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Today the podcast has reached a milestone, at episode 100. Starting back in February 2016, it has taken a little over 3.5 years to get to this point. I hope you have been one of those who have come along on the journey.

I am calling today’s episode, “Your mission, vision, values, and offerings … in 10 minutes.” That’s a pretty tall order, so let’s get started.

I am not a big fan of mission and vision statements that are found in most organizations. Why? Because I have always felt that they are frequently untethered to first principles. Let me explain.

Here at The Age of Organizational Effectiveness podcast, we have an unconventional view of what an organization should be about, whether it is a business, a government agency, or a nonprofit. You see, organizations are not all that different in their underlying rationale. From first principles, we know that for an organization to survive and thrive, it must exchange benefits with its environment. In other words, an organization must serve its environment, so that it can be rewarded in return. The more effective and organization becomes, the more benefits it will exchange with its environment. In short, the goal (or meta-goal) of every organization is the same, that is, to be effective within its environment while improving the health of the system as a whole. Each organization has the freedom, of course, to determine where it will serve and what it will offer its environment as part of its service to it. With that in mind, it uses positive values to improve and sustain the health of the organization and its environment as a whole.

Which brings us to your mission, vision, values, and offerings. Given first principles, we can formulate them in the next 10 minutes. Here is a suggested format:

Mission: Our mission is to serve our environment effectively using positive values in order to make the world a better place. The environment that we have chosen to serve is ____________________. Our people are free to decide for themselves how best to serve our environment every day.

Vision: Our vision is a world where our offerings are integral to the success of _______________, both now and in the future.

Values: We embed positive values in our offerings and in all that we do so that they provide benefits that build up the environment that we serve. Our top 5 values are:

1. _________
2. _________
3. _________
4. _________
5. _________

Offerings: Our offerings embody the positive values and unique attributes we seek to cultivate in order to serve our environment effectively. Our offerings are the instruments through which we exchange benefits with our environment, thus allowing us to survive and thrive, along with our surrounding environment. Our key offerings are:

1. ____________________ for __________________
2. ____________________ for __________________
3. ____________________ for __________________
4. …

Today I have provided a suggested format for crafting your mission, vision, values, and offerings. It enables the creation of a first draft quickly, but you can revise and refine the framework as needed over time. It is a good way to get your entire organization involved in crafting a path toward the future.

For more information on Management by Positive Organizational Effectiveness and the types of tangible and intangible benefits that are exchanged with your environment, please refer to my book referenced in the show notes (below).

Charles G. Chandler, Ph.D.

Reference:

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

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In this episode, I talk about the need to reinvent management and suggest a way forward to achieve it. I like to think of management as a technology that makes all other technologies productive (if done right). Yet, today’s dominant approach to management (command & control) relies upon an outdated input-output model (developed during the industrial revolution) that values efficiency as the highest good and frequently creates negative side-effects among internal actors and within the environment. Today, I will describe a more meaningful input-outcome model for management that values positive organizational effectiveness as the highest good and serves to sustain or improve the health of both the organization and its environment as a holistic system.

How I arrived at my view that management needs to be reinvented.

            In the 1980’s, I found myself in New Delhi India, working for the World Health Organization (WHO) in the regional office for SE Asia. It was during the UN’s International Drinking Water Supply & Sanitation Decade, 1981-1990 (better known as the UN Water Decade). At the time, I was the project manager for WHO/UNDP’s Advisory Services Project that was part of the Decade. My job entailed visiting countries in the region to see what was going right and what was going wrong with the Water Decade and helping participating government organizations improve their programs.

            Government agencies in participating countries thought they knew what end users needed, since they had been providing water and sanitation services for decades. They said they just needed more funds to build more facilities. But completed facilities were frequently in disrepair, and others were not utilized by end users for the purposes intended due to a variety of reasons.

            The goal of the UN Water Decade was to expand the ‘coverage’ of safe water and adequate sanitation in participating countries. The focus on coverage (i.e., access to services) turned out to be an unfortunate choice because the goal typically resulted in a numbers game in each country, where success was measured in rural areas, for instance, by how much of the population was covered with hand pumps & latrines. If rural users were within a few minutes’ walk from a hand pump, they were deemed to have access to safe water supply. The fact that some of the hand pumps were in disrepair and others were not being used for their intended purposes was not easily reflected in the system.

            Much of the problem was due to a conceptual gap between the planners and the end users. They didn’t understand each other. The planners were delivering engineering solutions based on their technical training, but the adoption and use of their solutions was hampered in traditional societies by the embedded patterns of thought found in the social and cultural narratives of the past. Later in the UN Water Decade, WHO urged governments to look beyond coverage, to ensure the continued functioning of the completed facilities and their utilization by end users (for the intended purposes).

            This example highlights a fundamental problem at the heart of traditional management approaches, that is, what counts as meaningful accomplishment. As we will see, the overall program goal for the UN Water Decade was set at the wrong level (a largely meaningless supply-side output which focused on ‘coverage’), which then drove what was delivered during implementation, and the subsequent evaluation of completed activities. Traditional management does not distinguish between arbitrary output-level objectives and meaningful outcome-level objectives during the objective setting process, and later during program implementation and evaluation. This problem was baked into management science at the beginning and has not been corrected since. Historical examples of this fundamental problem can be found in the Scientific Management movement of Frederick Winslow Taylor (Taylor 1911), the Management by Objectives approach pioneered by Peter Drucker (Drucker 1954), as well as some more recent management remedies such as OKRs — or Objectives & Key Results (John Doerr 2018).

What’s wrong with traditional management?

            While Gary Hamel (of the London Business School) has called management “the technology of human accomplishment,” traditional management approaches often fail to produce meaningful results. As a technology, management needs to be reinvented because it remains organization-centric and locked into a largely meaningless input-output model that values efficiency as the highest good.

            Early theories viewed organizations as “rational systems”– social machines of a sort, meant for the efficient transformation of material inputs into material outputs (Scott 1987, 31-50). Organizations were often depicted as largely closed entities separated from the surrounding environment. Inputs arrived at factory gates, engineers determined what technologies to use for processing, and outputs evaporated off loading docks, all in support of built-in assumptions (Suchman 1995, 571).

            In the traditional input-output model, an organization extracts resources from its environment as inputs, internally processes the inputs to produce outputs, and returns to the environment the outputs it produces and the waste products it has created. While this model has been the historical basis for organizations large and small, it generally fails to produce meaningful and timely evidence for management decision support, and frequently creates negative side-effects among internal actors and within the environment.

            Traditional management is so familiar that it is hard for most people to conceive of anything else. Its features include:

• Top down, command & control [originally designed for repetitive manual work]
• Objectives focused primarily on output production and cascaded down from the top of the hierarchy to the lower levels
• Largely authoritarian & bureaucratic in nature
• Efficiency is the highest good (an isolated and largely closed system)
• Input – output model (organization centric), within management’s full control
• Requires objectives to be ‘clear,’ but virtually any objective is acceptable
• Positive values are largely optional (little self-regulation)
• Intermediation services (balancing supply & demand) are performed by ‘the market’ utilizing financial & economic benefit exchanges between relevant actors
• Waste products are returned to the environment

            In the traditional approach, managers at the top of the hierarchy identify goals and develop strategy, sending directives to the lower levels. This approach conforms to the early Goal Model of organizational effectiveness, wherein an organization is believed to be effective if it accomplishes its stated goals (set by management). Despite its continued widespread use, the Goal Model has been debunked by scholars. Only some goals are relevant to effectiveness, and even when a stated goal is achieved, an organization may not be judged effective (Chandler, 2015). Goals set at the top by the executive team simply make the organization responsible to the top of the hierarchy for its approval rather than to the customers or end users that need to support the organization if it is to be successful. This is not a good place to be.

