For his Phd thesis at Harvard, Clark Gilbert tried to understand why some newspaper companies were successful in responding to the internet while others failed. He found that those companies that viewed the internet as a threat ended up failing in their response. Surprisingly, those that succeeded in their response did not view the internet as an opportunity. Instead, they saw it as both a threat and an opportunity: http://hbswk.hbs.edu/item/2967.html. Doing so allowed them to create the sense of urgency required to generate action but also to approach the task strategically and proactively.
This is just one of the many studies available which show that how we view or frame something can have a big impact on what we do (and how successful we are in our actions). And that is why it makes a big difference how we frame one of the key issues facing the modern corporation, namely: “what is the goal or purpose of the modern corporation?”
One view, proposed by people in Finance is that the purpose of the modern corporation is to maximize shareholder value. Another view, coming primarily from people in Strategy is that the purpose of business is not to maximize shareholder value. Instead, it is to create great products and services that satisfy customers’ needs and in the process improve the state of our world. The argument is that if we focus our attention on creating superb products and services that the world needs, then as a by-product of that, we will also maximize profits. Thus, maximizing profits is not an end in itself—it is a by-product of something else. Look, for example, at Steve Jobs. He is the one CEO that created more value for shareholders than anybody else. Yet, he never once said that his goal is to maximize shareholder value. No. What he aimed to achieve was radical new products that made our life better. As a result, we bought his products. As a result, he made a lot of money.
People in Finance usually respond to such arguments by suggesting that while they accept the need to produce superb products and services, this should not be the focus of the corporation. Instead, it should be a by-product of something else. Specifically, they propose that the modern corporation should focus on maximizing shareholder value and as by-product of this we will produce superb products and services. So the essence of the disagreement boils down to this—do we focus on producing superb products and services and as a by-product of this maximize shareholder value? OR do we focus on maximizing shareholder value and as a by-product of this produce superb products and services?
The difference may appear academic but as we saw above, how you frame something has a big impact on what people do. So the question we need to ask ourselves is the following: “If we frame the goal of business as maximizing shareholder value, can we see managers doing things that may maximize shareholder value which are at the same time unethical and/or illegal?” (such as selling unnecessary products—say financial derivatives—to uninformed customers?) The answer to this is yes! By contrast, “if we frame the goal of business as producing superb products and services that make the world a better place, can we see managers doing illegal and unethical things in an effort to achieve this?” It’s hard to see how!
And that is why it is important that we win the academic debate on what the purpose of business really is. It is not to maximize shareholder value but to make the world a better place for everybody (through its products and services). That has always been the purpose of business but somehow we lost sight of it along the way. If we put this goal at the forefront of business, then we will succeed in focusing the attention of millions on what matters most—improving the state of our world for everybody.
More than two hundred years ago, a class of 10-year old German students were asked by their teacher to solve a seemingly difficult problem: “If you add all the numbers from 1 to 100, what is the sum total?” Most of us will probably do a search on Google to find the answer to such a problem. But one of those ten year old kids came up with the answer really quick. Instead of adding the numbers linearly (1+2+3+4 and so on), he added them as follows: (1+100 = 101); (2+99 = 101); (3+98 = 101). He quickly realized that he had 50 pairs, each adding up to 101. So the answer is 50 X 101 = 5050. That little kid turned out to be the biggest mathematician that Germany ever produced. His name was Gauss.
The question is: “did Gauss think creatively about his task? Did he innovate?” The answer, obviously, is yes. But why was he so creative? Was it because we asked him to think outside the box or to think creatively? Was it because we asked him to be innovative? Obviously not! The simple answer is that Gauss was creative because in trying to tackle a really difficult task, he quickly realised that he could not do it by using the standard methodology or the standard way of doing things (which was adding the numbers linearly). He therefore questioned the way he was trying to solve the problem. By questioning his methodology, he was able to think of another way (i.e. another methodology) to solve his difficult problem.
