What are the key lessons from business history that will still apply in the future?

My most loyal readers will know that this is the question I’m currently trying to answer, as part of my project to describe the future of business.

First, I spoke to Chris McKenna of Oxford University’s Saïd Business School. Since my last post I’ve also spoken to Nitin Nohria, the Dean at Harvard Business School, and Geoffrey G. Jones, Professor of Business History at Harvard Business School.

The two HBS scholars added a number of lessons to the ones carved out by McKenna. And, interestingly, they both reinforced Mckenna’s argument that change is not accelerating.

The idea that change is accelerating is not new, but they were actually more right to think so in the 19th century, says Geoffrey G. Jones:

“Before the telegraph, information travelled at the speed of a horse. That’s the biggest transformation one could imagine in the world of information. And the web hasn’t done that.”

Driven by basic emotions
So, instead of hyperventilating over the idea of accelerating change and the next big thing that’s going change everything, businesses ought to study business history. Because things are changing, yes, but rather than acceleration we see certain repeating patterns.

Why is that? According to Mr. Jones it’s fairly simple: ”Businesses are driven by human beings whose nature hasn’t changed much at all. We’re motivated by some very basic emotions. Greed, fear and so on. And these basic emotions drive the same sort of patterns.”

He continues: “If, for example, we look at financial services, we know that there will be asset bubbles, and that they will burst. We also know that there will be speculators and crooks. We’ve always had that, from Charles Ponzi to Bernie Madoff.”

Is history lost on business?
Nevertheless, history seems to be lost on businesses. The Financial Crisis made that abundantly clear. With a better understanding of history, people would have known not to play around with financial instruments.

This lack of historical awareness in business is not only unfortunate, it’s also a bit odd: In many other parts of society we see a much greater appreciation for how useful history can be.

One example is the military. As part of your officer training you will more or less go through all the battles of the past. Even though everything in the military is new, knowledge of history is important because there’s an understanding that you take better decisions if you have an understanding of the patterns – rather than pretending everything is new.

Contextual intelligence
The lessons from business history are many. In fact, you could argue that there are too many.

So, it’s not about knowing business history inside-out and referencing history whenever you can. The idea is more to study business history in order to develop a better overall understanding of business.

This is what Nitin Nohria and Anthony J. Mayo referred to as having “contextual intelligence” in their book In Their Time: The Greatest Business Leaders of the Twentieth Century (2005).

Nohria explains: “Everybody talks about business intelligence and emotional intelligence. The argument that we made was that you also have to have contextual intelligence. Which means you have to have an appreciation for how your context is different from the past, and how it continues to change. In what ways is it similar? In what ways is it different?“

“Appreciation of history is very good at building contextual intelligence; and having contextual intelligence is a very useful thing for a leader.”

Three kinds of leaders
In the research for their book, Mayo and Nohria also saw a specific pattern when it comes to leaders. They learned that business is a constant interplay of three kinds of leaders:

The entrepreneurs. People who create new things. A classic example is Henry Ford who built the assembly line and then the Model T.

The managers. People who add structure to ideas and allow the ideas to develop their full scale and scope. If Henry Ford was the entrepreneur, then GM’s Alfred P. Sloan (pictured above) was the manager. He showed that you could build a company like GM – of even larger scale and scope than Ford – by focusing on the idea that each and every customer segment needs a different kind of product. Not everybody needs a Model T.

The leaders. In Nohria and Mayo’s terminology the word “leader” was reserved for this category. A leader is someone who comes in when a company is losing its energy and needs to change. And who is then able to transform this company. In some ways it’s what Jack Welch did at GE (and what Jeff Immelt failed to do), and it’s what Mary Barra is now trying to do at GM.

So what are the lessons from this? Well, first of all that all companies will move through different phases (in cycles of many decades). And secondly, that in the majority of cases you will need very different kinds of leaders in the different phases.

For example, only very rarely will a great entrepreneur turn out to also be a great manager. Someone like Amazon’s Jeff Bezos is an exception. (And the question is if he will – when the time comes – be a great leader too. It’s not very likely.)

Balancing management and leadership
While these are the three archetypes among business leaders, the disciplines of management and leadership will of course need to co-exist in a company. And according to Nohria, another important lesson from business history is that you need to balance management and leadership:

“Organizations can be overmanaged and underled. But they can also be undermanaged and overled. It’s a repeated lesson in history that you need to balance the disciplines. You see examples throughout history of organizations that have failed because they were overled. And of organizations that failed because they were overmanaged.”

Today, the overmanaged companies arguably still by far outnumber the overled companies. Which is why “bureaucracy” is often made the scapegoat. But we need to be critical when people then say things like “we must stop managing and start leading”.

As said, the key is to balance the two disciplines. This requires that we keep in mind just how important the management discipline is for any business. Raffaella Sadun’s paper in Harvard Business Review entitled “Why Do We Undervalue Competent Management?” helps us do just that.

Sadun’s paper is based upon work done across countries and across sectors, and it shows that 1) basic management practices is still a massive challenge for many, many organizations; and that 2) good management correlates with strong performance.

Therefore, as Sadun concludes, it’s simply unwise to teach leaders that strategy and basic management are unrelated.

In a way, this is good news. There’s still so much room for improvement.

* * *

Looking ahead, what are the main challenges facing businesses and societies? The answer to that question should give us a better idea of the future of business.

And so, that’s the question I will try to answer in my next blog post.

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