EFFECTIVENESS IS ABOUT ACHIEVING MEANINGFUL OUTCOMES

            For much of my career I was involved in projects and programs in international development, having helped design and implement over 800 initiatives worth more than US$ 80 billion in countries around the world (not counting the Water Decade).

            A few years ago, I began a survey of the literature on organizational theory to see what it had to say about the concept of organizational effectiveness (OE). Based on my international development experience, I thought I knew what effectiveness was in projects and programs, but I was shocked to find that organizational scholars could not identify a verifiable concept of OE, and their field was in disarray. There were at least five prominent models of OE (including the Goal Model), but none could be objectively verified in the field (Cameron 2005). Despite the lack of a verifiable model, scholars agreed that OE was the highest level of organizational performance and was expected to be the capstone concept that brought other aspects of organizational theory together into a unified whole (assuming a verifiable concept of OE could be found).

            Currently, organizational effectiveness is viewed by many scholars as an enigma (Cameron 1981) with characteristics of a wicked problem (Zammuto 1982). The main issue continues to be how to define the concept of effectiveness because we need to know effectiveness when we see it. R.L. Kahn wrote in 1977 that “To be effective is merely to have effects. The problem is what effects accord with the concept of organizational effectiveness?” (Kahn 1977). For me, achieving organizational effectiveness is about managing for meaningful outcomes, that is, achieving contextual-specific effects that can be observed directly in the field to provide a relevant and favorable demand-side response.

MANAGING FOR MEANINGFUL OUTCOMES

            Management technology needs to put aside the traditional (and largely meaningless) input-output model to adopt a more meaningful input-outcome model that values organizational effectiveness as the highest good and serves to sustain or improve the health of the organization and its environment as a holistic system. This is what “managing for meaningful outcomes” is all about.

            Let me define the two terms that must work together to provide “meaningful outcomes.” ‘Meaningful’ refers to relevant contextual-specific effects observed in the field that can serve as markers for the types of outcome(s) we seek. ‘Outcome,’ although a common English word, has two, somewhat different meanings. One is “the final result, or how a thing turns out.” This is not the one I am using. The second meaning of ‘outcome’ is “an effect caused by an antecedent.” It is this one that I associate with meaningful outcomes, i.e., an effect that results from a stimulus that logically precedes it.

            Managing for meaningful outcomes requires a more comprehensive model than the traditional input-output model that has only two levels and acts as a largely closed system. Since the late 1960s, “open system” theories (Scott, 1987: 78-92) have reconceptualized organizational boundaries as porous and problematic (Suchman 1995, 571). In this context, consider the four-level model (input-output-outcome-impact) available from the ‘logical framework’ of Results-Based Management (RBM) (Asian Development Bank 2006). It has been used in international development since the 1960’s, beginning in USAID. The four levels comprise a hierarchy of goals or objectives within the model. This hierarchy was originally designed to serve temporary organizations such as projects and programs but has been extended recently in the Outcome-focused Model (OFM) to serve organizations more generally (Chandler 2017, 83). While the new model uses the hierarchy of objectives from results-based management, it improves upon it by dividing supply from demand. In the OFM, the supply-side input & output levels are within the control of management, while the demand-side outcome & impact levels are outside the control of management (in the environment). This creates a truly open system model of organizational performance by giving meaning to both environmental context and environmental response.

            Managing for meaningful outcomes incorporates a demand-side test of effectiveness for an organization’s offerings. For meaningful outcomes (and effectiveness) in temporary or permanent organizations, actors in the environment must be attracted to the organization’s offerings (outputs), then initiate the behaviors of uptake, adoption or use (meaningful outcomes). For instance, an agricultural extension project could be judged effective only if the local farmers first adopt and use a new package of farming techniques viewed as key to project success. Without the farmer’s favorable response, the results chain fails, and the project is judged ineffective. Of course, it also helps to involve the farmers initially at an early stage of project design to provide feedback on the available options.

            In managing for meaningful outcomes, the focus is on the outcome level because the link from outputs to outcomes is the weakest link in the results chain (Chandler 2017, 73). If expected outcomes can be observed in the field, it means that the weakest link is effective, and implies that the entire results chain is viable. The outcome level represents the immediate demand-side effects that can be observed in the field.

            Further along the results chain (i.e., input-output-outcome-impact), impacts can be simply thought of as the longer-term effects that are propagated when meaningful outcomes are sustained and spread throughout the environment. Our approach is not called “managing for meaningful impacts,” however, because the time lag from the achievement of outcomes until the appearance of impacts is too great (on the order of 5 years) to provide feedback for management decision support. In addition, it is expensive to measure impacts, and I argue that a formal impact assessment is unnecessary in most cases as long as meaningful outcomes are continually monitored and remain favorable.

            The achievement of meaningful outcomes is not certain because outcomes (and impacts) occur in the environment, outside the direct control of management (and causality can be nonlinear, unpredictable, interdependent, and intertwined at multiple levels in complex environments). Success depends upon the ability of the organization to understand the context for its service to the environment, then experiment to confirm “what works now.” Favorable outcomes are verified by observing emergent behaviors that are induced in the environment in response to the outputs on offer.

            Managing for meaningful outcomes has the following features and characteristics:

• Meaningful outcomes are achieved in the environment surrounding the organization (using specific behavioral markers for effectiveness)
• The environment is assumed to be complex at the start, thus causality may be unpredictable & intertwined (results chains involve conjecture)
• Managing for meaningful outcomes is about inducing favorable effects in a system not under management control
• Involves self-regulation of processes in order to uphold positive organizational values and reduce or eliminate negative side-effects
• Intermediation services (which balance supply & demand) are performed by ‘the environment’ (including ‘the market’) utilizing a variety of benefit exchanges (financial & economic, social & psychological, environmental & spiritual) between relevant actors
• Adopting this new management approach requires a major cultural shift to an experimental, self-regulatory, and adaptive culture

            Let’s consider a real-world example of managing for meaningful outcomes, this time from a World Bank-financed program that I helped design. Bird Flu in Asia occurs in a complex environment, where wild migrating birds acting as the reservoir for the virus seasonally intermingle with domestic poultry to spread the disease. The goal of the World Bank-financed program was to achieve physical separation between domestic and wild flocks to interrupt the spread of the virus in participating countries. This is an outcome level goal because uptake, adoption or use of cages was expected by domestic poultry producers to achieve program success. If we visit the field during program implementation and find that cages are being used for the containment of domestic flocks, separation between the domestic and wild flocks has been achieved and the intervention can be judged effective. The expected longer-term impact of the program would be that Bird Flu does not return, assuming the outcome-level effects continue to be sustained over time. In this example, the key to success is outlining a results chain that specifies the exact behavior(s) that must be induced on the demand side to qualify as meaningful outcomes, then confirmation of the expected outcomes through direct observation of the key behavior(s) involving cage use in the field once the outputs (i.e., cages) become available.

