Business at a Crossroads The Crisis of Corporate Leadership_7 pdf

120 Business aT a Crossroads effective way to run large enterprises. The question we turn to in the next chapter is whether other forms of enterprise could emerge to chal- lenge CEO-led companies. References 1 “Bankers Can Learn from Sport about Fair Play on Pay,” Financial Times, February 28, 2009. 2 Times Books, 2002. 3 “Thain Behavior. Bankers Need to Start Seeing Themselves as Others See Them.” Finan- cial Times, January 24, 2009. 4 “Why do Dominant Personalities Attain Influence in Face-to-face Groups? The Competence- Signaling Effects of Trait Dominance.” Journal of Personality and Social Psychology, 2009, Volume 96, Issue 2. 5 Time, February 11, 2009. 6 “Seven Ways to Attract Analysts and Investors,” Corporate Board Member, Spring, 2001. 7 Simon & Schuster, 1989. 8 “Empowerment: The Emperor’s New Clothes,” Harvard Business Review, May–June 1998. 9 Allen & Unwin, 2006. 9780230_230941_08_cha06.indd 120 09/09/2009 10:01 PART II Reforming big business 9780230_230941_09_cha07.indd 121 09/09/2009 10:02 This page intentionally left blank 123 7 Leaderless competitors The hierarchical corporation run by, or rather under the control of, an omnipotent CEO, is not the only form of enterprise making a decent living these days. There are well-established traditions of dual leader- ship in publishing (editor/publisher) and the theatre (director/ producer). Joint ventures, strategic alliances and other inter-firm collab- orations comprise another class of enterprise in which control is in more than one pair of hands (see Chapter 9) and the partnership model still thrives in professional services, such as law and accountancy. By and large, professional partnerships seem to have done a better job at adapting to what people want from their work, and in their work- places, than large joint stock companies. KPMG in the U.K., the U.K. member of one of the “big four” global accounting networks and an organization I happen to know quite well, was ranked “the best big company to work for,” in the Sunday Times 2009 “Best companies to work for” survey. It was the third time KPMG had come first in the five-year-old ranking. It has never come lower than third. Two other “big four” firms, Deloitte and PricewaterhouseCoopers, also made it into the top 20 big company ranking. 1 To begin our examination of what can be done to adapt big business to its more challenging environment, this chapter will discuss other enter- prise forms that are emerging from the undergrowth, which may chal- lenge and, in some cases, are already challenging, the CEO-led MuBE. The large CEO-led company is vulnerable to challenge, because it’s not as solidly based on foundations of contemporary economic logic as it appears. We have already discussed, in earlier chapters, its accidental origins and contingency – its emergence, in the mid-19th century, from a number of fortuitous circumstances that prevail no longer. Moreover, a case can be made for arguing that the MuBE wasn’t just the creature of the economic circumstances prevailing at the time of its birth, but was also a social construction that emerged from the personal prejudices, interests, relationships and ambitions of its creators, as much as from those natural economic laws to which Adam Smith attributed the rise of capitalism. 9780230_230941_09_cha07.indd 123 09/09/2009 10:02 124 BUSINESS AT A CROSSROADS To paraphrase Khurana when he describes the external CEO market as a “social construction,” 2 to call the CEO-led MuBE a socially constructed institution is not to say that it is an institution in the normal sense. It is an institution in the sociologist’s sense: a pattern of practices, relationships and obligations so taken for granted that they assume the status of rules governing thought and action. This isn’t to say there are no natural economic laws. Any business institution, whether or not it’s socially constructed, must comply with fundamental economic logic if it is to survive and prosper. But there is scope, within that constraint, for a wide variety of enterprise forms, all of which will be socially constructed to some extent. As Khurana pointed out, one of the most important lessons of the sociology of knowledge is that “very little in society had to be the way it is.” An institution that was socially constructed in one way could have been constructed in many other ways. “Part of the process of social construc- tion is to camouflage this fact, since society becomes more stable, when people accept institutions as simply given and share a common explana- tion for events.” Roads not taken An irony in the evolution of forms of enterprise is that while the early American railroads were producing Chandler’s MuBE (multi-unit busi- ness enterprise) they were experimenting with a different form of enter- prise which, had it been allowed to develop, may well have stopped the MuBE in its tracks, so to speak. 