From multiple perspectives, traditional business models and management practices are in deep trouble, and it has nothing to do with the recent economic downturn. There are three reasons why this is true.
Reason 1: Rising Income Inequality.
The Pew Foundation study, reported in theNew York Times, concluded, "The chance that children of the poor or middle class will climb up the income ladder, has not changed significantly over the last three decades." The Economist' special report, Inequality in America, concluded, "The fruits of productivity gains have been skewed towards the highest earners and towards companies whose profits have reached record levels as a share of GDP." I addressed the issue of income inequality in two previous articles in Psychology Today, “How Income Inequality is Damaging Our Social Structure,” and “Will Income Inequality Cause Class Warfare?”
Kentaro Toyama, writing in The Atlantic, argues, is “inequality grows naturally from unfettered capitalism…If free market capitalism works so well for every income level, why have so many people seen income pass them by with capitalism working more efficiently than ever before?”
One possible reason is a moral foundation of capitalism—meritocracy. The term meritocracy is defined as a society that rewards those who show talent and competence as demonstrated by past actions or competitive performance. This concept is often interwoven with the widely accepted belief in the “self-made man” or “rags to riches” story. An OECD report concludes the only way to achieve fairness in a meritocracy is to provide more equal opportunities for everyone, not just the wealthy or privileged.
There is a clear connection between the alarming increase in income inequality and the prevailing paradigm of free market capitalism.
Nobel Prize winning economist Joseph Stiglitz’s book, The Price Of Inequality: How Today’s Divided Society Endangers Our Future, provides an insightful analysis of the problem of income inequality. Stiglitz argues free market capitalism isn’t working the way it was supposed to, for it is neither efficient nor stable. He also says that political systems are unfair, which compounds the problem. Stiglitz contends “We are no longer country of opportunity and that even our long-vaunted rule of law and system of justice have been compromised.”
Stiglitz echoes Toyama’s perspective: “America has always thought of itself as a land of equal opportunity…[it is] now a myth reinforced by anecdotes and stories, but not supported by the data. The chances of an American citizen making his way from the bottom to the top are less than those of citizens in other industrialized countries.” Stiglitz says there is a corresponding myth—rags to riches in three generations—that once a person reaches the top they have to continue to work hard to stay there or their descendants will move down. The reality is that children of wealthy people usually remain at the top.
Who is to blame? Stiglitz casts a wide net but zeroes in on Wall Street. He says “Capitalism seems to have changed the people who were ensnared by it.” Much of what has happened can only be described by the words “moral deprivation.” What’s the solution? Stiglitiz, like many other expert observers, advocates policies that move toward a redistribution of wealth, not as an ideological solution, but as a practical one that will serve all in society and strengthen the economy.
The best selling book in the world currently is French economist Thomas Piketty’s Capital In The 21st Century, which is a deep and thorough examination of economic inequality. Piketty outlines at great length the growth of capital (ie., wealth) and its concentration in the hands of the 1% and how increasingly wealth is inherited, not created or distributed anew. The big idea of Capital in the Twenty-First Century is that we haven’t just gone back to nineteenth-century levels of income inequality, we’re also on a path back to “patrimonial capitalism,” in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties. His proposal to solve the income inequality issue is a progressive global wealth tax.
Robert Reich, an economist and former White House advisor, argues “if prosperity were more widely shared, we’d have faster growth. The rules are now designed to entrench and enhance the wealth of a few at the top and keep almost everyone else comparatively poor and economically insecure.” Reich argues that if we want to reduce the savage inequalities and insecurities that are now undermining our economy and democracy, we shouldn’t be deterred by the myth of the “free market.”
Reason 2: Obsolete Business Models.
Some people argue then, that today’s business organizations are oligarchies, created and strengthened by an unrestrained free market system. The Western world has adopted the concept and set of principles that govern them should be democratic which includes the consent of the governed. But since the rise of Western capitalism businesses operated on primarily a non-democratic basis. While businesses are owned by shareholders or owners, they are subject only to the laws of the jurisdiction in which they operate, but are not subject to the will of employees or their customers. In this way, it can be argued that most business organizations are like oligarchies.
Like our faith in a clearly broken system of free market capitalism, our theories and practices of management no longer work in today’s world. The problem is that, currently capital is downed in a speculative game. Most business organizations are geared toward wealth creation for financial markets not the improvement of life on this planet.
At the macro level, the “real economy” –that of the global exchange of products and services—has become poor man’s economy, representing less than 3% of the total amount of foreign exchange transactions
The endless emphasis on employee engagement is the narrow focus of efforts at organizational transformation. But for what purpose? What outcome? To be more productive? By producing more material things? At what social and environmental cost?
Roger Martin Dean of the Rotman School of Management argues in his book, Fixing The Game: “We must shift the focus of companies back to the customer away from shareholder value. The shift necessitates a fundamental change in our prevailing theory…that the singular goal of the corporation should be shareholder value maximization. Instead, companies should place the customers at the center of the firm.”
