Category Archives: F. Blog

086 – Why does worker productivity remain low?

Worker productivity is the output of goods and services per hour worked. In the broad terms of an industry, productivity is the gross output of industry sales divided by the number of workers allocated to produce the output.

After World War II, worker productivity in the USA improved significantly due to the investments made by companies in the technological advances of the period. Increasingly, American products were in high demand as much of the rest of the world rebuilt after the war. The US government provided educational opportunities largely free of cost to returning service personnel, who then entered the workforce with improved skills. Typical of the times, firms retained and invested profits in their growing businesses. It was a period that is now remembered fondly as being a golden age in the American homeland. During the period 1947-1973, non-farm worker productivity grew at a robust 2.8 percent per year (according to the Bureau of Labor Statistics).

By contrast, the last decade (2007-2016) has seen non-farm worker productivity grow at an anemic 1.2 percent per year. Granted, the USA (and much of the world) was working its way out of a deep recession during the period, but that may not fully explain the low rate of productivity growth. Productivity growth has been weak, and getting weaker, for decades in most industrialized countries. If it continues at this pace, living standards in the USA and highly developed countries around the world will stagnate for most workers.

Economists have provided a number of competing explanations to try to explain what is going on:

1. management strategies that worked in the past have been widely implemented and may no longer contribute to productivity (e.g., efficiency improvements like downsizing, re-engineering, KPIs, etc.);

2. the slow down in capital investment following the financial crisis of 2008 has probably contributed to low productivity;

3. measurement error may be a factor, since the measurement of productivity is notoriously difficult;

4. a delay or lag in productivity gains from any investments in new technology (which may be realized in coming years);

5. a fall in wages across the globe during the recession has put pressure on workers compensation in the USA;

6. the psychological pressures on workers that do not feel secure in their current position;

7. continued weak growth in demand; and

8. the continuing shift from a manufacturing to a service-based economy.

The above explanations generally reflect common beliefs among economists about the nature of the current problems surrounding productivity.

Now let me focus on another possibility — the underlying negative effect of current management practices on productivity and worker engagement. As Gary Hamel (London Business School) has pointed out, many organizations remain inertial, incremental, and insipid in the face of the creative destruction going on in the world economy. The top-down, command and control, and bureaucratic nature of most organizations is hampering innovation at a time when innovation is key to survival and growth.

Clayton Christensen (Harvard Business School) has found another management behavior that is limiting innovation and growth. It relates to the financial metrics (e.g., IRR) being used in public companies. First, Christensen outlines three common types of innovation:

1. Market-creating innovation. This type of innovation creates growth in the economy as it discovers ways to take expensive products that have limited appeal and makes them widely available at lower cost to a mass market. The evolution of the computer from the mainframe to the personal computer, to the smartphone, is an example. The benefits of this type of innovation in the financial metrics are apparent only in the long term (5-10 years), while there is likely to be a short-term decrease until the investments pay off.

2. Sustaining innovations. This type of innovation makes good products better but doesn’t create growth, due to the substitution of new for old. For example, if you buy a Toyota Prius hybrid, you will not be buying a Camry.

3. Efficiency innovations. This type of innovation tries to do more with less, through downsizing, rightsizing, and other cut back measures. It generally eliminates jobs but frees up cash. The benefits of this type of innovation are apparent in the short term in the financial metrics.

Since efficiency innovations provide short-term results which can be seen quickly in the financial metrics, but market-creating innovation only pays off in the long term, it is the efficiency improvements that usually win out. This too can help explain low worker productivity in recent decades.

A recent article in Harvard Business Review (March 1, 2017) noted that great companies obsess over productivity rather than efficiency, since the benefits of efficiency improvements have now played out. Despite weak top-line growth in many years, the 1990s and 2000s saw the earnings growth of S&P 500 companies run nearly three times the rate of inflation due to improvements in efficiency; however, starting with the quarter ending March 31, 2015, S&P 500 earnings began falling and has remained negative ever since. Without top line growth, continuing efforts to achieve improvements in efficiency eventually hit a proverbial brick wall. The same HBR article found three fundamental tenets of a productivity mindset that executives need to understand:

1. Most employees want to be productive, but the organization often gets in the way;

2. A company’s talented “difference makers” are often put in roles that limit their effectiveness; and

3. Employees have plenty of discretionary energy that could be devoted to their work, but many are not sufficiently motivated to do so.

As is often the case with this podcast, we have once again found a need to reinvent management for the 21st Century and beyond. Efficiency improvements have worked their way through companies in recent decades, but have taken a significant toll on future growth. The current path on which many public corporations find themselves is not sustainable. Now we need to create corporations that invest for the future, in workers and their work, by providing the freedom and the tools to do creative and innovative work. It seems that innovation is the only likely path out of the current low productivity regime.

To find this path, I recommend a new management approach that we have discussed before on this podcast, and which is described in my 2017 book, Become Truly Great: Serve the common good through Management by Positive Organizational Effectiveness.

Charles G. Chandler, Ph.D.
cchandler@AssumptionAnalysis.com

References & Links:

1. Link to Gary Hamel’s blog
2. Link to Clayton Christensen’s talk
3. Mankins, Michael. 2017. “Great companies obsess over productivity, not efficiency.” Harvard Business Review, March 1, on-line edition.
4. Chandler, Charles G. 2017. Become Truly Great: Serve the common good through Management by Positive Organizational Effectiveness. Powell, OH: Author Academy Elite.

077 – The outcome economy in technology services

Today I want to focus on a transition happening in the technology services industry driven by some macro trends. This issue appeared on my radar screen while I was looking into the business models used by technology services firms such as IBM, Cisco, and SAP. It is the emerging phenomena that some have called the outcome economy. The outcome economy in technology services, as SAP defines it, is the leap from selling software to selling outcomes to its customers. The old economy was an output economy. As you know, an organization’s outputs are its products and services, or its projects and programs. In technology services, the output economy involved selling boxes of software to customer organizations, so that their internal IT department could install and manage the software on in-house servers. Vendors also sold software directly to individual consumers, for example, Microsoft Windows or MS office.

The new economy is outcome-based. It involves delivering results valued by customers, while providing software as a service in the cloud. In the Outcome Economy, selling an outcome is much more complex for the vendor than selling a product (or output) because delivering outcomes typically involves an integrated and managed end-to-end process.

Now, long-time listeners to this podcast may be wondering whether the outcome economy refers to ‘outcomes’ in the same way as we have used them in the past when discussing organizational effectiveness. The quick answer Is ‘not exactly,’ since those promoting the outcome economy do not define their terminology in a precise way, but let’s not quibble over terminology just now. Today’s discussion is simply a report on trends in the technology services industry, which may have lessons for the rest of us, since these trends are likely to spread elsewhere in the future.

Let me outline three macro trends in the market that I believe are pushing the disruption in technology services.

1. The search for knowledge worker productivity. Today, all knowledge workers require technology services for productivity, and there is a continuing need to enable higher levels of capability and productivity as time goes on and applications evolve. Knowledge workers in the traditional professions include doctors, lawyers, and teachers, to name a few. Knowledge workers master a body of knowledge and apply it to accomplish a task. Knowledge workers become productive within a system that manages the scheduling of the work with the worker. It is a system that either they create themselves (if they are running their own practice) or someone else creates for them (as part of a larger organization). The basic ingredients of the system for knowledge worker productivity can be divided into two categories: a) back office operations — which takes care of the administrative functions, such as personnel, accounting, budgeting, maintenance, facilities, etc., and b) production operations — which organizes the internal production tasks in order to acquire the work (from a customer), and then distribute the work to the individual knowledge workers in a logical, timely, and efficient manner. The knowledge worker remains in control of how the knowledge is applied to the work. Technology services vendors are enhancing the basic productivity model for knowledge workers by adding additional services, such as cognitive computing (e.g., IBM’s Watson in the medical field) to diagnose problems and suggest solutions based on the latest research. Many fields are becoming so complex (e.g., medicine, law) that no single knowledge worker can keep up with everything that has changed since they graduated. Cognitive computing addresses this problem, striving to extend the reach of knowledge workers in new ways.

2. Outsourcing in search of lower costs. Pervasive internet connectivity, together with mobile and cloud computing, are leading to outsourcing and some atomization of business processes in a search for improved efficiency and lower cost. For instance, because everybody is connected to the internet, we can have Virtual Assistants in the Philippines (who act like they are simply part of your office), or social media services optimization by vendors in India. This is just the tip of the iceberg, and the trend is leading to the outsourcing of bits and pieces of processes where it makes sense to do so.

3. Increasing customer expectations. Customer expectations are increasing, and organizations are integrating technology within their offerings to compete. The customer experience, particularly the customization of that experience for the customer by the organization, is increasingly being driven by algorithms. The best experience that the customer has had is driving expectations toward higher and higher norms. For instance, Amazon knows what you have bought in the past, and suggests what else you might be interested in now. Your car, once repairable by you a few decades back, but no longer (yet it monitors itself, and alerts you to a problem). Your kitchen appliances are increasingly being connected to the internet (IoT), and they can schedule a service call before a major problem occurs.

