Think:Act Magazine "Own the Future"
Building longevity into an organization’s DNA
Flexible, forward-thinking stability means focusing on tomorrow’s world as well as performance today
by Detlef Gürtler
Artwork by Francesco Ciccolella
The present – with all its complexities and problems – might seem to require all your attention, but you need to keep your eye on the horizon too. So how can you shore yourself up against the coming storms without losing sight of what is right in front of you today?
"Neither an ox nor a donkey is able to stop the progress of socialism." When Erich Honecker, the leader of communist East Germany, made that bold statement in August 1989, he didn't know that just two months later he would be ousted from power. Or that a year later, in 1990, the entire country would cease to exist – let alone that the whole Communist Bloc, one of the most impressive power structures the world has ever seen, would disappear by 1991. Formed by the Soviet Union in the aftermath of World War II in Eastern Europe, the Bloc seemed like it was built to last: a number of heavily armed countries, all with a close to absolute domination over all sectors of the economy and the public (and even private) lives of those who lived in them. Then it all came crashing down, like a comedian slipping on a banana peel. And funnily enough, it was Communism's failure to provide its citizens with simple stuff of daily life – nylons, faucets and, yes, bananas – that was a key factor in its collapse at the end of the 20th century.
The promise of a better life tomorrow is a bad excuse for a lousy performance today. The same can be true for the opposite strategy: Being able to deliver short term can become disastrous if your long-term perspective is a mess. Two mid-sized German banks, IKB and Sachsen LB, learned that lesson in July 2007. Over the years, they had made steady and decent profits with investments in US mortgage-backed securities – until the music stopped with the global financial crisis. Within a weekend they transformed from being solid, somewhat boring banks into a financial avalanche that threatened to drag the whole German financial system into the abyss.
There is a void at both ends of the playing field: Short-termism can pay off nicely, until it doesn't; and long-termism may pay off in the end, but – how to put this politely? – in the end, we're all dead. "Both sides exist – so deal with it," recommends Charles O'Reilly, professor of management at the Stanford Graduate School of Business and co-author of "The Ambidextrous Organization". Settling somewhere in between "future-only" and "present-only" strategies may sound like a golden mean, but it can quite easily turn into a middle ground of mediocrity. For O'Reilly, "the essence is to be both: a good short-term manager and a good long-term manager." He calls this being ambidextrous. But even if you can manage companies with both hands as well as Cristiano Ronaldo can score goals with both feet, the two sides are still different things. You have to "host multiple contradictory structures, processes and cultures," admits O'Reilly.
There is a tension between exploiting the present and exploring the future, between building long-lasting structures and implementing an operative system that can be "fluid" and innovative. It's a necessary tension, like building a cathedral that is designed not only to be used for worship on Sundays, but also to serve as a trading bazaar each morning. One industry where that tension can be observed throughout history is in the bazaar industry itself: retail. The bazaar, or the market, was the default global shopping system throughout history. The Greek "agora," the Roman "forum" or the Arabic "medina" were all hemmed in by impressive administrative and religious buildings – and then filled with any number of trading booths and small workshops.
It wasn't until the middle of the 19th century that the first retail cathedrals were built. Department stores like Au Bon Marché in Paris, Harrods in London or Macy's in New York became shopping temples, bringing goods from all over the world to the metropolitan upper class. The department stores shaped the image of shopping in the industrial age – and the model seemed unbeatable. Until the second half of the 20th century, that is, when a more adaptive structure emerged: the shopping mall. They were impressive buildings, and they brought the bazaar into the cathedral. A lot of small shops could come and go under the mall's roof, and that system outgunned the now cumbersome-looking department store dinosaurs. "The higher flexibility was a competitive advantage for the shopping mall," says Karin Frick, head of Think Tank, Gottlieb Duttweiler Institute, "but now the mall seems to be succumbing to an even more flexible competitor – the internet." The more customers get used to shopping wherever, whenever and for whatever they want, the less they need the brick and mortar malls that stipulate both the times and the place in which that shopping can occur. The "cathedrals" have become virtual.
In online retail, we're about to see this go full circle yet again. E-commerce took off in an almost anarchic fashion during the dotcom boom with any number of shops and tools and apps – a bit like the bazaar. Then the first cathedral emerged: Amazon. The online giant offers everything for everyone, just like Macy's, Harrods or Karstadt had started doing offline more than a century before. Amazon is less glossy than its predecessors – its solid structures are automated warehouses – but it is even more powerful. Amazon has become one of the world's most valuable companies and, once again, it is seemingly unbeatable.
