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A business within the business

A lot of problems in business could be solved if we could align the interests of employees and managers with owners. Is there a way to get everyone to act like owners? The answer is yes – but not without changing the structure of your company in ways that might make you a bit uncomfortable.

The idea of aligned incentives is kind of a holy grail. The goal is always the same: to align the interests of managers and employees with the owners of the business.

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Why do so many incentive plans fail?

We pay commissions to salespeople because we want them to get energized about selling things. We use profit-sharing and stock options to get people excited about increasing the value of the business. We try to align executive pay with incentives like earnings growth, revenue growth or stock prices.

But too often these attempts fail to get people to think and act like owners. Why?

Short-term thinking. Since we have to reward people within a reasonable timeframe, many incentives tend to focus on short-term measures. Optimizing incentives for short-term results discourages long-term thinking that may be necessary to ensure the survival of the company in the long run. For example, in the rush to earn commissions, salespeople make deals that the company can’t make a profit on, or push customers to buy more than they need, or offer too much because they want to squeeze in a deal at the end of the quarter. Their efforts increase sales in the short run but destroy value in the long run. And for executives, there are always ways to drive up the stock price or other measures in ways that look good in the short term but destroy value in the long term.

Too vague. Stock-option and profit-sharing plans reward employees when the company does well, but the larger the company, the more difficult it becomes for people to feel that their efforts have an impact on the stock price. Frontline workers often have a hard time believing that anything they do can affect stock prices or profits one way or another. Their impact is just too small relative to the actions of the company as a whole.

The industrial era was built on the kind of carrot-and-stick management that rewards some behaviors and punishes others. This has been successful in a world of predictability, where work can be broken down into routine tasks that can be done according to a prescribed formula. But it won’t serve us in the 21st century. In the coming years we will need to get the absolute best our people can offer. We will need their heads and hearts as well as their hands.

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In his book Drive: The Surprising Truth about What Motivates Us, Dan Pink cites research that indicates extrinsic rewards, such as sales commissions or other financial rewards, do work well under certain limited conditions: when a task simply requires people to follow a formula, such as Adam Smith’s famous pin factory. But for jobs that require complex or creative thinking, extrinsic rewards can be dangerous, because they tend to restrict people’s ability to notice things on the periphery and craft novel solutions.

Pink’s prescription is that in a world that increasingly requires people to think creatively, solve problems and remain flexible in uncertain environments, extrinsic incentives don’t work, and we should instead focus on the kinds of intrinsic motivation that drives artists, inventors and other creative professions: mastery, autonomy and purpose.

Certainly Pink’s point is an excellent one. Intrinsic motivation does indeed motivate people and drive creative success. But in business creative success is only part of the equation. In business we also need to make money. A quick look at the history of inventors and other creative people will confirm that, while creativity and invention may be necessary components of innovation, they are not sufficient if you want to achieve both innovation and business results.

The great innovators in business did not succeed on creativity alone; their success was a blend of creative thinking and business logic. There was no lack of creativity and invention in Xerox PARC, but Steve Jobs and Steve Wozniak were able to translate that creativity into a tangible product that people were willing to pay for. The great innovators in business – Henry Ford, Thomas Edison, Benjamin Franklin, John D. Rockefeller, Andrew Carnegie, Walt Disney, Sam Walton, Ted Turner and so on – blended creativity with business sense and a deep understanding of customers and market dynamics.

The challenge in aligning incentives is threefold: First, incentives must be real and tangible enough that people can see the impact they have on the business as a whole; second, they should balance long-term and short-term thinking; and third, they should balance rewards so they reward people for things that make the business as a whole healthier and more successful.

A good incentive system should reward people for thinking and acting like owners. So is it possible to get every worker to act as if they own the business?

It is possible. And the answer is actually quite simple. The way to get everyone to act as if they own the business is to give them a “business within the business.”

The podular organization.

To make this work, you first have to understand that the most common template for large-scale modern business design, the multidivisional corporation, is not the only way to do it. The multidivisional form, first realized by General Motors in 1920, has become the standard form today. While phenomenally effective in some ways, the multidivisional form also has significant weaknesses when it comes to innovation.

There are things that seem “obvious” about organization design that are in fact not so obvious at all. Some things that we take for granted as fundamental are in fact only optional.

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We tend to design organizations by splitting them into divisions. We divide the business, and the labor, in order to do work more efficiently. We put the software developers together so they can focus on software; we put the salespeople together so they can focus on selling and learn from each other, and so on. Sounds obvious, yes? And it’s very efficient. But as we move into a world where efficiency leads to commoditization, and where value will increasingly be driven by innovation, efficiency is no longer the overriding goal.

How can you divide the labor in your organization to optimize for innovation rather than efficiency? The answer is to supplement divisional thinking with another approach that I call podular thinking.

In a divisional organization, the kind we are all familiar with, you divide the labor into functions and specialties. As you continue to divide an organization in this way, you increase efficiency, but as a side effect you also disconnect the people from the overall purpose of the business. People in a functional group tend to identify with each other more than they identify with the purpose of the organization.

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In a podular organization, you divide labor into “businesses within the business,” each of which can function as a complete service in its own right. Since each pod functions as a small business, its focus remains outside the pod, on its customers. Those customers might be inside or outside the organization as a whole, but each pod delivers a complete service. A podular approach allows a large company to act as if it were a flock or swarm of small companies; it gives the whole a level of flexibility and adaptiveness that would never be possible in a divisional organization. A podular organization is a fractal organization: every pod is an autonomous fractal unit that represents, and can function on behalf of, the business as a whole.

Does this sound strange? How is this possible?

Let’s look at four examples from four different industries: A food processing company, a retailer, a software company and a conglomerate.

Morning Star’s self-organizing marketplace.

Morning Star, a privately held company, was started in 1970 as a one-truck owner-operator hauling tomatoes. Today the company is the world’s largest tomato processor, with revenues of $700 million a year.

At Morning Star, workers manage themselves and report only to each other. The company provides a system and marketplace that allows workers to coordinate their activities. Every worker has suppliers and customers – and personal relationships – to consider as they go about their work.

Every employee writes a personal mission statement that describes how they will contribute to the company’s goal, and is also responsible for the training, resources and cooperation they need to achieve it. Every employee also creates a yearly Colleague Letter of Understanding (CLOU), describing their promises and expectations for the coming year, negotiated in face-to-face meetings with peers. All the agreements, taken together, describe about 3,000 peer-to-peer relationships that describe the activities of the entire organization. Each Morning Star business unit also negotiates agreements with other units in a similar way.

If a worker needs something, they can issue a purchase order. If someone needs help or identifies a new role that’s needed to do the job better, they can start the hiring process. The bigger the dollar amount, of course, the more important it is to lobby your peers and get their buy-in for the purchase, because the unit will sink or swim together. Over time, workers tend to move from simpler to more complex roles, hiring people to fill the roles they need to support them. There’s no competition for management jobs because there are no management jobs. To get ahead, workers must find better and more valuable ways to serve their peers.

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The discipline at Morning Star comes from a strong sense of mutual accountability. Problems are settled through mediation. If mediation can’t settle it, a panel of peers is convened. If that doesn’t work, a dispute will go to the president for a final decision. If the problem is serious or sustained enough, the worker may be fired. But while people can be fired, nobody has a boss hovering over them. What they do have is customers.

Every two weeks, the company publishes detailed reports of finances and other measures, that are transparent and available to everyone.

Business units are ranked by performance, and those at the bottom of the list can expect a tough conversation. In yearly planning meeting, business units present their plans to the entire company and workers invest using a virtual currency which then informs the budgets for the year. Workers elect compensation committees who evaluate performance and set pay levels based on performance.

Morning Star is a marketplace, where every worker is a business within the business. You can read more about Morning Star on their website or in this excellent HBR article by Gary Hamel, First, Let’s Fire All the Managers.

The Nordstrom way.

Nordstrom is a publicly traded high-end retailer, known for excellent service, with revenues of about $9 billion a year.

Nordstrom’s employee handbook is so short and simple it can fit on an index card. It states:

“Use your best judgment in all situations. There will be no other rules.”

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Nordstrom salespeople are free to make their own decisions, although Nordstrom’s strong culture of putting the customer first provides a guiding light for all to steer by.

That customer-service culture is at the core of Nordstrom’s success. The entire system is organized in order to support that salesperson on the Nordstrom floor to help them deliver the best possible customer service. If Nordstrom stocks something, they will make every effort to stock it in every size available – they don’t want to disappoint a customer by not having something in their size.

Salespeople aren’t chained to a department like they are in other stores. If a salesperson wants to walk through the whole store to help her customer pick out clothes, shoes, cologne, and anything else, she can do that. A Nordstrom salesperson might stay in touch with customers by Twitter, email, or whatever else is convenient. The message to customers is: however you want to buy it, however you want to interact with us, we can do it that way.

Customers are encouraged to take things home and try them, and bring them back at any time. If you ask, “How long can I bring it back?” the answer you will hear is “forever.” And they mean it.

One Nordstrom customer said “What I love about Nordstrom is that if I want to browse by myself that’s fine, and if I want help people are there and happy to assist me.”

As you can imagine, customers love it.

“Nordstrom has the faith and trust in its frontline people to push decision-making responsibilities down to the sales floor, the Nordstrom shopping experience is “as close to working with the owner of a small business as a customer can get,” said Harry Mullikin, chairman emeritus of Westin Hotels. Nordstrom salespeople “can make any decision that needs to be made. It’s like dealing with a one-person shop.” From The Nordstrom Way: The Insider Story of America’s #1 Customer Service Company by Robert Spector and Patrick D. McCarthy.

Nordstrom culture demands that the employee put the customer before company or profit in all decisions. Nordstrom provides a platform, the store, and each employee is treated as an entrepreneur who can set up a business on the platform. With commissions, Nordstrom salespeople can make six figures yearly on a base wage as low as $11 an hour. One worker stated:

“The way I saw it, the Nordstroms were taking all of the risks and providing all of the ingredients-the nice stores, the ambiance, the high-quality merchandise-to make it work. All I had to do was arrive every morning prepared to give an honest day’s work, and to value and honor the customer.”

Nordstrom employees can offer the best service in the industry because every Nordstrom salesperson operates a business within the business, backed by the full support and resources of a Fortune 500 company.

Self-organizing teams at Rational Software.

Rational software was founded in 1981 to provide tools for software engineers. Rational was acquired by IBM for $2.1 billion in 2003. Since Rational has been acquired I will describe the company in the past tense, although it may operate similarly today as a group within IBM.

Rational’s goal was very transparent to everyone in the company: “Make customers successful.” Customers were served by small, autonomous pods known as field teams. Each field team operated as a fully functional, stand-alone unit, with technical and business experts working closely together. The same team who sold a product or project was also responsible for delivering it. Resources were distributed to teams based on their performance.

Rational’s team-based approach permeated the culture at all levels. “If you weren’t team oriented, you wouldn’t survive” says Jerry Rudisin, Rational’s VP of Marketing from 1991 to 1999. Rational put team orientation first even when it hurt the bottom line in the short term. “When I was a district manager, I fired the top sales rep more than once” says Kevin Kernan, who worked at Rational in a variety of roles for 17 years. “We had zero tolerance for people who didn’t exhibit team behavior – that was just poisonous to our culture.”

The cross-functional teams at Rational were a great way to build entrepreneurial skills within the company, because every team member understood every aspect of the business. Team members worked closely together and learned from each other constantly. As the company grew, many technologists grew into new careers in sales, fielding their own teams in new territories. Many went on to start companies of their own.

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Rational management focused on managing the teams as if they were a portfolio of companies. Teams were evaluated on five things: First and foremost, customer success: Did the team help customers succeed in achieving their goals? Revenue: Did the team make or beat its revenue targets? Team development: Was the team optimizing for the career growth of each team member as well as the team? Territory growth: Was the team growing in reach as well as revenue? Business basics: Did the team play well with other teams? Did they spend money as if it was their own?

“You could have a team that did poorly in their overall ranking even though they made their revenue target, because their customers weren’t successful in achieving their goals” says Kernan. One year a new sales rep in a 7-person team was fired because he didn’t treat his team well and had filed some paperwork that was misleading, even though the deals he made with customers were all solid and his sales accounted for 25% of the company’s revenue.

Top-down intervention in team dynamics was rarely necessary. When a team member wasn’t performing, the greatest pressure for improvement came from the team itself. “When I was a district manager I had 25 direct reports, but I rarely intervened. The teams basically managed themselves” says Kernan.

Teams made their own hiring decisions, and hired outside consultants or traded resources with other teams when necessary. “You had to be careful when you brought on a new member,” says Ray LaDriere, who worked in one of the Rational sales pods. “If you hired someone and they didn’t pull their weight, the deal was that we had to carry them for a full year.” Since one poor performer could hurt the performance of the whole team, people were very careful in their hiring decisions.

“It was an amazing experience for 17 years, and I would be surprised if you found anyone who worked at Rational for any significant period of time that didn’t feel the same way” says Kernan. “Our goal was to change the world by changing the way people design, build, and deploy software. And we did it.

