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.
Corporations 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.
Yet 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, efficiency 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,
governments 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 start ups 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 largely the dilemma large enterprises find themselves in
at the moment. They need to manage huge organizational resources, but
no longer derive the same efficiency benefits 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
The Sopranos, mafia boss Tony Soprano ruled
his crew with an iron hand. Sensing that there was more to life than
murder and extortion, he often sought out enlightenment from his
therapist, Dr. Jennifer Melfi. Yet 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.
Most 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, in the information age 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.