The corporate world needs to be redesigned to make it much more networked, interconnected, open, egalitarian, non-hierarchical, agile, transparent and empowering. Luis Suerez argues “The future of work is to freelance within organizations—choose your task, assemble to work, and then dissolve.” Many discussions about the future of work revolve around the need for more fluidity and freedom in the way work is done. But why do we continue to consider work as a separate entity from life? Isn’t each worker also a customer and a networked individual in a hyper-connected world.? And if we stop seeing work as separate from life, then we must see the notion of “worker” as also not being separate from management.
Business is now becoming a social enterprise. The Altimeter Group states, “Organizations moving into the “Business as Social” phase are driven by a vision that articulates how social media and digital overall improves customer and employee relationships and experiences.” Ann Marie McEwan, writing in her book, Smart Working-Crating the Next Wave, argues "Connected companies are not hierarchies, fractured into unthinking, functional parts, but holarchies : complex systems in which each part is also a fully-functional whole in its own right. A holarchy is a different kind of template than the modern, multidivisional organization.”
David Gray, in his book, The Connected Company says to be able to adapt both to customers’ changing needs and to competitive pressure, organizations should adopt a decentralized cooperative model and build strategic ad hoc “alliances.” This model is very similar to the Italian industry, which is dominated by small (less than 100 employees), family owned businesses that cluster for opportunities.
To understand customers fully, companies need to integrate them into their processes, make them integral part of the business ecosystem, and make them the part of the stakeholder system. Organizations in the new economy will not only have to be agile, tied to customers’ needs, but have to deal with dissolving boundaries, orchestrate resources they won’t own anymore through influence rather than control, according to Ranjay Gulati and David Kletter, authors of Shrinking Core: Expanding Periphery: The Relational Architecture of High Performing Organizations.
Michael Brenner, writing in Forbes, regarding the future of business identified 99 startling trends some of which are:
Nilofer Merchant, writing in the Harvard Business Review Blog, argues that the current and developing Social Era is the new context in which traditional strategy is dead. In the industrial era, organizations become more powerful by being bigger; in the Social Era, companies can also be powerful by working with others. Merchant says “While the industrial era was about making a lot of stuff and convincing enough buyers to consume it, the Social Era is about the power of communities, of collaboration and co-creation.
In the industrial era, power was from holding what we valued closed and separate; in the Social Era, there is another framework for how ee engage one another—an open one.” Companies cannot survive let alone prosper without recognizing that Social as a phenomenon can allow us to redefine our organizations to be inherently more fast, fluid and flexible by its very design, contends Merchant. Not by doing a little more, or sliming down a little, or by doing a few things a bit faster. Not by tweaking their way into the future.
Reason 3: Dysfunctional Management Practices.
While the old free market capitalism business model focused are shareholder value is becoming dysfunctional, so too are the management practices imbedded in this paradigm.
Gary Hamel, writing for the Harvard Business Review, calls for a new era of management thinking: “Equipping organizations to tackle the future would require a management revolution no less momentous than the one that spawned modern industry…executives and experts must admit that they’ve reached the Limits of Management 1.0—the industrial age paradigm built atop the principles of standardization, specialization, hierarchy, control and primacy of shareholder interests…they must cultivate, rather than repress, their dissatisfaction with the status quo…Why should so many people work in uninspiring companies? Why should the first impulse of mangers be to avoid the responsibilities of citizenship rather than to embrace them?”
Geoffrey James writing in the Business Insider, identified 7 terrible management fads that just won’t die, illustrative of the current broken model of business and management. These practices are:
Steve Denning contends what we know about management is wrong. He says “We are in fact at the beginning of set of gigantic changes in society, in which everything we do is being re-invented-how we live, how we work, how we play, how we communicate, even how we think and how we feel. At the heart of these changes is of course the Internet and its related technologies.” Much of what we thought or knew about the economy doesn’t make sense anymore, despite the nightly news reviews fo the ups and downs of economic life, complete with statistics,, says Denning. There is no such thing as “the economy” anymore.
There are two economies going at “different speeds and on different trajectories. One economy is what Denning calls the Traditional Economy inherited from the 20th century—a world of factories, command-and-control, huge hierarchies churning out masses of products and services through a maze of delivery systems and huge capital investments in getting consumers to buy through sales campaigns and advertising. Although this economy is huge, it is declining, Denning contends. It doesn’t create new jobs, it is not agile and it is becoming increasingly inefficient and lacks innovation. And this economy is finding it increasingly more difficult to make profits. Denning concludes this economy has no future.
The other economy Denning descries is the Creative Economy—one of continuous innovation and transformation. This is an economy of entrepreneurs whose focus is delivery to customers things and services “better, faster, cheaper, smaller, more convenient and more personalized.” It is an economy focused on value and flexibility. It requires an empathetic connection to customers. In this economy the focus is shifted from the seller to the buyer. While this economy is smaller, says Denning; it is highly profitable and it is the economy of the future.
The kind of management required for the second economy is very different than the first economy. For one thing management cares about the environment and cares for people, Denning contends.
Management practices for the second economy will shift the goals of the organization, the structure of work, values and how people communicate. Denning summarizes these practices as:
Clearly the current free market business model is no longer serving society well, and income inequality will retard not advance economic prosperity. Tied to that reality is recognition that traditional management practices no longer work. The world has changed and the social nature of our world will require substantial changes to create a new economy.