Leadership In The Economic Phase Change

By Steve Denning, Forbes Contributor

The New Killer Apps Chunka MuiAs Chunka Mui and Paul B. Carroll have written in their wonderful new book, The New Killer Apps, firms are now facing “a perfect storm of technological innovation… Incumbent companies will either do the re-imagining and lay claim to the markets of the future or they’ll be re-imagined out of existence.”

In the two prior segments of this book review, I’ve covered some of the key principles involved in coping with the economic phase change, including “think big”, “start small”, “learn fast”, “embrace your doomsday scenario” and “redefine the finance function.” These are major changes. What sort of leadership is needed to make them happen?

A key principle of success is:

The top embodies a belief in the new way

Although the new management can occur in pockets at lower levels of the organization at any time, sustainable organization-wide change can only occur when the powers-that-be in the organization have arrived at a deep-seated belief that the organization needs to be run in a fundamentally different way and they embody this belief consistently in their actions.

This is not an eight-step change initiative of the kind described by Professor John Kotter, in which the organization begins with a sense of urgency driven by some kind of crisis, assembles a team of senior people to formulate a vision to deal with the crisis, articulates and communicates relevant strategies, implements them so as to achieve quick wins, and persists until the crisis is resolved and the strategies become standard organizational practice.  Such change initiatives may succeed in resolving crises but they rarely, if ever, achieve deep organizational culture change. Even when successful, they operate within the existing organizational culture. At best, they adjust aspects of the organizational culture, rather than transforming it.

The kind of management required by the Creative Economy emerges when the leadership realizes that the pressing problems, challenges and crises of the organization are merely symptoms, not the underlying disease. They come to see that the firm needs to be run in the fundamentally different way to fit today’s marketplace and they embody this different way of operating in their behavior over a sustained period of time. It is a “bet-the-company”, “bet-your-career” and “non-negotiable” kind of commitment. Once the Rubicon is crossed, there is no going back. If the firm loses courage in midstream and reverses course back to the traditional management mode, the executives who led the charge for change will have to leave, as Ron Johnson discovered at J.C.Penney.

The three modalities of change management that have succeeded most often are:

  • Continuation by the founder: The management suited for the Creative Economy is similar to what is found in many successful startups, albeit on a smaller scale. Usually, the startup culture shifts to some form of hierarchical bureaucracy as the firm grows, as the challenges of coordination at scale appear and as consultants advocate the introduction of traditional management practices. In some cases, however, the founders of the organization continue in the Creative Economy mode, even as the firm becomes large, as at Amazon [AMZN], Whole Foods Markets [WRM] or Zara [BMAD: ITX].
  • A new chief executive who is already deeply committed to the transition: The transition may happen when a new chief executive arrives with a fresh concept of what it will take for the organization to prosper, and succeeds for the most part in implementing it. Examples include Apple [AAPL] in 1997, Burberry [BRBY (LON)]in 2006, or HCL Technologies [HCLTECH] in 2005. In a very different context, the success of Robert McNamara in changing the organizational culture of the World Bank from 1968 to 1981 offers useful lessons in introducing culture change, even though the culture he introduced was the wrong kind—the quintessence of hierarchical bureaucracy: having a clear vision of the new direction, consistently embodying the vision in his actions, and continuously measuring progress towards implementing the vision over a period of more than a decade, indelibly changed the culture.
  • A decision by the existing leadership to support the transition: The transition has also occurred, although less frequently, when the leadership of the organization comes to a conclusion that the firm can only prosper if it changes the way in which it gets work done, as happened at Salesforce [CRM] in 2006.

Navigation paths that typically fail

There are a number of ways of approaching the culture change that typically fail.

  • The transition won’t occur as a response to a crisis: Solving the crisis inevitably takes precedence over resolving the deeper issues of culture change.
  • The transition won’t spread from a successful pilot program. Successful pilot programs only spread of their own accord if they are in sync with the existing culture. Because the new management entails a change in culture, the existing culture will resist. The more successful the pilot is, the more of a threat of a threat to the existing culture it becomes.
  • The transition won’t occur as a “management fix”. The goal is not just to “fix” management but to radically repurpose it. (The most dramatic example of this was at Apple in 1997 where Steve Jobs simply abolished the positions of thousands of middle management positions: in the new mode of operating in which everyone in the organization is focused on delivering value for customers, there was no longer any need to shuffle papers up and down the hierarchy in search of management approvals. When the transition occurs, it is perceived, not as a better way, but a different way, to run the firm.)
  • The transition won’t succeed as “a new business process”: When firms adopt the change as a new business process, the result is that people don’t embrace the change in values. A training course can get people pumped up, but they become discouraged when they return from training and are faced with the same siloed hierarchical bureaucracy. As software developer, Mike Cottmeyer, has noted: “When firms reorganize around teams, but still focus on delivering with big plans, heavy processes, top-down command-and-control leadership, the potential gains are constrained. Adoption of practices and transformation are not the same thing. Adoption of practices is the doing side of the equation. Transformation has to do with the being side of the equation.”

