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"The Changing Role of Top Management (Part 3):Beyond Managing Systems
to Developing People"
by
Sumantra GHOSHAL*and
Christopher A. BARTLETT**
94/21/SM
* Professor of Business Policy, at INSEAD, Boulevard de Constance, Fontainebleau, 77305Cedex, France.
** Visiting Professor of Strategy and Management, at INSEAD, Boulevard de Constance,Fontainebleau, 77305 Cedex, France. Professor of Business Administration, at HarvardUniversity, Soldiers' Field, Boston MA 02163, USA.
Printed at INSEAD, Fontainebleau, France
pevised 10 May. 1994
1
THE CHANGING ROLE OF TOP MANAGEMENT (Part 31:
Bevond ManaMna Systems to Develonine People
Christopher A. BartlettHarvard Business School
Soldiers' Field, BostonMA 02163, USA
Tel: 617-495-6308
Sumantra GhoshalINSEAD
Boulevard de Constance77305 Fontainebleau
France
Tel: 33-1 60.72.40.00
Drat for circulation. Please do not quite or cite without written permission from the authors. Comments andsuggestions are welcome.
Revised 10 May. 1994
2
THE CHANGING ROLE OF TOP MANAGEMENT (Part 3)Bevond Manaeine Systems to Develonine People
In the immediate post-War period, Norton company and 3M were the two main ri yals in the
abrasives business. Roughly equal in size, Norton was the older of the two, with a relatively
more established position in the market, and 3M was the emerging challenger.
By the mid-1950s, 3M had grown to twice the size of its older competitor; by the mid-1960s,
it was four times larger; by the tnid-1970s, it had six times the sales; and by the mid-1980s, it
was out-selling Norton eight to one. By the mid-1990s, while 3M was racking up an enviable
record as a perennial entrant on Fortune's list of most admired companies in the United States,
Norton had been swallowed up by the French industrial giant St. Gobain.
Throughout this history, Norton and 3M have epitomized two very different approaches to
managing large, diversified companies. Norton has been a firm believer in "professional
management", built around sophisticated systems of planning and control. It was a pioneer in
adopting the PIMS profit impact model that used 37 factors to identify the profit potentiel of a
business; an early user of the BCG growth-share matrix that allowed management to view its
business portfolio in cash flow terms; and an enthusiastic supporter of the nine block grid that
defined generic strategies for businesses depending on their position on a framework that
mapped industry attractiveness against business strength. Supported by expert staff-driven
analysis, the top management of Norton consistently pursued a strategy of growth through
acquisitions and of improving profitability by adopting rigorous financial control systems that
monitored the performance of each SBU against their "precisely defined missions".
In sharp contrast, guided by William L. McKnight's twin beliefs - respect for the individual and
commitment to entrepreneurship - 3M had established a management process dominated by
informai communication, interpersonal networks and consensus decision-making. Despite the
rapid growth of an expanding portfolio of products and technologies - the vast majority of
them internally developed - the company did pot introduce any strategic planning until the
1980s. Rather than systems, the dominant means of top management influence in 3M has
always been through its direct relationships and personal contracts with people.
Amid ail the rhetoric about "empowerment", the management approach of most large
companies remains far doser to that of Norton than to that of 3M. Like Norton, they are
caught up in a symbiotic relationship among the troika of strategy, structure and systems with
increasingly complex strategies creating the need for ever-more-elaborate structures to be
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managed by systems of ever-growing sophistication. And unless they can break out of this
self-reinforcing cycle that has now become so self-destructive, it is Norton rather than 3M that
will be more representative of their future.
From Systems to Peonle
With the rapid spread of the divisional organization structure had corne the complementary
management philosophy of delegation - a belief that had become one of the foundation stones
of the established management doctrine. Ironically, it is this commitment to shift more
responsibility to new levels of general management deeper in the organization that has
eventually led to the downward spiral of disaffection and disengagement and the resulting
erosion of the contract between companies and their employees.
As responsibility for managing the ongoing operations has shifted further down the hierarchy -
first to division executives then to SBU managers - top management has become increasingly
dependent on management systems for their understanding of the company's operations and for
their ability to identify and take action on key issues. The physical isolation caused by a self-
imposed reluctance to intervene in operational activities has resulted in a knowledge gap
between corporate and front line management that has been exacerbated by the increasing
diversification of the company's businesses.
Yet despite this widening physical and informational gap, most companies still operate under
the assumption that those of the top are best placed to provide strategic direction and to
monitor and adjust operational performance. To meet top management's need to understand
the businesses they control and to make increasingly complex judgments and decisions,
companies are forced to develop increasingly detailed systems and support them with larger
staff groups able to consolidate and analyse the masses of data being demanded of operating
units.
By developing sophisticated analytic models, the specialized staff groups are able to reduce the
complexity facing top management, transforming capital budgeting choices into a more routine
task of verifying that projects clear a carefully calculated cost of capital hurdle, for example, or
reducing the strategy setting process to a much simpler exercise of balancing the portfolio of
businesses on the basis of their cash fiows. As a result, top managers, supported by systems
and the staffs that design and gave meaning to them, have developed a management style based
on dealing with abstractions, generalizations and simplifications of the complexity multiplying
below them.
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But while top management sees systems as the lifelines that provides their information link to
the operations, those deeper in the organization more often feel that they are being used like
chains to pull them to heel when performance lagges, or as puppet strings to try to control
strategy from above. Thus the impact of this increasingly systems-driven management process
on those at the front line has been one of frustration at the distraction of the ever expanding
number of forms, reviews and reports, growing to annoyance at the increased operational
interference by staff groups investigating the source of variances in reported results, and has
eventually exploded into full blown cynicism regarding the ability of their superiors to provide
strategic guidance or make investment decisions. In short, the systems-driven approach has led
to a deterioration in relationship between the top executives and front line management, and an
eventual demotivation of any front line initiatives as those in the operating units have gradually
conformed to the facile strategic roles defined in simplistic corporate planning models.
This impact of the systems-dominated management process is brought into sharp relief when
one compares the internai culture of companies like Norton that had become enmeshed in the
so-called "professional management" model with others like 3M that have been more cautious
about allowing systems to dominate their people-based and relationship-driven management
processes. It is a contrast that has become even more striking as companies have begun to
acknowledge that their elaborate hierarchical structures and the vertical systems-driven
processes that supported them has been built on some organizational assumptions that are
rapidly eroding. For example, most have begun to recognize that it is deep in the organization
and not at the corporate headquarters that one finds the knowledge and expertise needed to
keep the company competitive, and that it is the front line managers, not the top level
executives, who are best equipped to sense and respond flexibility to fast-changing
environmental demands and opportunities. In short, in the dynamic new information age in
which most companies find themselves as the twenty-first century approaches, the old
management doctrine assuming top management can lead the company through its control of
strategy, structure and systems has become a myth.
In an attempt to rebalance the systems-driven process that has suppressed individualism and
dampened initiative, one of the most widespread management fads of the late 1980s and early
1990s has been "employee empowerment", a terni that has corne to encompass anything from
introducing an employee suggestion scheme to implementing a program to create an
organization based on self managed teams. While many of these initiatives represent well
constructed efforts to recognize the new reality, this simple and appealing notion has been
notoriously difficult to implement. To some overloaded, frustrated and sometimes
disillusioned top management the idea of pushing their backlog of problems down into the
organization has become enormously appealing, and under the sanctioned concept of
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"empowerment" many have handed off responsibilities so broadely and so quickly that the
process of delegation has became one of abdication. And on the receiving end, front line
employees have often found themselves vested with new responsibilities and authority, but
with neither the understanding nor the organizational means to manage their newfound power
effectively.
While the changes we propose certainly result in the empowerment of those down in the
organization, we avoid using this terni due to the diverse interpretations that have been given
to it and the serai-religious fervor sometimes associated with it. What we observed in the
companies we studied was less a sense of organizational fadism, and more a serious attempt by
a group of top managers to reverse the growth in formai systems that had isolated them and
cut them off from the members of their organization. Instead of continuing to make decisions
based on the systems-driven abstractions and generalizations they were trying to refocus their
attention on building personal relationships and working directly with those who were best
suited to making the decisions. In doing so they had built relationships and developed
capabilities in ways that gave those deeper in the organization much greater access to and
influence in the decision making process than they had ever had under the more sterile and
isolating systems-driven culture. As described by Jack Welch,
Above ail elle, good leaders are open. They go up, down and around theirorganization to reach people. Ifs ail about human beings coming to see and acceptthings through a constant interactive process aimed at consensus. And it isabsolutely relentless.
In undertaking this relentless task of trying to reach people, the experience of the companies
we studied suggest that top management must gradually reduce its reliance on management
systems and reconstruct their key management fonctions around processes based on more
direct human relationships and personal contacts. For example, they need to replace much of
their dependence on information systems by developing personal communication channels with
those in the organization who have access to vital information; they must lighten the burden of
control systems by developing relationships and processes that encourage more spontaneous
check and challenge in routine interpersonal interactions; and they can reduce their reliance on
strategic planning systems by influencing the organization's direction through their
development and deployment of key people. In the following pages we will describe how
some leading companies have managed each of these transitions from a systems-driven to a
people-oriented management process.
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Information Through Personal Relationshins
As those at the top are progressively more isolated from the front fines of their organization by
six, eight, or even ten layers of hierarchy, they find themselves becoming increasingly
dependent on format information systems to keep abreast of operations in the compaties they
manage. In this context, front fine management feel obliged to justify their forecasts, defend
their plans, and explain their results to senior level executives whose limited knowledge of
operating details typically reduce them to the rote of under-informed cross examiner. The net
result is a graduai deterioration in communications, an erosion of relationships across the
vertical hierarchy, and a consequent degradation in the quality and quantity of the information
flow.
The most obvious problem is rooted in the increasing organizational distance between those
who rety on positional power and those who can exercise their substantial information power.
The more top management uses the data they obtain through the information system as the
basis of top-down directives or imposed controls, the more likely it is that those who provide
the information will distort it to minimize its ability to be used as a club against them. As
confidence in the system deteriorates, communication take on more of an adversarial tone and
in the resulting cops and robbers game, the questioning and response often take on tones of
challenging accusations countered by justifying alibis. Front fine managers quickly learn to use
their control over information inputs to manipulate the system, leaving top management with
insufficient understanding to do much more than decree across the board ificreases in sales
objectives, indiscriminate expense cuts, and arbitrary freezes in investment or hiring decisions.
This process-related impediment to systems-driven information transmission is exacerbated by
another more basic problem that is endemic to the systems themselves. In their need to collect
and transmit the vast quantities of relevant data needed by top management to direct and
control their diverse and dynamic operations, information systems are, of necessity, designed
to simplify. Standard formats, generalized categories and consolidated presentations ail help
to move massive amounts of data through the organization, but they do so at a cost. The net
result is that top management operates with a view of front fine strategic and operational issues
that tends to be broad, abstract and sometimes simplistic. As the information gap between top
and operating level management widens into an understanding gulf, it undermines the whose
top down direction and control approach of the classic management doctrine.
To reverse this downward spiral of information distortion and decision degradation, top
management must redefine this remote systems-driven linkage that has developed across layers
of hierarchy, and overlay it with much better developed persona] relationships that can ensure a
richer and more robust source of vital information. Fortunately, the widespread destaffing and
Ravisai 10 May. 1994
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delayering of over-structured hierarchies is providing many companies with the opportunity to
rebuild and redefine organizational relationships, with more frequent direct personal
communication emerging as the most important means of information transfer for all but the
most routine data transmission.
