The Leader's Guide to Radical Management

Don’t Blame Green For GE’s Problems

A fellow contributor on Forbes, Aman Singh, has an insightful spotting of some Jack Welch pronouncements, starting with the startling headline, “GE May Be Going Too Green”.

Her article interprets Welch’s latest message delivered at The Tulsa Business Forum hosted by Oklahoma State University’s Spears School of Business as: “The main social responsibility for a company is to win.”

Apparently, Welch is not impressed with the bevy of new alternative-energy products offered by GE [GE], which have generated some $18 billion in annual revenue. As reported by the Tulsa World, Welch said, “If it doesn’t turn green into green, it doesn’t turn out to be a helluva good business. The whole idea is to grow jobs,” adding, “The main social responsibility for a company is to win.”

“We played business like it was a sport,” Welch said of his philosophy heading up GE from 1981 to 2001. “You make a game of it; you field the best team and weed out the weakest. The weeds you’ve got to pull out if you’re going to build a beautiful garden.”

The clear implication from Welch’s talk is that if he was still running GE, the Ecomagination projects that CEO Jeff Immelt vaunts, and President Obama praises, would be high on his list of “weeds” to be pulled, because they don’t make money fast enough.

Does this make any sense?

GE has a problem

First, let’s face it. GE has a problem. Its share value is now roughly 50% of what it was ten years ago, when Jack Welch retired. He is right to point this out, even obliquely. He is also right to imply that it’s misguided to argue (like Michael Porter) that “going green” is a panacea that will by itself save either GE or the entire US economy.

When one compares GE’s performance to companies like Apple [AAPL] or Amazon [AMZN] whose share prices are now more than ten times what they were a decade ago, one can see that GE has a management problem of some kind. The question is: what kind?

GE’s problem is not in going green

Second, as Aman Singh points out, other businesses like Seventh Generation, Timberland, and Tom Shoes, are proving every day that green can be highly profitable. The question is how to achieve that kind of profitability.

Part of GE’s problem is Jack Welch’s legacy

Whatever else Jack Welch was, he was lucky. He left GE the day before September 11, 2001, thus leaving his predecessor to cope with the impact of September 11 on its business, parts of which were severely affected, e.g. its aircraft engine business.

He was also able to appear as the master of the universe by steadily growing GE’s earnings, in part through arrangements with GE Finance, which didn’t unravel until the financial crisis of 2008.

Jack Welch’s management regime looked good at the time, in part because the legacy of problems that he bequeathed to his successor didn’t appear until after he left.

GE’s main problem today is 20th Century management

GE’s main problem today is however something else: another Jack Welch legacy: 20^th Century management. This is a view of the world that sees organizations as pushing products and services at customers, of tweaking the supply chain, of parsing and manufacturing demand, with the goal of making money of shareholders. It has been called shareholder capitalism and Jack Welch was its sponsor.

It was a way of managing that worked reasonably well, decades ago, when the marketplace was dominated by a few oligopolies (customers lacked both options and information about the options) and most work was semi-skilled work.

Today that world has all but vanished. The reality is that we now live in the age of customer capitalism. As a result of epochal shift of power in the marketplace from seller to buyer, the customer is now in charge. Making money and corporate survival now depend not merely on satisfying customers but delighting them. To prosper, firms must have knowledge workers who are continuously innovating and delivering a steady supply of new value to custonmers and delivering it sooner. The new bottom line of business becomes: is the customer delighted? It’s a fundamental shift from outputs to outcomes.

Firms like Apple [AAPL] and Amazon [AMZN] have grasped this transition and taken advantage of it. GE has yet to embrace it a wholesale way.

Not that GE’s declining performance is in any way exceptional. GE’s performance reflects disastrous declining trends across a wide array of firms, as shown by a comprehensive study of some 20,000 US firms by Deloitte’s Center for the Edge.

• The rate of return on assets of US firms is one quarter of what it was in 1965.
• The life expectancy of a firm in the Fortune 500 has declined to less than 15 years and is heading towards 5 years unless something changes.
• Executive turnover is accelerating.
• The topple rate of leading firms is speeding up.
• Only one in five workers is fully engaged in his or her work: the larger the company, the lower the level of passion among the workers.

In this new world, the Jack Welch style of management involving dictatorial management, tight control, ruthlessly cutting costs and pulling out weeds, measurement of outputs and sole focus on shareholder value is no longer appropriate or effective. It’s the problem, not the solution.

Instead, managers now have to be helping focus everyone in the organization on the goal of adding value to customers and delivering it sooner, rather than merely tweaking the supply chain and searching for efficiencies.

Bottom line: don’t blame green

So yes, Jack Welch is right to point out that GE has a problem: GE does need to be making more money. But blaming green isn’t going to fix it. Instead, GE has to transform its management into something fit for the 21^st Century marketplace.

GE—and Jack Welch—can learn what the new way of managing is all about from Roger Martin his classic HBR article Martin, R. “The Age of Customer Capitalism.” Harvard Business Review, Jan. 2010, pp. 58–65, or in The New Capitalist Manifesto by Umair Haque, The Power of Pull by John Hagel, John Seely Brown and Lang Davison, Reorganize for Resilience by Professor Ranjay Gulati.

The practices and principles involved are also comprehensively covered in my own book, The Leader’s Guide to Radical Management (Jossey-Bass 2010).

To learn more

If you would like to learn even more about reinventing management, please join me for two days on May 12-13, 2011 in Washington DC in a workshop that is all about cool, innovative and serious fun. More details here.

Leadership’s #1 Challenge: Transforming Management

My fellow Forbes contributor, John Kotter, has an interesting post entitled, Corporate Culture: Whose Job Is It? He asks: who is responsible for corporate culture?

“Who raises red flags if the culture is impeding performance?  Who figures out how to change it if it is a problem, or maintain it if it is an asset?  If you ask the employees and managers of most companies, the most common answer is “the folks in HR.”  And that’s not a very good answer.  The truth is that top leadership, including the CEO, has to take responsibility if the culture is to be strong.”

Why are so few leaders taking on this responsibility? Kotter’s answer is that

“we have too many managers and not enough leaders in today’s business world.  Managers focus on timelines, budgets, organizational structures, metrics, controls, and numbers.  Leaders focus on vision, buy-in, motivation, culture, and people.  Of course management is important.  But while you may get the top job by excelling at management, you thrive in the top job by excelling leadership.  Culture is always in a leader’s job description.”

The implication seems to be that strengthening the creative culture is in the job descriptioin of leaders, but not necessarily in the job description of the manager.

Responsibilities are bifurcated. Leaders inspire people, spark change and strengthen the culture, while managers organize, control work, measure outputs and get things done. The tasks involve different skill sets and attitudes. The hope is that the roles happily complement each other.

The distinction between leaders and managers

The truth is that the division of responsibilities between managers and leaders is defunct, a relic of 20^th Century thinking. It’s a leftover from an era that viewed organizations pushing products and services at customers, of tweaking the supply chain, of parsing and manufacturing demand, with the goal of making money of shareholders. It has been called shareholder capitalism.

While this seemed to work well for much of the 20^th Century, the results in today’s different work are disastrous, as shown by a comprehensive study of some 20,000 US firms by Deloitte’s Center for the Edge.

• The rate of return on assets of US firms is one quarter of what it was in 1965.
• The life expectancy of a firm in the Fortune 500 has declined to less than 15 years and is heading towards 5 years unless something changes.
• Executive turnover is accelerating.
• The topple rate of leading firms is speeding up.
• Only one in five workers is fully engaged in his or her work: the larger the company, the lower the level of passion among the workers. 

The age of customer capitalism

The reality is that we now live in the age of customer capitalism.[1] As a result of epochal shift of power in the marketplace from seller to buyer, the customer is now in charge. Making money and corporate survival now depend not merely on satisfying customers but delighting them. To prosper, firms must offer a continuing supply of new value and deliver it sooner. The new bottom line of business becomes: is the customer delighted? It’s a fundamental shift from outputs to outcomes.

In this new world, 20^th Century management involving tight control of workers and measurement of outputs is no longer appropriate or effective. Managers now have to be helping focus everyone in the organization on the goal of delighting customers, rather than merely tweaking the supply chain and searching for efficiencies.

As a result of the transition from semi-skilled labor to knowledge work aimed at delighting clients, the role of the manager shifts from being a controller to an enabler, so as to liberate the energies and talents of those doing the work and remove impediments that are getting in the way of work. They have to be enabling workers to achieve the goal of continuing to add value to customers and get it to them sooner, rather than tightly controlling them.

Managers have to put their primary emphasis on the new bottom line of business, i.e. whether the firm is delighting its customers, not merely whether it is making money for its shareholder. They have to be measuring customer outcomes, not merely outputs.

In effect the role of management needs to be transformed.

Why should managers be different from leaders?

Why should managers be different from leaders?

The question only arises because of the supposed distinction between the roles of leaders and managers that was articulated in Abraham Zaleznik’s classic 1977 HBR article, “Managers and Leaders: Are They Different?”  

That article argued that managers have different skill sets and attitudes. Three aspects are key. First, managers focus attention on procedure and not on substance. Second, managers communicate to subordinates indirectly by signals, rather than clearly stating a position. Third, managers play for time. Amid conflicting rules and procedures, managers have no way of knowing what the right answer is. Self-protective routines are used, up and down the hierarchy.

The origin of Dilbert-style management

The insight that traditional managers act differently from genuine leaders might have led to an inquiry as to whether "focusing on procedure rather than substance" and "playing for time" were productive behaviors even in 1977. In fact, they constitute the essence of the Dilbert-style manager, whose antics are celebrated in Scott Adams’ popular cartoon. They dispirit workers, cripple innovation and frustrate customers.

Paradoxically, Zaleznik’s article led to an acceptance of those behaviors and to a bifurcation of management from leadership. The role of leaders was to inspire people to embrace change while managers were grimly grinding out disciplined execution. Leaders and managers not only had different attitudes and skill sets: inevitably they worked at cross-purposes. As much as leaders inspired employees with new ideas, managers were dispiriting them with their Dilbert-cartoon style management.

The result of the distinction between leaders and managers is an organization in conflict with itself, with leaders inspiring people doing the work, sparking change and strengthening the culture, while managers are busily undermining everything the leaders are doing by controlling work through bureaucratic processes and measuring outputs rather than outcomes.

The alternative to hierarchy and anarchy: dynamic linking

A principal reason offered today for preserving the distinction between leaders and managers  is that it is necessary to achieve disciplined execution. We don’t want chaos. So we are stuck with traditional management. It’s not pleasant or fun. But that’s the only way to run an efficient organization.

The ongoing reinvention of management shows that there is another way. One can mesh the efforts of autonomous teams of knowledge workers who have the agility to innovate and meet the shifting needs of clients while also achieving disciplined execution. It requires a set of measures that can be called “dynamic linking”. The approach began in automotive design in Japan and has been developed most fully in software development with approaches known as “Agile” or “Scrum”.

The main elements of “dynamic linking” are that (a) the work is done in short cycles; (b) the management sets the goals of work in the cycle, based on what is known about what might delight the client; (c) decisions about how the work should be carried out to achieve those goals are largely the responsibility of those doing the work; (d) progress is measured (to the extent possible) by direct client feedback.

As The Power of Pull  (2010) notes, one proceeds “by setting things up in short, consecutive waves of effort, iterations that foster deep, trust-based relationships among the participants… Knowledge begins to flow and team begins to learn, innovate and perform better and faster.… Rather than trying to specify the activities in the processes in great detail… specify what they want to come out of the process, providing more space for individual participants to experiment, improvise and innovate.”

It’s not hierarchy and it’s not anarchy. It gets the best of all worlds. It has the decisiveness and discipline of a hierarchy but without its inflexibility or its tendency to de-motivate workers and frustrate customers. It creates an agile environment that is radically more productive for the organization, more congenial to innovation, and more satisfying both for those doing the work and those for whom the work is done. The approach has been implemented for over fifteen years in organizations large and small with great success.

Managers must also be leaders

In effect, the problem in dealing with culture is not so much that we have too many 20th Century-style managers and not enough leaders.

The problem is that we still have 20th Century style managers at all. They have no place in the 21st Century organization.

In effect, in the 21st Century organization, the distinction between managers and leaders dissolves. Leaders need to be managers. Managers nee   d to be leaders.

The central challenge for both leaders and managers today is to lead the transformation of management and so generate the creative, innovative organizations that are needed for the 21^st Century.

To learn more

If you would like to learn more about the transformation of management, please join me for two days on May 12-13, 2011 in Washington DC in a workshop on “revolutionizing the world of work.” It’s all about cool, innovative and serious fun. More details here.

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[1] Roger Martin wrote about the shift from shareholder capitalism to customer capitalism in his classic HBR article Martin, R. “The Age of Customer Capitalism.” Harvard Business Review, Jan. 2010, pp. 58–65. It is also reflected in The New Capitalist Manifesto by Umair Haque, The Power of Pull by John Hagel, John Seely Brown and Lang Davison, Reorganize for Resilience by Professor Ranjay Gulati and my own book, The Leader’s Guide to Radical Management (Jossey-Bass 2010).

Reinventing Management

My article, The Reinvention of Management" has just been published in a special issue of Strategy & Leadership on "outracing change: learning to foresee, adapt, re-invent and innovate faster." (Strategy & Leadership, 2011, Vol. 39 Issue: #2, pp.9 - 17)

The article explains why business leaders and writers are increasingly exploring a fundamental rethinking of the basic tenets of management. It synthesizes a number of books including my own book, The Leader’s Guide to Radical Management (2010) and shows how management is being reinvented with five fundamental shifts:

• the firm's goal (a shift from inside-out to outside-in);
• the role of managers (a shift from controller to enabler);
• the mode of coordination (from command and control to dynamic linking);
• the values practiced (a shift from value to values); and
• the communications (a shift from command to conversation).

The raison d'être of the firm changes from a focus on efficiency and reducing transaction costs to scalable collaboration, learning and innovation. The shifts are interdependent: if only some shifts are made, the firm will slide back into hierarchical bureaucracy.

By adopting a people-centered goal, a people-centered role for managers, a people-centered coordination mechanism, people-centered values and people-centered communication the leaders of a firm can focus on the people who are its customers.

The article is available here.

Cool, innovative & serious fun

If you would like to learn more about the reinvention of management for the 21st Century, please join me for a two day workshop on May 12-13, 2011 in Washington DC that is all about cool, innovative and serious fun. More details here.

On hand will be some of the co-creators of the new world of work, including Seth Kahan, author of Getting Change Right, Rod Collins, author of Leadership in a Wiki World,and Madelyn Blair, author of Riding The Current.

 

 

Revolutionizing The World of Work: Washington DC: May 12-13, 2011

Please join us for two days to
Establish a Radical Management Mindset &
Reinvent Business, Government, Education & Health

 
Each Spring for the past ten years, I have helped organize a gathering at the Smithsonian Associates in Washington DC focused on organizational storytelling. Seth Kahan and I are happy to announce along with our practice partners--Madelyn Blair, Rod Collins, Michelle James, Deborah Mills-Scofield and Peter Stevens--that this tradition will continue—with some exciting new elements—on May 12-13, 2011.

We think this will be a unique event where coolness, innovation and serious fun intersect, unlike any other conference you have ever been to, as Seth and I explain here.

We hope you will join us. Registration is available here now. Don't miss out. Places are limited.

When: From 8.30am Thursday May 12 to 5pm Friday May 13, 2011
Where: downtown Washington DC
What you will learn: In-depth learning about how to use storytelling to revolutionize the workplace and establish a radical management mindset. The first day will focus on co-creating the "big picture" principles of radical management as well as the practices involved in implementing the principles. It will include what is involved in creating an environment that brings everyone along. The second day will focus on working together in applying those principles and practices to your setting and showing you how you can take this forward.
Who is giving it: The gathering is being organized by  Steve Denning and Seth Kahan, along with their practice partners, Madelyn Blair, Rod Collins, Michelle James, Deborah Mills-Scofield and Peter Stevens.
How will it be organized: It will be a highly interactive event. Rather than a conference where a series of speakers make presentations, it will be more like a conversation, woven together as an integrated and cohesive experience in which the focus is on co-creating and group learning.
Books: Participants will receive a copy of the following books:

• Steve Denning's The Leader’s Guide to Radical Management (2010)
• Seth Kahan's Getting Change Right (2010)
• Madelyn Blair's Essays in Two Voices (2011)
• Rod Collins' Leadership in a Wiki World (2010)

 Who should attend:  It’s for anyone who is ready to join with us to help radically reinvent the world of work, whether you are a senior manager, thinker, activist, insurgent, speaker, leader, consultant, student, worker, whether you are in the private sector, the public sector, the health sector, the education sector or in an association.
Registration: 

• Full registration: $597;
• Early bird registration by March 31: $497
• Group discount of 25% for three or more participants.
• A limited number of student places are available.uu

Agenda for the two days:

The agenda will be a interactive conversation with the participants aimed at group learning.

    Day one: The conversation will focus on the big picture:

• why is work managed the way it is,
• what are the principles of traditional management,
• what has been learned about how to manage in a radically different way so as to generate continuous innovation, deep job satisfaction and client delight. It
• what are the big shifts needed to reinvent work
• what are the practices needed to support these shifts.

Day two:  The conversation will shift to focus on how to apply the principles and practices of radical management in your own setting

• where and how do I start?
• how do I convince my boss? My colleagues?
• what pitfalls should I anticipate?
• how do I maintain momentum?
• what do I do when things get blocked?
• what help can I get?

A note from Seth and Steve 

We would like to invite you to a gathering.

For two whole days, we want to share with you what we are jazzed about and we would like to get you equally inspired.

We are really excited that we will have four practice partners to help co-create the future with you.

This is a gathering for people who are intent on revolutionizing the world of work.

We want people who are tired of a world in which people are being treated as things, where employees are seen “human resources” and customers are seen as “demand” that has to be manufactured.

We are offering here more than a set of tools. We are seeking to create a state of mind that starts with a change of heart.

This is about locating that sweet spot where coolness, innovation and serious fun intersect. The fact that it also happens to be ultra efficient and productive is another big plus, because that means that the economics will drive it forward.

This is about creating stuff that people must have. And in the process, we stop wasting time on stupid things, spinning wheels, going through useless routines, attending management prayer meetings and spending endless amounts of time and energy on second-guessing what the boss wants.

It’s for those of us who want to escape from the mind-numbing confines of the cubicle culture, of budget crunches and endless reorganizations, and discover together what it takes to have a workplace that is truly different.

This gathering is the logical culmination of everything that the two of us have been talking about for the last ten years. We’ve been on a storytelling journey. We have come a long way and the journey has been rewarding. As our journey continues, we see the need to explore new territory so that we can get to a new level. We couldn’t undertake the next leg of the journey if we hadn’t already come so far.

We’re talking about getting things done at work in a way that uplifts the human spirit.

For quite a while, we spent time asking people to close their eyes and dare to imagine a workplace where everyone was pulling together and creating meaning for themselves and for the people for whom the work is done, a workplace where it was all for one and one for all.

Then we discovered that most people didn’t have to imagine it. They could remember it. They had experienced it, or something like it, at one time or another in their life. So most of us know what this is like: what we need to discover is how to replicate those experiences, reliably and on a sustainable basis.

It’s creating about workplaces where the human spirit sings, where we realize that life is worth living. That life has meaning. That we are doing something that matters.

We don’t care if your current workplace resembles a festering petri dish, or a paradise of joy, curiosity, and peak performance, or is somewhere in between.