Democratic management at Semco.

Semco is a Brazilian conglomerate that specializes in complex technologies and services like manufacturing liquids, powders and pastes for a variety of industries; refrigeration; logistics, and information processing systems; real estate, inventory and asset management; and biofuels. Semco’s revenues are around $200 million a year.

Semco is a self-managed company. There is no HR department. Workers at Semco choose what they do as well as where and when they do it. They even choose their own salaries. Subordinates review their supervisors and elect corporate leadership. They also initiate moves into new businesses and out of old ones. The company is run like a democracy.

Says CEO Ricardo Semler: “I’m often asked: How do you control a system like this? Answer: I don’t. I let the system work for itself.”

Semco is organized around the belief that employees who can participate in a company’s important decisions will be more motivated and make better choices than people receiving orders from bosses. Workers in each business unit are represented by an elected committee that meets with top managers regularly to discuss any and all workplace issues, and on important decisions, such as plant relocations, every employee gets a vote.

Workers at Semco choose their own hours. CEO Semler recalls that when he first proposed the idea, managers were convinced this wouldn’t work, especially when it came to factory work. But Semler was confident. “Don’t you think they know how to manage their own work?” he asked. Turns out they did, and they do.

Semler says simply, “if you want people to act like adults you need to treat them like adults.”

Things do take longer than they do in a traditional, hierarchically-managed company. Semler elaborates in his book Maverick: The Success Story Behind the World’s Most Unusual Workplace:

“Dissent and democracy go hand in hand. It’s also good management technique. What traditional executives don’t consider is that decisions arising from debate are implemented much more quickly because explanations, alternatives, objections, and uncertainties have already been aired.”

One of the principles underlying Semco’s success is the idea that every business should be small enough that each worker can comprehend it as a whole system. If a business grows to more than 150 people, Semco will split it into two.

Another principle is transparency and trust.

“The only source of power in an organization is information, and withholding, filtering, or retaining information only serves those who want to accumulate power through hoarding,” says Semler.

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Once a month Semco holds open meetings for the employees of each unit, where all the numbers in the business are presented for open examination and debate. The company also offers courses to help employees better understand financial reports such as balance sheets, Profit-and-loss reports, and cash flow statements.

What about profits?

“Profit is highly important to us at Semco, and we’re as avid about it as a general is about his supplies. If provisions run out, his soldiers will die. If a company ceases to make money, it too will die. But armies are not created to feed soldiers, just as companies don’t generate income just so they can hire more employees. Food fuels the soldiers and keeps them going. Yet to serve as more than mere gun fodder, they must have a higher purpose, a reason for going through boot camp and charging the enemy in battle… This is where profit and purpose meet and, unfortunately for most organizations, it’s a head-on Humvee wreck.” ~ Ricardo Semler, The Seven-Day Weekend: Changing the Way Work Works.

Nearly a quarter of Semco’s profits go to employees, but the company doesn’t decide how to distribute it. Each quarter, the profit contribution of each unit is calculated, and 23% of profits go to that units employees, who can distribute it however they wish. So far, they have always decided to distribute that money evenly to everyone.

Employees who are particularly confident can choose to put up to 25% of their pay “at risk.” If the company does well, they get a bonus raising their compensation to 150% of normal; if the company does poorly, they are stuck with 75% of their pay.

Does it work? Semco’s growth from $4 million in 1980 to more than $200 million today seems to point in that direction.

Can your company go podular?

Although each company has done it differently, Morning Star, Nordstrom, Rational and Semco have all found success by organizing along podular lines. This kind of design won’t make sense for every situation, or for every division. But no company can afford to ignore its innovation efforts. To ensure its long-term viability, every company needs to find a balance between their efficiency and innovation efforts.

The podular organization may be unusual, but it’s not a theory. It’s a fact. It can work in retail, it can work in manufacturing, it can work in technology, and it can work for a conglomerate. It can work for private as well as publicly-traded companies. It can work for a Fortune 500 company. Can it work for you? You can only find out if you’re willing to give it a chance.

You might start by reorganizing a single unit, like an innovation unit, a single store or location, or an R&D group. Look inside any R&D department or fast-growing web services company and you are likely to see a form of organization that’s more podular than hierarchical.

Podular organizations need to do a few things in radically different ways: First, they require information to be transparent and readable by everyone; second, they require principles, platforms and culture to guide individual decisions and give cohesion to the company as a whole; third, they require people who are not territorial, who are capable of open discussion and who will hold themselves and others accountable; and fourth; they require owners and managers who are capable of trusting people and teams to make good decisions and manage their “business within the business.”

When you give people a business within your business, you are aligning their incentives with owners and management. Everyone is a business owner, and everyone is a manager. Rewards are real and tangible, short-term and long-term benefits are in balance, and workers are rewarded when they are good stewards of the business.

If you want to unleash innovation, get closer to customers, and manage complexity, pods are worth a look.

You can read more about pods here and here.

Everything is a service

The emerging service economy will require business and society to do some some fundamental restructuring. The organizations that got us to this point have been hyper-optimized into super-efficient production machines, capable of pushing out an abundance of material wealth. Unfortunately, there is no way to proceed without dismantling some of that precious infrastructure. The changes are already underway.

The great big shift-reset.

In The Power of Pull: How Small Moves, Smartly Made, Can Set Big Things in Motion, John Hagel and John Seely Brown observe that return on assets, the measure of how efficiently a company can use its assets to generate profits, has steadily dwindled to almost a quarter of what it was in 1965. They argue that ever-improving digital infrastructure and social networks are causing profound social change that increases competitive intensity. Since this turbulent environment shows no signs of stabilizing, they say, the only sustainable competitive advantage is the rate at which a company can learn.

Return on assets is dwindling

In The Great Reset: How New Ways of Living and Working Drive Post-Crash Prosperity, Richard Florida points to a shift from an economy based on making things to one that is increasingly powered by knowledge, creativity, and ideas:

“Great Resets are broad and fundamental transformations of the economic and social order and involve much more than strictly economic or financial events. A true Reset transforms not simply the way we innovate and produce but also ushers in a whole new economic landscape.”

Jeffrey Immelt, CEO of General Electric, agrees.

“This economic crisis doesn’t represent a cycle. It represents a reset. It’s an emotional, raw social, economic reset. People who understand that will prosper. Those who don’t will be left behind.”

The good news is that although resets are initiated by failures – sometimes catastrophic failures, like we have seen in the mortgage system – they also lead to new periods of growth and innovation, built on new systems and infrastructure.

Whether you call it the Big Shift, the Great Reset, or the great big shift-reset, there’s little doubt that a fundamental economic restructuring is underway. There will be winners and there will be losers.

An age of abundance.

As we stand on the verge of a new era, it’s easy to disparage the old-school industrial economy. But let’s not forget that the industrial economy gave us an abundance of material wealth we now take for granted, including many things that were unavailable – and unimaginable – in previous centuries.

Economist J. Bradford DeLong points out that in the 1890s, even the richest of the rich could not go to the movies or watch football on TV, and traveling from New York to Italy took at least a week. In 1836, the richest man in the world, Nathan Rothschild, died of a common infection that would have been easily curable with modern antibiotics.

Model T

The material abundance we all enjoy was made possible by an industrial economy that focused primarily mass-producing material goods. The philosophy of mass production was based on Henry Ford’s big idea: If you could produce great volumes of a product at a low cost, the market for that product would be virtually unlimited. In the early days his idea held true, but eventually, every market gets saturated and it gets more and more difficult to sell them more stuff. By 1960, 70% of families owned their own homes, 85% had a TV, and 75% had a car.

As markets became saturated with material goods, producers found a new way to apply the principle of mass-production in mass-marketing. With a TV in nearly every house, producers had a direct line to customers. Customers became known as consumers, because their role in the economy was to consume everything that producers could make. Increasingly, this producer-consumer economy developed into a marketing-industrial complex dependent on consumer dissatisfaction and the mass-creation of desire for the next new thing.

New technologies of communication have splintered the channels of mass-communication into tiny fragments. It’s no longer possible for mass-marketers to reach out and touch all of their customers at once. The megaphone is gone. And with the rise of social networks and peer-to-peer communication channels, every customer can have their own megaphone.

To many mass-marketers this feels like a chaotic cacophony of voices, and it’s hard to be heard in the crowd. But to most customers it’s an empowering feeling to have a voice, to be heard. Even if a company ignores your complaint, the world will hear, and if companies don’t respond they will eventually feel the pain, as customers find new places to go to get what they want.

The producer-driven economy is giving way to a new, customer-centered world, where companies will prosper by developing relationships with customers by listening to them, adapting and responding to their wants and needs.

The problem is that the organizations that generated all this wealth were not designed for this. They were not designed to listen, adapt and respond. They were designed to create a ceaseless, one-way flow of material goods and information. Everything about them has been optimized for this one-directional arrow, and product-oriented habits are so deeply embedded in our organizational systems that it will be difficult to root them out.

Product orientation

It’s not only companies that need to change. Our entire society has been optimized for production and consumption on a massive scale. Our school systems are optimized to create good cogs for the corporate machine, not the creative thinkers and problem-solvers we will need in the 21st century. Our government is optimized for corporate customers, spending its money to bail out and protect the old infrastructure instead of investing in the new one. Our suburbs are optimized to increase consumption, with lots of space for products and plenty of nearby places where we can consume more stuff, including lots of fuel along the way.

While workers are being laid off in many industries, technology companies like Facebook and Google are suffering from critical shortages, struggling to fill their ranks and depending heavily on talent imported from other countries that place a higher priority on technical education.

“The whole approach of throwing trillions of public dollars at the old economy is shortsighted, aimed at restoring our collective comfort level. Meaningful recovery will require a lot more than government bailouts, stimuli, and other patchwork measures designed to resuscitate the old system or to create illusory, short-term upticks in the stock market, housing market, or car sales.” ~ Richard Florida

We no longer live in an industrial economy. We live in a service economy. And to succeed in a service economy we will need to develop new habits and behaviors. And we will need new organizational structures.

A service economy.

Since 1960, services have dominated US employment. Today’s services sector makes up about 80% of the US economy. Services are integrated into everything we buy and use. Nine of every ten companies with fewer than 20 employees are in services. Companies like GE and IBM, who started in manufacturing, have made the transition and now make the majority of their money in services.

Manufacturing vs services

What’s driving the move to services? Three things: Product saturation, information technology, and urbanization.

Product saturation. When people already have most of the material goods they need, they will tend to spend more of their disposable income on services. Increasingly the products that companies want to sell us are optional; they offer not functionality but intangible things like status, pride of ownership, the new color that’s in this year, and so on.

And products, we have found, can not only make life easier, they can be a burden. When you own a house, you have to spend money to fix the roof or the plumbing. Where’s the fun in that? And moving can be a big hassle when you have a truckload of stuff to lug along with you.

Information technology. In addition, another, post-industrial revolution is delivering a new kind of abundance – an abundance of information, along with networks and mobile devices for moving that information around, and much faster processing that allows us to do more interesting kinds of things with the information we have.

And while at first this shift was driven by the kinds of things we traditionally think of as information containers, like documents and images, now it has exploded to include many things that were previously undocumented. Your network of friends and acquaintances, the efficiency of your car’s engine, the things you do, the places you go, the things you buy, what you think about them, and even your random throwaway thoughts are being captured in foursquare check-ins, tweets, status updates, photo and video uploads and other kinds of “data exhaust” that you may not even know you’re generating, simply by using your phone and other devices.

This digital revolution is ushering in all kinds of new ways to deliver, combine and mix up services, resulting in all kinds of enticing combinations: Streaming music, following other people’s book highlights, renting strangers’ apartments or cars by the day, negotiating bargain prices at 4-star hotels and much more.

Urbanization. In addition, there is an increasing trend toward urbanization. Throughout the world, city populations are growing much faster than rural populations. We are becoming an urban society and living more urban lifestyles.

Fifty percent of the world’s population today lives on two percent of the earth’s crust. In 1950 that number was 30%, and by 2050 it is expected to be 70%.

Why are people moving to cities? Because cities are where the action is. There are more jobs, and more kinds of jobs, available in cities, and even when the same job is available in the country and the city, the job in the city pays more. Urban workers make, on average, 23% more than rural workers. And the more highly skilled you are as a worker, the more you stand to gain financially by moving to a large city.

Also, if you happen to get laid off or your company goes out of business, as a worker it’s much easier to find a new job without having to pick up and move.

Urbanization

As work becomes more complex and more skills are required, cities become more attractive to companies too, because that’s where the skilled workers are. Cities pack a lot of people and businesses into a relatively small space, which is good for services companies in several ways.

Space: People living in small city apartments just don’t have a lot of room for products, and because they are making more money than their rural counterparts, they tend to spend more on services. Why take up space with a washer and dryer when there’s a laundry service right down the street?

Density: Urban density makes it more attractive for companies to provide a wide variety of services. For example, a cable company can wire a city apartment building and serve hundreds of households for a fraction of the cost to do the same thing in a suburb or rural area. Taxis find customers quickly in densely-packed urban enters. One city block can support several specialty stores and a variety of restaurants. And in a reciprocal loop, that wide variety of services makes cities even more attractive places to live.

Consider the quintessential industrial-age product, the automobile: For many, a symbol of individuality, status, personality and freedom. In suburban and sparsely-populated rural areas, a car provides you with unlimited mobility and choice. But in a densely-populated urban environment, a car quickly becomes more trouble than it’s worth. A permanent parking space in New York costs more than a house in many other areas.

Density creates demand for more services, like taxis, limousine services, buses and subways. It also creates opportunities for new services. For example, Zipcar is a car-sharing service that gives customers shared access to a pool of cars located throughout their city. RelayRide and Whipcar are peer-to-peer services that allow car-owners to rent their car to neighbors by the hour or by the day. Uber connects a network of professional limo drivers with city dwellers, who can order a car by SMS or mobile phone app. Orders are routed to the nearest available driver, payments are automated and driver tips included, creating a simple, easy, seamless customer experience.

Cars themselves will increasingly become platforms for delivering services. In 1995 GM created OnStar, an in-car subscription service that offers turn-by-turn directions, hands-free calling, and remote diagnostics. If your car is stolen, GM can track the vehicle, slow it down, or shut off the ignition remotely. But that’s just the beginning. Automakers will increasingly be integrating with digital services, and cars will become platforms for a broad array of apps and services that will help you lower your fuel costs, stream music, avoid collisions, find parking, notify you if friends are near, and a whole host of other things we can’t yet imagine. Ford announced recently that they are creating an open platform that will allow tinkerers and developers to electronically “hot-rod” their cars. And Google is working on cars that will drive themselves. How’s that for a service?

If a car can be a service, anything can.

An urban migration

The majority of business growth in the coming decades – new jobs and new businesses – will come from services.

Some people argue that the majority of services growth comes from low-wage jobs without much potential for growth. But according to the US Bureau of Labor Statistics, job growth will be led by health care, followed by professional, scientific, and technical services, as well as education.

Service-dominant logic.

Most companies today are designed to produce high volumes of consistent, standard outputs, with great efficiency and at low cost. Even many of today’s services industries still operate in an industrial fashion. Schools efficiently produce standardized students. Hospitals efficiently move the sick and injured through a diagnostic-and-prescriptive production line. Drive-through restaurants move drivers quickly and efficiently through an order-fulfillment pipeline.

But most of these services are not really services at all. They are factory-style processes that treat people as if they were products, moving through a production line. Just think of the last time you called a company’s “customer service line” and ask yourself if you felt well-served.

Sure, many services require some level of production efficiency, but services are not processes. They are experiences.

Unlike products, services are often designed or modified as they are delivered; they are co-created with customers; and service providers must often respond in real time to customer desires and preferences. Services are contextual – where, when and how they are delivered can make a big difference. They may require specialized knowledge or skills. The value of a service comes through the interactions: it’s not the end product that matters, so much as the experience.

To this end, a company with a service orientation cannot be designed and organized around production processes; it must be designed and organized around customers and experiences. This is a complete inversion of the mass-production, mass-marketing paradigm that will be difficult for many companies to adopt.

In Evolving to a New Dominant Logic for Marketing, Stephen L. Vargo and Robert F. Lusch describe a new paradigm they call service-dominant logic, a fundamental shift in worldview and orientation toward marketing as a social process, where products are not ends in themselves but means for provisioning services, the customer is seen as a co-producer, and knowledge is the source of competitive advantage.

In product-dominant logic, production is the core of the value-creation process, while customer service is a cost to be minimized. But in service-dominant logic, products are the cost centers, and services become the core value-creation processes.

Why such a fundamental shift?

Products are costly and require large investments of capital in R&D, factories, and manufacturing before money can be made.

Products are anchors. Investments in manufacturing take time to provide returns, and during this time period customer needs are likely to change. Investing in physical products “hardens” the offering and reduces the company’s ability to respond and adapt to changing customer preferences.
Investing in services “softens” the offering and increases the company’s flexibility. Since costs aren’t sunk into a single product, it’s easier to shift the offering and keep pace with their demands.

Like looking through a telescope the long way round, for many people who have become habituated to a product orientation, this inversion will at first feel unnatural and uncomfortable.

The good news is that there is huge room for improvement, and companies that dedicate themselves to improving services stand to make significant gains in profitability and competitive advantage.

According to an Accenture survey, customer satisfaction is declining in every area they measure, and 64% of customers have switched companies in the past year due to poor service. Only one in four people say they trust the companies with which they do business.

Another survey by American Express found that two thirds of customers have not noticed improvements in customer service, and that fewer than one in ten customers think companies are exceeding their expectations. An overwhelming majority of customers are willing to spend more to get excellent service, and more than half of them will switch companies to get it. The same survey also found that while 40% of customers are willing to tell their friends about good service experiences, even more of them – 60% – will tell their friends about poor service experiences.

It doesn’t take a genius to figure out that poor service will result in lost sales, and good service will result in repeat business. And for most companies, the biggest growth opportunities in the coming years will come through services.

A product is a service avatar.

The first step to a service orientation is to change the way we think about products. Instead of thinking about products as ends in themselves, we need to think of them as just one component in an overall service, the point of which is to deliver a stellar customer experience.

Avatar

Today, we think of an avatar as the face or icon that represents you in your Twitter stream, or on your Facebook page. But the original word avatar comes from ancient Sanscrit, based on the root words ava (descent, coming down) and tatari (crossing over). The original meaning is the divine made flesh; an incarnation or physical manifestation of an idea or god. In Hindu belief, Buddha was an avatar of the god Vishnu – a physical manifestation of the deity descended to earth. Energy transformed into matter.

In the same way, a product can be considered as a physical manifestation of a service or set of services: a service avatar.

Products come with knowledge and services embedded within them. A car is the manifestation of years of learning, accumulated through research, crash testing, metallurgy, electrical engineering, design and a score of other disciplines, including good old trial and error. And as we have seen, a car itself provides the service of getting you comfortably from one place to another.

The ratio of knowledge to matter in any product increasingly favors knowledge. A modern car contains more computing power than the system that guided Apollo astronauts to the moon. Consider the difference between a TV and a TiVo. The knowledge and services embedded in a product are what gives the product its value. Consider an iPhone. Its value comes from the services it provides you: You can talk to friends, send messages to them, and access a wide variety of applications, songs, books and even movies if you care to. Having an iPhone allows you to carry around a whole city’s worth of services in your pocket. The job of the iPhone is to provision you with services.

Service avatars

The words we use to describe products are a dead giveaway. Think about the number of product names that are essentially verbs or job descriptions:

Products as verbs: You use an iron to iron things, a brush to brush things, and a bottle to bottle things. You ladle with a ladle and hose things down with a hose. You step on a step, drum a drum, handle a handle and grill with a grill. When you’re driving you brake with the brake, accelerate using the accelerator and steer with the steering wheel. You mail the mail, drink a drink, lock a lock and microwave things with the microwave. Cups cup things, nails nail things, and staples staple things. You tape things together with tape. A light gives light.

Products as job descriptions: A blender’s job is to blend things. A washer washes things and a dryer dries things. The lawn mower mows the lawn. The heater heats, the boiler boils and the air conditioner conditions the air. In your kitchen, the refrigerator refrigerates and the freezer freezes. At work, the copier copies, the scanner scans, the printer prints and the computer computes. The doorstop stops the door. Lipstick sticks to your lips and eye shadow shadows your eyes.

Products aren’t just things. They are servants.

“The Kindle is not a device, it’s a service” said Jeff Bezos in a recent interview. The Kindle is a physical manifestation and extension of the services Amazon provides to its customers; an avatar for Amazon services. On the Kindle, you can go to the store, browse for stuff, read reviews, and start reading a book, listening to music or watching a film in less than a minute. Kindle’s service aspect becomes even more clear when you use it with more than one device. Open a Kindle book on your iPad, and the service syncs to the last page you were on. It doesn’t matter what device you’re using, Kindle follows you from device to device and always remembers your place.

Services are co-created.

In a product-dominant world, value is exchanged in transactions between buyers and sellers. But in a service-dominant world, value is co-created by companies and customers working together. This kind of exchange requires a relationship, and the product is only an intermediate step in the value-creation process.

Services are co-created

Value is co-created: A company can’t create value. Value is only created through exchange. The customer must participate in defining and determining that value. That car, beautiful as it may be, has value, in an economic sense, only to the degree that a customer is willing to pay for it. The company can only create an offer, value proposition or proposal. The customer must accept in order to create value. The bus can make an offer, but the customer still must step onto the bus for the value to be delivered.

Co-created value requires a relationship: Products can play a role in relationships – even a key role – but products can’t have relationships. The relationship between a company and its customers develops gradually, as customers build trust in the company and its ability to deliver on their promises over time.

The product is an intermediate step, not an end in itself: Even after a customer buys a product, they must learn how to use it, maintain it, repair it, and enjoy it. If the company is lucky, they will like it enough to tell friends about it, educate others, promote it, buy additional services around it and so on.

A service-dominant world changes the game significantly. Service-orientation is a fundamental shift and creates opportunities for new business strategies, new sources of competitive advantage, new ways of interacting with customers, and new ways of organizing work.

Everyone is a service.

In a service-oriented company, it makes sense to consider every aspect of the company as a service. Managers provide a management service. Engineers provide an engineering service. Designers provide a design service. Marketers provide a marketing service.

A process is not a service

We have developed a tendency to think of flows in terms of process, but services and processes are not the same. Processes are linked, linear chains of cause and effect that, when managed carefully, drive predictable, reliable results.

A service is different. Processes are designed to be consistent and uniform, while services are co-created with customers. This difference is not superficial but fundamental. A process has only one customer, the person who receives the final result. A process is rule-bound and tightly regulated. The quality of a process’s output can be judged by the customer at the end of the line.

A service is at its core a relationship between server and served. Service is work performed in support of another. At every point of interaction, the measure of success is not a product but the satisfaction, delight or disappointment of the customer.

Service networks.

As if change wasn’t already difficult enough, service orientation for many companies will require a whole new approach to business partnerships.

Because services map to increasingly demanding customer preferences, companies must find ways to make them more granular, as well as easier to bundle with other services. Customers want services to be convenient for them, not for you.

Consider insurance. Even though insurance is a service, in many ways it is sold like a product. A product-dominant mindset says “we sell life insurance, car insurance and homeowner’s insurance. Our customers come to us when they need insurance.” But if a company can find a way to offer business partners insurance as a configurable service, a lot more options open up.

For example, Whipcar allows car owners to rent their car out when they are not using it. Part of the Whipcar service involves bundling car insurance along with the rental, which requires the “insurance service” be available on demand in increments as small as one hour. The more networked and linkable an insurance service, the more easily it can be blended and bundled with Whipcar’s other services.

PayPal is a super-granular payment service which is easy to plug in to any ordering system. Some of PayPal’s customers are so happy with the service, and so loyal, that they will not buy from merchants who don’t offer PayPal payment service. After all, buying from another vendor is usually just one click away.

Services do better when they cluster together

Service networks also thrive by making a set of complementary services more easily available to customers. A restaurant does better if it’s within a short walk of a movie theater and shopping. Customers tend to like convenient clusters of services. For example, it’s nice if you can go grocery shopping, drop off your laundry and get a coffee in a single stop or within a short distance.

Making change happen.

The biggest impediment to service innovation is not a lack of ideas. It’s the inability of companies to deliver them the way they are currently structured. Service designer Ben Reason notes that “Coming up with innovative services is easy. What’s hard is getting companies to adapt.”

Industrial one-way mass-production logic must give way to the more reciprocal service logic before progress can be made. This is so exceedingly difficult that not many companies have successfully made the transition. It involves changing not only org structure but the company’s dominant culture and logic, a herculean task.

But change is possible.

IBM and GE led the way, with major organizational transformations in the 1980s and 1990s. IBM famously divested its last manufacturing operations in 2005 by selling its laptop division to Chinese company Lenovo, and more than half of GE’s profits come from services today.

Consider Cemex, a global cement company. What could be more industrial-age than cement? Cement is clearly a product, not a service. And perhaps the most obvious way for a cement company to compete is on price. But to customers, cement is only one aspect of a larger project. Customers don’t just care about cement, they want the right cement, in the right amount, at the right place and the right time.

Cemex wins customers with services like 24/7 delivery, ATM-like ordering systems, education and training for customers, and construction financing. Customers can order online and get text messages when cement is ready for delivery. Cemex will actively manage a customer’s cement inventory, to anticipate and respond to demand in real time. Cemex will provide pre-fabricated components like walls, ceilings and basements. And if a customer so desires, Cemex will carefully match the color and texture of older concrete roads and paths.

Where to start.

This kind of change can feel overwhelming to contemplate. But help is at hand.

In 1983, bank executive G. Lynn Shostack proposed a design tool called the service blueprint as a tool for service design. The service blueprint connects customer activities and touchpoints with a company’s “front stage” where services are provided, as well as “backstage” operations that support and enable the front stage.

The Service Research and Innovation Institute, a non-profit organization initiated by IBM, was formed to lead and support organizations through the massive transformations that will be required.

The Consortium for Service Innovation is a non-profit alliance of organizations focused primarily on facing the challenges of customer support services.

On the practitioner side, the Service Design Network was formed in 2004 as an international network of service design professionals, with the purpose of strengthening and developing service innovation practices. Their peer-reviewed publication, Touchpoint, is an excellent resource for service design thinking.

The Social Business Council is a peer-to-peer membership organization of business professionals that are directly involved in planning, leading and executing social business transformation initiatives.

Although the cogs and gears are still turning in many large companies, it is the result of momentum, not progress. The industrial economy is fueling new growth in some parts of the world, but it is leaving the US and Europe, and it’s not coming back. The time to change is not some day in the future, when you have reached a crisis of GM, Kodak or Greek proportions. The time to change is now, while you still have the financial resources to change assertively and proactively.

Turn around and face the market

Running through every business success story is a common theme: stay connected to customers; stay connected to your market; anticipate and expect change. This seems pretty obvious. It’s simple and it’s easy to understand. Customers, after all, are the one thing no business can do without. They are the key to every company’s survival.

Paying attention to customers seems like such a fundamental thing. So why do so many companies do it so poorly? How do companies lose touch with their customers, and lose their grip on the realities of the marketplace?

As any athlete will tell you:

Just because something’s fundamental, that doesn’t mean it’s easy.

With growth come distractions

Without question, customers are the single biggest factor in any company’s long-term growth and profitability. And yet, as companies grow, distractions multiply. Success can create such a dazzling array of opportunities that companies try to capitalize on too many of them, over-expanding and diluting their offerings. Internal efficiency and organization become paramount as companies struggle to maintain their growth trajectories and keep the factories and supply chain flowing. Political squabbles can erupt as people jockey for status, attempt to seize greater authority and control, or take credit for successes. Bureaucracies that emerge to handle increasing complexity and organizational challenges can also stifle creativity and innovation. Focusing on the complexities and intricacies of growth, many companies take their eyes off of the customer, their most important asset.

Ironically, a history of success may be the biggest reason companies lose touch with customers. Success can fuel enormous growth and even lead to market dominance. But it can also lead to over-expansion, blind spots, complacency, bureaucratic rigidity and risk-avoidant cultures.

Over-expansion.

Caught up in whirlwind growth, some companies become distracted by a landscape of opportunity and try to do everything just because they can.

Over-expansion

How Starbucks lost touch.

In the early 2000s, Starbucks focused on growth, expanding globally, opening new stores, and populating their stores with more and more products, like songs and books. New stores were opening every day, and a seemingly endless parade of new products entered stores, until every Starbucks seemed to double as a gift shop.

“Obsessed with growth, we took our eye off operations and became distracted from the core of our business” says Howard Schultz, Starbucks CEO, in Onward: How Starbucks Fought for Its Life without Losing Its Soul.

“Every new store increased the company’s profits, and every incremental product increased sales and profitability in each store. It wasn’t any single new store or new product introduction that hurt the company, but as these incremental changes added up, Starbucks slowly lost touch with what its customers cared about – fast, great service, great coffee and a place to enjoy it.”

Schultz recalls a day when he realized the need for change.

“Once, I walked into a store and was appalled by a proliferation of stuffed animals for sale. “What is this?” I asked the store manager in frustration, pointing to a pile of wide-eyed cuddly toys that had absolutely nothing to do with coffee. The manager didn’t blink. “They’re great for incremental sales and have a big gross margin.” This was the type of mentality that had become pervasive. And dangerous.”

Schultz called this “hubris born of a sense of invincibility.”

In 2008, Starbucks closed 600 stores, narrowed its product line, and closed stores around the world to retrain employees on how to make a great espresso.

Since 2008, Starbucks has refocused on its core business, profits are up, and most investors are bullish.

How Krispy Kreme flamed out.

It seemed as if Krispy Kreme had created the perfect business with all the right ingredients: a secret recipe, donuts that tasted so good they were addictive, and a media that had a crush on the company. Krispy Kreme had grown organically since its founding in 1937, and after going public in 2000 the company entered into a phase of aggressive growth, opening a flurry of new stores and selling their donuts in convenience stores, drug stores, gas stations and big-box retailers like Wal-Mart. The company’s stock more than doubled in the two years following its IPO. New store openings were heralded on local news stations and customers lined up outside stores for a first taste of the fantastical donuts. Krispy Kreme’s marketing plan boldly stated “Our market is everyone, everywhere.”

But the company grew too fast, and spread itself too thin. Donuts, it turned out, might not be so addictive after all. By opening so many franchises, so quickly, Krispy Kreme forced franchisees to compete for a limited market. In addition, franchisees were required to buy equipment directly from Krispy Kreme at marked-up prices. But by maximizing its short-term profits from franchisees, Krispy Kreme shot itself in the foot. Many stores struggled to make a profit and some went out of business or had to declare bankruptcy.

Sales dropped. One of its biggest franchisees defaulted on payments and later filed for bankruptcy. Other franchisees also declared bankruptcy and Krispy Kreme found itself saddled with more stores than it could operate profitably. Krispy Kreme’s troubles worsened when shareholders filed lawsuits, charging company executives with ignoring signs the company was expanding too quickly. The SEC launched an investigation – never a good sign.

Krispy Kreme stock fell from a high of $50 in 2003 to $3 in 2007.

Krispy Kreme retrenched, sorted out its finances, and settled with the SEC in 2009. Today the company is expanding again – more cautiously this time.

Blind spots.

While trying to do too many things can be a problem, a focus that’s too narrow can be equally problematic. As companies grow, they increase in expertise and efficiency as they attempt to increase profits and market share. But that expertise can narrow the company’s focus so much that it develops gaping blind spots. When new technologies and business models inevitably come along to disrupt the status quo, the company has stuck all its eggs in one basket.

Blind spots

How Xerox missed the PC revolution.

In 1970 Xerox set up its PARC (Palo Alto Research Center) to envision and develop the office of the future. To that end, the group was wildly successful and has been credited with the invention of laser printers, bitmapped graphics, the mouse, the graphical user interface, WYSIWYG (What you see is what you get) text editors, and Ethernet. But when it came to introducing these innovations to the marketplace, Xerox faltered.

Xerox PARC was based in Silicon Valley, a far remove from Xerox headquarters in Rochester NY. While this gave researchers great freedom to pursue new ideas, it also made it more difficult for them to convey the opportunities to senior executives. At the time, copiers were generating huge profits for Xerox, and Xerox still saw itself as a copier company.

In a recent interview, Gary Starkweather – inventor of the laser printer and former Xerox PARC researcher – told Malcolm Gladwell:
“They just could not seem to see that they were in the information business… Xerox had been infested by a bunch of spreadsheet experts who thought you could decide every product based on metrics. Unfortunately, creativity wasn’t on a metric.”

Apple founder Steve Jobs paid a visit to Xerox PARC in 1979. He was inspired. Xerox PARC engineer Larry Tesler reported to Gladwell:

“Jobs was pacing around the room, acting up the whole time. He was very excited. Then, when he began seeing the things I could do onscreen, he watched for about a minute and started jumping around the room, shouting, ‘Why aren’t you doing anything with this? This is the greatest thing. This is revolutionary!’”

Jobs went back to Apple, and the rest is history.

Xerox may have learned its lesson. Today the company is focused on moving from being a copier company to a services company. Since 2006, revenue from services, such as outsourcing its customers’ document management and other business processes, has risen from 25% to almost 50%. The jury is still out, but Xerox may be turning itself around.

How Sony missed digital music.

Sony invented portable music with the Walkman, introduced in 1979. Walkman led the portable music category for 20 years, and during that time the product evolved through many iterations. Sony engineering teams worked closely together to develop lightweight headsets and music players; they also worked closely with marketing and customer groups to create specialized products for niche markets. For example, they developed a rugged, sealed case for people who wanted to listen to music while jogging or cycling. During the 1980s they released 250 different Walkman models. Sony engineers were among the best in the world, but they were focused mainly on incremental improvement. The company’s deep history and expertise in mechanical devices became a fatal blind spot, and when digital music players entered the market, Sony was slow to react. Quipped one Sony engineer: “I don’t really like hard disks—they’re not Sony technology. As an engineer, they’re not interesting.”

Sony also owned a record studio, and a desire not to cannibalize record sales – digital music files were hard to protect – may have been a factor as well. But history has shown over and over that you can’t protect your customers from new, disruptive innovations, and if you’re not willing to cannibalize your business then someone else will.

Once again, Steve Jobs stepped in to fill that gap, redefining the music industry with the Apple iPod.

Sony has struggled to achieve and maintain profitability ever since.

Cultural rigidity.

When a company is large and successful, its size can be its worst enemy, especially when it is so dominant that it lacks serious competition. A company culture that drove success in the early days can become overly codified, rigid and ritualistic over time. Over time, bold new moves become much more risky; new business models may compete with existing businesses and cannibalize their sales. Even when it’s obvious that they will someday be necessary, it’s not hard to find excuses to put them off just a little bit longer. Slowly, great companies can lose touch with reality.

Cultural rigidity

How Kodak faded away.

Kodak introduced one of the first consumer cameras in history, in 1888, with the slogan “You press the button, we do the rest.” For 100 years, it sold cameras and film. Its highly profitable business was based on the classic “give away the razor and sell the blades” strategy: selling cheap, easy-to-use cameras and reaping profits from the film business over time.

In 1975, Kodak engineer Steve Sasson invented the world’s first digital camera, a prototype cobbled together using existing technologies, including a super-8 camera lens and cassette tape. After taking your photos with the camera, you could remove the tape and put it into a playback device to display the images on a standard TV. He and his colleagues demonstrated this “filmless technology” to Kodak executives throughout 1976. Sasson reports the executive reaction:

“Why would anyone ever want to view his or her pictures on a TV? How would you store these images? What does an electronic photo album look like? When would this type of approach be available to the consumer?”

Sasson and his team did not have the answers. But by applying Moore’s law the team came up with an estimate: In 15 to 20 years the devices would be available to consumers.

Kodak sold low-cost cameras but made the lion’s share of profits on film. The company’s core product was threatened, and Kodak had a 15-year head start to figure out what to do about it. What did Kodak do? Not much.

The predictions were right on. In 1988 the JPEG and MPEG formats were introduced. Consumer digital cameras followed in the 1990s. While Kodak’s film business slowly faded, the company struggled to find a strategy. One Kodak Senior VP and Director of Research said in 1985: “We’re moving into an information-based company… [but] it’s very hard to find anything [with profit margins] like color photography that is legal.”

In the early 1990s CEO Kay Whitmore vowed to “set the standard in film-based digital imaging.” You may ask, as I did, “what’s film-based digital imaging?” One example is the Photo CD. Customers could take film to a processor and get a CD instead of prints. They could then view the CD on their TV with a special player. Kodak executives met with technology companies, trying to find a way to partner. Bill Gates remembers Whitmore. He remembers him falling asleep in a meeting.

More “strategies” followed. First digital cameras, but it turned out the margins in that competitive industry were way too thin. Next, online services to help people manage their photos. Today it’s cheap inkjet printers.

No doubt, times are tough in the film business. But consider rival Fuji. As early as the 1960s they were producing videotape, computer tape and audio cassettes. In the 1970s they were selling VHS tapes and floppy disks. In the 1980s Fuji started an Electronic Imaging Division and introduced the first digital, computerized X-ray system and introduced the world’s first consumer digital still camera.

Today, Fuji is building on their experience and expanding into other industries, such as medical systems, digital imaging, optical devices and specialty materials like the thin films used in making flat-panel displays and solar cells. Fuji stayed in touch with customers and the changing market. Meanwhile, Kodak is talking to bankruptcy lawyers.

How GE revitalized its business.

GE was founded in 1890 by inventor Thomas Edison and over time it grew to dominate many industries, including power generation, turbine engines, electrical appliances and many others. When the Dow Jones Industrial Average was created, GE was one of the 12 listed companies (it’s the only one of the 12 that still exists).

Bureaucratic rigidity reigned supreme when young executive Jack Welch moved into GE headquarters in 1974. In his memoir Jack: Straight from the Gut, he remembers that “a set number of ceiling tiles signified one’s status in the corporation.”

There were as many as a dozen layers between the CEO’s office and frontline workers. All those layers insulated the company’s executives from its customers, like a person who was wearing too many sweaters: “When you go outside and you wear four sweaters, it’s difficult to know how cold it is.”
In GE’s power business, says Welch, “There was an attitude that customers were “fortunate” to place orders for their “wonderful” machines.”

“The bigger the business, the less engaged people seemed to be. From the forklift drivers in a factory to the engineers packed in cubicles, too many people were just going through the motions. Passion was hard to find.”

