The Financial Times published a pair of important articles Last year that asked why leading business schools are still teaching one of the obsolete pillars of 20th Century management, namely, that the goal of a firm is to maximize short-term shareholder value:
“While there is growing consensus that focusing on short-term shareholder value is not only bad for society but also leads to poor business results, much MBA teaching remains shaped by the shareholder primacy model.”
The FT concludes that moving away from this model will be difficult “for reasons ranging from the tenure system to institutional inertia.”
However it’s not just the individual impediments that hold back change. The transition will be more disruptive. The shift is as fundamental in scope and implications as the Copernican Revolution in astronomy. It entails a different mental model of how the world works.
The Copernican Revolution in management
On the surface, the Copernican Revolution in astronomy was a paradigm shift from the view that the Sun revolves around the stationary “center of the universe”—the Earth—to the view that the Earth is one of several planets revolving around the Sun.
Similarly, the Copernican Revolution in management is a paradigm shift from the 20th Century view that customers revolve around the stationary “center of the universe”—the value chain of the organization—to the view that the organization is one of many organizations revolving around the customer. The organization survives and thrives only so long as it is agile enough to meet the customer’s shifting needs and desires.
The Revolution in astronomy: a social change
When it was first presented, Copernicus’s thesis seemed to be no more than a different mathematical model for astronomers and astrologers—a simpler way of calculating the paths of the planets.
Copernicus’ theory looked so innocuous that the powers-that-be initially didn’t resist it. In fact, they welcomed it. Thus when Pope Clement VII had the theory explained to him in 1533 by his own secretary, Johann Widmanstetter, he was so pleased with it that he offered him a valuable gift.
What Pope Clement didn’t grasp was that Copernicus’ theory wasn’t just a mathematical methodology for calculating the movements of the planets. Embedded within it was a different worldview that implicitly undermined the plausibility of established religion in general, the Roman Catholic Church in particular, and the Divine Right of Kings, on which most existing governments in Europe rested their claim to legitimacy.
The publication of Copernicus’s theory thus began an inexorable process of inquiry into the entire organization of society, including the rights and privileges of the individuals who happened to be in charge of the Roman Catholic Church and of the monarchies that asserted power through the Divine Right of Kings.
It became possible to ask what social value those presiding over these institutions were adding. While some of them might be genuinely wise men and courageous leaders, others were discovered to be petty tyrants, plodding bureaucrats, incompetent nincompoops or simply hangers-on. By stripping these organizations of their Divine Legitimacy, Copernicus’ theory enabled their true social worth to be examined. To be sure, kings and churches still continued to exist, but they occupied a steadily diminishing role in the structure of society.
Eventually, the Church grasped the seriousness of the threat. In March 1616, the Roman Catholic Church issued a decree, banning Copernicus’s book until it could be “corrected” and forbidding any similar book from being published. In 1633, Galileo Galilei was convicted of heresy for supporting the position of Copernicus and was placed under house arrest for the rest of his life.
But it was too late. The revolution was under way. Institutional resistance was futile, even though it continued for some time. It wasn’t until 1822 that the Church finally conceded defeat and lifted the prohibition on discussion of the revolution.
In this way, Copernicus’ theory had a vast social impact. It freed the human mind from the intellectual stranglehold that religion and the Divine Right of Kings had held over it for thousands of years.
As Thomas Kuhn writes in The Copernican Revolution: (*1957):
“To describe the innovation initiated by Copernicus as the simple interchange of the position of the earth and sun is to make a molehill out of a promontory in the development of human thought. If Copernicus’ proposal had had no consequences outside astronomy, it would have been neither so long delayed nor so strenuously resisted.”
The social implications for management
Similarly what makes the Copernican Revolution in management so significant is not its technical content, which appears to be merely a different methodology for guiding and measuring the effectiveness of organizations.
Embedded in the new way of managing is a different worldview, which threatens the hegemony of all the big hierarchical bureaucracies that systematically dispirit those doing the work, frustrate those for whom the work is done, repeatedly disappoint society and yield increasingly meager returns for investors.
It also begins an inquiry into the contribution of those leaders who currently preside over large organizations in both the public and private sectors. It shreds the assumption that they are by definition value-creating entrepreneurs, worthy of extraordinary compensation. It invites a re-examination of the duties, rights and privileges of all those who happen to be occupying managerial positions.
What we are seeing in the best management writing and exemplars is the emergence of a coherent and consistent set of management principles that, when implemented fully, enable organizations to achieve a level of performance that was impossible for the hierarchical bureaucracies of the 20thCentury.
This revolutionary new kind of organization is described in more than a score of recent books. It focuses on delighting customers profitably, enabling self-organizing teams and networks, coordinating work in iterative cycles and communicating interactively. The shifts in behavior, attitudes and skills needed to implement it are significant and will have effects as profound and revolutionary as the Copernican Revolution in astronomy.
Just as the Copernican Revolution in astronomy helped put in question social arrangements in which kings and priests and their retinues were in charge of society by Divine Right, so the Copernican Revolution in management is putting in question the social arrangements of the large bureaucracies that currently rule modern society. In the emerging organization, there is little need for “bosses” and “administrators of the status quo” and “paper shufflers”, along with a pressing need for managers who can inspire self-organizing teams, networks and ecosystems to respond to the shifting needs of customers.