And the good news is that this world is within reach. Our goal is to show you how to reach it.

It’s about generating workplaces where deeper meaning replaces the drab grind of repetition with challenging and compelling work that elevates the soul.

It’s about having fun with the talents and intelligence that we’ve been given and finding our place in the ever shifting realms of doing something meaningful with our lives, something that matters.

We hope you will join us.

                      Seth and Steve

 

What you will learn

• Why organizations are managed the way they are today and what can be done to transform them and create a world in which people can find sustenance and inspiration
• How to instill a new mental model of radical management so that organizations create continuous innovation, deep job satisfaction and client delight.
• Specific actionable tools to enable you to reinvent your workplace and establish radical management as the norm for your organization.
• How to go beyond learning how to use a new set of tools, but also a quality change—how to put the heart back in the workplace.
• How to achieve a shift in focus from manipulating customers and employees as things, to one of instead interacting with customers and employees as people.
• How to find new ways to interact with customers and employees and to add more value for them and provide that value sooner.
• How to understand the world of the client or stakeholder.
• What are the specific practices that will help delight customers, clients and stakeholders.
• How to measure client delight.
• How you can add more value to those people sooner.
• How to organize and sustain self-organizing teams.
• What is the role of manager as enabler rather than controller.
• How to organize work in short cycles so as to ensure steady progress towards the goal of customer or stakeholder delight.
• What are the values that support organizational transformation, particularly radical transparency and continuous improvement.
• What are the practices that support those values.
• How to shift communications from command to conversation.
• What are the specific practices that support that shift.
• How to use storytelling to inspire organizations to become curators of the human spirit
• How to inspire business, government and social sector organizations to reinvent themselves and create a work-world of life-enhancing practices and values.
• How to create a world with meaning that reveals our deepest values, our very core, as human beings.
• Why most organizations today are much less productive than they were fifty years ago.
• Which organizations have discovered how to create simultaneously high productivity, continuous innovation, deep job satisfaction and client delight.
• How to inspire workplaces that generate fiercer passion so that innovation becomes as natural as drawing breath.
• How to move forward, even on those miserable days when the cause seems hopeless, when the guardians of the status quo are doing their darnedest to prevent change, and everyone is discouraged and tempted to abandon the challenge.
• How to inspire others to take the future into their own hands and change the world themselves.
• How to stimulate others to summon up the energy and the ingenuity to overcome the forces of soul-destroying stagnation and create a new world.

Our practice partners

Madelyn Blair: Madelyn Blair, Ph.D., founded Pelerei, Inc. in 1988, a company dedicated to helping organizations and individuals move to the next level. She is on the faculty of Kent State University in the IAKM graduate program. She is a Taos Associate, the co-moderator of Worldwide Story Work, and a teaming partner with PwC. Before Pelerei, she was a division chief at the World Bank.  Her most recent work is on the creation of radical learning environments. Madelyn  is the author of Riding the Current: How to Deal with the Daily Deluge of Data, Essays in Two Voices: Dual Dialogues of Discovery, and Riding the Current: The Way to Successful Sailing on the Edge of New Knowledge (2011)

Rod Collins is the owner of Wiki-Management and an expert in collaborative management practices. He helps business leaders successfully manage accelerating change by changing how they manage.  Rod is the former Chief Operating Executive of the Blue Cross Blue Shield Federal Employee Program (FEP), one of the nation's largest business alliances, with over $19 billion in annual revenues. Under Rod's leadership, FEP increased its market share by 10 points and achieved unprecedented operational performance. He is the author of the Leadership in A Wiki World (2010).

Michelle James has been pioneering Applied Creativity and Applied Improvisation in business in the Washington, DC area since the mid-nineties. She is CEO of The Center for Creative Emergence and founder of the Capitol Creativity Network . Her mission is to integrate the worlds of creativity, service, meaning and business and cultivate whole-brain, whole-person engagement in the workplace. She's designed and delivered hundreds of programs for entrepreneurs, leaders, and organizations such as Microsoft, Deloitte, GEICO, Teach for America, Center for Nonprofit Advancement, National Institutes of Heath, The World Bank, Invest Northern Ireland and Kaiser Permanente among others. Her passion for improv led her to develop Quantum Leap Business Improv, and in 2009 year she produced a sold-out Creativity in Business Conference with the next one coming up in October of this year.

Deborah Mills-Scofield helps companies create actionable,  measurable, adaptable, and profitable innovation and strategic plans.  While at AT&T Bell Labs she received a patent for what became one of their top revenue-generating services.  She was instrumental in creating AT&T’s entrance into the Internet and E-commerce marketplace.  Deb’s love of innovation – from products/services to management - includes mentoring entrepreneurs in Northeast Ohio, Brown’s Entrepreneurship Program, and seniors in Brown’s Women's Launch Pad Program.  

Peter Stevens is a coach in the software development approach known as Scrum (one of the forerunners or subsets of radical management). He is trainer and mentor with a passion for helping organizations become more effective at creating great products and services. He has helped many organizations successfully adopt or optimize their use of agile methods. He writes the Scrum Breakfast blog and is a regular contributor to AgileSoftwareDevelopment.com. His popular articles include 10 Contracts for Your Next Agile Software Project and Explaining Story Points to Management. Peter started his career as a Software Engineer at Microsoft in 1982. Today, he is the initiator of the Lean Agile Scrum Interest Group of the SwissICT and co-founder of DasScrumTeam AG, a partnership of leading Scrum trainers and coaches in Central Europe.

We hope you'll join us.

ve

When: From 8.3

The Alternative To Top-Down Is Outside-In

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.

Why doesn’t management advance?

In amongst all the many enthusiastic comments and twitterings about my article, Shhhh! The Next Really, Really, Really Big Thing is… which was prompted by Greg Satell and which suggested that the next big new thing is the REINVENTION OF MANAGEMENT, Tim Carroway commented”

“Hasn't this happened before? Aren't there already groups of smart people doing great things?”

And Keith Decie commented:

“Why fantastic? Any of us would probably make pretty much the same list if we read HBR. What am I missing?”

Some wonderful articles

Interesting points. In fact, if you read Harvard Business Review, as I do, you do indeed find some absolutely wonderful articles which point in the direction of the reinventing management. Several in particular stand out for me:

• Gary Hamel’s classic article, “Moonshots for Management” (HBR, February 2009)  which sounded the alarm that there was something fundamentally wrong with the way many organizations were being managed and called for a wholesale reinvention.
• Roger Martin’s landmark article, “The Age of Customer Capitalism” (HBR, January 2010) which signaled a fundamental shift from shareholder capitalism (an inside-out focus on making money for shareholders) to customer capitalism (an outside-in focus on providing value for customers).
• Umair Haque’s wonderful HBR blog, which has a wealth of material about what’s involved in the fundamental reinvention of economics and capitalism.