If history repeats itself, then the next step is already on the way: a business model that combines the cathedral with the bazaar. And indeed, it's already here – Alibaba. The Chinese retail giant owns even less real-world assets such as warehouses or robots because it itself is not the seller of all the things people buy via its platform. It is, instead, just that: a huge and trustworthy platform for buyers from everywhere to connect with sellers of everything. Though still much smaller than Amazon, and with roughly a quarter of the revenue, Alibaba has sustained higher margins than its US-based counterpart for years. The more flexible approach with fewer fixed costs should give Alibaba a competitive edge, especially in the development of new markets and regions.
The contrasting juxtaposition of the cathedral and the bazaar was first coined by the software engineer Eric S. Raymond in 1997. He used it to emphasize the superiority of open-source software like Linux compared to closed-shop products like Windows. Raymond, however, like most of the open-source revolutionaries, underestimated the frictions that can occur in complex, but unmanaged innovation processes – a problem that Linux still struggles with.
MIT research scientist Peter Gloor has proposed a solution. Using a biological analogy he sees the founders of open-source projects as "queen bees," leading a swarm without hierarchical power: "They lead by example and conviction, they constantly worry about the success of their innovations, they are evangelists and teachers, the flag bearers of their innovation." Gloor's "leading by example" is not limited to founders like Linux's Linus Torvalds or Wikipedia's Jimmy Wales, but can be assigned to swarm members as well – an open-source meritocracy.
Family businesses have a special relationship to longevity – to pass the baton to the next generation, the business model should be sustainable in the long term. This helps embrace disruptive changes, as the leaders of the next generation usually begin in new technologies. Ferdinand Piëch, for example, started his automotive career at the racing division of the family-owned Porsche KG, the most innovative division of the car manufacturer.
Another result of the long-term scope of family business can be transformation. If the business model doesn't look sustainable for the next generation, it's better to change than stick to a legacy. This happens even at one of the most traditional business dynasties in Europe, the Brenninkmeijer family. In 1999, 158 years after founding textile retailer C&A, they diversified for the first time from pure fashion business to real estate. Today, the real estate division is about as valuable as the retail chain. In 2018, they even thought out loud about divesting from fashion completely.
Whatever is built to last can be destroyed in seconds by an earthquake – one of the heaviest short-term challenges long-term structures will face. Especially in regions with high seismic activity, like Japan, Taiwan or California, buildings having earthquake resilience is important. And, as a lot of quakes have shown, even the highest skyscrapers can survive them – if built properly.
The most common construction technique for quake resilience is base isolation: The substructure of a building is separated from its superstructure by an isolation layer – the building is almost floating above the ground. Equally widespread is the use of tuned mass dampers that can absorb seismic energies. The Taipei 101, one of the highest buildings in the world, contains a 660-ton steel pendulum between the 87th and 92nd floor that serves as a damper for wind and seismic waves. Even though the skyscraper is located just some hundred meters away from a major seismic fault line, it should survive whatever earthquake might strike.
In her book "Peers Inc: How People and Platforms Are Inventing the Collaborative Economy", US entrepreneur Robin Chase argues for a sharing of central functions by a multitude of small and micro enterprises. Patent lawyers or HR specialists for example, which no small business could afford on a permanent basis, could be shared as a service.
The rise of the internet has made it simple to find, organize and access the small, the individualized and the local. The concept behind "Peers Inc" is the combination of the best of people power with the best of corporate power: The "Inc" delivers on industrial strengths that require significant scale and resources. The "Peers" deliver on their strengths – localization, specialization, customization. When Incs and Peers focus only on what they do best, each handling what is difficult, annoying, or just plain impossible for the other, the resulting collaboration is compelling and sometimes even miraculous.
Those switches from bazaar to cathedral, to bazaar within real cathedral, to virtual cathedral within real bazaar, are always made by a new kid on the block. Incumbents seem to struggle to master the challenges and often vanish with their business model. "You have to decide whether you shall take away capabilities from known businesses to new businesses with lower margins, but higher long-term potential," O'Reilly says. And the decision often leads to short-term gain and long-term pain: "Companies like Blockbuster or Barnes & Noble saw what was coming, but they were not able to get into the new business lines." But Richard Kelly is convinced that traditional businesses can adapt to the speed and scope of technological change and market disruption. Kelly is the chief catalyst of the Hong Kong-based Fung Group. The trading conglomerate, founded as Li & Fung 113 years ago, employs more than 20,000 people worldwide and is best known as the supply chain manager for western brands and retailers. "My job is to reignite the cultural innovation across the organization," Kelly says, and he does it by "making really loud noises at the edge of the business and learning from it as fast as we can."