This example has immediate applicability in business. We will not get innovation in companies by asking people to be innovative or by encouraging them to think outside the box! What we must do instead is to first give people a really difficult task (say a stretch goal) and then (and more importantly) “sell” it to them to win emotional commitment for it. If they really bought into the goal, they will attempt to achieve it. But they will quickly realise that they cannot achieve such a stretch goal by simply using their old ways of doing business. They will, therefore, begin to question their ways of doing business (like Gauss). Out of this questioning will, hopefully, come new and innovative ways of operating that will allow us to achieve this stretch goal. The key to all this is that people “buy into” the stretch goal. And nobody will buy into anything until we actively “sell” it to them to win their emotional commitment.
All this suggests that innovation is not an end in itself. It is, instead, a by-product of something else. And that something else is the active questioning that comes about when our people are trying to achieve a really stretch goal that they have really bought into. If you don’t believe me, just read the biography of Steve Jobs.
Strategic decisions often have long-term consequences – in fact, that might be the reason we consider them “strategic” in the first place. Sometimes, organisations have to accept some short-term pain for long-term gain. In a way, any investment is like that. However, conversely, certain decisions with short-term gain can also have more painful consequences in the long-run. The problem is that managers often see the short-term benefits – and that’s what they base their decisions on – but they are unaware of the potential long-term negative effects.
For example, together with Mihaela Stan from University College London, I conducted a large research project on IVF clinics in the UK. These fertility clinics are obliged to publish their success rates (number of treatments that lead to a birth), for the sake of “transparency” and “consumer choice”. However, in response, many of them started to select their patients: patients with a good prognosis are welcome everywhere, but quite a few clinics refuse patients with a poor prognosis, in order not to mess up their success rates. Mihaela Stan and I found that this practice works – at least in the short-run – in the sense that clinics that are more selective enjoyed higher success rates.
However, what these clinics are not aware of is that they also learn a lot from treating difficult patients. When we computed the so-called “learning curves” of all the clinics in the business, we discovered that the ones that did treat a relatively large number of poor-prognosis cases improved their overall success over time quite dramatically. In fact, they learned so much from these difficult patients – in terms of new innovative processes, tests, and techniques – that, after a year or so, they overtook the clinics that thought they were being clever by doing easy cases only. That is, their success rates in fact became significantly higher – in spite of treating more difficult patients! Hence, the selective clinics – in the long run – shot themselves in the foot.
The problem is, clinics are not aware of these detrimental long-term consequences of their actions. Sure, they see that their success rates might be lagging behind some of their competitors’, but what they have trouble understanding is that “that’s because some years ago we started selecting only easy patients”. Therefore, they usually just continue with the practice, or become even more selective, in a futile attempt to turn the tide.
Similarly, process management systems (such as ISO9000 or SixSigma) have been shown to have detrimental long-term effects (because they harm long-term innovation); likewise for downsizing programmes (which lead to bad employee morale, low commitment and increased employee turnover), some outsourcing practices, and so on. Generally, management practices and strategies have advantages and disadvantages; different short-term and long-term consequences. Thinking that something only has benefits is usually rather naïve and unrealistic. When considering a strategic decision, it is always important to ask “what might be the long-term consequences?” And perhaps then you will open the door for that difficult customer.
Here are a couple slides excerpted from recent discussions of the Whatsapp acquisition. (The acquisition happened to hit, as I was in the middle of teaching classes on economics and strategy of digital multi-sided platforms.)
I hope these might be helpful in pointing out the woeful limitations of counting eyeballs, looking at historical cash flows, etc.
When digital music became available online, through various file-sharing websites, the music industry witnessed a substantial decrease in sales. The big recording companies – EMI, Sony, Universal and Warner – blamed the decline on piracy and intellectual property rights infringements. They responded by suing thousands of individuals who had shared digital music, resulting in several landmark court cases. The industry also responded by adopting technology – digital rights management (DRM) technology – which was embedded in music files purchased on-line, that made copying all but impossible. However, in April 2007, EMI unexpectedly removed such DRM technology from its music files, which then enabled individuals to share the music files they had purchased with others.