            Why manage for meaningful outcomes?

•   It offers a more meaningful way to manage, supported by theory & practice
• It is equivalent to managing for organizational effectiveness (the highest level of performance)
• Since effectiveness can now be verified in the field under the new OFM model, it becomes the meta-goal for every organization (no other goals needed at the top, as effectiveness is the highest good — both in the short term & the long term)
• Meaningful outcomes observed in the field provide timely feedback for decision support (i.e., management of a portfolio of offerings)
• The new approach reduces or eliminates negative side-effects through self-regulation (utilizing positive values) and by accepting responsibility internally for waste reprocessing
• This is true evidence-based management, where causation is established by experimentation and direct observation of meaningful outcomes in the real world.

            Note that organizational effectiveness is judged in the short term by confirming the presence of meaningful outcomes in the field for a portfolio of offerings (i.e., specific behaviors of uptake, adoption or use within the defined results chain for each offering). Longer term measures of effectiveness are reflected at the impact level as meaningful outcomes accumulate over time, allowing for spread effects to take hold throughout the environment (integrating instantaneous outcome-measures of effectiveness over time).

            How to manage for meaningful outcomes?

1. Start with… “the meta-goal of the organization is to be effective within its chosen environment” (by achieving meaningful outcomes and sustaining or improving the system as a whole)
2. Develop a portfolio of offerings (one at a time) to serve the environment while conforming to the organization’s core competencies, quality standards, and positive values (Chandler 2017, 132-133)
3. Pilot test to verify the effectiveness of each offering on a small scale by observing the expected demand-side response(s) consistent with its results chain hypothesis (i.e., verify that the meaningful outcomes — the behaviors of uptake, adoption or use — are being observed in the field)
4. Utilize observations of outcome-level results in the field to provide management decision support to scale up the production of successful offerings where desirable and feasible

            For me, the technology involved in managing for meaningful outcomes is equivalent to the technology of Management by Positive Organizational Effectiveness that I have described in my 2017 book, Become Truly Great: Serve the Common Good through Positive Organizational Effectiveness (Chandler 2017). It should be noted that improvements in effectiveness are additive across the portfolio due to cumulative benefit exchanges, but efficiency improvements achieved in individual parts of an organization can come at the expense of the efficiency of the organization as a whole (Chandler 2017, 14).

            An often-quoted view among organizational consultants and practitioners is that “efficiency is about doing things right, while effectiveness is about doing the right things” (Drucker 1966). Peter Drucker meant this statement to refer to the effectiveness of executives, not their organizations. When it comes to organizations, efficiency experts proudly declare that efficiency is the domain of doing the right things right the first time and every time. Effectiveness, on the other hand (as discussed today), is something entirely different. It is not about doing anything within the organization, it is about achieving something outside of it (i.e., meaningful outcomes).

            Under our new approach to management, the meta-goal of every organization is the same, that is, to be effective within its environment (while sustaining or improving the system as a whole). The approach focuses the attention of the organization on its external interface and it is encouraged to be in-tune with the immediate and future needs of its environment. The focus on meaningful outcomes improves the way that the outputs are designed and delivered because internal actors come to realize that outputs are waste without the behaviors of uptake, adoption or use associated with the achievement of meaningful outcomes.

CONCLUSION

            A focus on meaningful outcomes offers significant benefits for projects, programs, and organizations more generally, as well as the wider world. The traditional approach to management (still commonly in use) is based on a largely meaningless input-output model where efficiency is the highest good. In such a model, the organization extracts resources from the surrounding environment, internally processes the inputs to product outputs, and returns to the environment the outputs it produces and the waste products it has created. While this model has been historically important, it generally fails to provide meaningful and timely evidence for management decision support, and largely ignores any negative side-effects on internal actors and the negative side-effects that affect the environment. As long as efficiency is the highest good, as in the traditional input-output model, principles of humanistic management and environmental conservation will fall victim on the altar of efficiency. Unless changed, the traditional management model will continue to imperil the world we live in.

            Going forward, management technology needs to adopt a more meaningful input-outcome model that values positive organizational effectiveness as the highest good. This would provide meaningful and timely evidence for decision support of a portfolio of offerings, while sustaining or improving the health of the organization and its environment as a holistic system. In the new approach, an organization achieves effectiveness when its outputs induce meaningful outcomes in the environment in line with one or more defined results chains. This approach offers demand-side validation of an organization’s portfolio of offerings (whether in business, government or nonprofit) and thus provides verification of organizational effectiveness (the highest level of performance) by direct observation in the field. This is the first approach to do so. The new approach provides a verifiable concept of organizational effectiveness that creates a capstone to organizational theory and offers a more unified (and parsimonious) approach to the field.

            Traditional management practice can be characterized as “managing for outputs, valuing efficiency as the highest good.” Very little meaning is derived from the successful delivery of outputs alone, however, because the process remains largely disconnected from considerations of environmental context and environmental response. The new approach advocated here can be characterized as “managing for meaningful outcomes, valuing positive organizational effectiveness as the highest good.” It offers a better way to manage by creating a path to more effective organizations, a more meaningful technology for human accomplishment, and a better world.

Charles G. Chandler, Ph. D.

REFERENCES

Asian Development Bank (2006). “An Introduction to Results Management: Principles, Implications, and Applications.” Manila, Philippines.

Cameron, Kim S. (1981). The Enigma of Organizational Effectiveness. Reprint series. National Center for Higher Education Management Systems: Boulder, CO (USA).

Cameron, Kim S. (2005). “Organizational Effectiveness.” In Great Minds in Management, edited by K. G. Smith and M. A. Hitt, 304-330. Oxford University Press: New York, NY (USA).

Chandler, Charles G. (2015). “Organizational Effectiveness: Replacing a Vague Construct with a Defined Concept.” Academy of Management Proceedings, Volume 2015, No. 1: 11023.

Chandler, Charles G. (2017). Become Truly Great: Serve the Common Good through Management by Positive Organizational Effectiveness. Author Academy Elite, Powell, Ohio (USA).

Doerr, John (2018). Measure What Matters: How Google, Bono, and the Gates Foundation Rock the World with OKRs. Penguin Random House: New York, NY (USA).

Drucker, Peter F. [1954/1982] (1993). The Practice of Management. 1993 Harper Business Edition. HarperCollins: New York, NY (USA).

Drucker, Peter F. (1966). The Effective Executive. HarperCollins: New York, NY (USA).

Khan, R. L. (1977). “Organizational Effectiveness: An Overview.” In New Perspectives in Organizational Effectiveness, edited by P. S. Goodman, et al. Jose-Bass: San Francisco, California (USA), 236.

Scott, W. R. (1987). Organizations: Rational, Natural and Open Systems (2nd ed.). Prentice Hall: Englewood Cliffs, NJ (USA).

Suchman, Mark C. (1995). “Managing Legitimacy: Strategic and Institutional Approaches.” Academy of Management Review, 20(3), 571-610.

Taylor, Frederick Winslow [1911] (1998). The Principles of Scientific Management. 1998 edition. Dover Publications: Mineola, NY (USA).

