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THE MANAGEMENT 2.0 CHALLENGE: HOW WILL YOU REINVENT MANAGEMENT IN YOUR ORGANIZATION?

Gary Hamel, Visiting Professor of Strategic and International Management, London Business School Angelia Herrin (Moderator), Editor for Research and Special Projects, Harvard Business Review

OVERVIEW Most organizations use traditional management techniques, which are based on bureaucratic hierarchies. This model promotes control, consistency, conformity, and specialization, but does not address the way humans work best. A new management model is needed. Looking at the behaviors brought about by the Internet offers a promising alternative. Common practices on the Internet such as transparency, collaboration, and meritocracy can fundamentally transform management. The philosophy of Management 2.0 suggests that organizations can be large, focused, efficient, and disciplined without suffering from bureaucracy, myopia, and inflexibility. CONTEXT Gary Hamel discussed why current management models are broken and how innovative management practices can generate competitive advantage. KEY LEARNINGS Although management is one of societys most important modern innovations, the time has come for reinvention. Management is not usually thought of as a technology, yet it is one of societys most important recent innovations. Management mobilizes human resources and is the technology of human accomplishment. Unfortunately, the current management model inhibits the success of many companies. While alternatives to the status quo exist, they often are hard to imagine. The time has come to think more boldly and to reinvent the management model. Management innovation creates enduring business advantages. Within the business world, many different types of innovation exist, but not all provide the same amount of value. One way to organize business innovation is through a five-level hierarchy. Professor Hamel sees management innovation at the top of the hierarchy. 1. Operational innovation. This is the lowest level of innovation because it is easy to copy and rarely generates long-term business advantage. Examples of operational innovation include changes to supply chains and customer support systems. 2. Product innovation. This represents the next level in innovation and business value. Product innovation comes from new offerings, such as new financial instruments or products like flat screen TVs. 3. Strategy innovation. New business models emerge through strategy innovation. Examples include Ikeas and The Body Shop. 4. Ecosystem innovation. With ecosystem innovation, entire industries are revolutionized. Apples digital distribution model has dramatically changed the music industry, while its iPhone ecosystem is changing the mobile phone market. 5. Management innovation. At the top of the hierarchy is management innovation; it is the most challenging but creates the most enduring business advantage. For instance, General Electric and Thomas Edison created the modern R&D lab and put science on a schedule. Other examples include Procter & Gambles brand management system and Toyotas quality initiatives, which transformed frontline employees into problem solvers. More recently, open source software like Linux has transformed product functionality.

Organizations must address todays business challenges by embracing new management models. Todays business challenges cannot be solved using old management models. Companies must develop the capacity for management innovation. Professor Hamel described three trends that are fundamentally changing the way that business is conducted. Change is accelerating at an increasingly rapid pace. The world is becoming more turbulent, but existing companies are not built to accommodate these changes. In most organizations, it takes a crisis to drive change. In contrast, new businesses are built to be more adaptable. This is illustrated by the differences between incumbent companies like Microsoft, Motorola, and Nokia, and insurgent competitors like Google, HTC, and Apple. Too often, change happens belatedly, infrequently, and convulsively. We can't afford to change in this way any longer." Gary Hamel The winds of creative destruction are blowing more fiercely than ever. In the past, barriers to entry such as distribution systems, proprietary technologies, and government regulations protected players in many industries. However, these barriers are now crumbling worldwide. Skype, for example, broke into the capitaland regulation-intensive telecommunications industry and is now the largest international phone company. As companies face creative destruction, they are exposed to new types of competition. To preserve profit margins, innovation is essential. If management innovation is essential for competitive advantage, then companies need to develop the capacity for this type of innovation." Gary Hamel Knowledge is becoming a commodity. As existing knowledge becomes commoditized, companies must create new types of knowledge more rapidly. For instance, when Apple entered the mobile phone market, it wrapped its own unique knowledge around existing commodity knowledge. Apples user interface and app store allowed it to enter the market in just 18 months. To generate new forms of knowledge, companies must think differently about employees and the organizational culture. Historically, employers have expected employees to be obedient and diligent, and to have expertise. These traits, however, are becoming commoditized. Today, organizations need employees who take initiative, are creative, challenge the conventional wisdom, and view work as a passion. Managers must build a sense of purpose and create an engaging work environment that attracts people with these characteristics. Towers Perrin recently conducted an employee engagement survey which found that only 14% of workers are highly engaged, while 62% are moderately engaged, and 24% are disengaged. Fewer than 40% of employees believe that top management cares about their well-being. Winning companies make work interesting and promote innovation, engagement, and adaptation. This doesnt mean working harder; it means creating a new paradigm. Organizations must move away from monolithic organizational structures, encourage experimentation, accept some risk, and give employees more autonomy. HCL, an Indian IT services company, has built its management model around reverse accountability. Every employee rates the management team and results are posted online. In addition, when employees see something they dont agree with, they generate tickets which can be closed only after a manager resolves the issue. New management models based on Internet principles can overcome tradeoffs between control and flexibility. Traditionally, companies have followed an ideology of control. Bureaucratic hierarchies are effective for uniting people for complex tasks, but they undermine initiative, passion, and creativity. Markets, on the

