Why customer-based business models are succeeding
What 21st Century Management Looks Like
While there is a growing consensus as to what good 21st century management looks like, as well as a recognition that Agile isn’t the only path to achieve it, it is striking to see how many big corporations are still practicing the outmoded principles of 20th century management, in which:
· The goal of the firm is to make money for the firm and its executives. Maximizing shareholder value has been the catch cry of large organizations for the last 50 years and is still, despite recent language change, driving the behavior of most large organizations.
· The architecture of work is bureaucratic with individuals reporting to bosses and filling defined roles.
· The dynamic of the firm is a top-down hierarchy of authority. The top is assumed to know best.
Because most corporations are still these practicing 20th century principles, most business schools, including some of the leading schools, are still teaching students how to operate in that way. The principles also engender, and are supported by, a characteristic set of 20th century processes as shown in Figure 1.
The Centrality of Principles
The principles of the firm embody the prevailing mindset in the organization, if you like, or the DNA of the firm. It’s about what the firm actually does, not necessarily what the management says it is doing or should be doing. It’s about the “why”of the firm acts the way it does.
And these principles can be deduced by the staff of the organization. They see who gets promoted and who doesn’t, why resources are allocated the way they are and why hard decisions are made in this way and not that. So the principles drive behavior throughout the organization, no matter what the management says.
In 20th Century management, the underlying assumption is that the firm is like a machine.
· Its parts can be controlled and measured and analyzed separately.
· Outputs will be proportional to inputs,
· The firm can be understood quite separately from its context.
· Every problem has a root cause and every problem can be solved.
This mechanistic way of thinking drove these principles and processes in the firm.
Why 20th Century Management Prospered
20th century management was very successful in the 20th Century.
· It is a consistent and coherent system of behavior: the principles drive the processes and were supported by them.
· It is an understandable way to run an organization.
· There is still a steady stream of new recruits trained in this kind of management by the business schools.
· And it led to the greatest material improvement in the human condition ever in history.
And so there is much to be said for this kind of management.
The World Changed
There was just one problem. The world changed. There were four major changes that basically made this way of running organizations a bad fit for the current context.
· First, the pace of change drastically accelerated.
· Then radical new technology appeared on the scene.
· Then knowledge work replaced manual work.
· Most important, power in the marketplace shifted from the firm to the customer. The customer was now the boss of the organization.
But The Firm Wasn’t Able To Change
These four changes made it difficult for firms to operate in the old way successfully. Managers, of course, noticed the problems and they did many things to try to fix it.
· They tightened control.
· They downsized.
· They reorganized,
· They de-layered.
· They re-engineered processes.
· They launched sales campaigns.
· They acquired new companies and sold off losing divisions.
But the fixes didn’t work. Although there were sometimes short-term gains, the decline continued. It wasn’t that the machine was broken and needed to be fixed. The problem was that the firm wasn’t like a machine at all. It was a different kind of entity. It was a complex adaptive system.
Some Firms Try Something Different
And so in the early 2000s, some firms began trying something different. At the time, they were mainly small, unknown startups, like Amazon, Google, and Facebook. They started experimenting with a different way of running the organization. They were launching a reformation of management, creating a different concept of management for a new age.
I am calling this new way of managing, “21st Century management” but there are many other names for it:
· A vast amount of experimentation by thousands of firms took place under the aegis of “Agile”.
· Google has called it “Project Aristotle.”
· Vinci calls it “the Vinci Way.”
· The U.S. military calls a “mission command”.
· Professor Julian Birkinshaw follows Alvin Toffler in Future Shock and calls it “adhocracy”.
· Haier talks of “Rendanheyi”.
Despite these different names, it is increasingly recognized that there are common principles and processes in these organizations which represent the core of 21st century management. The new way of managing is driven by principles that are the opposite of those of 20th century management.
The Goal Of The 21st Century Firm: The Customer Is The Boss
The goal of the firm in 21st management reflects a shift from making money for the firm to an obsession with creating value for the customer. Everyone in the organization is focusing their work on delivering value for the customer.
This stems from Peter Drucker’s dictum of 1954 that “there is only one purpose of a corporation: to create a customer.” After years of neglect, the dictum is now becoming a reality. Now leading firms take that seriously, not just mouthing the words, but have the whole organization revolving around that principle.
Paradoxically, the most financially successful corporations today—Amazon, Apple, Facebook, Google, Netflix, and Microsoft, as well as the Haier Group in China and the Vinci Group in Europe—are making more money by pursuing the opposite goal of making money for the firm and its executives: delivering value for customers.
