How Industrial-Era Management Kills Innovation
Over the last fifty years, the concept of management hardened into a pattern that is prevalent in large firms. It was steadily honed and perfected over this period. It has many strengths. It is a coherent and consistent way of running a large firm. It has been highly successful in making money. And it is highly respectable: it taught in all the best business schools. However, it has one killer defect: it kills innovation and the entrepreneurial spirit.
The Resilience of Industrial-Era Management
One of its core strengths of industrial-era management is its resilience. It operates as a complex adaptive system that resist efforts to change it or undermine it. While goofball leaders and crazy managers may prosper for a time, industrial-era management bends but it doesn’t break. Ultimately, these efforts to push the firm in strange new directions fail. This resilience is not captured in a traditional organizational chart which focuses on the static reporting relationships in the hierarchy (Figure 1). It can be pictured in an alternative image of the interactive functions of a firm, as shown in Figure 2.
Figures 1 and 2 present org chart and CAS images of the firm
Thus, the functional characteristics of industrial-era management are well known. The goal of the firm is to make money and maximize value to its shareholders and its executives, i.e. prioritize shareholder value; This goal leads to principles and processes that emphasize stable structures that control staff, contain costs, and increase revenues, and profits. Thus, the principles are typically of hierarchical-work structures with individuals reporting to bosses; and key indicators being short-term profits and current stock price.
These principles engender processes such as top-down leadership; strategy that is backward looking and defensive; innovation that primarily protects the existing business; sales that induce customers to buy; HR that controls workers as the firm’s resources; operations that delivers output targets at lower cost; a budget process that is a battle for resources among the silos; and compensation where gains mostly go to the top. It fits together as an interactive, coherent, internally consistent system that is mutually supportive, as shown in figure 2.
Managers in this system tend to see themselves as solving the equivalent of familiar jigsaw puzzles. If they can fit the pieces together into the correct pattern, they could extract, and take, the value that is their due.
The Disastrous Impact Of Industrial-Era Management On Innovation
One dire side of effect of this type of management is that it kills innovation and the entrepreneurial spirit. At the lower levels of the firm, it is impossible to get ideas up through multiple layers and the chain of command, in which any level could veto a new idea. Any big idea was inevitably risky and anyone in the hierarchy can veto a new idea. At the higher levels, the executives are being hugely compensated for short term gains in the current stock price: it is therefore natural that this is what they primarily focus on. Innovation and long-term capital gains figure much lower in the list of management priorities. In effect, senior managers are being paid not to innovate.
This weakness of industrial-era management has long been recognized and wonderful innovation processes have been developed to overcome it, including Curt Carlson’s NABC methodology developed at SRI International, discovery-driven planning by Rita McGrath, and. “blue ocean strategy” developed by Chan Kim and Renée Mauborgne. The hope of these new processes leaders was that the innovation practices they recommended would spread through the firm, as shown in Figure 3.
Figure 3 pictures the hope that Innovation will spread
What Actually Happens
Yet as Rita McGrath points out, this is often not what happens in many large firms that are still in the grip of industrial era management. First, there’s the strategy process. When that's done right, it's a portfolio of strategic options, pulling you into the future and it's creating a shared sense of where are we going here. Yet often the strategy function is a set of hard choices, which comprise the pet projects of individual executives, or even former CEOs, more than a realistic portfolio of strategic options.
Then the innovation process itself is often completely disconnected from strategy or budgets. It's run by a different group of people. It operates on its own logic. And if you lift up the hood and look at the corporate portfolio, it’s a mess. Meanwhile there are mission-urgent, critical problems that no one is working on.
And then there is the compensation process, which often has more to do with power and politics and personal gain than with the goal of the firm.
The reality in most cases is that the hopes of these wonderful innovation processes are mostly dashed. The firm acts like the auto-immune system of the human body. It turns on these practices as something at odds with everything else going on in the firm and caused progress to be limited, as shown in Figure 4.
Figure 4 shows how the processes of industrial-era management combine to crush innovation
Can A Consigliere Help?
Kim and Mauborgne. recognize the issue and address it briefly in Blue Ocean Shift, where they say: “Is your organization dysfunctional? Ridiculously bureaucratic? Or highly political so that getting things done feels akin to walking through a minefield? Large, older organizations may feel this way. So can government entities. In these situations, in addition to putting the team together and selecting the right team leader, you also want to think about enlisting a consigliere…. As a respected insider, he or she can advise the team and provide air cover from potential detractors, as well as garner support from individuals who might otherwise want to thwart the initiative actively or through passive aggression.”
The idea is that the change team appoints a consigliere, who will somehow magically resolve all of the tensions created by the other principles and processes of the firm: inconsistent goal, bureaucratic structure of work, vertical hierarchy, transactional leadership, controlling HR, short-term financial focus, antiquated risk management, and more. All these principles and processes will be operating at odds with the task of creating a blue ocean strategy, making its success questionable, no matter brilliant it is.
Part 2 of this series of articles shows how industrial-era management affects other managerial change efforts, such as budget and HR reform, and even Agile management.
Part 3 of this series shows how to overcome these challenges with the comprehensive solution of digital-age management.
And read also:
