The current business model was created in the woollen mills and iron foundries of Britain more than two centuries ago. It was refined in the United States as the railroads grew to Alfred Sloan in the 1920s. This model, described vividly by Harvard historian Alfred Chandler and by management theorist Peter Drucker, was essentially a rigid, mechanical model designed to cope with simple mass-market businesses "� in many cases single-line businesses. In the era of dirt roads, protected markets, non-existent regulations, centralised financial markets, and closely held stock, the command-and-control model worked quite well. A few men at the top of the organisation could control huge sectors of the economy and mobilise resources on a massive scale. In its embryonic days, the command-and-control model was sufficiently robust to open the country and much of the world, to new "� albeit almost identical-products. As such, it was able to lift almost half the world out of abject poverty and into the middle class by the beginning of the 1960s.
Traditionally, debate over the "center" revolved around the matter of centralisation or decentralisation. It was a case of individual independence at the level of one or of many. The concept of the centre connotes interdependence and connectivity. We feel that the flip-flopping between more and less centralisation is a fruitless effort and is based on a flawed concept of how each piece of the corporation adds value.
Over the years, the basic model has evolved in a number of crucial aspects "� it is flatter, larger, and appreciably more far-flung than before. But in many respects these changes have been a matter of cosmetics. The essential functions are unchanged. Responsibility for corporate strategy, finance, human resources, and policy is centralised in headquarters of varying sizes. Operations "� whether mining, manufacturing, or services-are usually located in business units with various levels of autonomy. Business units "� and sometimes even the headquarters itself-are often subdivided by region, country, or continent with differing rules, regulations, and sometimes laws dictating the way business is conducted in each of these areas. Sitting on top of this is a board of directors and a chairman who are responsible for making certain that the interests of the shareholder are served. This is the very model that P&G adopted at the outset in the 1830s, and it is the same model that helped Bill Gates when he co-founded
Microsoft a little more than two decades ago.
The world, of course, looks much different than it did when the basic business model came into being. Consumers insist on ever greater variety in the goods and services they buy. (Henry Ford's black Model T would be nothing more than a speciality item today, not the mass-market product it once was.) Trade barriers and regulations are less of a market inhibitor today than in the past. Shareholders are more restless and vocal. Industries are restructuring at a breakneck pace.
Although the basic business model has survived, even thrived, for generations, such changes in the economic environment have significantly chipped away at its effectiveness. But two changes in particular have recently conspired to assure its demise. These are globalisation, which has stretched the model to the limits of control, and the telecommunication revolution, which has called into question the notion of command.
These two changes in the way business is conducted go hand in hand. E-mail, Lotus Notes, Internet, intranet, various types of centralised and distributed computing, and video and telephone conferencing were supposed to help headquarters keep track of what was happening anywhere in the global field. No activity, however slight, would go unknown. That was what the theory promised. Using this technology, so the story went, savvy CEOs would be able to keep an eye on all the disparate elements of the company and be ready to lend a hand when it was needed, or sort out a thorny problem when it occurred. Using this technology, a CEO and the top team back at headquarters would be able to spot when a business unit was off strategy, and gently nudge it back on course. The CEO, in this model, would become a kind of electronic helmsman glued to readouts and dials as the business was piloted past the shoals and into the wind. The world would grow bigger, but no matter. Technology would make it manageable, centralised command and control would continue unabated, the superior way to run a company.
The old business model confronts reality
Reality did not quite play out that way. Today, instead of a helmsman piloting a craft, the CEO of global companies occupies a place that is more like a node on a decentralised electronic network. This network is supposed to link a complex field of co-ordinated - and often uncoordinated - activities. Companies in the real world, resemble that old engineer's joke about helicopters: thousands of well-designed, highly machined parts flying in formation "� hopefully.
Each of the company's activities "� manufacturing, marketing, finance, human resources, and so on "� interacts with other parts of the network, often on its own, as well as with the world and the market outside the company. Barriers between companies, which were once solid and absolute, are now permeable. And risk is rampant. Companies today must thread their way through the growing volatility of the stock, bond, and currency markets, as well as through the manifold perils associated with product liability, the environment, and political turbulence.
In addition, the market "� which was steady and constantly expanding when the old model came into being "� is now rife with change. Product development times are shorter and new markets leap into being overnight. For example, Ken Lay, the chairman and CEO of Enron Corporation, a diversified natural gas and power generation company, recently calculated that a full 40 percent of his firm's income emanates from businesses that did not even exist little more than a decade ago.
No business leader of forty or fifty years ago imagined the multifold shape of the world and economy that has unfolded at breathtaking speed in recent years. Companies today operate in a testing environment of monumental and continuous fluctuation. Changes on a massive scale, which once occurred sporadically, are now everyday parts of the landscape. And it is unlikely that we will ever be able to retreat to the simpler ways of the past.
Ponder the following:
lThe pace of business is appreciably faster with ever rising customer expectations. New products burst into the market at a record clip. Astoundingly enough, Rubbermaid aims to develop a new product everyday of the year. Today there are twice as many products cramming supermarket shelves as there were a decade ago. Computer chip makers estimate that a new chip is reduced to a commodity in a scant three months.
lInformation is becoming readily available around the world at an unprecedented pace. The ever-expanding information highway affords customers and competitors instant access to each other. During the past twenty five years, the cost to process one instruction per second has fallen by half each year. In the United States, the number of households subscribing to on-line services or using the Internet grew approximately 120 percent in 1995 alone. Technological change has delivered the Information Age and converted it to the Knowledge Age.
lMarkets are globalising, as are the companies that compete in them. About half of the sales of the fifty biggest companies come from outside the headquarters country.
lCompetitive pressure has been intensifying and it is becoming harder to achieve leadership and to stay on top. Consider that 116 companies on the Fortune 500 list in 1983 were off it by 1993. The dropout rate continues at this feverish pace. In another sobering sign, in the 1990s, the rate at which chief executives of Fortune 500 companies were heaved out by their boards has increased drastically.
lIndustry structures continue to evolve. In some cases, the definition of industry is changing. Witness the dizzying convolutions in telecommunications and media. Between 1989 and 1994, there were more than 1,500 mergers just in the United States banking industry. These changes mean new dynamics and totally new barometers of success.
lThe regulatory environment is becoming stricter, and penalties are far harsher. For instance, more stringent environmental codes have been reinforced in the United States by 1991 Federal sentencing guidelines, which provide for jail sentences and stiff fines for executives of companies that violate environmental laws.
lCapital markets have evolved significantly. Investors are more activist and informed, and have themselves become agents of change by demanding superior performance. In the United States, institutional investors currently own 44 percent of all stocks, compared with just 6.1 percent in 1950. In 1990, more shareholder proposals passed than in the entire history of shareholder proposals.
lMuch snide and sneering cynicism is being directed toward business motives and values, exacerbated by press reports on the immense downsizing scythe being wielded by corporations. Witness the huge response to a seven part series in The New York Times and the "Corporate Killers" cover story in Newsweek. Mistrust of business has returned to the forefront of the public mind, with people once again asking what corporations owe society. Business has often been under attack. There was the student movement of the late 1960s, the environmental wave in the 1970s, and the disenchantment in the wake of the 1987 stock market crash. But now we are seeing broad-based, global, and unyielding criticism. Companies are being castigated for trying to achieve their fundamental mission "� creating value for their shareholders.
This new world, where barriers are porous and competitors in one market may establish alliances in another, is highly complex. Too complex for most companies are opting out. They are desperately shedding businesses and laying off workers in a concerted effort to simplify what they do. Or they are engaging in corporate fusion to try to keep in step, twisting themselves into all manner of new shapes and sizes.
Some companies are simplifying, focusing more on their core businesses, and getting smaller. Other companies, listening to a conflicting siren call, are getting bigger by tacking on new capabilities through acquisitions and alliances, seemingly swapping what from the outside may look like greater complexity for enhanced capabilities that they hope will gain them a competitive edge.
Percy Barnevik has taken ABB, the diversified Switzerland-based company involved in things like making power generation equipment, building locomotives, insurance, investment management, and industrial robots, and smashed its old business model to smithereens. The Company's headquarters staff was reduced to 140 people. At the same time, the number of business units throughout the world soared to an astounding 1,400. Most of the people once working at headquarters are now toiling on the business units, which are linking to headquarters through a complicated electronic matrix that fuses the company's operational and financial functions with its overall performance goals. To anyone who does not dream in higher math, it is hard to find a stress-free moment at ABB. Barnevik himself calls it a sometimes loose, sometime tight federation of businesses that must continually be reminded of their links.
Downtrodden companies seem most likely to pursue simplification. KMart, for instance, has been selling its speciality businesses. As Floyd, Hall, the retailer's chief executive, put it, "The sale takes us out of a business that we perhaps didn't know as well as we should." AT&T's historic deintegration into three companies was ostensibly both for focus and to allow Western Electric, the manufacturing arm now called Lucent, to sell to rivals of AT&T. In 1988, Sun Oil (Sunoco) carved up the big oil corporation into an upstream company concerned with exploration and production and a downstream company that performs, refining and marketing. The head of Oryx, the upstream sibling, said that the benefits and synergies of being one company failed to outweigh the costs of management attention, bureaucracy, competition for investment, and the like.
Which is not to say that other business leaders aren't avowedly channelling their energies into integration. News Corp. Time Warner, Disney, and other media giants are scrambling to integrate so they can offer a package of services and content. As well as to redefine the very soul of their, industries. and while Ma Bell is getting divorced, the Baby Bells like Pacific Telesis and Southwesterns Bell are getting married.
The miscellaneous actions of these companies "� and many others "� suggest that infatuation with structure in a bewildering world has become a dominant concern on the agenda of corporate managers, and an issue that has sown much confusion.
When we consider the great shifts that have been shaping the economy in recent decades, and the deep, persisting evidence of disarray, we are pondering a genuine and radical transformation. Indeed, it is a transformation that will challenge the very core of our psyche. These changes have enormous implications for what a company has to do and how it has to think to be successful. Profit opportunities have become more fleeting as an onslaught of products has flooded the market. At the same time, products must be increasingly differentiated from each other, not just in highly fragmented home markets but also when companies enter global markets and bump into national differences and preferences. Thus a company must become adept "� not to mention catlike quick "� in its ability to adjust to changing times. it must also become much more precise in targeting windows of opportunity, more creative in how it competes, and more customised in what it delivers.
Unfortunately, most large companies no matter how eminent, have proven themselves particularly inept in responding to the steady heat from these demands.
The centerless corporation revolves around three axes
The answer, we believe, is the centerless corporation. As we imagine it, it directly addresses all of these concerns. For while the old business model is structured around individual businesses, the centerless Corporation is built along three axes: people, knowledge, and coherence. They are what allow the corporation to breathe and function. While we will discuss each of these concepts at length in separate chapters, here's what we think is unique about them:
People: Though it may sound like a truism, it bears repeating that people are a firm's most under-utilised resource. People are the firm's repository of knowledge and they are central to the company's competitive advantage. Well-trained, highly motivated people are crucial to the development and execution of strategies, especially in today's faster-paced, more perplexing world, where top management alone can no longer assure the firm's competitiveness.
In the future, corporations will have to rely more on committed and entrepreneurial workers to ensure their competitive position. The complexity of identifying opportunities, creating new products, and working across the organisation requires more and better people. As a result, people are a significant investment in the future performance of the corporation. Motorola, for example, spends almost $100 million annually on education and training and calculates a return of $3 in sales for every education dollar spent.
To attract and protect this resource, we suggest that companies adopt a "New people partnership". Recognising that lifetime employment is no longer feasible, this "partnership" involves a mutual commitment to establishing the environment for learning and for ongoing employability as part of the overall package offered to the work force.
Knowledge: Never before has knowledge been as critical as it is today, and yet many companies are at a loss in knowing how to tap and manage this vital resource. In the centerless Corporation, the management of knowledge is one of the highest priorities. Quite simply, knowledge enables growth and productivity.
We think of knowledge in the broadest possible sense. Though knowledge is often derived from information, it is much more than data. We define it as a set of understandings used by people to do work or make decisions. It is amassed from experience and constitutes the primary building block of the company's capabilities. It is strategic and focused on adding to the company's prowess by enabling the firm to do something significantly better than others. And so real knowledge creates real value for shareholders.
Managing knowledge involves, among other things, managing interactions and exchanges across organisational boundaries. The external boundaries to knowledge are coming down at a rapid rate. Knowledge must be gathered and made available to ensure access to such crucial factors as best practices and customer intelligence. The very best companies today are building networks of knowledge (the so-called intranet), are transferring best practices seamlessly around the world, and are erecting the infrastructure to make this work. The Centerless Corporation has a formal Core Knowledge Team to drive the knowledge through the corporation. Booz Allen & Hamilton is among a growing number of companies that now have a actual chief knowledge officers.
Coherence: This refers to the linkages that hold a company together. Indeed, they have never been more important in a global marketplace. They are the connectors among the many pieces of the firm, such as the global network of offices and systems, which allow the firm to globalize yet work as one, management processes which enable the firm to function smoothly, and a whole range of other factors which bind together the value-adding horsepower of the corporation and create value greater than the sum of the parts.
These linkages range from the vision and values of the firm to specific management processes like budgeting and compensation. for example, IKEA's top management abolished its budgeting system altogether. Instead, they have introduced a set of simple financial ratios that act more as benchmarks for carefully managed internal competition. Chaparral Steel has introduced a bonus salary system for all employees; what's more, 93 percent of all staff members own company shares.
Information linkages through systems have proven to be power tools of strategy implementation. for instance, Banc One has installed a Management Information and Control System which posts and ranks each of its 100 'banks' monthly performance. All bank managers have access to the system. This allows managers to identify high performing units and actively seek out best practice information from them. Kao, Japan's leading soap and detergent company and now the second-largest cosmetics company, has perfected an information network called a "Value Added network" (VAN) that gives front line managers access to information throughout the organisation. Kao has even shared information advantage with its retailers to help them build volume and profits on Kao's products.
This new model perforce has to have a different style of leadership. rather than managing the activities of the corporation, the CEO creates the context for growth with a heavy emphasis on the three enablers of growth. The context provides direction in terms of vision and culture. The enablers actually make growth happen.n
The centerless corporation
By Bruce A Pasternack and Albert J Viscio
Published by Simon & Schuster
Distributed by IBD, New Delhi
Pages: 287; Price: $ 18.25
