Reasonably successful business enterprises usually start off with relatively high rates of growth. In part this is the natural effect of a mathematical truth: it may be easier to achieve a 50 percent growth rate when you’re moving from $200,000 to $300,000, than it is to achieve a 50 percent growth rate when you need to move from $20 million to $30 million.
Nevertheless, the disheartening thing that far too many enterprises experience is the flattening of the profit growth curve even if they are able to sustain significant growth in revenues.
Abraham Lincoln is remembered as having famously said, “A house divided against itself cannot stand” (even though he was actually quoting the Bible from Mark 3:25).
Well, actually, that house might stand for a while. But, ultimately, it is doomed.
Most business enterprises are “houses divided.”
Why do I say that?
Because there are two men at work in these enterprises: economic man and administrative man.
Economic man believes he perceives the world as it really is, even though his perception is really a dramatically simplified model of the reality around him.
Economic man also diligently tries to consider all of the rational alternatives at his disposal when attempting to meet the challenges before him. But, because his view of the reality that surrounds him is limited and simplified, he often fails to consider alternatives that are presently outside his realm of perception and knowledge.
Nevertheless, being the diligent man he is, economic man will attempt to choose wisely from among his (known, perceived) options the “best alternative” for achieving what he also perceives as the most important goal at the time.
Administrative man is less idealistic, and more pragmatic, than is economic man counterpart.
Administrative man recognizes that his view of reality is limited and simplified. Therefore, he also knows that, in making decisions, he must take into account only a few of the most relevant factors and facts available to him in the moment the decision must be made.
As a result, administrative man will choose, perhaps not the idealistic “best” alternative, but the alternative that is “good enough” to keep things moving forward—hopefully, without doing too much damage in the long-run.
The same man
Sometimes administrative man and economic man are found in the same person. Under certain circumstances he acts like administrative man, and at other times, under other circumstances, he acts like economic man.
However, even if they are not found in the same man, these two men are virtually always found working side by side in the same organization—sometimes as co-workers, but more frequently in some hierarchical arrangement. Regardless, the results are the same: management oscillation.
What it looks like
Economic man says, run larger batches, because we need “efficiencies” and to “minimize costs.” But, administrative man, has no problem overriding batch size decisions when push comes to shove and orders being held up behind a big batch need to get processed and out the door to a customer.
Economic man says, we need to hold the line on our prices in order to keep our margins up. But, when cash flows are declining or business is being lost to competition, administrative man says, "Do whatever it takes to get those orders, even if it means offering bigger discounts.”
Economic man says, “We need to cut back on overtime. We’re losing money running this way.” Nevertheless, when quarter-end or month-end comes around and shipped orders need to get “booked,” administrative man comes to the fore and says, “Get those orders produced and out the door, even if you have to work the weekend to get it done!”
There are similar oscillations going on between economic man and administrative man over other business factors like:
- How equipment is maintained (as needed, or on a preventive maintenance schedule)
- How inventory is purchased (as needed, or in bulk to minimize costs)
- How production is managed (produce to order as much as possible, or produce to stock to be more efficient)
- How work is allocated (to the most efficient resource, or to any capable resource, even if less efficient)
- How shipments are handled (to ship partial orders and absorb the freight costs on additional shipments, or ship only complete orders)
I am fairly certain you can think of even more examples from your own experience.
Cost-world thinking versus FLOW
Consider again the examples above. You will notice that economic man is a cost-world thinker. He believes he understands how “costs” and “profits” work in the real world (even though he doesn’t), and he makes his decisions based on his imperfect perceptions of costs and profits.
And, remember how we said administrative man bases his decisions on a “good enough” solution to keep moving forward. Even without being intentional about it, administrative man is a systems and FLOW thinker. He breaks big batch setups to achieve FLOW. He realizes that the FLOW of sales (leading to Throughput) is more important than cost-based calculated unit-by-unit profits (even if his thinking is muddy on the issue). He recognizes that FLOW is essential, and wants to get product moving (even if he is somewhat wrong-headed in allowing policy to create huge variability that hurts flow in other ways).
With a little enlightenment, we can help you reconcile the thinking of administrative man and economic man in your organization and supply chain. We can help you stop damaging management oscillation that hurts both profits and morale.
Tell how you have experienced the battles that go on between economic man and administrative man—whether it’s being tossed to and fro in your own mind and finding yourself saying one thing one day, and the opposite thing another day, or between players in your company or supply chain.
Leave your comments below, or feel free to contact us directly, if you prefer. We look forward to hearing from you soon.
See also: Herbert A. Simon (1947). Administrative Behavior: A Study of Decision-Making Processes in Administrative Organization. 4th ed. (1997), The Free Press.