Doctor Ioannis Ioannou is Assistant Professor of Strategy and Entrepreneurship at London Business School, specialising in sustainability and corporate social responsibility. Tim Cooper interviewed him on behalf of the Accenture Institute for High Performance (AIHP) as part of a new research project on business agility—in particular, the way in which businesses can enhance their agility through the way they engage with stakeholders outside the boundaries of the firm.
AIHP: We hear a lot today about the need for companies to be more agile in response to today’s volatile and uncertain environment. From your perspective, how are businesses doing this?
DR. IOANNOU: I think a good way to think about agility is the ability of a company to strike a balance between their “explorative endeavours” (innovation, R&D, entering new markets) and their day-to-day focus on execution and meeting their margins—what we could call their “exploitative side”. These so-called “ambidextrous organisations” are able to exploit their current position while keeping their eyes focused on their external environment, reacting and seizing opportunities as they unfold. They usually do this by designing exploratory entities that act as filters between the outside world and the organisation. For example, venture capital vehicles, employee incentive schemes or open innovation programmes. UK supermarket chain Sainsbury’s recently crowd-sourced the development of elements of its sustainability strategy through an event organized by Green Monday, and opened it up for criticism and feedback by a panel of top business and thought leaders. Or take the example of Oticon, a Dutch hearing-aid company that during the 1980s lost a significant proportion of its market share to a competitor who introduced the in-ear hearing aid device. To resuscitate the company’s innovative ability, a newly appointed CEO, Lars Kolind, turned it into a “spaghetti organisation”. This meant no hierarchy, no fixed processes and slimmed-down bureaucracy. In a sense, you could see them as actively replicating external market pressures in their internal organisational environment: employees were granted freedom of choice over which projects they wanted to work on, a mechanism that allowed the best ideas at any point of the organisation to be recognised and rapidly implemented while others were disregarded. This internal revolution resulted in a boost in the creation of innovative products, securing Oticon’s market leadership for the years that followed.
AIHP: To what extent do you think that the concept of “social agility”— sources of agility that exist outside the boundaries of the firm—is currently appreciated by businesses?
DR. IOANNOU: I would say that it differs from company to company, but generally speaking this idea is only slowly beginning to be institutionalised. Let me draw a parallel with sustainability here: in the 1990s, you would not see “sustainability” as a specific function within companies’ structures. Nor was it a core strategic concept shaping organisations’ goals and values. It was a niche concept, mainly related to reputation management or other issues such as corporate philanthropy or charitable giving, but as its importance grew it started to become integral determinant of organisations’ identity and a key aspect of their strategies. Today, leaders in sustainability begin to show a complete integration between their business strategies and their sustainability goals. In the same way, I think your concept of social agility is only just beginning to be appreciated by businesses, but, in time, could become part and parcel of how they do business
Full interview and PDF available here.
The business news continues to be full of stories of large companies getting into trouble in part because of their complexity. JP Morgan has been getting most of the headlines, but many other banks are also investigation, and companies from other sectors, from Siemens to GSK to Sony, are all under fire.
It goes without saying that big companies are complex. And it is also pretty obvious that their complexity is a double-edged sword. Companies are complex by design because it allows them to do difficult things. IBM has a multi-dimensions matrix structure so that it can provide coordinated services to its clients. Airbus has a complex process for managing the thousands of suppliers who contribute to the manufacturing of the A380.
But complexity has a dark side as well, and companies like JP Morgan, IBM and Airbus often find themselves struggling to avoid the negative side-effects of their complex structures. These forms of “unintended” complexity manifest themselves in many ways – from inefficient systems and unclear accountabilities, to alienated and confused employees.
So what is a leader to do when faced with a highly complex organisation and a nagging concern that the creeping costs of complexity are starting to outweigh the benefits?
Much of the advice out there is about simplifying things – delayering, decentralising, streamlining product lines, creating stronger processes for ensuring alignment, and so on.
But this advice has a couple of problems. One is that simplification often ends up reducing the costs and benefits of complexity, so it has to be done judiciously.
But perhaps the bigger problem is this advice is all offered with the mentality of an architect or engineer. It assumes that Jamie Dimon was the architect of JP Morgan’s complexity, and that he, by the same token, can undo that complexity through some sort of re-engineering process.