A march into the past

At the same time, I also find in HBR quite a few articles that purport to be forward progress, but in fact represent a determined march back into the past. Notorious examples include:

• The headline article, How To Fix Capitalism (HBR, January 2011)
• The article on the real lessons of Robert McNamara (HBR, December 2010)
• The article, Stop Trying to Delight Your Customers  (HBR, July-August 2010)
• Looking back further, one can even trace the birth of the Dilbert-style manager to the famous HBR article Abraham Zaleznik’s “Managers and Leaders Are They Different?”  (HBR, January 1977)

Management is in decline

If we look back over the last fifty years, the reality is that management hasn’t advanced much. Gains in one area are wiped out by backsliding in another.

Statistics confirm that management as a whole is in sharp decline. The return on the assets of U.S. firms is only a quarter of what it was in 1965. The life expectancy of firms in the Fortune 500 is already startlingly brief—now less than fifteen years and heading towards five years, unless something changes. Executive turnover is accelerating. Only one in five workers is fully engaged in his or her work. Firms older than five years contributed zero net new jobs for the U.S. economy in the period from 1980 to 2005. By and large, the private sector is no longer providing a good livelihood for all the country’s citizens. This is not a record of success.[i]

Three debilitating syndromes

Three factors in particular play an important role in this failure of management to advance:

a.      The Amnesia/Eureka! Syndrome

One of the problems in management writing is a tendency to forget the past, and then rediscover it with shrieks of “Eureka!” Thus ever since Mary Parker Follett was talking about teams and the human factor at Harvard and Oxford in the 1920s, successive writers have “re-discovered” teams and the human factor with great fanfare. This includes Elton Mayo and Chester Barnard in 1930s, Abraham Maslow in the 1940s, Douglas McGregor in the 1960s, Tom Peters and Robert Waterman in the 1980s, and Smith and Katzenbach in the 1990s. There is a lack of historical perspective in the writing. “Teams and the human factor” are presented as “the big new thing”, when the idea has been around for close to a century.

b.      Old wine in new bottles

The second phenomenon is that minor tweaks are hyped as major changes. It is only after a number of years of excited but troubled implementation, many consulting dollars spent and millions of books sold, that it becomes apparent that “the big new thing” is largely a relabeling of existing management thought. “Business process reengineering” is a notorious example in the early 1990s, while in 2011, “shared value” shows all the signs of following in its footsteps.

c.      The virgin birth of management articles

Intellectual disciplines that advance systematically keep track of the evolution of the subject. Writers are careful to give credit to predecessors, signal alternative viewpoints and demonstrate sensitivity to the evolution of the subject as a whole. By contrast, journals such as Harvard Business Review systematically eliminate traces of earlier thinking about the subject at hand. It is as though the articles have “a virgin birth” and emerge into the world without any legitimate parentage. Thus you could read the January article on “shared value” entitled “How to Fix Capitalism” by Michael Porter and Mark Kramer without getting any hint that a similar argument was put forward some five years earlier by C.K. Prahalad in his book, The Fortune at the Bottom of the Pyramid. Any such reference would of course have undermined the hype that “shared value” is the “next big new thing” that will “fix capitalism”. The reality is that shared value was worthwhile idea in 2006 when C.K. Prahalad proposed it in 2006 but it didn’t “fix capitalism” then. It is highly unlikely, by itself, to “fix capitalism in 2011.  This is not the fault of the individual writers, but rather the “house style” that eliminates historical references. (Thus when my own article, “Telling Tales”, was published HBR in May 2004, it was also shorn of any reference of prior writing on the subject, mine or anyone else’s.) The problem is not the individual writers. It is the house style of presenting ideas as though they have a virgin birth.

Distinguishing real and counterfeit change

Is then the REINVENTION OF MANAGEMENT simply another instance of the Amnesia/Eureka syndrome, or Old Wine in New Bottles, and the Virgin Birth syndrome?  

I think not, at least when it comes to the collection of books and articles that include: 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 and The Responsible Business by Carol Sanford.

What all these books are saying is synthesized in a series of short articles that began with The Reinvention of Management and identified five big shifts:

• Shift #1: Delighting the client
• Shift #2: From controller to enabler
• Shift #3: From bureaucracy to dynamic linking
• Shift #4: From value to values.
• Shift #5: From command to conversation

In my book, The Leader's Guide to Radical Management, I offer a detailed history of the evolution of this  thinking and an analysis of the respects in which these shifts resemble or differ from management practices in the past.

I believe that there are two main respects in which the new thinking is genuinely new and different.

One is the shift from an inside-out perspective to an outside-in perspective, so as to focus the entire organization on delighting the client, rather than on making money for the shareholders. This shift is fundamental because it reflects the fundamental shift in the balance of power in the marketplace from seller to buyer. Books and articles that purport to reinvent management without reflecting this shift are, I believe, committing the sin of “old wine in new bottles”. (For example, this is the major weakness of the Porter/Kramer article entitled “How to Fix Capitalism” on "shared value": it is written from an inside-out perspective of making money for shareholders.)

The second respect in which the reinvention of management is genuinely new is not that any single one of the five shifts is new. What is new is doing all of the five shifts simultaneously. Thus the shift from inside-out to outside-in has deep historical roots in marketing thinking for many years. So one might be tempted to say: “Nothing new here!” What is different is combining marketing thinking with the other four shifts so that you get disciplined execution and continuous innovation. That is something genuinely new.

By contrast, books and articles that focus on only one or two of these five shifts may help generate some gains in some areas, but the gains will not be sufficient to reverse the sharp decline in management performance noted above. The major gains come from doing all five shifts simultaneously. It is then that we get a genuine reinvention of management.

[i] Sources: Deloitte’s Center for the Edge: The Shift Index;  The jobs figures are from The Kauffman Foundation.

VIDEO: Tim Jackson: Economics that serves the full potential of our humanity

In this interesting TED video, Tim Jackson discusses prosperity and sets out to re-imagine economics to serve the full potential of humanity.

He notes that we spend money we don't have on things we don't need to create impressions that don't last on people don't care about. Yet if we stop hunker down and stop spending this is disastrous for the economy. Tim asks: Why do we act this way?

What sort of creature are we?

What sort of creature are we? Are we merely novelty seeking hedonistic selfish individuals? Or are altruistic selfless individuals who care for others and try to do the right thing?

Tim’s interesting answer is that we are both. We are both self-regarding at times and other-regarding at other times. From an evolutionary viewpoint, this makes sense. Selfish behavior is adaptive in certain circumstances. Fight or flight is not a bad approach to a threat to one’s life.

