiOhno,thefatherof
theToyotaproductionsystem.Hedidntinfer
hisnewparadigmfromabigdataanalysisof
historicalpatterns.Hedrewuponananalogy
theU.S.supermarkettoinformhisintuition
thatthecurrentsystemofpushing
automobilesthroughmassproduction
imposedinefficienciesthatcouldbeeliminated
throughapullsystemproducingcarsinlot
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sizesofone.
Infact,analysiswouldhavesuggestedhis
paradigmwasimpossible.Optimallotsizes
weredefinedbythechangeovertimeof
equipment,makingalotsizeofoneinfeasible
becausethehugepressesinautomotive
manufacturingrequired12hourchangeovers.
Undeterred,Ohnosenthistopindustrial
engineer,ShigeoShingo,tobenchmarkthe
bestintheworld.Shingolearnedthat
Volkswagensetthebenchmarkatsixhours,
butbyincorporatingotherobservationshe
managedtoreduceToyotaspresschangeover
timeby67percenttofourhours.
Unimpressed,OhnopushedShingotomake
changeoversinlessthan10minutes,not
becausehehaddatatojustifysuchatargetbut
becausetheapproachheenvisioned,which
wouldbecomeleanmanufacturing,demanded
it.
ThatextremetargetforcedShingoto
fundamentallyrethinktheproductionprocess,
andbydoingsohebrokethekeyconstraintto
achievingOhnosvision.Today,manufacturing
managersroutinelydismissthesimplistic
notionsofmassproduction,andtheworld
benefitsfromhigherqualityatlowercost,
thankstothecreativityofOhnoandShingo.
Morerecently,BlakeMycoskieofTomsShoes
soughttobreakthetraditionalconstraintof
Carnegiesgospelofwealth.Ratherthan
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turningtophilanthropyonlyafterachieving
financialsuccess,Mycoskieintegrateditinto
hisentrepreneurialbusinessmodel.Duringa
vacationinArgentinain2006,henoticeda
localstyleofcanvassliponscalledalpargatas,
whichhebegantowear.Duringthatsametrip,
hespenttimewithanonprofitorganization
helpingpoorchildrenintheoutskirtsof
BuenosAireswhooftenwentbarefoot.
Integratingthetwoideas,heformedToms
Shoesasaforprofitsocialenterprisedesigned
tobothmakemoneyanddogood.Marketing
theArgentineinspiredshoestoU.S.
consumersonaoneforonebasis,hesold
10,000pairsinsixmonthsandthen
distributed10,000freepairstoArgentine
childreninneed.In2011,Tomsexpandedits
oneforonebusinessmodeltoeyeglasses.And
itrecentlyannouncedplanstolaunchacoffee
businessthatwilldonatecleanwatertothe
poorincoffeegrowingregionsinSouth
AmericaandAfrica.Thoughnotyet40years
old,Mycoskiehasreportedlyamasseda
multimilliondollarlevelofpersonalwealth
whilehiscompanyhasgivenawaymorethan1
millionpairsofshoes.

Lean Startups
Iwontattempttopredictthefuture,butI
havelittledoubtthatthefuturewillbring
dramaticchange.Changeistheonlyconstant.
Themillennials,whoarenowreaching
adulthood,grewupinthedigitalageandare
alreadysufferingsomeofitseffects.Despite
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beingwelleducated,thisgroupfaceshigh
unemployment,massivestudentdebt,anda
lessrosyeconomicfuturethaneitherofthe
previoustwogenerations.Yetaccordingtoa
recentPewsurvey,althoughmillennialsare
lesstrustingofotherpeopleingeneral,they
havegreatconfidencethatthefuturewillbe
betterthanthepast.
Iseepositivesignsthatthisnewgenerationis
embracingthehypothesisdrivenapproachin
ordertobreakconstraintsandbuildnew
businessmodels.Theleanstartup
movement,spawnedfromtheentrepreneurial
cultureofSiliconValley,arguesthatinitially,
allanentrepreneurhasisasetofuntested
hypotheses.Theentrepreneursgoalshouldbe
toproducetheminimumviableproducttotest
thosehypotheseswithrealcustomers.The
businessmodelschangeonthebasisof
customerfeedback.Thecompanypivotstoa
differentstrategyifcustomerfeedbackproves
thatthecurrentstrategyisfundamentally
flawed,orifbetteronespresentthemselves.
Forexample,PayPalstartedoutasawayto
processpaymentsbetweenPalmPilotusers.
ButcofounderPeterThielsawabigger
opportunityinpartneringwitheBay(which
acquiredPayPalfor$1.5billion).Whilestill
supportingeBaytransactions,PayPal
positioneditselfasabroaderpayment
processingbusinesswithmajorgrowthin
mobile,atechnologynotimaginedatthe
companysfounding.
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Theleanstartupmovementhasalsotakenroot
amongsocialenterprisesseekingyoung
managementtalent.Considertheannual
competitionfortheHultPrize,initiatedin
2010bytheHultInternationalBusiness
School,whichhascampusesinBoston,Dubai,
London,SanFrancisco,andShanghai.The
firstcompetitionchallengedmorethan300
businessschoolstudentstodevelopbusiness
modelsinsupportoftheOneLaptopper
Childnonprofit.The2014HultPrizesought
businessplansforsocialenterprisestoreduce
chronicillnessesamongtheurbanpoor
worldwide.Itattractedmorethan10,000
applicantswhocompetedinteamsforsix
regionalprizesof$50,000,anda$1million
grandprizeofseedfundingforthewinning
proposedsocialenterprise.
Themillennialshavegrownupintheearliest
daysofthesecondmachineage.Althoughthey
areawareofthemassivequantityof
informationnowavailable,theyunderstand
thatnewbusinessmodelsarentdiscovered
throughahistoricalpoolofbigdatabutare
insteadinventedthroughaprocessof
managementthatstartswithhypotheses,
whicharetestedwithdata.Bigdatawillallow
themtotestfarmorehypotheses,farmore
cheaply.Butdataorthemachinesthatcollect
itwontinitselfcreatetheinnovative
businessmodelsofthefuture,especiallythose
thatseektobalancecommercialandsocial
goals.
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Mostofmystudentspossessabroadworld
viewandexudebothcreativityandpassion.
Havingtaughtthesebrightmindsoverthepast
decade,Ihavedevelopedbothhopeforand
faithintheirfutureasmanagers.AndIbelieve
theywillembracethissentiment:Thebest
waytopredictthefutureistocreateit.
ReprintNo.00252
Author Prole:
Tim Laseter is a senior executive advisor for Strategy& and a
professor of practice at the University of Virginias Darden
School. The author or coauthor of four books, including The
Portable MBA (Wiley, 2010) and Strategic Product Creation
(McGraw-Hill, 2007), he draws upon decades of experience in
business strategy and academia to serve as a contributing
editor of strategy+business.

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