Unfortunately, organisational complexity is, in fact, more complex than that. To some extent, organisations are indeed engineered systems –we have boxes and arrows, and accountabilities and KPIs. But organisations are also social systems where people act and interact in somewhat unpredictable ways. If you try to manage complexity with an engineer’s mindset, you aren’t going to get it quite right.
I have been puzzling over complexity in organisations for a while now, and I reckon there are three processes underway in organisations that collectively determine the level of actual complexity as experienced by people in the organisation.
1. There is a design process –the allocation of roles and responsibilities through some sort of top-down master plan. We all know how this works.
2. There is an emergent process – a bottom-up form of spontaneous interaction between well-intentioned individuals, also known as self-organising. This has become very popular in the field of management, in large part because it draws on insights from the world of nature, such as the seemingly-spontaneous order that is exhibited by migrating geese and ant colonies. Under the right conditions, it seems, individual employees will come together to create effective coordinated action. The role of the leader is therefore to foster “emergent” order among employees without falling into the trap of over-engineering it.
3. Finally, there is an entropic process – the gradual trending of an organisational system towards disorder. This is where it gets a bit tricky. The disciples of self-organising often note that companies are “open systems” that exchange resources with the outside world, and this external source of energy is what helps to renew and refresh them. But the reality is that most companies are only semi-open. In fact, many large companies I know are actually pretty closed to outside influences. And if this is the case, the second law of thermodynamics comes into effect, namely that a closed system will gradually move towards a state of maximum disorder (i.e. entropy).
This may sound like gobbledegook to some readers, so let me restate the point in simple language: as organisations grow larger, they become insular and complacent. People focus more on avoiding mistakes and securing their own positions than worrying about what customers care about. Inefficiencies and duplications creep in. Employees become detached and disengaged. The organisation becomes aimless and inert. This is what I mean by entropy.
The trouble is, all three processes are underway at the same time. While top executives are struggling to impose structure through their top-down designs, and while well-intentioned junior people are trying to create emergent order through their own initiatives, there are also invisible but powerful forces pushing the other way. The result is often that everyone is running very fast just to stand still.
So let’s return to the leader’s challenge. If these three processes are all underway, to varying degrees, in large organisations, what should the leader do? Well, sometimes, a sharply-focused and “designed” change works well, for example, pushing accountability into the hands of certain individuals who are much closer to the customer.
But more and more the leader’s job is to manage the social forces in the organisation. And in the light of this blog, it should be clear that this effort can take two very different forms:
1. Keeping entropy at bay. This is the equivalent of tidying your teenager’s room. It involves periodically taking out layers of management, getting rid of old bureaucratic processes that are no longer fit for purpose, or replacing the old IT system. It is thankless work, and doesn’t appear to add any value, but it is necessary.
2. Inspiring emergent action. This is the equivalent of giving a bunch of bored teenagers a bat and ball to play with. It is about providing employees with a clear and compelling reason to work together to achieve some sort of worthwhile objective. It isn’t easy to do, but when it works out the rewards are enormous.
And here is the underlying conceptual point. The more open the organisation is to external sources of energy, the easier it is to harness the forces of emergence rather than entropy. What does this mean in practice? Things like refreshing your management team with outside hires, circulating employees, making people explicitly accountable to external stakeholders, collaborating with suppliers and partners, and conducting experiments in “open innovation”.
A lot of these are initiatives companies are trying to put in place anyway, but hopefully by framing them in terms of the battle between emergence and entropy, their salience becomes even clearer.
Of course, every company says they have a strategy. In fact, I am pretty sure most of them have a document labelled “Our Strategy”, or at least a powerpoint presentation of that name. But, in fact, not many companies really have one. Here are some of the most common mistakes – or poor excuses for a strategy.
Goals are not strategy. “We want to be number one or two in the market”; I am pretty sure you have heard that one before. Well, it is not a strategy; it is a goal. And there is nothing wrong with having an aspiring goal, but strategy is how you endeavour to accomplish it. Strategy involves making choices; genuine choices. Of course, being number 1 or 2 in the market is not really a genuine choice, which requires trade-offs, and giving up something that could have worked as well. Nobody will choose to be number 32. In fact, a Silicon Valley CEO wrote to me saying “it is like stating, ‘My strategy to win the 400 meters at the Olympics is by running faster than anyone else’”. A good goal, but it does not tell you anything about how you intend to achieve it. Your route towards the goal; that is strategy.