One of the main instruments with which Kelly makes those noises is located near Shanghai and is called the "Exploratorium" – a kind of shopping mall for business clients. At the Exploratorium, Fung, its suppliers and its buyers can experiment with new sales approaches and business models while at the same time getting information about new ways of doing business that others are testing. For Kelly, doing lots of experiments and looking at even more of them is the best way to future-proof your company: "Even if you have been around for 100 years, you should know that the best way to optimize your old business model is to search for and experiment with new ones." Combining solidity and flexibility may sound a bit weird, but it is the obvious choice for those situations where hard and heavy impacts could strike any time. Building skyscrapers in earthquake-prone regions is one of those situations, and building large-scale enterprises in disruption-prone industries is another. And in the digital era, well, every industry is disruption-prone.
To apply the retail industry experience to organizational challenges, ask the following questions: Can you build a company like a shopping mall? Can you fill the cathedral (a big and solid external structure) with a bazaar (a multitude of approaches for maximized internal flexibility)? This hasn't been a very common organizational model to date, and that's to put it mildly. Karin Frick points out that size still matters – in a negative way. "Large-scale companies have an innate problem with too much bureaucracy and too little creativity. You can't simply decree that you keep the size, but skip the bureaucrats." The second-best option is to keep the flexibility, but at arm's length. "That's the way big pharma does it," explains Frick. Pharmaceutical giants like Novartis, Merck and GlaxoSmithKline need a large and well-oiled machine to turn new drugs into global blockbusters, so they developed a strong corporate culture of reliability. But drug research and development requires a culture of flexibility and creativity – and that's quite the opposite. The solution? "They leave a growing part of drug development and early-stage tests to small companies. It's easier to acquire the small ones, once proven successful, than to foster two opposite corporate cultures in one company."
The only major company that has combined solidity and flexibility rather successfully under one roof is Google. The search engine and its algorithms form one of the most impressive structures of the digital world. But from the very beginning, Google has encouraged its employees to do more than simply improve on the search cathedral – and in particular to do something completely different. Or better. And not something: anything. The markets Google operates in change in huge and rapid and unforeseeable moves, and the people Google employs are so savvy, quick and independent that the best strategy to stay ahead of the competition is to trust their own people to do what's right – or at least fail trying. Jeff Jarvis, professor for journalism at City University New York and author of "What Would Google Do?", explains it biologically: "It's so much in their DNA to see things differently" – in the DNA of the company and in the DNA of the people working there.
The 80:20 rule was a symbol for this deeply ingrained approach. Employees were encouraged to spend up to 20% of their time on projects that they themselves felt to be important. Shielded by the strength of the core product, search, Google's software engineers developed an abundance of ideas, projects and products like no other company on earth. The concept was effectively a victim of its own success and Google has quietly abolished the rule – because the results were too good. Lots and lots of promising products just couldn't get the resources for further development, because there were simply too many promising products around. But that's a different story, and it's a problem that every other company would love to have.
We started this story with German politics and its relatively recent and blatant example of failure. And German politics is a good place to end it, too – but this time, with a success story. Think about this: The recipe that made Google great in the first decades of the 21st century is very similar to the one that made the (West) German economy great in the second half of the 20th century. The Germans even coined a term that combines the solid external shield with the flexible interior design: soziale Marktwirtschaft, or the social market economy. It offers a trustworthy framework with the rule of law, political stability and social security for everybody, and within this framework it allows the maximum freedom for individuals and companies. Being freed from short-term hassle means being free for all-term performance.
This frame-plus-flexibility design can be found not just at the society level, but in business too. Take, for example, working hours in Germany. With the so-called "short time” or "reduced hours” instruments, the employee can work less and the employer can pay less, but the state takes up the slack and jumps in to pay part of the shortfall. This gives huge flexibility especially during an economic downturn. People don’t lose their jobs, companies don’t go bust and that’s a win-win. Combine that with flexible working agreements (such as unpaid overtime when necessary, but paid time off when there is no work) and you have a very flexible tool – as shown during the financial crisis, when German manufacturing nosedived. Interventions such as these can build stronger relationships between workforce and management. After all, the less you have to talk about money (which, let’s face it, is always a conflict) the more you can think about new ideas. And who wouldn’t want that?
After printing the magazine, the text was updated for the online edition.
Curious about the contents of our newest Think:Act magazine? Receive your very own copy by signing up now! Subscribe here to receive our Think:Act magazine and the latest news from Roland Berger.
- Photos Kyle Dorosz; Jörn Kaspuhl; Jim Stoten/Bernstein/Andriulli ; Jeanne Detallante