Get the assumptions wrong and everything that follows from them is wrong — Peter Drucker

In a recent article, Scott D. Anthony and Michael Putz examined an interesting question¹: How can it be that so many companies still allow themselves to be vulnerable to disruption?

It’s been more than two decades since Clayton Christensen published his theory of disruptive innovation. We understand the causal mechanisms, including why incumbents typically mess up when faced with a disruptive threat. Yet the dilemma persists. Why?

The authors give a compelling answer: leaders delude themselves. They downplay the threat or overestimate the difficulty to respond. In the theory, we have a technical solution, but we’ve failed to develop a human solution: how leaders avoid delusion.

Ideally, we would also develop an organizational solution. Organizational solutions hardwire certain principles into an organization’s systems. In this case, the principles would encompass our knowledge of how companies avoid disruption. And so the systems would guide leaders in responding well.

Organizational solutions are also very relevant for our discussion of ecosystems. Similar to disruption, our understanding of ecosystems is fairly advanced at a technical level.

We understand the economic dynamics and have an analytical grasp of ecosystem strategies, but have not developed the organizational solutions. It’s thus easy to predict that many ecosystem strategies–while looking great on paper–will fail to materialize in practical reality.

In this essay, I'll show that the core problem is a general one: we have lots of technical solutions in management but fail to use them in practice for lack of human and organizational solutions. I’ll suggest that the root causes reside in our management models.

From there, I'll show how this applies to ecosystem strategies and what leaders should do in response. I'll close with a call for what I believe is a broader need for management reformation and how ecosystems might help start it.

Defining an Ecosystem

My research led me to many papers and articles freely using the word “ecosystem” without ever defining it. A notable exception is an article by Jack Fuller, Michael G. Jacobides and Martin Reeves.² They simply and beautifully define ecosystems as “dynamic multi-company systems as a new way of organizing economic activity.” In what follows, I’ll go with that.

The General Problem: Dismal Performance of Organizations

We’re all familiar with the numbers. Only 15 percent of employees worldwide are engaged at work (Gallup). Seventy-five percent of new products and services fail to be commercially successful (Christensen). Seventy percent of change and transformation programs fail to achieve their objectives (McKinsey). The RoA of US public companies has been on a steady decline and is down to 25 percent of what it was in 1965 (Deloitte).

In plain English: organizations make people miserable, they can’t innovate, they can’t change, and as a result, performance suffers.

Does it have to be that way? Don’t we know what drives engagement? How innovation works? How organizations change successfully? How short-term, quarterly financial management actually hurts performance?

The answer is “yes” to all of the above. And yet organizations invest billions of dollars in engagement programs, innovation hubs, large-scale transformation and leadership programs aimed at developing the leaders who will save our organizations. All to no avail. The numbers have not improved for decades. Why?

Enter the Management Model

Scholars and practitioners have worked hard to reverse these numbers. Indeed, much progress has been made in our understanding of strategy, culture, innovation and more. Yet our attempts to systematically integrate and use this knowledge show few results.

We have the technical, but not the organizational solutions. Yes, there are exceptions–the wonderful organizations we all read about in case studies–but they are just that: exceptions. And the rest of us seem unable to learn from them.

I believe the missing link is the management model as a unit of analysis. It’s the key to turn technical solutions into organizational solutions. Management models are at least as important as business models.

Business models are well understood as a unit of analysis and as a source of competitive advantage. Organizations put in significant and rigorous efforts to design and continuously improve their business models, but business models are themselves technical solutions. They don’t deliver results. People and organizations do. Business models need organizations to deliver on their promises. And here’s where management comes in.

Peter Drucker defined management as the social function charged with “making people capable of joint performance.” In other words: it’s management’s job to create organizational solutions.

But how does management get this job done? How does management work? That’s what’s described in the management model. Most executive teams can explain their business model. But they cannot explain their management model.