The case for change in management
Just as the critics of Copernicus’ theory could argue that it offered no improvement in calculating the path of the planets while generating massive social disruption, so the critics of the Copernican Revolution in management can argue that there are no scientific long-term studies proving beyond all doubt that the new way of managing always gets better results than shareholder value. They also point out—correctly—that its replacement will involve significant social disruption.
In making such arguments, critics prefer to avert their gaze from the declining returns of US organizations over the last 45 years, the high societal cost of unemployment and underemployment, and the disengagement of most of the workforce.
They also fail to take into account ten years of research by Professor Ranjay Gulati, summarized in his wonderful book, Reorganize for Resilience: Putting Customers at the Center of Your Business (2010):
“Those companies built around an inside-out mind-set—those pushing out products and services to the marketplace based on a narrow viewpoint of their customers that looks at them only through the narrow lens of their products—are less resilient in turbulent times than those organized around an outside-in mind-set that starts with the marketplace, then looks to deliver creatively on market opportunities. Outside-in orientation maximizes customer value—and produces more supple organizations.
“Embracing an outside-in perspective—focusing on creatively delivering something of value to customers instead of obsessing over pushing your product portfolio—builds an inherent flexibility into organizations. While this perspective is beneficial under all market conditions, its advantages become particularly acute in adverse and turbulent markets, making you inherently more responsive to market shifts, a competence that’s especially important in markets where firms must radically alter what they produce, what they sell, and how they sell it. Rallying around customer problems thus results in the resilience that protects businesses from economic storms.”
Our institutions have run out of gas
Today’s hierarchical bureaucracies are so out-of-step with the current marketplace in which power has shifted from seller to buyer that we cannot wait for the results of definitive long-term scientific studies. As Don Tapscott said in this column last week,
“The fundamental problem facing all our institutions today, including government, is not related to conjunctural economic changes. It’s not a business cycle that we are going through. It’s not a cyclical change. It’s a secular change. We are at a punctuation point in human history where the industrial age and institutions have finally come to their logical conclusion. They have essentially run out of gas.”
The shareholder value theory is thus only a small part of the problem. It is part of a web of obsolete management ideas that no longer fit the 21st Century marketplace. As noted below, other once-sacred truths in management are part of the same failing paradigm. Absorbing even a couple of these fundamental shifts will take time. Absorbing them all, and acquiring the skills and attitudes necessary to implement them, will not be easy or quick.
Nevertheless, despite these constraints, the Copernican Revolution in management is under way and is moving forward inexorably. Just as the combined efforts of the powers-that-be in the 16th and 17th Centuries were unable to halt the progress of Copernicus’ Revolution in astronomy, so also today’s big hierarchical bureaucracies, though seemingly all-powerful, will ultimately succumb to the power of a better idea for running organizations—better for customers, better for employees, better for managers, better for society, and better for the organizations and their investors.
Even seemingly impregnable institutions like business schools will in the end be unable to resist. The two articles in the Financial Times this week are thus welcome steps in the process, but they are simply the beginning. The outcome of the Copernican Revolution in management is not in doubt. The only question is how long it will take.
And read also:
1/ The origin of the world’s dumbest idea: Milton Friedman
2/ The dumbest idea in the world: maximizing shareholder value
3/ The management revolution that’s already happening
4/ Don’t Diss the Paradigm Shift in Management: It’s Happening
5/ The five surprises of radical management
Other aspects in the Copernican revolution in management
- The search for the holy grail of strategy—sustainable competitive advantage—is recognized by Professor Rita McGrath of Columbia Business School as futile: competitive advantage is at best transient and cannot be deduced from the structure of industry.
- The “essence of strategy” seen as “coping with competition”, as argued by legendary guru Professor Michael Porter, is now obsolete: the essence of strategy is about adding value to customers.
- It transpires that the raison d’être of a firm is not only, as Nobel Prize winner Ronald Coase argued, because it can reduce transaction costs, but also because it can add value for customers.
- The uni-directional value chain—the very core of 20th Century management thinking developed by Professor Porter—is being replaced by the concept of multi-directional networks, in which interactions with customers play a key role.
- The short-term gains of large-scale off-shoring of manufacturing are recognized to have caused massive loss of competitive capacity: new heuristics for outsourcing have emerged.
- Supposed distinctions between leaders and managers, as argued by leadership guru Professor John Kotter, are dissolving: managers are leaders and leaders must be able and willing to get their hands dirty and manage.
- As a result of a failure of many firms to recognize and respond to these changes, a study by Harvard Business School has concluded that the US has lost much of its capacity to compete.
- Whereas the traditional management pursued an ethos of efficiency and control, a new paradigm is being pursued by many firms that thrives on the ethos of imagination, exploration, experiment, discovery, collaboration and self-organization.
- Whereas traditional management often treated both employees and customers as inanimate “things” to be manipulated, the new management paradigm respects employees and customers as independent, thinking, feeling human beings.
- The new management embraces the increased complexity inherent in the shift as an opportunity to be exploited, rather than a problem to be avoided.
- The extraordinarily generous compensation afforded to senior executives is recognized in an HBR article by Professor Mihir Desai, the Mizuho Financial Group Professor of Finance at Harvard Business School to be a giant “financial incentives bubble”, accompanied by an unjustified sense of entitlement.