Arnold Kling  

Knowledge Problem

34 Postcards About Terrorism... Tabarrok Should Bask in His Vi...

Lots of good stuff recently at Knowledge Problem. Lynne tells us what to think of the new energy legislation.

If you support a forward-looking, dynamic, creative, innovative approach to energy, this is not the legislation for you. If you are a fan of corporate subsidies to oil companies, and you are happy with the reality that "what gets subsidized gets done" (that is, increased oil production and consumption), then belly up to the bar.

I don't drink, thanks.

On another topic, she points to a post by Grant McCracken.

[Michael] Tushman distinguishes between two modalities in the life of the corporation:

1) The exploitative modality in which the corporation works the world it knows. This is a matter of extracting maximum advantage from the market as presently constituted. This is the traditional modality of the corporation, the very method of “business as usual.” But it is now haunted by a new, tragic understanding: that what makes corporation successful also make it vulnerable to discontinuous technology. Success is now sometimes a tragic flaw.

2) The explorative modality in which the corporation prepares for the world it doesn’t know and can’t fully anticipate. This is the new modality of the corporation, the place it is obliged to give up some of its problem solving, quality controlling, administrative elegance. Here it is obliged to be messy, complicated, iterative, and wrong.

My view, which I expressed in the recent WSJ Econoblog, is that corporations have limited capacity to explore new ideas. The reason is that significan new projects require inder-departmental co-ordination, and you cannot get that kind of co-ordination without top management focus. And top management does not have time to focus on more than a few projects at once. They have to spend a lot of time on baseline functions (Tushman's "exploitative modality"), leaving time for only a few major new initiatives.

The point I made in the WSJ debate was that Sarbanes-Oxley became a top priority in corporate America over the past two years, which greatly reduced other initiatives. In Tushman's terms, Sox usurped the "explorative modality."

For Discussion. Will this year produce a rebound from Sox, or will other factors hold back corporate initiative?

Comments and Sharing

COMMENTS (7 to date)
Randy writes:

Risk management has been the name of the game for the past few years. My guess is that this will continue until the price of oil stabilizes - or at least until the shock wears off. I'll be watching the consumer confidence numbers.

gh writes:

Thanks to see an economist finally notice that corporations are lousy at new ideas - they make money they don't create. Inventions are usually done by weirdos in their cellar or lab and then stolen - ever tried to take on IBM, DOW, etc when they decide to liberate your idea - save your time and money ( try to sell it to the Japs or Chinese instead, you might get a few yen). Pharmaceuticals mostly patent stuff developed in taxpayer supported colleges - we pay for it twice. A libertarian would say burn down the college or the corporation - save 50% with one match.

Lawrance George Lux writes:

Is Corporate initiative actually suppressed by Sarbanes-Oxley? It makes Corporations keep three sets of books, instead of Two. There is a philosophy which states they could keep just one set of books, and not worry about it. Some idocy call Transparency. lgl

SOX isn't over. (I know because I make a good living as a SOX consultant.)

Companies are still scared and excessively risk averse. SOX is still a top-of-mind issue. The SEC talks of scaling back SOX, but the new public accounting bureacracy (PCAOB) has only begun to flex its muscles making the audit firms cower. The audit firms, in turn, hold public companies hostage.

Long story short, companies will continue to be hamstrung by SOX for a while. It strongly discourages even the most prudent risks (for fear of undocumented control changes or mis-reported financial statement impact).

The new paradigm is all about complying with the rules and avoiding downside, not finding upside.

It sucks. It's SOX.

Bernard Yomtov writes:

I think it's wrong to imagine that the "explorative modality" is some kind of new phenomenon. Change is not new. It's been a very long time since successful businesses could just keep on doing the same thing without paying attention to changing markets, technology, etc.

This frankly sounds like consultant-speak. "New paradigms, global this and that, etc." That's not a compliment.

Tim Wise writes:

Any thoughts as to whether the "knowledge problem" extends to government? My guess is that it applies to all levels of management -- corporate or government -- since the one limiting factor is time. I read recently that Condi Rice would sometimes spend seven hours a day with the President. If that was the case, there was little time to spend on domestic issues that day.

Wildman writes:

I work in corporate IT for a JNJ subsidiary and have seen the impact SOX has taken on our organization firsthand. We have lost at least 6 months worth of productivity of this department in implementing SOX controls and documenting current-state. We predict that SOX will add about 10% to the on-going cost of IT for our organization.

SOX consulting has become a cottage industry.

Comments for this entry have been closed
Return to top