Creating a Competitive Strategic Advantage
— By Russell L. Ackoff, chairman of the Institute for Interactive Management,
and Professor Emeritus, Wharton School, University of Pennsylvania.
Editor’s note: Following are excerpts about five kinds of changes required for an organization to remain in a leadership position in the new century from Dr. Ackoff’s article in the Journal of Innovative Management. A link to the full article (pdf), is found at the end.
Change 1: Interactive Planning
The first change concerns the prevailing concept of planning. The principal way of planning employed in the United States is predict and prepare. It begins by forecasting the future and then, given that forecast, preparing a vision of where the planners would like to be in five or ten years. Their plan then describes the path they hope to take from here to there to achieve fulfillment of the vision. Most plans produced this way are never completely implemented. Something happens that was not anticipated, and it throws the plans out of whack. In a rapidly changing environment of increasing complexity, forecasts deteriorate rapidly. Therefore, planning based on forecasting is unlikely to be effective. We have to deal with the future in some other way and reconceptualize the planning process.
Using the conventional mode of planning, the planner stands in the present, predicts the future, and then sets objectives in the form of a vision that takes the plan from where s/he is to where s/he wants to be. An idealized redesign of a system is a design that starts with the assumption that the system to be planned for has been destroyed. It no longer exists, but its environment remains as is. The planners then decide what features they would include if they could have whatever they wanted, constrained by just three requirements. First, the design must be technologically feasible, no science fiction; second, it must be able to survive in the current environment but need not be implementable in it; and third, it should be capable of learning and being improved over time from within and without. When the design is completed, the designers should determine the closest approximation to that design that can be attained. Designers are almost always surprised to see how close to their ideal they can actually get. Planning to get there is the realization phase of planning.
When you stand where you are and look out to where you want to be, you see all kinds of obstructions. But when you stand where you want to be and look backward, you don’t see the same obstructions—for a very important reason. The principal obstruction between where we are and where we want to be is always us. But we see obstructions differently; we attribute them to the environment, the law, the boss—usually to something over which we think we have no control. But when we stand where we want to be and look backward, it becomes apparent that we are the obstruction; what appears to be an obstruction is at most a hurdle that can be jumped over or averted.
Change 2: Democratizing Organizations.
The second necessary change for an organization to compete effectively in today’s competitive environment involves the nature of management and derives from a series of considerations. We have a habit of identifying problems by the discipline of the person who formulates them. For instance, if a marketing man sees a deficiency in sales, he says, “Uh-oh, I’ve got a marketing problem.” But in over 90% of the cases I’ve ever been involved with, problems are best solved someplace other than where they are recognized. But we don’t manage organizations that way. Instead, we manage them within disciplinary silos—production, marketing, finance, personnel, and so on—as though problems fall into those categories, but they don’t. Problems should not be viewed as the property of any part of a system, but of the system as a whole. Therefore, all problems should be viewed from a variety of disciplinary perspectives to find the best way of treating them.
Another consideration that the second necessary change derives from is what has happened to the educational level of the work force. In 1900, the average educational level of the American worker was low—grade school. Many workers were immigrants who at best were barely literate. By World War I, because of compulsory public education, the average level rose to about eighth grade. Today, most workers have had some or a great deal of college. We have a highly educated work force, but we continue to manage it exactly the same way we managed the illiterate, ignorant work force of yesterday.
The great challenge before management is to determine how to use what people know more effectively—how to manage knowledge, understanding, and wisdom. This requires a different kind of management. Of relevance here is the tremendous difference between management’s exercise of authority, which is power over, and its ability to influence, which is power to.
An organization that contains educated people cannot be run effectively if it is run autocratically. If you try to build a house in New York and tell the carpenters how to do the framing, or the electricians how to wire it, they’ll laugh at you. However, if you’re working with a group of aborigines in New Guinea and want to build a house, you’d better be prepared to tell them how to do it because they don’t know how. You should not manage people who know how to do their job better than you do in the same way you manage people who don’t. But most managers do.
In sum, the second fundamental change required to attain or retain leadership in the new century is to democratize our organizations. How can we convert autocratically managed organizations, particularly enterprises, into ones that are democratically managed? Designs for doing this—called democratic hierarchies, or circular organizations—are available but are seldom used as yet.
Change 3: Using an internal market economy.
We live in a nation that believes in the free market at the national level, but most of our organizations within it operate with the same kind of economy that the Soviet Union had before its dissolution. When I point this out to a group of executives, their usual response is, “Oh, come on. How do you explain all the successful corporations? Look at them.”
I think most executives have no idea of how badly corporations are managed and organized. I once read that 23 new corporations must be started each year to produce one that will survive that year. The average life of an American corporation is only about 20 years. Over 50% of the corporations listed in the Fortune 500 just 25 years ago don’t exist anymore. Today, the Dow Index contains only one of its original corporations. All the others have disappeared. The fact is that we are not very good at organizing and managing enterprises.
The third requirement for attaining or retaining leadership in the new century is for firms to adopt an internal market economy and regulate it to serve the interests of the whole as well as the parts. With this type of economy, it is possible to override decisions made by the parts, but only when it is judged that the whole is improved by doing so, and that overall performance is improved as well. One of the most important systems principles is never to improve performance of a part unless it improves the whole. When you improve the performance of the parts of a system taken separately, it is very unlikely that the performance of the system as a whole will be improved.
Therefore, it is critical that the focus of management must not be on the way the parts perform taken separately, but on how they perform interactively, or together. An internal market economy facilitates such management.
Change 4: Organizing Multi-dimensionally.
The fourth change required for an organization to attain or retain leadership in the new century concerns the way corporations are organized. Consider what an organization is.
