Tag Archives: Minerva

What is a firm? an organizational culture

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I just received a review copy of Tyler Cowen’s latest, Big Business, which will be released in a week. As is my habit, I started reading it from the outside in, and I quickly landed on the appendix, in which he writes

in lieu of the Coase and Williamson transactions-cost appraoch, I typically view a corporation in terms of the following properties:

  1. It is a collection of assets, assembled at favorable purchase prices (or at least the prices were favorable for the case of successful corporations.
  2. It is a nexus of external and internal reputation and norms.
  3. It is a carrier of contractual and legal responsibility.

My inclination is to elaborate on (2). I might describe a firm as an organizational culture.

I think we need to distinguish among types of firms. The local restaurant run by a family of recent immigrants is not the same as Microsoft.

I want to ignore most types of firms, including the restaurant, and instead focus on young, ambitious firms and mature, established enterprises.

I would describe a young, ambitious firm (or a “promising business” in Amar Bhide’s terminology) as an organizational culture embodied in its top management layer. To be successful, the members of this team must:

  • generate good ideas and discard bad ones
  • have the skills, experience, and drive to execute on ideas
  • work well together
  • manage the transition to a mature, established enterprise

In a mature enterprise, the organizational culture permeates the entire firm. A set of rules, systems, processes, habits, and institutional knowledge is deeply ingrained in every layer of the organization. One of the things that struck me about Minerva, the innovative college, is the terminology that I called “Minerva-speak.” This sort of firm-specific terminology can contribute to a shared organizational culture.

When Tyler points out that bureaucracy is both good and bad, I interpret that in terms of the tension between organizational culture and individual initiative. I picture Minerva in those terms. Its culture is more clearly defined than that of a typical college, but ultimately that could feel stifling to some faculty and students.

Recall that one of my rules for work and financial life is:

When you have little left to learn on a job, it is time to move on.

A lot of what you learn when you work at a firm is its organizational culture. Moving within a firm means you learn new subject matter, but you are largely staying within the same culture. The psychologically more challenging move to a different organization gives you an opportunity to experience a different culture, sort of like spending time abroad.

Large, established enterprises are in one sense easy for a CEO to run and in another sense very difficult to run. With a deeply-ingrained organizational culture, an enterprise can operate on auto-pilot in a stable business environment. In a changing environment, which seems to be more prevalent nowadays, the CEO has to know when and how to discard cultural baggage. Changing the culture of a large organization is risky and wrenching. In a large corporate merger, cultural integration is both challenging and very important.

Perhaps the biggest challenge faced by top management in a large organization is to know what the organization needs to learn and to unlearn as its environment changes. I can think of many examples where the environment changed quickly and a large enterprise unlearned too slowly. Or maybe the value of its legacy rules, systems, processes, habits, and knowledge was decimated by the new environment, and there was not much that top management could do about it.

But I can think of at least one example where a new top management layer insisted that the organization unlearn its approach and the outcome was tragic. That was when Freddie Mac’s board brought in Richard Syron as CEO. Syron and his executive team discarded the organizational knowledge about credit risk, which included a reluctance to deal in “low-doc” mortgages. Under Syron, Freddie Mac dove into the “low-doc” business, with results that were disastrous, both for the company and for the country.

Learning concepts vs. asking questions

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On my essay on Minerva, a commenter writes,

It seems to me that centralization and hierarchies can be useful in contexts where a unitary goal exists and where information is concentrated (e.g. performing surgery, waging war). On the other hand, decentralization and emergent approaches are useful when multiple/unclear goals exist and information is dispersed/local (e.g. politics, consumption choices).

Applying this to education, centralization (e.g. adherence to lessons plans, strong professor guidance) should then be relatively more useful when students are first learning a concept they are unfamiliar with since the goal is clear (learn the concept) and information is concentrated (with the professor). On the other hand, decentralization (e.g. open-ended discussions, student-led activities) is relatively more useful when students are applying concepts they have already learned since the goal becomes less defined (deepening knowledge can occur in many ways) and information is now dispersed (students can bring in their own views once the concept is understood).

Think of two ways of learning to read. The centralized way is for a teacher to systematically explain the letters and how they form words. The decentralized way is to sit in your parent’s lap while they read and to acquire reading skills by gradually learning to associate the symbols on the page with what the parent is saying. The parent responds to your curiosity about the symbols on the page. I think that we tend to over-estimate the efficacy of the centralized approach and to under-appreciate the role of the decentralized approach.

At a college level, think about concepts as tools to answer questions. So if I learn accounting, I have a tool that I can use to analyze a business.

With a centralized approach to education, you teach accounting, and you tell students, “You are going to need this.” With a decentralized approach, you trust that the students who become interested in analyzing businesses will sooner or later become interested and motivated to learn accounting.

When I say that the future belongs to auto-didacts, I am saying that a motivated college student should be capable of coming up with questions that serve to direct that student’s learning. The best role for a professor is to be a guide or mentor.

The Minerva education model

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I wrote about Minerva, which is a new college that strips out a lot of the fluff of higher education and tries to focus on core habits of mind and foundational concepts.

To me, it seems plausible that students who choose to apply to Minerva are unusually focused on learning, as opposed to dating opportunities or sports or other features that attract students to colleges. Thus, if these particularly learning-motivated students had not gone to Minerva, they might during their freshman year have made just as much progress, or more, elsewhere.

Readers will recognize the Null Hypothesis lurking the background of my thoughts. But read the entire essay before commenting.