Technology services vendors report that the revenues from their old business models are decreasing rapidly, and they are searching for new ways forward. Many have already moved away from selling software boxes and are now selling software subscriptions (e.g., Microsoft office). Smart analytics and the Internet of Things (IoT) has made it possible to move from the “break it-fix it” model to the “fix it before it breaks” model involving offerings that are sold as a service, tied as closely as possible to business outcomes. These trends have been termed the outcome economy, the consumption economy, or the B4B economy — simply different terms for the same macro trends. In the outcome economy customers pay on the basis of usage (e.g., a cell phone contract) or on the basis of business outcomes (e.g., hours of jet engine operation for an airline, rather than allocating capital toward aircraft engine ownership).

Technology services is complicated, and can be scary for customers. The customer needs (and values) a trusted advisor and partner with whom to chart their journey into the future. Vendors are best placed to absorb the risk of the journey for their customers. In return, they can experience high adoption and renewal rates for their new as-a-service offerings.

In summary, the writing is on the wall. Old business models in technology services are dying as part of the outcome-based economy, and new ones are taking their place. For some, their current situation represents a burning platform, and it creates a “bet the farm” moment, requiring a major change going forward. It must start with what their customer wants (an outside-in approach), and big new investments are likely to be needed going forward to make the transition a reality. Vendors must convert their burning platform into burning ambition, in order to successfully overcome an adverse situation and claim a new future within the outcome economy.

075 – The new assumptions of management

In his 1999 book, Management Challenges for the 21st Century, Peter Drucker explored the assumptions that pertain to the study of management. They are important, he wrote, because they “largely determine what the discipline assumes to be REALITY.” Now, almost 20 years after Drucker wrote these words, it is worthwhile to consider how well the assumptions he mentions still hold up today.

To begin, Drucker notes that since the study of management first began in the 1930s, two sets of assumptions held sway among most scholars, writers, and practitioners regarding the REALITIES of management. The first set concerns the DISCIPLINE of management:
1. Management is Business Management.
2. There is – or there must be – ONE right organization structure.
3. There is – or there must be – ONE right way to manage people (command & control).

The second set concerns the PRACTICE of management:
1. Technologies, markets and end-users are given.
2. Management’s scope is legally defined.
3. Management is internally focused.
4. Management’s scope is defined by political boundaries.

Drucker believed that every one of the above assumptions had been replaced by 1999 (when he was writing), as follows:
For the DISCIPLINE of management:
1. Management is the specific and distinguishing organ of any and all organizations.
2. The best structure for an organization is one that fits the task to be accomplished.
3. One does not manage people. The task is to lead people. The goal is to make productive the specific strengths and knowledge of each individual.

For the PRACTICE of management:
1. Neither technology nor end-user can be taken as given, they are limitations. The foundations are customer values and customer decisions regarding their disposable income.
2. Management scope is not legally defined, but rather operationally defined (embracing the entire process). It is focused on results and performance across the entire economic chain.
3. Results of any institution exist only on the outside. Management exists for the sake of the institution’s results. It has to start with the intended results and has to organize the resources of the institution to attain these results. It is the organ to make the institution, whether business, church, university, hospital or a batter women’s shelter, capable of producing results outside of itself.
4. National boundaries are important primarily as restraints. The practice of management – and by no means for businesses only – will increasingly have to be defined operationally rather than politically.

Now, almost 20-years on from Drucker’s writings, I would submit that the following updates (in italics) could be made to his list based on Management by Positive Organizational Effectiveness (advocated in this podcast):
For the DISCIPLINE of management:
1. Management is the distinguishing organ of any and all organizations in the business, government and nonprofit sectors (i.e., throughout the economy). It is also required when several organizations cooperate to tackle specific problems in society to support the common good.
2. The best structure for an organization is the one that is most effective in serving its chosen environment.
3. One does not manage people. The task is to lead people. The goal is to make productive the specific strengths and knowledge of each individual (and to make the specific weaknesses of each individual irrelevant).

For the PRACTICE of management:
1. Neither technology nor end-user can be taken as given, they are limitations. The foundations are customer values, customer decisions, and customer behaviors surrounding the use of their disposable income.
2. Management scope is not legally defined, but rather operationally defined (embracing the entire process). It is focused on results, performance, and effectiveness across the entire economic chain.
3. Results of any institution exist only on the outside. Management exists for the sake of the institution’s results. It has to start with a portfolio of expected external outcomes to be generated by its offerings and has to organize the resources of the institution to attain these results. It is the organ to make the institution, whether business, government, or nonprofit, capable of achieving results outside of itself.
4. National boundaries are important primarily as restraints. The practice of management – and by no means for businesses only – will increasingly have to be defined operationally rather than politically.

What we have tried to do today is to revisit some of Drucker’s wisdom from about 20 years ago to see how it fairs today. In general, it has held up well, but some new ideas have come on the scene, and further updates may be warranted.

Charles G. Chandler, Ph.D.
email: cchandler@AssumptionAnalysis.com

References:

1. Drucker P. F. 1999. Management Challenges for the 21st Century. HarperCollins: New York, NY.

2. Chandler, C.G. 2017. Become Truly Great: Serve the Common Good through Management by Positive Organizational Effectiveness. Author Academy Elite: Powell, OH.

071 – Does an organization need a big goal?

You may have heard of a BHAG, which stands for Big Hairy Audacious Goal. It is the idea that for an organization to excel at what it does, it needs to work toward a big long-term goal that takes a decade or more to achieve. This is not just a stretch goal, but an audacious goal. It is supposed to motivate the workforce to get behind management’s vision for the future, to stimulate forward momentum, and kick the organization into high gear. The BHAG idea was proposed in a 1994 book by Jim Collins & Jerry Porras, Built to Last: Successful Habits of Visionary Companies. The authors noted that “a true BHAG is clear and compelling, serves as unifying focal point of effort, and acts as a clear catalyst for team spirit. It has a clear finish line, so the organization can know when it has achieved the goal; people like to shoot for finish lines.” BHAG examples include President Kennedy’s 1962 goal, “before this decade is out, …landing a man on the moon and returning him safely to earth” or GE’s goal “become #1 or #2 in every market we serve and revolutionize this company to have the speed and agility of a small enterprise.”

So, does an organization need a big goal, like a BHAG? Well, maybe not. The BHAG approach assumes that goal setting will generate a positive change, yet goal setting is far from benign. A new C-suite team with a new set of goals can be only one misstep away from dysfunction and havoc. The BHAG approach is inherently risky; the bigger and more audacious the goal, the more likely it is to be one of those “we’re betting the farm” moments. It’s not just the risk that things can go wrong during implementation, but a big goal can take an organization in the wrong direction from which it may have trouble recovering. An organization in which management has taken a significant wrong turn, is an organization that is reluctant to trust management again.

Another problem with goal setting is that it can have unintended side effects. A 2009 study published in the Academy of Management Perspectives noted that the side effects of goal setting include things like “a narrow focus that neglects nongoal areas, distorted risk preferences, a rise in unethical behavior, inhibited learning, corrosion of organizational culture, and reduced intrinsic motivation.”

A story illustrates what can happen. In 2015, Volkswagen’s big goal was to take over leadership in the global auto industry and its vehicle sales were strong. At the height of this apparent success (despite the self-serving goal), a scandal emerged by chance. A small lab at the University of West Virginia started testing engine emissions to understand how VW diesels were able to achieve their high mileage ratings. The new tests were conducted on the open road, as opposed to the test bed where the vehicles had been certified in conformance with standards. It turned out that because of deceptive software within their engine monitoring system, VW diesels were producing emissions on the road that far exceeded standards in the USA. The lab’s findings created a major scandal at VW, and a great brand was significantly tarnished, driven in part by management’s desire to reach an overarching goal.

It seems that the more single-minded an organization becomes in focusing on a narrow financial or economic objective (such as maximization of profit or shareholder value) at the expense of everything else, the more likely it is that dysfunction will emerge. This may well be a property derived from the nature of organizations as complex adaptive systems.

The situation can become a national crisis if an entire sector is focusing narrowly, and is being rewarded for unethical practices. For example, the financial debacle of 2006-2008 and beyond in the USA was precipitated by investment banks that were focused on generating financial profits from complex investment vehicles in the housing market, without the vehicles being sufficiently supported by underlying assets on their books — thus increasing market risks and environmental instability over time, eventually leading to the crisis. The rise of instability in organizational systems may explain why the risk of exit for public companies traded in the US now stands at 32 percent over 5 years, compared with the 5 percent risk that they would have faced 50 years ago. For individual public companies, these exits are mostly unintended and are likely associated with managerial failure.