Strategy is not what you were doing anyway. Most companies, when writing up their strategy, look for some formulation that fits in all the things that they were doing anyway. There is nothing wrong with that, if what you are doing, happens to constitute a consistent set of coherent choices, i.e. a strategy. But more often than not, it leads to some amorphous statement that is designed with the sole purpose of not giving anything up; no matter how disjointed the current set of activities. The worst I have seen was the supermarket conglomerate Ahold, which stated to be “multi-format, multi-local, multi-channel”. It did not exclude anything. Not coincidentally, this was shortly before they collapsed.
Strategy is not secret. Some companies really have formulated a wonderful strategy; a coherent set of genuine choices about their value proposition and the precise set of customers that they are going to serve, but when I ask middle managers lower in the organisation, they are unable to tell me what it is. I am sorry, but then you do not have one either. A strategy is only really strategy if alters the behaviour of the people in your organisation; what they do and how they do it. If nobody knows about it, it cannot influence their actions and decisions. In which case it may be an impressive powerpoint; but a strategy, it is not.
Professor Costas Markides, of the London Business School, put it well: “strategy is about making choices; about ‘who, what, how’: who is our chosen customer; what are we going to sell; and how are we going to deliver that value proposition”. It should lead to a coherent set of mutually reinforcing choices. For example, Nespresso’s strategy is to sell an easy-to-use system for consuming high quality espresso at home, sold directly to individuals via their Nespresso club. It involves a clear set of choices, that fit together. The litmus test for any strategy is whether what you are not doing is meaningful and could be profitable for someone else (e.g. serving offices, or filter coffee, or selling coffee in supermarkets). If someone else is making money on what you choose not to do, it just might be a sign that you have a good strategy.
Interim executive roles seem to be proliferating. In the last two weeksBlackberry appointed John Chen as its interim CEO, and Northern Ireland Water announced that its interim CEO would stay in post while the board tried, for a second time, to find a permanent replacement. Other large companies, including AstraZeneca, have had interim CEOs in recent years. And of course these public announcements just scratch the surface of a booming market for interim work at all levels, and in all sectors of the economy.
There are many types of interim executive – some are hired to do a very specific job, perhaps a turnaround or sale, some are provisional appointments that may lead to a full-time position, others are simply filling a hole. My particular interest in this column is with the latter type– the interim executive who is brought in to do a particular job, but without any specific mandate, until a permanent appointee can be found. And these ideas apply as much to the mid-level interim as they do to the CEO-level appointee.
What sort of person do you want as an interim executive? It is often said that good interims are flexible and responsive; they are fast-learners with a broad range of skills; and they are high-energy people, able to put in long hours when needed.
All these points are probably true. But my focus here is on some of the softer features of what makes a successful interim executive, features that often get overlooked when drawing up the profile for the type of person you are looking for. These observations are based partly on my research, but also partly on personal experience: twice in the last decade I have seen interim Deans come in as heads of business schools I have been working at, and do a better job than the formally-appointed Deans that came before or after them. What made these interim executives successful? Three things stood out.
First, they were focused on getting things done; on making the trains run on time. One arrived when an important initiative was stalled, so he worked to remove roadblocks and to bring stakeholders in line to support it. The other spent a lot of time finding the resources to help faculty, brokering conversations between warring factions, and allaying the concerns of unhappy students.
Second, they had no personal agenda, no grand vision for the business school they were running. This meant they didn’t feel compelled to force their point of view on the people around them – making for a better working environment all round. Of course, there are times when you need a big strategic plan –when the market is changing rapidly or when your organisation is in trouble – but these occasions are rare. Most business organisations today (the big banks for example) simply need a clear and consistent implementation plan.
Third, they were genuinely intent on working themselves out of the job. These individuals were academics who wanted to get back to their research. So they worked hard to recruit able deputies, and they gave these people as much responsibility as possible – which helped to bring the best out of them.
In my view, these two interim deans were successful because the short-term nature of their appointments steered them towards a very desirable set of behaviours. They were coaches and facilitators, seeking to get things done by enabling collaboration and initiative; they downplayed their own egos, in favour of supporting the existing direction set by their predecessors; they actively delegated work and sought out and promoted talent people.
