11 Rules for Creating Value in the Social Era. Copyright © 2012 by Nilofer Merchant.
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Chapter 1: Traditional Strategy Dies
Traditional Strategy, who played a significant and meaningful role in how organizations operated to win in the industrial era, perished on Tuesday, in Boston.
He was forty-three.[1] The cause of his demise was the numerous complications arising from a collision with the Social Era, the context for business in the twenty-first century.
Traditional Strategy (T.S.), born of Joseph Schumpeter and Frederick Winslow Taylor, combined capitalism and industrial efficiency. T.S. had a rich and full life, contributing significantly to the era of big business. For nearly four decades, he was anointed by leaders to guide and inform business organizations and society at large through the dynamics of corporate strategy, industry influences, advantage, market power, and competitiveness. He established position and identified which markets to pursue, as well as ways to design and maintain competitive advantages, and, finally, to defend against competitors. He fueled scale, efficiency, and productivity.
He leaves behind a signature accomplishment: each organization was encouraged to be unique, to carve out its own differentiated identity, to set itself apart from its rivals. While not all organizations understood or truly adopted this philosophy, T.S. did foster the understanding that strategy is all about making choices and trade-offs, and deliberately choosing to be different. This understanding continues to be highly relevant and, in that, the legacy of T.S. will live on.
T.S. was a central figure in the industrial era, when centralized big institutions were the best way to provide scale. While his beliefs may strike many today as outdated, at the time they were considered the cutting edge of business thinking. His legacy includes:
1 Right strategy reigns supreme. A group of elite executives once designed the highly considered and analytically rigorous “right” strategy and then handed it over—apparently via a program called PowerPoint—to managers and their underlings to execute it. This worked well in a simpler time when markets were stable, and when information was scarce and staff needed to be told exactly what to do. Back then, mobilizing the talent and creativity of all members was not required to be competitive. In T.S.’s lifetime, markets evolved at a leisurely pace—the speed at which a teenager moves in the morning—so businesses could take their time to consider “the” right response to a new opportunity or threat. The idea that there could be many possible right responses, and that a business could try them concurrently and experimentally, would not take hold for several more decades. And far too few organizations recognize that more than a winning idea, it is important to engage the hearts and minds of their highly educated workforce.
2 Size matters. Size created competitive barriers and correlated with market power. Being big allowed organizations to corner the means of production and negotiate lower raw-goods supply costs, giving leverage and pricing power. Big dollars also bought vital access to once-limited media outlets. This meant some dominant firms could reach consumers when others could not, and thus lock out potential competitors. Taken together, these norms supported a mind-set in which size could protect the firms—or at least buy time. Being big had many advantages and no meaningful disadvantages. Size came to be its own measure of success.
3 Stability rules. During T.S.’s lifetime, economic disruptions were thought to be exceptions. It thus made sense to invest in building organizational structures to last. Minimizing variability was seen as essential, which resulted in the hallmarks of the T.S. organization: top-down command and control, division of labor into parsed work, and standardized routines. Predictability was programmed into the business model. Following that embedded logic, the leader’s role often centered on optimizing systems and processes around the organizational structure so that people could continue to do what they did yesterday, only more efficiently. Although the idea that disruptions are rare may seem quaint in today’s world, vast numbers of organizations are still functioning under the assumption that change is the anomaly, rather than the norm.
4 Sustainable advantages exist. T.S. taught us that industries consist of relatively enduring and stable competitive forces that, once understood and exploited, can provide the firm with a long-lasting advantage. Yet, the lifespan of companies listed in the Standard & Poor’s index has steadily declined over the last forty years, suggesting the limitation of that idea. We set an annual strategy and then spend most of the year executing against that strategy. Reviewing Traditional Strategy before the appropriate next cycle is then interpreted by corporate boards as an execution problem—such as trying to move the goal posts. This has created a false tension for many organizations—do we focus on the current business and market, or do we build the capacity to identify and tap into the next?
5 The customer is the guy at the end of the value chain. The value chain—as it had been interpreted—meant that organizations directed their efforts at a customer outside the perimeter. The organization made things and told the buyer that it was good, and the buyer bought. But by the 1980s, buyers became customers with cynicism, opinions, and expectations, and by the 1990s, the old approach was starting to show the strain. Then in the early twenty-first century, so-called “customers” began to exert co-creative tendencies. During this time T.S. underwent his first major hospitalization; his legacy that the idea that products can be co-created is still often treated as an anomaly. Even in these enlightened times, most organizations have a hard perimeter wall between the company and its employees, and the customers.
In the twentieth century, T.S. had a huge impact on how organizations conceived of their work; he has unfortunately also cast a long shadow into the twenty-first. No self-respecting business today should be without a strategy. But it is simply wrong for leaders of organizations to continue to rely on him and his many passé ideas. Though we honor the value he once created, his demise means that organizations have an opportunity to conceive anew the way to create value—from strategy, scale, organizational design, advantage, and production—and to identify the new rules to win.
T.S. is survived by two generations: his immediate children, the management thinkers who are now struggling to fit relatively newer concepts like crowdsourcing, open innovation, transparency, co-creation, and collaboration into its classic models; and his many grandchildren attending business schools who continue to be taught his antiquated ideas from out-of-date textbooks.
Services will be held shortly. In lieu of flowers, you are asked to consider what the Social Era means to you, your organization, and the economy at large.
1. I’m talking about the business strategy currently in use today, first introduced in the 1970s. I don’t like the term it is often referenced by, modern strategy, since it is anything but.
Chapter 2: Rules of the Social Era
Things we once considered opposing forces—doing right by people and delivering results, collaborating and keeping focus, having a social purpose, and making money—are really not in opposition. They never have been. But we need a more sophisticated approach to understand business models where making a profit doesn’t mean losing purpose, community, and connection. Finding the right balance among them is key. We will find that balance as we shape new constructs for business models, strategies, and leadership. What we can create will be rich in many senses of the word.
In this book, 11 Rules for Creating Value in the Social Era, I will cover a
