There’s a worm eating away at the core of most modern business models. It’s extremely simple to describe, but incredibly difficult to do anything about. Modern companies are constructed around replicated routines – routines embedded in clever bits of machinery and software which allow them to do the same thing again and again, at minimal cost.
Replicated routines lie at the heart of companies’ ability to deliver good quality products and services at low cost. But the trouble with replicated routines is… they can be replicated. Yes, you can protect some of the things you do with patents and suchlike, for some time at least. But for the most part, similar companies making similar things in similar industries tend to adopt the same replicated routines. As a result, they find it extremely hard to differentiate, and face an endless uphill struggle against the forces of commoditisation.
Most companies are still struggling to come to terms with the result: the source of real differentiation and competitive edge is not the things their precious technologies can do, but the things they cannot do. These “things” tend to be people-related, such as spotting new opportunities, designing, inventing and creating, empathising, communicating and engaging, inspiring and motivating. Remorselessly, relentlessly, successful business is becoming “a people thing”.
Social philosopher Charles Handy addressed this issue at the recent Marketing Forum, identifying four contradictions every company has to “learn to manage”. First is the contradiction between creativity and efficiency. Every manager says he wants to encourage creativity. The trouble is, by definition, creativity is incredibly wasteful. It’s all about exploring avenues, many of which turn out to be dead ends. And “celebrating failure” is much easier to talk about than do. The danger is compromising efficiency in the pursuit of creativity.
The second contradiction is between autonomy and control. Replicated routines live and breathe control. The company that creates wealth through replicated routines breeds a command and control culture. Yet, remarked Handy, “you get no energy, no passion if people don’t control what they do.” Once again, forces that encourage the people-side of differentiation clash with those of efficient, low-cost production.
Contradiction number three is between big and small. People tend to get a greater sense of meaning and feel they matter more when they are involved in small organisations, noted Handy. Yet, in many industries, being big is an entry requirement, because “big equals clout”.
Finally, contradiction number four: between ideas and owners. Shareholders may like to believe they “own” the company, but individuals own what goes on in their head. If the company relies on individuals’ motivation and creativity, it has to find a way to “reward the owners of ideas as well as the owners of companies.”
Handy offered some answers. The future lies with federal structures, where the centre does the few things that only the centre can do and the rest is farmed out to localities, he suggested. The trick is knowing how to divvy up the tasks between centre and locality – and to find ways of stopping the centre trying to “steal other people’s choices”. Too many centres do, however, because “they don’t trust other people to make the right choices”.
Also, the business environment is separating out into “elephants” and “fleas”. Elephants are colossal, globe-spanning organisations that do essential things like suck oil out of the ground; the fleas are the armies of consultants, freelancers, sub-contractors and so on, who prefer the flexibility and creativity of a life outside the organisations. How should we manage the relationship between the elephants and the fleas?
Handy’s observations ring true, and different organisations are coming up with different answers to the same questions. You might think, for instance, that if creativity and intellectual property are a company’s crucial assets, it would outsource everything else and do anything it can to keep key people close to its heart. Yet organisations such as the Royal Court Theatre and Penguin Books effectively outsource the creativity to “flea” writers, authors and actors, and make production and distribution their operational core. They also demonstrate that motivation is often more about personal passion than money. Book publishing is not well-paid, and even the glitziest Hollywood actor gets only &£320 a week on stage at the Royal Court.
That’s a far cry from the challenge at Morgan Stanley where, as European managing director Amelia Fawcett pointed out, the organisation has to encourage creativity and innovation within a very tight, highly regulated compliance environment. Its answer is stock incentives: “It ties people to the future of the company. They feel that they own it,” she explained.
Another fascinating implication is that, from the outside, it’s getting much harder to understand what makes successful organisations tick. Increasingly, it’s all down to the invisible people and culture stuff. According to Penguin publishing director Stuart Proffitt, success or failure for a publishing company rests on a series of small publishing teams, including a commissioning editor, sales and marketing people and a finance person. The acid test is “the dynamics between them: whether there is strong, earned, mutual respect”.
Likewise, as Virgin’s Will Whitehorn pointed out, Virgin would be just another financial holding company if it wasn’t for its people and culture. Sitting right at the centre is a tiny group of senior people who have been with Virgin through thick and thin and understand “Virginness” implicitly. They sit on the board of every Virgin venture, hold its purse strings (shall we invest in this venture or not?), and decide whether or not the Virgin brand can be used. It’s this invisible, silver thread that keeps the Virgin empire together and coherent, he argued.
Handy chose this odd assortment of speakers to make a point. What makes businesses “tick” is changing in important but subtle ways. “We need a new type of organisation and a new style of management,” he said. The details of this new type and style will be crucial and depend absolutely on individual circumstances. Is this where the future of real differentiation – and therefore successful brand building – lies?