Think, for a second, about what you are looking for in your own boss. My guess is you would draw up a list that closely resembles what I have described here. Unfortunately, the business world continues to celebrate charismatic leaders who do the exact opposite. There is a place for domineering bosses –during a crisis for example—but they are seldom successful for long periods of time, neither are they much fun to work for.
In a strange way, interim executives are the models of modern management because they are only there for a short while. Remember the Hippocratic Oath: first, do no harm. Every executive, whether interim or permanent, should have these four words etched on the back of their iPhone. So when starting a new job, your first priority is to figure out what is already working, without your input, that needs to be maintained. Then, plot the minimal number of interventions you need to make to sort out the problems. In the world of management, less is more. As an interim executive, this type of thinking probably comes naturally to you. But it’s also a useful discipline for any executive to bear in mind when moving into a new role.
In fact, given all these benefits, I think companies should be a bit more creative about the way they move people into and out of executive roles. I would like to see companies putting term limits on executive appointments, and enforcing more frequent moves. I would also like to see more companies embrace the logic of a professional partnership where the leader is a first among equals, not a boss. These types of initiatives would serve to remind executives that their role is to serve the organisation, not the other way round.
With the orientation of the conference in mind, I gave a speech making the point that in fact all of our innovation systems are open. Yes, even the patent system! (Indeed, the word “patent” derives from Anglo-Norman “lettre patente,” meaning “open letter.” )
The key point of my speech to this group was that there are important lessons to be learned by carefully studying the differences in open disclosure policies across innovation systems.
Much of the content on that speech can now be found in our new paper: How Disclosure Policies Impact Search in Open Innovation
There are two key points to our paper:
The first point simply clarifies a basic distinction in the nature of disclosure policies. Society’s various innovation systems–academic science, the patent system, open source, etc.–can be distinguished in terms of whether disclosures take place only after final innovations are completed (e.g., final inventions, working technology platforms, completed research papers, biological organisms, etc.) or whether disclosures relate to intermediate solutions and advances (e.g., intermediate solutions, data, methodologies, etc.).
The second is that different open disclosure policies come with stark tradeoffs. Intermediate disclosures (ex: open source, open data, wiki’s, open access, etc.) have the advantage of efficiently steering development towards improving existing solutions, but produce less experimentation and wider “searching” for alternatives.
More closed final disclosure policies (ex: innovation contests, entrepreneurial system of industrial competition, traditional academic publishing) produce higher incentives, and greater independence of experimentation–albeit with less reuse and cumulative learning.
Karim is presenting the paper for us today at Stanford–go see him! http://hci.stanford.edu/connect/
We frequently accuse large and complex companies of being bureaucratic, but what do we really mean?
The dictionary says bureaucracy is a means of coordinating activities through standardised rules and procedures. It was originally seen as a good thing – a way of freeing up organisations from the tyranny of powerful individual leaders with vested interests. We may not like the idea of Italian bureaucracy very much, but it beats having Silvio Berlusconi in charge. But over the decades, the term has gradually taken on negative overtones, a shorthand for the complexity that makes large organisations slow-moving and uninspiring to work in.
I spend a lot of time working with executives on how they might declutter, simplify or speed up the inner workings of their organisation. And I always push back when they say bureaucracy is the problem. What exactly do they mean, I ask them? Bureaucracy is a convenient bogeyman, as it represents all that is bad about big companies. But if these executives are going to make their company less bureaucratic, they had better figure out exactly what problem they are trying to solve. And to do this, a simple anecdote is far more powerful than a faceless monster. Here is an example of what I am talking about.
Last week my small consultancy business received a payment of £3,000 for some consulting work I had done for one of the top 20 companies in the UK, let’s call it Megafirm. I did the work in March 2012. Yes, 2012. It took 20 months for them to pay me.
I guess I should have been angry or frustrated at this delay, but in fact the longer it went on the more I became intrigued by what was happening (or, in fact, not happening). At no point in this 20 month period was there any dispute about whether my small business (my wife and I) was owed the money. Everyone we spoke to in the company was polite, helpful and increasingly apologetic. And yet somehow they couldn’t pay us. Some sort of glitch in the payments system meant that the initial invoice wasn’t paid on schedule, at which point the problem disappeared into a big black hole.
