Why Big Organizations Are Broken

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Charles Erwin Wilson, Eisenhower’s Secretary of Defense is credited with the quote, “What’s good for General Motors is good for the country.” In fact, what he said was actually the inverse (that what was good for the country was good for GM), but no matter, both statements had an element of truth.

Firms like GM needed a strong government to provide extensive industrial infrastructure and effective economic governance. Governments, for their part, needed large corporations to run the economy productively, raise living standards and expand the tax base.

Today, according to Gallup, we’ve lost our faith in large institutions, including government, religious organizations and labour unions (though we never had much faith in big business). Many attribute this trend to high profile scandals and the financial crisis, but the reality is that the decline is longstanding. In truth, large organizations are fundamentally broken.

The Industrial Revolution And The Emergence Of Bureaucracy

The industrial revolution created enormous increases in scale. Production, rather than dispersed among cottage industries and guilds, became centralized in large factories. No longer would productivity depend on the skill of artisans, but the efficiencies of organizations.

In the early 20th century, the eminent German sociologist Max Weber theorized that this increase in scale would lead to the creation of large bureaucracies to manage it all. Jobs would be broken down into small, specific tasks and be governed by a system of hierarchy, authority and responsibility.

Time proved Weber prescient and great organizations like GM rose to prominence. Charismatic entrepreneurs like VanderbiltCarnegie and Ford were replaced by professional managers, like Alfred at GM, Charles Schwab at US Steel and Owen Young at General Electric, hardly household names.

As a 1955 profile in Fortune magazine explained, corporate executives at the time lived comfortably, but not ostentatiously. They were less the ego driven, masters-of-the-universe that we associate with corporate leadership today and more akin to technocrats, engineering ever greater efficiency to keep the productivity machine humming smoothly.

The Rise And Fall Of Strategic Planning

In 1937, a young economist named Ronald Coase sought to make sense of the transition from artisanal to industrial production in his famous essay, The Nature of the Firm. He argued that the function of a firm was to reduce transaction costs, especially information costs, and that firms would grow until the increase in organizational costs canceled out efficiency gains.

Later, Michael Porter created the concept of a value chain, which laid out all the activities a firm or industry would undertake in order to produce a product or service. The idea was that by optimizing efficiencies in each component of the chain, performance could be maximized, conferring competitive advantage on effective practitioners.

Porter also posited that corporations had three viable strategies available to them: Cost leadership, differentiation and strategies focused on a particular niche. The work of Porter and others led to the development of strategic planning, which would streamline the process of transforming inputs into outputs.

Yet much like the organizations themselves, the strategic planning process became a victim of its own success. In striving for ever greater efficiency, it became more granular and cumbersome. As Jack Welch put it:

Our planning system was dynamite when we first put it in. The thinking was fresh; the form mattered little. It was idea oriented. We then hired a head of planning, and he hired two vice presidents, and then he hired a planner; and the books got thicker, and the printing more sophisticated, and the covers got harder, and the drawings got better.

Unfortunately, none of the added complexity made the organizations run any better. In fact, as informational technology became increasingly cheap and pervasive, large enterprises would find themselves at a distinct disadvantage.

How Coase Got Turned On His Head

When Coase wrote his famous paper in 1937, transaction costs were a much greater concern than organizational costs. Corporations, government and other institutions at the time were still relatively small and infrastructure still sparse (there were, for example, no interstate highways). So firms that could wring out inefficiencies could grow substantially.

Today, however, we live in an information economy. Competitiveness is no longer determined by how efficiently we move around men and materiel, but in how we connect to informational resources. More specifically, we use platforms to access ecosystems in order to create movements that may or may not reside within one particular organization.

So, in effect, the Coasean model has been turned on its head. Technology has minimized transaction costs, while organizational costs have become a heavy burden. Nimble startups can access access manufacturing resources, talent, financing, computing power and just about anything else you can imagine and still be price competitive with the big guys.

And that’s the dilemma large enterprises find themselves in at the moment. They need to manage huge organizational resources, but no longer derive the same scale advantages they used to. New strategies, such as open innovation can help mitigate the problem, but can’t eliminate it entirely.

That leaves executives with a dilemma. They still wield significant authority, but what do they do with it?

The Tony Soprano Problem

In the famous TV show, mafia boss Tony Soprano ruled his crew with an iron hand. Yet, sensing that there was more to life than murder and extortion, he often sought out advice from his therapist, Dr. Jennifer Melfi.  But after listening to her advice on taking a more collaborative approach, he asked, “But then how do I get people to do what I want?”

Most executives today have some version of the Tony Soprano problem. Many are acutely aware of the transformative power of platforms ecosystems and movements, but in the course of everyday operations, they need to get people to execute according to plans—in effect to do what they want them to.

While often brushed aside, this is a serious concern. Everybody would like to think more about the long term, but unless you can solve everyday problems, you’ll never get there. However, control is an illusion and always has been. When large organizations had a monopoly on resources, it was a workable fiction. It no longer is.

Now that access to resources has become nearly universal, leadership is more important than authority. So we need to shift our mental models from getting people to do what we want, to inspiring them to want what we want. That’s why today, the mission of the enterprise must drive strategy.

In effect, the information age means that the lunatics increasingly run the asylum. A leader’s job is not to try to control people or events, but to help them run it right.

Image via flickr

Original Post: http://www.digitaltonto.com/2015/why-big-organizations-are-broken/