The management model captures how management makes an organization function. In essence, it answers five questions. How the organization…

• …executes its current business model
• …innovates products, service, and future business models
• …builds bridges to connect execution and innovation
• …learns, improves and changes over time
• …enables people to perform, both as individuals and as teams

To accomplish these things, organizations put in place a set of systems, tools and practices–all of which are shaped by the theories managers choose to guide their thinking. If leaders choose well, the management model provides a coherent explanation for how and why their organization works.

Every organization has a management model. But in most organizations, it's not explicitly designed. These implicit management models tend to suffer from a number of dysfunctions, the most important of which are inconsistencies, not being fit for purpose and relying on bad theory. These are the root causes for our organizations’ dismal performance.

We build organizations with fatal flaws, incapable of doing what we earnestly want them to do. And we’re not even aware of it, because we don’t make our management models explicit. Gary Hamel was right: “Management is likely the least efficient activity in your organization.”

How Management Models Eat Business for Breakfast

In their book about jobs theory, Clayton Christensen and his team give many examples of how implicit, invisible management models cause real harm in organizations.³

Jobs theory states that customers don’t just buy products; They “hire” them to get a job done. The lesson for companies is clear: understand your customers’ “job to be done” and then create a solution that’s better than any alternative. The job is the causal mechanism behind buying decisions.

Most startups have a clear understanding of the job they help their customers get done. But once a product is successfully introduced to the market, something changes.

Under the pressures to run and grow their business, companies lose sight of the job. They begin to collect all sorts of data about products (sales, profitability), customers (demographics, channels), operations (productivity, earnings per share) and competitors (benchmarks). And before they know it, they let this data drive their decision-making, even though none of it has anything to do with the customer’s job to be done.

Managers begin to manage the numbers. And the (implicit) management model creates an organizational solution for a very different job: the manager’s job of making the numbers.

This may not even be a deliberate choice of greedy, self-centered managers. Rather, it’s a consequence of implicitly substituting jobs theory with a set of unchallenged and unhelpful theories about how to run and grow a business. It won’t be long before the business suffers.

Ecosystems: What We Know

Now, we're finally ready to turn our attention to ecosystems. We'll start with a brief overview of things we know. Note how these all reside in the technical realm.

1. Firm and industry are no longer relevant units of analysis. The value of a firm is no longer found in its own assets but in a network of relationships; These networks often transcend industry boundaries. Traditional strategy frameworks are becoming less useful. Strategic thinking requires a new perspective: more dynamic, collaborative and emergent.
   
   
2. Ecosystems are more about learning than they are about execution. The focus shifts from the linear dynamics of scale and scope (execution) to the complex dynamics of evolution and emergence (learning). By definition, ecosystems are not stable. They constantly change as individual members change and engage in weaving their networks of relationships. Learning may well become the objective function of management.
   
   
3. Creating value for customers becomes the governing principle. In theory, firms always existed to create value for customers, but in practice, many followed a different path. Ecosystems, however, can only work in pursuit of a common objective that is bigger than anyone's firm’s narrow self-interests. That common objective can only be found in customer value. It’s what unites and inspires collaboration. Ecosystems thrive when their members help each other create value for customers.
   
   
4. Relationships among ecosystem members combine aspects of competition and collaboration. These relationships involve different but complementary products and capabilities. Ecosystem members coevolve over time as they strengthen or redefine their distinct capabilities (competition) and reconfigure their complementarity (collaboration).
   
   
5. Ecosystems require systemic and critical thinking. Ecosystems are not the solution to every business problem. Neither are they just a new term for supply chains. They don’t always involve a digital platform and are not always maximally open. The complex nature of ecosystems requires deeper, more critical thinking. Also, leaders will have to accept that ecosystems can neither be managed nor controlled, but can only be understood through systems thinking.

We know a lot more about ecosystems than what is presented in the short summaries above. But they are sufficient to demonstrate the main point of this essay: that many organizations’ implicit management models will get in the way of becoming a successful ecosystem player.

Ecosystems: What Is Likely to Get in the Way

1. Wrong purpose. Most organizations still operate on the basis that their main purpose is to make money and please investors. Just look at how they measure performance and make decisions almost exclusively based on financial data. Shareholder value theory and agency theory are alive and kicking in these organizations. Meanwhile, customer value is seen as a means to an end at best.
   
