Why do decentralized, seemingly disorganized market economies routinely outperform centrally planned, tightly controlled economies?

One reason is the principle of obliquity. Direct, goal-oriented action works well in simple stable contexts , where tasks are easy, consequences of actions are predictable and feedback is quick. But in complex, turbulent contexts, where tasks are difficult, consequences of any individual action are unpredictable and feedback is delayed, oblique or indirect goals generally work better.

In 2004, economist John Kay recommended applying the principle of obliquity to business: “meeting global business targets [is] the type of goal that [is] best achieved when pursued indirectly.”[2] Thus, when Peter Drucker wrote in Management in 1973 (p. 61) that the only valid purpose of a firm is to create a customer, his proposal reflected the principle of obliquity: pursuing goal A (value for customers) should lead to results B, C and D (long-term shareholder value, employee satisfaction and social goals ) Drucker’s emphasis on decentralization also reflected the principle of obliquity.

Studies confirm the relative success of companies pursuing oblique goals. A recent review concluded: “companies that consistently invest in their employees, in their relationship with their external stakeholders, and in a vision that all stakeholders can subscribe to, outperform peer companies that are more narrowly focused on financial objectives.”(Reinventing Management, 2010, p.127) Examples include SouthWest Airlines, Handelsbanken, WL Gore, Whole Foods Market, Tata and Toyota .

The role of business schools

Nevertheless, many large firms still focus narrowly on direct goals like maximizing short-term shareholder value. Moreover business schools reinforce this thinking. As Sarah Murray wrote in the Financial Times in July 2013 : “While there is growing consensus that focusing on short-term shareholder value is not only bad for society but also leads to poor business results, much MBA teaching remains shaped by the shareholder primacy model.”

Short-term shareholder value thinking is embedded in the core curricula of MBA courses around the world. Managerial economics and accounting tend to assume that short-term profits will lead to long-term shareholder value. Profits are “the overall goal” of the firm.

Constraints to change in business schools

Why do business schools still teach the linear thinking implicit in shareholder value theory? It is not that the professors slavishly believe the theory. In fact, every discipline actively debates how to be more relevant. Yet interlocking institutional arrangements tend to prevent change.

First, business schools often constitute a significant revenue stream for their universities. Students from around the world want “a standard MBA”. Administrators are hesitate to tamper with core curricula lest it jeopardize this revenue stream.

Second, business schools succeed in part because graduates get jobs in consulting and finance-sectors still dominated by direct financial goals. These firms are seen to want students schooled in efficiency and shareholder value theory

Third, the tenure system generates incentives to do research that is methodologically rigorous but often has little relevance to business. The research is usually conducted within an existing paradigm. The “efficient market hypothesis” in microeconomics, for example, still underpins much research in finance.

Fourth, the accreditation process of business schools is slow, cumbersome and inflexible. This creates additional pressure to stay with the status quo.

Finally, business school rankings by the Financial Times and others are built on criteria such as acceptance of articles in academic journals, the academic accreditation processes and starting salaries of graduates—thus reinforcing the status quo .

The issues facing business schools are thus principally issues of institutions, not individuals. Changes in personnel will have little effect without shifts in management processes.

Change is coming

Nevertheless deep change is imminent. First, business schools in emerging countries are on the rise, as shown in recent rankings. This phenomenon will disrupt business education in Europe and North America.

Second, Massive Open Online Courses (MOOCs) that can reach much larger numbers of students at much lower cost will inexorably generate disruption for all universities. Business schools that master the opportunity as a tool for improvement will prosper, while many that don’t won’t survive.

Third, funding from government and industry is forcing greater attention to the practical impact of teaching and research . Business schools are increasingly seen as essential components of business enterprise in local communities, job creation by incubating startups, and student employability with practical real-life work skills.

Recommendations

We believe that business schools should consider the following:

1. A renewed focus on purpose: Business schools should be equipping graduates to be leaders of the 21st Century organization that operates in a complex environment where innovation and responsiveness to customers and society are key. Moreover as work is increasingly done in self-organizing self-managing teams and networks, the “professional manager” concept is giving way to a vision of management in which everyone in the organization has management and leadership responsibilities.

2. Updating the core curriculum: A core curriculum built on the linear thinking of shareholder value and efficiency is unsound education for the 21st Century leader. Merely adding more relevant courses on the periphery will be insufficient. Forward-looking business schools should join together in generating textbooks and courses that reflect the complexity of today’s business world.

3. Changes to the ranking system of business schools: The ranking of business schools by the Financial Times and others should include a criterion that reflects practical relevance, vitality and impact. A new approach to measurement and metrics should reflect society’s complex expectations of business schools .

4. Putting “business” back in business schools: Academic recruitment and accreditation processes should be overhauled to reflect today’s complex business world and the need for greater practical relevance. Impact assessments should be adopted in accreditation processes.

5. Interdisciplinary approaches in research and teaching: The complex problems now facing firms do not fit traditional disciplinary boundaries. They require radical cross-disciplinary thinking that challenges the old assumptions of each discipline. Some business schools are already experimenting with integrative approaches to teaching.

These recommendations are meant to further discussion about how business schools can support business leaders in transforming organizations from linear, efficiency-driven, shareholder-value-maximizing machines into complex organs of the society, as envisioned by Peter Drucker years ago (Management, 1973, p.41). What do you think of the role of business schools today and in the future in dealing with complexity?

This article is a joint effort of all six authors.

Authors:

Alan W. Brown is Professor of Entrepreneurship and Innovation in the Surrey Business School and the author of Enterprise Software Delivery (2012)

Julian Birkinshaw is Professor of Professor of Strategy and Entrepreneurship at the London Business School and the author of Reinventing Management (2010).

Steve Denning’ is the author of The Leader’s Guide to Radical Management (2010) and has a regular blog on radical management on Forbes.com.

Tom Roy is a management consultant and an adjunct faculty member at George Washington University.

Vlatka Hlupic is Professor of Business and Management at the University of Westminster and CEO of the Drucker Society London.

Franz Röösli is professor and management trainer, Director of the Beyond Budgeting Round Table (BBRT) and a co-author of The Leader’s Dilemma (2011).

[1] http://www.johnkay.com/2004/01/17/obliquity

[2] http://www.ft.com/intl/cms/s/2/e392f12c-adac-11e2-82b8-00144feabdc0.html