The Evolving Corporation - From Model-T to UBER: Managing in Changing Times
We have always been interested in the way businesses have evolved and with that management paradigms that govern the tools used to manage the business and people.
What’s a business? Well, whether it is called an enterprise, a firm or a corporation, its purpose is to serve the customer. To do that the business entity needs to find a value proposition, organize resources (people and materials) put that into a framework with a management structure that hopefully works! However as we well know there are continual changes in the business environment, driven mainly by changing consumer needs and expectations. The changes in customer expectations, either from needs or lifestyle directly impact the type of products and services that appear and disappear from the market place. It is really up to the management of the company to catch these changes and adapt.
The pace of change is accelerated by technology. Smaller companies, especially technology companies seem better equipped to capitalize on the changing business environment. We decided to probe a little deeper into the reasons for this and wanted to share our thoughts on Entrepreneurship since much of debate on management practices dwell on tools rather than looking at what we feel are more fundamental issues.
After all, one sees entrepreneurship in all parts of the world – developed to undeveloped, north to south, in the Silicon Valley to a small village in India without electricity. Clearly entrepreneurship existed long before any formal management practice and therefore must have significant merit.
We often read of new entrepreneurs building companies and achieving success against incumbents but equally through creating new market opportunities based on “customer needs” which they are able to meet. Entrepreneurs have several traits but one that is important is the ability to learn. Let us elaborate. Learning means to be clear about their capabilities (and that of their organizations) but also learning about the needs of the customers, both present and future. There are several definitions for “learning styles” which we will not delve into, suffice to say that the ability to listen is a critical element of learning. Taken at a larger and broader level, many enterprises have missed out on changing consumer demands because of the inability to listen, to customers as well as internal voices.
We live today in a rapidly changing environment brought on by technology advances, perhaps most visible on the internet, which delivers news, services and gives us access to products. We are familiar with many technology companies that touch our daily lives through the pc, mobile phone, tablet, etc. Most have been founded in the last 40 years. Samsung Electronics, although founded in 1969, gained visibility (and profitability) with their Galaxy range of mobile phones. Other technology companies that come to mind (and the year they were founded) are; Microsoft (1975), Apple (1976), Amazon (1994), Google (1998), Facebook (2004), YouTube (2005), Spotify (2006), etc.
The rapid growth of these companies is quite remarkable. The often quoted statistic of reaching 50 million users is worth repeating; Radio - 38 years, TV - 13 years, Internet - 4 years, iPod - 3 years, Facebook - 2 years. What does this mean about the times we live in? Gary Hamel says that the pace of change is growing exponentially and that we are now experiencing “Hyper competition”. Change and competition at a level never seen before is the reason we can see such exponential growth (and demise) of companies today. Salim Ismail quotes a known statistic highlighting the destructive impact of competition; “89% of the Fortune 500 companies from 1955 are not on the list in 2014”.
Why then do leaders at companies not see the danger signals? Boards and the “C” suites get blindsided, often stuck in their compliance efforts and rigid budgetary and business planning sessions. The technology entrepreneurs freed of these chains, and other management practices are focused on serving the customer often come up with a different way of running a business. Putting aside the changes in the market place for the moment, are there lessons we can take away from the way the companies are structured internally? Has the nature of the “Corporation” changed or evolved and what of management practices?
We thought it useful to reflect on the different types of “corporations” that have emerged over the last 100 years and by implication the different management structures.
In 1937, British economist, Ronald Coase, established the basic reason for a corporation “The Nature of the Firm” which was to organize resources and activities in an efficient manner.
Preceding this definition, Henry Ford in 1908 introduced the Model-T which sold for $825, a price that fell to $575 just 4 years later. His corporation (Ford Motor Company, founded 1903) utilized standardized parts produced by other companies, an assembly line and organized labor as opposed to craftsmen – the birth of a modern factory.
This model of the corporation was successfully replicated in the US and Europe, with companies leveraging technology, innovation and scale. Following on the success of the factory corporation, General Motors (1908) and Chrysler (1925) joined Ford, to lead the US car industry. These companies were, in a sense, process-oriented – they worked on achieving economies of scale in production, distribution and advertising. And they were structured in a rigid, hierarchical manner, with lots of rules – often referred to as “Standard Operating Procedures”. To effect control of labor, a number of management practices were introduced which in effect were designed to manage people (who were referred to as units of labor) in the most efficient manner. Add to this rigidity are the budgetary cycles, which favor “no surprises” and hence a culture of “business of yesterday” is breed into the company, coupled with layers of management – “managers who manage people who manage other people”.
Other examples of US companies are; GE, founded as the Edison Electric Light Company, by Thomas Edison in 1878. The elements of a successful corporation were clear; product, process, structure and control. Not surprisingly, Jack Welch, Chairman and CEO of GE (1981 - 2001) made Six Sigma central to his business strategy. It was introduced into Motorola, IBM, Honeywell and a host of other corporations. Not all the companies have done well. Was it that they missed the changes in the business environment? Were they blind-sided by new products? Or, were structure, process and control throttling innovation and entrepreneurship? There are also significant costs to these centralized functions – estimates are as high as 30% of payroll, not counting the impact of the confusion resulting from matrix organizations, coupled with the lack of “ownership” of the P&L.
A novel way to organize the corporation emerged 60 years later – in 1997, Erik S. Raymond presented an essay at a Linux Conference and followed on with a book “The Cathedral and the Bazaar: Musings on Linux and Open Source by an Accidental Revolutionary”. He described two different approaches to software development.