As the delay in payment entered its second year, I started to ruminate on what had gone wrong, and I realised that tiny problem was emblematic of a fundamental feature of bureaucracy.
Who, I asked myself, owned this problem? If I had been trying to get paid by a small company, the answer would have been obvious: I would have talked to the boss, he would have pulled out his chequebook, end of story.
But trying to get paid by a global company with 80,000 employees, it rapidly became clear to me that no-one owned the problem. In theory there were three plausible owners. One was my immediate client, the guy I did the work for. He was on my side, and indeed suitably embarrassed by the whole thing, but powerless and just not that interested – after all, he has his own job to do, and chasing invoices was a waste of his time.
Then there was the person who ran the payables department, or whatever that internal function was called in Megafirm. But to this day, I still don’t know who that person might have been, if indeed he or she existed in the first place. We spoke to people in processing centres in London, Mumbai and Warsaw, but how they were connected to each other was entirely unclear.
Then there was the person at the top – the Chief Financial Officer in this case, to whom we eventually wrote a letter, just at the point when the money finally arrived. But while he was ultimately accountable, he was also completely removed from the action. I don’t think he understood the payables process in his company much better than we did. The only value in seeking his involvement was as a vague threat to the people in Mumbai and Warsaw.
So who really owned this problem? The answer should be pretty obvious by now: I did! Or rather, my wife did, as she was the one who spent hours sending emails and calling people in India and Poland. Megafirm had outsourced the problem to us.
Think about this point at a broader level, and the implications are scary. When companies become too complex to manage, they create costs to others. Of course, it is well known that they make life miserable for their employees –Karl Marx first observed this more than a century ago. But equally importantly, they also impose a burden on the companies who have to deal with them. Suppliers like my little business get stuck trying to figure out how to get paid. Customers despair at the lack of joined-up thinking between the various divisions. Regulators and government officials often struggle to know who to talk to.
To get back to where I started, one of the key manifestations of bureaucracy is simply a lack of accountability. I don’t mean internal accountability – I am sure someone inside Megafirm is nominally in charge of the payables process – I mean external accountability. Think back, one more time, to the global financial crisis and what caused it. The big banks had well-intentioned formal processes for risk management, but no-one was really, genuinely accountable for the risks they took. And the result, as with my unpaid invoice, was that the outside world ended up owning the problem (risk) and its consequences (financial meltdown).
And lack of accountability is a problem we can actually do something about. Here is a simple fix for Megafirm: provide all suppliers with the name and email address of the person who is responsible for payables, so that when the process goes awry (which probably isn’t that often) we know who to talk to. And a similar logic can be applied to all other internal processes: what is the purpose of the process? Which stakeholders are affected by its activities? And how can their input be used to help improve it?
We will never banish bureaucracy, but we can find ways of keeping it under control. And the best way to do this is to home in on the specific problems it creates. If you ask the right question, the answer is usually pretty obvious.
Over the last thirty years, we have accumulated a lot of academic evidence on the topic of new market entry. The most consistent finding is that the majority of firms that attempt to enter a new market (by, in effect, attacking bigger established competitors) fail. It has been estimated that almost 80% of all entrants fail within ten years.
Yet, without disputing the academic evidence, we all know of examples of companies that entered new markets with great success. In several instances, not only did the new entrant survive but often managed to emerge as one of the leaders in the industry! IKEA did it in the furniture retail business, Canon in copiers, Bright Horizons in the child care and early education market, Starbucks in coffee, Amazon in bookselling, Southwest, easyJet and Ryanair in the airline industry and Enterprise in the car-rental market. The list could go on!
What explains the success of these outliers? The evidence points to a simple enough answer: successful attackers do not try to be better than their bigger rivals. Rather, they actively adopt a different strategy (or business model) and aim to compete by changing the rules of the game in the industry. Over and over, what we see is that significant shifts in market share and company fortunes took place not by trying to play the game better than the competition but by trying to be different—in a sense, by avoiding head-on competition. This is what has come to be known as business-model innovation.