A mid-70s tour of Japanese manufacturing plants galvanized Welch into acting early and proactively, while the company was still healthy and profitable.
“The incredible efficiency of the Japanese was both awesome and frightening… And the Japanese, benefiting from a weak yen and good technology, were increasing their exports into many of our mainstream businesses from cars to consumer electronics. I wanted to face these realities.”

“I came to the job without many of the external CEO skills,” says Welch, “but I did know what I wanted the company to “feel” like. I wasn’t calling it “culture” in those days, but that’s what it was.”

Change wasn’t easy. In fact it was war. Welch declared war on the bureaucracy and entitled culture at GE. “I was throwing hand grenades, trying to blow up traditions and rituals that I felt held us back.”

He cut the levels of hierarchy in half and instituted a competitive, performance-oriented culture, insisting that top achievers were rewarded handsomely and low performers were fired. The strategy he laid out was to focus only on industries where GE could be number 1 or number 2. If they couldn’t be number 1 or 2, they would fix, sell or close the business.

In Welch’s 20 years as CEO, GE re-focused on customers and market realities, and grew revenue from $27 billion to $130 billion while increasing profit margins. GE has been consistently profitable since 1991.

How IBM rediscovered customers.

IBM was also founded in the 1800s. It’s early “business machines” included scales, electric tabulation machines, and company time clocks. As the company grew it continued to focus on its business customers and helping them process and manage the data it took to run their businesses. IBM successfully managed to stay ahead of the technology curve for most of its history, combining investments in R&D and innovation with customer service and support for its complex, leading-edge technologies.

But by the early 1990s the company’s culture had atrophied into an internally-oriented, ritualistic web of territorial fiefdoms. IBM’s sales and profits were falling at an alarming rate. They needed a change agent. In his book “Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change” Lou Gerstner remembers the culture he inherited in 1993:

“An institutional viewpoint that anything important started inside the company—was, I believe, the root cause of many of our problems… They included a general disinterest in customer needs, accompanied by a preoccupation with internal politics. There was general permission to stop projects dead in their tracks, a bureaucratic infrastructure that defended turf instead of promoting collaboration, and a management class that presided rather than acted.””

Gerstner didn’t come from inside the company. He was an outsider and former IBM customer as CEO of American Express. As a customer he had been enormously frustrated by IBM’s territorial geographic structure.

“The fact that American Express was one of IBM’s largest customers in the United States bore no value to IBM management… It was enormously frustrating, but IBM seemed to be incapable of taking a global customer view or a technology view driven by customer requirements.”

One of Gerstner’s first moves was “Operation Bear Hug,” where every member of the senior management team, and every one of their direct reports, visited at least five of their biggest customers in a three-month period, to listen, show the customer they cared, and initiate action as necessary. For every visit Gerstner wanted a one-to-two page report sent to him and anyone in the company who could solve that customer’s problems.

The prevailing plan when Gerstner came on board was that the company should be broken apart into individual businesses – so-called “Baby Blues” so they could compete more effectively. But Gerstner took a different tack.

Realizing that IBM’s strength with customers came from its global reach and broad, deep expertise, he reorganized the company from geographic territories global customer-oriented segments that cut across geographic lines. Like Jack Welch’s “hand-grenade” approach at GE, this was tantamount to a declaration of war. IBM regional managers were like powerful heads of state that resisted him at every turn.

“During a visit to Europe I discovered, by accident, that European employees were not receiving all of my company-wide e-mails. After some investigation, we found that the head of Europe was intercepting messages at the central messaging node. When asked why, he replied simply, ‘These messages were inappropriate for my employees.’ And: ‘They were hard to translate.’”

“One particularly stubborn—and inventive—country general manager in Europe… simply refused to recognize that the vast majority of the people in his country had been reassigned to specialized units reporting to global leaders. Anytime one of these new worldwide leaders would pay a visit to meet with his or her new team, the country general manager, or GM, would round up a group loyal to the GM, herd them into a room, and tell them, “Okay, today you’re database specialists. Go talk about databases.” Or for the next visit: “Today you’re experts on the insurance industry.” We eventually caught on and ended the charade.”

Changing the culture was the key to the transformation. Gerstner, like Welch, wanted a high-performance culture. “Culture isn’t just one aspect of the game — it is the game” he says.

But culture isn’t something any one person can control. It lives and breathes in the actions and behaviors of every person in the company, and it’s acted out every day. Culture is deeply embedded in the ongoing habits and routines that permeate any company. Changing a culture is a herculean task and it doesn’t happen overnight.

“You can’t mandate it, can’t engineer it. What you can do is create the conditions for transformation. You can provide incentives. You can define the marketplace realities and goals. But then you have to trust. In fact, in the end, management doesn’t change culture. Management invites the workforce itself to change the culture” says Gerstner.

“Frankly, if I could have chosen not to tackle the IBM culture head-on, I probably wouldn’t have”.

Luckily, he did tackle it, and persistent effort paid off. Between 1990 and 1993, when Gerstner took over, IBM lost $16 billion. In his first year he rescued IBM from its steep dive and returned it to profitability. The company has grown steadily ever since.

When in doubt, get in touch with your customers.

Name a company you love, a company you are loyal to, a company you buy things from all the time, and you will inevitably find a company that’s connected to its customers; that knows who they are and what they care about.

Focusing on customers doesn’t mean trying to please everyone. It’s about getting a deep sense of who your customers are and what they care about. Wal-Mart dominates retail by relentlessly focusing on price-sensitive customers. Everything in Wal-Mart’s culture is focused on squeezing one more penny of cost out of their operations, and sharing those cost savings with customers. Much smaller Nordstrom has only 2% of Wal-Mart’s revenue but generates higher profits by focusing on customers who prefer excellent service and selection over price. Wal-Mart and Nordstrom focus on two profitable but distinct market segments, while other retailers who try to be too many things to too many people, like Sears and JC Penney, get squeezed.

Some things don't change

The world is constantly changing, and so are customers. Customers won’t always want any one product or service. They won’t always want iPads.

But some things won’t change. Customers will always want great experiences, great service, convenience, selection, low prices and fast delivery. A customer-focused company knows what its customers care about and builds capabilities and strategies that reinforce its advantages over time.

GE, IBM and Starbucks turned their companies around by focusing on customers. Kodak continues to struggle – the company’s latest bet is using its patent portfolio to finance a line of cheap inkjet printers it hopes will save the company. Kodak investors are understandably skeptical, and the company’s stock today is trading at all-time lows.

There’s an old adage about making difficult decisions:

“When in doubt, go towards the fear.”

When you are facing a difficult decision, more often than not you know deep down what direction you need to take. But when that direction is risky, or difficult, or otherwise scary, people look for reasons to avoid the difficult road. So lurking within most difficult decisions is trepidation and fear about the road you must take.

We can only imagine what the decision-makers at Kodak must have felt when they realized the future of photos was filmless. The fear must have been palpable. But at the same time the imperatives must also have been evident: Start getting out of film and start preparing for the digital world.

Unfortunately we can also all-too-easily imagine the meetings and memos that rationalized away the fears, the people hanging on to near-term retirement, the desperate hope that by some miracle the world would not evolve.

When in doubt, don’t look inside your company for answers. Turn around and face the market. Get back in touch with your customers.

Today’s customers are more connected than ever. The rate of change in society is accelerating, as whole families – kids, parents and grandparents – join online social networks to keep up with each other and with friends, to share their interests and connect with new people. Social networks are where the people are going; that’s where the customers are. But most companies are slow to adopt these new, connected technologies.

Why? In some cases they don’t understand how social networks will impact the business. They can’t see a clear path or understand the implications. In most companies, however, there are a few people who do understand. But bureaucracy, corporate culture, blind spots, fear and risk-avoidant behaviors stand in their way.

Customers are connecting. Are you?

Jack Welch once said “I’ve always believed that when the rate of change inside an institution becomes slower than the rate of change outside, the end is in sight. The only question is when.”

Can your company’s inside rate of change match the rate of change you see on the outside? If not, it’s time to take a good hard look at social technologies and start thinking about how they can help.

The connected customer

In September of 2011, Bank of America announced it would start charging customers $5 per month to shop with their debit cards. In early October a 27-year-old gallery owner in Los Angeles named Kristen Christian set up a Facebook event page, inviting 500 of her Facebook friends to move their accounts to local credit unions by November 5, which she called “Bank Transfer Day.”

The ATM revolt

“Together we can ensure that these banking institutions will always remember the 5th of November,” she wrote. “If we shift our funds from the for-profit banking institutions in favor of not-for-profit credit unions before this date, we will send a clear message that conscious consumers won’t support companies with unethical business practices.”

Christian’s groundswell movement quickly snowballed. Within three days 8,000 people had signed up to attend the event.

“I was tired” wrote Christian in another post. “Tired of the fee increases, tired of not being able to access my money when I need to, tired of them using what little money I have to oppress my brothers & sisters. So I stood up. I’ve been shocked at how many people have stood up alongside me. With each person who RSVPs to this event, my heart swells. Me closing my account all on my lonesome wouldn’t have made a difference to these fat cats. But each of YOU standing up with me… they can’t drown out the noise we’ll make.”

By November 4, the day before Bank transfer Day, at least 650,000 people had added $4.5 billion to credit union savings accounts. That same week, Bank of America dropped its plan to charge additional fees.

A power shift.

Customers are becoming aware that they have the power to collectively organize and protest, and today they have the tools to do it. Revolutions never start at the top. They start with the people, when they begin to recognize the power that comes from numbers.

A single customer is as powerless as a drop of water. But put enough drops together and you’ve got a force on your hands that will never be contained or controlled. Revolutions like Christian’s ATM revolt begin the same way: one molecule bonds to another, and they connect. With every new connection the mass and momentum of the whole increases.

Information technology and revolution.

This isn’t the first time in history that new information technologies have sparked revolution. It’s a recurring pattern.

Before the printing press, books were hand-written manuscripts available only to the clergy and the wealthy. The mostly-illiterate public relied on those in power to interpret humankind’s body of knowledge. Any communication between ordinary people relied on word of mouth and was mostly limited to short distances. In short, information was distributed in pockets and silos.

Information technology and revolution

The printing press gave people a way to share information in a peer-to-peer way, bypassing traditional power structures. The rapid information sharing that followed, via books, pamphlets, newspapers and scientific journals, effectively ended the Middle Ages and sparked the Age of Enlightenment, the Industrial Revolution, and ultimately the political revolutions that resulted in the first constitutional democracies.

Today the web is having a similarly profound effect, allowing people to bypass traditional media channels and power structures to communicate with each other directly. Once again, information and ideas which were contained in pockets and silos are spreading far and wide. Once again, innovation is accelerating. Once again, mass peer-to-peer communication is enabling and empowering social, intellectual and political revolutions.

Peer-to-peer information technologies like the printing press and the web unleash powerful revolutionary forces. But revolutions begin in the streets. They often go unnoticed or ridiculed in their early stages. It took 100 years of bible-printing before Martin Luther nailed his 95 theses to a church door in Wittenburg. It was another hundred years before the first scientific journals were printed, and another hundred before the American Revolution broke out in 1775. It took more than ten years for colonial dissent to simmer before the American Revolution broke out into open war.

But today events unfold at a more accelerated pace. It’s happening faster this time.

95 theses.

In case you didn’t notice it, another 95 theses were nailed to the wall of the web in 1999, when Rick Levine, Christopher Locke, Doc Searls and David Weinberger wrote the Cluetrain Manifesto.

In the same way that Luther’s 95 theses directly challenged the most powerful institution of his day, the Cluetrain Manifesto directly challenges today’s most powerful institutions, and its messages seem more prescient than ever. I’ve pulled a few of the statements from the Cluetrain Manifesto, along with an observation or two for each.

Markets are getting smarter… faster than most companies.

Clearly social networks such as Twitter and Facebook, which didn’t exist in 1999, have gained momentum far more quickly among the general population than they have in corporations. Customers are connecting and sharing information at a far faster rate than the companies that serve them. There’s no question that when it comes to social networking, companies lag behind their markets.

Networked conversations are enabling powerful new forms of social organization and knowledge exchange to emerge. As a result, markets are getting smarter, more informed, more organized. Participation in a networked market changes people fundamentally. People in networked markets have figured out that they get far better information and support from one another than from vendors.

Think about where you go when you want to make a buying decision today. In general, you go to peers first. If you want to go to a restaurant, you might go to Yelp or Urban Spoon to read recommendations and reviews from customers. Booking a hotel? If you care about comfort and service, you might go to hotels.com to read some reviews, or if price is a priority, you might go to Priceline where you can set your own price. Want to watch a movie? You can find the best picks at Rotten Tomatoes, Netflix or IMDB, where movie-watchers have a voice.

Companies can now communicate with their markets directly. If they blow it, it could be their last chance.

Some companies have figured out how to create these kinds of direct relationships. Amazon allowed customers to write negative reviews on the store’s website since the day they launched. That was a controversial decision at the time. Why would a retailer allow anyone to post information that would help a customer make a decision not to buy something? Jeff Bezos recalls a publisher calling him and saying “I don’t think you understand your business. You make money when you sell books.” But Bezos knew better. He understood that what connected customers value is a company that will help them make better buying decisions. And today we all understand that.