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The elephant comes with risk.

There is an elephant in the C-suite. It has been there a long time, but it has blended into the background and few have questioned its legitimacy or presence. The elephant I am referring to is the goal-setting process, that is, the way that management sets the direction going forward. It is generally believed that setting one or more goals is the primary job of the CEO and other C-suite executives, but objective setting may be the riskiest thing that C-suite leadership does. Without warning, a new C-suite team with a new set of objectives can arbitrarily attempt to turn an organization in a new direction designed to unlock value, then face resistance while trying to enforce the change without internal support. This can easily destabilize the internal culture, destroying social and psychological capital in the process. The elephant has gone rogue, and the organization’s performance will likely suffer.

This may not be an isolated phenomenon. As detailed in a 2015 study by Boston Consulting Group, today’s public corporations are estimated to have a 32 percent chance of disappearing from the stock market within 5 years, compared to only an 8 percent risk in the 1950s (BCG, 2015). The study looked at 35,000 public corporations listed on the stock market between 1950 and 2010 to assess their longevity. Today’s one-in-three risk of failure during the next 5-years is relevant to the tenure of a typical CEO or the time horizon of a typical investor. The study found no safe harbors, as neither scale nor experience provided a safeguard.

How to explain what happened? The study looked at stock market exits because of bankruptcy and liquidation, merger or acquisition, or other causes. Exits from the market are often viewed in aggregate as part of the creative destruction found in a vibrant economy, but at the individual firm level, an exit is generally seen as a managerial failure, as the disappearance of a public company from a stock exchange is largely unintended. The study found that the fastest-growing and the fastest-shrinking companies were the most vulnerable. Whether a company is growing fast or shrinking fast, the company’s goals are likely to need reassessment.

The message of today’s episode is that the C-suite management team should not set the organization’s goals because the overriding goal of every organization is now the same. I will come to why that is true in a moment, but if the C-suite no longer needs to set goals, a major source of instability and risk is eliminated. In addition, the practice of management is greatly simplified, resulting in organizations that are naturally aligned with, and effective within, their respective environments.

Given a viable concept of effectiveness, the elephant is redundant.

But, let’s back up a bit. A few years ago, I began a search for the holy grail of organizational thought, that is, a satisfactory way to describe and verify an organization’s effectiveness. A rigorous way to think about organizational effectiveness had never been found, yet it was acknowledged to be “at the very center” of existing organizational models. In theory, a satisfactory concept of effectiveness would offer internal consistency, universal applicability, a parsimonious nature, and an objective referent that could be observed in the real world to verify effectiveness. Since effectiveness is viewed as the highest level of organizational performance, an agreed concept of organizational effectiveness would be the capstone of organizational theory, bringing everything else together. If effectiveness could be verified in the field through direct observation, then logically, the goal of every organization would be to maximize effectiveness. In addition, empirical evidence from the field could provide immediate feedback on performance at the highest level to inform management actions.

Scholars searched for such a model in the 1960s, 1970s, and early 1980s, yet the various conceptualizations that were developed rarely overlapped, and no consensus could be found on exactly what amounted to effectiveness. Scholars came to believe that organizational effectiveness was an enigma, with characteristics of a wicked problem, thus it has remained a vague construct rather than a defined concept in organization and management theory. The search was largely abandoned in the mid-1980’s as the scholarly literature reflected a widespread belief that a workable concept of effectiveness would never be found. Without a concept of effectiveness, workarounds continued to be in use.

Today, by default the model most often used for effectiveness is the goal model – in which an organization is deemed to be effective when it achieves the goals that it has set for itself. There are few organizations that do not use this model in some way. The problem is that the goal model will accept virtually any goal that the C-suite wants to introduce, and, in the end, it is hard to know if a viable goal has been selected until considerable time has passed (because feedback may not be immediate). Management by objectives, first popularized by Peter Drucker in 1954, is derived from the goal model. Today’s computer-based scorecards, dashboards, and indicator monitoring systems that organizations have adopted widely, take the idea to the next level. It’s the goal model on steroids, where the organization’s goal is cascaded down to subordinate levels through an objective setting process; but the goal model does not reliably improve effectiveness.

If the C-suite sets its own goals and is rewarded for achieving them, much can go wrong. In 1974, Peter Drucker wrote in response to a rash of reorganizations in large American organizations, “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” (Drucker, 1974). Goal setting is fraught with risk because it is not a benign over-the-counter remedy. Rather, it is a prescription-strength medicine that must be administered according to a strict protocol. A new organizational goal represents a pivotal change in direction that may prove unsuccessful, burning resources and jeopardizing the organization’s future. It doesn’t have to be that way.

Has a viable concept of effectiveness been found?

The holy grail of organizational thought may have been found. I believe that a workable concept of organizational effectiveness (OE) is now available. It is described in my 2017 book (Become Truly Great: Serve the common good through Management by Positive Organizational Effectiveness). This concept of effectiveness is built around a new model, called the outcome-focused model (OFM). In the model, an outcome is not an end result but is an effect caused by an antecedent, confirming that the supply-side push from an organization’s offerings has been successfully converted to a demand-side pull by actors within its environment. In the end, organizational effectiveness is about converting the organization’s supply-side intentions into the relevant demand-side behaviors of uptake, adoption or use (within defined results chains).

The outcome-focused model is expected to be useful in determining the effectiveness of an organization as a whole, its component parts, or externally-focused projects and programs of an organization (or groups of organizations). Indications are that it is applicable to organizations of all types (business, government, or nonprofit), large or small, without known constraints.

The goal of an organization is to be effective within its environment.

The overriding goal of an organization can be derived from first principles. To survive and thrive, we know that an organization must exchange benefits with its environment. The purpose of an organization is not only to do something for itself, but to create, amplify, and channel benefits in society so that the organization can receive benefits due to it in return. In the new model, the goal of every organization is the same – to be effective within its environment. This means that the organization serves its environment and is rewarded in return while striving to improve the whole. The organization is encouraged to produce offerings that actors in the environment want, whether customers or non-customers, instead of things that the C-suite wants. Effectiveness is observed at the supply/demand interface as the organization’s offerings induce relevant demand-side responses involving uptake, adoption or use. If we confirm that the expected behavioral responses are strong, we have evidence of effectiveness, and it can be documented empirically at any time through direct observation (and measurement, where required).

The benefits that are being exchanged at the boundary between the organization and its environment can take several forms. They may be financial and economic benefits when an actor within the environment acquires and uses an offering over time. But there are likely other benefits for those same actors, such as social and psychological benefits, and higher-level benefits such as environmental or spiritual benefits. In the outcome-focused model, the organization becomes effective by experimenting with, and then successfully managing, benefit exchanges at the supply/demand interface. Workers are free to ask anew each day, “how can I serve my environment well now?”

The traditional style of management (i.e., top-down, command & control) doesn’t work well in today’s environment. If we need fresh evidence that management is broken, we can look at the 2017 numbers on worker engagement from Gallup. Only 21% of employees strongly agree that they are managed in a way that motivates them to do outstanding work. Overall, only 33% of US workers report that they are actively engaged in their work. I believe the reason can be traced to this top-down form of management where the C-suite sets the objectives and the employees are exhorted to achieve them. Over time, this approach kills the intrinsic enthusiasm of the workers, because it doesn’t provide enough freedom for them to innovate and do their best work. Today, C-suite teams that continue to drive their organizations toward goals focused on profit or shareholder value have set directions that are problematic, constraining, and fraught with risk. In other words, the elephant is still living in the C-suite (…and I will leave it there for today).

