Firms of Endearment

The Shape of the Postmodern Corporation

My ear was glued to the radio as NPR’s Morning Edition carried an interview with Ori Brafman, co-author of The Starfish and the Spider.

Brafman was discussing organizational approaches that we found commonplace in companies presented in Firms of Endearment as exemplars of the stakeholder relationship management (SRM) business model. As soon as the interview was over, I rushed to my computer to order a copy of The Starfish and the Spider from Amazon.

Two days later I was deep in reading one of the more engaging business books I’ve read in awhile.

While the book is anything but political, it contains a persuasive argument why the war on terrorism cannot be won through armed conflict, nor for that matter, the war in Iraq. For similar reasons why that is so, General Motors and Ford are unlikely to survive much longer in their present form.

The world is now infected with terrorist cells that do not depend on a hierarchical organization to wreak havoc virtually anywhere on the planet they choose to. Calling armed conflict against these elusive autonomous cells of destruction a “war” distorts reality. Most people think of wars as open, armed conflict between nations or states headed by clearly identifiable leaders. As a nation, we’ve always operated on the premise that if you take out the leader you end the war.

That will not happen with the terrorist activity that plagues the world today. A hierarchically organized state, such as our own, cannot move nimbly enough to be everywhere a terrorist might be with his tool kit of destruction.

The hierarchical, heavily bureaucratized organizations GM and Ford have built for themselves cause them to lumber through the world of business enterprise like octogenarians trying to coax tired legs and stiff bones to move a little bit faster.

Brafman observes that starfish are eminently capable of surviving assault. Cut off an arm and it grows a new one. Meanwhile, the severed arm grows into a new starfish. In contrast, cut off a spider’s leg or two and it begins to hobble. Cut of its head and it dies. A starfish doesn’t have a head. In fact, it doesn’t have a brain. Yet it’s ability to survive many dangers is impressively greater than that of a spider.

Paul Saffo, director of the Institute for the Future, says that “The Starfish and the Spider lifts the lid on a massive revolution in the making, a revolution certain to reshape every organization on the planet from bridge clubs to global governments.”

That revolution is accompanying the emergence of the Age of Transcendence – the name I give the present era in Firms of Endearment, which will be available on Amazon February 9.

The Starfish and the Spider offers insights into the forces that are massively altering the very bedrock of organizational cultures the world over. To paraphrase Winston Churchill’s famous statement about architectural determinism (Man shapes his buildings; thereafter they shape him), “We shape our organizations; thereafter they shape us.”

How FoEs Leverage the Second Law of Thermodynamics (2)

An architect friend of mine, Wayne Smith, told me one day that communities must have something of value to export to remain vital. Years later, after reading about Ilya Prigogine’s proposition that living systems remain far-from-equilibrium because they discharge entropy to permit the inflow of restorative energy, I had a better understanding of what Wayne meant: the process of freely and openly interacting with the external world facilitates a community’s export of entropy.

Take blighted neighborhoods. They suffer a paucity of things of value to export. Entropy builds up like streetside detritus. Everyone sees the accumulating rubbish, but ignores it because they know trash removed today will be replaced by new trash; so why bother? The slum desperately needs revitalizing energy, but it cannot efficiently absorb it because of the efficiency-robbing effects of ever-mounting entropy. Its inner-directed perspective, focused on raw survival, consumes the community.

Many companies suffer from an inner-directed perspective that impedes the exporting of entropy. They operate as “closed systems.” Closed systems are incapable of self-renewal. Only by entering the bidirectional stream of exporting (entropy) and importing (energy) can a system remain in a far-from-equilibrium state.

A closed system company typically sees operations through a shareholder lens. This restricts the exportation of entropy. (Remember Milton Friedman’s famous take on corporate social responsibility: The only social responsibility a company has is to lawfully make profits for its owners. He was in essence championing the closed system approach to company organization. )

The structure of closed system companies promotes information constipation. Employees are strewn along channels of information with the power to block the free flow of information. Employees at all levels use information as a strategic tool for their own survival. Wanting credit for newly found information, an employee may keep it from upper management as he or she waits for the most propitious time to release the information.

