It’s Time for the Fundamental Change: A New Look at the Management Principles, Processes, and Systems
The Second Industrial Revolution has made a profound mark on the world of organizations we live in today. It started around 1870s with the widespread adoption of telegraph, railroads, gas pipeline transport, and other inventions, continued with factory electrification and introduction of the production line, and ended at the start of the World War I. More specifically, the inventions created during this period have allowed industrial organizations to grow large at unprecedented speed. Enlarged size of organizations has created increased complexity of work, with huge repercussions in the domain of division of labor, coordination between organizational units and individuals, and the process of managing.
These repercussions required significant changes to take place within organizations. What eventually followed was the development of scientific management and a vast number of methods and techniques that assisted managers in coping with this increased complexity of organizations. The main goal for all these methods and techniques has been to create predictable, stable and above all efficient operations in order for organizations to reach high volume of products and services in an uninterrupted manner. The mass production was born, and it allowed organizations to spread their overall costs to a high level of items and get proportionate savings and cost advantages in the market. Hence, a whole new era has dawned that led companies to continually improve their efficiency and squeeze costs wherever possible. In other words, in this period, one could almost equate efficiency and economy of scale to market effectiveness.
Now, with the Third Industrial Revolution underway, new requirements are facing organizations again, challenging them to entirely change themselves once more. The biggest change of all is that our world is becoming transparent and more connected due to the rapid advancements in information and communication technology, which increases the overall complexity of the global environment. Besides this, other characteristics of the Third Industrial Revolution have had a significant impact on organizations as well. For example, manufacturing is going digital in most industries. Take a look at 3D printing and additive manufacturing that overtook a significant part of the production processes in various industries, from civil engineering to automotive and aviation. On the other hand, instead of mass production we now have a concept of mass customization in which each product and service is being tailored in real time to fit customer’s requirements.
And here is where the problem starts. When first management pioneers set out to build complex industrial organizations, they tried to make them disciplined, not adaptable. They focused on fragmenting processes into small chunks of tasks that could easily be routinized and learned by every employee. That is how organizations became very proficient at processing transactional high frequency activities – they were built on principles, systems and processes developed for stability and efficiency. But if one takes a closer look at organizations today, he will learn that most of this management philosophy has remained intact. In other words, management principles, systems and processes that were developed in the first half of the 20th century, with the goals of stability and efficiency in mind, are still being practiced and haven’t changed much. Some of the most obvious examples include: (1) work analysis and standardization pioneered by Frederick Winslow Taylor in the late 1900s, (2) management principles such as unity of command, subordination and remuneration defined by Henri Fayol in 1910s, (3) mass production using assembly line technique established by Henry Ford also in 1910s, (4) divisional structure introduced by GM and DuPont in 1920s, (5) statistical process control championed by W. Edwards Deming during 1940s, and (6) management by objectives popularized by Peter Drucker in the mid 1950s.
The prevailing management philosophy, developed in the first half of the 20th century to foster stability and efficiency, is not a good fit for today’s environment. Even though everything changed around them, for some reason organizations in general failed to change their management practices. As a result, the great majority of organizations all over the world is not aligned with changes that have already happened around them. The divergent trajectory of organizations and their environments is becoming more evident, widening the gap that is becoming more difficult to bridge with every day that passes.
These days, due to the increased complexity of environment and technological innovations that reshaped the organizational landscape, stability and efficiency in organizations do not necessarily lead to market effectiveness. What we need today are organizations built for flexibility and innovations. The most adaptive and innovative organizations are getting the biggest prizes in terms of growth, market share and, consequently, market capitalization. Take just a few examples in different industries: (1) Amazon in retailing, (2) Facebook in software and services, (3) Tesla in automobiles and components, or (4) Incyte in pharmaceuticals and biotechnology. All these companies have managed to thrive in their respective industries due to their ability to change themselves and innovate relentlessly.
Therefore, for organizations to remain viable or even thrive under changed circumstances, we need to rethink the management, as the technology of human accomplishment (Hamel, 2012). In other words, we need to rethink the complete management philosophy. But what management principles, systems and processes do we need so organizations could become more effective in the environment characterized by high level of complexity and change? There has been some writing and empirical evidence on this topic. We will briefly discuss some of the new management principles offered by several distinguished scholars.
According to Hamel (2012), the most critical principles for building an innovative and adaptable company are as follows: (1) variety (trying a lot of new things), (2) decentralization (creating mechanisms for bottom-up change), (3) serendipity (creating more opportunities for unexpected encounters and unscripted conversations), and (4) allocation flexibility (making it easy for resources and ideas to find one other). Besides taking these principles into account, leaders need to perceive their organizations and the world around them as “a portfolio of skills and assets that can be endlessly recombined into new products and businesses” (Hamel, 2012, pp. 66-67).
Organization must become highly skilled at making quick changes in their strategies, but also at developing the ability to sense the need to reconfigure their own asset structure (Amit and Schoemaker, 1993) “The ability to calibrate the requirements for change and to effectuate the necessary adjustments would appear to depend on the ability to scan the environment, to evaluate markets and competitors, and to quickly accomplish reconfiguration and transformation ahead of competition. Decentralization and local autonomy assist these processes.” (Teece, Pisano and Shuen, 1997, p. 521)
Furthermore, Gunther McGrath (2013) wrote on the balance organizations must maintain between continuity and discontinuity. She noticed that successful organizations nowadays are remarkably consistent over time when it comes to their values, cultural norms, core strategies, capabilities, customer relationships, and leadership. On the other side, they are quite focused on experimentation, which is obvious considering the way they develop and deploy new technologies, move into new markets, explore new business models, and open up new industries. They are experienced at rapidly adjusting resources and comfortable with moving employees from one role to another.
On the other hand, tall organization structures comprised of very large organizational units must become a thing of the past. In an organization comprised of a set of very large organizational units there is often a lack of intellectual diversity since people within the same unit tend to think alike. Large number of employees usually undermines personal accountability because it is hard for an employee, who is one of many, to feel a personal sense of responsibility for helping the organization adapt and change. To thrive in today’s complex environment, organizations must become a bit more disorganized and unmanaged – less structured, less hierarchical, and less routinized. To do so, they should break large organizational units into smaller ones and create more fluid, project-based structures, give them challenging growth targets, move aggressively to reallocate resources to faster-growing areas, spin off units where growth is decelerating, and search everywhere for new sources of differentiation (Hamel, 2012). Organization applying these structuring principles will not have bigger problems when facing severe changes in its environment. It will be able to quickly reorganize without leaving its employees traumatized. This is especially important now, when reorganization has become an event that doesn’t happen every four or five years, but something that occurs more or less continuously.
The principles described briefly in these paragraphs should represent the stepping stone for a journey toward a new form of organization that will be able to match frequent changes in a highly complex environment. To see this through, we need a lot more willingness to abandon routines and become adaptable, as well as experimentation to become more innovative. We desperately need new management principles, processes and systems. This is something that is long overdue.
References:
Amit, R. and P. Schoemaker (1993). Strategic Assets and Organizational Rent, Strategic Management Journal, Vol. 14, No. 1, pp. 33-46.
Gunther McGrath, R. (2013). The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business, Boston, MA: Harvard Business Review Press.
Hamel, G. (2012). What Matters Now: How to Win in a World of Relentless Change, Ferocious Competition, and Unstoppable Innovation, San Francisco, CA: Jossey-Bass.
Teece, D. J., Pisano, G. and A. Shuen (1997). Dynamic Capabilities and Strategic Management, Strategic Management Journal, Vol. 18, No. 7, pp. 509-533.