Industrial Revolution Org Cultures


Reading Peter Scholtes’ 1998 The Leader’s Handbook should today cause some reflection. His assessment of most modern org cultures is in no way positive and, one can say with confidence, no less accurate than it was a quarter century ago.

Scholtes contrasts two general org cultures, similar to McGregor’s Theory X and Theory Y, which he narratively ties to two different times and places.

The first takes us back to the mid-1800s.

Train Wrecks and Org Charts

On October 5th, 1841, two passenger trains collided outside Worcester, Massachusetts. In response, Western Railroad asked Major George Whistler to head a committee. The resulting recommendations, along with its famous “train-wreck chart”, Scholtes says, helped to shape US managerial practice until present day. Just over a decade later, in 1854, Daniel McCallum was placed in charge of operations for the New York and Erie Railroad, responsible for more than 500 miles of track.

McCallum took Western’s train-wreck chart and created what McKinsey considers to be the first modern org chart. Thus, as Scholtes notes, the org chart as we know it today was originally adapted by the railroad industry from work by the Prussian army in an attempt to prevent train wrecks. Like many information visualizations of its time, it is a thing of beauty.

As we’ll see, the thinking that went into the chart, as well as its accompanying principles, map nicely onto McGregor’s Theory X style of management.

The culture Scholtes contrasts this with takes us to the 1950s.

MacArthur and Deming

In the aftermath of WWII, General MacArthur wanted to increase the dissemination of US propaganda in occupied Japan. To accomplish this, he had experts flown in to help teach Japanese companies how to mass produce reliable radios.

Two of those sent were Homer Sarasohn and Charles Protzman. Sarasohn told the MacArthur administration to also bring W. Edwards Deming over. MacArthur agreed. Deming arrived in Tokyo on Friday, June 16, 1950, where he began giving daily lectures to groups of 200 to 600 people.

Almost a month later, on July 13, at the behest of Ichiro Ishikawa the top officials of 21 industries attended a dinner with Deming. This dinner, Scholtes states, was instrumental. It wasn’t another lecture where attendance was required by the MacArthur administration. Here, in Scholtes’ words, Deming “was not another victor giving orders to the vanquished”. He came across as a colleague who genuinely cared about the wellbeing of Japan.

Deming himself considered this the “birth of the new Japan”. The companies he worked with started seeing global market gains within four years. In the US, where Deming’s teachings never really caught on, companies went from ignoring Japanese products to, in the 1970s, losing more than half their market share for cars, TVs, stereos, and most other tech products.

By the 1980s, American companies were calling for trade sanctions against Japan. Deming would later say that, when it came to America, one of his biggest mistakes was to teach his methods to those who made the products and not to the managers who made policy. As Deming concluded in his masterpiece, The New Economics, “What we need is cooperation and transformation to a new style of management.”

Deming’s 14 Principles and “System of Profound Knowledge” map nicely onto McGregor’s Theory Y style of management from his book, The Human Side of Enterprise (which itself cites Deming).  

Theories X and Y, Scholtes Style

Major Whistler’s committee introduced to Western Railroad several innovations which, Scholtes contends, are still a key part of most org cultures today. These included functional divisions with clear chains of command and a description of responsibilities for each individual. Perhaps most impactful, the committee suggested the creation of central offices that would be run by people dubbed “managers”.

As cottage industries increasingly gave way to large, distributed organizations, this brought with it an increase in roles holding power that were wholly outside the work itself. To exercise said power, then, the focus increasingly shifted to the notion of “accountability”. This brings us back to McCallum of the New York and Erie Railroad. Along with creating the first modern org chart McCallum introduced his general principles for the formation of an efficient system of operations.

Baked into his principles is the assumption that where there is an error there is, ipso facto, a “dereliction of duty” as its cause. McCallum stressed the use of the org chart to promptly identify the “delinquent” responsible. Thus, Scholtes ultimately ties his version of Theory X management to 1841—to the time of Dickens and Poe.

In Scholtes’ view, most modern org cultures are still stuck in the industrial thinking of pre-Civil War America, so much so that the systems revolution he ties to post-WWII Japan has not had much effect, as evidenced by how radical much of Deming’s thinking still is in American corporate cultures.

Consider, for example, his famous “red bead experiment”. Deming was a protégé of Walter Shewhart, a pioneer of statistical quality control. The red bead demonstration showcased the futility of punishing and rewarding individual contributors for the outcomes of a process that was statistically stable, meaning its outcomes are what should statistically be expected given the constraints of the system itself.

Thus, all the sturm und drang of performance reviews fails to improve resulting outcomes and is therefore managerial waste. After all, if a system is a design that gets the results it tends to get, and if there is a desire to improve said results, then the system itself should be the focus of attention. Notice how different this is from McCallum’s principles and the use of org charts to “find the delinquent”; or, consider the inverse, where a focus on rewarding “rock stars” or “high performers” often just ends up incentivizing infighting and drama.

As Edward Martin Baker, a protégé of Deming’s, later noted in The Symphony of Profound Knowledge, some people objected to the red bead demonstration, arguing it only applies to production processes. This, Baker says, entirely misses the point. Any employee behavior is determined by the system in which it occurs, and one of the dominant forces here is the management system itself. Managers should, Deming argued, be focused on mentoring people, removing roadblocks, predicting what are the likely outcomes given the constraints of the current system, and, thus, on the continuous improvement of the system itself.

This is true, by the way, in many contexts. Hilariously, as Professor Adnan Husain observes, this same error—to take what is really a systemic and structural issue and to try and make it about the play of particular personalities—is also how conspiracy theorists think. It’s like doing a multiple regression and then prioritizing only variables that account for very little variance. As Deming himself famously put it, “A bad system will beat a good person every time.”

To ignore this and to instead focus on punishing and rewarding individual employees is, Deming would say, an abdication of leadership. This maladaptive thinking peaked, Scholtes argues, with Drucker’s unfortunate concept of “Management by Objectives” or “MBOs”, which are, he states, little more than the “Harvardization” of 1840s-style “train-wreck management”. (Today, of course, we are witnessing the full-throated resurgence of this “Harvardization” in the form of “Objectives and Key results or “OKRs”.)  

Also starting in WWII, the emerging field of Human Factors Engineering coalesced around a similar epiphany: Finding “the right man for the job” is the wrong thinking. Instead, you must redesign jobs to fit most people. Once one understands such systems thinking, the implications start spreading in a dramatically networked fashion.

For instance, as Johanna Rothman notes in the second book of her fantastic series, Practical Ways to Lead & Serve (Manage) Others, once you realize that the focus on individual resource efficiency is increasing cycle time and decreasing the flow of value, once you start to grok agile and flow efficiency, then you’ll also realize that there is no need for performance reviews.

This was not missed by Deming, whose own 14 Principles explicitly emphasized a focus on eliminating employee fear, getting rid of targets, breaking down siloes, doing away with MBOs, and abandoning performance reviews. Feedback should instead be baked into the cadence of regular one-on-ones. As in Toyota Kata, managers should be more like coaches, focusing on creating an environment of autonomy and mastery, on helping each person craft their individual job ladder, on offering career opportunities, and helping people get desired training.

This might seem an odd comparison, but the core insight here is very similar to Marx’s concept of base and superstructure: Changing what people do does not change the system. Instead, changing the underlying system changes what people do. Fascinatingly, and Scholtes’ acerbic evaluation aside, it is worth mentioning one aspect of McCallum’s chart that is often overlooked.

Notice that—even with all of McCallum’s Theory X assumptions—his original chart is not a pyramid with executives on top; rather, it’s a tree with the board and the executives as its roots. That is as it should be.     

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