164 BUSINESS AT A CROSSROADS collective intent. What might seem to have been a strategy, such as conquering Detroit, was in retrospect merely a fortuitous and unpre- dictable interference pattern generated by the interplay of the actions of the MaBE’s constituent agents, as each explored its adjacent possibili- ties. Because MaBEs don’t know where they’re going, all destinations are open to them. Many allegedly “intentional” strategies are probably like that. An accident or chance encounter leads to a series of small steps each of which makes sense on its own; a critical combination of actions and circumstance produces an unlooked for success; the CEO is said to have devised and implemented a brilliant strategy, retro-fitted on to a sequence of more or less fortuitous events, and it is not in his or her interests to disabuse the hero-worshippers and admit that “it just happened.” There are lessons here for large companies. Small and local Some say that a strength of large companies is that they have more people than small companies in direct contact with customers. This is obviously true – a large circle has a larger circumference than a small circle. But it’s also true that the combined circumference of 10 circles is over three times the circumference of one circle with the same total area. It’s the propor- tion of employees who are customer-facing that determines an enter- prise’s sensitivity to the market and by that measure a 10-agent MaBE beats a CEO-led company of the same size hands down. Another great strength of the MaBE, which is seen by many of those who acknowledge its existence as a great weakness, is its lack of global intent. The great weakness of today’s giant company, which is often seen as its great strength, is its subordination of local intent, of which the MaBE has plenty, to a global vision. Local intent and locally selfish actions that may not always be in the interests of the whole enterprise make the MaBE more sensitive to its environment and more adaptable. It follows from this that a large, CEO-led company eager to become more sensitive and adaptable to its local marketplaces around the world should yield more power to its local units and allow them to pursue their own, local goals, even if when so doing they act in ways that appear to be against the interests of the global company as a whole. Dream on, seems the obvious response to that suggestion. No CEO being paid a king’s ransom each year to align the company behind a 9780230_230941_11_cha09.indd 164 09/09/2009 10:02 9 SIZE AND SHAPE 165 grand global strategy is going to allow local baronies to go their own ways, ride roughshod over the rules designed to ensure global align- ment, or generally refuse to sing from the group hymn sheet. Giving power away requires surrendering power, and only omnipotence can justify today’s CEO pay packets. This is why CEOs tend nowadays, when embarking on the classic CEO project of restructuring the company (almost de rigueur for a new CEO because it affects everyone and is thus a clear demonst- ration of CEO omnipotence), to rein in local baronies by switching from a geography-based to a business-based structure. If globaliza- tion is to deliver value to shareholders, so the theory goes, regional and national operations must be brought under the centre’s control. So hungry are the CEOs of global companies for “power over,” as Mary Parker Follett put it (see Chapter 8), that, far from ceding power to local managers, they take it away. This centralization of power and agency is an integral part of the globalization process. But there’s a disintegration yin within the integration yang. Power with The CEO-led company is a command organization. The CEO directs and controls, through master–servant and principal–agent relationships with its own employees, teams, and departments, and with its value- chain neighbors (suppliers and distributors). All these have their own plans, but it is taken for granted that they’re subordinate to the central strategy. The center dreams and everyone else realizes its dreams. But, in addition to illustrating the command nature of the CEO-led company, globalization has been modifying it, by encouraging CEO-led companies to form business relationships (strategic alliances, joint ventures, and other kinds of partnership) in which they don’t have full control. Partnership as a means to commercialize technological advances was common long before James Watt linked his engineering genius to the entrepreneurial flair and managerial talents of Matthew Boulton in the 18th century to develop, manufacture, and sell steam engines. In our own time, partnerships between inventive small firms and large companies with marketing and distribution clout were often seen as an alternative to licensing deals during the microelectronics and microbiology revolu- tions of the 1970s and 1980s and they are still seen as a good way for small, high-technology companies to reach overseas markets. Partner- 9780230_230941_11_cha09.indd 165 09/09/2009 10:02 166 BUSINESS AT A CROSSROADS ships, both between CEO-led companies and within MaBEs, seem likely to continue to play an important role in computer software devel- opment (see Chapter 7). Partnership was the only way for large companies to enter overseas markets where majority local ownership was required by law. It was also seen as an effective way to respond to major plate shifts in the world economy, such as the disintegration of the Soviet bloc, European inte- gration, the opening up of China and globalization in general. Another partnership theme has been the replacement of conven- tional market-based relationships between suppliers and buyers with more intimate alliances. First seen as a cheaper and less risky way to exert control over the value chain than vertical integration, this model later developed into the “value-adding partnership” (VAP); a group of independent companies working together to manage the flow of goods and services along their value chain. Some early American railroads resembled VAPs (see Chapter 7) and they’re comparable in some ways to the Japanese keiretsu (business society). The idea of the VAP survives in the modern VAR (value-added reseller); a firm favored by an original supplier, because it adds additional value to its products or services before selling them on. Whatever the motivations for such alliances and partnerships, they all involve, to a greater or lesser extent, the teaming up of CEO-led companies with other organizations that are not their servants or agents, and whose life plans, although compatible with, are not subordinate to theirs. A 1995 study by consultants Booz-Allen & Hamilton, found that the number of joint ventures, licensing deals, collaborative research, exchanges of technology, and marketing alliances had exploded over the previous decade. U.S. companies had formed only 750 partnerships in the 1970s, but were forming thousands a year in the mid-1990s as globalization was getting into its stride. The Booz-Allen study esti- mated that revenues from alliances in 1995 accounted for 6 percent of the revenues of America’s 1,000 largest companies, against less than 2 percent in 1987. The study’s authors concluded “a new chapter in the evolution of free enterprise” had begun. 1 Another study by Andersen Consulting (now Accenture) in 1999 found that 82 percent of Fortune 500 executives surveyed saw alliances as prime vehicles for growth; alliances accounted, on average, for 26 percent of Fortune 500 members’ revenues (up from 11 percent in 1994), and for 6–15 percent of their market value; executives expected alliances to account for 16–25 percent of the company’s market value 9780230_230941_11_cha09.indd 166 09/09/2009 10:02 9 SIZE AND SHAPE 167 within five years. But there were downside risks. The study estimated that the 15 most successful alliances had created $72 billion of share- holder value, but that the 15 least successful had destroyed $43 billion of shareholder value. 2 A study by consultants A. T. Kearney, found that the share prices of the best exponents of partnership (those with a long history of successful partnerships) outperformed their sector peers by over 5 percent, but those with a poor record underperformed by nearly 12 percent. 3 Whether it is because of these downside risks, which may have more to do with the inability of CEO-led companies to yield power, than risks inherent in partnership itself (see Partnership problems below), or because there are only so many seats on the strategic alliance bus, and they are all occupied now, one does not hear so much about alliances, joint ventures, and partnerships these days. In the late 1990s, alliances between large, CEO-led companies were seen as the next “big thing” and a lot was written about them. There is still plenty of talk of networks and alliances of small firms, but the idea of partnership strategies at large companies has gone out of fashion. This is a pity, because the growth in partnerships between CEO-led companies could, as Booz-Allen & Hamilton suggested, have been and with luck may still be the start of a new chapter in the evolution of free enterprise. It is difficult but healthy for all-powerful CEOs accustomed to commanding to be obliged, if their partnerships are to thrive, to negotiate, compromise, and concede. Partnerships only account for a fraction of the total revenues of most CEO-led companies, but it’s a vital fraction, because it is where business is going. Imagine a company whose business relationships consist entirely of partnerships; a company like ARM Holdings (see box below). From an Acorn Acorn Computers designed the world’s first commercial, single chip RISC (reduced instruction set computer) in 1985 and used it in its Archimedes computer, launched in 1987. But A corn, based in Cambridge in the U .K., knew the potential market for its fast, energy efficient chips, which were easy to program and had good code density (they needed less memory than competing RISCs) extended way beyond personal computers. I n an effort to tap the wider market, the company “spun out” the RI SC development team in November 1990, to form Advanced RISC Machines (ARM). 9780230_230941_11_cha09.indd 167 09/09/2009 10:02 168 BUSINESS AT A CROSSROADS The traditional way to exploit such a lead is to raise a bundle of money and set up an integrated, design, development, manufacturing, and marketing business. When R obin Saxby (now Sir R obin) was being interviewed for the job of AR M’s CEO he proposed another approach. “My idea was to run lean and quickly, and get into profit fast. We had outstanding people, a leading architecture and the chance to transform it from an A corn, into a global standard. But we did not have the capital for manufacturing.” 3 Saxby saw ARM’s raison d’être as designing and developing advanced RISC processors and systems. ARM would stick to that. Everything else needed to make A R M ’s chips world beaters would be provided by what Saxby called “partnering in multiple dimensions.” A R M did not form partnerships from time to time as expedi- ency dictated. It was built on them. “ Th at’s the benefit of a clean sheet of paper,” said Saxby. “We had no history so we could plan for [partnerships] from the outset and concentrate on doing what we were best at.” AR M licenses its designs to its partners, who manufacture, develop applications and market their products. “We can license to anyone we want,” said Saxby. “We charge an upfront license fee and then a royalty per piece.” O ne important attraction for AR M’s partners is that AR M’s multiple partnerships make it easy for them to arrange local sources of supply. A nother attraction is the AR M practice of publishing its product development plans, or “roadmaps” as Saxby called them. T his allowed AR M’s partners to plan their own product development around specifications for more advanced chips that ARM had committed itself to developing. T he roadmaps exemplified AR M’s partnering philosophy, because they revealed to partners product development plans that a conventional semiconductor company would have regarded as highly confidential. Saxby saw it differently. H e wanted AR M’s partners to commit long term to the AR M architecture. To be willing to do that, they would need, he believed, to know what AR M was planning. “It costs us and our semiconductor partners, several million dollars to develop a new chip … we have to be sure there are products ready and waiting for it.” AR M’s research and development is also based on partnerships, with universities and other research institutions. A s Saxby put it, “We recycle intellectual property.” AR M was part of what Saxby called the “Cambridge keiretsu”; an autocatalytic network of academic and business people, which spawned AR M’s parent, A corn, and many other high-tech firms that have sprung up around the university town. When I spoke with him in 1997, Saxby was happy with the results of the novel business model that he had proposed at his interview six years earlier. Sales had risen from less than £1 million in 1991, to £10 million in 1995, and after start-up losses of £2 million, operating profits had reached £3 million. “ It seems to work in the early stages, at least. We are self-funding and cash generating.” Sales and profits were £42 million and £9 million respectively in 1998, the year AR M’s shares were listed on the London and NA SDAQ stock exchanges. Saxby retired as chairman in 2006, leaving AR M in rude health. I n the year to D ecember 31st, 2008 AR M revenues were almost £300 million and pre-tax profits reached a new peak of over £100 million. 9780230_230941_11_cha09.indd 168 09/09/2009 10:02 9 SIZE AND SHAPE 169 ARM’s strategy, if one can call it that, is indistinguishable from its partnership business model. In effect, it borrows its strategy from its partners. It’s part of several distributed enterprises in several markets, and its fate is the fate of all its partners. ARM sees itself and its partners as members of a community. It claimed in a press release issued in February 2009, for example, that the fact that over 60 “ARM Connected Community” members would be showcasing ARM technology at the forthcoming Mobile World Congress, in Barcelona, demonstrated “the impressive strength and growth of the ARM ecosystem.” ARM sees each partnership as long term. It has no idea of where it will lead. It’s content to take one step at a time. Its people are inspired, not by visions, but by faith in the RISC technology they have mastered. They go where it leads. They have no desire to plan its life in detail. They are great project planners, but they have no “strategy,” in the normal sense. The parasite’s strategy The emergence of companies such as ARM, with what might be called “reduced instruction set” strategies derived from the strategies of other companies, is a sign of evolutionary activity reminiscent of the activity Thomas Ray observed in his computer-simulated, virtual world, Tierra. One of the problems in previous “Alife” (Artificial Life) research had been that self-replicating computer programs were “brittle,” in the sense that any mutation caused them to crash (in biological terms, they became non-viable monsters that were invariably stillborn). Ray realized that the quality of the genetic code that made it so robust when mutating, was its small instruction set; only 64 instructions from the nucleic acid bases, are translated into only 20 amino acids. Ray gave Tierra, which first went live on January 3, 1990, 32 instructions, far less than conventional computers and considerably less even than ARM’s RISC machines. 