The Future of Management

Who, then, will be interested in "The Future of Management"? This book will clearly generate heated discussion in boardrooms, and ambitious business school students will read it with gusto. But the book isn't just for senior management or those who aspire to scale the corporate heights.

Indeed, it argues that the most successful firms will be the ones that learn to empower all of their employees – from the corner offices to the cubicles. In a sense, anyone with a stake in the future of business will want to give it a look.

So stick around, and hear how a hippy grocery store chain shook up the U.S. market; how the evolutionary process of "natural selection" does just fine without the oversight of senior vice presidents; and why great cities offer important lessons for great companies.

The book is separated into four sections, each with three chapters. In the opening section, the author sets the stage for his argument. Here's his thesis: Over the past few decades, we've witnessed stunning technological breakthroughs and seen new industries rise from nowhere and old ones transform. New business models have swept through the business world, and new products and services have changed the way we live. And yet, amid all this product innovation, management practices have changed little.

Corporate decision making power still generally trickles from the top down. Hierarchies have flattened a little, but haven't disappeared. Frontline employees may be better-trained than in the past, but they're still expected to accept and execute orders from on-high. Senior managers still select lower-level managers, on down the line. There may be fewer middle managers, and they may operate at a high level of anxiety about their job security, but they still do what they've done for decades: setting budgets, assigning tasks, monitoring underlings and cajoling them to do better.

For the author, a business tycoon from a century ago would be astonished at today's technology and marvel at innovations like real-time supply chains. But he'd be completely familiar with the prevailing management structure. Strict hierarchies made perfect sense to control and direct the huge companies that emerged from the industrial revolution.

A century later, the same management philosophy is holding back innovation, making big companies flatfooted and slow, in a time of rapid technological change.

So why does the author think old-school management structures are unsuitable for meeting today's challenges? He proposes several reasons.

For one, the pace of change has accelerated. He cites research showing that industry leadership is changing more frequently, and competitive advantage eroding more rapidly, than ever before. Think of traditional airlines, the newspaper industry, the big drug companies, America's auto makers – all of these entities, representing hundreds of billions in wealth, have seen their competitive positions plunge in the span of a decade.

And mass-scale digitization of information has meant an assault on intellectual property rights. Media companies of all stripes have struggled to adapt to a world in which nearly all of their material is easily and cheaply reproduced and distributed. Meanwhile, the rise of the Internet rapidly shifted market power from producers to consumers. The explosion of e-commerce allows consumers to scour the globe for bargains, increasing price competition and driving down profit margins.

But rapid change brings opportunity along with threats. Avoiding the pitfalls of a changing landscape, and gaining a toehold to scale new heights, will require a new kind of company, the author argues. And not one that creates innovation committees, or funds an internal new-business incubator, or anything of that sort. Rather, he claims, innovation must be spliced into a company's very DNA. It can't be counted on to trickle from the top down, but must be made to course through the company's veins from all quarters.

How to achieve this? The author spends the rest of the book teasing out examples. But the basis of the argument is this: Companies must embrace what he calls "management innovation." That is, they must strive for new and effective decision making structures, just as hard as they strive to roll out new products and services.

To underline his point, the author delivers a concise definition of "management innovation." It goes like this: Management innovation is anything that substantially alters the way in which the work of management is carried out, or that alters customary organizational forms, and by doing so advances organizational goals.

So if your company manufactures personal computers, it must, of course, always be looking for ways to streamline the process, produce a better product, and develop new products from existing technologies. That much is standard practice. But if we listen to the author, our PC company must also always be looking for new and more effective ways to manage its talent and organize its efforts. To neglect doing so, he argues, is to lumber along, while nimbler companies zip past yours.

In the second section, the author turns to case studies about the sort of companies he has in mind. His three main examples operate in wholly different industries, but share a characteristic: Each has successfully managed to empower employees at all levels of the company, counting on them to use their eyes and brains to make informed decisions.

All three provide compelling evidence for the author's claims. His most powerful case may well be that of Whole Foods Market, the American grocery chain that has upended received wisdom in the supermarket industry.

While supermarket chains have traditionally operated with razor-thin profit margins, eking out profit through high volume, Whole Foods sells what it calls "natural food" at a premium price. But its innovation stems from more than just a unique business model. The company also has a unique management model.

In most supermarkets, product decisions are made at the corporate level, often based on the best deals buying managers can get from suppliers. But Whole Foods makes no product decisions from company headquarters. Rather, product decisions are made at the store level – again, not by managers but by store employees. These people come face to face with the customers, and develop a strong idea of what they want and what they'll pay for. Meanwhile, store departments operate like small businesses, run by teams with veto power over new hires. Teams are allocated capital – and team members are compensated based on how well they perform. And management doesn't rely on secrecy to maintain rational compensation patterns. Everyone knows everyone's salary – and company policy states that top management can't make more than 19 times more than the lowest-paid employee. In typical U.S. companies, such ratios can easily surpass 100.

