The Boston Consulting Group Caused the Recession

Like all good conspiracy theories, this one may have a few loose links.  But work with me here–it’s a good story.

The 70s: When Strategy Became Competitive Strategy

Back in the 60s, Bruce Henderson, chafing at Arthur D. Little, re-conceived competitive strategy.  He founded the Boston Consulting Group, who in the 70s introduced the world to concepts like the experience curve, the Doom Loop, and the barnyard strategy matrix

Together with Michael Porter, they redefined strategy from a vague, military idea, to a disciplined, quantitative analysis based on a Hobbesian view of the business world: a State of Nature as Competition.  Competitors lurked everywhere–including masquerading as your suppliers and your customers.  Henceforth, all talk of "strategy" would implicitly have “competitive” as a leading adjective.

It is hard to describe today the impact this new ideology had on the business community.  Suddenly the world made sense—everything was about competition, and everything was quantitative.  It was about winning, and the winner was the one who ran the numbers best.  Peter Drucker was so 10 minutes ago–now, if you couldn’t measure it, you couldn’t manage it.

The 90s: When Organizations Became Processes

In the early 90s, Michael Hammer  and James Champy wrote Reengineering the Corporation, and the other shoe dropped.   The other shoe was business process re-engineering.  Pre-Hammer, companies were functional organizations.  Post-Hammer, they were bundles of processes. 

Functional organizations were messy things that needed coordinating, leading, managing.  Processes could be broken out, modularized, tinker-toy-rebuilt, outsourced, and re-assembled—and despite Hammer’s later protestations, the idea remained attractively impersonal to its fans. 

The 00s: Metrics, Competition and Process Prepare the TinderBox

BCG, B-schools and other leading business thinkers embarked on a decade of exploring the implications.  The Holy Grail of business had become sustainable competitive advantage, which produced economic value added, which produced maximal shareholder value. 

You got there by achieving global scale in every business process: if you weren’t #1 or #2 in any process, you outsourced it to one who was.

Outsourcing to achieve scale through best practices meant multiplying transactions, reducing time-frames, and replacing messy relationships with tightly written contracts–or, better yet, markets, the truly impersonal solution.  Performance was quantitatively defined, included not only in contracts between companies, but in employee relationships with people (who were renamed “human capital” to fit the new business Esperanto—finance).  No need to inspire or manage through people; just craft a blend of  metrics and incentives, the way Skinner incented those white mice in his boxes.  Poster child: Jack Welch.

An example: the mortgage industry.  The purveyors of the competitive/process/metric paradigm saw mortgage as an industry that was regionally fragmented, structurally clumpy, high cost, stodgy, inefficient, illiquid, and highly subjective.

In 15 years, they transformed it.  The mortgage business became globally integrated, highly specialized (substituting markets for organizations via disintermediation), low-cost, nimble, cutting edge, efficient, liquid, and highly impersonal.  It became a market-driven, process-linked, globally efficient industry.  That’s all true.

It also became bereft of relationships; laden with perverse incentives; managed by serial transactors; stripped of any sense of responsibility; and governed solely by financial metrics.  In a business whose product already was money, the doubling-up emphasis on financial metrics obliterated any memory of other principles or values that might have once existed in the financial sector. 

The new mantra was IBGYBG. I’ll be gone, you’ll be gone; do the deal and let the next sucker clean it up.  The entire Meaning of Business became—to make more money than the other guys.  Period.

You work for your company–in theory, the shareholders.  Your company’s job is to win.  You win by beating others before they beat you.  Customers are walking wallets, sources of the poker chips you use to measure success.  Suppliers are to be played off against each other.  All parties are to be managed in clumps of processes, carrotted-and-sticked to behave in certain ways.  That, simply, is how it was supposed to work.  According to this mantra.

This ideology didn’t just happen.  It was four decades in the making. 

Bruce Henderson didn’t mean to do it—but he set the wheels in motion.  BCG, Hammer, Porter, and CSC-Index made it look enticing.  Economists and quant-wannabes from the HR, exec-comp and leadership world added their hops and spices to the brew.  Goldman Stanley and Morgan Sachs refined it; private equity and financial engineers distilled it; and Merrill Stearns, mortgage brokers and Joe the Plumber  got drunk on it.

Complicated?  Yes.  That’s where conspiracy theories come in; they let you simplify.  So pardon me if I just use the shorthand version: BCG caused the recession.

14 replies
  1. Ann Kruse
    Ann Kruse says:

    Great article to start the weekend!  I couldn’t tell whether to laugh or cry.  Thanks for pointing to the significance of the disconnect between human relationships and business transactions.


  2. barbara garabedian
    barbara garabedian says:

    Charlie, you should find some time to go back to mentoring consultants and/or teaching courses at B-School!! What a great survey course! Can’t wait to see what kind of reaction this receives!!!!

  3. John Spence
    John Spence says:

    Classic!  Well played   Charlie… and so true. 

    However, you’ll have to put this into a four-quadrant matrix if you want anyone to pay attention to it.


  4. Charlie (Green)
    Charlie (Green) says:

    Thanks all; I had fun with this one.  When you get old enough and before you get senile, you get the chance to have some perspective.  Hopefully my friends at BCG still have a good sense of humor; and I think it makes sense of a lot of things.

  5. peter vajda
    peter vajda says:

    A wonderful teaching story, Charlie. And thank you.

    As for it "making sense" to BCG, "no one snowflake ever says it’s responsible for the avalanche."  Hmmm.

  6. Jim Bullock
    Jim Bullock says:

    You left out a player, perhaps influenced by the shareholder value & endless climb meme, but necessary – us. Everyone who buys  securities bought into the same share-price-gain-uber-alles ethic, punishing any investment that didn’t play along.