In this process of reestablishing direct communication as the primary source of information
exchange, while maintaining formai systems in an important yet clearly secondary support role,
we observed top level managers focusing their efforts on three important changes to their
historical style and approach:
• First, they were broadening access to information by creating new channels andforums that expanded the volume and scope of interpersonal communication, and byestablishing norms that underscored the importance of face to face exchanges.
• Next, they were supporting this increased flow of information by creating a cultureof mutual trust to ensure that the quality of the communication rose along with theincreased volume.
• And finally, they were linking these efforts to the decision processes to ensure theinfluence of the information flows would provide those responsible for generatingthem with a motivating focus.
Broadenin2 Information Access
In 1987, when Asea was merged with Brown Boveri to form ABB, top management set a
priority to develop a highly sophisticated yet simply focused information system that would
provide people throughout the company with clear, precise and consistent data on the key
dimensions of each part of the organization. The objective of this system - the ABB
Accounting and Communication System or ABACUS - was not simply to consolidate data in
simplified aggregate form that would allow top management to monitor performance as many
other such systems were designed to do. Instead its explicit purpose was to provide everyone
throughout the organization with equal and simultaneous access to a uniform data base in
order to create a common basis on which to discuss key business issues more productively.
Following the highly visible lead of CEG Percy Barnevik, ABB's top executives shunned what
Goran Lindahl EVP for Power Transmission and Group Executive Board member, referred to
as "the abstract management approach in which executives control operations through
sophisticated systems". Instead, they preferred a style Lindahl called "fingers in the pie
management" that involved a high level of personal contact not only with their direct reports
but with those in the front line operations as well. In this approach, an issue or problem
identified by ABACUS would result in a phone call or face to face meeting to review the
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options and agree on action - a means of communication that front line managers found
infinitely more helpful than a cryptic notation on a variance analysis or a study visit from a
member of the corporate controller's department.
This top level approach of dealing with issues in an open, direct and personal manner quickly
became the model for information sharing throughout ABB. At every level of the company
direct channels of contact and forums for discussion were established to facilitate and
legitimize the intensive communication that was required in a company structured around a
matrix with only three levels of management between the CEO and the front fine. In the words
of L'if Gundemark, a middle level business area managers responsible for the company's
worldwide relays business:
ABACUS is fine, but it can only provide historical financial information. Toanticipate problems and understand alternative courses of action, you need a strongpersonal management network. We ail work intensively of that.
Building Mutual Trust
While creating the channels and establishing the norms for frequent face-to-face contact can
increase the flow of interpersonal communication, the task of ensuring the openness and
honesty of these exchanges demands a high level of individual confidence that the process
allows even the most controversial views to be aired honestly without fear of reprisais. In
Intel, CEO Andy Grove tried to signal such a tolerance for questioning and challenge in his
frequent exchanges with employees one-on-one, in small groups or work teams, and in open
give and take forums that were a well established company tradition.
He articulated an ideal of information transfer and decision making that was unconstrained by
the formai channels and systems, but rather was explicitly modelled rifler the kind of open
exchange and trusting cooperation that developed among those responding to natural disasters.
Following his model, information and expertise flowed freely and rapidly to wherever it was
needed without concern about its source or protection of its ownership.
Reflecting on how different this was from most companies' operations he said:
The old management practices are failing us in this new, more demanding age. Weare trapped in well meant routines that have diverged from our prime businessimperative: speed. Soon there will be just too kinds of companies, the quick andthe dead. Those that make the cut will have succeeded in establishing "just-in-timemanagement" - moving information around quickly so it is available to whoeverneeds it when it is needed.
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This model of "just-in-time management" demanded a climate of open information sharing and
mutual trust to ensure that opinions and analysis would be exchanged without concerns about
political maneuvering or game playing. In Intel, it was reflected in a culture described as
"constructive confrontation". Modelled after Grove's own management style, this approach
was built on a belief that if Intel employees did not constantly question, challenge and renew
their own policier, practices and products, then their competitors would. Organizational
position was irrelevant and formai channels unnecessary since everyone was expected to enter
into the debate on any key issue on which they had the relevant knowledge, expertise or strong
opinions.
Under this philosophy, for example, any employee anywhere in the company could demand an
AR or action request of any executive on any issue, and expect a prompt reply. More broadly,
the acceptance, indeed the expectation, of open informed questioning and debate pervaded
every meeting at ail levels of the company. Far from being censored or penalized for such
behavior, those who were the most challenging of current practice and conventional wisdom
were the most respected. Grove made sure that it was widely known that it was through such
internai skepticism that some of the companies' key products, including the phenomenously
successful x86 sertes of microprocessors, was developed.
Ensurine Decision Influence
While opening information access and improving the openness of the exchange are necessary
prerequisites, top level managers in many companies have found that these actions are not
sustainable in the long term unless individual participants in the process can see how their
information input affect decisions and outcomes. This had become very clear at Becton
Dickinson, the US based health care products company, where top management had sparked a
substantially more open and positive environment for information exchange between managers
in the previously insulated domestic and international parts of the organization simply by
creating worldwide business teams that acted as joint decision making forums on key strategic
issues.
Like many US-based companies where international operations were developed as offshoots of
a domestic organization, BD's overseas managers historically had little access to corporate
level decisions. When the company's highly successful blood collection system, Vacutainer,
achieved European market penetration at less than 20% the levels it had recorded domestically,
the US-based business management's reaction was to push for higher budget objectives. The
European managers' variance analysis reports of the safety risk problem in their markets made
Revised 10 May, 1994
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little impression in the US since there was no system for inputting foreign market needs in the
domestically-controlled product development process. Indeed, the major impact of the
reporting system seemed to be to frustrate the Europeans who once again felt the impotence of
feeding data into an intensive and unresponsive system.