4 After Tierra had been running for a while a “mutant” appeared with a slightly smaller instruction set, which quickly outnumbered its ances- tors. A few generations later a program emerged with half the original instruction set (too few to reproduce in the conventional way), which depended on others to reproduce. These parasites were later displaced in their turn by hyper-parasites, which reproduced by forcing other parasites to help them by sharing their operating instructions. This led to the emergence of “societies,” where each creature relied on at least one other to reproduce. 9780230_230941_11_cha09.indd 169 09/09/2009 10:02 170 BUSINESS AT A CROSSROADS Ray’s societies are strikingly reminiscent of ARM’s ecosystem, and the Linux community (see Chapter 7). Tierra and other artificial worlds have shown that parasitism is a powerful evolutionary strategy, and there is no reason to suppose the business world is any different. Few firms can produce without the help of other agents and, as outsourcing and partnership-based enterprise increase, companies in general are becoming less self-sufficient. The way they cling to their core competences and key functions suggests CEOs see this reduction of self-sufficiency as a weakness. Tierra suggests the opposite. Plans that are so simple as not to deserve the name “strategy” and must borrow instructions from other agents, are more robust than conventional strategies, because they work with, rather than against, the self-organization that shapes their environment. Partnership problems A partnership is a more complicated enterprise, both operationally and psychologically, than an integrated, CEO-led company. It has a different shape. It is bipolar, rather than monopolar, and cannot be managed by command. A CEO who, for good business reasons, forms a partnership with another company (or companies), must recognize this difference in shape and adopt a different management approach that relies less on power and more on persuasion. In The Partnering Imperative, Anne Deering and Anne Murphy say the essence of the challenge is the need to confront contradiction and paradox. To succeed in the era of partnership enterprise, agents (individ- uals and firms) must learn to value difference and make it work for them. CEOs find working with difference hard going. “How can we main- tain our sense of identity, while accommodating different ways of doing business locally?” they wonder. “How can we allow our partners and employees to grasp local opportunities, without causing chaos? How can we develop understanding and trust and retain control? How can we share without being exploited; open ourselves to the influence of others and remain true to ourselves; share visions, when we see things differently and see different things?” The choice is between controlling partners, which risks alienating them, and surrendering control, which risks chaos. (As we’ve seen in Chapter 7, it need not be chaos – except in a technical sense – because complex adaptive systems can organize themselves and reach a state where things are under control, but no one is in control.) 9780230_230941_11_cha09.indd 170 09/09/2009 10:02 9 SIZE AND SHAPE 171 One way to look at the competition between the CEO-led company and new forms of enterprise, such as the MaBE, is as an exploration of a “relationship space.” CEO-led companies favor or are confined by their nature within one particular area of the relationship space, while other forms of enterprise are free to roam further afield to more productive regions. Deering and Murphy aren’t as concerned as I am with the structural implications of different regions of the relationship space, but their “grid,” plotting relationships both within and between partners according to their “ambitions” for the relationship on the vertical axis, and “response to difference” on the horizontal, is an elegant depiction of this space. It is worth summarizing the six boxes generated by their grid. 3 Figure 9.1 The partnering grid Reprinted with the kind permission of John Wiley & Sons Ltd Command and control (bottom-left) The widely held view is that the source of most of the problems in relationships (including business partnerships), from the trivial, to the life-threatening, is differences between the partners. This leads to poli- cies designed to eliminate or minimize differences in goals, processes, values, and behavior, typically by establishing standards and rules, and requiring all parties to the relationship to comply with them. Such relationships are based on formal contractual agreements, and assume every contingency can and should be planned for in advance. Great care is taken, in pre-contractual preparation, to ensure