The BHAG approach is driven from the top down. Management sets a long-term goal, then directs the staff to achieve it. This new approach relies upon the leadership team to set the right course. What if they are wrong, what if they are driven by unethical motives or perverse incentives, or what if the environment changes radically during implementation? With a BHAG, the organization is committed for a decade or more to an overriding goal that may not serve it well. Success requires almost perfect knowledge and anticipation of the future. It may work sometimes, but it is not very reliable.

Consider the alternative approach embodied in Management by Positive Organizational Effectiveness, which has been discussed in previous episodes of this podcast (and described in my book, Become Truly Great). This new approach discards the goal model because of its inability to distinguish between appropriate and inappropriate goals. Instead, it specifies that the goal of every organization is the same, that is, to be effective within its environment. While this is a fixed goal, it is defined in terms of serving an ever-changing environment which can be full of surprises. It is also an appropriate goal because it gives an organization a useful and meaningful purpose, one that will not only serve to delight its customers, but guarantee that the organization will survive and thrive. This is less risky than creating a BHAG because it does not rely on perfect knowledge from the C-suite. Instead, it allows decentralized teams who are close to the action to decide what it will take to serve their clients and customers best today.

Organizations that consider their goals to be the maximization of profit, shareholder value, or other such goals driven primarily by financial or economic gain are not using Management by Positive Organizational Effectiveness. They are still living in an age of ‘efficiencyism,’ where dysfunction is an emergent phenomenon (due to potential instability within an organization’s complex adaptive system). In the new approach, the effectiveness of the organization as a whole is determined from its portfolio of offerings. Demand-side behaviors of customers and other actors (observed in the field) are used to gage the effectiveness in each results chain, thus verifying that the supply-side of the organization is offering what the demand side environment willingly takes up, adopts, and uses.

Management by Positive Organizational Effectiveness (M+OE) has several new features. It counsels the incorporation of positive values within the organization from the start, to attract & amplify success, instill virtuousness, and be protective on the journey toward greatness. While Frederick Winslow Taylor’s “scientific management”, described in a book by the same name in 1911 enabled manual worker productivity by increased task efficiency, the new approach manages benefit exchanges at the interface of supply & demand to ensure that outputs are readily converted to outcomes as expected. It also programs the organization for knowledge worker productivity because tasks are specified once an offering’s results chain and expected external outcome (EEO) have been determined. M+OE encourages an organization, once it discovers effectiveness, to occupy a niche within its environment, and to serve it so well that competition is irrelevant.

An organization is encouraged to co-create value over time with stakeholders in its niche in order to continuously adapt to environmental change and to serve the needs of the environment more fully. In this way, a pipeline of new offerings can emerge to replace mature products and services that become outdated, or to expand offerings in promising new areas. Observations of demand-side behavior are instructive as feedback to hone the preferred attributes of an organization’s offerings over time. Effectiveness is an instantaneous measure that can be observed in the field every day (or measured periodically, as appropriate).

An organization is effective to the extent that it achieves its expected external outcomes. This is a more useful and meaningful way to think about effectiveness. When we refer to an outcome, we do not mean a final result such as is assumed in the goal model. Rather, an outcome is an effect caused by an antecedent event. While outputs are produced by the organization in the form of its offerings, it is demand-side actors that must decide if an organization’s offerings are attractive enough to compel them to exhibit the behaviors of uptake, adoption or use. When such behaviors do occur, they can be observed in the real world, and provide the “objective referent” that has been missing in models of organizational effectiveness thus far.

A BHAG is not needed under the new approach, since the goal of every organization is the same. You may recall that the US Army, back in 2001, changed its ad campaign and slogan, from the old slogan (“Be all you can be”) to the new slogan “Army of One.” In the new ad campaign, each soldier was to think of himself or herself as an army of one. We could envisage a similar approach. Since the goal of every organization is to be effective within its environment, every front-line employee is empowered to wake up each day and reinterpret what it means to “serve your environment” anew. It is clear, however, that “serve your environment and be rewarded in return” is not about extracting as much profit as possible from every customer. It’s about serving every customer and being sure that they receive the value that they are expecting. Potentially, this could create a very flat organization. Do you really need a highly-incentivized C-suite and a well-paid Board? Perhaps not. The approach gives clarity of purpose to every level of the organization. In fact, it could make sense to take a portion of the compensation that is being paid to the C-suite and the Board, and redistribute it to front-line teams.

Today we have considered whether an organization needs to set a big goal to achieve high performance. Conventional practice is mired in the goal model, and it may appear that a big goal can kick things up a notch. Beware of the hidden dangers that have been mentioned. The alternative approach embodied in Management by Positive Organizational Effectiveness offers a more predictable and satisfactory way to kick up performance, removing the burden of the C-suite to always be right, and empowering front-line staff to do what they do best.

Charles G. Chandler, Ph.D.
cchandler@AssumptionAnalysis.com

068 – Simplicity on the far side of complexity


In the spring of 1804, explorers Lewis & Clark and their party, began an assent of the Missouri River from St Louis in search of an overland passage to the Pacific Coast. They were on a mission of discovery at the request of President Thomas Jefferson, who had added a vast tract of land to the country through the Louisiana Purchase, made up largely of the Mississippi River basin. After a cold winter in present-day Montana with the Mandan Indian tribe, Lewis & Clark arrived at Lemhi Pass in August 1805, on the continental divide, where they hoped to see a gentle plain sloping to the Pacific Coast. Instead, they saw more and more mountains, some capped with snow, as far as the eye could see.

Oliver Windell Holms, Sr. (poet and medical reformer of Boston) was quoted as saying: “For the simplicity on this side of complexity, I wouldn’t give you a fig. But for the simplicity on the other side of complexity, for that I would give you anything I have.” At Lemhi Pass, Lewis & Clark found themselves lost in the middle of a complex series of mountains, and their expectation for a simple route to the coast had fallen apart. At that point, they would have given anything they had for simplicity on the far side of the complex situation they found themselves in, but they would not successfully complete their journey to the Pacific for many more months.

When management is considered as a field of study, it appears rather complex. There are numerous terms, techniques, and approaches to be considered, and there are luminaries of the field (both past and present) that have written extensively on the topic. When today’s organizations find themselves in the midst of a complex situation, there are management consulting firms that offer their services. Yet hiring an outside firm may be only the beginning of a voyage of discovery with no satisfactory end in sight. Managers are too often presented with a choice among simple answers to the complex environment they face. Such choices can become traps, because they represent simplicity on this side of complexity. Like Lewis & Clark, it may be a long time before they find simplicity on the other side of their complex situation, if at all.

While organizational effectiveness is the most important form of organizational performance, much of current management practice is based on the Goal Model, where an organization is said to be effective if it achieves its stated goals and objectives. Yet the goal model serves an aging, and largely top-down, bureaucratic reality. Let’s call it “last century” technology. It is not reliable, because it accepts arbitrary goals that often focus on the wrong things.

The traditional approach to management is to set up a particular organizational form (organizational chart), program the organizational units with a series of goals and objectives, then lead and direct the staff to fulfill them. This is the basic idea behind Management by Objectives, which utilizes the goal model for effectiveness. The problem with this approach is that the goal model will accept almost any goal that management wishes to use, and not all goals have any relation to improvements in organizational effectiveness. It is impossible to know whether the right goal has been specified, and even if a stated goal is achieved, it may not mean that the organization is effective.

For example, selecting a new executive team with a new set of goals can be a risky strategy with unpredictable results. In 1974, Peter Drucker wrote in response to a rash of reorganizations in large American firms, “the main causes of instability are changes in the objective task, in the kind of business and institution to be organized. This is at the root of the crisis of organization practice.”

In fact, it appears that the more single-minded an organization is in focusing on a narrow financial goal (such as maximization of profit or shareholder value) at the expense of everything else, the more likely it is that instability and dysfunction will emerge. That is because organizations are complex adaptive systems and can respond in unexpected ways when forced down a self-defeating path. This is explained in more detail in my 2017 book, Become Truly Great: Serve the Common Good through Management by Positive Organizational Effectiveness.

Our view of organizational effectiveness is based on a model that pairs a defined concept of effectiveness with a way to verify it in the field, overcoming a key limitation of the past, and forming the basis for a new management approach called Management by Positive Organizational Effectiveness (M+OE).

Compared to current management practice, the new approach differs in seven key areas:

1. The goal model has been discarded, because it will accept virtually any goal that management chooses to use, without a way to discriminate between useful and non-useful goals. Within the new approach, by contrast, the goal of every organization is the same, that is, to be effective within its environment. Organizations that consider their goals to be the maximization of profit, shareholder value, or other such goals driven primarily by financial & economic gain are not using M+OE.

2. The approach uses a new outcome-focused model (OFM) to gage effectiveness of an organization’s individual offerings, and in turn, the overall effectiveness of the organization’s portfolio of offerings. Expected external outcomes (EEOs) are the demand-side behaviors of customers and other actors that can be observed in the field to validate effectiveness, confirming that the supply-side of the organization is offering what the demand side in the environment willingly takes up, adopts, and uses.

