A refreshing tip for 2008: tear up the textbook

An economy without organisations would be unbearably coercive, while an economy without markets would be unbearably bureaucratic.

IT’S 2008 (ALMOST), and time for some management reappraisals. On the one hand, the excesses of the private equity era are so last year – its end being signalled by the disappearance of Martin Lukes, head of a-b global and hero of the FT’s email soap, behind bars at Christmas. So if management by sticks, carrots and over-the-top exhortation is over, it’s back to basics. But, on the other hand, just what are the basics today?

Every half-way successful business knows that it is just that: half-way to doing what it could. At least half the energy, intelligence and creativity of its people is leaching away unused. Improving co-ordination and flexibility, speeding up innovation and reacting faster to changing customer needs calls for engagement, initiative and creativity. But these are just the things that conventional organisation – ‘Management 1.0’, command and control or whatever – doesn’t do. In fact, it destroys them. So what next?

One option that companies longingly consider is trying to make themselves more like markets. After all, markets are unsentimental at weeding out inefficiencies and great at allocating resources. A market-like company would surely move faster, adapt more quickly and be more efficient than a conventional hierarchy.

But although tempting, imitating markets leads companies to a dead end. Think about it. The point about organisations is that they aren’t markets, otherwise they wouldn’t need to exist. The vigour of capitalism is the result of the interaction of both markets and companies, each doing its different thing. Companies and markets differ in three main ways. First, companies innovate and make strategies while markets can’t, since, second, while companies have purpose and intention, markets don’t. Third, markets are about self-interest and competition, while organisations are about collective interest, based ultimately on trust and forbearance.

As the late Sumantra Ghoshal put it, an economy without organisations would be unbearably coercive, while an economy without markets would be unbearably bureaucratic. Each disciplines each other in what economist Joseph Schumpeter called capitalism’s ‘waves of creative destruction’. A company innovates and creates an advantage, for which it can charge high prices; the market then competes the advantage away, to the benefit of society as a whole.

It follows that for companies to imitate markets is to betray their ‘company-ness’. Organisations exist to provide a (temporary) shelter from market pressures in which people can do the things markets can’t: innovate and strategise. The better they do that, the more they remove themselves from market pressures. Look at Apple.

‘Never teach a pig to sing. It wastes your time, and annoys the pig.’ Rather than trying to make their organisations into inferior markets, companies would do better studying those of their peers that most emphasise their distinctiveness, even eccentricity, as organisations. A surprising number of outstanding performers are organisational outliers – those that do things differently from the textbook. Toyota is one such. It focuses on making it easier for customers, whether external or internal, to ‘pull’ what they need from the organisation.

Or take WL Gore, maker of Gore-Tex, a pounds 1bn-a-year private company that has been profitable for 50 years. As described by Gary Hamel in The Future of Management, Gore has no organisational chart and no management layers. ‘Few people have titles and no one has a boss… The core operating units at Gore are small, self-managing teams.’

In that it is similar to Whole Foods, the fast-growing US organic supermarket chain, where all key operating decisions – including pricing, ordering and staffing – are devolved not only to individual stores, but departmental teams within the stores who are closest to the customer. To aid decision-making, Whole Foods maintains open books: all teams have access to necessary commercial and operating information. Salary details are available to everyone. No executive can make more than 19 times average pay (current ratios in large US companies are 400 times) and 95 per cent of stock options have gone to non-executives.

There are plenty more examples of organisations whose success has come from turning the orthodoxies upside down: always radically decentralising responsibility and leadership, and generating their own distinctive certainties, rather than pursuing generic alternatives such as the market. Google is one; the Brazilian Semco, where there is no company rule book, another; Linux and the open source movement, now reportedly comprising 150,000 projects and 1.6 million people, another. Much of their secret lies in their self-confidence as organisations, reflected in management frameworks that allow them to control their own destiny but also in the timorousness or wrongheadedness of their peers that fail to do the same.

The Observer, 30 Demcember 2008

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