the part- nership is “set up right.” In these relationships, it is usual for one partner, usually the largest, to draft the rules. Because the partnership is Command and control Do and reviewHearts and minds Arm’s length Radically new Gridlock Promote the positive Ambition (reason for partnering) Avoid the negative Avoid Tolerate Value View of difference 9780230_230941_11_cha09.indd 171 09/09/2009 10:02 172 BUSINESS AT A CROSSROADS merely a vehicle for completing a project, or a transaction, and consists of little more than a formal exchange of resources, the relationship is usually seen as short term, and its character usually reflects the character of the dominant partner. Hearts and minds (top-left) In this box, difference is reduced by a search for alignment rather than an imposition of rules. It’s assumed that if all the partners think alike, they will work harmoniously and achieve the mutually desired outcomes. When leaders stress the need for the partners to “sing from the same hymn sheet,” they’re advocating this hearts and minds approach. CEOs who believe that expressing a “vision” is the way to gain the commit- ment of their people, tend to bring the same philosophy to their partnerships. Arm’s length (bottom-middle) There’s always a tendency for perceptions of a partnership to move to an adjacent box as partners’ attitudes to difference change. A partner- ship that begins in hearts and minds, for example, may fail to achieve a cultural fusion and move to command and control, or a command and control partnership may mutate into arm’s length, when partners become more tolerant. The latter move is inevitable when neither partner is dominant and the relationship continues for any length of time, because differences can only be papered over for a while. Sooner or later they will become too obvious to ignore, and will have to be tolerated if the partnership is to survive. In arm’s length relationships, risk is managed by agreeing to differ and formal procedures for resolving disputes. Good communi- cations, and periodic checks on understanding, are seen as absolutely vital in these partnerships. Flexibility is seen as valuable, as long as it does not require the loss of too much identity. Relationships tend to be distant and tinged with mild, mutual suspicion. As with all defen- sive relationships, there is a temporary quality to arm’s length part- nerships. They continue as long as anticipated benefits materialize, but the partners reserve moral as well as contractual rights to with- draw at their convenience, or seek other partners if the relationship encounters problems. Do and review (top-middle) A relationship that tolerates differences but takes a longer term view than an arm’s length partnership, requires more committed and trusting part- 9780230_230941_11_cha09.indd 172 09/09/2009 10:02 9 SIZE AND SHAPE 173 ners. Do and review extends arm’s length emphasis on planning and process design, from the operational to the strategic aspects of the part- nership. Partners accept that goals are multi-dimensional and should change in response to new opportunities and threats. There is an ethic of cooperation, an assumption that the partnership is long term and a focus on learning and improving the partnership’s processes and systems. There is a feeling of sharing a future as well as a present. These part- nerships still move step by step, from project to project, but the purpose of the reviews following each step is to learn how to improve the part- nership, rather than to decide whether it is worth continuing with. Gridlock (bottom-right) This box is easy to enter from arm’s length, but hard to occupy for long, because of inherent contradictions. Its location on the grid shows it as lacking ambition, but valuing difference. Deering and Murphy say these attitudes are hard to reconcile. If difference is regarded by both partners as valuable, two things can happen. Its potential can be real- ized, in which case the partnership will tend to become more ambi- tious; or can fail to materialize (because of conflict, bad management, or disagreements about the appropriate balance of power), in which case partners will begin to doubt the value of their differences, and be inclined to move to the left of the grid. Radically new (top-right) When differences are not merely valued but actively explored, the part- ners may begin to see the relationship as a possible solution to the most pressing problem of all; the need to change themselves utterly to cope with a turbulent present and unpredictable future. In these circumstances, the partnership is seen, not as an adjunct to each partner, but part of its essence. Difference is valued and the perspectives of everyone in the two organizations contribute to and define the relationship. Instead of seeking a shared vision of the future, the partners seek a picture of their shared present by exploring each other’s views and outlooks. They stop trying to change, or convert each other (that would take them back to hearts and minds) and embark on a joint search for the “common ground” on which there are opportunities for profitable joint action. The partnership is never defined – it is encouraged to emerge from the day-to-day experiences of working together. All the prejudices of separateness that made gridlock uncomfortable and frustrating are abandoned, and a shared sense of destiny comes to dominate the outlooks of all those involved. 