Entrepreneurship in Everything: Management Is Doing Things Right; Leadership is Doing the Right Thing

~ Frederic Sautet ~

In his famous book The 7 Habits of Highly Effective People, Stephen Covey attributes this quote to Peter Drucker and Warren Bennis (p. 101). I came across it the other day and was struck by the parallels that one can find between this statement and the way one can think of entrepreneurship in the Kirznerian approach. The quote is in a section of the book on the “two creations.” Everything we do, execute, and produce must first be thought through as an idea, Covey explains. Before a house is built, the idea of a house must exist in the mind of the builder.

This is the fundamental point of the theory of entrepreneurial discovery. Microeconomics is a closed-ended universe of optimization under constraints. By contrast, the entrepreneurial approach seeks an explanation of human action that includes novelty. Israel Kirzner showed how opening the microeconomic universe gave us a different, much richer, perspective on the way the market functions.

The statement “management is doing things right; leadership is doing the right thing” rests on this idea. Implicitly Drucker and Bennis argue that the leader must be an entrepreneur, i.e. a discoverer of new means-ends frameworks. Setting the vision — doing the right thing — is being an entrepreneur in the Kirznerian sense. Of course, one may say that leadership encompasses more than pure discovery; it also means convincing stakeholders that the vision is right and that everyone should buy into it. But at the bottom is the discovery of the idea(s) that sets the organization’s direction.

Management is different; it is closer to an optimization exercise — choosing the best option among all the known ways of doing things. Of course, in the “living economy” everyone is an entrepreneur; and managers can also exercise their entrepreneurial function. They can discover new ways to manage the daily operations of the organization, but at the end of the day, pure managerial activity is about doing known things well, rather than discovering new ways of doing things. This is perhaps why a good manager is often seen as someone who gets things done, whereas a good CEO is one who takes the organization forward where it hasn’t gone before.

Comments

[Jerry O'Driscoll]

A very good post distinguishing management and leadership. I will partially dissent on identifying entrepreneusrship with CEOs or any particular person or function.

We can all act entrepeneurially and do so whenever we act other than routinely. I think that is in the Kirznerian spirit.

[Frederic Sautet]

Jerry, I agree with you and I did mention that everyone can be an entrepreneur, as Kirzner would argue. It is clearly the case that CEOs can be managers and managers can be leaders, at times. But if there is a fundamental difference between these two roles, it may pertain to how entrepreneurial one needs to be.

[Jerry O'Driscoll]

We agree. I'm just not a fan of CEOs of major corporations as either leaders or entrepreneurs. There are important exceptions, of course.

[Greg Rehmke]

Maybe this is nitpicking, but though "the idea of a house must exist in the mind of the builder"-- usually the details of the idea are wrong in ways not apparent until construction begins. Because most new projects (whether research papers, buildings, or spaceships) are complex, only after development and construction starts are problems caused by divergence of real world complexity discovered.
So if by "the idea of the house" we just mean some vision of shelter, fine. As private firms dig into projects they discover new problems and new opportunities, and must have the flexibility to adjust their initial ideas.
Nevil Shute's autobiographical "Slide Rule" tells the first-hand story of the R100 vs R101 contest. It is the often repeated story contrasting error, discovery, and adjustment in private sector technology development vs. error, cover up, and disaster in public sector technology development.

[Daniel J. D'Amico]

Fred,

I'm not sure this definition of leadership accurately deserves being labeled as Kirznerian:

"Implicitly Drucker and Bennis argue that the leader must be an entrepreneur, i.e. a discoverer of new means-ends frameworks. Setting the vision — doing the right thing — is being an entrepreneur in the Kirznerian sense. Of course, one may say that leadership encompasses more than pure discovery; it also means convincing stakeholders that the vision is right and that everyone should buy into it. But at the bottom is the discovery of the idea(s) that sets the organization’s direction."

I agree when you describe Kirzner as "opening the micro-universe" to include newness and innovation. So I think rather than defining leadership in terms of convincing others to do the right thing, perhaps we should define truly effective leadership as inspiring agents to do the things that they themselves were unaware of being possible. In the previous definition, the group of agents failed as a matter of choice - because they were unconvinced. If they were convinced or had the knowledge as to the benefits of coordinating their actions they wouldn't need the leader - not all tasks do. Only for those tasks where leaders provide new knowledge and recognize profit opportunities unseen by the agents themselves are leaders needed.

[Daniel Klein]

Nice post.

The distinction neats fits those of a recent paper:

plan fulfillment = doing things right
plan affirmation = feeling you did the right thing

mistake = not doing things right
error = not doing the right thing

disappointment = the sentiment arising from mistake
regret = the sentiment arising from error

[Frederic Sautet]

Dan (D'Amico),
You make a good point. I agree with you. My point was to say that to do the right thing also implies to discover what that right thing is. And leaders do that and make others realize that this is what they need to pursue. This, it seems to me, is entrepreneurship in the open-ended Kirznerian sense.

Dan (Klein),
Can you send a link to that recent paper of yours? Thanks.

[Frederic Sautet]

Greg,

There is no denying that most building projects are complex and may require adaptation to new circumstances as you go along, etc. The point Kirzner (and Covey) makes is that before one acts on the basis on information one possesses (optimizing behavior in standard micro), one must come to know what that information is (discovery). So irrespective of the complexity of a project, that project first has to be discovered in the mind of the agent. It may lead to further discoveries down the road, but ideas always come first.

An interesting issue that I was thinking about recently is the "feeling" vs "thinking" debate (not directly related to your comment). In Andre Agassi's recent book, Open, he talks about playing with his feeling rather than his thinking. When he let go and felt the game rather than thought it, he played better. Tennis players (and others sportsmen) do not always use their thinking mode, but it doesn't mean that ideas have no place. In order to switch the feeling mode on, one must have had a lot of practice beforehand and thus had the idea of practice and playing tennis in the first place.

[Calvin]

Management functions basically do many kinds of works such as planning, organizing, direction, and control in order to make their works most efficiently. It is right as Dr. Stephen Covey says management is just to choose the best option among all the known ways of doing things.
Leadership is different when compared to management. The leadership is the key to succeed in the competition of the organizations. The leadership gives employees the possibility to go ahead with right direction with ease. Moreover, the Leaders are the decision makers, so they must have a vision further than everyone else and they are free to take decision. In order to keep the companies going, the leaders have to apply plans new and persuade employees follow their decision. They must be doing right, and they have the right to do the right thing. If they do wrong, they will not be leaders at all

[Daniel Klein]

Fred, here are two papers with the matrix:

(in the following, search on "error", "mistake," "affirmation", "fulfillment", "regret", or "disappointment".)

http://swopec.hhs.se/ratioi/abs/ratioi0127.htm
(forthcoming with reply by Kirzner in The Journal of Private Enterprise)

http://swopec.hhs.se/ratioi/abs/ratioi0133.htm
(forthcoming in The Adam Smith Review)

[Frederic Sautet]

Thanks Dan. I know the first one of course, we have been discussing it a lot. And thanks for the link to the second one.

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[Extenze]

In the previous definition, the group of agents failed as a matter of choice - because they were unconvinced. If they were convinced or had the knowledge as to the benefits of coordinating their actions they wouldn't need the leader - not all tasks do. Only for those tasks where leaders provide new knowledge and recognize profit opportunities unseen by the agents themselves are leaders needed.