other hand, are flexible, but they cannot handle complex forms of coordination. New management models are needed that transcend this tradeoff between control and flexibility. We are at an ideological inflection point. For 100 years, we've had the ideology of control. We need to think of control in new ways." Gary Hamel Professor Hamel suggested that there are two ways to accomplish this goal. 1. Rethink first principles. New problems cant be solved with old principles. The Web offers new ways to think about management. The Internet is innovative, adaptable, and engaging. New types of management referred to as Management 2.0should be based on dimensions found in the online experience. People have a sense of purpose. On the Web, people are driven by purpose and passion. In business, the language of purpose is rarely used. One exception is Apple, where employees have a sense of purpose and have transformed several industries. Hierarchies must grow from the bottom up, not top down. Although hierarchies exist on the Web, authority comes from the value that people add to communities. Companies should operate in a similar way. Disaggregation is key. The Web succeeds because things are small and easily recombined. Google, for example, has adopted this approach and organizes employees around small teams. Market dynamics prevail. The Web unifies buyers and sellers. The prevailing method of resource allocation in businesses is small groups of gatekeepers who accept or reject new ideas. This is outmoded and must be revised. In the company context, multiple sources of experimental capital are needed, as well as people who act as angel investors. Communities of passion flourish. Like the Web, companies must enable people to come together around ideas they are passionate about. Transparency, openness, and freedom are critical in the workplace, as well as on the Web. 2. Embrace experimentation. Companies must learn how to experiment with management. This means running small-scale, low-risk experiments and cultivating an environment where people dont need extensive permission to experiment. W.L. Gore is an example of a company that has embraced Management 2.0 principles. This business, with $3 billion revenue and a 50-year history, is a lattice organization with no hierarchy. Employees become leaders when their team asks them to take on a leadership role. In addition, every employee decides what to work on. Despite this freedom and lack of bureaucratic control, discipline still exists. Each year, every employees work is ranked by 20 peers based on the amount of value added to the company. This data drives compensation. HBR is working to help reinvent management. The Management Innovation eXchange (MIX) was launched to address the need for new management models. MIX is an open innovation project created by Harvard Business Review and McKinsey & Company. The projects goal is to accelerate the management revolution using techniques like crowd sourcing. MIX recently sponsored the Management 2.0 Challenge. This 60-day contest explored how companies are using technology to change the way they manage. Over 140 organizations from around the world submitted entries. At this time, MIX has identified 20 finalists that are revolutionizing management through disruptive ideas and radical solutions. The Management 2.0 Challenge demonstrates that companies can implement extraordinary new ways to manage.