3. It counsels the incorporation of positive values within the organization from the start, to instill virtuousness, attract & amplify success, and be protective on the journey toward greatness.

4. Our new approach offers a way to make both manual workers and knowledge workers productive. While Taylor’s “scientific management” enabled manual worker productivity by increasing task efficiency through time and motion studies, the new model enables the production of internal outputs and their conversion into expected external outcomes through the management of benefit exchanges at the supply/ demand interface. The new approach programs the organization for knowledge worker productivity because tasks can be specified once an offering’s results chain and expected external outcomes (EEOs) have been determined.

5. The new approach encourages an organization, once it verifies the effectiveness of its offerings, to occupy one or more niches within its environment, and to serve them so well that the competition is irrelevant.

6. The approach encourages an organization to co-create value over time with stakeholders in the environment in order to continuously adapt to change and to serve the needs of the environment more fully. In this way, a pipeline of new offerings can emerge to replace mature products and services that become outdated, or to expand offerings in promising new areas. Observations of demand-side behavior are instructive as feedback to hone the preferred attributes of an organization’s offerings over time.

7. Within the new approach, effectiveness is an instantaneous measure that can be observed in the field every day (or measured periodically, as appropriate). True greatness, on the other hand, is the longer-term and cumulative impact of effectiveness that is associated with an organization’s reputation and impact over time. An organization can expect to spend at least five years applying the principles of effectiveness (while maintaining positive values) to become firmly established as a truly great organization in its chosen niche.

Utilizing M+OE within your organization means that product and service teams are empowered to consider a key question every day, “How can we serve our environment well today?” Businesses, government agencies and nonprofits have the same challenge. It’s a probing question, and the answer may change over time. It’s a question that will be difficult to answer quickly in a bureaucratic, top down, command-and-control management system. It is best handled by flexible, team-based management focused on the success of individual offerings to the environment by capable teams of knowledge workers. Of course, we are not suspending the principles of accounting, economics, or finance, in making such decisions, but these are not necessarily constraints. To the extent that the approach generates true greatness, it is likely to deliver superior financial and economic performance as well.

Does being truly great and occupying a niche mean that you don’t have competitors? Perhaps not, but it does mean that you are paying attention to the big things and the little things that create effectiveness at the supply-demand interface, and that you are always testing new things to serve your environment better. So, why isn’t the goal of every organization to be great rather than to be effective? Well, because an organization needs to focus on something that can be observed every day, to provide feedback and correction. Greatness (and superior reward) is something that is a natural outgrowth of being effective over time, together with serving your environment using positive values.

Truly great organizations know their environment well and serve it effectively with their offerings. They closely monitor demand-side behaviors to determine if the environment is behaving as expected, to be alert for emerging new behaviors that need to be studied further. Once an organization has developed and tested a portfolio of results chains (with more in the pipeline), it has the keys within hand to survive and thrive. Continuous adaptation to the environment is critical for survival, since the danger over the mid- to long-term is that the environment will change in ways that make the organization’s offerings irrelevant. Major catastrophic events such as 9/ 11 (or the 2008 recession in the US) can compress this timeframe, of course, and make the need for an appropriate response immediate.

The single-minded pursuit of profit, shareholder value, or any other objective (other than effectively serving your external environment, and improving the whole) can create instability within an organization’s complex adaptive system for a variety of reasons.
Evolutionary processes operate on the population of organizations, while adaptive pressures act on individual organizations, to enforce “survival of the effective” over time. Ineffective organizations are marginalized or eliminated by their environment in the absence of a sufficient exchange of benefits across the supply/ demand interface. Organizations that intentionally harbor negative values are continually at risk, and can become unstable and short lived once the environment recognizes and rejects their corrosive attributes, then actively engages in efforts to expose and eliminate the offenders among them.

A new age of organizational effectiveness will arrive when C-suite teams and other executives and managers “think different” using the principles outlined above. In the new age, small and large organizations alike (whether business, government, or nonprofit) will serve their environment and be rewarded in return, thus managing capitalism for the common good. The world needs organizations that are virtuous, effective, and truly great. Such organizations represent simplicity on the far side of management complexity.

Charles G. Chandler, Ph.D.
cchandler@AssumptionAnalysis.com

Affiliate link to Amazon.com:

067 – ‘Greatness’ does not arise from negative values

If you have listened to this podcast for a while you will know that the philosophy I advocate to lead your organization is called Management by Positive Organizational Effectiveness (M+OE). It is outlined in my recent book, Become Truly Great. The approach has three phases: 1) Be Virtuous, 2) Discover Effectiveness, and 3) Become Truly Great. This week we are exploring Phase 1 of the process, Be Virtuous. Here you are invited to start your journey toward greatness by examining whether your organization is virtuous. If this seems puzzling, it should not be. Even drug cartels can manage effective organizations, so it is important to apply super powers for good rather than evil. Think of Google’s admonition to itself, “don’t be evil.” Yet the approach goes beyond simple slogans. Phase 1 of M+OE is about instilling positive values in your organization that can both attract and amplify success, while being protective on the road ahead. Positive values and attributes such as honesty, decency, transparency, high quality, resource conservation, and doing what’s best for the customer need to be guaranteed within your processes because internal behaviors matter. It is important to do this at the beginning of the journey, rather than discover 15-20 years down the road, during scandal, that positive values were never present (e.g., Enron). We can learn from highly reliable organizations (e.g., aircraft carriers, nuclear power plants) that are obsessed with potential failure modes, and incorporate ways to recognize and avoid them.

When I first began thinking about writing a book on management, my emphasis was largely on how organizations could become effective, since that was the key problem that I believed needed to be solved. The literature had few answers in this area, and I had some ideas on how to remedy that problem. It took a while to internalize the fact that bad actors can be effective, and that I needed to address the problem more comprehensively in the book. There have been examples of organizations in the past that have appeared to be effective for a time, but eventually came to grief because of bad behavior within the organization. It seems that organizations are often unprepared to hold internal agents accountable to a common set of positive values until it is too late. So, success is not just about being effective, but about being effective while honoring core values. To make this happen, organizations need to be intentional about being virtuous.

But why? Why be virtuous? Virtuousness should be considered a prerequisite for true greatness. It is about instilling positive values in an organization, and being sure that those values consistently result in positive behaviors. An organization needs to live its values and love its purpose. While values may change over time, they express beliefs and attitudes that permeate the organization, and shape its culture. Core values should also include attributes that the organization needs to maintain at a high level of reliability and resilience. Traditional business values have included things like efficiency, profitability, and management control, but these need to be balanced against higher values and virtues to help the organization aspire to greatness and connect its values to the common good. Here there is a need for management to lead the way. It is often the leader of the organization that embodies the values and acts as an example to others on how to live those values within the organization. An example of positive values, together with organizational virtuousness, would be the US Marine Corps — for the way it instills values within its members.

A useful model on how to instill virtuousness in organizations is illustrated by the methods used in high reliability organizations, such as aircraft carriers, nuclear-powered stations, air traffic control, and forest firefighting. These situations are dangerous and prone to error, and errors that are experienced can be devastating and costly. High reliability organizations are quite sensitive to, and preoccupied with, failure. They have identified the main modes of failure, and have implemented safeguards and checks to be sure that they do not occur. Such organizations contain a high degree of expertise, and work hard to keep their operations stable and failsafe. Using a similar approach, positive virtues and attributes can be intentionally instilled in an organization to amplify performance and to protect it from specific failure modes.

A good example of organizational virtuousness was the cleanup work conducted at the Rocky Flats nuclear waste site (in Colorado), where there had been a long history of nuclear weapons production. When an estimate was done of how much it would cost and how long it would take to clean up Rocky Flats, the estimate was for 70-years and $ 36 billion dollars. What makes this an amazing story, however, is that the work was completed 60-years early, while saving almost $ 30 billion in taxpayer funds due to the positive values and outstanding work of the clean-up contractor, Kaiser-Hill. The remediated nuclear waste site is now part of a wildlife refuge.

In Management by Positive Organizational Effectiveness it is important to start from a position of virtuousness. It is the values and virtues which are inculcated in the personnel carrying out the processes that set the organization up properly for success. If the intention is to become truly great, it would be difficult to argue that an organization should not clothe itself with virtuousness before starting the journey. The founder of Patagonia, Yvon Chouinard, noted in a recent interview that the values his company began with were critical in charting the course of its later success. Google, in its original outline of mission and vision talked about “don’t be evil.” Alphabet, which is the successor to Google, now calls for “doing the right thing” but Google still mentions “don’t be evil” within its admonitions to employees. It is the adherence to positive values and virtues that amplifies performance and protects the organization from falling into a ditch along the path to greatness. To be more intentional about its values, an organization needs to take the viewpoint of an outside observer and make an honest assessment of what values are expressed within its processes and culture.

