The Death of Modern Management: How to Lead in the New World Disorder

Introduction

How We Got Here and Where We Are Going

Modern management is dying under the weight of its own contradictions.

This book does not predict a revolution. It maps the revolution that is happening before our eyes. The old world of simplistic formulas for strategy, finance and leadership no longer works. The credit crunch exposed fatal weaknesses in finance. It also exposed a deeper crisis which has been brewing for longer: a crisis of management. The easy certainties of the past are over. Producer power is being challenged by consumers; shareholders are losing out to managers and the West is losing ground to Asia. As with all revolutions, this revolution is about power. The old order is giving way to a new world disorder. For some, this represents great risk; for others, it represents great opportunity.

Modern management promised progress through science, efficiency and insight. Since the Industrial Revolution, this has led to huge progress and prosperity. But modern management is now reaching its end game. There is no more advantage to be gained from doing the same as everyone else. We may run hard to improve our operations, but if everyone else is improving at the same rate we find we have run hard to stay still relative to the competition. If we all do the same analysis and enter the same markets, we are collectively doomed to fail. The universal truths which modern management sought have led to self-defeating conformity.

We are now embarking on the third wave of management. The first, pre-modern, wave of management was barely capable of making progress. Management, to the extent it existed, was the product of tradition carefully handed down from master to apprentice and jealously protected by the closed shop of craft guilds. The Renaissance and then the Enlightenment paved the way for the Industrial Revolution by freeing minds to question, measure, analyse and improve. This was the revolution which led to the second wave of management: modern management.

The third wave of management is quietly burying the certainties and assumptions that have been inherited from the previous waves of management. Organisations are moving from command and control to cooperation and commitment; we are struggling to manage the change from deficit to surplus of information, knowledge and communication; customers are fragmenting and globalising at the same time; firms are hollowing out and reconfiguring themselves; accounting and capital is floundering as value shifts from tangibles to intangibles.

The new world disorder is with us now. Changing technology is a small part of it: changing the way we think is the big part of it. Some businesses and managers intuitively understand what it takes to succeed in an increasingly uncertain world. Others do not understand and simply see the change as risk. This book will help you chart your way through the revolution, turning risk into opportunity and challenges into success.

Six snapshots and a movie of the revolution

From the Boston Tea Party to the storming of the Bastille and the uprising on the battleship Potemkin, every revolution has its symbolic moments. Management revolutions are slower and less bloodthirsty than political revolutions, but they also have their symbolic and defining moments.

Through the fog of history we can see at least six moments in management which define its past and shape its future. Three of the moments define the ascent of modern management. Three of the moments symbolise its decline.

Snapshot One: an apple falls on Isaac Newton’s head

Isaac Newton is not normally seen as the godfather of modern management, but he is. Legend has it that an apple falling on his head led him to enquire why apples always fell downwards, not upwards. The consequences of his enquiries shaped the world of science and the world of management. In 1687 he published Principia. Once Newton had discovered the laws of classical physics, he opened up the floodgates of the Enlightenment. For sure, the seeds of the Enlightenment had been sown by Copernicus, Galileo and others who challenged the orthodoxy of the Church, but it was with Newton that the Enlightenment finally bloomed into an unstoppable force. Following Newton, scientific enquiry became the spearhead of progress, not just in science but also in agriculture, industry and management. Everyone wanted to discover the universal rules which would help us understand and improve the world around us.

Modern management has helped transform the world since Newton’s time. Newton was born in 1643 in the early stages of another revolution: a civil war which led to the execution of King Charles I. King Charles lived without iPods, i, MTV, electricity, running water, cars, planes, dental care, fridges, freezers or central heating. Modern management has helped turn unimaginable luxuries into everyday necessities. To understand how this came about, we need to step forwards another 100 years or so to the dawn of the Industrial Revolution.

Snapshot Two: Adam Smith observes the pin makers of Gloucester

1776 was a revolutionary year. America declared Independence and, just as revolutionary, Adam Smith published Wealth of Nations. What Isaac Newton did for physics, Adam Smith attempted to do for economics. He succeeded where no alchemist had ever succeeded before: he discovered laws which created wealth out of nothing. His most famous breakthrough was to observe pin making in Gloucester. One skilled pin maker would struggle to make 20 pins a day if he did every task himself. Ten semi-skilled workers, each focused on one small part of the task, could produce upwards of 48,000 pins in a day. Adam Smith had observed division of labour, volume production, de-skilling and specialisation. This was not just an economic revolution, it was a management revolution. The resulting Industrial Revolution swept away the old craft guilds and swept in unprecedented poverty, prosperity and progress.