Limited time offer for listeners:

Let me remind you that my 2017 book (Become Truly Great: Serve the common good through Management by Positive Organizational Effectiveness) is now out in a 2018 Audible audiobook edition. I have a few free downloads that I can provide listeners of this podcast. (You might want to get a piece of paper and a pen to write this down). If you prefer to consume your content in the Audible format rather than the soft-cover or hard-cover editions or the Kindle e-book edition, I will give you a website address where there is a free download offer. Are you ready? Simply go to “www.ageofOE.com/offer” and follow the directions found there. I will send a coupon for a free download to the first 10 listeners who respond. That’s all for now.

Charles G. Chandler, Ph.D.

References:

Chandler, Charles G. 2017. Become Truly Great: Serve the common good through Management by Positive Organizational Effectiveness. Powell, OH: Author Academy Elite.

Gallup 2017. “State of the American Workplace.”

Reeves, M. & Pueschel, L. 2015. “Die another day: What leaders can do about the shrinking life expectancy of corporations.” Boston Consulting Group.

 

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Gary Hamel (London Business School) characterizes management as the technology of human accomplishment. It came into its own in the late 1800s and early 1900s, as the USA entered the new century. Among the traditional long-standing factors of production (land, labor, and capital) in the British tradition, management became the fourth, the one that helped make the other three productive.

Today, despite more than a century of management in organizations around the world, there is a growing dissatisfaction with management practice. It seems to have lost its way. The factors of production are at odds with each other, laying competing claims on the proverbial ‘pie.’ Management is gripped in an introspective search for meaning and validity.

In the 1900s, the traditional form of management (sometimes called Management 1.0) seemed rather sure of itself. It was about setting goals and objectives, then directing subordinate staff to achieve them. It was top-down, command and control, and authoritarian in nature. It helped train manual workers in productive ways to do their work. But now (in 2018), knowledge workers dominate in the workplace, and managers often know less than workers about how to get the work done. Today’s millennial workers want the freedom to do the work in their own way, in short, to be creative. They hunger for organizational goals that are more uplifting than profit or shareholder value.

Meanwhile, other forces are at the gates. There is a steady undertow pulling organizations toward the adoption of the latest data measurement and storage initiatives, with an implied promise that they offer a more ‘scientific’ approach to management. Louis Columbus, writing in Forbes, notes that a recent study found that ‘big data’ adoption rates reached 53% in 2017, up from 17% in 2015 (in the large companies referenced). Telecommunications and financial services companies have been the largest adopters so far, while data warehouse optimization has been the use case most cited, followed by customer/social analysis. The logic of big data is that large data sets can be mined to reveal patterns, associations, and trends, especially relating to human behaviors and their interactions.

But ‘big data’ is only one in a series of measurement initiatives that have entered the management toolbox over the years. Others have gone before, including the Balanced Scorecard, Six Sigma, Total Quality Management (TQM), Objectives and Key Results (OKRs), and Performance Management with Key Performance Indicators (KPIs). Each of these initiatives has its own built-in logic, but in general, they offer quantitative approaches surrounding so-called ‘scientific’ or evidence-based tools. But are they scientific or evidence-based? Do they offer validity in management?

In 1963, William Bruce Cameron noted that “not everything that can be counted counts, and not everything that counts can be counted.” I believe he was right, but too optimistic. Little that can be counted counts, and only that which counts should be counted. There is a clear need to fight the social undertow surrounding measurement initiatives, least organizations are dragged down.

When it comes to goals, a fundamental weakness of Management 1.0 has been that a management team can set their own goals and objectives, then declare success when they are achieved. It makes it easy to game the system. For instance, to say that the goal of an organization is to maximize shareholder value and then use financial engineering tricks to maximize the stock price is self-serving, especially when the bonus compensation of the management team is tied to related measures. It means that an organization may serve the incentives of the management team rather than the needs of customers or other key stakeholders.

For validity in management, it remains very important to thoughtfully select the goals, as well as what will be measured. For instance, if achieving organizational effectiveness was simply about measuring a set of key performance indicators (KPIs), then most organizations would be performing very well today. Unfortunately, not all indicators are created equal, and measurement alone does not verify causal linkages. Organizations often miss the point that before investing in a measurement initiative, strategies need to be well crafted, outcomes and associated indicators properly set, and one or more results chains identified and validated. Only then can a specific indicator be relied upon to provide a short-hand measure of effectiveness that is objectively valid.

This might be a good time to make a distinction between meaning and validity. Sociologists tell us that shared meaning in groups is socially constructed. We, along with our associates, family, and friends, jointly construct the meaning of our everyday existence. In an organization, shared beliefs emerge over time and become part of an organization’s culture, along with a sense of “how we do things around here.” Within a socially constructed view of the world, how can measurement approaches add validity? The short answer is that they probably can’t, except for social groups (largely made up of professionals) that attach shared meaning to quantitative methods.

In society more generally, we see examples of social groups that have been led to attach shared meaning to political views that are not in their best interest, through appeals to their emotions (e.g., political wedge issues such as immigration, abortion, civil rights, gay rights, etc.), or through appeals to symbols of their cultural identify (e.g., the flag, the military, religion, etc.). Because meaning is jointly constructed within a social group, it is hard for individuals to abandon a shared view unless their social group also abandons it.  To avoid being deceived by these media tactics, truth or validity must be confirmed by triangulation with independent sources that use different methods. If independent sources agree regarding the resulting conclusions, we can be relatively sure that we have arrived at the truth.

In summary, I want to leave you with four takeaways from today’s discussion:

1) measurement does not provide meaning by itself;

2) meaning is socially constructed through the interaction of group participants;

3) meaning is not the same as validity or truth, and

4) validity and truth are confirmed through triangulation with independent sources that use different methods.

A new philosophy of management that utilizes these principles is Management by Positive Organizational Effectiveness, which I have mentioned before. Under this approach, the goal of every organization is the same, that is, to be effective within its environment, and product and service teams are empowered to consider a key question every day, “How can we serve our environment well today?” Business, government, 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. The approach focuses on staying close to the customer, wandering around, and being passionate about serving.

For more information, grab a copy of my 2017 book, “Become Truly Great: Serve the common good through Management by Positive Organizational Effectiveness.”

Charles G. Chandler, Ph.D.

References:

Marsen, S. 2008. “The Role of Meaning in Human Thinking.” Journal of Evolution and Technology (17/1), pp. 45-58.

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

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If you are a manager of an organization, whether business, government or non-profit, you currently have a hand in managing capitalism. In a very real sense, you are the visible hand of managerial capitalism. Free market capitalism is long gone. Adam Smith’s invisible hand of market forces is largely absent today, except where commodities are traded. Most transactions are cleared within firms at managed prices without haggling in a free market. I am sorry if that does not correspond with your world view, but let me explain how we got here and where we need to go next.

