The changes that swept through the business world in the 1980s and 1990s opened up a wide range of new organizational possibilities. This section examines some of these possibilities, from both strategic and organizational perspectives.
We start with a subsection focused on how strategy has evolved since the days of the traditional hierarchical firm. This subsection—Inventing New Strategies— addresses new approaches to achieving competitive advantage that have emerged with the reconfiguring of organizations in recent years.
Strategy in the heyday of the multidivisional corporation was about turning industrial organization economics—which was born out of the trust-busting ethos of the early twentieth century—on its head. Corporate strategists used the principles of industrial organization to find ways to extract, and maintain, monopoly rents. Thus the main questions were:What is the structure of our industry? and How is our firm positioned? The primary strategic levers were entry and exit, and once a firm decided to compete, the primary choice was between striving for low cost or differentiating its products (Ghemawat 2002).
As the post-World War II corporate order came under pressure in the 1980s and 1990s, there was growing recognition that old forms of structural advantage were increasingly less sustainable in volatile sectors (Coyne and Subramanian 1996). New strategic opportunities were emerging, which involved not so much positioning an individual firm as a stand-alone actor, but instead, exploiting ties between firms. Of particular importance were ties with both customers and suppliers. Each relationship implied an alternative to the old cost vs. product differentiation tradeoff. Both articles in the first subsection address the strategic opportunities afforded by the newly emerging business framework.
In the first article, Arnoldo Hax and Dean Wilde contend that in addition to the old cost/differentiation choice, which they term competition based on product economics, today's connected business environment now offers two additional strategic opportunities. One is competition based on customer economics, in which a firm solves a customer's problem with its product or service offering. The other is competition based on system economics, in which a firm locks in a technical standard and attracts complementors to develop products based on it (see Hax & Wilde 2001).
Competing based on customer economics requires firms to have close ties with customers, so they can develop offerings that solve customer problems. The first mass-produced products often represented only a very gross fit with customer preferences, but in that era, even a rough approximation with actual needs led to an overall increase in consumer utility because of the far lower cost. Product differentiation, which came later, represented an incremental move beyond mass standardization and provided a better fit between product offering and customer preferences. In recent years, several new approaches have enabled a far closer fit between customer needs and the product characteristics. One is mass customization, enabled by the use of product platforms and modular designs. The other is providing solutions, combinations of products and services tailored to meet customers' specific needs. Both these approaches can be seen as a kind of super product differentiation. But the differences between them and traditional product differentiation—a focus on individual customers, as opposed to broad customer segments; rich communications links to enable direct customer-firm interaction vs. one-tomany mass marketing; close collaboration with outside firms that provide subsystems of the solution—are great enough that the new approaches are truly different in kind.
Competing based on system economics requires that a firm be able to manage its product innovation effectively enough to become a leader whose technical standard is widely accepted in the industry. It also requires that the firm encourage a myriad of other companies within its industry ecosystem to develop complementary products based on its standard.
Hax and Wilde lay out the firm and industry characteristics required for each of the three competitive stances—product, customer and system-based competition— to be viable. They then go on to show how increasingly close relationships—what they call "bonding"—are required as a firm moves from competing on the basis of a standardized product and works toward achieving customer lock-in; and then moves further toward locking in a technology standard, which requires close interconnections with both customers and the suppliers and partners who produce complementary products. They end by noting processes and priorities that allow execution of the three strategies and the performance metrics appropriate to each.
Charles Fine's article is a distillation of his extensive research on supply chains in a broad range of industries (see Fine 1999). The article starts by introducing the concept of clockspeed—the pace of key industry variables like product development cycle time and the life-span of factory equipment. Fine has compared fast clockspeed industries—Internet services, computers, media—to sectors that operate at a slower pace—for instance, autos and aircraft. He found that all industries exhibit similar dynamics; in fast clockspeed sectors, things just play out more quickly. The fast clockspeed industries—what Fine calls industrial fruit flies—thus have lessons to provide to more leisurely sectors. And as the pace of business overall picks up, these lessons must be absorbed increasingly quickly.