There are no secrets. The networked market knows more than companies do about their own products. And whether the news is good or bad, they tell everyone. Companies must ask themselves where their corporate cultures end. If their cultures end before the community begins, they will have no market.

When the Cluetrain Manifesto was written Dell was the poster child of the PC industry, a company that had grown from a college kid’s startup to a $12 billion technology leader in just 13 years. But in 2005, Dell learned a tough lesson when they shut down peer-to-peer customer forums in 2005, and Dell customer (and blogger) Jeff Jarvis, who had recently bought a machine that almost immediately malfunctioned, expressed his dissatisfaction on the web in a post titled “Dell lies. Dell sucks.” Jarvis coined the term “Dell Hell,” saying Dell didn’t “respect [customers] enough to listen to them. Within a week, Dell Hell was a story in the New York Times and Business Week. Hundreds of other bloggers chimed in to tell their “Dell Hell” stories, Dell remained silent, and the PR nightmare snowballed. Dell sales plummeted along with its reputation. At the time, Dell had an internal policy not to communicate not to reply publicly to blogs.

Dell hell

Dell has learned from its mistake and in 2010 launched a customer listening command center to monitor and proactively respond to online conversations, and Founder and CEO Michael Dell is active on social media, engaging with customers directly.

If that isn’t enough, Wikileaks has demonstrated definitively that no secret, corporate or political, is safe for long.

There are two conversations going on. One inside the company. One with the market. In most cases, neither conversation is going very well. Almost invariably, the cause of failure can be traced to obsolete notions of command and control.

So far, the market conversation is doing better than the internal one. Most companies still see social media as primarily a marketing function, a new communication channel, as opposed to a fundamental shift from one-to-many broadcasts to peer-to-peer conversations. But as companies engage with customers they will find that they won’t be able to respond effectively without internal social networks that mirror the ones their customers are using.

The Law of Requisite Variety, a concept from information theory, says that a system can’t stabilize unless it is capable of states that match the variety of states in its external environment. In other words, if you want to engage in a high variety of external activities, you will have to create a system that allows for an equal amount of variety in your control systems. Most companies are still figuring that out.

To traditional corporations, networked conversations may appear confused, may sound confusing. But we are organizing faster than they are. We have better tools, more new ideas, no rules to slow us down. We are waking up and linking to each other. We are watching. But we are not waiting.

In 1999, statements like the ones above seemed a bit hyperbolic to many business executives, but today most businesses are paying attention.

Customers have begun to recognize, and exercise, their power. This power, in and of itself, is not necessarily new. Customers have always had the power to choose what they wanted to buy. They have always had the power to share their experiences with friends and peers. They have always had the power to promote, or demote, a company based on what it promised and what it delivered. Customers have always been able to vote with their wallets.

But they weren’t connected. And that little thing we call linking makes all the difference.

Any dictator will tell you that in order to control the state, you must control the media. So ask yourself: who controls the media today? And which way are the trends heading?

We’ve been saying the customer is king so long that it has become a cliché. And in most cases, our actions don’t match those words. But customers will be kings and queens, not only in name but in fact. One by one, customers are recognizing the power that comes from a world where their choices are infinite and their voices are amplified. They are connecting. They are organizing. They are gaining mass and momentum.

Despite Martin Luther and his theses, the Catholic Church is still here today, and although its power and reach is greatly diminished it will not be going away any time soon. And big business isn’t going away either. But the landscape is shifting, and there are few in business today who would deny it.

To think that this customer revolution won’t affect your business is naive. It will affect every business. It is already shifting the balance of power. It will change the way power is controlled and exercised. It will change the way companies are organized and the way they do business.

Eventually every customer will be a connected customer. And if you want to win over connected customers, you will need to become a connected company. If you’re already on this journey, congratulations. If not, today is a good day to start.

Change is changing

We talk about change management. Change as a process. We tend to think of change in business as something that needs to happen once in a while, when the need arises. It’s uncomfortable, but necessary. There is a whole industry called Change Management that has built up over the years to help people through these inflection points. Change management is big business these days, because just about every organization knows they need to change. And the bigger the org, the harder it is to change.

The general paradigm and “message to the troops” in change management goes something like this:

We are in a situation that’s problematic. Our profits are declining. We need to make a change. The vision for our future is (whatever it is). We all need to band together and change our routines and processes to get from here to there. Once we have gone through this difficult period we will be over there, in our happy place, and everything will be great.

But change is changing.

Change is Changing

The problem with this approach is that it looks at change as a difficult transition between two states. But it’s becoming increasingly clear that change is not a once-in-a-while thing so much as something that is going to be happening all the time.

Change is accelerating, to the point where it will soon be nearly continuous. Periods of sustained competitive advantage are getting shorter, and there are a host of studies that confirm that. It’s not just something that is happening in technology, either. It’s happening in every industry.

We need to change the way we think about change.

If change is a constant, then the only real sustainable competitive advantage is to be able to grow and evolve continually, to stay ahead of the competitive pack.

You can’t do this with the traditional business structure that we’ve inherited from the industrial revolution. This isn’t like redecorating a room in your house or moving the furniture around. This is a major rehab project that might affect the foundations, the plumbing and everything else. It requires some pretty fundamental rethinking of the way your company is structured, how you execute your strategy, and how you’re going to evolve.

What the world requires today is organizations that are capable of continuous creativity and innovation, that can adapt and evolve on a continual basis; organizations that can generate new businesses, that can sprout and branch into new categories and new industries; that can recover quickly from failures and move on.

This is not change management but portfolio management.

Portfolio management is not so much about taking big steps as it is about balancing risk with opportunity, planting a lot of seeds and nurturing them until they are big enough to succeed (or fail) on their own. Portfolio management requires a tolerance for risk balanced with some big expectations, and an expansive view of what’s possible.

The whole attitude toward change needs to change. It can’t be about leaving a rough patch and moving everyone to a happy place in some imaginary future. It’s got to be about the excitement of pursuing new business opportunities, not because it’s necessary to beat competitors (although that is certainly the case) but because it’s energizing to try new things, to explore new territories, and to experiment with new business ideas.

It can’t be change anymore. It’s got to be fun.

Reading the conversation cloud

For those of you who know Hari Seldon, he needs no introduction. But for those who don’t, let me briefly introduce him. Hari Seldon was the star of Isaac Asimov’s Foundation Trilogy, a science-fiction masterwork which asked the question: What if we could predict the future the way we can predict the weather? Seldon, a fictional mathematics professor, developed a science called psychohistory, which allowed him to predict the future in probabilistic terms. That is, not exactly, but based on statistics and probability, he could predict the most probable futures, the way we predict the weather today.

Map of the Foundation galaxy
Map of the foundation galaxy by Cygnus.

It’s not hard to imagine that such a thing might be possible, if only we had the data.

Predicting the weather

Predictions and data go hand in hand. Consider the history of weather forecasting. For millennia, we tried to predict the weather in informal ways, by reading the clouds, throwing sticks, stargazing, and observing seasonal cycles and patterns.

But in the 1800s the electric telegraph was invented, and suddenly it became possible to share temperature and weather data across distances. Once we had the data things started to change.

Weather map from 1906
Weather map from 1906 by Justhus Perthes.

We began to apply a scientific approach to understanding and predicting the weather, by collecting quantitative measurements and using those measurements to develop models of atmospheric processes. Perhaps it is not a coincidence that Asimov’s Foundation Trilogy was published in the 1950s, just as weather forecasting was coming into its own as a reliable predictor of atmospheric activity.

In the 1950s, the development of computers meant that we could make more accurate, quantitative predictions on a regular basis. Today, these algorithms have become so sophisticated that many predictions are based on computer models that crunch huge volumes of data, and human forecasters make their predictions by choosing between multiple computer-generated options. That data and those models are what we now use to make ever-more-precise predictions of weather around the globe.

Predicting the social weather

Today, the people of the world are generating social data at a pace never before imagined, except perhaos by Isaac Asimov and his invented protégé, Hari Seldon.

Facebook’s 750 million users create and share a billion pieces of content every day. Twitter users tap in 350 billion tweets per day. Every two days, more information is created than between the dawn of civilization and 2003. One out of six minutes people spend online is spent on social media.

All this social activity generates a massive cloud of data, representing the social activity of the planet: Status messages, tweets and retweets, likes, plus-ones, comments, pokes, photo uploads, check-ins and so on. Like a global weather pattern, the conversation cloud is readable if we only had the tools to do so.

If only we had the data.

When it comes to the conversation cloud, we are using methods more appropriate to ancient times. We are throwing sticks and trying to read the stars. We try to read this whirl of information and look for patterns, but so far there has not been any systematic, quantitative approach to collecting and interpreting social data. The cloud is there. But every day a treasure trove of data is generated, only to slowly dissipate, like smoke on a windy day.

We can’t look back at historical data. We can’t search for patterns in the data. We can’t build predictive models. All because we just don’t have the data. And until we have consistent, reliable data, these things just aren’t going to happen.

If only we had the data.

Well now we do.

At the Dachis Group, we have been developing just such a system, a massive data repository we call Social Business as a Service (SBIaaS), collected from hundreds of millions of sources all over the web. SBIaaS is a platform that provides real-time social business data on demand.

Today we launch our first application that taps into this data service, the Social Business Index (SBI). The Social Business Index tracks more than 20,000 companies, providing real-time ranking, analysis and benchmarking of their social business adoption and performance. I hope you will pardon the expression, but it’s pretty effing cool.


The Social Business Index. Check it out. It’s free :)

Predicting the future

Social business is a young field. We don’t yet have well-formed metrics and performance indicators than easily be compared across industries. We’re still a long way from being able to make accurate predictions and social forecasts, but the SBI is a good start. It monitors conversations initiated by companies in real time. It measures engagement levels, response times, conversation volume and velocity. It tracks social business initiatives on Facebook, Twitter, YouTube, blogs, forums and other social platforms. It ranks companies by social engagement and execution and updates its rankings dynamically, based on real-time information.

SBIaaS is a platform that provides Data as a Service (DaaS), and the Social Business Index is just the first of many applications. There will be future developments so stay tuned.

I think Hari Seldon would be proud.

Give pods a chance

Pods – also known as self-directed work teams – have been around for more than 20 years. Pods are 30% to 50% more effective than their traditional counterparts. A survey of senior line managers offers some of the benefits derived from implementing self-directed teams:

    Improved quality, productivity and service.
    Greater flexibility.
    Reduced operating costs.
    Faster response to technological change.
    Fewer, simpler job classifications.
    Better response to workers’ values.
    Increased employee commitment to the organization.
    Ability to attract and retain the best people.

So if it’s such a great idea to go podular, why aren’t more companies doing it?

Pods

Podular design is a concept that focuses on modularizing work: making units more independent, adaptive, linkable, and swappable. But the environment that surrounds the pods is equally critical to the success or failure of a podular system. Modular components are a critical element of a connected company. But to take advantage of pods you also need a business that is designed to support them.

Architectural vs component innovation

Architectural vs component innovation

Most innovation involves small, incremental improvements to the parts of a system. A better spark plug, a better kind of tire, a better bar of soap, and so on. This is because these kinds of innovations are easier to inject into an existing system.

But some kinds of innovations – often called disruptive innovations – involve changes to the system itself. The PC revolution is an example of disruptive innovation, because the entire system of work computing had to change to accommodate it. This required a whole host of component innovations beyond the PC itself, such as the office scanner, printer, networking, and so on. System innovation like this requires changes to the fundamental architecture – known as architectural innovation.

Component innovation swaps out one node for another, which usually results in an incremental improvement. Architectural innovation changes the links. Changing the relationships between nodes is a sweeping change that usually transforms the way that the entire system works. Apple’s iTunes/iPhone ecosystem was an architectural innovation that changed the music industry forever.

Perhaps one of the reasons more companies haven’t organized around small, empowered teams is that their business architectures don’t allow it. It’s not easy to plug modules into a platform that isn’t designed for it.

What kinds of companies have been successful with a podular approach?

Xerox, Procter and Gamble, AT& T and many other companies have credited self-directed teams with marked impact on their operations, including improvements in customer service, manufacturing, inventory management, and other productivity gains. In this post I’d like to highlight three highly effective podular systems: one old-school company, one new-school company, and one old-school industry that’s reinventing itself.

3M is podular

3M is podular
Although they are known for innovation, 3M was incorporated in 1902, which makes it more than a hundred years old. 3M was one of the companies in the famous (but unpublished) 1983 Shell study of long-lived companies that I mentioned in the original Connected Company post.

Big pods
3M has roughly 100 autonomous profit centers, each of which operates like a separate company. As operations grow, profit centers divide in order to keep each group small and agile. 3M’s R&D teams are integrated with business units to keep them close to buyers and markets.

