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The Connected Company

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Many thanks to Thomas Vander Wal for the many conversations that inspired this post.

The average life expectancy of a human being in the 21st century is about 67 years. Do you know what the average life expectancy for a company is?

Surprisingly short, it turns out. In a recent talk, John Hagel pointed out that the average life expectancy of a company in the S&P 500 has dropped precipitously, from 75 years (in 1937) to 15 years in a more recent study. Why is the life expectancy of a company so low? And why is it dropping?

I believe that many of these companies are collapsing under their own weight. As companies grow they invariably increase in complexity, and as things get more complex they become more difficult to control.

The statistics back up this assumption. A recent analysis in the CYBEA Journal looked at profit-per-employee at 475 of the S&P 500, and the results were astounding: As you triple the number of employees, their productivity drops by half (Chart here).

This “3/2 law” of employee productivity, along with the death rate for large companies, is pretty scary stuff. Surely we can do better?

I believe we can. The secret, I think, lies in understanding the nature of large, complex systems, and letting go of some of our traditional notions of how companies function.

THE COMPANY AS A MACHINE

The company as a machine

Historically, we have thought of companies as machines, and we have designed them like we design machines. A machine typically has the following characteristics:

1. It’s designed to be controlled by a driver or operator.
2. It needs to be maintained, and when it breaks down, you fix it.
3. A machine pretty much works in the same way for the life of the machine. Eventually, things change, or the machine wears out, and you need to build or buy a new machine.

A car is a perfect example of machine design. It’s controlled by a driver. Mechanics perform routine maintenance and fix it when it breaks down. Eventually the car wears out, or your needs change, so you sell the car and buy a new one.

And we tend to design companies the way we design machines: We need the company to perform a certain function, so we design and build it to perform that function. Over time, things change. The company grows beyond a certain point. New systems are needed. Customers want different products and services, so we need to redesign and rebuild the machine, or buy a new one, to serve the new functions.

This kind of rebuilding goes by many names, including re-organization, reengineering, right-sizing, flattening and so on. The problem with this kind of thinking is that the nature of a machine is to remain static, while the nature of a company is to grow. This conflict causes all kinds of problems because you have to redesign and rebuild the company while you also need to operate it – an idea dramatized in an EDS commercial from a few years ago: Building an airplane in flight.

THE COMPANY AS AN ORGANISM

The company as an organism

It’s time to think about what companies really are, and to design with that in mind. Companies are not so much machines as complex, dynamic, growing systems. As they get larger, acquiring smaller companies, entering into joint ventures and partnerships, and expanding overseas, they become “systems of systems” that rival nation-states in scale and reach.

So what happens if we rethink the modern company, if we stop thinking of it as a machine and start thinking of it as a complex, growing system? What happens if we think of it less like a machine and more like an organism? Or even better, what if we compared the company with other large, complex human systems, like, for example, the city?

Cities are large, complex, systems, but we don’t really try to control them. In Stephen B. Johnson‘s book Emergence: The Connected Lives of Ants, Brains, Cities, and Softwarehe quotes complexity pioneer John Holland:

Cities have no central planning commissions that solve the problem of purchasing and distributing supplies… How do these cities avoid devastating swings between shortage and glut, year after year, decade after decade?

No, we don’t try to control cities, but we can manage them well. And if we start to look at companies as complex systems instead of machines, we can start to design and manage them for productivity instead of continuously hovering on the edge of collapse.

Cities aren’t just complex and difficult to control. They are also more productive than their corporate counterparts. In fact, the rules governing city productivity stand in stark contrast to the ominous “3/2 rule” that applies to companies. As companies add people, productivity shrinks. But as cities add people, productivity actually grows.

A study by the Federal Reserve Bank of Philadelphia found that as the working population in a given area doubles, productivity (measured in this case by the rate of invention) goes up by 20%. This finding is borne out by study after study. If you’re interested in going deeper, take a look at this recent New York Times article: A Physicist Solves the City.

Okay, you say, but cities are fundamentally different than companies. Just because this works for cities doesn’t mean that it will work for companies. Right?

THE LONG-LIVED COMPANY

The long-lived company

Actually there’s some interesting data there too. Back in the early 1980’s, right after the revolution in Iran, Shell Oil was concerned about the future of the oil industry. What might Shell look like after oil, they wondered? So they commissioned a study with some very interesting parameters:

1. First, they looked only at large companies with relative dominance in their industries, companies similar to Shell in that regard.
2. Second, they looked only at companies with very long lifespans – 100 years or more.
3. Third, they looked at companies who had made a major shift from one industry or product category to another.

