The Wisdom of Crowds: Corporations

notes from Surowiecki, James. The Wisdom of Crowds. (Anchor: 2005).

The 20th century corporation (Ford, for example) was

  1. Vertically integrated. “What a company could do for itself, it should do for itself.”
  2. Hierarchical, with many layers of management.
  3. Centralized, with final decisionmaking power concentrated among very few executives (or just one)

This began to break down by the 1960s and 70s, as “the endless layers of management made people less willing to take responsibility for their own work.”

Attempting to run a company by command and control is a futile task. It’s too costly in terms of time; it requires far too much information — information that top executives should not be bothering with; and it saps the initiative of workers and managers.

In the 1970s, Ford had 15 layers of managers between the chairman and the factory floor supervisor. Toyota had 5.

The only reason to organize thousands of people to work in a company is that together they can be more productive and more intelligent than they could be apart. But in order to do that, individuals need to work as hard to get and act upon good information as they would if they were a small businessman competing in the marketplace.

Most corporations’ incentive systems is skewed against dissent and independent analysis. Real information is obstructed by bosses’ hostility to opposition from subordinates.

Managerial pay is usually based not on performance, but on how one performs relative to expectations:

Tell a manager that he or she will get a bonus when targets are realized and two things are sure to happen: first, managers will attempt to set targets that are easily reachable by lowballing their estimates…Second, once the targets are set, they will do everything they can to meet them.

Thus companies are encouraging dishonesty and the hiding of information. A more decentralized, “boundaryless” corporation can combat these problems, however.  Decisions about local problems should be made as locally as possible, using tacit knowledge (Hayek), knowledge from experience.

Benefits of decentralization:

  1. The more responsibility people have for their own environment, the more engaged they will be.
  2. Instead of having to make constant resort to orders and threats, companies can rely on workers to find new, more efficient ways of getting things done.

Toyota’s Production System:

Frontline workers should be trained to have a wide range of skills, and they have to understand how the production process works from the bottom up if they are to take best advantage of it. Toyota has eliminated the classic assembly line, in which eaech worker was isolated from those around him and, often, worked on a single piece of a vehicle, and substituted for it teams of workers who are effectively put in charge of their own production process.

Contrast this with this story about a GM plant, from Maryann Keller’s Rude Awakening

A supervisor there saw a pair of assembly-line workers who kept failing to install a bracket that held the car’s sunshade in place. If the bracket wasn’t installed, at the end of the line the car’s carpet had to be torn out and the bracket welded into place. “I took them out and said, ‘Look, this is what happens when you miss one of those,’ ” the supervisor told Keller. “The repair guy showed them how he had to rip out all the carpet, and they were shocked. And the woman said, ‘You mean to tell me that bracket holds the sunshade?’ She’d been doing this job for two years and nobody had ever told her what part she was welding.”

Critique of decentralization in corporations: even if you let people control their immediate environment, real power will always be in the hands of top management. And decentralization leading to competition between divisions is a bad thing.

Serious internal rivalries defeat the purpose of having a company with a formal organization in the first place, by diminishing economies of scale and actually increasing the costs of monitoring people’s behavior. Decentralization only works if everyone’s on the same team.

The paradox here of course is that even as the benefits of decentralization are being extolled all over the place, the importance of the CEO only continues to rise.

The more power you give a single individual in the face of complexity and uncertainty, the more likely it is that bad decisions will get made.

CEOs should come with the same disclaimer as mutual funds: past success is no guarantee of future success.

The remarkable tendency for CEOs and executives of new ventures to believe that they are absolutely right, and the tendency to overestimate the quality of managerial talent by relying on track record, especially in situations that differ markedly from the present new venture.

Surowiecki suggests that companies should try to aggregate collective wisdom, even by using internal markets.

Decision markets are well-suited to companies because they circumvent the problems that obstruct the flow of information at too any firmst: political infighting, sycophancy, and a confusion of status with knowledge.

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