Why Most Of What We Know About Management Is Plain, Flat, Dead Wrong

By Steve Denning

The first two sessions of the eight-week Radical Management Book Club sponsored by IBM took place yesterday. These were my opening remarks for the discussions.

These conversations are going to be very practical and down to earth, about the nitty gritty of what it takes to get things done today at an operational level.

But let’s start by looking at the overall context in which this is taking place. Why is so much of what we thought we knew about the economy and the workplace and the principles of management now so different? Why is much of what we thought we knew about management now just plain, flat, dead wrong?

The fundamental reason is that we are going through an amazing set of economic and social changes. The world has changed, but management hasn’t. As a result, what used to work doesn’t work anymore.

We are in fact at the beginning of a set of gigantic changes in society, in which everything we do is being re-invented — how we live, how we work, how we play, how we communicate, even how we think and how we feel. At the heart of these changes is of course the Internet and its related technologies. We have already seen big changes. But the implications of it have only just begun.

I was at a meeting earlier this week in Washington DC with some distinguished thinkers and they concluded after some discussion that the Internet and its related technologies will be the most significant invention in human existence, ever, bigger even than the wheel. We can discuss that conclusion. Some people, I know, have different views. But one thing is clear: this change is big.

In one sense, this makes it a fabulous time to be an entrepreneur. If you have a little imagination, everywhere you look, you can see vast possibilities for doing things “better, faster, cheaper, smaller, lighter, more convenient and more personalized.” Now it’s true that we as human beings continue to act the way we do. We are creatures of habit. But when someone comes along and shows us how we can do something “better, faster, cheaper, smaller, lighter, more convenient and more personalized,” we tend to say, “Hey! Yes! I want that! And not only do I want it. I want it now! In fact, not only do I want it now. “I’ve got to have it now!”

So in one sense, it’s a great time to be an entrepreneur because if you are able to come up with one these ideas to do things “better, faster, cheaper, smaller, lighter, more convenient and more personalized,” you can make a great deal of money very quickly. We are seeing more instant billionaires being created in shorter periods of time than at any other time in history.

At the same time, there’s never been a scarier time to be in business. That’s because the risk of your business being disrupted is that much greater. Disruption—or what Clayton Christensen has called the innovator’s dilemma—is an often fatal disease for any business, but it used to happen  at a slow pace as some upstart would make inroads at the low end of your business in one geographical area, with clients you didn’t really care about anyway. It would steadily eat away at your client base, step by step. It happened relentlessly and it was generally fatal if you didn’t do something about it, but it happened slowly. If you kept your eyes open, you could spot it and take action and defend against it.

But now customers are coming to expect “better, faster, cheaper, smaller, lighter, more convenient and more personalized” as the norm. And there are lots of entrepreneurs out there, all around the world, dreaming up ways to do that and then actually delivering it very rapidly, not just in one location, but instantly all at once, all around the entire planet. The Internet becomes an instant delivery mechanism that anyone can access. When that happens, we begin to see the disruption of solid, established businesses happening faster and on a larger scale than was ever before imaginable. “Big bang disruption” is one expressive term used by Larry Downes and Paul Nunes in their book of that name to describe this phenomenon.

For customers, this is fun. Hey, wonderful new stuff! Wow! Amazing!

But for producers, it can be very big and very quick and very scary and very lethal.

As a result, much of what we thought we knew about the economy doesn’t make sense any more. When we listen to discussions on CNBC or the Wall Street Journal, the talk is usually in terms of, How’s the economy doing? Is it up? Or is it down? Why is the economic recovery so weak? Whatever happened to jobs?

The reason why the discussion doesn’t make sense is that there is no such thing as “the economy” any more. No such thing. Today there are two different economies going at different speeds and on different trajectories.

One economy is what I call the Traditional Economy. It’s the economy that we inherited from the 20^th Century. It’s a world of factories, and command and control, and economies of scale and big hierarchical bureaucracies pushing out products and services, through established delivery systems, and getting people to buy them through sales campaigns and advertising.

This economy is still the larger of the two economies. It’s been in steady decline for a number of decades. It doesn’t generate new jobs. It’s not very agile. It’s becoming steadily more efficient. But it’s not good at innovation. It’s less and less able to capture the gains of its efficiencies. In fact, it is harder and harder to make profits by operating in this mode. It’s still a big part of what’s going on in the world. But it doesn’t have much of a future.

The other economy is the Creative Economy. This is an economy of continuous innovation and transformation. This is the economy of firms and entrepreneurs that are delivering to customers what they are coming to expect, namely, “better, faster, cheaper, smaller, lighter, more convenient, and more personalized.” This is an economy where the winners are those who are able to delight customers by continuously adding new value. Success in this economy requires a number of things. For one thing, it requires agility: you have to be quick and nimble, as change is happening much faster than ever before.