If you have been paying attention in recent years, you may have noticed public dissatisfaction with what modern capitalism has become, particularly as enacted by large public companies that continually chase quarterly profits and resort to layoffs at the first sign of trouble. The tired refrain about “the market made me do it” is about as believable these days as “the dog ate my homework.” According to a Harvard University survey, half of 18- to 29-year-olds in America say they do not support capitalism (Ehrenfreund 2016). It has saddled many with student debt, high housing costs, low wages, and poor prospects going forward. Capitalism’s flaws are likely to be highlighted more prominently these days than its positive attributes.

Of course, young people’s attitudes toward capitalism may differ depending on the attributes and life experiences they associate it with. If they grew up in households where their parents were enmeshed in a 9-5 daily work routine in return for low compensation, they may associate capitalism with an all-consuming treadmill. On the other hand, if they grew up in households where their parents were highly-educated and highly-compensated professionals, they may aspire to start and grow new enterprises, associating capitalism with a new frontier. It depends on their lived experience and their resulting narrative.

While narratives are simply stories, they can powerfully shape the way people behave with respect to the future. Narratives have an ability to attract, and become attractors to specific viewpoints, within the complex adaptive system that is capitalism. A positive narrative can give us a sense of purpose and the ability to connect our own behaviors with the larger goals of society. When we feel that we are part of a larger purpose – helping not only customers, but our fellow man in a larger sense – we have a greater social connection with each other, with society, and with the organizations where we work.

Discussions of capitalism, pro and con, often concentrate on economic thought. The ideas of well-known economists like Adam Smith, John Maynard Keynes, Friedrich August Hayek, and Milton Friedman come to mind. Some argue that capitalism took a wrong turn in the 1970’s & 1980’s. Milton Friedman (now deceased former economist at the Chicago School of Economics and a big fan of agency theory) wrote a famous 1970 article in the New York Times Magazine, stating that “the social responsibility of business is to increase its profits.” As we entered the 1980s (the Reagan years in the USA), the federal government was labeled as ‘the problem’ rather than a source of solutions, and in public companies, agency theory elevated shareholder value maximization to the prime directive. Compliant boards helped incentivize CEOs to do just that. They replaced the retain and invest model that they had lived by for decades, with a new downsize and distribute model that emphasized efficiency (Lazonick, 2014). Yet it is not dead economists that keep capitalism from a needed rebirth; it is our inability to articulate and enact a better vision of what capitalism can become. It is C-suite executives and other managers who enact capitalism daily through their beliefs and actions.

Consider capitalism’s lack of virtue. If you are in business, your goals and values are likely suspect within the public’s eyes — for good reason. There are numerous examples of businesses that have strayed to the dark side by embodying negative values in various forms and destroying public trust — including Enron, WorldCom, Volkswagen, Wells Fargo, Toshiba, and Bernard Madoff Investment Securities LLC. Several organizations have appeared to be paragons of performance, riding high before their 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. It seems that organizations are often unprepared to hold internal agents accountable to a common set of positive values until it is too late. To instill virtue, organizations need to be intentional about it.

Still, problems with capitalism are larger than any real or imagined problems with bad actors. Instead, capitalism’s underlying mechanisms and components should be called into question as we move further into the 21st Century. Definitions of capitalism typically note that: (1) it is an economic system, (2) it is based on private ownership of the means of production, (3) prices, production, and distribution are determined by competition in free markets, and (4) the goal is profit. Today, all four parts of this definition are largely obsolete.

Part one of the definition: capitalism as an economic system. On a macro level, an economic system is a way in which market participants (or actors) allocate resources and organize the production and distribution of goods and services within an economy. Capitalism has historically set itself apart from communism, for instance, because it balances supply and demand through the pricing mechanism of markets, while communism historically emphasized a command economy, more reliant upon central planning. Now, in the 21st Century, this distinction has been blurred as both capitalist and communist economies have evolved their forms, not to mention that they now actively trade with each other (the USA and China being notable examples). Socialism (another historical category), reflects something of a middle way between the two extremes, emphasizing a stronger social safety net more than anything else, without a major departure from capitalism (e.g., in Europe).

We limit the potential of capitalism if it is simply an economic system; today it is more accurate to think of it as an economic and social system involving a variety of benefit exchanges, tangible and intangible, between intentional actors. This view better captures the realities of the non-profit and government sectors, in addition to being applicable to business.

Part two of the legacy definition: capitalism has historically involved private ownership of the means of production. Since the early years of the industrial revolution, capitalism has been synonymous with capital investments in the equipment and technologies that make manual workers more productive. Frederick Winslow Taylor’s task management ideas come to mind, from the early 1900’s, as well as Henry Ford’s assembly line. More recently, however, as manual work has given way to knowledge work, the means of production are centered around technologies and bodies of knowledge which have been created and continuously evolve through investments by both private and public entities. Thus, in modern capitalism, the means of production is increasingly being owned and shared by both private and public actors.

In part three of the definition of capitalism, prices, production, and distribution were historically associated with competition in free markets. Now 250 years downstream from Adam Smith’s mention of the invisible hand (Smith, A. [1776] 2005), this view is no longer accurate. The reason firms exist, and the reason why some have grown to large size is that they take transactions out of the free market and execute them more efficiently through their own internal processes (Ronald Coase, 1937). For instance, if only market mechanisms were available, customers would have to go to the market every time they wanted to conduct a transaction, thereby incurring information and negotiation costs as well as delay, placing a restraint on what could be accomplished in a timely way. Today, the friction of rowdy free markets where buyers and sellers haggle over the price (without barriers to entry), has been replaced by management decision making within organizations, and we now have managerial capitalism rather than free-market capitalism (Alfred Chandler, 1977). Even online platforms have not changed this reality; if you want to sell a book on Amazon, you must play by their rules. Only where commodities are traded today do markets approach the free markets originally associated with capitalism.

Yet something else is going on in today’s world, and it means that price is not necessarily the best way to discover demand. Other types of benefits are being exchanged that are not captured in the financial price of a good or service. Consider the following example. If I go to a big box store and buy a lawnmower, I will provide financial benefits to the retailer in exchange for the economic benefits I receive by using the mower over time. It is one of the fruits of capitalism that I become more productive if I invest in equipment to make the job easier. In buying a lawn mower, I am betting that the economic benefits I receive by using it over time are greater than the financial costs that I will incur in the purchase. But that’s not all that motivates the exchange, because there are likely to be social and psychological, as well as environmental benefits associated with this, and many other activities. While mowing my lawn I can receive social benefits through positive interactions with my neighbors, as I come to be known as a useful and productive member of the community. I may also accrue psychological benefits for myself while mowing if I gain self-esteem. Environmental benefits (serving the common good) can also come into play as I help to create a better neighborhood in which to live. The motivation to buy a lawnmower (or anything else) can have several dimensions. Capitalism is not about the economic or financial calculus alone. It is also about other benefits that encourage and motivate a purchase. ‘Good’ capitalism can gain strength and reveal its hidden potential when a rich array of benefits is considered to motivate every exchange.

