Strategy & Operations » Governance » The failure of “hierarchical” management structures

The failure of “hierarchical” management structures

If companies want to adapt quickly, they need a “second operating system” in addition to their existing management structures, writes Gavin Hinks

MANAGEMENT WRITERS like provocative statements. And John Kotter is no different. In a recent article, the emeritus professor at Harvard Business School writes: “The old ways of setting and implementing strategy are failing us.”

No holding back there, then. Kotter’s insistence is that classic “hierarchical” management structures simply cannot cope with the current rate of change. As a result, businesses are “managed” but singularly fail to develop effective strategy. The professor calls for a radical change to the way companies are run. His prescription is that companies need two systems operating side by side – one for management and operations, and a second for formulating strategy fast enough.

Kotter’s article, ‘Accelerate!’, has attracted widespread attention and drawn commentary from many quarters. It’s not really a surprise. Kotter is a best-selling management author, a font of business wisdom whose most popular book, Leading Change, published in 1996, shifted so many copies worldwide that it still frequently makes lists of the top business tomes. In 2001, Business Week magazine even voted him the number one “leadership guru” in the US. Kotter is described as the “go-to guy” on leadership and change, his career marked by a long-running insistence that there is a distinct difference between management and leadership, and by his now famous eight-step process to push through change.

In his latest foray in the Harvard Business Review, Kotter writes on how a business can keep up with change.

Dual system
In short, he says that if companies want to adapt in a speedy way, they need a “second operating system” in addition to their existing management structures. This additional body, made up of volunteer staff from around the business and from every level, will be the unit that thinks through the essential strategic challenges. It’s able to do this because it is a network outside the hierarchy and it is unemcumbered by its orthodoxies or the operational need to manage the business day to day.

The idea behind the dual system is to reintroduce some of the conditions present when a business is in development mode with a relatively flat structure in which everyone is happy to do anything and ideas come from all quarters.

“Basically, how organisations are started is the ‘network’ type thing. They’re these little solar systems where the processes are all opportunity-seeking and innovation-driven with a clarity of vision that people have bought into – huge empowerment and motivation. And it’s all designed around being very fast, very agile and very innovative,” Kotter tells Financial Director. Success usually brings the beginning of the growth of hierarchy to start managing the business. For a while, according to Kotter, the two systems – network and hierarchy – exist side by side successfully. But over time, as the company grows so does its hierarchy until its processes and systems swamp the “innovating” network.

“The reason that is so interesting – and it’s not in the paper – is that I am convinced all successful organisations might go through a stage, which might be pretty brief, that looks like what I’m describing. And the problem is that when they go through it, they don’t even know that they are in it – and it just works,” explains Kotter.

“But because they don’t see that – because they don’t recognise that one is hierarchy and one is network-based – it just evolves the way it naturally evolves. Which is the hierarchy growing and growing and killing off the other.”

He concedes that a finance chief could be unsettled by a second independent body operating outside the traditional hierarchy and making decisions for the company. But this isn’t a problem.

“Part of what you do is about helping them through that. And part of that, of course, is that you start small. You let the thing grow, demonstrating wins along the way. As people discover that it’s not destroying them, they buy into it,” he says.

Nor is Kotter convinced that volunteers in the secondary network system get sucked back into their day jobs and away from strategy. According to Kotter, people can do both and, ultimately, there’s a positive pay-off to the day job.

“You are not taking something away from the traditional work system. As a matter of fact, what we’ve found is that not only does the guy get his regular job done and contribute to the new system – good feeling also comes back to the regular job,” Kotter says.

Management turns to bureaucracy
Kotter’s claim is built on a single diagnosis: existing hierarchical management structures are simply too conservative to do the job of coping with rapid change – though Kotter doesn’t dismiss hierarchies altogether. They’re still good at doing the day-to-day management stuff – ”keeping the ship on course”, he says.

“What they do not do well is identify the most important hazards and opportunities early enough, formulate creative strategic initiatives nimbly enough, and implement them fast enough,” Kotter writes. And those failings come about because “hierarchies and standard managerial processes” are bureaucratic and risk averse. This is in some part a result of internal politics in which people won’t move without permission and corporate cultures in which people fear for their status, and also in part because hierarchies default to what they know best – managing, not creating.

He’s not alone in this view. Indeed, look at the business news closely enough and you’ll find the frequent refrain that corporate bureaucracies are failing. In 2011 – when everyone was watching Nokia’s attempts to remake itself – Mary McDowell, the head of its mobile phone division, observed that the business was weighed down by bureaucracy. “Somewhere along the way, the process became the product,” she told the Financial Times. And last year – when the debate over executives’ pay was once more ignited – Will Hutton, of the Work Foundation, bitterly accused many businessmen of wanting “capitalist pay for running a corporate bureaucracy”.

Much chatter has followed Kotter’s article, especially on the internet. And his latest idea has been met with welcome from a devoted fanbase. According to Ruben van der Laan, a Dutch innovation consultant who has worked with the BBC, ABN Amro and the Dutch Ministry of Justice, and has interviewed Kotter for his website: “There is definitely value in what he says because it helps people think about how to organise innovation within a company.” Meanwhile, Julian Birkinshaw, a professor of strategic management at the London Business School, described Kotter’s thinking as “elegant”.

And yet, for all the praise directed at the dual operating system, some lingering doubts remain.

The scepticism begins with a nod to time constraints. Birkinshaw’s claim that Kotter’s idea is “elegant” is borne out of its effort to be inclusive and involve many people at all levels. For Kotter, this step is critical because it is a core element of how a company would have looked in its start-up stage, with all hands – whatever their rank – to the helm. But at the same time, Birkinshaw believes this element could be Kotter’s flaw. According to him, people simply do not have the available time to dedicate themselves to a secondary strategic network in addition to their day-to-day jobs. As a result, the project becomes inherently unsustainable.

“I’ve seen many organisations try to do this and they have not been as successful as they would have liked, and the reason is that you are building this group of people who still have to do jobs while working on this additional project,” he says.

“Kotter would say there has to be much more support from the top to create this group. That’s very easy to say but very few organisations have the patience to give people the freedom they need, for as long as they need it.”

That said, Birkinshaw suggests the Kotter model looks good for creating the kind of urgency needed to effect some much-needed change.

Chris Kinsella, a former finance director and until last year chief executive of the Chartered Management Institute, insists Kotter is right to focus on “strategic agility”.

But Kinsella’s worry comes down to “control” and the level of authority placed in the hands of a secondary body. He says someone needs to be in charge and implementation would still require strategic ideas to return from the secondary to the main board. “The FD would not see this structure as one that can be systemically controlled, and there may be infringements of procedure and delegated authority. It is full of control risks, with no obvious assignment of responsibility,” says Kinsella.

Birkinshaw also sees an issue over control – and views the lack of budget authority as a reason why Kotter’s secondary body could run out of steam.

“One of the reasons these Kotter-style teams don’t work well is that they don’t have their own budget. So the company faces a choice: either give the team resources and a mandate to get things done – and risk upsetting the CFO – or ask them to work on a voluntary basis and risk that their efforts fade out very quickly,” explains Birkinshaw.

There’s an added concern among observers here – that the success of dual operating systems might just depend on the complexity of a product.

Ruben van der Laan speculates that the more “integrated” a product is, the more likely a secondary body is to return to the main board for support and approval.

“If you look at Google, they have new innovations that they organise without linking too closely to the operating system. And that would be way different from an airliner where one small item would affect the whole product,” he says.

“It’s about the inter-dependencies within the product. The search engine of Google does not rely on how successful Google Glass is going to become and vice versa.”

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