9780230_230941_11_cha09.indd 173 09/09/2009 10:02 [...]... uncertainty, there are people they know, and who know them, at the helm Some companies might find they perform better without a leader and decide they can dispense with charisma, give the money they save on CEO pay to shareholders, and assign the CEO job to the regents committee permanently They might retain the name and maintain the fiction for a while that they were still looking for the right man... work and reduce the toxic effect of the CEO system on the liberal capitalist consensus This chapter has argued that the risk and costs associated with omnipotent CEOs and their grand strategies will be further reduced if companies become more dependent on other companies through partnerships of one kind or another The final chapter will look at other remedies for what ails big business, including therapeutic... On the Deering and Murphy grid the most comfortable habitats for a CEO-led company are command and control, and hearts and minds The hierarchical shape of such organizations, and the power with which it endows their CEOs, make the middle two boxes hard to enter, and the radically new box virtually inaccessible Huge CEO pay packets contribute significantly to the immobility of CEO-led companies in the. .. leaderless stand -by system would save money and equity dilution (from grants of options and restricted stock), and would also have many other advantages It would reduce the urgency of the search for a new leader, which would have the added benefit of moderating the upward pressure on CEO pay It would reduce the risk of boardroom bust-ups and, during the time of the regency at any rate, would reduce the sense... that sees individuals as the primary source of value creation.” The new form was immature, as its progenitors had been when Halley heralded their birth, and Ghoshal and Bartlett (to reflect their partnership, they liked to alternate the order of their names) expected it to have been much improved by the time Halley’s comet returned in 2062, to herald the next new business form They insisted, however,... because moving to the right of the grid involves yielding power and, as we’ve seen, only omnipotence can justify enormous rewards Given the complexity of the modern business landscape, the erosion of economic and technological frontiers and the endless battle for competitive advantage, the inability of CEO-led companies to yield power to partners, and to regard difference as desirable and life-sustaining,... didn’t herald the emergence of the “individualized” corporation and the realization of Douglas McGregor’s 30-year-old vision It heralded, instead, the advent of shareholder value maximization as the primary strategic objective, the associated obsession with finance, the rise of the charismatic CEO and the executive pay explosion The CEO system obstructed the emergence of the company Ghoshal and Bartlett... serve? What would be the formal relationship between the committee and the board? What would be the formal, legal responsibilities of the committee collectively and its members individually? These are important questions, because the answers will become the model for the way that power is exercised and responsibilities are assigned throughout the organization If the CEO is replaced by a committee of elected... McGregor’s Theory Y, which held that people can manage themselves and companies perform better when they trust their employees to make decisions.4 But Bartlett and Ghoshal weren’t interested in structure For them beliefs, ambience, and “smell” were more important than shape They saw the corporate form as an abstraction It is not an abstraction Structure and size help to determine the ambience and “smell of the. .. partners to write their own stories The story of a CEO-led company belongs to its CEO Its story is the CEO’s story The organization’s size and shape require the work of other employees to be broken up into jobs that are more or less the same each day, and for employees to be treated and feel as if they’re being treated as interchangeable components They are denied their own stories, for the sake it is . of the business has gone. Nothing happens, because no one has the power to act and no one wants to pre-empt the new CEO for fear of starting off on the wrong foot with the new Grand Panjandrum. Losing. contribute to and define the relationship. Instead of seeking a shared vision of the future, the partners seek a picture of their shared present by exploring each other’s views and outlooks. They stop. there, you are willing to deal with all agents, wherever they are or see themselves to be on the grid. Those in radically new will partner with anyone, the more different the better, and their