But what happens if an organization, or some part of it, harbors negative values and embraces the dark side. Examples are numerous of organizations that have embodied negative values in various ways in the past — including Enron, WorldCom, Volkswagen, the World Football Federation (FIFA), Toshiba, and Bernard Madoff Investment Securities LLC. Several organizations have appeared to be paragons of performance, riding high before scandal, and whose names seemed to be synonymous with some form of greatness; but these same organizations were brought low by one or more people within the organization that behaved in non-virtuous ways.

In the case of Enron, management used off-balance-sheet accounting tricks and complicated financial instruments that intentionally hid the truth from investors. Eventually it was found that the real value of the company was considerably lower than the stated book value, causing a precipitous loss in the stock price, and bankruptcy in 2001.

In 2015, Volkswagen (VW) was trying to take over leadership in the auto industry and was selling lots of diesel vehicles worldwide. At the height of this apparent success (despite the self-serving goal), a scandal emerged by chance. A small lab at the University of West Virginia started testing diesel engine emissions on the road to understand how VW diesels were able to achieve their high mileage ratings. The new tests were conducted on the open road, as opposed to the test bed where the vehicles had been certified in conformance with standards. It turned out that because of deceptive software within their engine monitoring system, VW diesels were producing emissions on the road that far exceeded standards in the USA. The lab’s findings created a major scandal at VW, and a great brand was significantly tarnished.

In another example, Bernard Madoff was well-known in the securities industry and was believed to be an upstanding leader (as a former chairman of the NASDAQ stock market). Eventually it was discovered, however, that his investment firm was simply a Ponzi scheme, and that over $ 50 billion worth of hidden fraud had gone undetected.

If we choose to expand our search to the shadowy and violent side of organizational performance, we could find somewhat effective but negative examples among drug cartels, and even terrorist organizations like ISIL or al Qaeda. Organizations such as these are likely to have relatively short and precarious trajectories, as state actors in the environment are mobilized and coordinated in efforts to eliminate them.

In the national election of 2016 in the US, the voters faced a choice between candidates (as usual). The narratives of each party (and their respective candidates) served as attractors to lead voters in the direction of one candidate or another for President. Unfortunately, narratives that we hear in the media, and that come to us through our televisions and radios (and across the Internet), are not subject to verification directly via first-hand knowledge. So, it is important that the validity of news sources be verified before buying into a narrative. It is well known that a lot of false information circulated in the media during the election season, and new parts of the narrative appeared even in the final days.

False narratives can lead us to vote for one or the other candidate for spurious reasons. Candidates that espouse false or misleading narratives can lead us in directions that may even be highly destructive. Despite the negative nature and questionable validity of some of the available information, political narratives clearly have extraordinary power to act as attractors to align voters’ preferences with one candidate or another – a phenomenon that was on display during the final days of the 2016 election. Although the polls may not have been wrong leading up to the election (as each reflected the situation at a single point in time), it appears that a significant number of voters changed their election day strategy in the final days in a rapid, non-linear fashion, typical of behavior in complex adaptive systems. The result on election night was surprising, and disconcerting (i.e., the election of Donald Trump).

If we turn now to the overall narrative of an organization, including its goals and how it expects to achieve them, the narrative is typically put forth by official sources. The official version can be verified for authenticity through conversations with internal sources and by observation of behaviors that can be observed internally and externally. This means that organizational narratives are verifiable, based on triangulation with multiple internal and external sources. False narratives within the context of an organization can be detected through a conflict between sources, including the official narrative, the informal narratives that we hear from internal sources, and observation of behaviors around us. If all sources are in alignment with the official narrative, we can feel confident that it is being acted upon in a deliberate manner. However, when we find sources are not in agreement, or observed behaviors that do not ring true, we begin to question the direction that the organization is taking.

That could be the case with Fox News. CEO Roger Ailes of Fox made his own news in 2016 when a sexual harassment suit was brought against him. Fox paid a single $ 20 million settlement to Gretchen Carlson, and perhaps others that came forward to accuse Ailes. Fox’s values are suspect because of what has gone on there, including reported “grotesque abuses of power… a culture of misogyny, and one of corruption and surveillance, smear campaigns and hush money.” What if other values, more positive values, had been in place? Would they have been protective? And what of the culture that has supported a corrosive environment for the last 20 years, with implications far beyond the man at the top? Based on available reports, Mr. Ailes appeared to be very intentional about the values in place at Fox News; unfortunately, they were negative values.

In another example, looking back on the US election of 2016, many Trump supporters were earnest and well meaning, with valid concerns about today’s economy, yet they were duped by a series of artful lies by the candidate himself and the enabling attention of the media. To believe that America will be made great again through the efforts of the dark-side forces that marked the Trump campaign is ludicrous. Greatness does not arise from negative values. That fallacy should have provided an obvious clue to the deception that was underway. Unfortunately, our news media and the voters failed to see this truth clearly.

Today we have explained the reason for the emphasis on positive values in Management by Positive Organizational Effectiveness, and why ‘Be Virtuous’ is Phase 1 in this approach. Positive values can serve to amplify benefit exchanges with customers, orient a diversified workforce to what behaviors the organization considers important for success, and act as a protective shield against scandal over time. They can become differentiators that define and distinguish a brand. Negative values, on the other hand, can cause great harm. It may seem that straying into negative territory is justified from time to time in difficult situations, but as the many examples have illustrated today, an excursion to the dark side is unlikely to turn out well.

Charles G. Chandler, Ph.D.
cchandler@AssumptionAnalysis.com

Affiliate link to Amazon.com:

066 – ‘Big History’ and its extension

Big History Project

You may have heard the term ‘Big History’. It comes from historian David Christian, at Macquarie University in Sydney, Australia. He has a TED talk describing what his team has been up to with Big History, a project that has received some funding from the Gates Foundation. Big History is the story of how life and eventually civilization have emerged on Earth, building upon one another. The story starts with the Big Bang roughly 13.7 billion years ago. The discussion introduces a puzzle. In a universe ruled by the Second Law of Thermodynamics (paraphrased: everything runs down over time), how could the complexity that we see today have come about?

Well, it seems that the universe can produce complexity in spite of the Second Law, but it is very difficult, and it requires special conditions, found only where suitable conditions are present at each stage of the process. Professor Christian calls this the Goldilocks conditions, not too hot, not too cold, just right. Even then, it was necessary to cross eight difficult thresholds to arrive at our present-day reality. It is not clear how much longer this can continue.

But let’s start at the beginning of the Big History story according to the best available evidence. Before the Big Bang, it was completely dark. This was before time and matter existed. Then suddenly, our universe emerged from a single point in space/time about 13.7 billion years ago. That was the first threshold to be crossed, and scientists have little idea why or how it occurred, as they can only see the after effects.

When our universe first emerged, it was incredibly dense and hot, theoretically no bigger than an atom, yet it began to expand rapidly. Within the first second, the forces of electromagnetism and gravity were unleashed. The universe continued to expand for thousands of years until, after about 380,000 years, it had cooled enough that protons and electrons could combine to form simple atoms. Once this happened, gas clouds were formed, largely made up of hydrogen and helium atoms (the lightest elements in the periodic table).

One of today’s satellites recently peered back into the early universe and took a picture of the cosmic background radiation left over from the Big Bang. The temperature was close to the same everywhere, but there were minute differences, indicating differences in density in the clouds of early matter. Since gravity is stronger where there is more stuff, compaction of these clouds took place gradually over time where density was highest. Where compaction occurs, temperatures rise. Some 100-200 million years after the Big Bang, the temperature in some parts of the universe exceeded 10 million degrees, where protons began to fuse, and stars were born. This was the second threshold. Today, it is believed that there are some 200-400 billion stars just in our galaxy, the Milky Way (not counting all of the other galaxies out there).

With the presence of stars, the creation of more complex chemical elements became possible. When very large stars age and run out of their lighter elements such as hydrogen, then helium, they collapse upon themselves and create temperatures so hot that they fuse more and more protons together to create heavier elements. Very heavy elements in the periodic table are formed when large aging stars are finally blown apart in a supernova event. If you have a gold ring on your finger, its elements were formed as part of a supernova explosion from a dying star. The creation of these denser chemical elements was the third threshold that was crossed, and they have been gradually scattered into space as a result of many, many supernova explosions.

Some 9.2 billion years after the Big Bang, or about 4.5 billion years ago, our solar system and its planets (including Earth) were formed. When this happened, the fourth threshold had been crossed. Of course, most of the solar system was still inhospitable to the creation of living organisms, being either too hot (near the sun) or too cold (far from the sun). Earth was just about perfect for the creation of life, especially because it had large amounts of water on its surface in the form of oceans. Wet chemistry is important for the creation of life. For instance, oceanic vents, where heat is released from the earth’s mantle, was a good place for complex molecules to form through wet chemistry involving the electromagnetic force. The remarkable thing that occurred was that a template for life was created (the complex DNA molecule), whereupon life began to reproduce itself based on that information. This was the fifth threshold. As life reproduced itself, DNA would occasionally make mistakes. Evolution relies on the fact that some of those mistakes work better in the environment than the original, so DNA appears to learn what works best over time, building greater diversity. Single-celled organizations were all there was at first, but slowly small multicell organisms began to emerge, then many others, large and small over millions of years, including famously the dinosaurs.