EMI’s move came as a surprise; so much, that many thought it was an April fool’s joke. This would obviously harm their sales, wouldn’t it? Individuals could not only share the music files they purchased with friends and family, but technically they could potentially also upload them on sharing sites. Surely, enabling this form of piracy would depress EMI’s sales? Yet, 2 years later, the other three record companies followed suit.
The question how it affected record companies’ sales is pretty much impossible to answer by just looking at the numbers, because there is no way of telling how sales would have developed had the record companies not removed DRM technology. Then, however, a clever PhD student from the University of Toronto – Laurina Zhang – spotted a golden opportunity to do some truly illuminating research. The fact that EMI removed DRM some time before the other three record companies, created what researchers excitedly call “a natural experiment”. She realised that by exploiting the time difference between these events and running a so-called difference-in-differences statistical model, she would be able to draw firm conclusions about how lifting DRM had affected sales. Eagerly, she got to work.
She painstakingly collected data on 5,864 albums released by 634 artists before 2007 – the date EMI dropped the DRM technology – and traced both their on-line and physical sales. She then put all this in a statistical model and calculated whether EMI’s album sales went up or down as a result of removing DRM technology from all its records (in contrast to the other record companies, which had not yet removed DRM). And the answer was unambiguous and clear: EMI’s sales went up.
In fact, EMI’s sales went up by no less than 10 percent. But why was that? How on earth could lifting the copy-restrictions actually stimulate sales?! To answer this question, Laurina (again) did something clever. She measured how the lifting of DRM influenced the sales of different types of albums: ranging from best-selling albums (more than a million sold) to relatively tiny niche records (less than 25,000 copies sold) and the results suggested a compelling story.
Removing the DRM restrictions enabled search and sharing among consumers, which caused many people to be exposed to music they otherwise would never have heard of. This left the sales of top-selling albums unaffected (people would hear those for instance on the radio anyway), but significantly stimulated the sales of lower-selling albums, by no less than 30 percent. Enabling sharing made people discover new fringe artists or rediscover old ones, and subsequently they went on to buy (other) albums of those artists on-line, through iTunes or Amazon. Consequently, EMI benefited significantly from lifting the DRM restrictions.
To me Laurina’s research offers a fascinating turn in our understanding of intellectual property rights (IP) and how they sometimes might have unexpected consequences. More specifically, with on-going digitisation in various industries – including games, books and television – it might make producers and rights-holders take notice and think twice.
But it also tells a wider story of sharing and search. It shows that for firms offering specialty products in their portfolios, enabling search and giving consumers access to sample products becomes key. Tapping into people’s network and desire to share with others could be a valuable opportunity to exploit for this purpose, rather than one to fight and restrict. Managers are often inclined to fiercely protect what they see as their competitive advantage and shield it from imitation and dispersion. However, sometimes it might be worth opening up, and reap the benefits in turn.
Yet, what I – as an academic – also much value in Laurina’s work is that it shows the sheer purpose (if not necessity) of academic research, to understand the world around us. Sometimes things – especially in the long-run – are different than meets the eye. What seems obvious at first (“of course removing copy protection is going to hamper sales!”) can be shown to work very differently when examined in a thorough and systematic way by someone who knows what she is doing (“in fact, if you dig a bit deeper, removing copy protection appears to increase sales”). And understanding the world around us clearly is a necessary first step for us to be able to improve it.
In November 2013, Zappos, the online retailer (and subsidiary of Amazon.com) launched a bold management experiment. Its CEO, Tony Hsieh, announced that the reporting hierarchy and job titles would be abolished, and replaced with a self-organizing model called a “Holacracy”. While the details are a bit fuzzy, the essence of Holacracy is that employees are grouped into circles who take responsibility for defining how their work will be divided up and who is accountable for what. Another important feature is that the professional development side of the business (coaching, reviewing performance, career development) is decoupled from the getting-things-done side of the business, as these two activities often require different skill-sets. This new model, Hsieh argued, will help Zappos become more adaptive to change, and it will enable employees to become more fulfilled as they take on more responsibility for their own work and personal development.
