On Monday, when stock markets crashed globally, Larry Summers tweeted: “As in August 1997, 1998, 2007 and 2008 we could be in the early stage of a very serious situation.”
The first thing Summers did was to reference financial history. Implicitly he asked: what can we learn from the past to make sure we adapt, survive and prosper when conditions in the present change? I would think that the same applies to the world of business too: CEOs, directors and managers need to know how to react when change inevitably comes, either externally to the firm – for example, when the economy is heading into a recession (as the South African economy seems to be doing) or when the state decides to intervene – or internally to the firm – for example, when the firm grows beyond what it’s organisational structure can support or when developing a Corporate Social Responsibility strategy. And one source of wisdom to learn from (not the only one, granted, but an underappreciated one) is history.
The need for business history is understood in the world’s top business schools. Harvard Business School, most famously, has a large team of business historians and publishes the Business History Review. The reason a place like Harvard invests in business history is because of intellectual honesty. As Andrew Godley, director of the Centre of Entrepreneurship at the Henley Business School explained to me,
almost all MBA subjects are taught using case studies. Case studies are, by definition, historical. They are justified as devices to aid student learning of a particular theme (e.g. Diversification strategies). But because they are historical by definition, any successful interpretation of the case study (and so any successful learning outcome) depends on the students understand the historical context facing the decision makers in that particular firm. Acknowledging explicitly that context matters and that context changes therefore leads to the further acknowledgement that MBA students need some sort of grounding in business history methods to be able to correctly interpret (and so learn from) case studies.
While business history was born in the early twentieth century, it took off in the 1960s. Alfred Chandler’s seminal Visible Hand (1977) explained the development of the firm from small-scale (often family-owned) businesses to large corporations and conglomerates. A 2002 paper by Naomi Lamoreaux, Daniel Raff and Peter Temin explain this Chandlerian view most succinctly:
Writing in the mid 1970s, Alfred D. Chandler, Jr., attributed the success of the U.S. economy in the twentieth century to the rise of large, vertically-integrated, managerially directed enterprises in the nation’s most important industries. These enterprises, Chandler argued, were dramatically more efficient than the small, family owned and managed firms that had characterized the economy earlier. Small firms had to depend on the market to coordinate their purchases of raw materials and the sale of their output, but large firms took on these supply and marketing functions themselves, coordinating them internally by means of managerial hierarchies. This visible hand of management, Chandler claimed, was such a vast improvement over the invisible hand of the market that firms that exploited its capabilities were able not only to dominate their own industries but to diversify and attain positions of power in other sectors of the economy as well.
The problem, though, is that this linear trajectory of firm development reversed by the 1980s. Conglomerates dissolved and large corporations began to divest their vertically integrated components. Here’s Lamoreaux et al. again:
Indeed, as the economic environment changed during the 1980s and 1990s, classic Chandlerian firms increasingly found themselves outperformed, even in their home industries, by smaller, more specialized, vertically disintegrated rivals. Many of the enterprises that now rose to the top succeeded by substituting for the visible hand of management alternative means of coordinating vertically and horizontally linked activities—most notably long-term relationships that were intriguingly similar to those that prevailed before the “rise of big business” or even before the so-called “market revolution.” Large Chandlerian firms in turn sought to improve their competitiveness in this new environment by refocusing resources on their “core” businesses, selling off subsidiaries and even entire divisions and, in the process, reducing significantly the range of economic activity subject to managerial coordination.
Lamoreaux et al. then develop a framework to understand why this trend reversed. Although there is much more in the paper, the following paragraph effectively summarize their view:
The perspective of hindsight enables us to see that this puzzling combination of trends can be attributed in part to the effects of communication and transportation costs on the location and organization of economic activity. When these costs are high, economic activity tends to be local and consequently small in scale. At the other extreme, when communication is virtually free, as on the internet, and transportation is very cheap, then economic activity can be located anywhere and even tailored to individual needs. In the middle, however, when communication and transportation costs are neither prohibitive nor trivial, there are advantages to be obtained from concentrating productive activity in specific locations and in large firms.
Thus, a u-shaped curve: when communication and transport costs are high, firms will be small; when they are infinitely small, they will also tend to be small. But when they are somewhere in-between, large firms will be the equilibrium outcomes.
Except: the paper was published just before the tech industry blossomed. (Google was four years old, Facebook was yet to be founded, the iPhone would only be released four years later.) How have their model held up to these developments? Not great. Only last week, Google announced that it will restructure into Alphabet as a conglomerate in industries ranging from ‘search’ (the original Google), to self-driving cars, to health, to finance. Apple, originally in PCs, now has phones, and watches and there is talk of a car too. I’m perhaps oversimplifying their argument, but it is clear that business forms do not only depend on communication and transportation costs.
This is especially true in emerging markets. As Harvard’s Aldo Musacchio suggests, emerging markets have specific ‘institutional voids’ that entrepreneurs must overcome if they are to be successful. This may be anything from capital market failures, a poor education system, or severe labour market regulations. How businesses react to these institutional voids determine the type of firm that will be established. His example: the rise of the Tata Group in India.
Our lack of understanding how these institutional voids gave rise to indigenous businesses is especially acute in Africa. In South Africa, we have two excellent business historians (Anton Ehlers at Stellenbosch and Grietjie Verhoef at UJ), but both are within a decade of retirement. There is much to be done to understand the institutional voids that gave rise to firms like SAB, or Discovery, or Black-Like-Me or the myriad of family businesses and informal businesses that continue to co-exist with larger corporations. We need to understand the rise and decline of state corporations. We need to know why banks collapse. We need to know why not-for-profit corporations exist. What are the role of ethnic minorities? What about black-owned businesses? What role for the apartheid state and sanctions? And what about colonialism and independence and state capitalism and corruption and its interplay with businesses in other African countries?
The rise of African capitalism over the next decades will require a large pool of skilled managers that can both understand the domestic complexities and global supply chains. I hope that these managers, trained in Africa’s leading business schools, will draw from the lessons of our own history and context. This, then, is my challenge to South Africa’s top business schools: Encourage student dissertations on the histories of indigenous businesses, introduce a course in business history (or the History of African Capitalism), appoint a tenure-track professor to research the histories of African businesses, create an archive of business history to protect the documents that future generations will need to understand our current successes and failures..
These challenges are not easy to fulfill in the time and resource constrained business schools of today, where accreditation uber alles. Yet we must try harder. We have a rich continent, with a rich (if largely unwritten) history. This history is messy and it still affects us. Which is why I love this quote by Stephen Mihm of the University of Georgia:
Business history – or the history of capitalism – is not a science. It’s a way of looking at the world that acknowledges the messiness of human economic activity even as it promises to explain both the recurrent patterns of the past and the unique factors that led up to the present. For business school students, history breeds recognition that the present is nothing more than the leading edge of the past.