About 65 million years ago an asteroid crashed into the Yucatan peninsula (in current day Mexico), creating conditions akin to a nuclear winter worldwide. That was bad news for the large dinosaurs that were wiped out in short order, but good news for mammals that began to populate the niches that they left behind. Birds, as it turns out, are today’s decedents from the dinosaurs.
It was not until about 200 thousand years ago that humans appeared. This was the sixth threshold. Their big brains allowed them to learn in real time. Through human language, and eventually writing, the human species began to accumulate knowledge and pass it on to its future generations. About 10,000 years ago, farming began, unleashing another energy source needed for the foundation of complex civilizations, crossing the seventh threshold.

Only 500 years ago, humans began to link up globally after voyages of discovery opened major trade routes by sea, and humanity became a single global force manipulating the environment. This was the eighth threshold. Humans are now over 7 billion strong. Fossil fuels, agriculture, the industrial revolution, and a multitude of evolved technologies explain the complexity of civilization that we see around us today. Yet with all this apparent success, there is evidence that the Goldilocks conditions that have allowed our flourishing are rapidly being undermined on this planet. Climate change is a real and present danger due to the current overreliance on fossil fuels, releasing CO2, and producing the greenhouse effect.

That brings us to the question of how this progression will play out in the future. How do we ensure our world will serve future generations? What is the next threshold that we need to cross and what conditions need to be present for it to happen?
Well, one way to extend this story (which just happens to be relevant to this podcast) is to focus on the super-organisms that have emerged over the last 200 years to encompass and magnify human activities. I am speaking of organizations (in the forms of business, government, and non-profit entities). Here humans are encased within a large social entity (if only during part of their day), gain an energy source, band together with other like-minded individuals to find purpose and meaning, and accomplish things together that they could not do on their own. A successful organization has access to considerable power and resources over time. It is no wonder that organizations large and small dominate the world around us, and we find them indispensable.

Yet all is not well with the ecosystem of organizations, and the capitalism that drives them. A story is emerging about organizations need to enter a new age, one that we have called The Age of Organizational Effectiveness. There are several threads to the story. One recounts the difficult situation that society finds itself in on multiple fronts, with limited options, and no clear path forward. Another thread is about widespread dissatisfaction with what capitalism has now become.

It is questionable how far current management technology can take us into the future. Current management philosophy revolves largely around the goal model, which forms the basis for management by objectives. This is risky because the approach accepts virtually any goal that management wants to use. This means that arbitrary goals such as profit maximization, shareholder value maximization, or any other arbitrary objective or goal, can be entertained to drive an organization. Bringing in a new C-suite team with a new set of objectives can be a risky proposition. That coupled with the fact that in many public corporations, C-suite executives have been highly incentivized with stock offerings, encourages the use of financial accounting tricks to artificially inflate stock market valuations. This may be good for the C-suite (at least for a short time), but not so good for the firm and its employees in the longer term. It often leads to counterproductive actions at the first sign of financial trouble, such as layoffs, downsizing, and general efforts to do “more with less”. The approach encourages cost reduction approaches and asset sales, which strip productive value from a firm and contribute to employment instability and income inequality inside the firm, reducing the firm’s ability to be productive in the future.

Just as DNA has provided a biological code to replicate and evolve organisms from the distant past to the present, new management theory and practice are needed to provide a template for a reliable future. The single-minded pursuit of profit, shareholder value, or any other arbitrary objective can create instability in an organization’s complex adaptive system, as we have discussed in previous podcast episodes. Furthermore, the market cannot be relied upon to stabilize the economy because we now live in Alfred Chandler’s managerial economy rather than Adam Smith’s free market economy. For example, the financial debacle of 2006-2008 and beyond in the USA was precipitated by investment banks that were focused on generating financial profits from complex investment vehicles in the housing market, without the vehicles being sufficiently supported by underlying assets on their books — thus increasing market risks and increasing environmental instability over time. To stabilize the planet, we need organizations that serve their environment effectively and cooperate to improve the common good. Today’s discussion highlights, even more, the view that we all need to find a way to live together on Earth, a little blue dot in the vast expanse of space. New-style organizations will be needed to extend ‘Big History’ into the future.

For more information, refer to a recent book: Become Truly Great: Serve the Common Good through Management by Positive Organizational Effectiveness (2017). A link is provided in the show notes.
Charles G. Chandler, Ph.D.

Link to Big History Project:
https://www.bighistoryproject.com/home

Affiliate link to Amazon.com:

065 – The new management technology that every organization needs

A technology is the application of scientific knowledge for practical purposes. When it comes to management technologies that can be used to guide the overall performance of an organization, new ones appear very rarely. One was introduced in 1911 by an American engineer, Frederick Winslow Taylor. Taylor’s technology (often called ‘Taylorism’) attempted to improve the efficiency of industrial firms. Taylor invented what he called ‘task analysis’ or ‘task management,’ later called ‘Scientific Management’ in his book by the same name. At the time, Taylor’s methods were meant to increase the productivity of unskilled manual workers by improving the efficiency of their tasks (using time and motion studies), thus increasing the efficiency of the firm in the process. Today we know these methods as part of industrial engineering.

The principles of scientific management were extended from industrial firms to other firms of the time by Henri Fayol in 1916. Today, Fayol’s 14 principles of management are widely known, and his 6 elements of management— forecasting, planning, organizing, commanding, coordinating, and controlling — still serve as an underlying core of management practice. While Fayol considered organizations to be largely closed systems, this would have been consistent with the drive for internal efficiency improvements that dominated early management thought. Efficiency is an internal measure which compares the ratio of outputs (such as products and services) to resource inputs.

Over a century has passed since Taylor and Fayol published their works. Looking back over the decades, Peter Drucker credited the management principles of Frederick Winslow Taylor with a 50-fold increase in the productivity of manual work during the 20th Century, an increase upon which rested, he noted, “all of the economic and social gains” of the times. The improved productivity of the manual worker created what is now called a “developed” economy. Taylor’s principles can be seen in the widespread application of equipment in production processes to allow workers to become more efficient and productive. As Taylor was the father of industrial engineering, Taylorism foreshadows and embraces all of the techniques that have served over the years to improve the efficiency of the worker and the quality of the end product. Despite its success, Taylorism focused on internal efficiency improvements alone, and did not focus on how well the organization was serving its external environment (including its customers).

That brings me to the new management technology that I want to focus on today. Unlike Taylorism, this new technology aims to improve the overall effectiveness of the organization rather than its internal efficiency. It deals with how well an organization serves its external environment (including its customers and other stakeholders). Organizational effectiveness has been the missing holy grail of management thought. It was given up for dead and labeled as an unworkable concept by scholars in the mid-1980s. That was because none of the prominent models that described effectiveness at the time could be verified in the field through direct observation.

That situation has potentially changed, however, with the publication of a new book: Become Truly Great: Serve the Common Good through Management by Positive Organizational Effectiveness (2017, by Charles G. Chandler). The book introduces a new model for organizational effectiveness that can be verified in the field by direct observation. It also turns out that Positive Organizational Effectiveness is the engine of greatness.

Let me clear about what I am discussing here. Organizations utilize many different technologies for different purposes within their production processes, but I am limiting my discussion of management technology to that which is used to judge the overall performance of the organization. The question of organizational effectiveness has long been recognized as being at the very center of this issue.

When it comes to judging the overall performance of the organization, current management technology is not reliable. Most organizations use the goal model, wherein the organization is judged to be effective if it achieves its goals. Even advocates of the goal model admit that not all goals are created equal, and few would argue that all goals relate to organizational effectiveness. Often, goal setters are simply admonished to set clear goals, with the emphasis on clarity. Another framework for goal setting calls for SMART goals (Specific, Measurable, Attainable, Relevant, and Timely). But it is not sufficient to set goals based on so-called SMART criteria, as these criteria do not ensure effectiveness.

The problem with organizational effectiveness has always been the need to define the concept in a way that would allow its verification in the field through direct observation. Until now that had proved to be elusive. The new technology I am describing is called Management by Positive Organizational Effectiveness, and it allows organizations to determine their effectiveness through a well-defined process that is verified in the field through direct observation.

The new approach departs from the goal model, which has remained dominant in the daily practice of management around the world, but with limited success. Many people are familiar with Management by Objectives, which is based on the goal model. The goal model serves an aging, and largely top-down, bureaucratic reality. Let’s call it “last century” technology. It is not reliable because it accepts arbitrary goals that may not be related to effectiveness (i.e., profit, shareholder value).