Fine found one key dynamic that is important in many sectors: a tendency for industries to oscillate between vertical structures—where an integrated product designed and produced by a single vendor dominates (for example, IBM in the 1960s)—and horizontal structures—where suppliers of modular components tend to dominate (for example, the personal computer industry in the 1980s). This oscillation creates increasing opportunity—and risk—for firms in both the single vendor and component supplier positions. Among the strategic implications are that single vendors who dominate when a vertical structure prevails must beware of decisions that allow suppliers to supplant their position—as IBM allowed Microsoft and Intel to do in the personal computer industry.
Fine emphasizes that in today's volatile business environment, there is no such thing as lasting competitive advantage. Given this reality, he sees the critical core competency to be an ability to incorporate supply chain considerations in the innovation process. He calls this capacity three-dimensional concurrent engineering: the ability to take into account, at the same time, design of the product, the manufacturing process, and the supply chain.
Organizational innovation—the ability to invent, and reinvent, organizations on a real-time, ongoing basis—will be an important characteristic of successful firms in the twenty-first century. This will not simply be a matter of traditional organizational redesign as known in the age of the hierarchical corporation.
When considering twenty-first century organizational invention, it is useful to recall the themes outlined in this volume's first section on how the business world is changing—volatility and uncertainty in the environment, organizational decentralization, and IT-enabled connectivity both inside and between firms. The five articles in the next sub-section—Inventing New Organizations—address how these factors will shape the work of inventing twenty-first century organizations.
The article on the Process Handbook by Malone et al. presents a way of thinking—and a software tool—that can enable organizational invention in an everchanging environment. A world of fluid firm boundaries and rapid change will require continual organizational reconfiguration, with supplier, partner, and customer relationships constantly being adjusted. It will also require an ability to reshape internal processes on an ongoing basis. To do this effectively involves going beyond static concepts like organization charts and headcounts, and instead adopting a more dynamic view of modular, interchangeable processes. As the chapter puts it, the Process Handbook views organizations not by looking at the nouns—the organizational units or individuals within them—but by looking at the verbs—the living processes that are enacted on an ongoing basis within those units by those people. This means seeing organizations—and entire value chains—not as squares on the chart but as a series of interconnected, mix-and-match processes that can be taken apart and reassembled in a variety of unexpected ways.
By mapping processes and providing a framework for understanding their deep structure, the Process Handbook gives organizational inventors new capabilities in undertaking their work. If they are revamping internal processes, they can get ideas for alternative approaches—in some cases from surprising places—by searching in the handbook's repository of business knowledge. If they are piecing together processes across firms, the handbook can provide insight into how those processes might be combined. Widespread use of such a tool could ultimately allow twentyfirst century business people to rapidly reconfigure inter-connectable processes, the way they cut and paste information between applications on their computer desktops today (see Malone, Crowston, and Herman 2003).
The next chapter, by Nina Krushwitz and George Roth, shows an early version of this kind of organizational invention in action. It is an excerpt from a learning history that documented one of the 21st Century Initiative's special projects. The project was a joint effort between the Sloan School's Process Handbook team; the consulting firm, A. T. Kearney, a major sponsor of the Initiative; and one of A. T. Kearney's clients, a large financial services firm. The project involved the redesign of some hiring processes at the financial services firm. The article describes how the special project diverged from traditional process re-engineering methods. Using the handbook as a process mapping and creativity tool led the team to take a novel approach. Krushwitz and Roth show how the university-industry collaboration generated a new set of ideas about how to manage the hiring process and also developed a general navigational tool, the Process Compass, that allows users to navigate conceptually through a large database of business processes.
The next chapter, by Wanda Orlikowski and Debra Hofman, is based on fieldwork at the help desk of a software firm and addresses the subject of organizational change in decentralized, information-rich settings. The twenty-first century can be expected to feature extended enterprises where numerous interconnected entities collaborate—both inside and across corporate boundaries—with each organizational node possessing significant autonomy. This sort of structure can't be run from the top by command-and-control fiat; it instead requires giving local actors the information they need and trusting them to make decisions based on their better view from the front lines. It also requires an experimental approach, an ability to run trials and then quickly read results and adapt, with quick feedback loops, an approach the nimblest players in the high tech sector tout as "do it, fix it." A hallmark of the twenty-first century organization thus will be an ability to gather feedback and adjust course. At the same time, the information accessible to local actors in real time will lead them to launch novel, unanticipated initiatives. Twenty-first century managers must thus be able to take in stride—even take advantage of—the unexpected. As Orlikowski and Hofman put it, they need to be adept at working with "improvisational change."