   
2. Dysfunctional view of strategy. The primary goal of the strategy is often value appropriation as opposed to value creation. Strategy is reduced to an analytical exercise based on past data when in reality strategy is a creative process about shaping the future. Porter’s static view of industries, the logic of erecting barriers to entry and “capturing” value, still shines through. Collaboration, innovation and customer value lose out.
   
   
3. Too much command and control. Bureaucracy is still the dominant model of organizing work. Hierarchy, targets and budgets exert dominating influence. Strategy is seen as separate from execution. People are mere resources. The organization is understood as a machine that can and must be controlled. But such organizations are too slow, too rigid and lack the positive energy of people demanded by the rapidly evolving ecosystem world around them.
   
   
4. Management is about operational execution. In many organizations, operational execution still dominates. The main goal is efficiency. Functional specialization is seen as useful. Managers, trained to “manage” in this way, extend this view beyond the boundaries of their organizations and try to “manage” ecosystems as well. All of this hinders learning, entrepreneurial thinking and collaboration.
   
   
5. Organizations are self-centered. Too many organizations still consider themselves the center of the universe. They organize around products and services instead of customer needs. And they measure their own activities instead of outcomes for customers and partners. The underlying assumption is that organizations exist for themselves, not as important organs of society who carry a great deal of responsibility for others.

Most organizations and their senior leaders deny that they operate on this basis. They see themselves as agile, customer-centric, purpose-driven, and responsible. And that’s part of the problem. These leaders may even believe what they say, yet examining the operational reality of their organizations often reveals a different truth.

What Leaders Can Do

Leaders must look beyond technical solutions and understand their most important job is to build organizational capabilities supported by a sound management model.

To many of the most successful players in the ecosystems space, this seems to come naturally. Most companies, however, have not yet built this systemic perspective into their DNA.

To get started, leaders should follow three steps.

First, you need to make your management model explicit. It’s very hard to understand the effects of something that’s invisible. And even harder to make purposeful changes.

When mapping your management model, identify management practices (i.e., how management work gets done) and also the assumptions and theories on which these practices rest (i.e., why you chose these practices over others).

Without questioning our theories in use we are unlikely to make the best possible choices for improvement later, as both Clayton Christensen and Sumantra Ghoshal have taught us⁴.

So, how to start? We don’t have any robust tools yet, however, an early version of a management model canvas can be found at my Management Model Design project website.⁵ You can use it for free and, if you like, also become involved in helping to make it better.

Alternatively, answer the five management model questions outlined earlier in this essay and identify the practices and theories you use in your answers.

Next, identify mismatches between the organizational capabilities you need and what your management model actually supports. That’s no easy thing to do. You have to think this through in your specific context. And it requires a great deal of honesty.

A helpful starting point may be the generic summaries above of what we know and what will likely get in the way.

Here are some examples that may also be helpful, each relating to a different aspect:

1. Purpose. Greyston Bakery’s purpose is to create thriving communities by giving everybody who wants to work an opportunity. Their hiring process follows up on that promise: all you have to do is to show up. No questions asked. No interviews, no background checks. Your previous life, perhaps with drugs or time in jail, doesn’t matter. Is your purpose as powerful? And are your practices so consistently aligned with the purpose?
   
   
2. Customer focus. Haier’s more than 80,000 people are organized as a network of thousands of micro-enterprises who can only survive if they serve customers well. Everyone behaves like an entrepreneur and is totally committed to satisfying user needs. To get there, among other things, they had to slash a layer of 12,000 middle managers. Are you prepared to really make the customer the center of attention and eliminate whatever gets in the way?
   
   
3. Collaboration. Apple is committed to winning through collaboration. They work with suppliers to help them develop manufacturing capabilities instead of trying to squeeze them on price. Similarly, Apple invests in their developer community with some of the best development tools and regularly gives developers a stage to shine and showcase their work. What are you doing to make collaboration more than a business transaction?
   