Part four of the legacy definition: The goal is profit. Those who argue that capitalism is about profit often point to Adam Smith’s 1776 book, Wealth of Nations, where he notes that “it is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.” Generations have taken Smith’s words to mean that the purpose of a firm is to satisfy private interests and maximize profit, but this view only serves as a shiny object that diverts our attention and should not be the main conclusion. It is more important to realize that neither the butcher, the brewer, nor the baker would be in business for long if their purposes did not serve the interests and needs of society. Smith notes in a later passage that “the butcher, the brewer, and the baker… together with many other artificers and retailers necessary or useful for supplying their occasional wants…contribute still further to augment the town. The inhabitants of the town, and those of the country, are mutually the servants of one another” (Smith, A. [1776] 2005, 309).

The goal of a firm is not profit; the customer is not willing to pay more to ensure that a firm achieves it. Rather, a customer is paying for the firm to deliver benefits to them. If the financial revenue that the firm receives in return for those benefits exceeds the costs, a surplus (or profit in business) is created. Customers are external actors and adopt a firm’s offerings to accrue financial, economic, social, psychological, spiritual, or environmental benefits for themselves. Such benefits accrue to society (and the environment) as a whole since external actors are a part of society. Thus, the purpose of a firm is not to satisfy private interests nor to maximize profits, but rather to create, amplify, and channel benefits in society so that the firm can receive benefits due to it in return. Overall, capitalism is meant to serve the common good rather than generate profit (or surplus) for individual actors.

Given what we have discussed here, a more accurate definition of modern capitalism can be envisioned going forward, such as: (1) it is an economic and social system involving a variety of benefit exchanges, tangible and intangible, between intentional actors, (2) where the means of production (technologies and knowledge) are owned and widely shared by private and public entities, (3) prices, production and distribution are managed within organizations based on observed demand-side responses to their offerings, and (4) the goal is effective service to, and maintenance of, the common good.

Since today’s managerial capitalism has largely displaced Adam Smith’s free market capitalism, we are all managing capitalism now. To improve our performance in this role, we need to incorporate a better system of management that is designed to serve the common good. Under a new vision of capitalism, small and large organizations alike (whether business, government or nonprofit) would serve their environment and be rewarded in return, thus managing capitalism for the common good. An organization is either part of the solution or part of the problem. It will not be possible to solve the myriad problems that society now faces without a new conceptualization of capitalism, together with the creation of truly great organizations that work to bring it about.

For more ideas on managing capitalism for the common good, pick-up a copy of my 2017 book, Become Truly Great: Serve the Common Good through Management by Positive Organizational Effectiveness.

Charles G. Chandler, Ph.D.

References:

Ehrenfreund, Max. 2016. “A majority of millennials now reject capitalism, poll shows.” Washington Post, April 26.

Friedman, Milton. 1970. “The Social Responsibility of Business is to Increase Its Profits.” New York Times Magazine, September 13.

Lazonick, W. 2014. “Profits Without Prosperity.” Harvard Business Review, September 2014, online ed.

Smith, Adam. [1776] 2005. An inquiry into the nature and causes of the Wealth of Nations. 2005 edition, An Electronics Classics Series Publication. State College, PA: Pennsylvania State University.

Coase, Ronald. 1937. “The Nature of the Firm.” Economica 4 (16): 386-405.

Chandler, Alfred D. (Jr.). 1977. The Visible Hand: The Managerial Revolution in American Business. Cambridge, MA: Belknap Press, 8.

Chandler, Charles G. 2017. Become Truly Great: Serve the common good through Management by Positive Organizational Effectiveness. Powell, OH: Author Academy Elite.

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Given the significant pressures on firms in the real world, what do we know about the traits, characteristics, or management approaches that help ensure that a firm can and will survive within its environment? Some might think this is a difficult, if not an impossible task, given all of the variables at play. Nonetheless, we will look at three approaches to survival and the mechanisms at play, which can be listed as: (1) survival of the paranoid, (2) survival of the fittest, and (3) survival of the effective.

1. Survival of the Paranoid

Andy Grove, the former CEO of Intel was the author of a 1996 book entitled, “Only the Paranoid Survive,” which tells about his experiences at Intel. Granted, this is a book written for a mass audience but stay with me for a minute. Formed in 1968, Intel first made memory chips, but moved primarily into microprocessors after 1981, once the IBM personal computer arrived.  In thinking about survival, Grove says, “sooner or later something fundamental in your business will change.” He emphasized the concept of strategic inflection points where change and adaptation to the environment can be critical, and where a firm needs to act with conviction once a revised course had been set.  Grove listed a number of different directions from which threats can arise, including competition, technology, customers, suppliers, flaws in the business model, and regulation.  Any of these could lead to what he called a 10x change.

In Andy Grove’s world, a strong dose of paranoia was a competitive advantage.  It was about never being sure what signal to trust, yet all the while surveying the environment for incipient change and trying to separate signal from noise. The fact that Intel was on the forefront for supplying technology to the next generation of computers put the company at risk for costly missteps, due to the large capital infusions needed to build and maintain chip technologies. Every transition was important. If Intel were to lose the leadership position, it would have been very difficult to recover. The company was remarkedly successful and remains an important technology company today. Despite the obvious risks, Intel rode a technology wave and won; however, survival of the paranoid seems unlikely to provide a general model for firm survival going forward.

2. Survival of the Fittest

Sometimes lessons for firm survival are drawn from other disciplines. For instance, the survival of firms over time is sometimes compared to survival of species in the natural environment. Here, we often see references to Charles Darwin’s work in biology and population ecology in the 1800s, where natural selection was believed to be important for the survival of natural systems. This is commonly referred to as Survival of the Fittest (a term coined by naturalist Herbert Spencer to refer to a species’ reproductive success). Darwin believed that survival is most likely among those species that are best suited to their natural environment.  Survival over time in natural systems is primarily about which species are able to successfully pass the most genes on to the next generation.

Darwin’s mechanism of “natural selection” was at the time contrasted with “artificial selection,” which was the process used by breeders of domestic livestock animals (preferentially selecting desirable traits for continuation in the line, while reducing others). In the mid-1800s, the theory of genetics was not well developed. DNA had not been discovered, and electron microscopes were not available to study cell material directly.  Darwin developed his theory of evolution based on the observable characteristics of a species, known as its phenotype. Darwin’s theory of natural selection was controversial and did not receive wide acceptance during his own time. It went against the creation story and many other teachings of the Christian church. It was not until the 1930s and 1940s, as Gregor Mendel’s ideas on genetics were combined with Darwin’s views that natural selection experienced something of a resurgence, and the scientific community came to a modern understanding of evolution through natural selection.

There are some similarities, but also considerable differences, between firms living within their chosen environment and organisms living in a natural environment. Perhaps the greatest difference is that organisms live for a relatively short time and pass on their genes through reproduction. Organizations, on the other hand, can theoretically live forever but must capture energy flows and benefit streams to continue their existence. Survival of the fittest provides a way for organizations to think about competition in their environment (often characterized as a ‘Red Ocean’ view of the world), but the mechanisms involved for success in the biological sphere are considerably different than those that firms need to adopt for their own success.