With similar self-interest at play, an employee may withhold bad-news information to protect his or her position. This happens with daily regularity in hierarchical organizations. The result? Entropy builds and compromises the well being of the company.

Hierarchically organized companies also experience mighty, mindless defense of the status quo at all levels regardless of changing conditions that call for change. Mindless defense of the status quo contributes to entropy build-up and blocks the flow of self-renewing energy.

Firms of endearment are outer-directed systems. Their commitment to addressing the needs of all stakeholders gives them continuous access to catalysts that trigger continuous exportation of entropy.

Southwest 93-member culture committee fights against status-quoism that impedes the export of entropy. Honda’s waigaya ensures the outward flow of entropy and influx of self-renewing energy. The car company also helps suppliers export entropy, thus making them healthier participants in Honda’s economic ecosystem, thus making the ecosystem healthier for all.

Operating with a transparency not customary with closed-system companies, FoEs are immune to information constipation. They are able to get early indications about problems from every stakeholder group.

For example, when a Wisconsin Whole Foods store voted for union certification, John Mackey personally investigated the situation to find out where management had failed employees. He corrected the alleged deficiencies, after which employees voted to decertify. A more typical C&C approach would have been to send a swat team into the region (which Wal-Mart does) to figure out how they could pull the teeth of the union or at least minimize its influence on employees.

The open-system structure of FoEs permits more rapid responses to situational change that require quick responses than closed system structures. In the latter, people’s first responses tend to be along the lines of “How will this affect me?” FoE employees are likelier to ask, “How will this affect the company? Or the customer? Or the supplier? Or the community? Therein lies the existential difference between the open-system SRM business model and the closed system C&C business model.

DBW

How FoEs Leverage the Second Law of Thermodynamics (1)

Companies that follow a stakeholder relationship management (SRM) business model intuitively make the Second Law of thermodynamics work for them. This plays a crucial in the success of firms of endearment or FoEs.

For over 150 years after the Second Law of Thermodynamics was formulated the apparent resistance of organic systems to conform to the Second Law mystified scientists. According to that law, the more energy that is fed into a closed system, the less efficiently it works. However, organic systems return time and again to earlier higher states of efficiency.

Every time you start your car engine it re-enters a wearing-out process in which energy available for its operation becomes progressively less efficient. Entropy is the name given this process, which nudges your car engine progressively toward the end state of equilibrium when the engine can no longer function.

Living systems work differently. Instead of energy input bringing them closer to equilibrium, they preserve their far-from-equilibrium state. Belgian chemist Ilya Prigogine won a Nobel Prize for showing how living systems hold the destructive influence of the Second Law at bay. They export entropy that leads to functional impairment (as happens with your car’s engine). With entropy exported, a living system can renew itself, a feat beyond the capability of a car engine.

The self-regenerative power of organisms extends to the social and cultural systems in which they dwell. Whether the system is an ecological system, or a beehive, government or company, continuous export of entropy promotes the health of an organizational system.

Companies organized as hierarchical command-and-control (C&C) structures – such as GM, Exxon, Citicorp and most Fortune 1000 – do poorly exporting of entropy. Structural rigidity and territorialism in each level of the hierarchy impede information flow that is critical to entropy exportation.

Failure to export entropy is harmful to a company’s health. Blocked from being able to reenergize itself, a company’s life expectancy drops. A famous Royal Dutch Shell study discovered that company life expectancy is actuarially only 43 years.

In contrast with companies operating by a hierarchical C&C business model, companies guided by an SRM business model are highly effective in exporting entropy.

Still, some C&C companies seem to do quite well despite not following an SRM business model. GE is a notable case in point. It has outlasted most corporations ever formed in the U.S., dating back to the twilight years of the 19^th century. Of the 10 largest companies in 1900, GE is the only one that survives today. And it shows every sign of continuing for the duration of this century. While not an FoE, GE has demonstrated an uncanny ability to reinvent itself – almost as though its creative founder, Thomas Edison, is still somehow guiding it into the future. Current CEO Jeff Immelt is clearly in the process of driving a reinvention of the company. In fact, he appears to be headed toward a SRM business model.