   
4. External orientation. Haier takes this thinking to its logical conclusion. They run their own organization like an ecosystem and are now even blurring the boundaries between inside and outside.⁶ Non-Haier entities operate within its network of micro-enterprises. This enables initiatives such as the Internet of Food, allowing Haier to think about customer value in much broader terms than if they were limiting themselves to their own capabilities. How far are you willing to go?

Once you’ve identified mismatches, it’s time to make changes to your management model. The most progressive organizations actually make this a habit. They continuously learn and adapt.

Haier didn't start with ecosystems within⁷. This concept was only proposed in 2019, as the latest in a series of transformational steps that took Haier from a hierarchical organization to a thriving ecosystem of entrepreneurs. It arose out of a growing understanding that micro-enterprises alone were great for strategic agility and innovation, but that they tended to solve far too narrow a set of customer problems.

On the brink of a business and management reformation?

The importance of rethinking our management models is not limited to a discussion of business ecosystems. It’s the same management models that not only eat ecosystem strategies for breakfast but also attempt to boost engagement, innovation and the very attempts of organizations to transform themselves.

In his closing address at the 2017 Global Peter Drucker Forum, the great Charles Handy called for a business reformation: “We need to rethink how organizations, particularly businesses, are actually run, why they are run and what their purpose and role are in society.”⁸

It’s easy to think that the reformation is already well underway. Think of all the wonderful organizations, large and small, successfully experimenting with new ways of working and organizing. They inspire us and we rightfully celebrate them in books and at conferences. It seems as if they’re winning. But they’re not.

The opposite is true, as Gary Hamel and Michele Zanini demonstrate in their aptly titled article More of us are working in big bureaucratic organizations than ever before.⁹

Nevertheless, I’m optimistic. Ecosystems might just be what we needed to unleash the reformation. Many leaders intuitively understand that ecosystems are systems, not machines they can manage and control. And so out of sheer necessity they may be more willing to experiment with different management models.

And if this is not enough, ecosystems allow smaller, nimbler players to unite, attract large amounts of resources and take the big risks necessary to attack the dinosaurs head-on. And win.

A focal point of the reformation must be that we invest as much in human and organizational solutions as we do in technical solutions. Or, as Jason Fried put it: “Your company better be your best product since it’s the product you use to make everything else you do.”

Please make sure yto its original publication in the Thinkers50 book and perhaps even link to that one

This essay was first published in the Thinkers50 book, Ecosystems Inc. — Understanding, harnessing and developing organizational ecosystems. Curated by Stuart Crainer, Published by Thinkers50 Limited. Get your copy (physical or ebook) here.

Footnotes:

1. Scott D. Anthony and Michael Putz, “How leaders delude themselves about disruption,” MIT Sloan Management Review, March 2020.
2. Jack Fuller, Michael G. Jacobides, and Martin Reeves, “The myths and realities of business ecosystems,” MIT Sloan Management Review, February 2019.
3. Clayton M. Christensen, Taddy Hall, Karen Dillon, and David S. Duncan, Competing Against Luck, Harper Business, 2016.
4. Clayton Christensen and Michael E. Raynor, “Why hard-nosed executives should care about management theory,” Harvard Business Review, September 2003; Sumantra Ghoshal, “Bad management theories are destroying good management practices,” Academy of Management Learning & Education, 2005, Vol. 4, №1, 75–91.
5. Raymond Hofmann, Management Model Design, www.managementmodeldesign.net.
6. Simone Cicero, “An entrepreneurial, ecosystem enabling organization — What’s emerging from understanding Haier,” Medium, August 2019.
7. Bram van der Lecq, “Why Haier introduced ecosystems and how they work,” Corporate Rebels Forum, April, 2020.
8. Charley Handy, “We need a business reformation,” Closing Address Global Peter Drucker Forum, 2017 (available on the GPDF youtube channel).
9. Gary Hamel and Michele Zanini, “More of us are working in big bureaucratic organizations than ever before,” Harvard Business Review, July 2016.