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Why Big Organizations Are Broken

2015 March 22
by Greg Satell

Charles Erwin Wilson, Eisenhower’s Secretary of Defense is credited with the quote, “What’s good for General Motors is good for the country.”  In fact, what he said was actually the inverse (that what was good for the country was good for GM), but no matter, both statements had an element of truth.

Firms like GM needed a strong government to provide extensive industrial infrastructure and effective economic governance.  Governments, for their part, needed large corporations to run the economy productively, raise living standards and expand the tax base.

Today, according to Gallup, we’ve lost our faith in large institutions, including government, religious organizations and labor unions (though we never had much faith in big business). Many attribute this trend to high profile scandals and the financial crisis, but the reality is that the decline is longstanding.  In truth, large organizations are fundamentally broken.

The Industrial Revolution And The Emergence Of Bureaucracy

The industrial revolution created enormous increases in scale.  Production, rather than dispersed among cottage industries and guilds, became centralized in large factories.  No longer would productivity depend on the skill of artisans, but the efficiencies of organizations.

In the early 20th century, the eminent German sociologist Max Weber theorized that this increase in scale would lead to the creation of large bureaucracies to manage it all.  Jobs would be broken down into small, specific tasks and be governed by a system of hierarchy, authority and responsibility.

Time proved Weber prescient and great organizations like GM rose to prominence. Charismatic entrepreneurs like Vanderbilt, Carnegie and Ford were replaced by professional managers, like Alfred Sloan at GM, Charles Schwab at US Steel and Owen Young at General Electric, hardly household names.

As a 1955 profile in Fortune magazine explained, corporate executives at the time lived comfortably, but not ostentatiously.  They were less the ego driven, masters-of-the-universe that we associate with corporate leadership today and more akin to technocrats, engineering ever greater efficiency to keep the productivity machine humming smoothly.

The Rise And Fall Of Strategic Planning

In 1937, a young economist named Ronald Coase sought to make sense of the transition from artisanal to industrial production in his famous essay, The Nature of the Firm.  He argued that the function of a firm was to reduce transaction costs, especially information costs, and that firms would grow until the increase in organizational costs canceled out efficiency gains.

Later, Michael Porter created the concept of a value chain, which laid out all the activities a firm or industry would undertake in order to produce a product or service.  The idea was that by optimizing efficiencies in each component of the chain, performance could be maximized, conferring competitive advantage on effective practitioners.

Porter also posited that corporations had three viable strategies available to them: Cost leadership, differentiation and strategies focused on a particular niche.  The work of Porter and others led to the development of strategic planning, which would streamline the process of transforming inputs into outputs.

Yet much like the organizations themselves, the strategic planning process became a victim of its own success.  In striving for ever greater efficiency,  it became more granular and cumbersome.  As Jack Welch put it:

 

Our planning system was dynamite when we first put it in. The thinking was fresh; the form mattered little. It was idea oriented. We then hired a head of planning, and he hired two vice presidents, and then he hired a planner; and the books got thicker, and the printing more sophisticated, and the covers got harder, and the drawings got better.

 

Unfortunately, none of the added complexity made the organizations run any better.  In fact, as informational technology became increasingly cheap and pervasive, large enterprises would find themselves at a distinct disadvantage.

How Coase Got Turned On His Head

When Coase wrote his famous paper in 1937, transaction costs were a much greater concern than organizational costs.   Corporations, government and other institutions at the time were still relatively small and infrastructure still sparse (there were, for example, no interstate highways).  So firms that could wring out inefficiencies could grow substantially.

Today, however, we live in an information economy.  Competitiveness is no longer determined by how efficiently we move around men and materiel, but in how we connect to informational resources.  More specifically, we use platforms to access ecosystems in order to create movements that may or may not reside within one particular organization.

So, in effect, the Coasean model has been turned on its head.  Technology has minimized transaction costs, while organizational costs have become a heavy burden.  Nimble startups can access access manufacturing resources, talent, financing, computing power and just about anything else you can imagine and still be price competitive with the big guys.