But other-regarding behaviors are also essential to our evolution as social beings. Other-regarding behaviors are important to create families and social groups.

Other-regarding behaviors are particularly important for today’s organizations which depend on delighting customers for their survival and collaboration within the organization to create innovation that will delight customers.

A map of the human heart

All of a sudden, as Tim points out, we are looking at a map of the human heart.

We have created systems and economies that systematically privilege self-regarding behaviors over other-regarding behaviors. We have privileged one narrow quadrant of the human soul. We have left the other parts of the human heart unregarded. What we need is an economics that reflects both aspects of our human nature.

The good news here is that reinventing economics doesn’t require changing human nature. It isn’t about curtailing possibilities. It’s about opening the possibility of becoming fully human. It’s about recognizing the depth and the breadth of the human psyche. It’s about building institutions that protect and nourish the fragile altruist within all of us.

Economics that captures our full humanity

What would economics look like if we took that vision of the human heart and stretched them along the dimensions of the human psyche? We would be investing in a meaningful prosperity, providing capabilities for people to flourish, while recognizing the importance of family, friendship, commitment, society and participating in the life of this society.

We would be investing in places where we can connect, where we can participate, shared spaces, concert halls, gardens, public parks, libraries, museums, quiet centers, places of joy and celebration, places of tranquility and contemplation, a common citizenship, a shared present and a common future.

Prosperity is a shared endeavor. It’s not about changing human nature. It’s about adopting an economics that is fit for purpose. At the heart of that economics Is the idea of something more credible, more realistic, more robust, about what it means to be human.

Organizations that generate delight

It would also mean reinventing the way we run organizations, built not on the sole basis of self-regarding profit-seeking motives, but rather organizations that are focused on providing thick value and delighting their customers. These organizations depend on other-regarding behaviors: collaboration within the organization to create innovation that will generate that client delight.

The new way of managing is sketched by Umair Haque in his book, The New Capitalist Manifesto (2011). It is also discussed by Roger Martin, Dean of the Rotman School of Management at the University of Toronto in his Harvard Business Review article, The Age of Customer Capitalism, by Harvard professor Ranjay Gulati in his book, Reorganize for Resilience (2010), by John Hagel, John Seely Brown and Lang Davison in their book, The Power of Pull (2010), by Carol Sanford in The Responsible Business (2011) and my web article, The Reinvention of Management.

For a comprehensive review of the principles and practices involved in reinventing management to elicit continuous innovation, read my book: The Leader's Guide to Radical Management: Reinventing the Workplace for the 21st Century.

Shhhhh! The Next Really, Really, Really, Big Thing Is...

Greg Satell has an interesting and entertaining post entitled, The Next Really, Really, Really, Big Thing. He begins:

Everybody should be excited about the next big thing.  And why not?  It’s very, extremely big.  Even bigger than anything that came before.  No, really, it’s that freakin’ HUGE.

If you don’t want to get left behind, you’ve got to hop on this right away.  Of course, you will need to be fast and smart and work late nights, but it will be worth it.  You can’t go halfway on a thing like this.  It’s all or nothing, baby!

He then runs through some of the previous “really big things” that didn’t turn out to be so big after all, including eCommerce, search and social media. They are big, yes, but REALLY big? And do they LAST? Greg is not so sure.

Greg’s suggestion for “the next really, really, really, big thing that will last" is, hold your breath:

Getting really smart, driven people to work together well

That's the next really big thing? The fact that this could even be considered as a bold new idea shows how badly management in the typical Fortune 500 company is broken.

Greg's point is that if you can get a group like that together and sustain them, they will be able to generate any number of really big ideas.

According to Greg, the elements to accomplish this include:

• In-House Training
• Focus On Intrinsic Motivation
• Best Practice Programs
• Coaches and Mentors
• Firing Nasty People
• A Community of Purpose

So the next big thing is really not so much in any particular idea but rather in how the idea will be developed. “The difference” says Greg, “will be made by the people, how they are developed and how they treat each other. If you wanna win a horse race, ya gotta have the horses.”

I’m inclined to agree that the next really big thing does indeed involve getting really smart, driven people to work together well. What I’m less sure of whether Greg has identified all the elements necessary to sustain that.

Some needed ingredients to sustain it

Experience shows that the following additional elements are essential to sustain "a group of really bright people working well together”:

• An intense focus on delighting those for whom the work is being done: It’s pretty easy to get a bunch of bright people working on something they all enjoy and believe in. But unless that something happens to be what turns other people on and gets their juices flowing, then the chance of the effort being sustainable is low. This is the Google Fallacy: the idea that if you get a bunch of bright people together and give them time and space to develop new ideas, they will come up with business winners. After almost ten years, the experience at Google is dismal: sure, they have come up with a lot of bright ideas, but of all the ideas generated, only Android is really making money. Bright people working together on something they believe in is fine, but unless the effort is tightly focused on who they are doing it for, the effort is unlikely to be a business winner.
• The need for dynamic linking: Having a handful of people doing their own thing is fine, but once an idea takes off and the group starts to grow, then the issue becomes: how is the work of this growing group is going to be coordinated, so that you get disciplined execution as well as innovation? If you introduce the traditional management approach of hierarchical bureaucracy, the air goes out of the balloon. To combine innovation with discipline, you need to coordinate the work in an Agile fashion, by what may be called “dynamic linking” i.e. (a) the work is done in short cycles focused on producing finished work for the ultimate customers. As The Power of Pull points out, you proceed “by setting things up in short, consecutive waves of effort, iterations that foster deep, trust-based relationships among the participants."
• A shift from economic value to values: The group’s goal also has to shift from a preoccupation with making money to a preoccupation with the values that will grow the group by generating innovation and customer delight, particularly radical transparency, continuous improvement and a culture of learning.
• Horizontal communications: The energy of the group is unlikely to be sustained if communications take place in the traditional top-down approach of boss to subordinate. Instead communications need to be horizontal conversations, with adult-to-adult interactions, human being to human being, using stories, metaphors and open-ended questions.

Thus it’s not enough just to have the horses. You have to have the other elements in place that keep the horses winning race after race.

To learn more

In effect, the next really big thing is the REINVENTION OF MANAGEMENT. It will have proFound effects on every organization in the world. It combines continuous innovation with disciplined execution. Because it is more productive than traditonal management, the economics make its adoption inevitable.

It is already happening. You can read about it in books like 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, The Responsible Business by Carol Sanford, or in my article, The Reinvention of Management.

For a comprehensive review of the principles and practices involved in reinventing management to elicit continuous innovation and disciplined execution, read my book: The Leader's Guide to Radical Management: Reinventing the Workplace for the 21st Century.