Management by Positive Organizational Effectiveness uses a new model, called the Outcome-focused Model, to determine effectiveness. Within this model, the goal of every organization is the same, that is, to be effective within its environment. Yet effectiveness does not operate here at the level of the organization as a whole; it operates just below that, at the level of its individual offerings to the environment. As such, efforts to improve organizational effectiveness focus on an organization’s portfolio of offerings that serve its environment.

The new management approach defines effectiveness as the conversion of the supply-side intentions of an organization into favorable demand-side responses in the external environment. Results chains are used to describe the linkage between inputs & outputs on the supply side, and outcomes & impacts on the demand side. The strength of expected outcome-level behaviors can be observed directly to verify effectiveness.

The new model focuses the attention of the organization on its external interface with its customers and stakeholders, and is encouraged to be in-tune with the immediate and future needs of these actors. The focus on expected external outcomes changes the way that outputs are designed and delivered because internal actors come to realize that outputs of the organization (including its product and service offerings) are simply waste without the achievement of expected outcomes (such as the favorable demand-side behaviors of uptake, adoption or use of those offerings).
Many organizations are still driven by inappropriate objectives that promote efficiency rather than on effectiveness. This can lead to false-positive indicators of effectiveness where true effectiveness may not exist. An outcome-focused organization avoids these problems by focusing its objectives on expected external outcomes, that is, on the behavior of external actors who can adopt and use its offerings.

While Taylor’s “scientific management” increased firm performance and manual worker productivity by increasing task efficiency, Management by Positive Organizational Effectiveness converts an organization’s offerings into relevant demand-side responses through the management of benefit exchanges at the supply/demand interface. If you are still using the goal model in business and continue to focus your primary goals on the maximization of profit or shareholder value, you need this new technology. In fact, every organization needs it because it can be applied to government, and nonprofits as well.

This episode has provided a brief explanation of a new technology to manage organizational performance, one that every organization needs. The approach is described in more detail in the book I have mentioned (Become Truly Great), for which there is a link in the show notes (below).

Charles G. Chandler, Ph.D.
cchandler@AssumptionAnalysis.com

Affiliate link to Amazon.com:

017 What starts as a trickle can become a flood

forest-1308484_960_720This week’s episode deals with complex adaptive systems, which are found both in nature and in organizational settings (among other places)…

With storm clouds overhead, I stand along a dry creek bank in Texas. As the rain starts, very soon there is a small trickle of water, it grows larger, and in time becomes a comparative flood. If I remain long enough, eventually the rain stops, and the creek goes back to its original dry state within a few hours. This is an example of a complex adaptive system. No one is in charge, yet the system self-organizes through the interaction of the drops of water with the land, and with the other features of the environment. One simple principle drives the system, that is, that water runs downhill to find its own level. The system undergoes a rapid phase transition, moving quickly from its static steady state where the creek bed is dry, to a dynamic state in which the creek is full of water. In most rainfall events, the creek bed acts to contain the water and to channel it safely downstream. But historic events can also occur in which the supply of water overtops the banks and floods wide stretches of adjoining area. The dry steady state can last for long periods, especially during drought; so long, in fact, that entire subdivisions can be built in close proximity to the creek without the authorities being fully aware of the hazard.

Trickles can become floods in other contexts, as well. Avi Dan, writing in Forbes, noted that for 40 years you couldn’t walk through Grand Central Station in New York without admiring the large 18 by 60 foot Kodak photographs displaying panoramas of America. These were designed to showcase the Kodak brand to travelers that passed through the station. In those days, Kodak marketing executives were adept at weaving the brand into the fabric of America, and they captured 90% of the US film market for generations. At the time, Kodak was one of the world’s most valuable brands. But Kodak’s story is ultimately one of failure, rooted in decades of success. Kodak didn’t miss the digital age, rather, it invented the digital camera in 1975. Instead of marketing the new technology, however, the company held back so as not to hurt its film business, which was quite lucrative at the time. Sony and Canon eventually exploited the opening and moved to absorb much of the market with digital cameras. What started as a trickle became a flood. Kodak saw its market share decline precipitously as digital imaging became dominant. In the new regime, only a small percentage of digital images were printed on Kodak film. In this example, the environment culled Kodak because it did not evolve quickly enough to give customers what they wanted within the dynamic new digital reality.

This episode of our podcast explores organizations as complex adaptive systems (or CAS). It is a valuable perspective for examining organizational performance because it reveals hidden patterns that are present beneath the surface. In the past, such patterns did not lend themselves to study due to a lack of tools to examine what was going on. In the CAS perspective, organizations are seen as complex systems made up of individuals that may act on their own. These individuals are called agents, and might typically include an organization’s management, employees, and suppliers. In such a system, order emerges from below based on the interaction of the agents with each other, and produces such things as a culture, a set of underlying principles, and a general sense of “how we do things around here”.

In the natural world, complex adaptive systems can be seen in flocks of birds, schools of fish, and colonies of ants, among many others. Within a flock of birds, individual birds synchronize their states in the flock based on simple local rules. No single individual controls the system, but order emerges from the interaction of the agents with each other. In a school of fish, agents interact in a nonlinear fashion and synchronize their movements by rapidly changing direction in surprising patterns. In ant colonies, individual ants self-differentiate to conduct different tasks, although no one is in charge (including the queen). While there is no agreed definition of a complex system, emergence occurs when complex systems function as an integrated whole, allowing consistent patterns to emerge from below.

Organizations are often thought of as fairly conventional entities that are focused on specific goals and organized somewhat like a factory to achieve them. When the organization is threatened, it is anticipated that staff will react with one accord to counter the threat. But this model does not work reliably, especially when the environment in which an organization lives is changing rapidly. In these cases, it is useful to think of an organization as a complex adaptive system, where the parts of the system are not assumed to act in unison, but may act separately. During periods of rapid phase transition, individuals, and social grouping within the organization can enter a state of turmoil. Complex adaptive systems react in unpredictable ways at these times. When the system is far from equilibrium, individual employees may adapt to the new reality by either cooperating to fix the problem or, alternatively, display a non-cooperative or competitive attitude by rejecting the storyline that management offers. During transition periods, so-called ‘attractor’ regimes can emerge. For example, when confronted with a zero-sum game, such as outsourcing some jobs overseas, employees seldom cooperate. On the other hand, the positive sum game presented by the expansion of a firm into a new segment of the market readily gains employee acceptance.

The complexity theory of organizations rejects the metaphor of organizations as well-oiled machines made up of replaceable parts. Instead, an organization’s collection of agents has been brought together for a specific purpose, where they exhibit aspects of self-organization, emergence, and interdependency. Over time, the organization generally attempts to retain agents based on their individual contributions to the whole. Exemplary individuals are promoted while those that seem to be a poor fit are encouraged to go elsewhere. While these can be thought of as common HR processes, it is important that a climate of fairness and good will be maintained throughout in order to avoid adverse behavior by those affected.

On the macro level, organizations are integral parts of their environment, where they act as agents themselves on a larger stage and where they interact with customers and other organizations that frequent the same space. Within the environment in which organizations live, evolutionary processes of selection and retention continuously act on them. Organizations survive and thrive based on the strength of benefit exchanges with their environment. When environments are far from equilibrium and undergoing rapid change, evolutionary processes act strongly to encourage them to adjust their offerings in order to remain relevant to the changing needs of demand-side actors in the environment. In these situations, it may be important for organizations to have a variety of offerings in the pipeline and ready for deployment to meet these emerging needs. In a real sense, the environment is selecting organizations for retention based upon their effectiveness.

A good example of this phenomena is Qualcomm. In May 2016, Qualcomm’s CEO Steven Mollenkopf described the dynamic nature of the tech environment to The Street, “What people kind of forget in the tech industry is that you are [in a battle of] life or death, basically. You either win technology transitions or you don’t live to tell the [tale] because things move so quickly. We have had to pivot the company so many times either to a different end market or a different core competency, and the rate we have had to do that would surprise people. It could be every five years that we really have to make sure that we hit the next transition very, very well.”

Some scholars distinguish an organization as a complex evolving system (rather than adaptive system) because its human agents have the capacity to learn and evolve with each change. This allows an organization to better influence its environment, predict likely future changes, and prepare for them.

There is a tension between the two extreme states that organizations face, homeostasis and chaos. Homeostasis can be represented by an old-style bureaucratic organization in equilibrium, where the goal is predictability and stability. Chaos is the opposite state, where an organization is operating far from equilibrium and is in a state of turmoil, typically brought on by a catastrophic event. Neither of these extremes is conducive of good performance. Between the two extremes, but just short of the onset of chaos, organizations can find their mojo. Here, random events in the environment can be amplified by feedback loops and become important new paths toward the future.

The CAS perspective lends itself to the study of organizational performance. For instance, as mentioned in Episode 015, the use of the goal model for organizational effectiveness, and today’s computer-based scorecards, dashboards, and indicator monitoring systems that many organizations have adopted to implement the goal model, encourage competition among individuals and groups within an organization rather than cooperation. The CAS perspective predicts that the phenomena of competition would be a common emergent phenomena under the goal model and that it is unlikely to be good for the performance of the organization as a whole.