This is a paradigm shift in management. It is almost as transformational as the Copernican revolution in astronomy when it became apparent to Copernicus, and eventually to all of us, that contrary to the evidence of our own eyes, the sun is not revolving around the earth. The earth is actually revolving around the sun.
Similarly, in management, it became apparent that the firm is not the center of the commercial universe. In fact, it is the opposite: it is the customer or user who is at the center of the 21st century commercial universe. The firm is on the periphery and its future depends on whether it can provide value for the customer. The customer becomes the boss of the organization.
The Architecture Of Work And The Dynamic Of The Firm
Secondly, the architecture of work: in order to deliver on this very different goal, work was architected differently from a set of individuals reporting the bosses. The firm has to draw on all the talents of those doing the work, typically with small self-organizing teams working in short cycles, able to understand the customer, interact with it, try something different and gradually iterate towards something that will create more value for the customer. It is a very different way of architecting work.
And thirdly, the dynamic is also very different. Instead of a vertical hierarchy of authority, there is a horizontal network of competence. Ideas can come from anywhere in the organization. Sideways, up, down, whatever is necessary. It was a network of competence, not a hierarchy of authority.
This implies is a very different view of the organization. It is seeing the organization not as a machine, and more like a garden, an interactive ecology in which things were happening like a garden.
· The firm couldn’t be mechanically programmed the way a machine can be programed or fixed
· The idea of the firm shifted from something complicated to something complex.
· It was recognized that the firm cannot be analyzed separately from its context.
· Its behavior cannot be fully predicted.
· It can only be understood by interacting with it and its environment.
· And it needs to be recognized that both the firm and the context may push back.
Creating 21st Century Processes
And when these firms in the early 20th century had actually started adopting the principles of 21st century management, in due course, they discovered that the processes that they had inherited from 20th century management—leadership, strategy, innovation, HR, and so on—were at odds with their very different principles. And so they had to reinvent the processes.
They had to reinvent processes for the new set of principles, as shown in Figure 1. For instance:
· In leadership, instead of being transactional and manipulative, becomes something that occurs at every level and is based on human to human relationships.
· Strategy instead being backward looking, and focused on coping with competition, is dynamic and future looking.
· Innovation, instead of being limited to keeping up with the competition, starts not only creating new businesses that reach new customers.
These were radically different processes from 20th Century processes. And when they had finally put all these pieces together, they had a coherent way of running a 21st century organization, as shown in Figure 1.
The Reformation Of Management Continues
And of course the reformation of management didn’t stop, as shown in Figure 6.
· It started initially by concentrating on delivering more value to the customer.
· And then finding ways to join with the customer and create a kind of ecosystem within which the customer enjoyed more benefits because they were loyal to the firm.
· And then creating multiple firm loyalty with a system in which many suppliers joined together to deliver value to customer.
· And then a further step was taken when the firm started having interactions with customers. Customers were no longer just the recipient of products and services, but began determining what services would actually be provided.
The Financial Success of 21st Century Management
And this way of managing has been an unprecedented financial success.
· The firms have prospered during the highly disruptive pandemic while the rest of the economy is struggling.
· The market capitalization of the largest of these firms is now almost equal to the bottom three hundred stocks in the S&P 500.
· These firms are now the leading global brands: Amazon, Apple, Microsoft, and Google.
And yet despite all this success and all this financial dominance, the way most big firms manage today is still in the mode of the 20th century. Why?
Why would firms go on managing in a way which we know we know doesn’t fit the context?
I have been trying to get answers to this conundrum for some years at the Drucker Forum, an international management forum in Vienna, Austria, and I’ve been asking exactly that question over and over.
And the answers I have received are not entirely satisfactory. I was told for instance
· “It’s just technology.”
· “It won’t scale.”
· “It’s chaotic.”
· “It’s a bubble that won’t last.”
· “The gains are not real.”
· “It’s just too different for us to accept.”
These are not really good answers. I will explore the real answers in the upcoming articles in this series:
Part 3: “Why Big Firms Stick With 20th Century Management”
Part 4: “Why Leadership, Strategy Or Innovation Initiatives Mostly Fail”
Part 5: “Why Business Schools Still Teach 20th Century Management”
Part 6: “The Role Of Values In 21st Century Management”
Part 7: “How To Get From 20th Century to 21st Century Management”