BD's chief executive, Ray Gilmartin recognized the constraint that this systems-driven process
was placing on the company's ability to access and leverage the knowledge and expertise of its
overseas management group - for example, the European blood handling safety concems
became a major issue in the US market with the spread of AIDS. As a result, he decided to
create a transnational team in each of the company's businesses to provide a more open
personal forum in which domestic and offshore managers could exchange information and
agree priorities.
At the simplest level, transnational team meetings provided an environment in which these
managers could educate each other. On the Vacutainer team, for example, overseas managers
exposed their domestic counterparts to the different needs of their markets, and US-based
managers openly discussed the competing demands on the scarce development resources. As
the team developed, however, the growing mutuel respect among members led it to evolve into
a decision making forum in which development priorities were rot only debated, they were
also decided. By directly connecting the information sharing process to tangible outcomes,
membership on the transnational teams became a high status position that greatly motivated the
continued flow of high quality interpersonal exchange. Indeed, Gilmartin cites this opening of
the information transmission and sharing of decision making as a key reason why BD was able
to expand its international sales from less than 30% of the total to almost 50% in just six years.
The common thread running through the experiences of top management in ABB, Intel and
Becton Dickinson is that they are ail devoting a major part of their time and energy to opening
access to face to face communication, building trust to ensure the quality of the interaction,
and linking the resulting open interpersonal communication to the decision processes. It is by
developing these more personally-based elements of the information transfer process that these
executives have been able to short circuit the vertical loops in which formai systems often take
information white, at the same time, tapping into and thus reinforcing the horizontal
connections that are based on informai communication networks.
Control throu2h Cultural Norms
The system-driven management process that has dominated the large complex organization in
the last half of this century has rot only tended to distort the flow of meaningful information
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from the front fine operations to top management, it has also reduced the latter's ability to
exercise effective influence and control over those operations. The problems are rooted in
some intrinsic limitations of control systems that have been exacerbated by the increasing
complexity of companies' internai structures, and the growing demands of their external
environment.
By design, control systems typically require that current performance be measured against
standards and objectives. But in an era of fast changing product and process technologies,
carefully defined standard costs are quickly obsoleted, while in highly dynamic markets, the
classic standard of last years' sales is also losing its power as a relevant performance
comparison. Even the effectiveness of evaluating actual performance against budgeted
objectives is being eroded not only by the unpredicability of external market conditions, but
also by the gaine playing in the internai objective setting process, a pathological behavior fed
by the information gap between top level and front line management.
Another inbuilt weakness that companies are discovering with highly systems-dependent
control is that it is unacceptably slow and unresponsive. There is an intrinsic limitation to a
process designed to take the pulse of an organization on a monthly or quarterly basis when it is
operating in an environment in which important strategic developments or operational changes
occur on a weekly or even a daily basis. This basic temporal dissonance is amplified by the
time consuming control process of recording, consolidating, transmitting and analyzing data as
it moves up the organization in order for higher management to decide on corrective action
that must then cascade down to the front-fine.
But the most basic problem confronting companies whose operational performance depend on
the effectiveness of their formai control systems is the implicit assumption that those at the top
of the organization are the most competent to act on the data and analysis generated by the
control systems. In reality, top management's ability to make meaningful judgments and to
take appropriate action on the basis of abstract, homogenized and often untimely information is
quite limited in most companies. This is particularly true where they have limited
understanding of either the operating details or the individual manager in the unit in which the
problem are identified. Yet the classic control systems assume that they are best placed to
initiate corrective action on the basis of their positional power.
As these limitations have become more constraining, top management has increasingly
acknowledged that while the company's traditional systems can provide an important
foundation for control, they have to be supplemented with, and often substantially replaced by
cultural norms and values that internalize control within individual attitudes and behaviors.
Anisai 10 May. 199412
This implies a major shift in management focus. Rather thon developing tools and mechanisms
to monitor outcomes, it requires them to focus on changing organizational context to affect the
quality of inputs; and instead of imposing control by intervening with corrective action, they
must play a coaching and supporting role to the more self-monitoring, self-correcting
organization they are trying to develop.
As we observed a group of companies going through such a change process, we recognized
some common characteristics that seemed to be important in developing this more individual
level means of control:
• At the most basic level, it was clear that such a process has to be built on a strongfoundation of self-discipline in an environment where individuals take responsibilityfor their own actions.
• Overlaid on this self-discipline, top management must create a context of internaichallenge based on self-comparison with a peer group to provide feedback and guidecorrective action.
• And finally, they must ensure an organizational transparency in evaluation anddecision making that gives individuals an understanding of the objectives and criteriathat are appropriate in making decisions traditionally escalated to the top levels.
Instilline Personal Self-Discipline
A good example of an organization that worked hard to create a strong culture of individual
self discipline was Andersen Consulting, a firm that went to great pains to inculcate each of its
new recruits in the models of behavior and standards of performance that were referred to as
"The Andersen Way". Soon after joining, the new associate was sent to Computer Application
Programming School (or CAPS) conducted at the firm's own well equipped campus near
Chicago. Through this intensive six week program, new employees not only learned the
fundarnentals of computer applications and programming, they also began an intensive
acculturation program into the firm's core values and beliefs. The CAPS requirement of
business attire emphasized the seriousness of the endeavor, the eighty-hour weeks underlined
the work ethic, and the social interaction forced by demanding workload built the basics of
relationships that would be vital in this team-oriented enterprise.
