The Power of Pull: How Small Moves, Smartly Made, Can Set Big Things in Motion by John Hagel III, John Seely Brown, and Lang Davison (Perseus, 2010)
Why can’t big organizations innovate?
Why can’t large established organizations become as good at game-changing innovation as they have been at disciplined execution?
Instead of innovation and organizational learning being the responsibility of a few courageous individuals or departments, why doesn’t innovation become an organization-wide capability, a part of the firm’s DNA?
An exciting new book, The Power of Pull, gives us the answers.
The World of Push
Established organizations, by and large, live in the world of traditional management—the world of push. The world of push is a world of telling people what to do and assuming that they will respond. Management forecasts demand and tells employees what to produce. Then based on those forecasts, management organizes the resources to make sure the firm’s people and resources are in the right place at the right time to meet the demand in the most efficient fashion. Management then communicates to the mass market of customers with messages that induce them to buy the firm’s products.
This way of managing is even supported by the orthodox economic theory of the firm. The rationale of firm is that the firm exists in order to reduce transaction costs of different parts of the firm. The object of traditional management thus becomes further reduction in costs.
The problem? As The Power of Pull, shows, this way of managing doesn’t work any more. It’s not just broken. It’s badly broken.
Traditional management is broken
The evidence? The Power of Pull summarizes the startling results of a study of some 20,000 US firms:
· The economy-wide return on assets (ROA) in the US has—remarkably—fallen to nearly one-quarter of 1965 levels, even as asset intensity has dropped by 40 percent.
· Labor productivity has steadily improved, but with global competition and the shift in power from sellers to buyers, the gains from productivity gains have been mainly captured by consumers and creative talent.
· The “winners” in this economy are barely maintaining their previous ROA levels, while the losers are experiencing bigger and bigger losses.
· Companies that out-perform their peers do so for ever-shorter periods of time: the “topple rate” is accelerating.
· Only one in five workers is fully engaged in their work.
· The life expectancy of a Fortune 500 company has fallen to around 15 years, and appears to be declining further.
Thus talk in board rooms about the Red Queen effect of managers having to run faster and faster just to stay in the same place understates the gravity of the situation. In reality, traditional management is running faster and faster to avoid falling even further behind.
Why is traditional management failing?
For one thing, telling employees what to do doesn’t bring out the best in them on a daily basis, and without that, high-quality innovation won’t happen. Without continuous innovation, the firm gradually declines and dies.
Today’s customers demand not merely average products based on static knowledge stocks. Instead they want rather something new that will interest, excite and even delight them. Whereas in the 20th Century customers had few choices and little access to information, now thanks to global competition, they have many choices. Also, thanks to the Internet, they have instant access to accurate information about what the choices really are. If customers are not delighted, they will go elsewhere.
In this new world, the traditional supply chain isn’t agile enough: by the time production is adjusted to generate a different output, the customer has moved on and wants something else again.
Moreover pushing products and messages to consumers who now have good information and many choices is no longer working. The financial yield of this approach is declining.
Half-way measures don’t work
Books like Roger Martin’s The Design of Business1/ urge a better compromise between the reliability of the supply chain (producing consistent, predictable outcomes) and the innovativeness of the design function (creating new value for customers). Martin argues that today’s organization should achieve a better balance between the supply chain that operates in a rigidly predictable fashion and the part that operates with the creativity of a design shop, with more emphasis on the latter.
The result of even a better-balanced compromise however is usually “war in the boardroom,” as Al and Laura Ries argue in their book of the same name, War in the Boardroom: Why Left-Brain Management and Right-Brain Marketing Don't See Eye-to-Eye--and What to Do About It. (HarperBusiness 2009). The left-brain thinking of the supply chain, supported by traditional management theory, business school teaching and Wall Street assumptions tends to crush the creativity of right-brain thinking about new ways to add value.
It’s not enough for the design department to be in touch with ideas that can excite the newly elusive customer, and to be dragging a rigid and unresponsive supply chain behind it. Now the entire organization has to become involved in the effort to generate customer delight and be able to deliver on the fly. This means not just adding a new fix to management, but re-thinking management from top to bottom.
Traditional management is so badly broken that creating an institutional capability to generate continuous innovation and organizational learning is not a matter of adding something on top of the existing management system. Rather it involves a radical re-think of the very fundamentals of how an organization is organized and managed. We need radically different management.
From Push to Pull: Scalable Collaboration
An uneasy compromise between reliability and innovativeness is not enough to avoid obsolescence and irrelevance. In a world of ever-accelerating change and global competition, in which the balance of power has shifted to the customer, continuous innovation and learning by the entire organization is required for survival.
The Power of Pull argues that whereas the 20th Century was about scalable efficiency, the new economy is about scalable collaboration. This is not just about innovation within an individual firm like Toyota, although lean manufacturing could be seen as an early implementation of the power of pull. But lean manufacturing only worked in a narrow set of business partners who are tightly aligned.
The Power of Pull is about scalable pull, embracing tens of thousands and eventually hundreds of thousands of participants in pull platforms. A prime example of a firm that has prospered in operating like this is Li & Fung, the largest company you have probably never heard of.
Li & Fung
Li & Fung is a $15 billion company. It is headquartered in China and orchestrates 14,000 factories in China and around the world. It has over 14,000 employees, and operates a sourcing network of over 80 offices covering over 40 economies across North America, Europe and Asia. It has no manufacturing facilities. But somewhere between 40% and 50% of the clothes in any US shopping mall come from factories in Li & Fung’s network.
Garments make up a large part of the Li & Fung business which also covers fashion accessories, furnishings, gifts, handicrafts, home products, promotional merchandise, toys, sporting goods and travel goods.
Although the apparel industry is a very low margin game, Li & Fung has been growing at a double digit rate annually over the past twenty-five years. It is highly profitable with a double digit return on equity—an impressive accomplishment.
Li & Fung owns practically nothing. Its role is to figure out a way to orchestrate factories, so that by coming together, they can achieve performance that they could never achieve individually. Each factory is allowed to engage in increasing specialization, so that they can create more and more value. The network is set up so that the participating companies are learning not only from their own eco-system. They also learn from partners up and down the value chain.
But all are working on extreme specialization. For example, for a particular garment, Li & Fung might source the yarn from Korea, dye it in Thailand, weave in Taiwan, cut it in Bangladesh, assemble it in Mexico, and bringing zippers in from Japan and come up with something that is better than anyone else in the world can do.
The network uses performance metrics throughout the whole chain, not only so that Li & Fung knows what is going on in the network, but more importantly to enable the member companies to understand how well they are doing, relative to other companies in the ecosystem and in the networks at large, and how they might do better. Information dashboards are focused on enabling the member companies to learn.
The network is a modular, relational network. In one sense, the activities are short-term in the sense of being about particular product at a particular time, but relational in the sense that the network itself is long lived. Member firms tend to stay in the network for years.
The network works in a counter-intuitive way, with a “30:30 rule”. When a firm joins the network, Li & Fung says, “We will guarantee to take at least 30% of your output from your factory every year. But we will never take more than 70%.”
Why? For one thing, Li & Fung needs to accelerate trust building, because the network works on trust. Li & Fung wants the member companies to have a certain amount of independence. For another, they want the factories to learn from competitors. They want to be working with partners who are looking at the world slightly differently from themselves.
The network uses protocols for rent distribution and dispute adjudication. The goal is to foster long-term trust-based relationships at multiple levels that lead to higher performance by everyone in the network. As individuals and firms improve in terms of their own performance, they get the opportunity to do new kinds of work, so that the whole network around the globe also increases its performance. This requires careful balancing of the interests of the individual firms and the network.
The power of the Li & Fung platform is not in technology. Until recently the company relied on only the most basic technology—telephone and fax. Its strength lies rather in a deep understanding of how to orchestrate complex supply networks.
What Li & Fung represents is scalable collaboration. It generates a creation space that gets more and more power as more and more participants join.
The 21st Century Firm Generates Increasing Value for Customers
The Power of Pull sees the key to the future in having those doing the work continuously adding value for customers. The successful organization of the 21st Century will be one in which management unleashes the creativity of its entire workforce and enables the people doing the work to delight customers.
The Power of Pull presents a new economic model of organizations and focuses mainly on what is happening at “the edge” of organizations, particularly the interactions between networks of organizations.
To succeed in this new world, a firm needs employees who are giving their very best on a daily basis in order to continuously add new value to customers. Everyone in the organization needs to have a clear line of sight as to what the customers want and how they are responding to existing products and services. They need to be constantly improving their performance to generate more value for the customer sooner.
The Power of Pull explains the new economic order through the lens of a 3 by 3 by 3 matrix—27 dimensions of doing things differently. In this new world, they see success coming by:
· Accessing resources and people with know-how, whether those resources and people are outside the firm or within.
· Attracting people and resources to come to you and collaborate in generating more value.
· Accomplishing results based on these knowledge flows, by facilitating partnerships based on collaboration and reliable production.
The new way of acting is occurring:
· At the level of the individual
· At the level of the organization and
· At the level of the network of organizations
When in this mode, participants get involved in journey that re-shapes the world around them:
· A shaping view: which sets the direction or trajectory of the individual, the firm or the network.
· A shaping platform, which creates increasing value for the individuals, firms or networks involved.
· Shaping acts and assets, which accelerate the conviction needed to speed investments and innovation on the part of participants, enabling the shaper and the ecosystem as a whole to make more rapid progress in realizing the shaping view.
Flipping the Experience Curve
Traditional management has had to deal with the experience curve and the phenomenon of declining returns. In traditional management, as the firm grows, it achieves economies of scale and so its performance in terms of the cost of production improves over time. But the returns steadily decline. The more experience the firm has, the longer it takes for the next performance increment of improvement, which is discouraging. The phenomenon has been observed in most industries, from toilet paper to beer or semi-conductors. The Power of Pull argues that the network effects of scalable collaboration can flip the experience curve and create what was unthinkable in traditional 20th Century management: an increasing performance improvement curve.
Thus the more participants involved, the more rapidly everybody learns. Part of this flows from network effects. For example: fax machines. One fax machine is worth nothing. The more machines there are, the more valuable the fax machine becomes. But the value of the fax machine is limited by the fact that it is static. But suppose each fax machine was itself aggressively improving? Then you would have a case of “increasing return squared”! That is the potential of the new network-based organization.
Traditional Management: Failing but Hard to Change
None of this is easy. Traditional management comprises a relatively simple linear task of delivering products and services. The new world of pull involves the complex challenge of delivering steadily increasing value to customers. The shift from linearity to complexity isn’t just a shift in degree. It is a radically different kind of task. It requires a radically different kind of management.
Yet even as traditional management is failing, it is hard to change. The very source of economic value of the 20th Century corporation is that organizations prosper by the efficient management of knowledge stocks. The pattern is familiar. The firm develops proprietary knowledge. It aggressively protects that knowledge to make sure no one else gets access to it, and it extracts the value from that knowledge as efficiently as possible and for as long as it can. The rationale of the firm is to minimize transaction costs in deploying these stocks of knowledge efficiently. That way of thinking and acting created huge and seemingly successful companies in the 20th Century.
The economic rot that is sucking the life out of these organizations hasn’t yet been widely recognized, even though the symptoms of decay are everywhere apparent. Traditional management is still by and large what is taught in business schools, described in management textbooks and admired on Wall Street. So it is hard to challenge or change.
Nevertheless the economic situation of the 21st Century dictates a radically different kind of management, with different ways of thinking, speaking and acting, different attitudes and different values. The change will either happen voluntarily as managers learn to manage in the new way, or involuntarily as economic forces put these traditionally managed firms out of business.
The life expectancy of firms in the Fortune 500 has already fallen to less than fifteen years—down from 50-60 years, half a century ago. If current trends continue, with no change in management, Hagel and Brown predict that the life expectancy will fall to five years. At a certain point, the economic rot of the traditional organization will be so obvious that even traditional managers will be forced to change, whether they want to or not.
The 21st Century Firm: Radical Management
How will this happen? What does the new management look like in practice? How is work managed inside the factories orchestrated by Li & Fung? The Power of Pull suggests that the new style of management will involve:
“setting things up in short, consecutive waves of effort, iterations that foster deep, trust based relationships among the participants. Once these relationships are established, individuals will begin to feel more comfortable with constructive conflict and productive friction—the hallmarks of healthy group effort. Knowledge begins to flow and the team begins to learn, innovate and perform better and faster. Having some significant problem or challenge to tackle causes these individuals to work together closely as they learn how to build on each other’s diverse experiences, perspectives and skill sets, discovering new practices that boos everybody’s performance.”
Will managers steeped in traditional management culture or people trained by business schools in the techniques of command-and-control, the supply chain and the experience curve, know how to manage in this radically different fashion?
The Power of Pull gives us the economic theory for radical management. But more is needed. To make radical management happen in reality, the next step will be to spell out in detail exactly how to go about managing workspaces that are sustainably creative, collaborative, efficient and scalable.
To learn more about radical management, go here:
 The Design of Business: Why Design Thinking is the Next Competitive Advantage, by Roger L. Martin (Harvard Business School Press, 2009)