It is too soon to know how successful Zappos will be with its new “managerless” model, though I will offer some views on this below. The primary question I want to address here is whether this announcement is symbolic of a broader shift away from traditional hierarchical ways of working? I think there are several fundamental changes underway in the business world that are causing us to question the basic principles of management (defined as “getting work done through others”). I will touch on three here.
First, the emergence of Generation Y, those people born after 1980, is bringing a change in expectations and skill-sets to the workplace. Gen Y, it is said, want freedom in everything they do: they love to customize and personalize; they are the collaboration and relationship generation; they have a need for speed; and they are very tech-savvy.
Gen Y employees have different expectations of their managers than previous generations. They want to be engaged and involved in their work, but they are highly tolerant of uncertainty so are less likely to put up with a dull job or a bad boss because they believe they have other options. The net effect of this trend is that your qualities as a manager are more exposed than ever before.
Second, there has been a dramatic increase in transparency. From geopolitical issues (the Arab Spring, Wikileaks) to business scandals (phone hacking, fraudulent accounting) to debates on corporate values (Google, Facebook), the common theme is that nothing is truly secret anymore. Technological advances make it much easier to gather, assimilate, and distribute information than before, and society increasingly accepts that higher levels of openness and transparency are OK.
Greater transparency means you can no longer hide behind a wall of “privileged” information. As a manager, you have become more tolerant of feedback, and you have to become better at influencing others through the quality of their arguments. It is harder work, and typically takes longer, but the potential for higher-quality outputs is greater.
Third, there is technology itself. We all have direct experience of how technology is changing how we process information and communicate with others, so these points don’t need repeating. But what about the second-order effects of technology on the work of management? Many of the technological innovations of recent years are about helping people in organizations become more effective at aligning their activities, problem solving, and sharing information – in other words, the sorts of things managers used to do in traditional organisations.
So the more pervasive these new technologies become, the more time managers have for doing their real value-added work – such as motivating their employees, structuring their work to make it more engaging, developing their skills, securing access to resources, and making linkages to other parts of the organisation.
Take these three points together, and you can see that social and technological changes are clarifying and sharpening our role as managers. Warren Buffett is famous for saying that it is only when the tide goes out that you can see who is swimming naked, and the same metaphor applies here: when employees can get all the basic support they need for their work through technology, rather than through their line manager, the real qualities of the line manager are exposed. And when employees have more freedom to choose, and greater expectations that their work will be interesting, managers have to raise their game to earn the respect of those around them.
So how successful will the Zappos experiment be? I think they are doing exactly the right thing in pushing for a flatter, more empowered way of working, because their employees are crying out for this, and because technology is making it increasingly straightforward to retain control over a distributed organisation. But I believe there is still an important role for managers, both around the “soft” areas of coaching and developing people, and also for making the difficult decisions, for example cutting the workforce or making a major new investment.
I suspect Zappos will end up with some sort of hybrid – a blend of traditional hierarchy and self-organising. The company will benefit from this new model, because the process for getting there will be useful in figuring out who does what and why, but it won’t end up being a truly manager-free organisation. It also helps that Zappos is already a highly progressive company, with a track-record of experimenting with innovative practices, such as offering to pay people to quit as a way of testing their loyalty. If any mid-sized company can make this Holacracy model work, it is Zappos.
We will always need managers – but we can become much smarter about defining what they do.
Some time ago, a London friend of mine in was diagnosed with a severe medical condition, which required urgent yet complex surgery. The condition is rare but, fortunately, there appeared to be several specialists both in Germany and France who had each treated hundreds of cases during their careers. When it comes to specialist operations, experience is key, so he was going to visit each of them and then make a decision.
However, when I spoke to him again, he had just decided where he was going to have the operation: in the hospital in his hometown in Spain. I was surprised; there was no specialist in that hospital. But he explained to me that he had flown to his home country for another opinion and that the local surgeon had made a good impression and was very pleasant. Moreover – he added – after the surgery, he would have to stay in the hospital for two weeks and it would be nice to do that near his family.