So how do these bottom-up policies perform in the marketplace? Quite well, it turns out. After two decades of extraordinary growth, Whole Foods operates nearly two-hundred stores and rakes in six billion dollars in annual revenue. In terms of value per square foot, it's easily the most profitable and valuable grocery chain in the United States. Its business model has inspired competitors to rush into the natural foods market, which could hinder future profitability. But the author points out that while business models can be easily copied, management models are trickier. Few old-line grocery chains have management teams that are bold enough to surrender much of their authority and let it flow throughout the workforce. The author speculates that Whole Foods will continue to outmaneuver its foes until they learn to innovate, not imitate.

The author's main case studies all involve management innovation with the benefit of a blank slate: He looks at companies with innovative founders who managed to create unique corporate cultures from the start. Besides Whole Foods, he also focuses on the materials maker Gore-Tex and the Web-software titan Google. But what about existing companies – massive organizations with layer upon layer of top executives, senior vice presidents, middle managers, and rank-and-file workers? Can these huge organisms be infected with the virus of management innovation?

Yes, declares the author, and he spends the third section showing how. He opens by describing what he calls the "outsider's advantage" – the ability of newcomers to see things that escape people who have been immersed in a problem. Management innovation in established companies begins by cultivating the outsider's advantage – to learn to see old problems with fresh eyes. He suggests gathering ten or so top executives and asking them how change happens in large organizations. Doing so typically uncovers three core beliefs:

One, it takes a crisis to create change. Two, you need a strong leader to drive change; and three, change starts at the top.

Now try challenging these beliefs. The author says that things will quickly turn contentious, because the statements are often true. For example, IBM lurched along for years, dominating the computer market, when it suddenly lost market share to new arrivals and nearly went bankrupt. Led by a charismatic CEO, the company got leaner and more nimble, cut unprofitable business lines, and returned to health. See? That's the only way change can work.

Not so fast, the author counters. If colleagues make this case, let them do so without challenge, but then ask them why. Why wait for a crisis before creating change? Some will say something about people's tendency to ignore danger signs in order to avoid discomfort.

A crisis is the only thing that will jolt them out of their false sense of security. Plus, people are lazy; they'll maintain the status quo as long as they can.

Aha, you respond – denial is like a virus that infects everyone... right? Or are there people who do see danger signs lurking, and attempt to do something about them? Now heads will start to nod. "Yeah," someone will say, "there are usually people who see the handwriting on the wall, but no one listens to them." Now the conversation gets animated – people start sharing stories about prophets who went unheeded, and disasters that could have been averted but weren't.

The author claims that if you keeping piping in with "whys," you'll eventually lead people to the real answer to the riddle of change and why it's so hard to achieve: Too much power invested among too few people. Prophets routinely get ignored because the people who see the most tend to be dispersed throughout the company, not concentrated in executive suites. The corporate power structure, not denial or laziness, holds up change. And crises, far from being necessary catalysts for change, are actually the unnecessary consequence of a failure to change.

The author calls this process "rooting out dogma" – digging deep into passionately held beliefs, and changing them when they fail to hold up to scrutiny.

In the fourth and final section, the author takes a close look at one established company's successful effort to revamp its management structure. It's about the information technology giant IBM – but it's not about that legendary turnaround in the mid 1990s. Actually, it's about what happened after the turnaround.

You may recall that by the early 90s, IBM had entered a deep funk. It had been an innovator in the personal-computer industry, but saw its dominant market position gobbled by smaller competitors. The explosion in personal computers had also eaten into IBM's once-mighty mainframe business. Meanwhile, the firm's storied research-and-development division, engine of past successes, had stagnated. In the span of a few short years, one of the globe's most profitable companies had plunged into a sea of red ink and shareholder ire.

Then CEO Lou Gerstner came aboard, and performed one of the most famous turnarounds in corporate history. He slashed costs, sold off laggard business lines, fired middle managers, and imposed strict discipline on the ones left behind. And he remade IBM as a services company, one that primarily sold not hardware but expertise. Within a few years, Gerstner's program restored IBM to profitability.

But a funny thing happened. IBM was now thriving, but it still wasn't firing on all cylinders. The research-and-development team returned to form, churning out more new patents than ever. But those patents weren't going anywhere. Gerstner's turnaround had revived existing businesses, but it wasn't generating new businesses – the kind of activity the company would need to thrive in the future. It turned out that the company's top-down management style was stifling its ability to build markets for its innovations.

The author guides us through precisely how IBM negotiated this thorny problem. Essentially, it established two-way communication between innovators and decision makers. The resulting "emerging business opportunities" program eventually managed to develop 22 new businesses, with revenues of 15 billion dollars, by 2005.

The author ends the book on an inspiring note. He pays tribute to the old top-down management paradigm, crediting it with revolutionizing society in the 20th century. Every time we start our car engines or flip on our televisions, we are taking advantage of management techniques developed in response to the industrial revolution. But the old techniques are reaching their limit; they're being outmaneuvered by innovative firms like Whole Foods and Google, and nimble, adaptive dinosaurs like IBM.

And moreover, who wants to work in a giant bureaucracy? Who wants to be stifled at work, or have their creativity squashed by rigid management? The challenge for today's managers involves eliciting, honoring, and rewarding human initiative and creativity throughout the firm. The author makes a strong and stirring case for his vision of the future of management – one that today's leaders would be well advised to heed.

"The Future of Management" by Gary Hamel is published in hardback by Harvard Business School Press.

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