Whatever happened to “the entrepreneurial society” that Peter Drucker forecast in 1985? Drucker had written in his insightful 1985 book, Innovation and Entrepreneurship, that in future work would transition from bureaucratic practices; management would focus on innovation and new opportunities, generating an entrepreneurial spirit throughout entire organizations; the whole of society itself would become entrepreneurial.
It was a brilliant vision, but now, some 31 years later, it hasn’t generally happened. Bureaucracy is still alive and well and thriving in a big organization near you. Why?
Last week, the world’s leading general management conference—the annual Global Peter Drucker Forum—met in Vienna to discuss the situation. Many speakers lamented the fact that many, if not most, workers continue to plod on as wage slaves, their talents locked in bureaucratic silos or eking out a precarious existence in the emerging gig economy, while big organizations spurn innovation and increasingly focus on exploiting existing business models. Firms are stuck on the treadmill of producing quarterly returns, often to be achieved through financial engineering, rather than exploring new opportunities through innovation.
Peter Drucker: Image Wikipedia Creative Commons
The Decline Of Innovation And Entrepreneurship
Instead of a golden age of entrepreneurship, most speakers recognized that there is widespread evidence of a global decline of innovation:
• The rate of new business formation in the USA has fallen by 50% since 1978. Today, there are more deaths of businesses than there are new business births. (Jeffrey Pfeffer, Professor of Organizational Behavior at the Stanford Graduate School of Business).
• The search for certainty through data and analysis has fostered exploitation at the expense of exploration. (Roger Martin, Director of the Martin Prosperity Institute)
• Only 20% of R&D has any value, because most big firms lack a coherent approach to innovation. (Curt Carlson, former CEO of SRI).
• In big organizations, being a promoter of innovation is often career suicide. (Alex Osterwalder, Co-founder of Strategyzer)
• The rates of return on assets and on invested capital continue their precipitous five-decade decline. Only one in five workers are fully engaged in his or her work and even fewer are truly passionate. (John Hagel, Founder and Chairman of the Deloitte Center for the Edge).
• Bureaucracy is still rampant, with a cost to the economy in the trillions of dollars (Gary Hamel)
• Existing firms are genetically unable to cope with disruptive innovation; the only solution is to set up a new organization (Clayton Christensen, Professor of Business Administration, Harvard Business School).
• Even the vaunted “hidden champions” of the German Mittelstand are having difficulty in dealing with fast-moving digitization (Gisbert Rühl, CEO, Klöckner & Co)
• In publicly owned firms, a focus on shareholder value is creating a focus on short-term at the expense of value creation in the medium term and destroying real shareholder value (Fredmund Malik, Founder and Chairman of the Malik Institute for Complexity Management).
Exploitation Vs. Exploration
Why hasn’t Peter Drucker’s entrepreneurial society materialized? Roger Martin suggested that established organizations face conflicting forces. Under pressure from capital markets, firms have to care about reliability: producing a consistent replicable outcome. (see Figure 1: 1) Increasingly, organizations have been dominated by the pursuit of exploitation, as capital markets care more about meeting quarterly targets than about what a firm is actually producing. This phenomenon is relatively recent: quarterly guidance to the stock market only became legal in the USA in 1996.
The other dimension is exploration and the value of validity—the production of new outcomes that society actually wants (Figure 1:2) This is the domain where entrepreneurial organizations produce value for society in the long term.
Figure 1: Images by Steve Denning based in part on a presentation by Roger Martin
Exploitation and exploration, said Martin, tend to be in conflict. Entrepreneurs are obsessed with validity—producing something that society wants and traditionally have cared less about reliability. As organizations in the public and private sector tilt more towards exploitation, there is a bigger and bigger vacuum in terms of organizations pursuing what we as a society actually want. As a result, entrepreneurs, including social entrepreneurs, need to play a bigger role, as large organizations retreat into exploitation of existing business models.