What do the events in Egypt mean for business?

Many have been astonished to see first Tunisia, and now Egypt, ride the modern wave of global interconnectedness into a new awakening of community. What do these events mean for business?

Some analysts have focused on the volatility in the price of oil and the potential for political unrest if extremist movements gain a foothold in the Middle East.

More discerning observers detect a deeper message for the managements of all large organizations, both political and business. The message is simple: imperial administrations are an endangered species.

What kills imperial administrations: economics

The process of rooting out imperial administrations in the political sphere has been under way for centuries, as far back as Magna Carta in England in 1215, the Revolution in France in 1789, and on to the fall of the Berlin Wall in 1989.  What eventually brings them down is not simply the people’s unquenchable love of freedom, but rather economics. It’s the inability of these administrations to deliver the economic results necessary to keep them in power.

Imperial administrations can create an outward semblance of prospering, even for extraordinarily long periods, but meanwhile the economics is eating away at the foundations. Imperial administrations lack the agility to cope with an increasingly complex, rapidly changing world. Frustration builds. Then some event sparks the collective consciousness and the intolerability of the situation becomes apparent to all. Abruptly, the imperial administration collapses like a punctured balloon.

Thus for decades, I gazed at the vast and somber edifice of the Soviet Union. Grim, impregnable, and despotic, it seemed as though it would last forever. Yet economically—unperceived by many—it was rotting from within. When the Berlin Wall came down, the edifice abruptly collapsed.

For decades, imperial administrations in the Arab world also appeared to be impregnable. Then the self-immolation by Tunisian street vendor who had his vegetable cart confiscated by the government sparked a national uprising of all the others who were frustrated. Egypt quickly followed, while Jordan, Yemen, Syria and Saudi Arabia now wait nervously in the wings for their turn.

The advent of social media has made the situation infinitely more combustible and accelerated the pace of change. What used to happen in decades and centuries is now happening in days and weeks. Suddenly people can communicate and organize horizontally on a mass scale. There is little that even powerful dictators can do to prevent it.

Imperial administrations in business

Meanwhile imperial administrations in business still stand. These vast and somber edifices also have an outward semblance of flourishing, even registering record profits. Like the political dictatorships, they appear impregnable and even give the appearance of being destined to last forever.

Yet like the political dictatorships, they are rotting from within. The return on the assets of U.S. firms is only a quarter of what it was in 1965. The life expectancy of firms in the Fortune 500 is already startlingly brief—now less than fifteen years and heading towards five years, unless something changes. Executive turnover is accelerating. Only one in five workers is fully engaged in his or her work. Firms older than five years contributed zero net new jobs for the U.S. economy in the period from 1980 to 2005. By and large, the private sector is no longer providing a good livelihood for all the country’s citizens. Frustration is building.[i]

The top-down command-and-control management practices that are causing the decline are anachronisms from a former era. They are incapable of coping with the complex rapidly shifting marketplace of today. It is only a matter of time before they come to be seen as uneconomic and intolerable as dictatorships in the political sphere. Once again, it is the economics that will drive the change.

Just as in politics, the heads of imperial administrations in business often claim that the only alternative to their rule is anarchy.  Yet just as in politics there is the alternative of democracy, so in business there is an alternative to anarchy—a different kind of management that focuses on delighting its customers with continuous innovation and draws on the full talents of those doing the work.

Mastering the art of continuous innovation

The exemplars of this reinvented management—firms such as Apple, Amazon and Procter & Gamble—are showing the way. They have mastered the art of continuous innovation.

As The Power of Pull  points out, these firms proceed “by setting things up in short, consecutive waves of effort, iterations that foster deep, trust-based relationships among the participants… Knowledge begins to flow and the team begins to learn, innovate and perform better and faster.”

The stock market is already recognizing the gains that are made when firms get into the new mode. Look for example at the extraordinary gains in the ten-year stock price of firms like Apple [AAPL] and Amazon [AMZN], with increments of ten to fifteen times, compared to the imperial stalwarts like Walmart [WMT] and GE [GE] that struggle even to stop losing value.

 

The revolution will also be accelerated by the decisions of talented young people who are not willing to spend their lives in these command-and-control bureaucracies . They are voting with their feet and opting to work elsewhere. As Umair Haque shows in The New Capitalist Manifesto, they prefer to work for organizations that create meaningful work and thick value for society.

Thus in business the revolution is happening, not through demonstrations in the streets, but more quietly in decisions by investors and by the talent that business needs. As a result, the days of these imperial bureaucracies are already numbered.

The events in Egypt and Tunisia are thus part of a larger story, an emerging process of societal change, in which imperial structures everywhere are being replaced by arrangements that enhance rather than strangle the living part of people’s lives.

To learn more:

To learn more about the new way of managing, read books like 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, The Responsible Business by Carol Sanford and my web article, The Reinvention of Management.

For a comprehensive review of the principles and practices involved in reinventing management to elicit continuous innovation, read my book: The Leader's Guide to Radical Management: Reinventing the Workplace for the 21st Century.

 

---

[i] Sources: Deloitte’s Center for the Edge: The Shift Index; The Kauffman Foundation.

HBR on How to Fix Capitalism: A Bandage on a Cancer

Michael Porter, strategy guru extraordinaire, and Mark Kramer have an article in the January 2011 issue of Harvard Business Review entitled How To Fix Capitalism. HBR has headlined the article in vivid red letters as “the big idea” on the cover, so that we are compelled to pay attention.

Umair Haque, the author of the wonderful new book, The New Capitalist Manifesto, offers a positive interpretation of the article on Twitter and notes Porter's 10 minute video on the HBR website:

"Delighted to see Michael Porter's new themes, rethinking capitalism + creating real value, strikingly echo my new book. http://bit.ly/hydDuH"

I am also delighted to see Porter, Kramer and HBR addressing the question of how to fix capitalism. I would have been even more delighted if the article had offered a real fix.

The argument of the article and the video

The video is entitled "Rethinking Capitalism" (rather than "How to Fix Capitalism"). It echoes the article, apart from the title. It starts out by saying that capitalism has an image problem. Then Porter gradually slides into the notion that capitalism today has certain real problems, including waves of restructuring, personnel reductions, relocation to lower cost regions, commoditization, price competition, little true innovation and slow organic growth,

In the video, Porter rightly questions the argument that what is good for business is necessarily good for society. He implies that in the elevated business circles in which he operates questioning such a straw man argument is seen as being radical.