Jack Welsh’s choice of Immelt to succeed him was an exquisite irony. Welsh rejected Bob Nardelli of recent Home Depot infamy whose management style was closer to that of Welsh's. Welsh's C&C management style was suited to the approximately two decades he ran GE. However his choice of Immelt as a successor suggests an intuitive (though perhaps unconscious) feeling that the C&C business model was becoming obsolete.

DBW

FoEs Are Simple-Minded Organizations

Kevin Kelly, founding executive editor of Wired wrote in his remarkable book about self-organizing systems, Out of Control, "A network of very simple-minded decision-making centers can form an organization that exhibits remarkable agility and adaptability."

That's exactly how the human brain works. Neuron-by-neuron, our brains are pretty feeble devices. Yet, through an awesome concinnity – the most spectacular in the known universe – those nerve cells combine to compose great music, write timeless stories, build great nations, generate almost unimaginable inventiveness and steer us as individuals toward lofty personal accomplishment.

And so it is with companies we call firms of endearment. FoEs – or more formally – companies that have adopted a stakeholder relationship management model tends to be organized around “lesser components” rather than around executive leadership at the pinnacle of a command and control hierarchical structure. By “lesser components” I mean participants in a company’s economic ecosystem that lack the power of decision-making but have virtually unrestricted access to communications channels through which they can express themselves to executive leadership.

The SRM business model presumes that as no neuron or even single cluster of neurons has decisive power, no single person in a company or in a company’s economic ecosystem has decisive power – decisive influence, yes, but decisive power, no. If customers reject a company’s offers, no executive power is strong enough to overcome customers’ decisions. They must either be won back through influence or they are lost as assets to a company.

The same goes with employees. To a point, executive leadership can command and control employees’ behavior, but beyond that point only influence can alter behavior. Companies that eschew the command and control approach to “managing employees” to choose the path of influence tend to enjoy higher levels of productivity from employees.

Bob Nardelli, the recently fired CEO of Home Depot, failed to understand that the command and control approach to management is an obsolete management style. His militaristic style (he favored ex-military officers over more conventionally-tutored executives), initially produced great bottom line results. His centralization of decision-making produced great savings that went straight to the bottom line. But it robbed local managers who knew their markets well of their sense of importance and they left in droves. Initially, Wall Street loved Nardelli’s approach. But his approach proved to deliver only short-term gains.

By applying the tenets of the SRM business model to the Home Depot under Nardelli’s rule, we anticipated investor disenchantment with Nardelli. We wrote in a post entered last June:

Home Depot’s share price has dropped 24% during the biggest home improvement boom in history despite an outstanding financial record over the past five years. However, that record is deceiving. It has been created by cutting into consumer service and taking the Wal-Mart route of lowering wage cost by raising the percentage of part-time workers.

Nardelli has reaped short term gains with a huge long term costs. And investors are catching on – the reason for the sharp decline in shareholder price.

Said the Biz Week article:

The University of Michigan's annual American Customer Satisfaction index shows Home Depot dead last among major U.S. retailers, 11 points behind Lowe's. Home Depot employees, who were encouraged to "make love to the customer" under co-founders Bernard Marcus and Arthur M. Blank now sometimes treat them like bad dates. "I don't want to say one bad apple spoils the bunch," says Curt D. Bridges, an electrical engineer from Decatur, Ga., who used to be a die-hard Home Depot fan. "But sometimes some [store clerks] almost blow you off."

Nardelli’s management style is the very antithesis of the stakeholder relationship management (SRM)) style of management, or if you will, the FoE (firm of endearment) way.

Nardelli’s fall from grace was inevitable. He was oblivious of Kevin Kelly’s wisdom that “"A network of very simple-minded decision-making centers can form an organization that exhibits remarkable agility and adaptability." Lacking awareness of that, he believed that he alone was adequate to determining Home Depot’s course.

DBW