This education and indoctrination process was continued and reinforced on the job by the
partners who saw their primary role as providing "stewardship of the firm". Their objective
was to instill in each member of the organization the strong values and high standards of the
founder, a man who preached that "the client deserves our best, regardless". By coaching,
counseling, telling stories, and above all, by acting as role models, the partners passed on to the
eevised 10 May. 199413
next generation a strong commitment to excel that was reflected in a firm-wide work ethic and
internai standard of performance that were the envy of the industry. Together with the well
developed tools and techniques associates learned in the one thousand hours of instruction they
received in their first five years with the company, these internai values gave rise to a uniform
professionalism and dedication among Andersen consultants that led competitors to refer to
them as Andersen Androids. But there was perhaps a hint of envy in the derision, since these
internalized controls allowed Andersen to give their employees a great deal of freedom without
concern for the flrm's high quality standards.
Puildine Internai Challenge
Heaving developed high personal standards, many compaties have sought to reinforce their
self-control valve with an internai culture that encourages competition among or challenge by
peers as a way of reducing top management's role as organizational policeman. Intel's practice
of encouraging what we referred to as "constructive confrontation" is a good example. It has
built a highly effective control process right into the ongoing organizational activity, ensuring
that those with the most relevant information and expertise have access to and influence in the
debate, thereby raising the quality of the decision making.
Another classic example was the way in which ABB ensured effective control of its operations.
Having created an organization framed with a strong commitment to decentralization and built
on a foundation of 1300 companies most of which were separate legal entities, there was a
clear need for effective control to prevent the system from deteriorating into organizational
anarchy. ABACUS, the company's powerful and well defined information system provided a
strong foundation but was rot designed as a tool for top down control as was abundently clear
just by looking at the structure of this extraordinarily lean organization. For example, those
responsible for the company's 65 worldwide business areas typically had staffs of 3 or 4 people,
while the whole corporate level staff numbered less than 150 people.
White ABACUS reports were carefully analyzed at both of those supervisory levels for signs of
problems and became the basis for the "fingers in the pie" style of communications-intensive
management involvement described earlier, middle level and senior management at ABB found
that the reports became much more effective when the analysis and corrective action were
intiated by the front line managers themselves rather than imposed from above. For this
reason, these managers routinely selected performance data for key dimensions on which they
were trying to focus front fine attention, and compiled it into comparative "league tables" that
were then sent to ail their operating units for review, comment and action. For example,
Worldwide Relays Business Area Manager, Ulf Gundermark compiled a performance league
Revised 10 May. 199414
table of ABB's fifteen key relays companies based on their cumulative ranking on reported
gross margin, selling and administrative expense percentage, working capital ratio, and net
earnings percentage. He found that just its compilation and distribution to the company
managers triggered a flurry of corrective activity that was far more effective than he could have
initiated with top clown intervention.
Such a self-evaluative system rot only reduced the burden on top management having to be the
expert despite their lack of appropriate information or expertise, it also changed the
assumption about relevant performance standards from some external and often arbitrary
benchmarks to an internai comparison against their peers. Equally important was the way in
which such self-regulated control changed the primary source of corrective action from the
top-down directives supported by staff analyses, to a peer-driven learning process based on
transferring best practice from top ranked units to managers lower in the tables, seeking to
improve their performance. For Ulf Gundemark's worldwide relays business it was a process
that helped him to report a 50% improvement in profits and almost a doubling of return on
capital during a four year period
Maintainin2 Oreanizational Transparencv
Many companies have found that one of the most effective ways to leverage the internalized
controls and peer-based challenge is to maintain an organizational transnarency that ensures
that everyone in the organization would be able to understand its objectives and evaluate its
performance in the same terms as top management. The assumption is that given the same
information and understanding as their supervisors, those in the middle and front line
management positions would corne to the same conclusions about the required corrective
action without going through the time consuming and often demotivating exercise of escalating
it for a format evaluation and decision.
This philosophy is deeply rooted in ISS, the Danish based multinational commercial cleaning
company, and it reflects the convictions of the company's founder and CEC) Poul Andreassen.
With his strong belief in the ability of people to make the right decision if properly trained and
provided with the right information, Andreassen has invested heavily in training so that even
the cleaning team supervisors learn about budget preparation and financial evaluation, and has
then built an information and reporting system that distributes operating results widely to
ensure that everyone understand how ISS was doing in ail parts of its operation. As a result,
when one part of the business continues to perform poorly, people throughout the company
focus on it, providing input and exerting informai pressure to improve, recognizing that their
earnings were supporting the losses and depriving them of needed capital.
Revised 10 Mav. 1994
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It is through such embedded values and institutionalized practices that top management in
many companies is shirting the focus of their vital control role from the systems-driven
approach of escalated evaluation and imposed redirection to the more people-centered model
of self-monitoring and auto-correction. While the systems still provide a necessary framework
for this process, they are increasingly viewed as support for the more powerful philosophy of
internalized control.
Direction throu gh Development and DeDlovment
Beyond creating information flows and ensuring proper operational control, providing strategic
planning and direction is the third key top management task around which most companies
have created sophisticated internai systems. Initially, most of these strategic planning systems
served the useful dual fonction of developing the strategic thinking of operations-oriented
front-line managers while providing top management with a format and a process that allowed
them to compare, evaluate and respond to the diverse set of ideas and proposais they received.
However, as front line managers became more strategically sophisticated while those at the top
grew increasingly distant from the operations and less able to provide relevant direction,
coaching or advice based on their own knowledge and experience, the systems were forced to
become more detailed and the processes more structured. In the process, the administrative
burden increased while the value added dissipated.
One of the main problems with many such systems is related to their need to legitimize the
concept of bottom up strategic planning by basing it on self-contained strategic businesses. In
the resulting delegation of primary responsibility for strategic planning from the corporation to
the division to the strategic business unit, the increasingly micro focus of strategy often leads
to an organizational compartmentalization and an individual parochialism that constrains the
company's ability to make strategic leaps or even to expand much beyond the currently defined
business boundaries. Such narrow perspective and constrained mandate is reinforced by the
fragmentation of the organization's scarce resources and capabilities that accompanies the
focus on SBUs as the company's primary strategic unit, and impedes the cross-unit learning
that occur when such isolated assets are linked and transferred more freely.