Obviously I am not the first person to praise business model innovation and this is not the first time that managers are encouraged to actively seek and exploit a new business model in their industry. Numerous books have been written and many ideas have been proposed on how firms could innovate in this way. But here’s the problem. Despite all the advice and despite the wealth of ideas, it is very rare to find a business-model innovation that originated from an established big company.
Why—despite all the ideas and advice—do big, established firms fail to pioneer new business models in their industries? These firms have the resources, the skills and the technologies to do a much better job at innovation than the new start-up firms. Furthermore, the advice that has come their way on how to do so is good advice coming from some of the best academic minds. Yet, they continue to allow new firms to take the initiative when it comes to business-model innovation despite the obvious benefits of this type of innovation. What can explain this?
The answer is that all business model innovations display certain characteristics that make them particularly unattractive to established firms. For example, new business models often conflict with the business models of the established firms. They also attract customers that the established firm is not (initially) interested in.
This suggests that giving more and better advice to established firms on how to become more creative so as to discover new business models is pointless. The issue is not discovery. The real issue is organisational and the only advice that can prove helpful to established firms is how to overcome the organisational obstacles that prevent them from growing a new business model next to their existing one.
Companies increasingly want to change the world and make a profit. Ioannis Ioannou and Heather Hancock survey the new reality.
Against the current backdrop of threats to public budgets, systemic market failures and the failure of orthodox business models there are optimistic signs of change. From being peripheral, social enterprise is thriving. It is estimated that there are 68,000 social enterprises in the UK alone, contributing approximately £24 billion to the economy.
Read the full article in the Special Edition of London Business School’s BSR here.
For decades, strategy gurus have been telling firms to differentiate. From Michael Porter to Costas Markides and through the Blue Oceans of Kim and Mauborgne, strategy scholars have been urging executives to distinguish their firm’s offerings and carve out a unique market position. Because if you just do the same thing as your competitors, they claim, there will be nothing left for you than to engage in fierce price competition, which brings everyone’s margins to zero – if not below.
Yet, at the same time, we see many industries in which firms do more or less the same thing. And among those firms offering more or less the same thing, we often see very different levels of success and profitability. How come? What explains the apparent discrepancy?
To understand this, you have to realise that the field of Strategy arose from Economics. The strategy thinkers who first entered the scene in the 1980s and 90s based their recommendations on economic theory, which would indeed suggest that, as a competitor, you have to somehow be different to make money. Over the last decade or two, however, we have been seeing more and more research in Strategy that builds on insights from Sociology, which complements the earlier economics-based theories, yet may be better equipped to understand this particular issue.
Consider, for example, the case of McKinsey. Clearly, McKinsey is a highly successful professional services firm, making rather healthy margins. But is their offering really so different from others, like BCG, or Bain? They all offer more or less the same thing: a bunch of clever, reasonably well-trained analytical people wearing pin-striped suits and using a problem-solving approach to make recommendations about general management problems. McKinsey’s competitive advantage apparently does not come from how it differentiates its offering.
The trick is that when there is uncertainty about the quality of a product or service, firms do not have to rely on differentiation in order to obtain a competitive advantage. Whether you’re a law firm or a hairdresser, people will find it difficult – at least beforehand – to assess how good you really are. But customers, nonetheless, have to pick one. McKinsey, of course, offers the most uncertain product of all: Strategy advice. When you hire them – or any other consulting firm – you cannot foretell the quality of what they are going to do and deliver. In fact, even when you have the advice in your hands (in the form of a report or, more likely, a powerpoint “deck”), you can still not quite assess its quality. Worse, even years after you might have implemented it, you cannot really say if it was any good, because lots of factors influence firm performance, and whether the advice helped or hampered will forever remain opaque.
Research in Organizational Sociology shows that when there is such uncertainty, buyers rely on other signals to decide whether to purchase, such as the seller’s status, its social network ties, and prior relationships. And that is what McKinsey does so well. They carefully foster their status by claiming to always hire the brightest people and work for the best companies. They also actively nurture their immense network by making sure former employees become “alumni” who then not infrequently end up hiring McKinsey. And they make sure to carefully manage their existing client relationships, so that no less than 85 percent of their business now comes from existing customers.
Status, social networks, and prior relationships are the forgotten drivers of firm performance. Underestimate them at your peril. How you manage them should be as much part of your strategizing as analyses of differentiation, value propositions, and customer segments.