Other principles that need to be kept in mind include:

Learn from the leaders

In its transition in 2006, Salesforce built on what had been learned in other organizations, but also adapted the change methodology to its own context. A document was prepared describing the new process, its benefits, and why the firm was moving away from the old process. The team held forty-five one-hour meetings with key people from all levels in the organization. Feedback from these meetings was incorporated into the document after each meeting, molding the design of the new process and creating broad organizational support for change. This open communication feedback loop allowed a large number of people to participate in the design of the new process and engage actively in the solution.

One team in the organization had already successfully run a high-visibility project using iterative methods. This experience helped when they introduced it to all the other teams. Focusing on the principles rather than the mechanics also helped people understand why the firm was moving to a new way of working. When teams ran into a problem, they could refer back to the principles and adjust anything they thought did not correlate with the principles.

Banish defunct management slogans

In practice, so long as the intellectual baggage of traditional management is still pervasive, it is difficult to effectively communicate and implement the change. As a result, time and effort must be spent on demolishing obsolete slogans, including:

  • “The raison d’être of the firm is to reduce transaction costs.”
  • “The goal of the firm is to maximize shareholder value.”
  • “The firm has a single objective financial function to which all decisions must be subordinated.”
  • “The role of managers is to control individuals.”
  • “Achieving efficiencies of scale is the way to success.”
  • “Bureaucracy is only way to coordinate at scale efficiently”
  • “Efficiency and predictability are the values that make a firm great”
  • “The job of a manager is to tell people what to do.”

Even very smart, highly educated executives still hold these obsolete views as fundamental assumptions. So long as managers–or consultants–are wandering around the organization with these ideas engraved in their brains and unthinkingly repeating them, the transition to the Creative Economy will be difficult.

Don’t micromanage the change

The new management implies a shift in the traditional role of managers from controllers of individuals to enablers of diverse self-organizing teams working in short iterations. It involves creating the space where those doing the work have the autonomy to apply their full talents and creativity to producing a product or service that will delight the customer. In effect, the customer becomes the boss. For many managers and workers, these are significant changes. If the shift itself is imposed from above in some peremptory eight-step program, there is a considerable risk that the new approach will be misinterpreted as a continuation of top-down command-and-control management.

By contrast, the implementation at Salesforce in 2006 modeled the new management philosophy of direction-setting and enablement, rather than detailed control. The change was led by a cross-functional team that was dedicated to making the change happened. This team used the new methodology for its own work. It held meetings in a public space where everyone could see what was going on. This enhanced accessibility, transparency and shared ownership of the transition. They also brought in industry experts and other companies that had adopted similar techniques. They created a global schedule for the entire process, provided coaching and guidance, identified and removed systemic impediments to change, monitored success and evangelized the new way of working throughout the organization.

Key features of the change included a focus on team output rather than individual productivity and cross-functional teams that met daily. All teams used an iterative process with a common vocabulary and a prioritized work programs for each iteration. The result was a new release of software every thirty days.

Don’t skimp on training and coaching

Studies show that the provision of coaches has a high payoff in terms of team productivity. When the very future of the organization depends on success, skimping on coaching can be a highly counterproductive form of economizing.

Salesforce put emphasis on providing the needed training and coaching. The process started by sending a large group of people, initially program and functional managers,  to training and buying training books for all staff. Three key members from the cross-functional team developed a consolidated presentation and training deck that included concepts from the current methodology. Two-hour training sessions were held for every team.  In addition, training was given to the proxy client representatives who would be setting priorities as “product owners.” They also created an internal, wiki-based Web site as a reference for team members as they made the transition to the new methodology and for information about the change process.


The experience of Robert McNamara at The World Bank in successfully achieving culture change is instructive from 1968-1981. McNamara introduced a system of measuring outputs of the organization and used the system as the basis for decision-making. The result was a lasting change in the organizational culture, even if in retrospect it can be seen that the culture he introduced was the wrong culture: hierarchical bureaucracy.

Establishing the culture change involved in managing in the creative economy over the long haul will entail developing and consistently using a measurement system for all important decisions in the firm. In effect, institutional measurement system needs to be put in place that reflects “profitably adding value to customers” as the guiding principle.

Read the first two part of this review:

Part 1: Navigating The Phase Change To The Creative Economy

Part 2: Economic Phase Change: Kill All The Finance Guys?

And read also:

The Phase Change to the Creative Economy

Leadership in the three-speed economy

The five big surprises of radical management


Steve Denning’s most recent book is: The Leader’s Guide to Radical Management (Jossey-Bass, 2010).

Follow Steve Denning on Twitter @stevedenning

Read Original Post from Forbes Leadership


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