In other words, they looked at the immortals: the companies that didn’t die.

The study was never published, but the findings were detailed in a book: The Living Company by Shell executive Arie de Geus. Shell studied 40 large, long-lived companies, some of which were still surviving after 400+ years.

Interestingly, these companies had a lot in common with large cities:

Ecosystems: Long-lived companies were decentralized. They tolerated “eccentric activities at the margins.” They were very active in partnerships and joint ventures. The boundaries of the company were less clearly delineated, and local groups had more autonomy over their decisions, than you would expect in the typical global corporation.

Strong identity: Although the organization was loosely controlled, long-lived companies were connected by a strong, shared culture. Everyone in the company understood the company’s values. These companies tended to promote from within in order to keep that culture strong. Cities also share this common identity: think of the difference between a New Yorker and a Los Angelino, or a Parisian, for example. At the Dachis Group we like to call this common culture hivemind.

Active listening: Long-lived companies had their eyes and ears focused on the world around them and were constantly seeking opportunities. Because of their decentralized nature and strong shared culture, it was easier for them to spot opportunities in the changing world and act, proactively and decisively, to capitalize on them. At Dachis we sometimes call this dynamic signal (watching and listening) and metafilter (information leading to decisive action).

DESIGN BY DIVISION

Design by division

Historically we have designed companies like machines – by division. We construct the org chart to divide the big chunks of work and separate them from each other: Finance, Sales, Operations. We design the work flows that process inputs into outputs: raw materials into products, prospects into customers, complaints into resolutions.

As we design this kind of company – the divided company – we need to separate functions, which means people may not always have a sense of the larger thing they are working on. They get very good at one of the tasks, but lose touch with the larger picture. So we have to design rigid policies and procedures so people will function efficiently and so they won’t interfere with each others’ work.

The problem comes with scale. As the number of employees grows, the profit per employee shrinks. It’s a game of diminishing returns. Efficiencies of scale are balanced out by the burdens of bureaucracy. Divisions become silos, disconnected from each other. Overhead costs increase with size. The resulting need for control, and the inability to achieve it at a reasonable cost, is what eventually kills a business.

DESIGN BY CONNECTION

Design by connection

Although we tend to design companies like machines, we instinctively and intuitively understand that companies are not made of cogs, levers and gears. In the end, they are made out of people. For top management, it would be wonderful if we could put our business strategy into the machine, push a button and wait for the results. But it doesn’t work that way. You have to put your strategy into people if you want to get results.

And today, thanks to social technologies, we finally have the tools to manage companies like the complex organisms they are. Social Business Design is design for companies that are made out of people. It’s design for complexity, for productivity, and for longevity. It’s not design by division but design by connection.

To design the connected company we must focus on the company as a complex ecosystem, a set of connections and potential connections, a decentralized organism that has eyes and ears everywhere that people touch the company, whether they are employees, partners, customers or suppliers.

Social Business Design is a new discipline, but some basic rules are already emerging. These emerging rules have less in common with traditional business design, and more in common with urban design and city planning. It’s not about design for control so much as design for emergence. You can’t control a complex system, but you can manage its growth, and there are a lot of things you can do that will position it for success. Here are a few of those emerging practices that signal excellence in design by connection:

Understand the culture: A company is like a city in many ways. First and foremost, a city is about the people who live and work there; it’s an expression of their collective culture. Before you can start your path to the connected company, you need to understand the culture (or cultures) that are already there, so you can look for ways to enhance and strengthen that shared identity.

Start small. Urban designers might look at maps or aerial views as they make their plans, but the life of a city happens at street level. As you initiate social programs, think of them as if you are designing a city street. A successful street is filled with people. The last thing you want is a whole bunch of large, urban areas with no people in them. In a city, big, open, empty spaces feel unsafe and unloved. So start small. The smaller the space is initially, the faster it will fill up with people. A good way to start is with an organization-wide project or initiative that requires participation from a number of people across the company. This gives you a cross-section of ideas and perspectives to look at as you plan the next stage.

Spaces need owners. Again, think of the city street: every business or building has an owner. The sidewalks have owners – typically every business at street level “polices” their stretch of sidewalk. And even the street has owners – the street sweeper, the cop on the beat. In the same way, make sure that every online space you create has someone positioned to take care of it, to keep it safe and clean.

