Strategy (94 page)

The best place to start this story is with the RAND Corporation, which we identified in the last section as the home of game theory and the belief that a formal science of decision could be developed. This effort gained credibility because of the very special issues posed by nuclear weapons. The effort transformed thinking about not only strategy but also economics because it demonstrated the possibilities opened up by powerful computing capabilities
for modeling all forms of human activity. Philip Mirowski has written of the “Cyborg sciences,” which developed along with computing, reflecting novel interactions between men and machines. They broke down the distinctions between nature and society, as models of one began to resemble the other, and between “reality” and simulacra. The Monte Carlo simulations adopted during the wartime atomic bomb project for dealing with uncertainty in data, for example, opened up a range of possible experiments to explore the logic of complex systems, discerning ways through uncertainty and forms of order in chaos.
¹
RAND analysts saw them as supplanting rather than supplementing traditional patterns of thought. Simple forms of cause and effect could be left behind as it became possible to explore the character of dynamic systems, with the constantly changing interaction between components parts. The models of systems, more or less orderly and stable, that had started to become fashionable before the war could take on new meanings. And even in areas where intense computation was not required there was a growing comfort in scientific circles, both natural and social, with models that were formal and abstract, not based just on direct observations of a narrow segment of accessible reality but also on explorations of something that approximated to a much larger and otherwise inaccessible reality. They could be analyzed in ways which the human mind, left on its own, could not begin to manage. As one of the first textbooks on operations research noted, this work required an “impersonal curiosity concerning new subjects,” rejection of “unsupported statements,” and a desire to rest “decisions on some quantitative basis, even if the basis is only a rough estimate.”

In their landmark book of 1957, which gave the field renewed vigor, Duncan Luce and Howard Raiffa noted prematurely the decline of the “naive bandwagon-feeling that game theory solved innumerable problems of sociology and economics, or at the least, that it made their solution a practical matter of a few years' work.”
²
They urged social scientists to recognize that game theory was not descriptive. Instead it was “rather (conditionally) normative. It states neither how people do behave nor how they should behave in an absolute sense, but how they should behave if they wish to achieve certain ends.”
³
Their injunction was ignored and game theory came to be adopted as more of a descriptive than normative tool.

One reason for this was the development of the Nash equilibrium, named after the mathematician John Nash (whose struggle with mental illness became the subject of a book and a movie).
⁴
This was an approach to nonzero-sum games. The idea was to find a point of equilibrium, comparable to those in physics when forces balance one another. In this case, players sought the optimum way to reach their goals. The equilibrium point was reached
when the players adopted a set of strategies that created no incentive for any individual player to change strategy so long as the others stayed unchanged.
⁵
Nash's contribution came to be celebrated within economics as “one of the outstanding intellectual advances of the twentieth century.”
⁶
But its value to strategy was limited. On the one hand, a lack of points of equilibrium led to chaos; on the other, too many points resulted in an indeterminate situation. As a contrast, Tom Schelling demonstrated the possibilities of using abstract forms of reasoning to illuminate real issues faced by states, organizations, and individuals. He encouraged people to think of strategy as an aid to bargaining, and he explored with great insight the awful paradoxes of the nuclear age. But he explicitly eschewed mathematical solutions and drew on a range of disciplines, thus abandoning any attempt to develop a pure, general theory. Mirowski found Nash's non-cooperative rationalism wanting but also found Schelling's more playful, allusive mode of analysis exasperating because of its lack of rigor. Schelling avoided the restrictive forms of game theory and the challenging mathematics of Nash in order to make paradoxical points about communication without communication and rationality without rationality.
⁷
Mirowski understated Schelling's importance as a conceptualizer and his recognition of the limits of formal theories when it came to modeling behavior and expectations. “One cannot, without empirical evidence,” Schelling observed, “deduce whatever understandings can be perceived in a non-zero-sum game of maneuver any more than one can prove, by purely formal deduction, that a particular joke is bound to be funny.”
⁸
Schelling, however, had many more admirers than imitators. In economics Nash became part of the mainstream.

The extraordinary boost from RAND's budget and advances in computing put social science on a new footing. The effect was particularly striking with economics. Orthodox economics had faced a crisis during the great depression of the 1930s. This led to greater empirical rigor backed by improved statistical analysis. Many key figures had learned the analytical techniques in wartime operational research. Even where there were important differences in emphasis and approach, as for example between the Chicago School and the Cowles Commission (which had been set up in 1932 to improve the collection and statistical analysis of economic data), they had much in common. Notably, they were rooted in the neoclassical tradition, going back to Walras and Pareto, and assumed that the safest assumption was of individual rationality. As Milton Friedman, the most prominent Chicago economist, put it: “We shall suppose that the individual in making these decisions acts as if he were pursuing and attempting to maximize a single end.”
⁹
Friedman considered the debate about whether people really acted so rationally, following
complex statistical rules, irrelevant. It was an approximation that was productive for theory, leading to propositions that could then be tested against the evidence.

Friedman and his colleagues were methodologically pragmatic, although dogmatic in their conviction that the market worked best when left alone by government. In this they were influenced by Friedrich Hayek, an Austrian who had acquired British citizenship in 1938 and had been teaching at the London School of Economics until he was recruited to Chicago, though not by the economics department, in 1950. His most famous book,
The Road to Serfdom
, was published during the war and warned against the inclination to central planning that was gathering momentum under the combined influence of socialism and the wartime experience. Meanwhile, the Cowles Commission, influenced by John von Neumann and sponsored by RAND, was up for new methodological challenges and was more inclined to believe that robust models could support enlightened policy. Either way the assumptions and methods associated with game theory became part of a wider project to develop new forms of social science.