What we need, said Martin, is a society that is balanced between reliability and validity. In principle, established organizations ought to be acting more entrepreneurially and there are some that are doing that. But there is now an inexorable shift towards reliability and exploitation. The need for entrepreneurs of all sorts to emerge is ever more urgent. (Figure 1:3)
Why The Tilt Towards Reliability?
Why are established organizations listing towards reliability and exploitation? Perhaps the clearest explanation came from Nicholas Colin, Associate Professor in business strategy, Université Paris-Dauphine, who pointed to the shifting power relationships between workers, executives, shareholders and customers.
In the 1960s, Colin explained, workers were in a strong position. But in the 1970s, the situation changed. Capital was both more mobile and more concentrated and could now exert pressure on corporations and obtain higher returns over shorter periods.
From the 1980s onwards, shareholders regained that upper hand as they sealed an alliance with stock options-incentivized executives who were now determined to maximize shareholder value as reflected in the current stock price. The losers of this round were the workers, whose unions were losing their clout. Capital flowed to the corporations that best succeeded in lowering costs and weakening the positions of employees, who had to accept lower wages. Firms made reliable profits by extracting money from customers.
Today the situation, particularly in the digital economy, is changing again. Customers have emerged as the dominant corporate party. Firms like Amazon are valued highly by the stock market because they are delivering continuous new value, even though they do not produce reliable profits in the short-term. Now customers have become the strongest and most active party, as a result of globalization, deregulation and technology. Where firms truly provide what customers need, such as Amazon, they are richly rewarded by the stock market. It is the firms that focus solely on reliability and exploiting existing business models, with no coherent path to growth through innovation, that are kept by the stock market on the treadmill of delivering reliable quarterly returns.
What To Do?
Colin envisaged two broad scenarios. One is a downward spiral in which customers will get ever cheaper products and services, but there will be fewer well-paid employees in their role as customers to purchase them.
A second scenario, more positive but perhaps less plausible, is that customers and employees might form an alliance in which employees would provide more value to customers, through a rebirth of the union movement, and possibly a stronger role played by social entrepreneurs.
Innovate The Future
A third possibility is for established firms to adopt a more consistent and coherent approach towards innovation, as suggested by Curt Carlson, the former CEO of SRI, which generated a continuous flow of high-value innovations, such as Apple’s Siri, through the use of an “innovation playbook.”
The goal here to generate clear and simple high-value propositions for innovation. The playbook, known as NABC, begins with arriving at a thorough understanding of the customer’s Need, before any significant development work is done. This is followed by clarifying the Approach to meet that need, spelling out the Benefits that would flow and then figuring out how this compares with what Competitors can provide. Although we now know, says Carlson, how to implement consistent innovation, many large organizations are slow to demonstrate the leadership needed to change their legacy cultures and enable innovation to happen.
Instead, in a world where the stock market is demanding certain returns, managers perceive that creating an organizational culture for innovation is too slow, too difficult and too risky. Rather than meet customers’ demands for innovation and new value, there is a tendency for established firms to stick to exploitation and lapse into financial engineering to cover up the shortfall in performance.
The Mittelstand Model
A fourth possibility was suggested in a session about the German Mittelstand companies, which are small and medium sized firms that focus on narrow market niches in manufacturing and achieve global excellence within the niche.
The remarkable emergence of these firms reflects a tradition of private ownership and long gestation periods needed to achieve global excellence. The current challenges faced by these firms in coping with the transition to digital are likely to be temporary, given their long track record of resilience. Yet the broader replicability of the Mittelstand model for other countries in the short term remains a question mark.
The "Age Of Agile"
A fifth possibility was sketched by Julian Birkinshaw (Professor of Strategy and Entrepreneurship at the London Business School). He suggested that some organizations are learning how to cope both with the pressure from the stock market for certain returns and with pressure from customers for more value by entering “the age of agile.” These organizations, he said, are leaving behind both “the industrial age” with its emphasis on efficiency through bureaucracy and “the information age” based on finding the right answer through planning and rational analysis.
In these organizations, a new kind of management is emerging, in which “adhocracies” emphasize searching out opportunities, finding solutions through rapid experimentation, and achieving agility through decisiveness. By drawing on the full talents of those doing the work, firms generate continuous new value for customers, thus creating a virtuous circle of value creation. When these firms demonstrate a coherent growth path, they are generously rewarded by the stock market. These emerging "adhocracies" fight complexity with simplicity, not more complexity.
Fighting Complexity With Simplicity
A session on “the entrepreneurial organization at scale” offered numerous examples of large organizations operating in accordance with Birkinshaw’s “age of agile.” In these organizations, even large and complex operations are being dealt with in an entrepreneurial fashion, by simplifying everything.
Four main elements are key to success in making the transition from bureaucracy to agile: (a) an obsession with delighting the customer; (b) descaling work, whereby big difficult problems are disaggregated into small batches and performed by small cross-functional autonomous teams, working iteratively in short cycles in a state of flow, with fast feedback from customers and end-users; (c) an enterprise-wide commitment to operating in this way and (d) systematically nurturing an agile culture. By fighting complexity with simplicity, the organization is able to keep a sharp focus on what is adding value to customers, eliminating what isn’t, and inspiring staff to contribute their very best talents.
In this world, the distinction between exploration and exploitation tends to blur and even dissolve. Those involved in exploitation are also continuously looking for ways to improve performance. Those involved in exploration and development are continuously seeking ways to deliver value to customers sooner, as shown in Figure 1:4.
The session suggested that in some ways, the “age of agile” is already here: it’s just very unevenly distributed.
Everyone An Entrepreneur
In the final session, moderator Andrew Hill of the Financial Times noted that in the course of the Forum, the conversation had moved a considerable way forward. At the outset, it seemed to be accepted that companies could be exploiters that are producing reliable results; these firms could leave it to others to become explorers and entrepreneurs. As the Forum proceeded, however, it had become steadily clearer that separating exploration and exploitation was problematic. In effect, didn’t everyone need to embrace an entrepreneurial mindset?
In a world of accelerating change and growing uncertainty, said John Hagel, even the largest companies need to reframe work. The ‘employee’ mindset — that is, the notion of just showing up to do a predefined set of tasks until leadership tells you otherwise — just isn’t cutting it anymore. The rates of return on assets and on invested capital has been in continuous decline. Financial engineering could only hide these shortfalls for so long.
What we need in the age of agile are entrepreneurs in every part of the organization, people who are relentlessly focused on identifying new opportunities to create even more value and are willing to assume the risks required to address those opportunities. In short, we will need to move from scalable efficiency to scalable learning, where everyone is driven by the need to learn faster and accelerate performance improvement.
A New Kind Of Leadership
This in turn requires a different kind of leadership. In the declining organizations of the employee society, focused on exploiting existing business models, the leader is someone who knows all the answers: no matter what the question, this leader has the answer.
By contrast, the strong leaders of the future are those who have the best and most powerful questions. They are willing to acknowledge that they don’t have the answer. They invite help. They are willing to express vulnerability and expose themselves to risk. If leaders are not willing to do that, why would anyone else do it?
Not everyone may be ready for or looking forward to the transition to the emerging world of entrepreneurship. Managers face a massive challenge in understanding the transition and transforming their legacy cultures. Employees may lack the skills or experience or will to make the transition. Society does not have in place mechanisms to facilitate the change or help those who are struggling. The education system, including business schools, is still too much focused on churning out dutiful employees rather than bold entrepreneurs. Capital markets, central banks and regulators still have to figure out what is going on. Yet change is coming, whether we are ready for it or not. The forces driving it are too big, too inexorable, to turn back.
And read also:
The Entrepreneurial Organization At Scale
The Economist Defends The World’s Dumbest Idea
How Corporate America Is Cannibalizing Itself
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Follow Steve Denning on Twitter at @stevedenning