Small pods
In the 1990’s 3M implemented “self-directed work teams” in their manufacturing operations. The teams do their work as a team and manage themselves. Managers in this system were freed up to become coaches and teachers – essentially full-time trainers. Self-directed teams were not a top-down directive at 3M. Initial self-direction efforts arose out of manufacturing, where complexity in the operations made traditional management cumbersome. Productivity soared.

Amazon is podular

Amazon is still a teenager, but it’s also the largest online retailer in the Unites States, and almost the biggest retailer period (in market cap, second only to Wal-Mart).

Amazon is an ecosystem
Legend has it that Jeff Bezos named his company Amazon after the world’s largest river to give the impression of size, or to ensure that it showed up high in Yahoo.com’s alphabetical listings. But I suspect that a deeper, more strategic concept underlies the name. The Amazon rainforest is one of the richest ecosystems in the world, and Amazon the company has been very deliberately organized like a complex, customer-centered ecosystem.

Rapid change: Just like animals co-evolving in a complex ecosystem, small teams at Amazon develop features in parallel. It’s a probabilistic approach, oriented toward fast-failure and recovery rather than failure-avoidance. Teams are self-organizing, self-repairing and self-managed.

Data Darwinism: New features are tested on a small portion of the overall population and compared against the original, an approach known as A/B testing. The fittest designs survive and are rolled out to the larger system. “What you want to do as a company is maximize the number of experiments you can do per unit of time” said Bezos in a 2007 interview with Harvard Business.

Amazon is built around self-managed teams
In 2004, Bezos told Fast Company that

We have this weirdness in our business… The raw ingredients that make our business — things like CPU processing power, bandwidth, and disk space — get twice as cheap every 12 to 18 months. Disk space is 30 times cheaper today than it was five years ago. Thirty times cheaper! So the real question becomes, What can you do with 30 times as much disk space, 20 times as much computing power, and 30 times as much bandwidth? All right, how are you going to make customers happy with that? It turns out that these are not easy questions to answer.

Pods at Amazon

Bezos does have an answer though: Break big problems down into small ones. Distribute authority, design, creativity and decision-making to the smallest possible units, and set them free to innovate. Small teams focus on small, measurable components that customers value. One example is a team that decided to focus on finding phrases that are unique to a particular book. Says Amazon CTO Werner Vogels:

The Statistically-Improbable Phrases service… turns out to be a mechanism that brings very remarkable collections together… Remember that most of our developers are in the loop with customers, so they have a rather good understanding about what our customers like, what they do not like, and what is still missing.

Teams are limited in size to about 8-10 people. At Amazon they call them 2-pizza teams: If you can’t feed a team with two pizzas, it’s too large.

What keeps the teams close to customers? Three things:

    1. Each team has a fitness function —a number they are focusing on – and organizes its work in any way it pleases to improve that number. Such data is critical for organizing autonomous pods: “Fact-based decisions overrule the hierarchy” says Bezos. Since each team focuses on a small part of the ecosystem, the company gets closer and closer to the data, tightening up feedback loops and helping the whole system evolve faster.

    2. Teams work backwards from customer value to service or product. They start with a press release describing their intended features and start collecting feedback before they have built a thing.

    3. Every two years, each Amazon employee is required to spend a couple of days interacting directly with customers at a call center or other facility.

Amazon’s approach is supported by a strong platform that allows the whole Amazon website to be developed in a massively parallel fashion by podular teams. When you visit an Amazon page, you might be accessing a hundred or more web services that are orchestrated to give you a personalized experience. Behind the scenes is a sophisticated service-oriented architecture that allows Amazon’s podular teams to access common data and functionality without having to worry about interdependency and conflict. “Any algorithm that requires agreement will eventually become a bottleneck… each node should be able to make decisions based on the local state.” says Amazon CTO Werner Vogels. Because of the architecture, services can evolve in parallel without affecting each other.

Podular manufacturing

What could be more old-school than the automotive industry? With the innovations of Henry Ford, the automotive industry ushered in the Industrial Revolution. But the automotive industry has not remained static over its hundred-year lifespan. Alfred Sloan began the trend to decentralize work when he designed the first truly modern corporation, GM, with a centralized finance and planning function that oversaw semi-autonomous business units. And between 1950 and 1975, Taiichi Ohno of Toyota reinvented the assembly line with the Toyota Production System, which pushed autonomy even further – down to the factory floor.

Perhaps one of the most exciting innovation platforms I’ve heard about recently isn’t a company at all – it’s more like a hive of podular activity. The Chinese motorcycle industry is a buzzing ecosystem of companies that creates motorcycles using a common platform and modular components. Because of this simple platform, motorcycle manufacturers can outsource components to suppliers with confidence that the pieces will fit together in the end product. The common platform also gives the component makers a lot of freedom to innovate within the modular structure.

The Chinese motorcycle industry has exploded onto the global market. China now makes more than 50% of the motorcycles in the world.

Modular manufacturing

A US-based company named Wikispeed has adopted the same approach with the design of the SGT01, a car designed as a modular platform which will empower suppliers to innovate freely. Each part of the car is a component that fits into a standard interface. For example, when the engine wears out, it can be removed and replaced in one piece, like a tire. Although they are still seeking funding to go into full production, they have designed a 4-seater commuter car that gets up to 114 miles per gallon and can sell for $20,000 using this approach. Although it’s not in production yet, you can still order one today on the internet.

Challenges

Do podular systems have to be embedded in a company from day one? I don’t think so. As we saw with the PC, disruptive or architectural innovation is possible within existing companies. But think about how that transition happened – in many cases because managers were brave enough to take on the internal powers-that-be, such as corporate IT, and take personal risks that they knew would increase the productivity in their unit. If you want to go podular you will need to face some challenges:

How to reward performance?
Self-managed teams must not only have authority, they must be accountable for the results they deliver. The results the team is responsible for should be clear and measurable. There is some debate over whether self-directed teams should be compensated on a pay-for-performance basis. Some say that it damages morale and performance should be recognized in other ways. Some say that it works, so long as it’s done well. The jury is out. My opinion here is that most pay-for-performance systems are costly, difficult to measure, and tend to encourage people to game the system. So I believe successful teams should be rewarded in other ways: by being recognized by their peers, or allocating more of the resources that make them successful, like better equipment, more people, support, and so on.

How do you deal with loafers and disagreement within the team?
This is where culture is critical. The culture of the company should be clear about expected behaviors like resolving disagreements, dealing with underperformers and so on. Letting teams self-organize will alleviate many of these issues up front. 360-degree reviews, where employees rate each others’ performance, can also help.

Do you have an infrastructure that can support the pods?
Culture is the most important support infrastructure you can possibly have, because it clarifies behavioral expectations and offers an approach for resolving conflicts. When a culture is working, it is also self-managing and self-reinforcing.

Technical standards help to reduce friction, but they are secondary to culture. Focus on culture first, and teams will start to demand the technical infrastructure they need to perform.

Complexity and interdependence among business units.
If your organization is not already constructed in a modular fashion, then architectural innovation is difficult at best. Most architectural innovation does not happen within a firm but within an industry. But any principle that can be applied within an industry can also be applied within a department. What you want is a part of the company that can be treated as a “black box.” If you can clarify the inputs and outputs you expect from a group or department, and what is inside the black box has limited interdependencies with other units, you have a sandbox where you can experiment with pods.

Find an area that is clearly connected to customer value, that’s as independent as possible from the rest of the organization. Early adopters in the PC revolution were sales teams, historically an area where broad autonomy is accepted as long as the group delivers results.

Can you go the distance?
Patience is important. If you implement a team-based approach, productivity will get worse before it gets better, as people learn new ways of working and build trust with each other and the wider organization. Set a reasonable time frame and give the pods some time to ramp up.

The self-empowered team concept is not new. In fact, it precedes the Industrial Age altogether. In an age where passion and creativity is increasingly important, we need to take another look at organizational forms that play to natural human strengths, like ingenuity, curiosity, and the joy of making a clear and recognizable impact on the world.

The road ahead

Pods aren’t the answer to every problem. But customers are demanding more and more. The world is increasing in complexity and more than 90% of CEOs say they will need to restructure the way their organizations work in order to deal with it. Chances are that the changes you will need to make are not so much incremental as fundamental. If you’re not ready to start now, then when will you be?

Think about the level of complexity in your business, and ask yourself if it’s increasing or decreasing. Ask yourself:

    How close to customers can your company make decisions?
    How fast are the feedback and learning loops on the things that customers value?
    How fast can your organization adapt to changes in your business ecosystem?
    What do you need to do in your organization to prepare for the next 20 years?

Give pods a chance. The future is podular.

The future is podular

Further reading:

The IBM 2010 C-suite study series reveals senior executives’ prevailing views about complexity and the need for deep transformation.

Amazon CTO Werner Vogels discusses the technology infrastructure that supports Amazon’s podular approach.

Data beats the SVP: An Amazon geek’s story about the company’s powerful culture.

1995 article about self-directed 3M teams by Ron Williams.

If you don’t feel like reading, here’s some stuff you can watch:

Tim O’Reilly and Gary Hamel discuss Amazon’s business architecture.

Treasures of the Amazon talk by Jared Spool highlights some of the design excellence that emerges from Amazon’s evolutionary approach.

You can also check out the entire Connected Company reading list, join our email discussion group, or read the original Connected Company article.

Many thanks to John Hagel III and John Seely Brown for their article about the Chinese motorcycle industry.

Thanks to Jim Benson for many conversations about team dynamics, and for pointing me to Wikispeed.

Thank you Doug Miller for pointing me to some of the rich history of self-directed teams.

Note 1: The term podular and the use of the term “pod” to describe self-directed teams is my own concoction. Do we need a new term? We can debate that, but “self-directed work team” is rather a mouthful, and SDWT is even worse. We could call them cells, but as a manager I can’t imagine trying to get people excited about going to work in a cell every day. Use your own term if you want, in the end it’s not the terminology but the change we make in the world that counts.

Note 2: I’m counting the 2001 reference as “fair use.” That’s my story and I’m sticking to it :)

“Culture is how a firm operates” ~ Reed Hastings

Reed Hastings is the Founder and CEO of Netflix. Hastings is a stickler for culture. In this slide deck he expounds on Netflix culture, what it is, why it’s important, and how Netflix intends to avoid complexity and chaos as they grow.

The future is podular

The future is podular
One of the most difficult challenges companies face today is how to be more flexible and adaptive in a dynamic, volatile business environment. How do you build a company that can identify and capitalize on opportunities, navigate around risks and other challenges, and respond quickly to changes in the environment? How do you embed that kind of agility into the DNA of your company?

The answer is to distribute control in such a way that decisions can be made as quickly and as close to customers as possible. There is no way for people to respond and adapt quickly if they have to get permission before they can do anything.

If you want an adaptive company, you will need to unleash the creative forces in your organization, so people have the freedom to deliver value to customers and respond to their needs more dynamically. One way to do this is by enabling small, autonomous units that can act and react quickly and easily, without fear of disrupting other business activities – pods.

A pod is a small, autonomous unit that is enabled and empowered to deliver the things that customers value.

By value, I mean anything that’s a part of a service that delivers value, even though the customer may not see it. For example, in a construction firm, the activities valued by customers are those that are directly related to building. The accounting department of a construction firm is not part of the value delivery system, it’s a support team. But in an accounting firm, any activity related to accounting is part of the customer value delivery system.

There’s a reason that pods need to focus on value-creating activities rather than support activities. Support activities might need to be organized differently. More on that later.

Process to pod

Process
Traditionally, it’s been the job of managers to coordinate activity across divisions or lines of business, because processes are usually complex and interdependent. Making changes in one part of the process might solve a problem for that unit but cause problems for others.

Pods
The goal of podular design is to reduce interdependency by enabling autonomous pods to focus on clear outcomes that deliver value to customers. Pods can coordinate with each other via clear cultural, behavioral and technical standards.

Chains vs. nets

You can think of any business process as a chain – a series of steps that people go through to get things done. Processes don’t depend on the intelligence or creativity of the people who run them, so much as their consistency and ability to perform a specialized task. The manager of the process is responsible for the intelligence of the system.

A process is a step-by-step set of instructions that’s designed to deliver repeatable results and avoid failure. This is just fine, as long as you want to achieve the same result every time. But processes are also very brittle when it comes to change and innovation. If you are responsible for a part of a complex process, it’s hard to try something new.

Processes are like chains

If you get one step wrong, there is a cascading effect, and everything downstream from that change is affected. Small changes at the beginning of a process can have devastating effects elsewhere in the system.

A chain, as the saying goes, is only as strong as its weakest link. Break one link and the whole chain fails.

Podular systems work like nets
A podular system is like a net. It distributes the work load across a wider area by allowing each pod to focus on goals rather than steps or stages. If one strand breaks, the system can still carry the load.

In a podular system, the burden of creativity and intelligence is on the people in the pod. In a pod, your focus is on solving problems and delivering value rather than executing previously-defined steps. You can no longer pull the levers, move the dials and say you did your job, even though the customer didn’t get what they wanted. Giving the customer what they want is your job.

If processes are fool-proof, then pods are fail-proof.