Adam Smith helped introduce the Enlightenment disciplines of observation, measurement, analysis and improvement into the world of commerce and management. Once started, the treadmill of progress appeared to be unstoppable.

Snapshot Three: The first Ford Model T rolls off the production line, 1908

From Adam Smith to Henry Ford is a small intellectual step and a huge economic leap. Ford ’s revolutionary moving production line changed the economics of car making. Out went all the hand built cars made by skilled craftsmen: in came semi-skilled, highly specialised workers producing a standard product at low cost. Ford took cost reduction to the limit, integrating the business all the way from owning forests for the wood he needed, through to offering customers any colour, as long as it was black.

If Henry Ford represented the practice of modern management, Frederick Taylor represented the theory. In 1911 he laid out Scientific Management. In the tradition of Newton and the Enlightenment, Taylor used observation and measurement to understand how productivity can be maximised. He developed time and motion studies, saw that work breaks raised productivity rather than interrupted it, and recommended that different sorts of people should do different sorts of job. These are commonplace ideas which were so revolutionary in their day that Taylor was dismissed from his first employer, Bethlehem Steel.

At this point, the science of modern management went into overdrive. GM, under Alfred Sloan, upstaged Ford with effective market segmentation. Sloan responded to Ford ’s idea of a single type of car for the great multitude with a car for every purse and purpose: market segmentation had arrived on an industrial scale with Chevrolet, Oldsmobile, Buick and Cadillac all carefully organised into different business units targeted at different customer age and wealth groups. By the time Sloan published My Years at General Motors in 1963 it appeared that the apotheosis of modern management had been reached.

By now, the West seemed to be on an inevitable, unstoppable ladder to prosperity. It would only be a matter of time before we would all be commuting on personal aircraft and possibly on personal spacecraft to our holidays on the moon. Something, somewhere, went wrong.

Snapshot Four: Akio Morita hears the ghetto blasters

The young Akio Morita, founder of Sony, was in New York and observed gangs of teenagers with boom boxes on their shoulders. Most people saw nuisance, heard pollution and felt fear when the gangs appeared. Akio Morita saw opportunity. He saw that young people wanted to be with music all the time. He made their dreams come true with the Sony Walkman, the first truly personal music system. The Walkman leads in a straight line to iPods and all the other basic necessities of modern teenage life.

Akio Morita is one of several possible standard bearers for the assault on modern management as the West perceived it. He is joined by Soichira Honda who saw that not all bikers were Hell ’s Angels on Harley-Davidsons: he produced smaller motorbikes for families, fishing and fun. The motorbike was the first step to global success in engines and autos. Just as Honda and Toyota assaulted the auto market, so Canon assaulted the copier market by turning it on its head. Canon did not follow Xerox with big, expensive centralised copiers which had to be leased. Instead they produced small, cheap, slow copiers which could be at the side of every executive.

The Japanese revolution blew away vast swathes of Western industry: consumer electronics, auto manufacturing and computers. This was not meant to happen. Giants like Ford, GM, Westinghouse, Philips, Wang and DEC should not have been threatened by tiny upstarts from the East. To make matters worse, they were not just competing on the basis of cheap labour. Anyone who has eaten in a Tokyo restaurant recently will wonder if they are buying a meal or buying the restaurant when the bill is ever so politely presented to them. Japan has not been cheap for the last 20 years. These upstarts were using the very methods of modern management that the West had discovered: moving production lines, market segmentation and quality systems devised by an American: Edward Deming.

China is now following in the footsteps of Japan, but with eight times the population. In 2004 an unheard of Chinese company, Lenovo, bought the PC business of IBM, which had been the godfather of the modern PC industry. The world has tilted on its axis from west to east. Already China and Japan own $1.5 trillion of US government debt, or about $5000 for every US citizen. The US had a trade deficit with China and Japan of $338 billion in 2008 (over $1000 for every US citizen). These imbalances show that the days of American hegemony are under threat: other countries and other ways of doing business are challenging the old order.