The conventional method; organized as a Cathedral - centrally led with all employees working in a regimented environment. The other, used by the open-source community (Linux and others), with developers working independently, in different locations on different parts of the code, but able to come together to build a cohesive software infrastructure. In fact a large part of the success was the willingness to engage the customer as co-developers – something quite revolutionary, or was this entrepreneurial, given that it was not possible to engage or pay for these resources! They also saved on the cost of layers of managers!
The contrast to the traditional corporation was revolutionary - not just in the manner in which work was organized, but where and how one worked. In a sense Erik S. Raymond described an alternative way of efficiently organizing resources, or building a corporation. The environment had changed in a very interesting way – skilled resources were available. People who were passionate about what they were doing and less than satisfied with solutions available to them were willing to work to build a better software solution. This is an appeal that resonates well with the new generation of managers and employees.
A new management practice was born – one where people were not managed as units of labor, but empowered, given flexibility, the ability to set their own goals and form their own teams. All this goes against the practice of management at the Ford Motor Company!
The entrepreneur continues to innovate and disrupt the environment for the larger Corporations. Clayton Christiansen in his 1997 book “The Innovator's Dilemma” speaks of companies getting too focused on the needs of existing customers, so much so they missed the impact of technological innovation. The destructive impact to companies was dramatic.
Large corporations did not see the coming of digital drives, digital mobile phones, ebooks, digital downloadable movie and a host of other products that came to market. Nokia and Blackberry missed out on digital innovations in mobile phones, particularly with the user interface and third party applications. Someone at Nokia must have had foresight because in 2007, Nokia acquired Navteq (that provided geographic information systems) for US$8.1 billion, only to lose the game, set and match to Waze and Google. Was Nokia by then, too rigid an organization to benefit from the acquisition of the technology?
Surely employees of these companies were aware, perhaps even using competitor products – did they not have a voice, or were the leaders not willing to listen to them? Perhaps line management were “doing their jobs” – they surely were not acting as entrepreneurs. Had they been, they would have the self-efficacy, passion and persuasive abilities to convince the “C suite” to make the necessary changes, or they would have left the organization.
What is the learning here?
The example of Wikipedia is a very interesting one. Launched in 2001 by Jimmy Wales and Larry Sanger, they reached out to the general public to build their database. Successfully appealing to knowledgeable people around the world who were willing to contribute to the education of the world. A noble cause indeed and an opportunity to volunteer in a rather unique manner.
Tapping into available external resources to build a corporation was given a name. “Crowd sourcing” coined by Jeff Howe and Mark Robinson and now represents another way of organizing resources either to accomplish tasks, out-source tasks or raise money.
Reflecting on the objective defined by Ronald Coase, crowd sourcing, allowed the corporation to more efficiently organize resources. The shared economy emerged as a new model of a corporation and companies were created . . . for personal shoppers, food or grocery delivery, car sharing, etc. In 2005, Waze, very successfully used the community model to build their map application which offered real time traffic information and route updates. This development would not have been possible without support from the community.
AirBnb has become a giant in this segment, through organizing the rental of rooms, initially for quirky and fun places, but is now very much mainstream – in competition with on-line travel agents for hotel bookers.
The award however for creating a truly unique company and generating a tidal wave in the environment goes to UBER. Imagine the audacity of offering you a ride in a car that is not owned, or even operated by the company. UBER has unleashed both the community of car owners/ drives into participating in the transport sector. In fact they have re-written the laws of “Supply & Demand” – conceived of at a time when supply was rigid and required an investment. The world has changed. Clearly the technological innovation is immense, but consider the massive disruptions that UBER, AirBnB and other similar companies will wreak on the “Corporations”.
Isn’t it interesting how far the corporation has evolved, in a quest to more efficiently organize resources, from the Model-T to UBER! Unfortunately when you look into the organization you will find that management practices from the time of the first Model-T are still in effect for many companies. Some companies have taken the “small is better route” and reorganized around smaller operating divisions to keep the “small business mind-set” with better P&L visibility; Johnson & Johnson, Haier, MARS, are examples.
Ford Motor Company is a global car manufacturer, employs about 180,000 people and is valued at US$63 billion. On a per employee basis, that is $337,000 per employee. Contrast that to UBER, with 550 employees (with the intention to grow to 1,500 employees in 2015) and based on the last funding round is valued at US$41 billion. At 1,000 employees, UBER is valued at $41 million per employee.
The environment changes and evolves and therefore the corporation needs to do the same. It is not just a leadership or innovation issue – companies need to become more entrepreneurial. Large corporations struggle with this and instead focus on technology or innovation, or leadership changes. Management theories and practices from the 1920’s will not work today – the world is fundamentally different – and so are employees!
The Haier Group, prides its self on disruptive innovation of products and management practices, reorganized into smaller autonomous units to reduce the time to market. Quirky (now in Chapter 11) , a New York based “invention company” can reduce the time taken in development and production so that a Consumer Packaged Goods (CPG) can land on a Walmart shelf in 29 instead of from 300 days, as highlighted by Gary Hamel.
We believe there needs to be a way to incorporate entrepreneurship into the organization and not rely on the CEO to drive the changes. Boards need to step in to make these structural changes that will see out leadership weaknesses by building Entrepreneurship into their organizations. Entrepreneurship needs to be “hard coded” into organizations to enable them to cope with today!