Standards and protocols

Even without a traditional command-and-control hierarchy, autonomous pods still need to make decisions and coordinate their activity in order to deliver value to customers. The secret of coordination is to make those exchanges as frictionless as possible.

Technical standards
Technical standards are simply interfaces that allow you to connect things at will. For example, the electrical socket in your wall uses a common standard that allows you to get electricity when you plug in a device. When your electrician installed that socket in the wall, you didn’t have to know in advance what you might want to plug in to it. And device-makers can be confident that if their plugs follow a common standard, you will be able to plug it into your wall.

Those of us who travel a lot wish that the world had a common electrical standard, but alas it does not. And, sadly, these kinds of standards are not as common in business as you might think. But things have come a long way in the last ten years or so.

Service-Oriented Architecture (SOA) and Software as a Service (SaaS) are ways to bundle small pieces of functionality into pods that anyone can access. PayPal, for example, handles payments securely and quickly via standard connections with other companies. Any web service or company can easily link in PayPal for payment processing, which means they don’t have to build that function for itself. But even such a simple thing as a standard protocol for email addresses (first initial, last name, for example) can help people connect with less friction.

Cultural standards
Cultural standards, put simply, are the kind of values and behaviors you can expect in a given company. A strong culture reduces the friction in making decisions as well as connections.

Decisions: If you’re in a pod and you need to make a decision, common values can help you make that decision autonomously, without the need to check with superiors. This means you can act more quickly than competitors who need to “check with the boss” before they can proceed. Common cultural standards give you confidence that your behavior will be consistent with those of other units.

Connections: If your pod needs to connect with other pods, it’s easier to link up and collaborate when you know what kinds of behavior to expect – when you speak the same language and work in the same way. Pattern languages are collections of common standards that allow teams to more easily connect and collaborate. Gamestorming, for example, is a pattern language for cross-disciplinary design.

Culture can be as simple as a set of shared values, or it can be codified in rules and policies. The important thing is that the values and rules are understood and the behavior is consistent with them. If the culture says everyone is equal, the CEO better not have a reserved parking spot. Culture is built by establishing behaviors that the whole organization can and will adhere to consistently.

Pods are flexible, pods are fast

When pods are autonomous, they can try new things without worrying about a “ripple effect” that will disrupt the activities of other units. They can adopt new tools and practices quickly, without having to ask permission. They can be flexible in the ways that they choose to respond to customer requests. This means that each pod can be free to innovate, try new things, adjust its work process, and so on.

Even though most innovations will happen at the pod level, innovation doesn’t have to be contained to one pod. Since linking up with other pods is realtively friction-free, an innovation in one pod can be quickly adopted by other pods.

Pods can fail

When a step in a complex process fails, the entire process comes to a halt. In a Toyota plant, workers have the power to stop the entire process when they see a problem or opportunity. This is great in the sense that it enables a process to continually improve, but it doesn’t solve the problem of interdependency – the whole process still must stop in order to accommodate the change.

In a podular system however, each pod can make adjustments without disrupting its neighbors, and even when a pod fails, there is enough redundancy in the system that those services can most likely be found elsewhere.

A recent New York Times article describes how Volvo is reinventing the automotive assembly line to make it more podular. Quality and productivity have soared. According to the article, Volvo’s approach has led to 20% pre-tax profitability and 25% return on capital, making it one of the most profitable car companies in the world.

Pods can scale up fast

Since pods are inherently modular, it’s easier to scale them up to meet increases in demand. There’s a huge amount of tacit experience in each pod, because each pod is like a tiny fractal snapshot of the entire business – focused on customer value instead of a specialized task or functional process step.

Reproduction

This means that when it’s time to scale up a particular service, a pod that has, for example, seven people, can reproduce itself by dividing into two pods which can bring on new members with minimal growing pains.

This kind of growth system is not new. It’s been a standard practice in knowledge-intensive professions for hundreds of years. When a job requires a lot of experience and creativity, people learn by apprenticing themselves to others who are more experienced, and they learn by doing. Think of a medical intern in a hospital, or the patrol cops in your favorite police drama. They always team up the rookie cop with the experienced veteran so the new cop can learn the ropes.

A podular system needs a platform

Podular backbone

For a podular system to work, cultural and technical standards are imperative. This means that a pod’s autonomy does not extend to choices in shared standards and protocols. This kind of system needs a strong platform that clearly articulates those standards and provides a mechanism for evolving them when necessary.

For small and large companies alike, the most advantageous standards are those that are most widely adopted, because those standards will allow you to plug in more easily to the big wide world – and the big wide world always offers more functionality, better and more cheaply than you can build it yourself. Platform architecture is about coordination and consistency, so the best way to organize it may not be podular. When it comes to language, protocols, culture and values, you don’t want variability, you want consistency. Shared values is one of the best ways to ensure consistent behavior when you lack a formal hierarchy. Consistency in standards is an absolute requirement if you want to enable autonomous units.

Platform decisions can be dictated from above (for example, the way Apple dictates standards for its App Store) or agreed by consensus (for example, the way Web standards are developed). What’s most important about platform decisions is that they focus on the connections between pods rather than within pods In other words, a pod can do what it likes internally, but when it shares or receives information it needs to speak the same language as other pods.

But to truly enable the pods, platforms should be as lightweight as possible. Consider this: The U.S. military will be using standard internet protocol as the backbone for its net-centric warfare strategy, a podular approach to military operations. If internet protocol is secure enough for the U.S. military, it’s probably secure enough for you.

A podular system trades flexibility for consistency

Pods don’t answer every business problem. Like any other strategic decision, the choice to go podular involves inherent risks and tradeoffs. A podular system is certainly not the most efficient or consistent way to conduct business. There is more redundancy in this kind of system, which usually means greater cost. When units are autonomous, activity will also be more variable, which means it will be less consistent.

The bet you are making with a podular strategy is that the increase in value to customers, paired with increased resiliency in your operations, will more than offset the increases in costs. It’s a fundamental tradeoff and thus a design decision: the more flexible and adaptive you are, the less consistent your behavior will be. The benefit, though, is that you unleash people to bring more of their intelligence, passion, creative energy and expertise to their work. If you’re in an industry where these things matter (and who isn’t), then you should take a look at podular design.

In times of stability, the world belongs to those in power. In times of change, it belongs to the bold, the bright, the brave. Seize the day!

Next post >> Give pods a chance.

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Further reading:

The view from the pod: Personal Kanban: Mapping Work, Navigating Life by Jim Benson lays out a framework for podular work teams.

The company view: Rethink: A Business manifesto for Cutting Costs and Boosting Innovation by Ric Merrifield gets into greater detail about how companies can make the shift from process to podular, with examples from Amazon, Procter & Gamble, JetBlue and others. (many thanks to @jcsteels for pointing me to that one!)

The market view: The Origin of Wealth by Eric D. Beinhocker takes a deep dive into the nature of economies and the arguments for more podular organizations.

You can also check out the entire Connected Company reading list, join our email discussion group, or read the original Connected Company article.

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Thank you to Larry Irons for pointing me to the New York Times article about Volvo podular approach.

Complexity Killed Your Company

The following  is a guest post by Jason Lorimer, fellow entrepreneur @CulturaHQ. Visit his blog and follow him on Twitter.

You never change things by fighting the existing reality. To change something, build a new model that makes the old model obsolete. ~ Buckminster Fuller

Ancient Civilizations

I was sitting at Terminal C in Philadelphia recently, reading over the first thing handy in an overly crowded airport lounge. A New York Times article to which I was unable to find an online url, about the demise of Ancient Civilizations. The Greeks, Romans and Maya are well known examples of societies that have ceased to exist throughout time. The list goes on. I was instantly intrigued by this phenomenon and came to find that many books have been written on the subject. My favorite among the ones I perused being The Collapse of Complex Societies by Joseph Tainter. The authors premise, as I understand it, is that once organizations pass a certain point of complexity, they begin to decline. That the law of diminishing returns comes to play as soon as you pass over into abundance — having more then you need to survive and grow sustainably.  Mr. Tainter expresses that it is human nature to create complexity. That once a group of people cross over efficiency into complexity, it is, in a word — doomed.

Being that we work with companies that have a pre-internet business model in a post-internet world, having this new found knowledge of the fall of these societies prompted me to notice some blaring connections between extinct civilizations and the organizations we study. Companies small and large that have long since crossed into abundance create processes and employ people to fill those procedures, the hope being that the employee will generate more revenue than it costs to run the company, and therefore result in profits. Inevitably, over time, the processes we create become less than the optimal solution, often crossing the chasm into a pointless exercise.

Nobody starts out to create massively complex organizations.  Its incremental and often sneaks up on you. Before you know it, you’ve gone from a small agile organization to a bureaucratic mess of people, places and things that need to be managed. Thus, initiating their own creeping demise into extinction.

Unfortunately, this is a seemingly irreversible process. Complexity is a common excuse for companies that are becoming increasingly more obsolete. The people who make up those organizations are the ones charged with changing course, but it is not typically in their own self interest. That is, the status-quo is what pays their bills — in the short term anyway. It is my position that in a world as rapidly changing as ours, complex organizations are wasting their time doing anything but fundamentally reinventing their business model. If they don’t, somebody from the outside will do it for them.

Scaling Back Is A Misnomer

In speaking with companies of all sizes across various industries, I regularly hear them use phrases like “scaling back” and “increasing agility.” These are great buzz words as they elicit the concept of controlling costs and improving profits. The problem is that it is not realistic to expect to achieve this when operating from the inside of the organization itself. Too many moving parts and more importantly — too many people who are benefiting or at least think they are benefiting from the way things run currently.

In the post-internet age, simply placing technology at the center of your organization will not suffice. You must change your business model or eventually cease to exist. It’s a slow transition, but not as slow as big companies are. It’s elastic, unlike big companies resistant to change. Jason Fried, Co-founder of 37 Signals and author of the best selling REWORK has a quote I like a lot:

Competition that kills isn’t pre-announced — it catches an unsuspecting incumbent by surprise…

Right now, as I write this, there are a few ambitious upstarts, working off of the free-wifi @Starbucks. They are chock full of caffeine and systematically building a better widget — A better business model. To survive, you must do the same.

Forget Competition – Fear Obsolescence

In the old days companies fought competitors within their own industry and occasionally one from just outside of it. Today competition, as we have come to understand it, is basically moot. Your industry itself, all industries, are under attack by agile, web based companies building disruptively better solutions for your customers. Products and services that they can participate and add their own value to.

Recently, I was asked by a current client to meet a family friend who worked as an executive at a print newspaper conglomerate. One Friday late-afternoon, I traveled to his office expecting to step out for a quick bite and some conversation on their needs. Instead, what I found was a boardroom filled with sales executives. Middle-aged men in suits looking to me as if they had been patiently waiting for me to arrive with the solutions to their problems. I quickly explained that I was confused as to the premise of this meeting and after a few laughs, I sat down at the far edge of the table, next to the VP of sales and awaited questions. Inevitability, within minutes the name Craig Newmark steamrolled up from about half way down the table. Craig, founder of the now common place Craigslist, a utility for people around the globe was not well liked in this room. The bitter tone of the sales manager who raised this name led us into a conversation about how Craigslist had “stolen” the newspapers industries bread and butter classifieds business.

Instead of arguing the many ways they could have leveraged Craigslist to drive their own revenue  rather than choose to sit on their hands, I looked down the table and said:

What Craig Newmark did to newspapers is a drop in the bucket compared to the absolute shellacking your shareholders are about to take from location based services and group sale sites if you don’t fundamentally rethink your business model and now.

Silence.

I went on to explain that their small business customer base which makes up some 90% of all their customers are currently being approached left and right with opportunities to drive people in the door in a measurable way. To pay only for what they receive.  Foursquare and Groupon are just the beginning. They went on to discount these sites as “fire-sale opportunists” and I shook my head as if to say:

Remember Craig Newmark.

Regardless of your industry, the fact that the internet and more specifically mobile technology has become ubiquitous in our lives means your business model is no longer the best offering. It is likely not even close. Grab your best people and most loyal customers and go back to the drawing board before it is too late.

Industry Advocates

It is all but impossible to take an existing organization and shift it towards the future when you have the people within that organization benefiting from the current operational structures. That is why we work with industry advocates to create new models. People that have experience within an industry — enough so they understand the intricacies, pain points and opportunities that our research would never expose fully.

You have the human capital in your organization. They are the most frustrated among you.
Those who have all but given up. We love working with these people.

Don’t Smother Innovation — Build Your Own Start Up

Trying to build a new company insides the confines of your existing organization is all but impossible. Many have tried and failed at the same. Constraints are ideal for innovation.
Existing rules and barriers are the death of it. Albert Einstein once famously wrote::

We can’t solve problems using the same kind of thinking we used when we created them.

Handpick your internal advocates to partner with an outside team to conceptualize and build the solution your customers will find the most utility in.

Incubate the venture using a test market from within your existing infrastructure and once proven, integrate it for the future.

In the end to survive, let alone thrive in the post-internet economy you must think ahead five years and execute in less than one.  Now get to work.