In the right hands (Western, if you are Western), modern management was the road to riches. In the wrong hands, it seemed to be the highway to hell. The first cracks in modern management were starting to appear. The universal rules of strategy and success suddenly seemed either not to apply, or to be a very double edged sword. Uncertainty began to intrude into a world which had been very certain and self-assured to the point of complacency.

Snapshot Five: the dot.com bust

In 2000, the dot com boom turned to bust. All the brave talk of a new paradigm turned to dust. The only winners from that bust were the senior executives of the top 20 corporate busts who took out a cool $2.6 billion in compensation for bankrupting their start ups and losing all their shareholders’ money: it was a play which was going to enjoy a big revival when the credit crunch came along. In the credit crunch, senior bankers took the place of dot.com executives in cashing in at the expense of the shareholders they ruined.

Both the dot.com bust and the credit crunch raise the same question: who has the power? Marx firmly believed that power lay with owners of capital who would so fully exploit the workers, that the workers would eventually rise up in revolt and usher in a Communist paradise (complete with labour camps, bread queues, pogroms and secret police on every doorstep). Writing in 1867, Marx might have been right about where the power lay. But power has shifted. Power no longer resides with the owners of capital: it resides with the controllers of capital, with the top managers and key executives of public companies. The dot.com bust and credit crunch have shown that managers have become very good at maximising their rewards while offloading all the risk onto the shareholders: that is an arrangement which would have been unthinkable both to Marx, and to his archetypal enemy, the evil mill owner.

The workers’ revolution did not come about through violence. It came about through education and skills. No longer could workers be coerced: command and control management started to give way. Employers found that employees had options. The days of the one-company towns, such as McDonald, Ohio (Carnegie Steel), Port Sunlight (Unilever) or Bourneville (Cadbury) were over. Employees had choices about where to work and welfare if they could not or would not work. Managers lost power: they had to discover the subtle arts of motivation and building commitment, a far remove from the time and motion studies of Frederick Taylor.

The dot.com bust and credit crunch showed that the organisational certainties of modern management could no longer be taken for granted. The key assets of the business were no longer the plant and the equipment but the people. Unlike machinery, employees can walk away if they do not like the company. Managers were learning to manage in fundamentally different ways from before. Managing people is far harder than managing machines.

Snapshot Six: Ford and GM go begging to Congress, 2008

In December 2008, the Chief Executives of the Big Three auto manufacturers went to Washington to plead for bail out money. It was a humbling experience. They had been forced to ditch their fancy private jets and had to drive to Washington. If Ford and GM had been at the vanguard of modern management, they now found themselves in the vanguard of its demise. Over decades, talented management had streamlined processes, improved quality, reduced costs, reorganised, innovated and introduced new models. They had done everything modern managers were meant to do. And yet their CEOs had been reduced to corporate beggars looking to survive on government welfare. For Rick Wagoner, the CEO of GM, this was particularly galling: Alfred Sloan had been the pin-up boy of modern management and GM. In March 2009 Wagoner was ousted: he had turned into the fall guy for GM, and possibly for the failures of modern management.

The auto manufacturers were not alone in their misery. The banks were in an even worse state. Investment banks disappeared as a species within a few months: Lehman Brothers went bust, Bears Sterns and Merrill Lynch got taken over and Goldman Sachs and Morgan Stanley quickly made themselves into commercial banks. The bill to the taxpayer for the bailout is $700 billion and rising.

When one company runs into trouble it reflects one company’s mistakes. When two entire industries go under something bigger is going on. Part of the something bigger is recession, which exposes all the malpractice and mistakes of boom time. But that is not the whole story. There is another theme which links the dot. com bust, the problems of the auto makers and the demise of the investment banks.

In each case smart managers were all doing smart analysis and coming up with smart solutions. But the solutions which were smart individually were suicidal collectively. They had not discovered the alchemist’s formula for turning base metal into gold. They had found the opposite, the formula for destroying vast amounts of shareholder wealth. This was the Enlightenment dream turned nightmare: universal laws which promised so much, delivered the opposite of what they promised. Universal laws seemed to turn prosperity into poverty.

