In previous blog posts, we have described the power and durability of the professional management system that has been central to the idea of the firm for roughly 100 years. What led to the dominance of professional management and why is this system under threat today? More pressing: Can professional management coexist with the idea of scale insurgency?
For all the critiques of “bureaucracy,” it is easy to forget why the professional management system took off a century ago. The previous era had been dominated by trusts—big, powerful, founder-led companies that were vertically and horizontally integrated to a degree that would make today’s tech titans blush. These companies thrived until a sweeping wave of antitrust regulation and rapid technological change left them vulnerable to a new breed of highly efficient competitor. One prime example: In the five years after 1923, family-owned Ford Motor Company’s dominant market share crashed at the hands of Alfred Sloan’s GM—an exemplar of the new professional management science—as Ford customers abandoned the Model T for GM’s modern, segmented product line.
The professionalization of management enabled a new generation of companies to scale and sustain themselves beyond the vision of a charismatic founder. Smart managers, trained in the latest techniques, made data-driven choices about strategy (where to play and how to win). They built systems to enable continuous improvement and enable better, fairer, more consistent decision making. They increased transparency and managed risk.
At its best, this system drove astonishing levels of innovation, growth and value creation. Consider three factors: standardization, routines and predictability. Malcolm McLean introduced the standard shipping container in the 1950s, dramatically reducing the cost and complexity of ocean transport and helping fuel a global trade boom. Routines underpinned success stories from McDonald’s to Ikea to Southwest Airlines, and formed the basis of management systems such as Six Sigma, by unleashing the power of learning. General Electric’s market value grew 30 times under Jack Welch as the company became a paragon of predictable earnings growth.
The professional management system has been written off many times, but has endured through the rise of the shareholder-value movement in the 1970s, through deregulation in the 1980s, globalization in the 1990s, multiple technology boom-and-bust cycles, and a global financial crisis. Today, it is challenged by a mix of rapidly advancing technology, a generational shift in the workforce, and a public backlash against globalization and the doctrine of shareholder primacy. Internal complexity has also exploded. Most big companies still put their management hierarchy at the center of the firm, and top business schools are still seen as an attractive pathway for top talent. But is there reason to doubt whether the professional management system is up to the task this time?
We believe the answer is yes. All firms manage three great conflicts: between scale and customer intimacy, between routine and disruption, and between the short term and the long term. Customers benefit on all sides of these conflicts. They see lower prices when companies capture the cost benefits of scale, but they also get products more attuned to their needs when companies offer local options. Not surprisingly, different units within the company fight for one side of the conflict or the other. The professional manager’s role is to force trade-offs.
Increasingly, however, the system has tilted towards one side of these conflicts. It has favored scale, routines and the short term. This is the result of several inherent biases:
- Stability over chaos. Large organizations become highly complex, which threatens stability. Steady routines are more predictable, less risky, and deliver regular learning curve benefits. Companies typically favor routine as they grow.
- Systems over personalities. Managers build systems to prevent strong personalities from disrupting the firm’s ability to deliver. This may cause the company to lose some of its “heroes,” but managing to the “average” keeps things predictable and fair.
- Cost over revenues. Cost benefits are more controllable and predictable than revenue benefits, so managers typically assign them more value in risk-adjusted forecasts.
- Commoditization over premiumization. Differentiation can be risky and unpredictable, so it is generally safer to limit difference and compete on costs, than to deal with the risks associated with customization. As one financial services CEO put it, “Our industry is like bottled water—only the deluded think there’s any differentiation there.”
- Administration over execution. Professional managers view administrative skills—the ability to deploy systems and procedures to manage complexity and risk—as the most valuable skills in the organization. “Execution,” the collection of skills involved in delivering strategy to customers, is seen as a commodity. Advancing in your career requires climbing the ladder and moving away from the customer. At Haier, the Chinese appliance giant, CEO Zhang Ruimin takes the opposite approach: “It is more important that employees listen to the market and not the boss.”
- Eco-man over emo-man: Finally, the bias toward predictability leads managers to view customers and employees more in terms of their classic economic motivations than their emotional needs and desires. The organization focuses more on the functional benefits to customers and employees, and less on the nonmonetary benefits that motivate employees.
In the era now drawing to a close, these trade-offs worked because market power and scale were such unassailable sources of advantage. But that is not true anymore. Even the best leadership teams are encountering forces in the marketplace that expose the weak spots in everything they thought they knew about running a business. Many of the professional management system’s rules of thumb are becoming irrelevant, or even damaging, in an era where the premium is not just on being big, but also on being fast.
Having focused on scale for so long, many professional managers are ill-equipped to operate at speed. First, the way they manage scale is through a system of spans and layers; as revenue grows, so does complexity, which decreases speed. Second, organizations naturally lean toward managing what they can measure. While we have robust tools such as relative market share (RMS) to measure and manage scale, we have yet to develop the “RMS of speed” or measure the cost of lost time. This will be a challenge for scale insurgents to master.
The path to scale insurgency does not start with a rejection of the professional management system. As we noted, the system has created too much value over too many years to assume that it has no value now. Companies will always need to define the core and point the way to full potential, while sustaining the insurgent mission beyond the limits of the founder.
The real questions, then, are:
- How can professional managers capture the benefits of scale without relying on a structure of spans and layers that dials up complexity and sacrifices speed?
- How can companies measure and incorporate the value of time in everything they do, giving speed as much weight as scale in decision making?
- Recognizing the critical importance of purpose, how can leaders create a new deal for talent and build an organization that taps the internal motivation of the workforce to translate strategy into action faster and with better customer outcomes?
We will explore the implications of these questions in future blog posts.