3 The weakness of the early railroad systems was that roads entering a terminal city from different directions had no direct rail links and, because they used different gauges and equipment, the cars of one road could not be transferred to the track of another. In 1865 the Boston Board of Trade put the cost of unloading and reloading freight between Boston and Chicago at over $500,000 a year. These high trans-shipment costs were in no one’s interests, so the roads got together and agreed to standardize gauges, equipment and proce- dures. As a result of this inter-firm cooperation, by 1880 a rail ship- ment could travel from one part of the country to another without a single trans-shipment. But standardization increased the intensity of competition between roads. Because railroads are capital-intensive, they have steeply declining marginal costs and their economics are extremely volume-sensitive. A small change in traffic could turn a 9780230_230941_09_cha07.indd 124 09/09/2009 10:02 7 LEADERLESS COMPETITORS 125 profitable line into a loss-maker and vice versa. Railroad managers were, for this reason, under considerable pressure to poach business from rival lines by aggressive advertising and rate cutting. Such competition is dangerous in a highly capital-intensive industry, because once the line has been built, it is worth taking new business at prices that cover variable costs. Since a road’s variable costs were only a small proportion of its total costs competitive rate-cutting, if left unchecked, would continue to way below breakeven. The solution was for rival lines to cooperate on setting rates in the same way as adjacent lines had cooperated on connections. Federations were established with their own legislative, executive and judicial bodies to set standard rates. When they too failed to prevent periodic outbreaks of rate cutting, the major trunk lines signed various agreements, culminating in the formation in 1878 of the Joint Execu- tive Committee, chaired by Albert Fink, to approve rates calculated by sub-committees and associations throughout the country. Fink believed this cartel arrangement was the only way to prevent the “centralization and absorption of the roads under the absolute control of one or a few persons. It makes the separate, individual existence of these roads possible … puts a check on the consolidation of [the industry, and] secures all the advantages of consolidation without its disadvantages.” But he realized this solution relied on “the intelligence and good faith of the parties composing it” and when he and his allies were unable to persuade Congress to give his committees’ rulings legal sanction, the whole system of associations and sub-committees fell apart, and it was just a matter of time before the “centralization and absorption” Fink feared became a reality. Chandler admitted “such co-operation might have worked” – managers might have been more rigorous in maintaining rates, and might have worked more closely with Fink in seeking out and fining violators of agreements. It’s certain that if the cartel agreements had been legally enforceable the costs of breaking them would have been far higher. “Given the basic nature of railroad competition,” Chandler concluded, a “legalization of the cartel arrangements was probably the only effective method to control competition and so remove the incen- tive for system building.” Sadly for this early flowering of a form of enterprise which might have challenged the MuBE for the position of “boss” institution in business, Congress was in no mood to sanction what seemed, to most Americans, to be price-rigging. The 1887 Inter- state Commerce Act outlawed the Joint Executive Committee’s pooling arrangements and the scene was set for the epic battle between the 9780230_230941_09_cha07.indd 125 09/09/2009 10:02 126 BUSINESS AT A CROSSROADS speculators, led by the “Mephistopheles of Wall Street,” Jay Gould, and the “system builders,” led by the Vanderbilts. Insofar as Fink’s failures opened the way for system builders, the MuBE itself, like the CEO market (see Chapter 5), can be seen as a social construction built not by inexorable economic logic, but by a scheduler’s blunder on the Western Railroad in 1841, the failure of the American railroads to adopt the telegraph earlier, the lack of price disci- pline in Fink’s cartel, Congress’s refusal to give legal sanction to the cartel’s price agreements, and the prejudice against price-fixing, which led to the Interstate Commerce Act. The pooling arrangements Americans had objected to as price-fixing (and Congress duly