The chapter on "X-teams" by Deborah Ancona, Henrik Bresman, and Katrin Kaeufer, is based on recent research at a number of large firms and describes the characteristics of successful teams operating in complex, uncertain settings. The team has emerged as a key unit of the new organizational order, supplanting the bureaucratic pyramid as the archtetypal work group. Though being able to function well internally is a prerequisite for effectiveness, Ancona, Bresman, and Kauefer show that another key characteristic of successful teams is they are highly connected—to constituencies inside their own firm and to important outside actors— partners, suppliers, and customers—as well. This external orientation allows X-teams to be more in touch with cues from the environment and to adjust rapidly to change—shifts in customer preferences, emerging technical developments, and reorientation of their own company's strategic priorities.
To achieve a combination of team focus, while still maintaining wide external ties, X-teams have evolved a complex structure. They have several types of members: a core group, the ones with "skin in the game", who assume leadership roles; operational members who do the work; and others who comprise an "outer net", who bring key expertise or resources and typically join on a part-time basis. Membership is also fluid, with people rotating in and out over the lifetime of the team. Xteams rely on a set of broadly agreed-upon tools and practices—meetings, formal decision-making procedures, deadlines and schedules—to coordinate their internal activity. The larger cross-team organizational context is important as well. It serves to establish and reinforce internal team practices and provides a broad information infrastructure and learning culture that allows the culling of "lessons learned" from past stumbles—and successes.
X-teams represent one vision of the kind of organizations that will meet the needs of the volatile 21st century environment—small groups, with fluid membership and so able to expand or contract as needed, operating autonomously to meet a particular objective, but heavily linked to external groups, and making use of some standardized practices within a broader cultural context. X-teams, as described in this chapter, are a product of large, decentralized firms; but teams exhibiting similar characteristics could also operate in other contexts—in collaborations among partners in supply chains or among e-lancers working together on a project basis over the Internet.
A strong technology backbone will be a key enabler of twenty-first century business, as shown in the next article on the information system (IS) organization, by John Rockart, Michael Earl, and Jeanne Ross. Based on a study done in the mid1990s, this chapter contains lessons that are just as applicable today. Among other things, Rockart, Earl, and Ross describe one of the promising alternatives for organizing in a decentralized environment: a federal structure. In a federal IS organization, a central group runs the common infrastructure and provides a standardized set of desktop functions to everyone in the firm. Local IS groups, housed inside operational units and working closely with them, develop the specialized IT functionality—usually in the form of custom-written software—to meet particular business needs.
A federal structure allows achievement of scale economies and global connectivity—through low-cost operation of the common infrastructure—and a large measure of autonomy in meeting business-specific IS needs, through the workings of the local IS units. It allows organizations to operate in a highly decentralized manner, granting decision-making authority to the front lines, while at the same time providing communication links that allow for cross-unit information sharing and collaboration.
The five articles in this subsection on Inventing New Organizations present not so much descriptions of how twenty-first century organizations are likely to look, but rather, a set of perspectives and tools that will allow the organizational inventors of the future to go about their work. The concepts presented in the articles— mix-and-match processes; improvisational change; focused, highly connected teams operating within a supportive institutional framework; networked, flexible information systems—are components from which next generation organizations will be built.
Coyne, Kevin P. and Somu Subramaniam. 1996. Bringing discipline to strategy. McKinsey Quarterly (4): 14–25.
Fine, Charles H. 1999. Clockspeed: Winning Industry Control in the Age of Temporary Advantage. Reading, Mass.: Perseus Books.
Ghemawat, Pankaj. 2002. Competition and Business Strategy in Historical Perspective. Business History Review 76 (Spring): 37–74.
Hax, Arnoldo C., and DeanL. Wilde. 2001. The Delta Project: Discovering New Sources of Profitability in a Networked Economy. New York: St. Martins Press.
Malone, Thomas W., KevinG. Crowston, and GeorgeHerman. 2003. Toward a Global Repository for Organizing Business Knowledge: The MIT Process Handbook. Cambridge, Mass.: MIT Press.