THE FIRM OF
We're beginning to see what the next generation of
successful companies will look like.
In the world of the firm, something is changing.
Many CEOs recognize that the way that they think about business is breaking down. They’ve reached the end of an era.
The next era, the firm of the future, will be very different.
The fundamental goals of strategy will not change, but how companies win will change significantly. New execution models will emerge. The future will be about how firms deliver the benefits of scale and intimacy better and faster to customers in a highly turbulent environment.
The first question we asked as we observed the change was this: Is such a shift unusual? Has the idea of the firm been consistent over time, or has it changed before?
The Shareholder Primacy Era
We are currently in the shareholder primacy era, in which the single most important theme has been the relentless pursuit and prioritization of shareholder value.
Like its predecessor, the professional management era, the shareholder primacy era has been hallmarked by the importance of professional managers and the pursuit of scale to achieve leadership economics.
But there are also important differences. Shareholder primacy firms refocused on their core businesses and moved away from diversification. CEOs and management teams aligned their interests with those of other shareholders. They dedicated overwhelming attention to delivering shareholder returns—and the ones who succeeded earned substantial rewards.
A New Era: The Greatest Shift Since the 1970s
The cumulative impact of four major structural forces has already set in motion the next profound shift in eras, which, over the next 10 years, will result in the biggest change in business since the 1970s.
For many years, technology has driven up the returns to scale. Yet as the economy has become more service-oriented and increasingly digital, the importance of speed has increased dramatically.
Governments have become more activist, while critiques of inequality and the role of the modern corporation in feeding it have increased. Business leaders and politicians alike have been leading a backlash against the short-term thinking of some of those focused mainly on shareholder value. As a result, a growing number of CEOs are calling for a higher purpose to become the central element of their culture, people and customer strategies.
Millennials, who now form the largest generational cohort in the workforce, place a higher value on new experiences than on traditional incentives, such as moving up the corporate hierarchy. Many prefer the gig economy of Uber, TaskRabbit or Amazon’s Mechanical Turk.
Complexity of the Firm
The nature of the firm itself feels increasingly complex. CEOs today find it more difficult than ever to translate strategy into execution.
Scale and customer intimacy
For firms of the future, scale will still offer potential benefits, but the dynamics of scale, speed and customer intimacy are changing.
The firm of the future will no longer need to choose between scale and intimacy, thanks to technology.
Traditionally, strategy has been a fundamental trade-off between scale and intimacy. Now, technology allows firms to have both, no matter their size. With a new wave of cloud-based services for rent, it is possible for small firms to access the benefits of scale without owning assets or capabilities themselves.
In the new era, firms will need to adopt new measures and tools for delivering customer intimacy and speed. They will require robust customer feedback loops, such as the Net Promoter System®. Firms of the future will also need Agile methods of working that allow teams to quickly solve specific problems and move on.
Professional managers vs. mission-critical roles
To succeed in the future, companies will need to adopt a clear mission and identify the roles that are most central to delivering it. We call these the mission-critical roles.
All too often today, the professional managers, rather than mission-critical roles, are at the center of the firm. In the coming era, the priority will be to create communities of expertise within the firm. With most activity automated or outsourced, almost all remaining roles will be mission-critical. Most work will be project-based, with Agile teams as the dominant organizational unit.
The firm of the future will need to identify mission-critical roles and allocate the best people to fill them.
Assets vs. ecosystems
Today, firms are defined by the assets they own and control. In the future, firms will be defined by the ecosystems—the assets and the partnerships—that they control.
Technology-based platform companies have earned huge values from relatively smaller employee and asset bases.
Platform companies will continue to proliferate and disrupt sectors. But not every company can or should be a platform. Two other types of companies can succeed as well—scale outsourcers and product or service providers.
The trick for any type of company—platform, outsourcer or product or service provider—will be to form win-win partnerships that maximize value across the full ecosystem.
Capital gets a reset
The Firm of the Future will see the emergence of new ownership models to enable longer-term perspective. As we transition away from the Shareholder Primacy Era, we will see longer holding periods for private companies and more concentrated ownership for public companies.
New ownership and investment models are evolving to better match the time horizons of the firm with the risk needs of the investor.
In the future, capital structures are likely to be more flexible. Investors will have the ability to invest in specific projects and not just the entire company, creating a new ecosystem of financial intermediaries to help them identify and gain access to the best projects.
Engine 1 and Engine 2
Leaders of the Firm of the Future will be running their core—today’s engine—as efficiently as possible. Yet they will also need to create a new business—tomorrow’s engine—that reflects new customer needs, new competitors, new economics or all three.
The firm of the future will manage two types of businesses—Engine 1 of its core and Engine 2 of its more innovative business.
Routines, discipline and continuous improvement are the hallmarks of today’s engine, Engine 1. The chief traits of tomorrow’s engine, Engine 2, will be innovation and rapid adaptation.
The most successful firms in the coming era will use their Engine 2s not just as sources of new growth but as vehicles to transform their companies into firms of the future.
What does this mean for companies?
The new era is going to require very different skills and leadership approaches than what have prevailed for the past 40 years.
Leading and working in a firm of the future will also feel very different. It will sometimes feel like a venture capital firm, with its ecosystem outlook and its focus on mission-critical roles. At other times, it will feel like a professional services firm, with its ability to rapidly mobilize and demobilize resources.
Professional managers, who have successfully guided us through the past 90 years, will either be the greatest partners or greatest obstacles to this change. Leaders seeking to adapt will need new metrics and tools for speed, learning and helping talent reach full potential.
Start your journey today.