But it requires more than agility. It requires an agility that is tightly linked to empathy and a responsiveness to what customers want and need. That’s because the technology has not only empowered producers and entrepreneurs and given them more possibilities in terms of what they can produce, but has also empowered customers. Globalization gave customers choices. The Internet gives customers instant access to reliable information as to what those choices are and an ability to communicate with other customers and mobilize support for what they collectively want.

So suddenly power in the marketplace has shifted from seller to buyer. Suddenly the customer is in charge. The customer is now collectively the boss. This is an epic social and economic development.

This second economy, which I and others have called the Creative Economy, is growing rapidly. It’s still relatively small. But it is highly profitable. It doesn’t just make money. It makes humongous amounts of money. This is the economy of the future.

It’s important to understand the money thing. The Creative Economy, and its mode of operating — radical management — make a great deal of money. Paradoxically its goal isn’t to make money. That’s because if you set out to make money, you end up doing a lot of things that customers don’t want, and you don’t make as much money as you do when you focus on giving customers what they really want. To be precise, making money is the result, not the goal.

The kind of management you need to succeed in this Creative Economy, or what I have called Radical Management, has other advantages too. It has the potential to create more meaningful workplaces — more challenging, with different skills, but also profoundly more satisfying.  It tends to be more environmentally sustainable. Overall, it is more people-friendly.

But for our purposes today, the main thing that it has going for it is that it makes an awful lot more money. This is what makes its advance inexorable. This is what ensures that it will be the economy of the future. It’s not a question of whether it’s going to happen. It’s a question of when. Will the transition from the Traditional Economy to the Creative Economy be quick and elegant and intelligent? Or will it be slow and ugly with a whole lot of unnecessary liquidations and job losses. That’s the choice.

As we look out across the world, we can see some firms operating almost totally in one economy or the other. We see some big old industrial firms operating in the mode of the Traditional Economy. And we see firms in Silicon Valley for instance operating almost entirely in the mode of the Creative Economy.

But we also see a lot of hybrids. Many of the large firms like GE and IBM have both aspects of the two economies going on simultaneously.

• You see some parts of them operating with the traditional management of hierarchical bureaucracy, grinding out their traditional products, and focused on making money for the shareholders.
• And you see some parts, like DevOps in IBM or health care in GE, increasingly operating in the mode of the Creative Economy, with a focus on Agile management and understanding customers and delivering continuous innovation to them.

Part of the stress and tension that people experience in doing Agile software development in a large firm like GE or IBM derives from the tension between the two management modes.

Much of the discussion here will focus on what’s involved in being successful in the Creative Economy. What sort of radical management practices does it take? But some of that discussion will also be about resolving the tensions between the part of the firm still operating in the mode of the Creative Economy and the part of the firm still operating in the mode of Traditional Economy, and what to do about that.

It helps to see that these stresses and tensions are not just the problems of IBM or the problems of GE. They relate to the epic development that the corporation is no longer the centre of the economic universe: the customer is in charge. As a result of this epic transition, some of the fundamental principles on which organizations have been structured and run for the last hundred years have become defunct.

Those organizations that figure out what’s going on and take advantage of it will flourish. Those that don’t will become extinct. The future is that thrilling and that grim.

The management principles of the Creative Economy

So corporations cannot now prosper for long, as they did in the 20^th Century, merely by becoming more efficient at delivering products and services and pushing them at passive consumers through sales campaigns and advertising. Now firms must understand, anticipate and meet the needs, wants and whims of customers who are well-informed, empowered and interacting among each other.

They must learn to do what the 20^th Century corporation was constitutionally incapable of accomplishing: delighting the people who use their products and services through continuous, disciplined, transformational innovation. They must continuously deliver “better, faster, cheaper, smaller, lighter, more convenient and more personalized.”

The good news is that we know how to do this. The practices are becoming increasingly well established. There is a constellation of principles that has been articulated in what I have called a canon of radical management literature. There are different terms in use. I call it radical management. Haydn Shaughnessy calls “the elastic enterprise”. Dan Pontefract calls it “the flat army”. John Seely Brown and John Hagel call it “the power of pull”. There are more than a score of recently published books that talk about it, often using different labels but basically talking about the same set of phenomena. And the literature is growing by the day. If you analyze these books in depth, you can see that they describe five simultaneous shifts now underway.

• These shifts affect the goals of the organization
• They affect the structure of work within the organization
• They affect the way work is coordinated
• They affect the values of the firm
• They affect the way people communicate.