Every person needs a place. In the same way that public spaces need caretakers, every person needs a place to live; somewhere they can put their stuff. As you build your social business, make sure that every single person has a place where they can put, and see, their stuff: their projects, the links they want to get back to, the documents they have created, their role, qualifications, expertise and so on.

Jumping-off points. A good city street offers opportunities that are unanticipated but serendipitous. The promising side-street. The sound of music coming through an open door. As you design for connection, think about how you might create those unexpected, but delightful, surprises. Every time someone visits an online space, there’s a chance to offer them something new.

Watch, listen, adjust and adapt. Design by connection is not a top-down activity so much as bottom-up. Complex systems just don’t work that way. In a complex system, you need to pay attention to small things and make little adjustments along the way. Think about how city streets evolve: one small step at a time. One retailer moves to a larger space; another goes out of business. One old building is torn down and replaced; another is rehabbed and turned into lofts. Pay attention to the culture, and watch how people react to the tools you provide. Are they using something in a different way than you expected? Find out why and see if you can enhance that. And what are they ignoring? If they’re not using something you expected them to use, go talk to them and see if you can figure out the reason.

The typical company has a very short life, from 15 to 50 years. But cities – and some companies – live much longer lifespans: from hundreds to thousands of years. Wouldn’t you like that for your company? I know I would.

If you have thoughts I would love to hear them. Please take a moment and leave a comment.

Update: Based on the extreme volume of response to this post I have set up an email discussion group for those who want to continue the conversation. Please join us here.

As always, your comments, thoughts and feedback are much appreciated.

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6 Comments

  1. pure wrote:

    dave – first comment of 3 posts – I post separate as they are a bit long i suspect.

    key point —- shift for me is not product to service economy — shift is product to digitilised economy. of which this enables many many many things to be “digitialised service”.

    comment 1: shift to podular

    your detailed blog on podular delighted me — as i was reading stuff I did naturally, pure instinct — and so it was delightful to read… it in print.

    last gig I did was shifting to podular structure. I used the term “pod”. I did it intutively i believe has had not read the work on CAS then. For me, the pod is more intimate than a team. Team’s always have leaders. Pods have coaches or mentors. Often who takes the lead, will rotate informally.

    the gig involved 2 pieces of work that were quite different but both related to pods
    — 3 pods of multidisplinary teams – so creatives and technicals and front office and back office.
    — within 1 function 2 pods + specialists

    what I learnt the most was,
    “what makes/breaks the pod”, is ability of each member to sense. primarily sense the other members preferred problem solving method.

    I spent most of the effort self leadership coaching + utilising visual thinking tools as role model how they could solve the “shared problems”.

    so heirarchy to podular capability dependencies for me are:
    – self leadership capability of each member
    – gameStorming capabilties

    from a culture perspective, the shift caused a massive cultural shift within the remaining organisation.

    domino effect

    last point, as part of the gig, how to “run a business” was a theme that started from month 1 til I completed. For me this is the same as your “business within business” = owner test.

    the elements of this we used were:
    1 clarity
    2 focus
    3 risk maanagement (aka your portfolio management concept you mention in the blog)
    4 stakeholder management

    this is how each member was rated and provided feedback on themselves and each other.

    so podular works, as it enables FAST ALIGNMENT. alignment is KING!

    so podular enables “social”.
    I enjoyed Marc Bernoiff “social” acroynm, in the book Unleash Force (marc is ceo of salesforce.com if your not aware)

    that is:
    S speed — fast response
    O open — welcomes feedback, invites, focus is outward facing not inward
    C colloborative — pod is multidisciplinary
    I — individuals, I switched his definition to all members need to have decent self leadership capabilities (ability to hold space rather than reaction, ability to listen so you can match/lead in conversation, understanding of paradigms, understanding truth is subjective and not objective)
    A — ALIGNMENT
    L — Leadership

    —–
    end

    Monday, April 9, 2012 at 9:35 pm | Permalink
  2. pure wrote:

    2nd post — 2 new channels
    —————————
    Hi dave – not sure if you’ve stumbled on either of these in “design of business” content … pure magic!

    they are – 2 more channels that you may wish to consider in your “connected company” blog/book:

    1: digitialised economy enables “whats mine is yours” for many more things… than books/cds/dvds…

    collaborative consumption hub:
    http://www.collaborativeconsumption.com/the-movement/snapshot-of-examples.php

    2: APIs as a channel in themselves, especially now with salesforce.com streaming API
    In the book Unleash the Force, author
    presented the view:

    than any of your digitialised services can be API’d, so they are in fact a channel within themselves.