outlawed) effectively developed anyway, within the “systems” built by Cornelius Vanderbilt and others. They were required by the industry’s capital-intensity. When effecting them by a cartel within a disintegrated industry was proscribed, system building became the only option. The U.S. electricity utility industry is also a socially constructed institution, according to economic sociologists Mark Granovetter, Patrick McGuire and Michael Schwartz. In their paper Thomas Edison and the Social Construction of the Early Electricity Industry in America, 4 they argued that, when the industry was born in the 1880s, three development roads were open: power generation at the household, or neighborhood level; public ownership of generation and distribution grids; and private companies, serving large areas from central power stations. That the U.S. electricity industry took the third road was not due, according to Granovetter, McGuire and Schwartz, to any compelling economic case for such an arrange- ment, but to interactions within a social network consisting of trade associations, interlocking directorships, and generating equipment manufacturers. Another road not taken was the plan to split “Big Blue” (nickname of IBM, until it was robbed of the PC market it had dominated by a “multi-agent enterprise”; see under Linux below) into a brood of “Baby Blues.” Louis Gerstner abandoned the Balkanization plan when appointed CEO of IBM in 1993, and gained much kudos for turning the ailing giant into a different, and subsequently successful, IT services company. But who’s to say the Baby Blues would not have, collectively, been equally if not more successful? 9780230_230941_09_cha07.indd 126 09/09/2009 10:02 7 LEADERLESS COMPETITORS 127 A fractured landscape If you asked an alien economist from a distant star system how the modern, CEO-led company could be adapted, to suit today’s business environment, the dude might be either cryptic, and say: “Chop off their heads,” or unhelpful, and say: “If it is adaptation you want don’t start from here.” Where would you start? If you had a clean sheet of paper how would you go about constructing a business institution perfectly adapted to the modern environment? The first step, if you’re persuaded that the institution would, as well as complying with natural economic laws, need to be “socially constructed” to some extent, would be to list the qualities that most people want in their work and workplaces. The list suggested in Chapter 1 included “free,” “fair,” “reasonable” and “decent,” and distributions of primary goods including income, wealth, power and the bases of self-respect, consistent with Rawls’s “difference principle.” The second step would be to consider the environment in which such people with such desires will construct business institutions. One quality that will be immediately apparent is that the environment is infinitely more varied and complicated than the environments in which the U.S. railroad and power industries chose their paths. Many more roads are open, to many more people, with a wider variety of skills and aptitudes. And modern communications, particularly the internet, create a space for the social construction of a business insti- tution that spans the globe. For today’s business institution builders it is this enormous increase in complexity and the vastly greater number of challenges and opportunities it brings with it, that distinguishes most clearly their environment from that of the mid-19th and early 20th centuries. To illustrate the importance of this difference and to introduce a set of ideas, the sciences of complexity, that I believe are vital to any under- standing of how new businesses will emerge and develop in the future, consider Stuart Kauffman’s analysis of “patch” size on a “cost surface” (see box below). Kauffman, whose conjecture about the origin of life I quoted in Chapter 3 when discussing the origin of Chandler’s MuBE, is a world-leading complexity scientist who pioneered the use of complex systems methods to solve business problems. 