First, it is a system in which there is a functional division of labor. Second…its divided labor must be coordinated. If there are a large number of coordinators, they, too, must be coordinated; hierarchy is the consequence. So an organization consists of functionally divided labor and its coordination. The horizontal dimension in a typical organization chart shows the division of labor. The vertical dimension shows the distribution of authority and how labor is coordinated. The critical point here is that there are only three ways of dividing labor…by inputs, outputs, and users.
An input-defined unit of an organization is a unit whose output is primarily or exclusively consumed within the organization. It is normally defined functionally. Examples are accounting, data processing, buildings and grounds, computing, human resources, and research and development. An output-defined unit is a unit whose output is primarily consumed externally. The Chevrolet, Pontiac, Buick, and Cadillac divisions of GMC are output-defined units because their products go outside the corporation. User-defined units are ones based on classes of those who ultimately use and consume the product or service provided; for example, a corporation might have North American, Latin American, European, Asian, and African divisions. Implicit in the way every organization is structured is an ordering of the importance of these three criteria. Starting at the top of an organization, the CEO, and going down to the next level, the question arises: How should the vice presidential level be organized? By function, by product, by market, or some combination of these? The division of labor at this level identifies the criterion or criteria that are judged to be the most important. If a company is going global, for example, it is likely to organize by markets defined geographically. If an organization produces several products and sells them to a homogeneous market, it probably organizes by products, often as strategic business units. Companies that produce a single type of product are likely to organize functionally. In every organization, you will find some ordering of these three criteria: input, output, and user.
All major reorganizations consist of reordering these three criteria. When the reason for reorganizing is recognized, it becomes possible to conceptualize an organization in a completely new way, doing away with the manner in which we usually represent an organization’s structure on a flat surface.
How many dimensions are there on a piece of paper? Two: up-down, which, on an organizational chart, shows authority, and across, which shows responsibility. Our entire theory of organization derives from the fact that we insist on representing organizations on a two-dimensional surface and ignoring the way the parts interact. But is there anything about the nature of an organization that requires it to have only two dimensions?
When this requirement is dropped, we can obtain a Multidimensional Organization. One dimension is the input units, the second dimension is the output units, and the third is the market, or user, units. And these three types of units each occur at every level of the organization. This cannot be represented in a conventional tree-like diagram; it requires a three-dimensional diagram—like a cube—that makes it possible to show all the possible internal interactions.
Now consider how such an organization adapts to change. Its structure need not be changed. Adaptation consists of a reallocation of resources to units. In this way, an emphasis can be placed on the particular dimension that the organization wants most to develop: function, product or service, or markets and marketing. Furthermore, units of each type can easily be added or subtracted without changing the structure. This design has many variations, but the fundamental idea is that at each level of an organization all three types of units appear. If an internal market economy and democratization are combined with a multidimensional structure, one obtains an incredibly powerful organiz
ation. The effect is multiplicative, not merely additive.
Change 5: A Learning and Adaption Support System.
There are two kinds of mistakes. One occurs when you do something you shouldn’t have done. This is called an error of commission. The other occurs when you don’t do something you should have done. This is an error of omission. Errors of omission are more important than errors of commission.
Although errors of omission are more important than errors of commission, the type of accounting that pervades in the Western world makes note of only errors of commission. When a manager does something wrong, it will eventually appear in the books, however hidden or disguised it may be. But if a manager doesn’t do something s/he should have done, it never appears in the books. Suppose you are a member of an organization that holds making a mistake against you, and in which the only mistakes that are recorded are errors of commission. Then all you have to worry about is not doing something you shouldn’t have done. In such an organization, what is the best strategy for a manager who wants to maintain his or her personal security? Don’t do anything. This is the reason why managers and organizations resist change.
If organizations are to adapt to change rapidly and effectively, errors of both types must be recognized and identified, their causes must be determined, and they must be corrected. Only by so doing can the likelihood that errors will be repeated be reduced. Furthermore, every time an effort is made to correct an error and it fails—that is, a second-order error occurs—and we correct this effort to correct, we increase our ability to learn: we learn how to learn.
Every decision is made for only one of two reasons. Either we do it to make something happen that we think will not otherwise happen, or we do it to prevent something from happening that we think will otherwise happen. Whenever the decision is made to do something or not to do something, the expectation and the assumptions on which the expectation is based should be made explicit. For example, if you want to increase advertising, record the increase in sales you expect and when you expect it.
All expectations are based on assumptions that should be made explicit. For example, if you increase advertising, you undoubtedly assume that certain responses from competitors will or will not occur. Then the decision should be monitored to determine whether the expectations are realized and the assumptions are correct. Whenever what actually happens deviates from an assumption or expectation, a correction in the decision should be made. When this is done, learning or adaptation takes place. These are the elements of a learning and adaptation support system. There needs to be a high tolerance for mistakes, but no tolerance for failure to learn from them. This is the only way one can learn.
Summary
To conclude, here is a quick summary of the five kinds of changes that are required for an organization to be an effective competitor in the new century:
1. Utilizing a different kind of planning, called interactive planning, in which you plan backward from where you ideally want to be to where you are.
2. Democratizing the organization so people can use all they know and develop a new capacity for doing things.
3. Using an internal market economy to facilitate the management of interactions and to maximize freedom of choice among the parts.
4. Organizing multidimensionally to create a type of organization that doesn’t require continuous reorganization; making it possible to adapt to change by reallocation of resources.
5. Using a learning and adaptation support system that identifies errors, diagnoses and corrects them, and learns how to learn from errors more effectively.
Click to get the full article (pdf).