In the end, these shifts affect pretty much everything. They constitute a new canon of management. Let me summarize quickly the five main principles

• First the organizational goal: What’s the purpose of the firm? Here we are seeing a shift from an inward-looking goal of making money and maximizing shareholder value to an outward-looking goal of profitably delighting customers. Innovation and transformation are no longer options: they are now imperatives. The firm must orient everyone in the organization and everything it does to profitably delivering “better, faster, cheaper, smaller, lighter, more convenient and more personalized.” This must become the obsession of everyone in the firm.
• Second, the organizational structure: we are looking at a shift from a world where managers are controlling individuals to a world where the manager’s role becomes that of enabling collaboration among diverse self-organizing teams, networks and ecosystems. The reason for this shift is that when you have managers controlling individuals, you can’t unleash the creativity that you need from the workforce to deliver “better, faster, cheaper, smaller, lighter, more convenient and more personalized.” So you have to structure work differently so you can unleash this talent and initiative. Firms that don’t make this shift simply won’t be able to innovate quickly enough.
• Third, how work is coordinated: Here we are looking at a shift from coordinating work by hierarchical bureaucracy with its roles, its rules, its plans and its reports to dynamic linking, that is, a world where work is coordinated with iterative approaches to development and direct feedback and interaction with customers, networks and ecosystems.  In the first instance this kind of coordination happens within the team itself. But then it spreads to whole networks and even ecosystems outside the firm. This is the world of Agile, Lean, Kanban and so on. It’s a world that is increasingly familiar to software developers but it is still largely a secret for general managers. I believe for instance that there has never been a single article in Harvard Business Review devoted to it. And yet it’s the way of the future. It’s a different way of coordinating work and for various reasons, it’s very hard for traditional managers to understand.
• Fourth, values: We are looking at a shift from a single-minded preoccupation with efficiency and predictability to an embrace of values that will grow the firm and the accompanying ecosystems, particularly radical transparency, continuous improvement and sustainability. Hierarchical bureaucracies can be very efficient and very predictable. But they are not very transparent. There are a lot of reports going up and down the chain, but it can be hard to figure out what’s going on, particularly in a world of rapid change. Those reports are often about what people want to hear, not what people need to know. That’s not good enough for a firm that is desperately trying to deliver “better, faster, cheaper, smaller, lighter, more convenient and more personalized.” And they are delivering that to customers who are unpredictable and inscrutable and who don’t know what they themselves want or need. Radical transparency suddenly becomes something not just nice to have, but a requirement of survival.
• Finally, communications: We are looking at a shift from top-down directives to multi-directional conversations. Instead of telling people what to do, leaders need to be able to inspire people to work together on common goals, even across organizational boundaries, even beyond the firm, in related networks and ecosystems. Telling people what to do doesn’t get the job done anymore. In part that’s because the managers aren’t in control, because people are outside their organization boundaries. Control isn’t possible. In part it’s because managers don’t have “the answer.” Managers can’t tell people what to do because they just don’t know. Nor do the workers. Or even the customers themselves. The answers lie in the interaction between networks and ecosystems of customers, workers and managers. This is not like an equation puzzle to be solved, or an algorithm to be applied: it’s more like unravelling a mystery or a voyage of mutual discovery. So to succeed, communications have to become much more multi-dimensional and interactive than in Traditional Management.

When you look at these five shifts or principles, none of them individually is new. What is new is implementing all of the principles together as a system in a coherent and consistent way.

The core principles fit together as an interacting set of organizational possibilities. Implementing only one or two of the principles is not sustainable: the organization will slide back into the old mode.

This is a step change in organizational capability. It goes beyond merely becoming better at what is currently done, or acquiring different management tools, techniques, systems or processes, or following a new set of rules. Just as dinosaurs became birds, not by becoming better at crawling or walking, but by sprouting feathers and learning to fly, so organizations have to become different kinds of animals, with different mindsets, attitudes, values and capabilities. It means different ways of thinking, speaking and acting in the workplace. It means change at the level of the firm’s DNA.

The phase change is as fundamental as the Copernican revolution in astronomy—a shift from the view that the sun revolves around the earth to a view that the earth revolves around the sun.  Initially that discovery didn’t appear very significant. Copernicus’s discovery appeared to be no more than a better way of calculating the movements of the planets and the stars. It was just a discovery in an obscure subject – astronomy – of little general interest to society at large. No big deal. Copernicus even received an award from the Roman Catholic Church.

But once people grasped that the earth was not the centre of the universe, they began thinking the unthinkable. They began questioning fundamental societal assumptions like the role of the Pope and the power of organized religion and the divine right of kings and more. Almost a century after Copernicus, the Pope put Galileo under house arrest for even talking about it. But resistance was futile. In time, the change in theoretical perspective led to vast practical changes for politics, religion and society.

Similarly, the current economic phase change, with the shift in power from seller to buyer, might appear at first sight as an insignificant conceptual shift in obscure aspect of management theory. But as in astronomy, once people grasp that corporations are no longer at the centre of the economic universe, they are beginning to think the unthinkable. They are beginning to question fundamental assumptions as to how organizations are structured and run and their role in society. In time, it too will have similarly far-reaching economic, social and behavioural changes.

So this is a new world that is emerging. It’s undergoing a phase change that is enabled by technology but it is driven by economics. Those firms that get it and master it, will prosper. Firms that don’t, won’t. It’s as simple, as grim and as thrilling, as that.