The Ford Foundation was at the fore in exploring how management within big government and big business could become vital instruments of efficiency and progress. In the late 1940s, the Foundation moved from addressing the needs of the Ford Company's own operations around Detroit to meeting a broader agenda. The deaths of both Henry and Edsel Ford led to a surge of money into the Foundation. The man chosen to head a study committee to set the objectives for the future was H. Rowan Gaither, then chairman of RAND and later to become the Foundation's president. He was convinced that social science could and should be mobilized to serve the nation, and that this required managers who understood this science and could appreciate the possibilities for its application. He spoke to the Stanford Business School in 1958 about how “the Soviet challenge requires that we seek out and utilize the best intelligence of American management—and in turn put on management a national responsibility of unparalleled dimensions.”
¹⁰

A report for the Foundation in 1959 deplored an “embarrassingly low” standard of acceptability among business schools, one which many schools did not actually meet. The point was illustrated by citing multiple study options on the “principles of baking” at one southern school. At the same time there was optimism that the situation could be rectified by a “management
science” being transmitted to students as a methodology for decision-making. Instead of being taught to rely on judgment (which had been the basis of the Harvard curriculum), students could develop a more analytical competence by being immersed in quantitative methods and decision theory. Under Gaither's influence, Ford directed vast sums into the top business schools to create centers of excellence, raising the intellectual caliber and professionalism of the coming generations of managers and their teachers. Over two decades, the numbers of business schools in the United States tripled and the production of MBAs went up accordingly. By 1980, fifty-seven thousand MBAs were graduating from six hundred programs, accounting for 20 percent of the total number of master's degrees granted. At the same time, there was an equivalent expansion in the number of scholarly academic business journals, from about twenty at the end of the 1950s to two hundred two decades later.
¹¹

Harvard was the major beneficiary and the Hawthorne studies held as exemplars of the benefits of serious research, though it was the new Carnegie Institute of Technology's Graduate School of Industrial Organization that led the way in drawing upon the social sciences as a source of intellectual energy. Lee Bach, who led the Carnegie effort, was convinced that the best decisions must emerge out of the best reasoning process. He predicted a change that would involve clarifying and bringing to the surface “the variables and logical models our minds must be using now in decision-making and of persistently improving the logic of these models.”
¹²
One of those he recruited, political-scientist-cum-economist Herbert Simon, recalled a determination to transform business education from a “wasteland of vocationalism” into a “science-based professionalism.” By 1965, Ford was reporting “an increased use of quantitative analysis and model building” and more publications in disciplinary journals in economics, psychology, and statistics.

Its original concept had been to integrate the case study method as taught at Harvard with economics, sharpening the case studies while tempering economic theory with a dose of realism. The balance was to be shifted to more research with less description, more theory and less practice. Little balance was found. In what was later admitted to be a “tactical error,” Ford's push for academic excellence in the business schools came to be dominated by economists who showed little interest either in adapting to other disciplines or even worrying unduly about real-world applications. In the early 1960s, however, they seemed like a breath of fresh air. The determination to stress the practical and avoid the theoretical had led to an absence of any sort of theory, which left everything to common sense and judgment. In remedying this deficiency, economics had clear advantages over the other, softer social
sciences. It encouraged parsimonious models, simplifying the complex issues of management by focusing on core principles and assuming rational actors (which is just how managers liked to imagine themselves). The clarity of the assumptions would be reflected in the sharpness and testability of the hypotheses. The challenge for management was to achieve the best for their organization. It made sense to look at a theory that assumed that to be the aim of all individuals and organizations.

The change was reflected in Harvard. The business policy course, which treated corporate strategy in the “genteel tradition of those days, not as a set of formulas but as the mission of the company, its distinctive competence, reflecting the values of its managers,” and was not particularly popular, was replaced by one entitled “Competition and Strategy,” from which the material on the general manager and the values of society had been removed.
¹³

It was not just the push on the supply side that created the interest in economic theories of decision-making but also changes in the demands posed by the business environment. The emphasis on planning processes had reflected the supposed interests of a limited number of very large corporations with huge financial and political clout, offering a range of product lines in a steadily growing economy. While for these behemoths internal organization was a major issue, precisely because of their size and strength and the restraint of antitrust legislation, competition was not so important. The word does not even appear in the index of Chandler's
Strategy and Structure
or Drucker's
The Practice of Management
.

For smaller firms in new or dying markets with much simpler structures, the challenges were always quite different, and new challenges began to develop even for the big corporations. The large as well as the small became subject to increasing foreign competition, notably from insurgent Japanese corporations with a better eye for new consumer technologies and lower costs. Basic structural shifts were occurring: the move from manufacturing to services, new technologies that were creating new forms of enterprise as well as new types of goods, plus the development of increasingly esoteric financial instruments. Then there were temporary factors with severe effects, such as the hike in oil prices in 1974 and the subsequent combination of stagnation and inflation.

In this first instance, this challenge was picked up not by the business schools but by consultants, who by necessity were tuned to the stresses and
strains of changes in the business environment. The Boston Consulting Group (BCG), founded by Bruce Henderson in 1964, saw strategy as being about making direct comparisons with competitors, especially in relation to cost structures. While the business schools still encouraged the analysis of specific and unique situations, Henderson sought strong theories that would guide the consultant when considering the circumstances of new clients. His approach was more deductive than inductive. The aim was to find a “meaningful, quantitative relationship” between a company and its chosen markets.
¹⁴