    Back in the day "investment" in a high-value stock meant putting your money in something that paid a dividend of 7-11% while retaining its value. The idea of sustained 20-40%+ annual gains in share price was called speculation. These other ones, with price tracking inflation while throwing off a respectible return were called "blue chip." They were he epitome of wealth, and icons of respectability.

    Anybody who thought that acceptable over the last 25 years was, well, thought a sucker. And over the last 15 years we came to think of our "investment" in our very homes the same way. It always goes up. Somethign like 20-40% a year. Which we rake in when we sell to the greater fool.

    Speculation works like this. Yet, with speculation, sometimes you win. Sometimes you lose. But if you have to get your gain by selling to the bigger fool when things go up, up, up, it’s speculation. The elevation of endless value in stock price as the only good drove organizations to relentless expansion as the only way to avoid being purged or sold (then purged.) This pushed them into bad markets, bad business and bad behavior. They failed but there was a species of entrapment here. A species of this result being demanded of them. By the owners. Demanding endless gains. Demanded by us.

    You can’t cheat an honest man, they say. Yet, we insisted on it. Felt entitled to it. Would brook no question that we would ever have rwice what we’d but in every 1.5 to 3.5 years without doing diddly squat. Wouldn’t hear that the fundamentals of our economy didn’t reflect the valuations of stocks or housing for a decade or two. Because the Boston Consulting Group, or maybe somebody else, told us we could demand this kind of money for nothing. Then we felt entitled. Then we demanded our entitlement.

    And now we’re demanding that someone fix it, on the backs of, well I’m not sure, but I suspect in the end that it will be us.

  7. Chris Downing
    Chris Downing says:

    A good story and to the extent that a lot of under-developed managers buy and apply this stuff to the business; it’s true.

    We seem to have entered an era of amateurism and ‘that will do’ – if it’s ‘near enough’, looks ‘kinda OK’, or hire them ‘because they are better than nobody’.  Whatever happened to competency?  In all these horror stories about the economy, incompetency seems to be at the heart of it. 

    People don’t seem to be doing what they are good at. 

    The basics of business are quite simple really.  Since the 80’s management consultancies have sold ideas to make life seem to easier than having to face up to reality and just get on with it as it is.  There was a great TV series about the early consultancies and how they screwed up so many businesses.  It was based on Eileen Shapiro’s book, “Fad Surfing”.  It tracked the continual introduction of new theories about how business functioned.  Before I left behind working for big corporations in 2002,  I think I’d worked through most of these consultancy ideas close up – Mission Statements, 20 20 Vision, Flat Organization, TQM, Employee Empowerment, Zero Budgeting, Benchmarking, Competitive Strategy, Continual Improvement, Management by Objectives, CSC, Change Management, Customer Focus, GIGO, JIT, WCM, Learning Organization, Mentoring, Open Office, Pareto, Partnership, Win Win, Re-engineering, Value Chains.  I’m sure there were more!

    It’s surprising that we had time to do anything.   As you say though – all this creates an intellectual illusion that all is understood.  Whereas, most of these activities confuse rather than clarify.  But what wonderful contracts for consultancy can be won off the back of a new idea to make life simple.

    Why does it seem most of the guys who own big companies don’t seem to have a college education and the consultancy and corporate guys all have Harvard, Yale and MIT degrees and MBA’s?  When did business get so intellectual?


  8. Charlie (Green)
    Charlie (Green) says:

    Jim and Chris,

    Great stuff, many thanks for sharing.

    As to Kim_Cool, you are right about Das Kapital; one of the seminal insight books of modern times.  Marx was arguably a better sociologist than economist; he was the first to say, ‘if you want to understand how the world works, follow the money.’ (My paraphrase).

    I don’t think Michael Porter makes it quite to Marx’s level, but his dictum ‘it’s all about the competition, stupid’ (my paraphrase) has a comparable breadth and simplicity. 

    Both authors saw the world through mega-lenses, and the world was changed because a lot of people followed them.

    Kim–have you read Porter’s Competitive Strategy? Bourgeouis it’s not; you might find the same strong parallels with Marx that I see. Let us know.

  9. Chris Downing
    Chris Downing says:

    I’m not quite sure why this thread was emailed to me again today – but I had more thoughts.  One of the great ‘bulb coming on moments’ was when someone introduced me to the concept of "The Village of a 1000 People".  Originally used in a presentation to highlight the plight of billions of poor in the World at a scale we could relate to; it also in my mind seemed to drill to the core of big business, big economics and big politics.  If we reduced some of the Worlds or Nations issues to a village of 1000 people how would that problem look then.  If one of the three village banks had been speculating and gotten into trouble would the whole village vote to give them $50,000 each to keep them going or work out a way that the assets, loan book and commitmentas of that bank coulde be transferred smoothly to the healthier two banks so the viallge could keep functioning and the troubled bank ceased to exist?


    Apply this villge theory to most big stories and they get clearer.  Why did we need to bail out the banks?  Really?  Why can’t we have free trade around the World?  Why would we think one side of the village working for $10 a week is OK when the other side working for £1000 buys the stuff the $10 guys make and put out of business their next door nieghbour who can’t afford to work for $10.  Anyway you get the idea.  It’s a powerful interview tool and a powerful simplification technique to get your head round big problems – and don’t let yourself say, "Yes but the World is far too comlicated to deal with it’s problems that way."  When was the last time you met a politician who could deal with complicated?


Trackbacks & Pingbacks

  1. […] are many reasons for this, including business thought leadership, an over-reliance on market solutions, and increased wealth disparity. All of them have […]

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *