An interesting account by Simon Caulkin of nine UK organizations that are Managing For The Better concludes among other things:
"The opposite of top-down is not bottom-up, but outside-in. GE’s Jack Welch once defined hierarchical organizations as places in which 'everyone has their face toward the CEO and their ass toward the customer'… The focal point is the customer who defines the organization’s purpose and thus the value work that it exists to carry out.”
Jack Welsh was however unsuccessful at General Electric [GE] in getting everyone in the firm with their face towards the customer because that would have meant—in his cosmology—that the employees would have their ass to Jack Welch—something that the steep hierarchy at GE didn’t tolerate.
The Inside-out Perspective
GE remained, like most organizations in the Fortune 500, with an inside-out perspective, pushing products at customers, with the mindset, “You take what we make.” Efforts were made to “parse and manufacture demand” so that the products and services would be sold, and to tweak the value chain to achieve ever greater efficiencies, as explained by Michael Porter and Mark Kramer in a recent HBR article, How To Fix Capitalism. The role of managers was to control performance against the plan in order to generate value for shareholders. GE was an exponent of shareholder capitalism.
The well-known problems of the Fortune 500, including steadily declining rate of return on assets, the declining life expectancy, and the declining share price of firms like GE, have occurred, not because managers have forgotten how to manage, but rather because the world has changed and the Jack Welch school of management hasn’t.
Fifty years ago, large corporations were essentially in control of the marketplace. No longer. The advent of global competition, customers’ access to reliable information and their ability to communicate with each other through social media has meant that the customer is now in command. The shift goes beyond the firm paying more attention to customer service: it means orienting everyone and everything in the firm on providing more value to customers sooner.
The Age of Customer Capitalism
We are in effect now in the age of customer capitalism, which has occurred, as Roger Martin explains in his HBR article, The Age of Customer Capitalism, because of a monumental transition in the power balance between seller and buyer. As a result, the firm’s goal has to shift to one of delighting clients: i.e. a shift from inside-out perspective (“You take what we make”) to an outside-in perspective (“We seek to understand your problems and will surprise you by solving them”).
The shift was foreshadowed in 1973, by Peter Drucker when he wrote: “There is only one valid definition of business purpose: to create a customer. . . . It is the customer who determines what a business is. It is the customer alone whose willingness to pay for a good or for a service converts economic resources into wealth, things into goods. . . . The customer is the foundation of a business and keeps it in existence.”
In 1973, it was enough for an organization to have a customer—someone who is willing to pay for the good or service. In today’s more intensively competitive world, merely having a customer who is willing to pay for the good or service is a precarious existence for any firm. The key to an enduring future is to have a customer who is willing to buy goods and services both today and tomorrow. It’s not about a transaction; it’s about forging a relationship. For this to happen, the customer must be more than passively satisfied. The customer must be delighted.
Time now assumes a new importance: if value can be delivered sooner, it is more likely to generate delight. Simon Caulkin points out in Managing For the Better: what matters are end-to-end costs, not unit costs:
Most service managers focus on unit or transaction costs as their measure of efficiency. But unit costs only measure activity, which has no necessary connection with purpose. Offshored contact centres have low transaction costs, but many of them are either processing or creating failure demand which would be better not transacted at all. Service costs that matter are measured end to end; reducing them may mean raising transaction costs to make it easier for customers to get the service they want, when they want it.
As reformulated, the goal of the firm accurately mirrors the fundamental transformation in the power structure of the marketplace.
As Simon Caulkin notes in Managing For the Better, this entails a shift in thinking from cost to value for customers.
“Managing cost drives cost up. Cost reduction is a byproduct of focusing on value. Most managers assume that improving service pushes costs up. But that is the consequence of a faulty definition of service. By driving out failure demand, working to deliver the service that people need in the shortest possible time with the minimum effort releases capacity and reduces overall cost.”
Continuously generating more value for customers is not just the goal for the CEO or the marketing department: it becomes the operational goal of everyone in the organization.
Familiar examples of firms that are delighting their customers include Apple [AAPL], Amazon [AMZN], and Zappos.
The Alternative to Top-Down Control Is Not Anarchy
GE under Jack Welch however did not make the transition to customer capitalism. Why? The problem for Jack Welch in getting GE’s employees to face the customer was that he also wanted the employees to face their managers. The result was a gymnastic impossibility which generally resulted in the customer being subordinated to the needs of the organization.
In the steep hierarchy of GE, managers controlled the work of employees, an arrangement that was reinforced by the bureaucratic reporting arrangements.
In such settings it is often assumed that the only alternative to top-down control is anarchy. What is often missed is that for employees to be truly facing the customer, the role of the manager has to undergo a fundamental change. The manager's role needs to shift from a controller to a enabler and the mode of coordinating work had to shift from bureaucratic plan-driven processes to what may be called dynamic linking, in which the customer becomes the boss. In dynamic linking, work is done in short cycles and measured not by managers as against a plan but rather by direct feedback from clients as to whether they are delighted. In effect, in order to have organizations consistenly facing the customer, management itself has to be transformed.
What Makes The Transition Difficult
What makes the transition to the transformed management difficult for managers like Jack Welch is that it involves more than acquiring some new techniques or tools to be implemented within the framework of existing managerial assumptions, values, attitudes and ways of communicating. Instead, it involves a transformation of many of those assumptions, values, attitudes and ways of communicating.
Thus for Jack Welch spent his entire life focused on "winning" and doing whatever it took to win, and telling other people what to do so as to create "wins". He was looking at the world through a lens of self-regarding behaviors and values, i.e. from the inside-out.
In order to transform an organization into one which could delight its customers, the managers and the people doing the work have to transform themselves as well. They need to be looking at the world through the lens of other-regarding behaviors and values. Instead of creating wins for themselves, they need to be creating wins for the customer. As individuals, they also have to adopt an outside-in perspective. Instead of telling people what to do, they need to be having adult-to-adult conversations.
Transforming lifelong attitudes and values will not be easy for some managers. For others, it will be relief to be able to abandon traditional management habits of manipulating employees and customers and instead follow their natural preference to treat people as people and engage in authentic adult-to-adult conversations. But however the transition happens, it has to happen: the transformation has become the price of survival in today's marketplace. The economics makes it inevitable.
To learn more
To learn more about
- the reinvention of management, go here.
- the shift from inside-out to outside in, go here.
- the shift from controller to enabler, go here.
- the shift to dynamic linking, go here.
- the shift from value to values, go here.
- the shift from command to conversation, go here.
Also read books such as The New Capitalist Manifesto by Umair Haque, The Power of Pull by John Hagel, John Seely Brown and Lang Davison, Reorganize for Resilience by Ranjay Gulati, Leadership in a Wiki World by Rod Collins, or The Responsible Business by Carol Sanford.
For a comprehensive treatment of the principles and practices involved in reinventing management, read my book, The Leader's Guide to Radical Management: Reinventing the Workplace for the 21st Century.