I was stunned. My friend is a rational guy, in charge of a large company. I have no doubt that, if he had been making this decision for me, he would have immediately recommended me to go to one of the real specialists, wherever they were in the world. He would have told me that where I would spend the two weeks in a hospital bed and whether the surgeon was a good conversationalist are quite immaterial. But, when making this important decision for himself, emotional considerations took over. And unfortunately, the initial operation was not successful, and my friend ended up having to travel abroad to see one of the specialists anyway.
And many of us would make the same irrational decision, with the same troubling consequences. Whether it’s a personal choice or a strategic business decision, emotions often crowd out objectivity. Precisely because they are such important choices, loaded with anxiety and uncertainty, when faced with a major decision people start to “follow their heart”, “rely on intuition” and “gut feeling”, overestimate their chances of success, and let their commitment escalate.
Good leaders don’t let their emotional bonds cloud their judgment. Sound leadership requires objectivity. What can executives do to remain objective, when it comes to strategic choices: what businesses to enter, what to focus on and invest in, when to pull the plug and abandon a previous course of action?
Make decision rules beforehand. One way is to develop and set a clear decision rule beforehand, when there is nothing concrete to decide upon yet. When Intel was still a company focused on producing memory chips, Stanford professor Robert Burgelman documented that CEO Gordon Moore had emotional trouble abandoning this product, which was losing them money, because it “had made the company” (famously declaring “but, that would be like Ford getting out of cars!?”), in favor of the much more profitable microprocessors. Yet, the change happened, because they relied on their so-called “production capacity allocation rule”.
Gordon Moore and Andy Grove, well before this actual dilemma became relevant, had put together a formula – the production capacity allocation rule – to decide what products would receive priority in their manufacturing plant. When top management had emotional difficulty deciding to abandon memory chips, microprocessors were automatically receiving more production capacity anyway, because middle managers sturdily followed the rule that they had been given before. Because top management had made the decision what sort of product should receive production priority well before it became a concrete issue, the strategic choice became detached from their emotion of the moment.
Tap into the wisdom of your crowd. A second method to depersonalize difficult decisions is to not leave pivotal choices in the hands of one or just a few individuals – usually top managers – but, instead, to tap into the wisdom of the company’s internal crowd. When I asked Tony Cohen – the previous CEO of television producer Fremantle Media, of programs such as the X-factor, American Idol, Family Feud, and The Price is Right – how he decided what new programs to invest in he replied “I don’t make that decision”. He resisted making such crucial investment decisions himself; instead he designed an internal system that identified the most promising ideas, by tapping into the collective opinion of his television executives across the world.
For example, every year, he organized the “Fremantle Market”; an internal meeting in London where Fremantle executives from all over the world presented their new ideas (usually in the form of a trail episode). Subsequently, an internal licensing system made sure that prototype programs that many of them liked automatically got funded. A particular idea that hardly any of them believed in would not receive any investment – even if Tony Cohen happened to like the idea himself. This way, the decision did not rest in the hands of any individual; no matter how senior.
The revolving door approach. Finally, a valuable technique is to explicitly adopt an outside perspective. Andy Grove, regarding his debates with Gordon Moore whether to abandon DRAMs, said “I recall going to see Gordon and asking him what a new management would do if we were replaced. The answer was clear: Get out of DRAMs. So I suggested to Gordon that we go through the revolving door, come back in, and just do it ourselves.” Taking the perspective of an outsider – a new CEO, private equity firm, or turnaround manager – can help see things more clearly. Research shows, for example, that people are very bad at estimating the time it will take for them to complete a project (e.g., write an assignment; refurbish a house) but they are good at estimating it for someone else. Asking them to take a third-person perspective has been shown to help objectivize a process, making someone’s judgment more accurate and realistic.
When making important strategic decisions, which are going to decide our faiths and those of our organizations, it is important to not let emotions and personal preferences cloud our judgment. Emotional commitment can be good, but not if it gets in the way of sound decision-making. Depersonalizing decisionmaking can sound cold or aloof, but it’s the best way to ensure a better outcome, for ourselves and our companies.
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.