And that’s the dilemma large enterprises find themselves in at the moment.  They need to manage huge organizational resources, but no longer derive the same scale advantages they used to.  New strategies, such as open innovation can help mitigate the problem, but can’t eliminate it entirely.

That leaves executives with a dilemma.  They still wield significant authority, but what to they do with it?

The Tony Soprano Problem

In the famous TV show, mafia boss Tony Soprano ruled his crew with an iron hand.  Yet, sensing that there was more to life than murder and extortion, he often sought out advice from his therapist, Dr. Jennifer Melfi.  But after listening to her advice on taking a more collaborative approach, he asked, “But then how do I get people to do what I want?”

Most executives today have some version of the Tony Soprano problem.  Many are acutely aware of the transformative power of platforms ecosystems and movements, but in the course of everyday operations, they need to get people to execute according to plans—in effect to do what they want them to.

While often brushed aside, this is a serious concern.  Everybody would like to think more about the long term, but unless you can solve everyday problems, you’ll never get there. However, control is an illusion and always has been.  When large organizations had a monopoly on resources, it was a workable fiction.  It no longer is.

Now that access to resources has become nearly universal, leadership is more important than authority.  So we need to shift our mental models from getting people to do what we want, to inspiring them to want what we want.  That’s why today, the mission of the enterprise must drive strategy.

In effect, the information age means that the lunatics increasingly run the asylum.  A leader’s job is not to try to control people or events, but to help them run it right.

– Greg

 

10 Responses leave one →
  1. March 22, 2015

    This is an excellent article, though I’m not positive about the end of it. Actually both ” leadership is more important than authority” and “mission of the enterprise must drive strategy” are really good. … Lets see. I can go with the next paragraph too. ” A leader’s job is not to try to control people or events, but to help them run it right.” Ah, but you said earlier that control was mostly an illusion. OK, I’m going to leave it at that. This is an excellent analysis. Not sure I should look for more. What I am trying to find is systems related to dealing with excess productivity instead of the systems we have always needed for scarcity.

    [Reply]

    Greg Reply:

    Yes Michael, a leaders job is not to control people because control is an illusion. If leaders actually could control people effectively, then it might be an effective way to manage.

    – Greg

    [Reply]

  2. March 22, 2015

    Hi Greg,
    As usual, you open great topics. This one on what is broken with organizations also inter-relates with the next ‘Marketing shifts” so will comment there as well. But I will say in this blog topic that marketing is in the best position to help shape external priorities that excite and pull the passions of internal teams that are the hallmark of most great companies today, and yesterday before a decades long gap. Even a CEO needs to play a more succinct role yet not the unchallenged, unaccountable resistant to change role that plagues most leaders today.

    I do believe a shift from CEO’s as masters of the universe to the self-aware and market aware organization, (even entire communities) is both vital and achievable.

    We have seen this shift as our marketing approach helped organizations like HP and Agilent, even Steelcase and Finali to shift emphasis from resisting change and fighting for what worked decades or even a year ago to respecting that there is a level of creative insight and hypothesis that can sustain that companies vitality. Alas, the work I did for both orgs 25 to 10 years ago was accepted by management on the huge financial ROI without understanding the bigger win – how it connected internal and external influencers and customers around a common purpose. Imagine how they would be today had they mastered this as only folks like yourself, Dan Pink and Brian Solis get it now and advocate these approaches as timely, vital and rare.

    I talk to many current and ex-CEO and CMO professionals and ironically most talk about a wall of resistance and the need to hand hold leaders, cater to their ego’s, risk aversion and take small steps before they feel safe. These folks should not be leaders. They are clearly laggards. The window of opportunity any more is shorter and requires deft understanding, market empathy, holistic thinking and team inclusion versus directed work.

    Bureaucracies happen where objectivity is missing and challenging status quo is discouraged. Old school consultants set poor examples of what the new outside in an inside out organization needs to open up to in order to thrive.

    I love how you show our history and how some concepts have been applied, some maybe prematurely. I understand value chain yet have evolved my own approach to architecting value creation and earning influencer eco-system regard as germane to the success for any company in this time of flux.