Another increasingly common problem experienced by companies in which strategic direction
is shaped through a systems-driven process relates to the standardized formats and routinized
processes developed to communicate the data and frame the proposais that eventually define
the strategy. White such formalization allows strategic planning staffs to consolidate plans and
facilitate top management's task of making comparisons and deciding priorities among
Revised 10 May. 1994
16
proposais, such benefits often corne at the cost of increasing frustration and decreasinginitiative from the front line. Requiring managers to reduce their entrepreneurial ideas into a
standard planning format not only constrains their ability to communicate innovative or
unconventional proposais, it often homogenizes such plans, treating them as routine activitiesrather than as issues for special focus and nurturing support.
Finally, in the process of consolidating diversity and complexity into a simplified form that top
management can assimilate and respond to, specialized planning staffs and strategy consultants
expand and refine their systems in an attempt to reduce complex strategic decisions into
simplified formats. Over recent decades, these specialists have continued to refine theirmodels, defining strategic positions in terms of simple variables such as industry growth andrelative market share, and reducing complex strategic decisions into cross-funding investmentchoices based on categorical designations of businesses as stars, cash cows or dogs, for
example. Although such prescriptive strategic models have often been comforting to those in
top management who were particularly insecure about their limited understanding of themarkets and technologies in the businesses they oversaw, they have also trivialized their
strategic role to little more than portfolio managers balancing the cash flows among businesses.
For ail these reasons, in many companies strategic planning systems have eventually begun toconstrain the very process they had been designed to facilitate. Rather than broadening
strategic thinking they have confined it; instead of promoting the flow of entrepreneurial ideas
and proposais, they have discouraged them; and rather than enriching top managements
understanding of complex strategic issues, they have reduced it to a simplistic level. It is little
wonder that in recent years many top managers have ail but abandoned their once
indispensable corporate planning systems.
At Intel, for example, CEO Andy Grove became highly disillusioned alter a sophisticated
Strategic Longe Range Planning System (SLPR) failed to prepare the company for itsinevitable withdrawl from the memories business. His comments captured the sentiment of
many other CEOs who were demphasing their systems driven strategy formulation process:
The SLRP was turning into an embarrassment... We had the ridiculous system,common in American business, of delegating strategic planning to strategicplanners. Then top managers would try to get middle managers who had neitherpositional or informational power to corne up with strategies, then take pot shotsat them. So middle managers would gaine the system, regularly coming up withunrealistically high projections... As a result, Intel suffered from what I callstrategic dissonance. While we were shifting capacity to microprocessors, we stil'had our best development people working on memory projects. That made nosenne.
Revised 10 May. 199417
Like Grove, top managers in many companies have deliberately reduced their dependence on
formol strategic planning systems while simultaneously focussing much more on influencing
corporate direction through their development and deployment of people. Across the
companies we studied, three types of initiative in this direction seemed to be both widespread
and effective:
• The most basic was a commitment by top management to raising the consciousnessof the corporate priorities and principles in the minds of each employee.
• This process is leveraged and multiplied by the caret' deployment of change agents,chosen from those with the desired attitudes and beliefs.
• And finally, top management was getting directly involved in managing careerdevelopment not only to meet short term organizational needs but also to build longterm strategic capability.
Raisine Individuel Consciousness
For Goran Lindahl and most of his colleagues on ABB's top level Group Executive
Management Committee the company's highly deciplined strategic planning system and the
powerful ABACUS information and control system to which it was linked simply provided the
background infrastructure for monitoring a personnel development process that provided the
primary means of instilling strategic direction in the organization. Following the clear_ example
of the company's CECI Percy Barnevik, Lindahl saw his most important role as acting as a
teacher and developer of his management team - a process he called "human engineering", in
which he described his objective as developing engineers into managers and managers into
leaders.
During the 50 to 60% of his time that he spent directly communicating with his people,
Lindahl's most important goal was to ensure that ail members of the organization were focused
on and committed to the objectives and priorities that had been defined for the company and
their business. He used even the most casuel exchange with managers at ail levels to send
signais about areas of concern, to reinforce current priorities, or to present the individual with
persona' development challenges.
The process was deliberate, detailed and persona]. It began with a more intensive and
challenging set of exchanges designed to create an environment in which "unlearning" of old
assumptions and behaviors would occur; later Lindahl would shift his focus, spending most of
his time defining the challenging goals and priorities on which to focus; as he developed
confidence that the individual had internalized the overall objectives and had both the
Revised 10 May. 1994
18
motivation and the capability to implement, he would gradually expand and loosen these
constraints giving the manager a great deal of freedom and autonomy. He summarized his role
this way:
People are as good as you make them. We have about 8000 bright, capableengineers in our 35,000 power transmission segment. My first task is to providethe frameworks to help them develop as managers; the next challenge is to loosenand expand the frameworks and let them become leaders - those who are ready totake responsibility for setting their own objectives and standards. When I havedeveloped all the managers into leaders we will have a self-driven, self-renewingorganization.
Denlovine Change Avents
Ingvar Kamprad, the founder of IKEA, a small Swedish mail order house that grew to become
the world's largest furniture manufacturer and retailer, was equally committed to the notion of
transferring priorities and principles on what he described as "a mouth to ear basis". During
the first thirty years of IKEA's existence, he retained a deep suspicion of systems, policies and
procedures. As he continually reminded his managers, "Exaggerated planning can be fatal. Let
simplicity and common sense characterize your planning." Indeed it was not until 1988 that
the company introduced a forma] planning and budgeting system - and this was installed by
Kamprad's successor as president. Instead, the founder preferred to chart the company's
course and influence its operations almost entirely on the basis of the strong persona] influence
he had on the values and beliefs of his key managers.
However, from the mid 1970s when a 25% annual growth rate expanded the company's 10
outlets to 66 and extended its scope of operations from 5 to 17 countries a decade later,
Kamprad found his ability to personally ensure consistent beliefs and behaviors on a "mouth to
ear" basis was being diluted as the number of IKEA employees grew fourfold. Yet he was still
unwilling to rely on systems and procedures to provide direction and develop strategy.
Convinced that systems would dampen the entrepreneurial flexibility and the innovative
creativity that he had been able to instill in his management group, he sought ways to leverage
his more personal approach to providing consistent direction by embedding a common
understanding of the company's objectives and beliefs in the heads of those who would make
the decisions.
He found a highly successful solution in an approach that he referred to as "transplanting
culture bearers". The company created a special week long seminar to which were invited
managers whose qualifications were not only that they had good potential, but also that they
seemed to have intemalized the strong value and belief system that Kamprad had developed
Jtevised 10 May, 1994
19
within IKEA. After this special training session, in which Kamprad played a central role
leading sessions on IKEA's history and culture, these "IKEA ambassadors" would then be
assigned to key positions in ail the company's worldwide operations. By 1990, over 300 of
these cultural agents had been trained and assigned, and ICamprad believed they were a major
reason why the company had been able to maintain its remarkably consistent strategic direction
and organizational approach in spite of minimal use of formai strategic planning.
Building Cavabilities through Careers
While the top level managers' commitment to changing individual awareness either personally
or through change agents can affect corporate objectives and priorities in a fairly direct and
immediate manner, they can have an even more profound impact on long term direction
through their intense involvement in their company's career path management and personnel
development policies. We observed many such efforts by top management in the companies
we studied, but none as striking as Tetsuya Katada's dramatic overhaul of Komatsu's human
resource practices as a primary means of fundamentally changing the goal and strategy of his
company.
Komatsu's military-like sequence of actions designed to "catch up and beat Cat" made it a
classic example of a company with a clearly defined strategic intent. Coinmunicated by a top-
down process known as "management by policy" and controlled through the company's tight
PDCA (Plan-Do-Check-Act) model of management, the approach drove the company's growth
into the early 1980s. But as performance slumped in the mid- and late- 1980s, Komatsu's
corporate leadership came to believe that this highly systems-driven approach had reached the
limits of its effectiveness. When Katada was appointed as the fourth president to lead the
company in the troubled decade of the 1980s, he declared:
The spirit of enterprise and challenge has been lost... Top down management bypolicy is becoming obsolete. Managers can no longer operate within the confinesof a defined objective. They need to go out and see the needs and opportunitiesand operate in a creative and innovative way.
Although he rejected he notion of top down strategic direction and control, Katada believed
strongly that corporate leadership could influence the ways in which those deeper in the
organization perceived the "needs and opportunities" and in their ability to respond in a
"creative and innovative way". After replacing the narrowly defined strategic intent "to catch
and beat Cat" with the more liberating slogan "Growth, Global, and Groupwide", he became
deeply involved in making personnel decisions and changing human resource policies in ways
that would develop the company's people to fulfill the new broadly defined mission.
Xevised 10 May. 199420
For example, to implement the "groupwide" objective of leveraging Komatsu's distributed
capabilities in electronics, robotics and plastics in order to create new self-sustaining businesses
that would eventually account for 50% of the company's turnover, Katada relied primarily on
his ability to influence organizational processes and personnel assignments. The way in which
he focused on various means of linking the company's widely-dispersed pockets of electronics
expertise and resources was typical.
First, he changed Komatsu's historie pattern of recruiting and retaining the best people into
corporate staffs, Central Research Laboratory or the Construction Equipment division, while
using subsidiaries and affiliates as a way to provide career progression for those not destined
for top corporate jobs. Furthermore, he ensured that for at Ieast five years, the company
would commit 70% of its new university recruits to non-construction businesses which
accounted for only one-thrid of the total sales in 1991.
Next, a new career path management concept backed by a "return ticket" policy encouraged
the transfer of young employees to subsidiary and affiliate companies to broaden their
experience and develop their relationships. This was reinforced by a Strategic Employee
Exchange Program (SEEP) which facilitated the short term transfer of employees to work on
projects in other parts of the company. To provide both leadership of and a rote model for the
changed career path and the broadened perspective that would be required, Katada gave five of
the company's 27 directors oversight for the new businesses he was trying to create.
Eventually, he expanded that number to ensure that half the directors on the board had non-
construction business responsibility.
By focusing his attention as much on the personal assignment patterns as on the strategic plans
being developed for the new businesses, Katada not only signaled the company's firm
commitment to the changes, he also made strong strides towards building the company's
capabilities to manage those non-construction part of the operation. From just 27% of the
total in the year prior to his appointment as CEO, non-construction sales grew to represent
37% of turnover within four years. Despite the troubled Japanese economy, Katada was well
on the way to changing the strategic posture of the company primarily by developing individual
initiative and persona] capability rather than through detailed plans and controls.
The less systems driven approach to establishing and adjusting strategic direction being taken
by the senior executives in ABB, IKEA, and Komatsu is becoming increasingly common. Alter
a quarter century in which top level management in many large companies seemed preoccupied
by a need to develop and manage their companies' strategic direction, many have begun to
recognize the costs of such a systems-driven approach. By focusing so heavily on strategic
Revised 10 May. 199421
analyses, they risked underestimating and even undercutting their ability to shape the
company's direction on the basis of a much more human process of developing individual
understanding, spreading personal commitment, and developing human capabilities.
Individualizine the Corporation
In the post-industrial era, the management doctrine developed in the 1920s in companies like
General Motors, Du Pont, Sears and Standard OH has evolved from a facilitator to an
impediment of organizational effectiveness as the much publicized problems in at least two of
the pioneering companies testify. The old model was built on the assumption that top
management's perspective, knowledge and experience best equipped it to coordinate and
control the ongoing operations. The task of those on the front fine was to report changes in
the extemal and internai situation up through the information systems, to adjust operations in
response to signais coming down through the control systems, and to implement ail of this in a
way that was consistent with the clearly articulated corporate strategy.
While such an arrangement was able to create a highly efficient organizational machine capable
of implementing well defined and relatively stable tasks, it has proven to be far less able to
respond to the fast changing, knowledge intensive environment that defines the context of an
ever-increasing number of industries in the closing years of the twentieth century. The
information age has undermined many of the old assumption: most of the relevant lçnowledge
and expertise is now in the hands of front line managers, and the dynamic environnent has
made the time taken by vertical information processing and hierarchical decision making
impractical.
In such an environment, it has became clear - and for companies like GM and Sears, painfully
clear - that the top management can no longer lead the organization primarily through its
definition of strategy, its control of structure and its management of systems as it had in the
past. Much more than directing, it has to focus on developing and leveraging the company's
knowledge and expertise, most of which is concentrated in the lower levels of the organization;
and more important than controlling, it has to support the front fine units' ability to sense and
respond quickly and flexibly to their fast changing external environments.
Such a change involves more than just a modification to existing policies and practices; for
most companies, it implies a fondamental change in their organizational and management
philosophy. Under the old doctrine, management's actions tended to force individual
employees to conform to clearly defined corporate objectives and structurally framed
organizational norms; under the new model, the challenge is to embed the overall corporate
Revised 10 May, 1994
22
purpose and values into employees' personal belief systems, then build the institution on the
skills, knowledge and initiative of the individual organization members. Thus, instead of trying
to create the "organization man", the task now is to build the "invidualized corporation".
At the heart of this new organizational and management philosophy is a fundamentally different
contract than the one that was historically assumed to exist between the company and those
who worked for it. Under the old industrial model, the implicit contract was that employees
would provide the appropriate skills in exchange for tangible payments like wages and
incentives and intangible benefits such as status and security. On its Bide, the company would
undertake to coordinate the employees' contribution with other inputs, leveraging the resulting
resource flows through its capital investment. The resulting short terni income and long term
competitiveness was expected to provide the basis for the company's ability to pay the
employees' current compensation and to provide them with long term security.
But with radical changes in the operating environment in the new post-industrial age, this
traditional employment contract has become an increasingly constraining impediment to
organizational growth and adaptation. As he was so often able to do, Jack Welch expressed
what many other top level executives were feeling about the need to change the basis of
relationship and assumption about mutually assumed responsibilities between the company and
its employees:
Like many other large companies in the United States, Europe and Jipan, GE hadan implicit psychological contract based on perceived lifetime employment... Thisproduced a patemal, feudal, fuzzy kind of loyalty. You put in your time, workedhard, and the company took care of you for life... But that kind of loyalty tends tofocus people inward. The psychological contract has to change. People at aillevels have to feel the risk-reward tension.
The problem Welch and others were confronting has been caused by a new reality that no
longer corresponds with either the assumptions of the old management doctrine or the
commitments of its implicit employment contract. The shift of knowledge and experience
deeper into the organization has now created a widening gap between those who hold the
formai position power and those who exercise informel information power. And the need for
faster and more flexible front line responses to perceived environmental opportunities and risks
highlights an equally debilitating mismatch between those who assumes responsibility for the
organization's future and those who are in the position to act on it.
The most frequent top management response to these increasingly obvious problems has
predictably been to initiate a variety of structural changes from the more routine exercises in
destaffing and delayering to the more radical attempts to "invert the pyramid". Yet such
Jtevisec110 May. 1994
23
activities have normally been only partly successful since those in the newly configured
organization have typically continued to work under the implicit assumptions of the old
contract. For example, while expecting its employees further clown the hierarchy to take more
initiative, top management has often showed rductance at its level to accept responsibility for
providing the personal development and support that the newly empowered organization needs
if such spontaneous bottom up enterprise is to be institutionalized. Similarly, while front line
employees have long bemoaned their lack of authority, they have often remained locked into
their corporate dependency mode long alter major shifts in both formai and informai power has
occurred.
The challenge for companies is to define a new employment contract that reflects an almost
exact mirror image of the responsibilities of the company and the employee as classically
defined. As Jack Welch has proposed, it is the employee who must now "grapple with the
outside world" essentially accepting the old corporate responsibility for assuring the company's
long term competitiveness. And, in this redefined contract, it is the company that must take on
responsibility for providing the appropriate development and opportunities to ensure "personal
and profession] growth", an issue that was once the concern of the individual.
For the top management, the challenges of this change are immense. Not only are they faced
with the task of realigning a set of established expectations and redefining a body of embedded
obligations, they must then change the behaviors of the organization members ta ensure that
they comply with the newly restructured contract. In this task, there is no change more
difficult than the one they must make in the way they define and implement their own role, a
transformation that involves nothing short of a fundamental rethinking of the strategy-
structure-systems doctrine that framed their predecessors' definition of the top management
task.
44ove all, the new philosophy based on a top management role focused on purpose, process
and people involves a reversai of the decades of management practice that emphasized the
need to minimize the risk and reduce the variability due to "the human factor". The new top
management role we have defined recognizes that it is the great diversity and high
unpredictability of the human spirit that is the force driving initiative, creativity and
entrepreneurship. The focus of the new top management role is to recapture these lost and
unreplaceable human attributes by individualizing the corporation through a focus on purpose,
process and people