    —-
    so after reading your entire blog.. which I read first… and given my recent gig of shifting hierarchy to podular formation.. something was still missing…

    and so now after reading Unleash Force book and many many others Design Thinking books…

    My sense is:

    * social media in itself is not even a channel, it is an AMPLIFIER of all channels

    * the happenings..
    … is NOT a shift of product to service economy…
    … its a shift from product to DIGITIALISED economy.

    digitialised
    + mobile (removes accessiblity constraint)
    + API (removes integration constraint)

    + cloud (removes Client/Server constraint e.g. deep skillset and big $$ database + ErP/CRM licenses)

    + shift in thinking from its a “problem” to its a design issue. Problems are bad. Hit people over head. yeeckk.. (your UX 2010 presentation demonstrated this beautifully for me – huge insight!)
    (IMPACT – bpm + lots of cultural transformations make the as-is state wrong. so this reframe helps many stop feeling bad for the pickle they find theymselves in. THANKYOU for a STUPENDOUS INSIGHT. please post when you have one of yoru amazing concept diagrams for this particular shift)

    + DATA captures leapfrogs (— we are limping still here… so much data.. but then VISUAL DATA tools are booming – Nathan’s book is wonderful)

    + SOCIAL media
    (where I live this has not snowballed as it appears to be in USA) (even my sister who is 17 years younger…) (but it will come) (mine has been via email and skype and v .. all enabled by iphone with me). I still dont have a facebook account. and I only just starting blog interacting)

    + now really able to be more precise in everything we do… meeting those needs… deliverying services.. as from process to PATTERN (aka more granule)

    + we can do it fast as the constraints has disappeared or are fast disappearing.

    —-
    for me, this BUNDLE then ENABLES a flood of possibilities that I only once dreamed

    – whatever I want to contribute, if I make it digital then my market is EVERYONE + EVERYWHERE. wow!

    – I can DIY in so many more areas, now the flood of services being digitilised has started… so no longer needing to pay huge dollars for “consultants” yipee!
    (e.g. applications can be developed using force.com signficantly by yourself. I implemented one in about 2002 to 400 salesforce, and taught it to myself the night before. very simple. just requires good humour and ability to listen)
    (and now there is HTML5.. so iphone app design to the non-techie as me.. is getting closer and closer)
    (and so all those “middle men” specialists.. the skillsets can really be digitialised… and so the curious individual could get themselves 80% of way thru play… e.g. BPM which I have done for 10+ years)

    (IMPACT: shift in skillset/specialist)

    – I can ask any question I want, and higher probability someone will give me a tip/guiding light… that will reap benefits.. now more and more connected
    [so benefit of connected increases exponentially the more that are connected]
    (IMPACT: learning rate is exponential)
    (IMPACT: it feels SOOO great to help others and be helped)

    – I now know my voice can matter. I have the megaphone. The people have the megaphone and no longer the mass marketers — love your metaphor.

    —-
    so… if an individual is orientated towards being curious + inspired with life + believe in themselves…

    the world is now their oyster…

    thankyou Dave for your wonderful contriubtion to me thru your blogs.

    Monday, April 9, 2012 at 9:47 pm | Permalink
  3. pure wrote:

    post 3 — people need to design change by themselves

    I feel Ted Brown (IDEO dude) presentation here is wonderful
    http://av.vimeo.com/58863/007/22274533.mp4?token=1334033771_e2449e90195473f8eaa72041138b4c4d

    —–

    what I love about IDEO cards and gameStorming cards is that it helps gives the power back to the people

    they are method cards
    enabling non-design professionals to think in design ways

    (and thus power away from the external consultant/specialist/outsider) to solve the shared problem, discover the new opportunity.

    for me adopting design thinking, is one reason why podular formation really does produce amazing results.

    design thinking appears to be pod’s “glue”

    —–
    In my experience, if you have not experienced the impact of “design thinking”, it is very easy to assume it is the same “process based thinking”

    no
    process based thinking is linear. cause and effect

    design thinking is ….
    now Ive read 3 or so books in last 2 weeks.. and many have different views what that is…

    so from a non-schooled designer as me
    but one who has been bored to tears with rationalistic, linear thinking… since school…

    design thinking.. is play

    it only happens when we are connected WITHIN to our natural magnificence, our natural kindness. if one ever doubts this, look at young babies. Or the case of 2 young twins born prematurely, and one twin cuddled the other as soon as she was placed in incubator. and immediately the twin got better. I cannot remember their names sorry Dave.