Another instance relevant to the CAS perspective was Episode 010 of this podcast series. There we explored ‘efficiencyism’, which is a belief in the tenets of efficiency without questioning its assumptions and consequences in specific circumstances. As was explained at that time, ‘efficiencyism’ often holds organizations back from realizing their true potential for three reasons: 1) systems theory tells us that an efficiency improvement in one part of an organization does not necessarily provide an improvement in the performance of the organization as a whole; 2) elevating efficiency to a sacred value (to be pursued at all costs) often leads to counterproductive actions at the first sign of financial trouble, such as layoffs, downsizing, and general efforts to do “more with less”; and 3) ‘efficiencyism’ seldom works, because organizations are complex human systems that can react in unpredictable ways when disturbed. Episode 010 found that organizational dysfunction appeared to be a common emergent phenomena under ‘efficiencyism’, as illustrated by the many examples provided in that episode.

What we have done in this episode is look at organizations as complex adaptive systems. The CAS perspective provides interesting tools to look under the hood of organizations and explain what is really going on. I hope you have enjoyed this somewhat different view of the world. The CAS perspective deals with what has been called “the interesting in between”, far from equilibrium, but just short of chaos. Here, what starts as a trickle can become a flood.

Charles G. Chandler, Ph.D.
cchandler@AssumptionAnalysis.com

 

 

016 Meet the robotic overlords that are already here

robot-947924_1920 One of the recurring themes I see expressed from time to time in the media is humanity’s fascination, mixed with fear, that a humanoid robot equipped with artificial intelligence could be created, and that it’s kind would one day take over the world, perhaps subjugating humans in the process. This scenario is termed the “AI takeover”. Many people have worried that as artificial intelligence progresses over time, this kind of horror is inevitable. Notable individuals such as Stephen Hawking and Elon Musk have called for research into measures that would keep AI under human control and thus make such an eventuality less likely.

Of course, intelligence in robots and in computers takes many forms, but the one that people most worry about is AGI, or artificial general intelligence, where computers act with the skill of humans. Some of the tests that have been used to distinguish whether AGI capabilities are present in a given robot include some common tasks that humans can do but robots have had difficulty in carrying out so far. One of them is the coffee test, in which a robot is sent into a typical American household and told to find the coffee machine, the coffee, the water, and combine the ingredients, push the right button to make the coffee. Another one is the college freshman test where the robot enrolls in college, attends classes, and takes exams just like a human would. There are some other tests, of course, but I won’t belabor the point here.

The factors that make a future AGI takeover possible come down to basic biology and physics, coupled with consistent advances in computer technology. Our human brains are three pounds of tissue with a gelatin-like consistency, often termed ‘wetware’ rather than hardware. The brain houses our mind, and the mind can be thought of as the software of the brain. Though a human brain is a processing device, and the most complex object in the known universe, signals within the brain only move at about 100 miles per second, as opposed to a computer where signals move at the speed of light, which is 186,000 miles per second. In addition, biological neurons operate at a frequency of about 200 Hz, while the processing frequency of a modern computer has exceeded 2 Billion Hz. This means that computers have a significant, and growing edge in raw processing power over the human brain.

But aside from raw processing power, the fear of robots comes down to a fear of their intentions, and particularly their goals and values. Our species seems obsessed with goals and values, some of which could be categorized as incredibly idiotic, harmful, and destructive. Goals can assume various forms, and can even become obsessions within the human mind, including the pursuit of money, fame, power, or any of a hundred other choices. There are many types of goals, that when pursued to the extreme, create bad results for humanity in general, although the individuals involved may feel fulfilled for a time. There is essentially no connection between how intelligent a being is and how appropriate its goals and values are. Any level of intelligence can be combined with any set of goals, including goals that are basically stupid and values that are amoral.

If AGI does emerge one day, the fear is that robot processes could run off the rails if programmed with the wrong goals and values, coupled with sufficient power to achieve them. For instance, in a somewhat silly example, a robot that was a paperclip maximizer could theoretically destroy the world by continuing to produce paperclips at a rapid rate utilizing whatever inputs were handy. As we assign goals and values to robots and design processes for them to carry out, it would seem to be important to understand the implications in order to keep them from becoming our robotic overlords. Almost any goal, when taken to an extreme by a robotic machine that seeks goal maximization, may not turn out well.

That brings us to a discussion of the robotic overlords that are already here. Perhaps you have not recognized them as such. I am speaking of the large computer / human integrations that are among us. This is where humans, generally operating in the belly of a large public corporation, pursue specific goals and utilize computer-driven processes to gain scale and speed advantages. The goals can take different forms. Whether it is the maximization of profit, shareholder value, or production, the single-minded pursuit of growth through goal maximization can be destructive in the long run. Yet, there are many self-reinforcing mechanisms in the stock market and elsewhere (including quarterly reporting for public companies) that perpetuate this unhealthy reality.

Companies that operate in robotic fashion often care little for their employees. One such employee described his experience in surviving a series of eight corporate layoffs in a hostile environment. When he became toast on the ninth, he said it was like being a prairie dog in a prairie dog town located next door to an angry farmer who occasionally leaned across the fence with a shotgun to take out a few of your fellow prairie dogs. You never knew when the next attack was coming. It wasn’t until he had actually been laid off that he realized the amount of stress he had been living under.

Yes, robotic overlords are currently in place, and their goals are not benevolent to most of us. The Economist has noted that the goal of shareholder value maximization (as reflected in the stock price) provides a license for bad conduct, including skimping on investment, exorbitant pay for the C-suite, high leverage in the financial makeup of the company, silly takeovers, accounting shenanigans, and large share buybacks (which have been running around $600 billion in America in recent times). A corollary to shareholder value maximization is agency theory that holds that the C-suite should be well compensated with stock options in order to align their interests with those of the owners. Ironically, the short-term pursuit of shareholder value results in the destruction of shareholder value in the long run. It is not surprising that Steve Denning, writing in Forbes, has called this the second robber baron era, complete with the rise of monopoly power and little enforcement of antitrust regulations. Investment by public companies in their businesses is running near historic lows, only about 4%, while profits are at record highs of 12% or so. We don’t see the same problem in privately owned companies because different incentives are in place. There, investment is twice as high as in public companies. Main Street beats Wall Street in this area.

Peter Drucker noted in 1954 that the only valid purpose of an enterprise is to create a customer. Public companies listed on the stock market seem to have forgotten this truth. The current refrain from executives about “the stock market made us do it” is becoming a cliche somewhat akin to “the dog ate my homework”. The reasons that we have robotic overlords in place is that shareholder value thinking coupled with agency theory has things back to front. Steve Denning believes that the root of the second robber baron era is essentially shareholder value maximization, which Jack Welch, the former CEO of GE has called “the dumbest idea in the world”. The problem is with the single-minded pursuit of a goal in robotic fashion, especially one focused on shareholder value maximization.

There is some history to what we see going on in large public corporations. Much of the logic for shareholder maximization originated at the Chicago School of Economics under the direction of Milton Frieman and his colleagues. His famous opinion piece in the NY Times in September 1970 proclaimed (in response to the growing movement for Corporate Social Responsibility or CSR) that the sole social purpose of a firm was to make as much money as possible for its owners. The CEO was viewed as being ultimately responsible to the shareholders (equated with owners). Many business schools and economics department have been teaching shareholder value maximization ever since. But it is really not true. Shareholders do not own the company, they only have a claim to some of the residual assets of the company. No one owns a public company; it owns itself. As the British say, it’s like the river Thames, nobody owns it.

What we have tried to do today is to talk about the goal model, and how the robotic pursuit of certain goals can lead organizations astray; in fact, they give undeserved legitimacy to the robotic overlords that are currently in place. It is likely to be difficult to remove them. Michael Porter, in a 2011 article, tried to address this by offering a new “shared value” creation model, where a company operating in society is admonished to think broader, expand its reach, and create additional value with society in mind. Others have criticized this idea as a one-trick pony because the model relies only on economic value creation, but is missing social value and other values that could be brought into play.

As a listener to this podcast, another solution may readily come to mind — the Outcome-focused Model (OFM) for organizational effectiveness. Within the OFM, the goal of every organization is the same, that is, to be effective within its environment. The effective organization understands its environment, serves it to the best of its ability, and is rewarded in return. It is not about maximizing shareholder value, but about providing customer value, and creating products and services that elicit favorable customer responses. In the OFM, the demand side always remains in control of whether any given transaction will be completed. The supply side cannot run full steam ahead unless the demand side is in agreement. In this model, the achievement of effectiveness is a win-win for both the organization and its environment, so robotic overlords could not run amuck if programmed to obey this production function. The future of the world may come down to simply programming the right goals and values into our robotic future. Of course, there is still the question of what we do about the robotic overlords that are currently in place.

Charles G. Chandler, Ph.D.
cchandler@AssumptionAnalysis.com