    I am so glad to see us at a time when – as you have stated so eloquently – “previous methods prove untenable” as only failing faster will move laggards to embrace better methods sooner.

    My new web site will speak to this better late April.

    Great article Greg,

    Bill

    [Reply]

    Greg Reply:

    Thanks Bill. Very good points, btw.

    – Greg

    [Reply]

  3. March 22, 2015

    Spot on, Greg.

    See Frederic Laloux: Reinventing Organisations.
    Options are emerging.

    Start with the inspiring story of Buurtzorg on pp 62-73.

    [Reply]

    Greg Reply:

    Thanks Ken. I’ll check it out.

    – Greg

    [Reply]

    Melissa W. O'Mara (@melissaomara) Reply:

    I am in agreement with Ken’s comment. Options are emerging (and have been emerging quietly for quite some time). It does seem like we may be getting close to the first tipping point – where the lone pioneers are finding each other. People (like me and maybe you all) are connecting dots as “solutions” pop up with many similar characteristics, and smaller “movements” combine into a grander/uber movement. For example, there is a genre of books, consultants, coaches, methodologies and workshops that are emerging around the growing awareness that people want a life of “PURPOSE”. I use something called the Bigger Game for a dozen years to help ignite a clear and compelling alignment within individuals and teams to “play bigger”. Under purpose, more fundamental, is helping people understand their personal hunger for things to be different. In parallel, there is a very interesting & compelling movement around “HAPPINESS”, which is linked to neuropsychology and positive psychology, and studies that have turned some of our capitalist dogma upside down. Success and achievement (and wealth) don’t make us happier. In fact, the correlation is the opposite. Happiness leads to success. So if you want to be successful, you should work to turn up your internal happiness dial (one of the drivers for this – a sense of PURPOSE). Other signals and signs – the growing cynicism with our large organizations and institutions – as cited by Digitaltonto, and also in the book Reinventing Organizations by Frederic Laloux, and in the work of C. Otto Sharmer, and his most recent book, Leading from the Emerging Future, From Ego-system to Eco-system Economies, and his recent MIT EDx MOOC – Transforming Society, Business and Self (over 25,000 people signed up for this 6 week free online class, which will be offered again in September). And the work that I am doing – bringing a Collective Leadership Program by PresenceAtWork into the US from the Netherlands – this builds on relationship systems research and training, C. Otto Scharmer’s work, and other good work that has emerged in recent years – and is designed for intact executive teams to truly transform to leading from the collective strengths of the system/team/org vs. from power or hierarchy. The perfect storm may be forming for a real shift. I’ve not even mentioned the B-Corp movement, or the B Team, or the growing Social Entrepreneur space (for profit as well as non-profit). Or the impact of the Millennials…. Times – they are a changing…

    [Reply]

    Greg Reply:

    Thanks for sharing, Melissa.

    – Greg

  4. March 23, 2015

    Greg,
    I agree, another interesting and valid subject. Especially as you note the transition from artisinal to industrial. Information, like education, is essential at any place in time, but what I see missing in your piece is the impact from mathematical tech that concentrates on corporate profits. It seems many of today’s CEO are primarily focused on getting as much juice out of their fruit as they can without understanding the costs of such an objective. The early leaders you mentioned in the first stages of the industrial revolution were obviously well endowed with capital, but they also seemed to have a better understanding and appreciation of the life cycle of their business. They harvested their fruit more carefully than corporations (CEO’s) do today and that, in my opinion, is the main source of our dysfunctional corporate state. Sorry that my comments are slightly off subject, but what you wrote brought it to mind.

    Jmorran

    [Reply]

    Greg Reply:

    It’s hard to say, James. The ones we remember from the Industrial Revolution were not run of the mill entrepreneurs, but the true titans of business. I think if we compare like with like, it would be hard to say that a Rockefeller, Carnegie or Vanderbilt was more forward looking than a Gates, Jobs or Musk.

    – Greg

    [Reply]

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