    we are naturally curious – creative – connected.

    so
    plugged WITHIN.. enables creativity…
    look at those children in the video…

    Monday, April 9, 2012 at 10:11 pm | Permalink
  4. pure wrote:

    post 4 – blog says “why do human organisation struggle with change”

    —–
    hi dave – this comment in your blog and I were not aligned. Last 5 odd years I have been self leadership coaching in organisations, and though this is a common view, i have often felt it is misunderstood.

    my sense is we have languaged “a mess” we prefer not to be in, as “struggle with change”

    as human beings, our rational mind loves to “label stuff”

    rather than just say… we are in a mess and that feels uncomfortable…. we spin in a circle.. trying to make sense of it… around around we go.. record player spin I call it…

    so comfortability or uncomfortability with being vulnerable is a human trait

    in our conditioned world, much of the industrialisation era has created a structure to message to us “it is not safe”. so it makes sense a high proporation of people are not comfortable with being vulnerable.

    an alternate perspective.


    why i have this view?:

    nature itself adapts
    it is natural to change
    it is inherent

    we are a nature system
    we are a living system

    we naturally adapt


    so if we are a nature(al) living system
    why do we roadblock ourselves??
    or
    more precisely languaged “what/why does an aspect of us roadblock our experience of pure greatness we are, flow”

    what — that aspect, is non other than the “rational mind”

    why — rational mind is designed that way
    it is designed to filter, judge, discern, compare and contrast

    so rational mind is a TOOL
    however if we think we ARE our rational mind, versus it being a tool… then we are really get ourselves into a pickle…

    and then you will likely declare “human beings struggle with change”

    nope – some human beings think they are their rational mind, rather than realising their rational mind is a tiny part of them.

    Neuroscientist Jill Bolte Taylor in her book “stroke of insight” and the TED video on it too.. is some of the best collateral to really show this.


    the metaphor i use for our mind is a “camera lenze” it is a tool. so if we use it as “designed”, we would
    — zoom in / out (aka get perspective)
    — shift focus from A to B (aka put our attention on stuff that delights)

    simple.

    —-
    so
    in my entire consulting career, i have never seen anyone “struggle with change”. sure they may have lamented this to me… having bought into the “social lament”.

    so I use growth not change, so the social associations are not triggered.

    Growth, only requires a conversation or two.

    Sometimes the participant may wish you to do it with them, help them along, like my daddy holding my handle bars when I learned to ride my bike…

    hope this alternative viewpoint stimulates :-))

    Monday, April 9, 2012 at 10:27 pm | Permalink
  5. pure wrote:

    ok 5 not 3 posts
    —————-

    “social”
    social business
    social networks
    social media
    social bpm …. etc..

    ———
    something has not been resonating with this “social” word. sure some say its only a word.

    ———
    and it dawned on me after reading “snapshot of examples” on the beautiful colloboration hub site I posted above

    and seeing their amazing infographic (aka their version of Xplanation)

    http://www.collaborativeconsumption.com/spreadables_downloads/CC_Spreadables_Charts/CC_Chart_The_Complete_Picture.jpg

    ——
    social is constraining what is happening..

    “social” phenomena is a “resurgence of community” — wow!

    the resurgence is enabled thru a BUNDLE of tools
    (VISUAL lingo + MOBILE + SOCIAL MEDIA APPS + DIGITIALISED SERVICES + API + DESIGN THINKING ETC..)

    WOW! WOW! WOW!

    Monday, April 9, 2012 at 10:57 pm | Permalink
  6. pure wrote:

    this infographic maps out the SHIFT in the best way I have seen

    1960 – 2010

    http://www.collaborativeconsumption.com/spreadables/CC_infographic_Condense_hi_res.jpg

    Monday, April 9, 2012 at 11:23 pm | Permalink

11 Trackbacks/Pingbacks

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  6. […] Gray of Dachis Group has written extensively about this with his Connected Company efforts. It was his blog post in February 2011 that prompted me to get off my ass and finally put some of my thoughts down into a small burst of 3 […]

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    […] Dave Gray Quote: The Connected Company “We tend to design companies the way we design machines: We need the company to perform a certain function, so we design and build it to perform that function. Over time, things change. The company grows beyond a certain point. New systems are needed.”–Dave Gray […]

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  9. […] The Connected Company › The Connected Company No, we don't try to control cities, but we can manage them well. And if we start to look at companies as complex systems instead of machines, we can start to design and manage them for productivity in… […]

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