The credit crunch not only exposed malpractices of the previous boom. It exposed some of the fundamental flaws of modern management. When every company does the same rational analysis and arrives at the same rational solution, you do not discover competitive advantage: you discover competitive suicide. In science it helps when the same different people apply the same rules and arrive at the same solution: it confirms the validity of the scientific theory. The knowledge economy is based on innovation, diversity and myriad small failures. Simplistic formulas for strategy, finance and leadership encourage conformity, not innovation. Communist conformity helped bring about economic collapse in Eastern Europe: corporatist conformity brought about economic chaos in the West. When managers all arrive at the same solution and do the same thing, in financial markets or elsewhere, disaster ensues. Competitive advantage does not come from being the same as everyone else: it comes from being different in a relevant way.

During boom times, it does not matter that everyone is doing the same thing. If demand is strong, then all the competitors can make money. When the tide is in all ships float. When boom turns to bust and the tide of demand turns, many ships will find themselves stranded. Formulas for success become formulas for failure.

If the credit crunch illustrates the danger of formulaic strategies, that is good news for management. Managers should not be slaves to a theory: they need to create their own future, decide their own rules and control their own destiny. This world of disorder is liberating and unnerving in equal measure.

From snapshots to a movie

When a revolution happens over 300 years, it is hard to see the changes from day to day. Like Charles Darwin, we need a long perspective. Darwin trained as a geologist. Thinking in geological time, which allows for continents drifting and the sea bed to rise into mountains, gave him the time perspective to see that animals could evolve and change dramatically over millions of generations. In geological time, a 300-year revolution happens faster than the geological eye can blink.

In that spirit, we will now paste our snapshots from the past together to create a movie: we need to pick out the direction and movement of change, rather than focus on isolated moments in history.

The first three snapshots show the relentless rise of modern management. From Newton through Adam Smith, Henry Ford, Alfred Sloan and Frederick Taylor there had been a relentless pursuit of the formula for success: formulas for strategic success, competitive success, operational excellence, managerial success and the formula for managing people.

The last three snapshots show how the orthodoxy of modern management has been fatally undermined, both for strategy and for organisation. The result is liberation for management. Instead of being slaves to a formula, the challenge for management is to create their own rules and their own destiny. To some, this freedom is terrifying: it eliminates the old certainties. For the brave, the new world is one of opportunity.

The movie: In search of magic

The search for magic success formulas in modern management has a long history. To this day, there are academics and consultants churning out their latest theory on how to achieve success: BCG grids, Porter’s Five Forces, Hamel and Prahalad on Strategic Intent and Core Competences, Prahalad ’s protégé Chan Kim on Value Curves. The hunt for universal strategy formulas is a legacy of the Enlightenment quest for the universal laws of everything. There are two main problems with all these strategy theories:

Apples falling upwards

All the theories are based on cases where the theory has been retrofitted onto reality: none of the success stories used to illustrate the theory actually applied the theory that was being touted. Second, each theory is highly selective: they ignore all the exceptions which disprove their theory. If Newton had found even one apple falling upwards, he would have had to change his ideas. Most strategy formulas being touted in the marketplace are full of the strategic equivalent of whole orchards of apples falling upwards. Quite simply, the theories are lousy science which would embarrass any science undergraduate, let alone a professor.

A thousand lemmings can’t be wrong …

Universal strategic formulas are, by definition, self-defeating. When everyone does the same analysis and does the same thing, the result is collective suicide. This is the origin of the dot.com bust, the credit crunch and other industry disasters such as the 3G telco auctions and the rush into market making for UK government bonds after liberalisation in 1986. In each case, there was room for a few players to make money. When everyone did the same analysis and chased the same market all the players were acquiring licences to lose money. The problem arises when strategic formulas become a substitute for thinking, instead of an aid for thinking. Then the frameworks become a prison from which there is no escape.

As with strategy, so with organisation. The search for universal rules of success have turned out to be a mirage. All the paradigms of organisational excellence have turned to dust. GM may have represented the summit of best management practice under Alfred Sloan: few managers would care to copy GM nowadays.

One of the most famous attempts to codify and bottle organisational success came 30 years ago. Two McKinsey consultants, Peters and Waterman, decided to decode the formula of successful management by looking at the best companies of the time. They carefully selected those companies which showed sustained and sustainable marketplace success and shareholder value creation. The result was published as In Search of Excellence. For a moment, compare these two lists of companies: