Disruptive Managers

The New Leader of the Pack

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In an age when conventional business models seem to be falling by the wayside, disruptive businesses like Google and Uber are setting the new corporate standards, based on flat hierarchies and a break-up of the status quo.
  • Why it matters

    Why it matters

    Formal hierarchies can thwart new thinking and lead to sclerosis, say management experts, while empowering workers often results in increased performance.

  • Facts

    Facts

    • In classic pyramidal hierarchies, instructions are passed down from above and carried out below.
    • But a new breed of companies is dispensing with such bureaucracy and allowing staff to take more control.
    • For example, workers may organize production lines themselves or set their own salaries.
  • Audio

    Audio

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Gary Hamel is part of capitalism’s intellectual establishment. In 1990, the U.S. management expert devised the concept of “core competencies” with a colleague, C. K. Prahalad.

The idea is now used by almost every successful company in the world, consciously or unconsciously. In the world of ever faster and fiercer competition, it isn’t enough just to beat the competition with a better product. Companies now need no less than a virtual knowledge-and-skills machine to continually pump out exciting, unique, must-have products.

Mr. Hamel, 62, could take it easy for the rest of his life living off his reputation as “Mr. Core Competence” — here a lecture, there an easy consulting job and, of course, his professorship at the London Business School.

But instead, the establishment icon has turned revolutionary. Mr. Hamel is on a new crusade. This time it isn’t about core corporate competencies, but core “incompetencies.”

“If you let people work the way they want to, you’ll increase their engagement and therefore their productivity.”

Linus Dahlander, Professor at European School of Management and Technology

“Businesses are, on average, far less adaptable, innovative and inspiring than they could be and, increasingly, must be,” he said in an interview.

The main culprit standing between most businesses and their success, according to Mr. Hamel, is an excessive need for control and the preferred instrument to wield it: bureaucracy.

“Bureaucracy must die” was the message Mr. Hamel hammered into the heads of future managers who attended Handelsblatt’s Pathfinder Congress earlier this year.

The pyramid structure of command-and-control is no longer suited to companies in rapidly changing markets, he said. Above all, a traditional hierarchy thwarts creative new thinking because those who make it to the top have little interest in change.

Pyramid-style bureaucracies are as old as the Egyptian pyramids. Instructions are passed down from above and carried out below. Implementation is controlled always by the level above. Good performance is rewarded with advancement up the pyramid. At the very top is the pharaoh, field marshal or chief executive, who sets the overall strategy.

Mr. Hamel said there’s another way. His new heroes are U.S. companies such as Gore chemicals, the maker of Gore-Tex, and Morning Star food products. At Gore, bureaucracy was replaced by many cells within the company that act autonomously.

At Morning Star, hierarchy was replaced by a complex system of grass-roots cooperative agreements between individual teams.

Gore and Morning Star are, in the truest sense of the word, “crazy companies,” because they had the courage to free themselves from claustrophobic, conventional laws of management. And they are being imitated all over the world, including in Germany.

 

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Detlef Lohmann, the CEO of Jungfalk Allsafe, a company in southwest Germany that makes load restraints for trucks and other vehicles, has introduced a flat organization that his helping boost sales. Source: Jungfalk Allsafe

 

Jungfalk Allsafe, a mid-sized business in Hegau, a small town in southwest Germany about 70 kilometers (43 miles) north of Zürich, makes load restraints for trucks and aircraft. In this company, workers now largely decide how they want to organize production and distribution.

Doing away with corporate hierarchies isn’t the only way companies can go “crazy.” Some also redefine industry logic: Instead of orientating their businesses around traditional profit-driven business criteria, they are turning to ethically defined criteria.

Examples include GLS Bank, a community bank in Bochum in northeastern Germany whose workers function under a system of shared cultural and social goals. The bank runs on the German “Genossenschaft” model, one of the oldest and most time-tested concepts for doing business democratically, in which workers form cooperatives.

Google, the search engine and digital advertising giant that operates under the newly formed public holding company Alphabet, is perhaps the mother of all “crazy companies.”

A large portion of profits at Google are not distributed in dividends or reinvested in the core business. Instead, the money flows into “moonshot projects” — into expensive ideas with little chance of success, but huge market potential.

At the same time, Google is a pioneer in doing away with hierarchies, or at least flattening them. Google’s middle-tier managers see themselves most of all as “facilitators.” Their job is to support those who do the actual work.

Linus Dahlander, a professor at the European School of Management and Technology in Berlin, says these companies follow a simple business calculation. “If you let people work the way they want to, you’ll increase their engagement and therefore their productivity,” he said.

Surveys such as the Gallup Engagement Index reveal a big edge in productivity for teams of employees who strongly identify with their companies. The survey also shows that most employees couldn’t care less about their employers.

If that were successfully changed, companies could experience a true surge in productivity. The end of bureaucracies, Mr. Hamel believes, could lead to a fundamental reform of capitalism.

Companies that want to grow more quickly than the market in the future must get out of the classic pyramid.

Paradoxically, grassroots movements like the Occupy Wall Street movement, which are critical of capitalism, are helping shape its future.

“Social organizations like Occupy are very decentralized and free of hierarchies,” explained management expert Mr. Dahlander. “Nevertheless, they pursue a common goal.”

In contrast to Mr. Hamel, however, Mr. Dahlander is skeptical about whether all companies can really restructure along these lines.

Companies that have already been recruiting employees who operate with a high degree of personal responsibility could go forward with fewer or no control mechanisms.

“(But) simply removing all controls in a company drilled in command and obedience, on the other hand, would result in a catastrophe,” he said.

Mr. Dahlander recommends that companies first experiment outside the organization in an incubator for innovation projects or in a new subsidiary.

At the same time, hierarchy-free companies are not as much of a workers’ paradise as some employees might imagine. Whoever makes decisions must also bear the responsibility for failure. They must constantly prove their value to the company.

New employees at V+S corporate consulting in Hanover are able to determine their own salaries. At the same time, the income of each employee is public. Whoever gives themselves a high salary is thus under constant pressure to truly earn it.

In the end, they might end up with a model like the ride-hailing service Uber. The actual core business is run hierarchy-free by independent contractors. But drivers who don’t land at the very top in customer rankings are seldom notified to pick up customers.

Nevertheless, companies that want to grow faster than the market must abandon the classic pyramid. That can be seen in the woes currently afflicting U.S. retail giant Walmart, perhaps the most hierarchical of all companies in the world.

As long as it was expanding across the United States opening one new super-center after another, the retail giant’s rigid organization was helpful to its growth. Orders were followed below and no time was wasted with questions.

But the system hit its limit after its natural expansion ended — and adaptability, not rote growth, became the new challenge. In that sense Walmart showed the perils of a rigidity when it became lost in a new world where change, and embracing chaos, was the new core competence.

 

Christian Rickens is the head of Handelsblatt’s Agenda section, which oversees the weekend edition and magazine. To contact the author: rickens@handelsblatt.com

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