A Self-Reinventing Organization: Sustaining Long Term Growth _______________ by Matt Shlosberg
Years of research in the fields of strategy and management produced thousands of books, articles, frameworks, models, and ideas. Each one of them claims to be the winner and prescribes what looks like a recipe for success. So far, not a single one of them proved to be successful over the long term. The real long term success stories show only one source of success: luck. While following traditional models increases the chance of success short term, it creates a mental block in organizations that results in long term failure. Consider Jim Collins' study published in his "Built To Last" book. He identified strategies and structures that worked for companies over an extended period of time. Yet, five years later these same successful companies proved him otherwise. A study of some of the world's oldest companies reveals that luck is the only thing that carried them over the years. Consider Sberbank, the largest bank in Russia and Eastern Europe. Sberbank was founded in 1841 as a result of the Russian financial reform. The Russian government ensured its existence all the way until the Russian revolution in 1917, at which point the new Soviet government took over the bank and made it a 100% government owned monopoly. It was the only bank in Russia until late 1980s, at which point the government sold a 40% stake in the bank to the public, still controlling the other 60%. Sberbank's 160 year legacy isn't due to shining strategy or brilliant management, but rather luck that arose due to government regulations. But even luck doesn't last forever. Kongo Gumi, the world's oldest company founded in 578 A.D. in Japan, finally hit hard times in 2006 and its assets were liquidated and purchased by Takamatsu. So, if luck is the game, what can companies do to ensure that they stay lucky? Although there's no precise formula, there's a strategy companies can use to increase their chances of winning. First, they should forget the Build To Last approach. What works today may not work tomorrow. The past matters even less. Second, they shouldn't assume that their three year strategy will last them 10 or 20 years. Third, they should become dynamic and lose the baggage that makes it hard for them to change. Finally, they shouldn't think of their company being in the same business tomorrow as it is in the business of today. One of Hanna Concern’s customers proves a case in point (company name is hidden for privacy reasons). The firm was first launched as a provider of software that allows companies to make sense of large amounts of data. When market and customers needs changed, it repositioned its core competency and became a provider of software that powers cloud computing. When the firm saw problems in its industry, it used its core competency to launch a product for the public sector. This market reinvented itself three times, but the firm was able to keep up every time. When the public sector market became unattractive, the firm moved into a different vertical market and then changed its business model all together. The firm reinvented itself numerous times over a period of three years.
Electronic copy available at: http://ssrn.com/abstract=1630614
So, what is the formula? The basic idea is to create an organization that can quickly and easily reinvent itself. In order to enable this functionality, the firm should break the organization into two parts: the core team and the supporting team. The core team of the organization has two roles: (1) develop and maintain core competencies of the organization and (2) provide general services any organization would have a need for regardless of its portfolio of products, services, or core competencies (e.g. human resources, finance, marketing, etc). The core team is hired for attitude, ability to be open minded, ability to change, and ability to learn. Skills will be of a lower priority. A special culture is created around this team. Concepts like innovation, constant change, questioning status quo, and reinventing the industry are embedded as core values in this culture. This team will be tasked with (1) constantly thinking about the future, (2) reinventing the organization, the industry, and core competencies, (3) being innovative, (4) thinking small, not obsessing over growth, (5) reorganizing the entire organization every year or two, (6) not worrying about bureaucracy, titles, promotions, and org charts, (7) focusing on team work, (8) reinventing the business model, (9) changing the product portfolio, (10) stretching, (11) reshaping the industry, etc. The basic idea is to have this core team reinvent the entire company. Proper controls and motivational factors must be in place to ensure the core team's interest in completing these tasks. For example, instead of creating financial incentives around profitability of specific products, companies can create incentives around profitability of core competencies or company as a whole. The supporting team performs all the non-core functions that usually differ based on the business the company is in or the product or service the firm sells. For example, technical support staff may be important to a software business but not to a book publisher; capital markets analysts may be useful in an investment bank but not in a car manufacturer. Traditionally, the supporting team has been the one carrying the most baggage in organizations when it comes to change. For example, if you are a telecommunications firm with 100 technical support representatives with expertise in phones and you decide to become a software publisher, your technical support representatives will no longer be needed. Closing this department may be costly in terms of employee outplacement costs, transition costs, sunk costs write-offs, asset liquidation, and so on. The layoff of employees may also send a negative chain reaction throughout your organization, resulting in anything from minor employee unhappiness and fear to complete brand destruction. A combination of such negative reactions, executives' wishful thinking, and turnaround costs often act as barriers to change. The easiest way to solve this problem is to outsource the entire supporting team. That's right! The strategy is to keep a small core team and outsource everything else. The outsourcing strategy should be logistically and financially focused at being able to create, update, and destroy competencies overnight and at the lowest cost possible. The telecommunications firm mentioned above should be able to outsource technical support and terminate the contract whenever it wants to. In order to make sure the outsourced team delivers the greatest impact to the organization, the firm should actively participate in the vendor's talent management process and integrate its own cultural values into the vendor's organization.
Electronic copy available at: http://ssrn.com/abstract=1630614
This management structure makes the organization very dynamic. Not only will the organization be programmed to change, but it will also host embedded mechanisms designed to make change easy. All the baggage that typically stops change will now be moved to the supporting team, which case be easily disposed of. An organization like this can constantly reinvent itself. Although a self-reinventing organization isn't a sure recipe for long term success, it reduces the risk of failure that occurs when organizations don't change.
About Matt Shlosberg Matt Shlosberg is the Managing Director of Hanna Concern and is one of the most sought after management consultants. He has assisted dozens of multinational corporations and governments with solving complex business problems. Matt is the author of several books and is the leading authority on strategy and organization. Matt has received his MBA from the University of Maryland at College Park (Robert H. Smith School of Business) and has completed executive education programs at Cornell, University of Notre Dame, and INSEAD.
Electronic copy available at: http://ssrn.com/abstract=1630614