5 9780230_230941_09_cha07.indd 127 09/09/2009 10:02 128 BUSINESS AT A CROSSROADS Patches on landscapes Kauffman says the size of the “patches” (in this context, units of organization or departments) in a “system” (a business or company) travelling on a “cost surface” or “landscape” (seeking to minimize costs, or maximize shareholder value), is a crucial determinant of the entire system’s ability to find the global minimum (the lowest possible cost, or the greatest possible value). He says that, on complex cost surfaces, a system can be trapped in a poor local minimum and that one way to avoid the trap, and allow the system to search a wider space, is to introduce the equivalent of heat. A physical system tends to change in ways that lower its internal energy and take the system “downhill.” But occasionally a system will change in a way that increases internal energy, and so allow the system to escape a poor local minimum. It follows from this that if an organization wishes to avoid being trapped in poor local minima, it should try to contrive occasional injections of heat that will make the system ignore the “minimize cost” imperative and move “the wrong way” (increase cost). O ne way to achieve this, is to change the size of patches that act independently and selfishly. S elfish action is desirable, because it can move the whole system the wrong way, and allow it to escape poor local minima. A s Kauffman puts it “well chosen partitions can produce markedly enhanced optimization.” Take the case of an integrated system or organization, acting as a single depart- ment. I t will accept all opportunities to change that take the system downhill toward lower costs, but refuse all other moves. Such systems always descend to a nearby minimum, and become trapped there. When the organization is divided into independent departments, the criteria for screening opportunities change, because opportunities that can take the department downhill will be accepted, even when they take neighboring departments uphill. An integrated system in which all departments are “singing from the same hymn sheet” can’t escape a poor local minimum, but a system divided up into patches will only remain trapped in a poor local minimum, if it is a local minimum for each patch, which is unlikely if the minimum is poor. Th e maths are difficult, but Kauffman shows that when connectivity (commu- nication) between patches is low, energy falls as patch size increases. When connectivity is high, however, systems are better at finding the global minimum with smaller patches. Th e degree of connectivity between the patches determines the size of patch that will maximize the system’s ability to find the global minimum. As connectivity increases the system approaches a tipping-point or cusp. It w orks best at first with large patches, but then suddenly flips and works best with small patches. 9780230_230941_09_cha07.indd 128 09/09/2009 10:02 7 LEADERLESS COMPETITORS 129 One way to picture the implications of Kauffman’s patch size model for business, is to imagine that companies travel to their futures across “fitness landscapes.” Their mission is to climb the highest peak in their landscapes, because only there will their “fitness,” whether measured in terms of cost, profits, cash flow, shareholder value or some other vari- able, be maximized. In the past, the fitness landscape was even and although the climb was strenuous, particularly close to the top, the goal was clear. A single peak with smoothly sloping flanks like Japan’s Mount Fuji beckoned in the distance. Visibility was excellent, the path was clear and the physical demands were predictable. Fuelled by a good breakfast, and armed with intent, and the climbing method known as kaizen (continuous improve- ment) the firm could confidently set out to conquer its Fuji. Nowadays, fitness mountaineering is not so simple. For one thing the landscape’s topography has changed. Its previous evenness has been puckered by valleys and foothills, and fractured by gorges and chasms. Fuji’s silhouette is less distinct, although whether this is because it is no longer there, having been broken and eroded by the forces that fractured the foothills, or whether it’s simply obscured by intermediate peaks and the swirling clouds of unknowing that have enveloped the landscape, the climber cannot be sure. For another thing the fitness landscape remains active. The forces that have fractured its former symmetry show no signs of abating. New peaks erupt constantly. What were heights yesterday are depths today, and may be heights again tomorrow. The landscape is in a state of constant chaotic deformation. There’s no terra firma. All is turbulence and upheaval. As if that were not enough, climbers are becoming aware of another new phenomenon; each time they take a step in what seems to be the right direction the ground quivers. They have become agents of the landscape’s deformation, and there is no proportion to cause and effect. A small step can have huge consequences elsewhere, through a complex series of amplifying resonances that occur far below the threshold of the climbers’ awareness. Once quite separate entities, climber and landscape are now locked in a process of co-evolution. Neither can move without affecting the other in potentially profound, but intrinsically unpredictable ways. What happened? What transformed this smooth, stable, single- peaked landscape into a quaking, multi-peaked morass, where foresight and resolve seem less important than luck and balance? 