3. Survival of the Effective

Our last approach to firm survival is called “Survival of the Effective,” which comes from my 2017 book, Become Truly Great. From first principles, we know that firms must exchange benefits with their environment to survive and thrive.  In a real sense, a firm must serve its environment, else it receives no benefits in return. A firm and its environment form an open system, and there are many different kinds of benefits that can be exchanged. Benefit exchanges with the environment should not be considered casually, however, since a Darwinian-style imperative is at work behind the scenes to enforce a culling of the ineffective. Over time, ineffective firms are marginalized or eliminated in the absence of adequate benefit exchanges with their environment. Effective firms, alternatively, are selectively retained to survive and thrive. Firms that are highly effective for a period (e.g., Apple or Google) can experience rapid growth, and appear to enjoy an effectiveness premium through preferential benefit exchanges with actors in the environment. Effectiveness thus confers a significant advantage when facing many present and future challenges.

While it may be clear that ineffective firms can be marginalized or culled by the environment, there are usually internal early warning signs before this fully plays out. Often, instability arises from inappropriate objectives driving the organization. Consider that the traditional approach to organizing the work internally is for management to set up a particular organizational form (organizational chart), program the 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, and variations thereof, that 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 throw at it, and not all goals have any relation to improvements in effectiveness. It is difficult to know whether the right goal has been specified, and even if the goal is achieved, it may not mean that the organization is effective. 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 organizations, “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.”

It seems that the more single-minded a firm becomes in focusing on a narrow financial objective (such as maximization of profit or shareholder value) at the expense of everything else, the more likely it is that dysfunction will emerge. The situation can even lead to a national crisis if an entire sector is doing the same thing. 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 (eventually leading to a 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.

A traditional view of a firm often describes one as a conventional entity focused on specific goals and organized somewhat like a factory to achieve them. When the firm 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 the firm lives is changing rapidly. It would be useful if its employees could react quickly like a flock of birds, each following its wingman in a coordinated turn. Humans don’t seem to be able to execute this maneuver easily. During periods of rapid transition, individuals, and social grouping within the organization can enter a state of uncertainty.

In reality, firms should be viewed as complex adaptive systems (CAS). The CAS perspective is a valuable one for examining firm performance because it reveals hidden patterns that can be found beneath the surface. In the CAS perspective, firms (and their environment) compose complex systems made up of individuals that can act on their own, both internally or externally. These individuals are called agents, and typically include a firm’s management and employees (internal agents), and their customers and other stakeholders (external agents). In such systems, despite efforts at top-down management control, order often emerges from below based on the interaction of the agents with each other, producing observable internal phenomena as a firm’s “culture,” and a general sense of “how we do things around here,” or external customer demand. Complex adaptive systems often react in unpredictable ways. When the system is in crisis and far from equilibrium, individual employees may adapt to a 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.

The complexity theory of organizations rejects the metaphor of firms as well-oiled machines made up of replaceable parts. Instead, a firm’s collection of internal agents has been brought together for a specific period, where they exhibit aspects of self-organization, emergence, and interdependency. 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.

My favorite approach to management, which I have discussed before on this podcast, is called Management by Positive Organizational Effectiveness (M+OE). It discards the goal model that has is commonly used to gauge effectiveness because it does not provide a way to discriminate between useful and non-useful goals. Within M + OE, by contrast, the goal of every firm is fixed, that is, to be effective within its environment. Firms 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 M+OE. They are still living in the present age of ‘efficiencyism,’ where improvements in efficiency have been elevated to the prime directive without understanding the assumptions and consequences. Dysfunction is an emergent phenomenon under efficiencyism, due to potential instability within a firm’s complex adaptive systems.

It is likely to be more rewarding and stabilizing over the mid- to long-term to entertain the creation of social capital, psychological capital, spiritual capital, and environmental capital among stakeholders –- thus encouraging the emergence of attractor narratives (e.g., in social media and elsewhere) based on real benefit exchanges. Evolutionary processes operate on the population of organizations, while adaptive pressures act on individual organizations, to enforce “survival of the effective” over time.

Let’s consider a story about social capital building among employees and management. In 2001, in the aftermath of 9/11, the airline industry was reeling. Planes were grounded for three days throughout the country. Once they started to fly again, people were afraid to fly, and passenger traffic dropped precipitously. It wasn’t clear that the domestic airline industry would survive. In the weeks following the event, many airlines laid off employees. Only Southwest Airlines and Alaska Airlines did not, among major US carriers. James F. Parker, who had been CEO of Southwest for only a few months, faced some tough decisions in September 2001. “We just had to make a gut decision based on what we thought was important,” he said. The decision was to give customers refunds if they wanted them, no strings attached. It was a risky policy for the company. If customers flooded the company with requests for refunds, the company could quickly exhaust the cash required to remain solvent. Fortunately, few customers requested a refund; instead, they generally opted for credit on future flights. Some even sent in small amounts of cash to the airline to show their support.

Despite the uncertainty, Southwest went ahead and made a $ 179 million payment to the employee pension fund on time. Employees experienced no layoffs or reductions in pay. In the three years after 9/11, researchers followed the performance of the 10 largest US airlines. It was Southwest and Alaska that recovered most strongly and quickly, and those were the only two that had not resorted to layoffs. Before the event, they had the strongest cash reserves and the lowest debt and engaged in a no-layoff policy. US Airways and United Airlines, who laid off 20-25% of employees and had high debt and relatively low cash positions prior to 9/11, recovered more slowly. Southwest Airlines was the only airline to show a profit in every quarter studied, while US Airways showed a loss in every corresponding quarter. No doubt, strong performance prior to 9/11 was important in building financial reserves, but so were decisions immediately afterward in terms of resisting employee layoffs. Crisis events lay bare the real values of a company and its management. In Southwest’s case, grateful employees went out of their way to make the difference in company performance, while other airlines imposed layoffs. This story highlights the positive aspects of building social capital between management and employees of Southwest, and conversely the destruction of social capital among employees following layoffs at other airlines. Today, Southwest remains one of the strongest airlines in the country.

Examples such as this reflect a broader reality. Consider a September 2014 article entitled “Profits without prosperity” appeared the Harvard Business Review. The author notes that the period after World War II until the late 1970s was characterized by a “retain-and-reinvest” approach to resource allocation in major U.S. corporations. During this period, firms tended to retain earnings and reinvest them to increase the firms’ capabilities. The approach served to benefit the employees who had helped make the firms more competitive and provided workers with higher incomes and greater job security. The “retain-and-invest” pattern gave way in the late-1970s to a “downsize-and-distribute” regime where short-term efficiencies were implemented involving layoffs, asset sales, and other cost reduction approaches, followed by the distribution of freed-up cash to financial interests, particularly shareholders.

It is doubtful that history will be kind to the downsize-and-distribute regime. It tends to strip value from a firm and contributes to employment instability and income inequality inside the firm because the firm’s ability to be productive in the future is weakened. It also tends to destroy social capital inside the firm rather than build it.

In summary, the keys to firm survival (what we have been talking about today) can be summarized as follows:

1. Adopt an objective function where the goal of the firm is to be effective within its environment (using the Survival of the Effective approach);
2. Adopt a “retain and invest” mentality which builds social capital between employees and management and positions the firm to survive and thrive for the long term;
3. Become a Truly Great firm. (For more information, grab a copy of my book Become Truly Great at Amazon.com or on Barnes and Noble’s website.)

Charles G. Chandler, Ph.D.
[email protected]

Reference:

Chandler, Charles G. 2017. Become Truly Great: Serve the common good through Management by Positive Organizational Effectiveness. Powell, OH: Author Academy Elite.