He goes on to suggest that "the solution" is to see that what is good for society can also be good for business. Business has missed profit opportunities. It has not explored those profit opportunities that would benefit society. For instance, a firm can make "gobs of money" out of the environment by reducing energy costs, or by producing healthy food products. If firms focus on these additional profit opportunities, they will make a lot more money and society will be better off than it otherwise would be. The beauty of his solution is that capitalism can go on operating as it always has: no fundamental change is needed. There is no need to change managerial practices or behavior. Just a minor tweak of the "value chain" and, "open sesame!" Suddenly a whole new set of profit opportunites open up.

This, he says, is the next chapter in strategy and "value chains". He says that conventional strategy models have become exhausted. His new model offers additional profit opportunities that will differentiate a firm. For instance, Whole Foods has made a lot of money by offering high quality food.

No need to choose

The video is particularly interesting in that Porter has made his reputation in strategy and by insisting that the role of top management is to choose. In Porter's view, the greatest failure of management over the years has been its failure to make a strategic choice.

However when asked in the video whether companies will have to choose between making profits and serving society, Porter says no: companies should be able find "copious opportunities" to do both. In this instance, no need to choose.

The next step, he says, is to develop the analytic models, value chains and the toolkits, which his company be happy to provide (presumably for a fee) to companies so that they can implement his ideas.

He presents his ideas as the antidote to current Corporate Social Responsibility (CSR) programs, which, he says, typically involve making random donations to charity. This, he says, is an approach that has come to the end of the road.

His approach, he says, is an improvement on those programs, although one is tempted to think that he has caricatured many CSR programs so as to make his “new approach” look like a clear improvement.

I agree that Porter's approach is an improvement on the caricature.

But it is a big leap to suggest that his approach will "fix capitalism". Even on the limited definition of capitalism’s problem offered in the article, the approach does not offer a solution.

The GE story

Thus Porter and Kramer are impressed that GE had as much as $18 billion of ecologically friendly products (“Ecomagination”) in 2009 and that these products are growing faster than the rest of GE’s business.

To be sure, it is good to see GE making progress of this kind. However the relative size of the gains needs to be kept in mind: $18 billion is only 11.5% of GE’s total sales. Thus 88.5% of GE’s sales are still “business as usual” i.e. not ecologically friendly. In public relations term, we do not have a different view of GE as a whole, simply because 11.5% of its overall business is now ecologically friendly. The question in thinking people’s minds is: when will GE get around to doing something about the rest of its business?

It’s like the Safeway supermarket in my neighborhood that not so long ago opened a small counter offering organic products while the rest of the large store continued with its usual stuff. I am happy that the organic counter now exists, but my image of the supermarket as a whole hasn’t fundamentally changed.

The problems of capitalism missed

More seriously, one would never guess from the article or the video the deeper and well-documented problems of capitalism, such as

• the rate of return on assets on US firms is now a quarter of what it was in 1965;
• the life expectancy of firms in the Fortune 500 has declined to 15 years, and is heading towards 5 years.
• only one in five workers is fully engaged in his or her work.
• 84% of workers in the US plan to look for another job in 2011.
• established firms created zero net new jobs between 1980 and 2005.

The Walmart story

Thus ecological progress is only one part of capitalism’s negative image or real problems. For instance, Walmart is making commendable, even extraordinary, efforts to put all of its activities on a sounder ecological basis. However good progress in ecological terms does not erase the extraordinary asocial nature of Walmart’s practices in other areas, including underpayment of workers resulting in a need for public support through food stamps and welfare payments, underhand tactics to prevent unionization and the negative effects on employment and small business in the locations of its stores.

The intellectual quality of the article

If I were to grade the Porter/Kramer article as an undergraduate essay, I would give it a C-. The title is "how to fix capitalism" but the article never makes up its mind as to what is being fixed or why. It oscillates between two views as to what is wrong: an image problem or a set of substantive problems. The substantive problems that it alludes to are only part of a larger set of problems. The remedies suggested would not resolve even the image problem, or the substantive problems noted in the article, let alone the larger set of substantive problems which it doesn't mention.  The article is not wholly lacking in substance, but it is lacking in intellectual coherence. So it would escape getting an F, but only just.

Capitalism 2.0 vs Capitalism 3.0

As Rod Collins, author of Leadership in a Wiki World, has pointed out to me, Porter’s thinking about expanding value chains to include socially worthwhile opportunities reflects the continuation of shareholder capitalism and has yet to come to terms with the implications of customer capitalism.

Thus the article makes no reference to the 'three ages of capitalism" defined in Roger Martin’s landmark article in HBR of January 2010 entitled “The Age of Customer Capitalism". That article argued persuasively that, following the periods of “managerial capitalism” and “shareholder capitalism”, which one might call respectively “Capitalism 1.0” and “Capitalism 2.0” we are entering a new and very different third era of capitalism - "customer capitalism" or “Capitalism 3.0”. Porter and Kramer are still mired in Capitalism 2.0.

The real change needed in capitalism is not just evolving the second era of "shareholder capitalism" to include the shared values of both business and societal stakeholders and find more profit opportunities in socially worthwhile goals, or fine-tuning value chains that operate from an inside-out perspective while "parsing and manufacturing demand".

That's essentially a "push" strategy in today's "pull" world, as John Hagel, John Seely Brown and Lang Davison would put it in The Power of Pull.

Capitalism 3.0 and a real fix

The real change needed is the development of Capitalism 3.0 and a wholesale revolution in management thinking focused on "delighting customers" and redefining managerial roles, coordination mechansisms, values and communications so that everyone and everything in the firm is oriented towards accomplishing this goal.

It means reversing the value chain and starting from what would delight the client and focusing the entire organization on that goal. When this is done, as Apple shows, the returns can be extraordinary: its share price is more than fifteen times higher than a decade ago.

Compare that to GE and Walmart, which doggedly work on tweaking their supply chains: Walmart's' share price is roughly what it was a decade ago and GE's is less than half.

There is thus a big difference between Capitalism 2.0 and Capitalism 3.0.

One can agree wholeheartedly with Porter, Kramer and HBR that capitalism needs fixing. The extent of the fix offered in the Porter/Kramer article however is limited to that of fixing capitalism's image problem and tweaking the value chain so as to find more profit opportunities for the Fortune 500.

One regrets that the fix deals with only part of the problems from which capitalism is suffering. When a patient is suffering from a lethal disease like cancer, survival depends on adjusting the metabolism through radical surgery or chemotherapy. In this case, all we are offered is a bandage .

To learn more about how to (really) fix capitalism, go to my blog post on reinventing management or read my book, The Leader's Guide to Radical Management.

Also: read later posts on how to fix capitalism:

• Is "shared value" another "business process reengineering"?

• Is the problem with capitalism that people are trying to fix it?