9780230_230941_09_cha07.indd 129 09/09/2009 10:02 [...]... The Wikipedia, as a knowledge gathering (as opposed to a knowledge maintenance) project, is approaching some kind of completion In barely a decade the dreams of the ancient librarians of Alexandria and Pergamon have been casually surpassed, and a digital Aleph has snapped into existence What are we to make of this breathtaking achievement? Make of it what you will Many people have and many more will... the application of complexity science to business, “are [companies] that are sustained far from equi- 134 Business at a Crossroads librium in bounded instability In the paradoxical state known as chaos they are inherently changeable [and therefore] capable of continuing innovation and variety.”10 The problem with strategies is that they are relatively inflexible plans for wholly unknowable futures They’re...130 Business at a Crossroads Part of the answer is that the fitness landscape of each firm is a creature of the fitness landscapes of other firms In the past, there were only a few climbers and they were too far apart to affect each other Nowadays, the landscapes teem with climbers Some fall into chasms or are crushed by rock slides, but each is replaced by several new climbers And climbers are communicating... CEO was often described as a “change agent.” Some said change was needed, because the previous leadership had allowed the company to drift out of fit with the environment Others said that the company had stood still while the environment changed; that a natural, institutional inertia had caused the firm to cling to the status quo until the mismatch with the environment became critical (or, as Laurence... They’re attempts to stabilize organizations (and thus make them less agile, flexible, alert, and creative), by aligning employees with a view of the future that is certain to prove inaccurate Instability is a necessary condition for adaptability, but it must be constrained, because total instability is fatal The challenge, for managers, is to keep their company poised on the edge of total instability The. .. dimly aware they’re interacting in selforganized ways Moreover, anything more than a dim awareness of association, would in theory, be undesirable, for with awareness of being part of a group, comes the dangerous idea of a “strategy” and thus the beginning of the end for the cardinal chaotic virtues New roads It is still early days for the emergence of formidable, leaderless competitors of CEO-led companies,... because they didn’t make V8 engines The other objection to the suggestion that CEO-led MuBEs that have nothing to do with the internet are safe from attack by MaBEs is that it is not true In the late 1980s Microsoft was a member of a MaBE of small and medium-sized firms (it also included Intel, Dell and Compaq), each of which was pursuing its own goal, that harried the mighty IBM to the brink of collapse... progressively harder Unable to see the entire landscape, climbers have to aim for nearby peaks If they’re kaizen climbers, they may reach them, but might then see higher peaks they could have aimed for had they been less intent on continuous improvement, or find that the landscape has deformed and what looked like the summit at the start has become a ledge on the flank of another peak Having been stranded on... democratic Wiki software is, in a sense, a crystallization of the democratic idea (Some say Wiki stands for “What I Know Is,” but that’s a so-called “backronym.” The word is Hawaiian for “fast.”) The third thing to say about the Wikipedia is that it would not be what it has become without some rules The right to edit had to be limited, to prevent vandals from fouling the Wikipedia commons I have a friend... get) added further to the momentum In its first year Wikipedia fed over 20,000 entries to its Nupedia client and the growth rate was accelerating The article count had doubled again by the end of August 2002 The tail was wagging the dog to bits Nupedia was laid to rest in September 2003 By the end of 2008, the English-language Wikipedia (there are many others) had accumulated over 2.7 million articles, . signs of abating. New peaks erupt constantly. What were heights yesterday are depths today, and may be heights again tomorrow. The landscape is in a state of constant chaotic deformation. There’s. is seen as a measure of market efficiency, one can say that, as market efficiency rose in the late 19th and early 20th centuries, the integrated organization had the edge, but that when market. more than a dim awareness of asso- ciation, would in theory, be undesirable, for with awareness of being part of a group, comes the dangerous idea of a “strategy” and thus the beginning of the